A group of former directors for the now-defunct Tracy Collins Bank hope the U.S. Supreme Court will hear their case after their attorney filed a motion Friday seeking permission to present their arguments.
Attorney Robert Campbell said he filed a petition for a writ of certiorari with the high court late Friday. At issue is whether directors of failed financial institutions can be held personally liable for bad loans, even though no allegations of fraud or wrongdoing are involved.Such a ruling would define whether officers of hundreds of failed financial institutions nationwide could be held personally responsible for bad debts for what is termed "simple negligence."
Federal banking regulations state that a director or officer "may be held personally liable for monetary damages . . . for gross negligence," which includes fraud or criminal wrongdoing.
No such allegations have been made in the Tracy Collins case, but the Federal Deposit Insurance Corp. wants financial officers held responsible for bad debts even though they approved the loans in good faith, believing the transactions were viable. Campbell said the "simple negligence" standard allows FDIC officials to basically "second-guess" the best judgment of financial officers at the time the transactions were approved.
The petition follows a June 23 ruling by the 10th Circuit Court of Appeals in Denver, affirming an earlier decision that would allow the bank's directors to be held personally responsible for bad debts that forced closure of Tracy Collins in December 1988. The FDIC has sued the bank's officers for $7 million, alleging negligent management of the bank from 1982 to 1988.
The 10th Circuit ruling conflicts with decisions on similar cases in two other jurisdictions, Campbell said. Rulings issued recently in both the 6th and 9th circuits say gross negligence must be involved before officers can be held personally responsible for bad loans.
The discrepancies have arisen because state banking laws in five states allow for prosecution under "simple negligence" criteria, while other state laws adhere to the "gross negligence" standard. As a result, Campbell said the most recent 10th Circuit ruling "is a thoroughly erroneous decision. It will clearly and directly breed inconsistent and conflicting application from state to state . . .
"This decision is likely to mean that no rational-minded men and women of experience, talent and judgment will be willing to serve upon any bank board."
Campbell said a ruling by the high court would do away with inconsistent prosecution of bank officials that will result if his petition is denied, allowing some states to prosecute under their state banking laws for "simple negligence."
Among others, the ruling could affect officers in several failed institutions either based in Utah or with branches here, including American Savings, Deseret Federal Savings, Sandia Federal Savings and MountainWest Savings.
The FDIC has 30 days to respond to the petition.