On the Länder’s State Liability to their Regional State Banks (Landesbanken)
Are the Länder Liable to their Regional State Banks for Breaches of Duty by the Members of the Board of Directors (Verwaltungsrat)?
Some of the German regional state banks suffered large losses during the last financial crisis. Amongst others, the board of directors has been accused of serious misconduct leading to those damages.
Some of the members of the board of directors of a regional state bank are assigned by its respective land. This leads to the question whether a land may be held responsible for the misconduct of the self-appointed members of the board of directors. Such responsibility could derive from Article 839 of the German Civil Code (BGB) in conjunction with Article 34 of the Basic Law (Grundgesetz) which constitute claims arising from public liability. In this constellation, two particularities can be found. First, public liability claims arise between public authorities since regional state banks are organized as a public-law institution (Anstalt des öffentlichen Rechts). Second, the members of the board of directors are provided with an internal function within the bank.
In principle, claims can arise from public liability if a regional state bank is harmed by a member of the board of directors assigned by the land who breaches his obligation to supervise the board. A prerequisite for the liability is the accountability of actions of the director to the respective land. That was the case in 2007, when the Free State of Bavaria was represented within the board of directors of the Bayerische Landesbank with members of the government appointed by law and other state officials subject to directives. If the directors are to be qualified as such, the Landesbank is automatically a third party in terms of Article 839 BGB. This is because the directors are not supervising the bank for their land in a consensual cooperation with the regional state bank. The official duty of facilitating the bank that was harmed because of faulty supervision serves the protection of the Landesbank. A bank’s claim against the land arises from public liability under the further prerequisites of culpability of the directors, the absence of comparative negligence and as long as the reference to the second sentence of Article 839 para. 1 BGB does not apply. Therefore, the personal liability of the directors towards their Landes-bank is non-applicable.