Last Friday, the jury in FDIC v. Van Dellen (C.D. Cal. Case No. CV 10-4915 DSF (SHx)) returned a verdict totalling nearly $169 million against three former officers of the home builder division of IndyMac Bank, F.S.B. The Office of Thrift Supervision closed the bank in 2008. As the receiver for the bank, the Federal Deposit Insurance Corporation filed suit against the three former officers. Reportedly, a fourth officer settled.
Although the verdict has received widespread coverage in the press, I think it is worthwhile to look at Judge Dale S. Fischer's earlier memorandum opinion which dealt with critical choice of law issues and the application of the business judgment rule to officers.
California Law Applies To Subsidiary of Delaware Parent
In ruling on the defendants' motions for summary judgment, Judge Fischer rejected the argument that Delaware law should be applied based on the fact that the bank's parent was incorporated in Delaware and an OTS regulation, 12 C.F.R. § 552.5(b)(3), that allows federal stock associations to elect the corporate governance procedures of, among others, the laws of the state in which the association's holding company is incorporated. Instead, she found that California law applies under either the internal affairs doctrine or the choice of law test enunciated in Lidow v. Superior Court, 206 Cal. App. 4th 351 (2012). See California Court Distinguishes Delaware’s VantagePoint Opinion. Judge Fischer found that "California has a significant interest in regulating the conduct and setting the standard of care for corporate officers where the corporation's main offices and principal places of business are located in California and the corporation chooses California law in its contractual choice of law provisions." (One defendant's severance agreement included a California choice-of-law provision).
No Business Judgment Rule For Officers
The other key issue decided by Judge Fischer was whether to apply the business judgment rule to officers. See District Court Refuses To Apply Business Judgment Rule To Claims Against Officers. After reviewing the recommendations of the California Law Revision Commission, she concluded:
This Court is left with only one reasonable conclusion as to California substantive law - the state's business judgment rule does not protect officers.
Times Out of Joint
This reliance on the CLRC is decidedly anachronistic. The deliberations and recommendations of CLRC occurred long after the enactment of the current General Corporation Law (1975). Thus, they cannot be viewed as any evidence of legislative intent. Further, the CLRC is not a court and issues no binding decisions. All of the CLRC's members are either politicians or political appointees. Cal. Govt. Code § 8281. There is no requirement that CLRC members be lawyers much less experts in corporate law. All of these factors make the CLRC a slender reed on which to rely.