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Well over four years ago, before the subprime mortgage meltdown caused all our economic dominoes to tumble one into the other, leaving us wallowing in the current morass, I wrote a brief post about an important case involving directors of a company more associated with fantasy than funding. At the time I wrote it, I was thinking about the 19980s and 1990s, when directors and officers of failed banks and thrifts were mercilessly pursued by the FDIC, especially if they were covered by a liability policy the FDIC could tap to extract a settlement. When a fellow banking lawyer recently told me that the FDIC was, indeed, commencing its pursuit of directors of failed FDIC-insured banks, I thought it would a good time to re-post this short exposition on the problems associated with trying to impose legal liability upon folks with the benefit of 20/20 hindsight.

Those of us who represented banks and savings banks in the 1980s, especially those in Colorado and Texas, know that when scores of banks and thrifts failed at the end of that decade and in the early part of the next decade, the government agencies pursued the former directors (along with the former officers, controlling shareholders, borrowers, attorneys, accountants, appraisers and other professionals). Even where there was no criminal wrongdoing or conflicts of interest alleged (and, surely, there was some of that), the government sued directors for the breach of their duty to exercise "due care" in exercising their "business judgment." Initiated years after the decisions were made by the directors, many (certainly not all) of the actions pursued against these directors appeared to many of us to smack of the use of 20/20 hindsight to attempt to hang these board members out to dry.

In many cases, directors and/or the insurance companies that issued their errors and omissions policies, paid through the nose. Many settled these actions when they could to avoid being eaten alive by attorneys' fees and costs, and to limit the "psychological damage." No one, least of all an angry public that lacked understanding of the underlying economic causes of the failure of some of these banks and thrifts, wanted to hear was "it was a reasonable decision at the time that did not work out." Somebody had to pay, and the government went after every private nickel it could squeeze.

That's why, so many years later, I read with wry amusement today's decision by a Delaware court in the case filed by Disney shareholders against its Board of Directors over the hiring of uberagent Michael Ovitz as Disney's CEO and the granting to him of a $140 million severance package when the Board gave him "the boot" 14 months later.

Chancellor William Chandler III said that while directors' conduct "fell significantly short of the best practices of ideal corporate governance," board members did not breach their duties or commit waste.

"It is easy, of course, to fault a decision that ends in failure, once hindsight makes the result of that decision plain to see. But the essence of business is risk - the application of informed belief to contingencies whose outcomes can sometimes be predicted, but never known," Chandler wrote in a 175-page opinion.

I haven't read all 175 pages, but no more reasonable statement of the realities of the business world could be given. Too bad Chancellor Chandler was not overseeing some of the cases I consulted on 15 years ago. Some good people could have been spared some pain, and the "bad guys" would still have been punished.

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