In the case, FDIC v. Saphir, et al., N.D. Ill. No. 10-C-2009 (the “Case”), the FDIC seeks to recover at least $20 million that the FDIC lost in connection with the failure of Heritage allegedly because of the Directors & Officers’ “failure to properly manage and supervise Heritage and its [commercial real estate (“CRE”)] lending programs.” Among other things, the FDIC alleges in the Case that the Directors & Officers: (1) routinely financed CRE projects without adequate analysis of their economic viability and without adequate appraisals; (2) failed to provide sufficient loan loss reserves; (3) failed to segregate loan administration functions from loan origination functions; and (4) engaged in practices (including the approval of large dividends and incentive payments that depleted Heritage’s capital) that enriched certain of the Directors & Officers and Heritage’s holding company at the expense of Heritage.
In its Memorandum Opinion and Order, the District Court found that the FDIC’s complaint in the Case met the required standard of notifying the Directors & Officers of the FDIC’s claims against them and the plausible grounds on which those claims rest. The District Court also found that the FDIC had properly alleged each of the required elements of liability, i.e., the Directors & Officers’ duty, breach, proximate cause and resulting damages.
The District Court also rejected Directors & Officers’ contention that the FDIC’s claims should be dismissed on the grounds that Heritage’s losses resulted from bad economic conditions because the District Court found that the FDIC had alleged other plausible proximate causes and that for the claim to survive, the FDIC only needed to allege causes that were a substantial factor leading to the losses (not the sole factor or factors).
The District Court concluded that the business judgment rule defense could not be used by the Directors & Officers as a basis for dismissing the Case in a motion to dismiss at the current, relatively early stage of the case. The District Court stated, however, that the Directors & Officers would not be barred from raising the business judgment rule as a potential defense at a later stage of the proceedings, i.e., in a motion for judgment on the pleadings or in a motion for summary judgment.