North Carolina Law Review

University of North Carolina School of Law

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Chapel Hill, NC 27514

Overcoming the Rippy Effect: Why the North Carolina Business Corporations Act Should Allow Permissive Officer Exculpation

September 30, 2016

94 N.C. L. Rev. 2155 (2016) 

 

What if, in the popular board game Monopoly, “Get Out of Jail Free” cards could only be drawn by a predetermined segment of players? Further, what if the opportunity to draw the liberating vouchers was based on an arbitrary distinction that had no bearing on past or future performance? In all likelihood, players who could draw “Get Out of Jail Free” cards would engage in riskier and potentially more rewarding behavior than their opportunity-less counterparts because they might be able to “avoid jail” even after an unfortunate roll of the dice. Eventually, inducing opportunity-less gamers to play at all might prove problematic. 

 

If corporate management can be considered the game—and directors and officers the players—then the Court of Appeals for the Fourth Circuit in F.D.I.C. ex rel. Cooperative Bank v. Rippy recently interpreted North Carolina law to dictate that only directors have the chance to draw the little orange cards. In Rippy, the court held that while bank directors were not liable for ordinary negligence, sufficient evidence was presented to rebut the presumption that bank officers had acted on an informed basis. The Rippy court interpreted the exculpatory provision as allowing exculpation for directors—but not officers. Central to the Rippy court’s finding of no liability for directors was their analysis of an exculpatory provision contained in the bank’s bylaws and permitted by the North Carolina Business Corporations Act (“NCBCA”). Although the bank’s directors and officers engaged in the same negligent behavior, only the officers were exposed to liability.

 

This Recent Development argues that the NCBCA should be amended to allow permissive officer exculpation in corporate charters. 

 

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