Of Hungry Wolves and Horizontal Conflicts: Rethinking the Justifications for Bank Holding Company Liability
Eric J. Gouvin | 1999 U. Ill. L. Rev.
To what extent should bank holding companies bear the costs of bank failure? Current banking law provides a number of ways to impose liability on bank holding companies for bank failure. Those devices, however, have developed haphazardly and sometimes rest on inconsistent theoretical foundations. Professor Gouvin critiques the regulatory justifications that have been offered for holding company liability and offers an alternative justification for imposing liability on holding companies based on the idea that directors of bank subsidiaries suffer from an especially difficult form of horizontal conflict--the situation where the board of directors owe several different duties and choose to serve shareholder interests to the exclusion of all others, including their duty to the bank as an entity. He resolves the horizontal conflict through the application of agency-like principles. The quasi-agency approach would treat subsidiary directors as quasi agents of the parent company and impose responsibility directly on the holding company for any duties that bank managers owe to parties other than the bank holding company (including the duty to act in the best interest of the bank as an entity). Under the quasi-agency approach, the holding company should be liable only to the extent that the directors of its properly capitalized bank failed to discharge duties to nonparent constituents (including any duty to the bank itself as a separate legal entity). The extent of the liability so incurred should be limited to the harm caused by the failure to discharge the duty.
* Professor of Law, Western New England College School of Law. A.B. Cornell University; J.D., L.L.M. Boston University; M.P.A. Harvard University. The author thanks Phillip Blumberg, Deborah DeMott, Donald Korobkin, Geoffrey Miller, Eric Orts, and the participants of the Western New England College School of Law faculty forum for their valuable comments on an earlier draft of this article; of course, all mistakes, misconceptions, and omissions are solely the responsibility of the author. The author also thanks Dean Donald Dunn of the Western New England College School of Law for supporting this project with a research grant.