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By Yin Wilczek
June 2 — Some courts are starting to suggest that it may be easier to sue corporate officers than directors for breaching their duty of care, a law professor said June 1.
There has been “hinting and signaling” by some lower courts “that the fiduciary duty will be more stringent” for corporate officers than for directors, said Paul McGreal, who will become dean of Creighton University's School of Law July 1.
McGreal, the former dean of the University of Dayton's law school, said that of those decisions, he was “most interested and concerned” by the U.S. District Court for the District of Minnesota's recent ruling in Iron Workers Mid-South Pension Fund v. Davis (Docket No. 13-289), 2015 BL 78256.
In a March 19 opinion, Judge John Tunheim suggested that corporate officers may be liable for breaching their duty of care under the gross negligence standard rather than the higher standard of conscious disregard set out for directors under In re Caremark International Inc. Derivative Litigation., 698 A.2d 959 (1996).
McGreal said the ruling has particular implications for compliance officers.
Gross negligence “is an interesting standard,” McGreal said at a Practising Law Institute compliance panel. “Whether it’s the correct one, whether Delaware will adopt it I don't know, but” the ruling is part of evolving case law suggesting “there may be a heightened standard under Caremark for oversight of the compliance function, and certainly anyone who is a compliance officer should at least be concerned about that.”
In Caremark, the Delaware Chancery Court held that only a “sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system exists—will establish the lack of good faith that is a necessary condition to liability.”
McGreal observed that although it is extremely difficult to hold directors liable under Caremark, two underdeveloped questions in Delaware corporate law are: (1) what are the duties of corporate officers? and (2) who is an officer? He told the audience he has been “waiting for years” to see how the courts apply Caremark to officers, especially compliance officers.
“My considered opinion is that someone who is a chief compliance officer would fit that definition because typically, courts look at someone who is responsible for a significant function or business within an organization regardless of whether there is an ‘officer' in their title,” McGreal said.
The Iron Workers ruling involved a shareholder derivative lawsuit filed by the Iron Workers Mid-South Pension Fund alleging that U.S. Bank officials failed in their oversight duties as a trustee that made various mortgage-backed securities investments. The district court dismissed the lawsuit in December 2013 on the basis that the plaintiff made a presuit demand that was refused by the board.
The court granted the defendants' motions to dismiss the plaintiff's amended complaint in March. It found that the complaint did not adequately plead that red flags alerted the director defendants to any failings at the bank that they consciously disregarded. The court also dismissed the complaint against the corporate officers, finding that it did not adequately plead at least gross negligence in connection with their conduct.
In his remarks, McGreal also cited to Delaware's exculpatory provision for directors, noting that the provision doesn't apply to officers.
Delaware General Corporation Law Section 102(b)(7) allows directors to be exculpated for certain types of breach of duty claims at the outset of a case.
“So where directors can get their case dismissed up front, officers would have to go through the litigation process,” McGreal said. However, he added that the officers ultimately may be indemnified if their companies allow for it in their bylaws.
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The ruling is available at http://www.bloomberglaw.com/public/document/Iron_Workers_MidSouth_Pension_Fund_v_Davis_No_13289_JRTHB_2015_BL.
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