A U.S. District Court judge for the Eastern District of California has ruled that California dividend statutes trump common law claims in FDIC v. Ching, where the FDIC acting as receiver sued 11 former officers and directors of the failed Butte Community Bank in Chico, CA for breach of fiduciary duty, negligence and gross negligence and sought to recover more than $8 million in restitution.
Butte Community Bank was closed in 2010 by the California Department of Financial Institutions and put into receivership with the FDIC. As receiver, the FDIC filed suit against 11 of the bank’s officers and directors for failing to maintain adequate capitalization for the bank, allowing the bank to improperly transfer assets to its holding company and for approving a May 2008 dividend that allowed the defendants to realize a gain on their investment in company stock but caused or contributed to an “unwarranted depletion of capital” from the bank.
The FDIC was seeking $8.8 in restitution from the 11 defendants, the amount equal to the May 2008 dividend paid to the bank’s holding company that was used to buy back shares from the defendants in a tender offer.
While restrictions on distributions to shareholders are specified in Chapter 5 of the California Corporations Code, the Code is silent on matters of D&O liability when the limitations outlined in Chapter 5 have been met. The FDIC did not allege violations of the California Corporations Code in its complaint, but relied instead on negligence and common law fraud claims.
In a July 8, 2014, ruling, Judge Kimberly J. Mueller ruled for the Court that the FDIC’s common law claims were preempted by the statute and granted summary judgment for the defendants.
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