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California’s Business Judgment Rule

1019422_glass_building_2 sxchu.jpgIn July 2011, the Federal Deposit Insurance Corporation (FDIC) brought a lawsuit in a California federal court against Michael Perry, former CEO for Indymac Bank, over his purported actions during the United States mortgage crisis. The lawsuit alleges Perry allowed Indymac Bank to pool approximately $10 billion worth of unsalable and risky subprime loans that resulted in a $600 million loss to the company. When Indymac Bank ultimately closed, the FDIC was appointed as the company’s receiver.

Perry argued before the U.S. District Court for the Central District of California that California’s business judgment rule, which protects a corporation’s directors from legal liability for their business decisions, also protects corporate officers. Judge Otis Wright disagreed and allowed the FDIC’s case against Perry to proceed. Last week, Perry filed an interlocutory appeal with the Ninth Circuit Court of Appeals. In his appeal, Perry has asked the Ninth Circuit to consider the reach of California’s business judgment rule before the FDIC’s lawsuit against him proceeds.

Although the state’s business judgment rule applies solely to directors, Perry has argued a common law component to the rule also exists which ought to be read by California courts to protect a corporation’s officers from liability for business decisions. Perry also argued every other state in the nation has construed the common law associated with the business judgment rule to provide protections to corporate officers as well as directors. If the Ninth Circuit disagrees with Perry, California will be the only state in the nation that does not apply the business judgment rule to corporate officers.

A corporation is a business entity provided with many of the same legal rights as an individual. A variety of corporate structures exist in the United States. The most common corporate structures include closely held corporations, S corporations, and C corporations. Every corporation is subject to the laws of the state in which it was incorporated regardless of where its principal business takes place.

If a corporation issues stock, the company will normally be governed by its stockholders either directly or through a board. A board of directors must govern the corporation in a manner that serves the best interest of its stockholders. A corporation’s board of directors is responsible for making major business decisions. The board will also appoint and supervise corporate officers who handle the company’s daily business decisions.

By choosing to incorporate your business, you can normally limit an individual’s personal liability to corporate assets. The business judgment rule also generally protects agents of a corporation from liability for losses incurred during corporate transactions that are within the scope of the agent’s authority and made in good faith. A qualified business lawyer can explain the benefits of incorporating your business.


Contact the Law Offices of Salar Atrizadeh to discuss your corporate or business law needs. Salar Atrizadeh is an experienced Beverly Hills corporate attorney. He is available to assist California business clients with all of their corporate legal needs including corporate entity formation and dissolution. Contact the Law Offices of Salar Atrizadeh through the firm’s website or call (310) 694-3034(310) 694-3034.

More Blogs:

Retirement Accounts Are Generally Protected During Bankruptcy, Internet Lawyer Blog, February 29, 2012
Employee Manual Guidance for California Businesses, Internet Lawyer Blog, February 28, 2012
Additional Resources:

Does California’s ‘Business Judgment Rule’ Shield Officers Too?, by Joe Palazzolo, Wall Street Journal

FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER FOR INDYMAC BANK, F.S.B., v. MATTHEW PERRY, No. CV 11-5561-ODW, U.S. District Court for the Central District of California, Western Division (February 21, 2012).