In a recent ruling, the federal court in Los Angeles found that directors of a failed credit union were not liable for acts alleged to be negligent because the actions of the directors were protected by the so-called business judgment rule.

The case was brought by the National Credit Union Administration, which is the federal regulator of federal credit unions. The defendants are the former directors of WesCorp FCU, a now defunct credit union that acted as a “banker’s bank” for other credit unions. The NCUA alleged that WesCorp had purchased very large amounts of Option ARM-based mortgage-backed securities without regard to conducting sufficient analysis of the creditworthiness of the underlying securities or concentration limits in the institution’s portfolio. The NCUA alleged that this failure was negligence and the proximate cause of the credit union’s subsequent collapse.