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Corporate Officers in California Need to Be More Careful than Directors

Logo of Indymac Bank, whose corporate officers in California were not protected by the Business Judgment Rule

In California, corporate directors the so-called Business Judgment Rule (“BJR“) protects corporate directors. They are not responsible for honest mistakes of business judgment. A recent case revealed that the BJR does not protect corporate officers in California.

During 2007, Indymac Bank bought more than $10 billion in risky residential loans. These loans ultimately generating losses of more than $600 million. Indymac closed. The Federal Deposit Insurance Corporation was appointed receiver.

The FDIC brought suit against Matthew Perry, Indymac’s former CEO. The FDIC alleged negligence in continuing to generate and purchase loans. Perry moved to dismiss the complaint, claiming that he was protected by the BJR.

The U.S. District Court for the Central District of California denied Perry’s motion (FDIC v. Perry). The court noted that the statute setting forth the BJR (Corporations Code Section 309) expressly applies only to directors, not to corporate officers.

Bottom line: Those of you who are acting as corporate officers – even if you also are directors – have an obligation to be aware of corporate affairs and not to act negligently.

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Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
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