## Facts

- Allen County Bank (ACB), an Indiana bank, experienced deteriorating asset quality and repeated adverse regulatory findings beginning in 1981.
- Regulators issued examination reports warning that ACB’s loan portfolio was poor and that directors had to monitor the lending function; ACB entered memoranda of understanding with regulators in 1982 and 1983 but did not correct deficiencies.
- In 1985, Indiana authorities began liquidation proceedings, and the FDIC was appointed receiver.
- The FDIC, in its corporate capacity, sued seven former ACB directors/officers in 1987 for breaching statutory and common-law duties, seeking losses tied to several groups of loans.
- Evidence supported findings that certain directors engaged in imprudent transactions involving conflicts or personal interest, including loans made on weak terms and with inadequate credit information.
- Two directors (Bierman and Boley) did not originate the challenged loans but largely stopped attending board meetings during the relevant period; the trial court treated their nonattendance as a failure of oversight.
- The district court, after a bench trial, entered judgment for the FDIC for $574,809.36, jointly and severally, tied to three groups of loans.
- The defendants appealed, challenging liability, causation, damages, and defenses based on regulators’ involvement and doctrines limiting fault.

## Issues

1. Whether the directors and officers breached duties of care and, where conflicts existed, duties of loyalty under Indiana law in connection with the challenged loan groups.
2. Whether the district court clearly erred in finding the breaches were a proximate cause of ACB’s loan losses.
3. Whether defenses based on regulatory involvement, contributory-fault-type doctrines, mitigation, estoppel, or the business judgment rule barred or limited the FDIC’s recovery.

## Decision

- The Seventh Circuit affirmed the judgment for the FDIC.
- The court upheld findings that certain directors approved or participated in imprudent and conflicted loan transactions and that these acts breached duties of care and loyalty.
- The court upheld findings that directors who failed to attend meetings and supervise lending breached the duty of care and shared responsibility for resulting losses.
- The court held the district court’s causation determinations were not clearly erroneous, including the inference that attentive directors could have prevented or altered the challenged loans.
- The court rejected defenses seeking to shift responsibility to regulators based on examinations, memoranda of understanding, or supervisory involvement, and declined to treat such involvement as barring FDIC claims.
- The court left undisturbed the damages award of $574,809.36, jointly and severally, for losses tied to three loan groups.

## Legal Principles

- Bank directors have an affirmative duty to supervise and monitor lending; sustained nonattendance and nonparticipation can constitute a breach of the duty of care, especially after repeated regulatory warnings.
- Directors who participate in transactions where they have a personal interest or divided loyalties may breach the duty of loyalty; approval of imprudent insider-tinged loans can support liability.
- Proximate cause in director-liability cases may be proven by showing that proper board attention and objection would likely have prevented or modified harmful transactions; appellate review of such findings is for clear error.
- The FDIC, as receiver, may sue former directors and officers for bank losses notwithstanding the agency’s prior supervisory activities; defenses premised on regulatory acquiescence or shared fault generally do not defeat the FDIC’s claims.
- The business judgment rule does not protect conduct that is not informed or in good faith, including complete inattention to oversight duties, disregard of basic warnings, or self-interested decisionmaking.

## Conclusion

The Seventh Circuit affirmed a judgment holding former bank directors and officers liable for losses from imprudent and conflicted loans and from failures of board oversight, and it held that prior regulatory supervision did not bar the FDIC, as receiver, from recovering for breaches that proximately caused the bank’s losses.


Fed. Deposit Ins. Corp. v. Bierman, 2 F.3d 1424 (7th Cir. 1993)