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Legal Alert: Two Certified Issues to the Georgia Supreme Court Will Address Application of the Business Judgment Rule to Bank Officers and Directors  

January 16, 2014

In an unexpected turn of events, two recent cases arising out of the U.S. District Court for the Northern District of Georgia have resulted in two sets of certified questions to the Georgia Supreme Court that will likely have an impact on the ability of officers and directors of Georgia financial institutions to rely on the protection of the Business Judgment Rule. The certified questions place two issues before the Georgia Supreme Court:

  1. Are officers and directors of Georgia financial institutions entitled to claim the protection of the Business Judgment Rule?
  2. Does the availability of the Business Judgment Rule change if the plaintiff suing them is the Federal Deposit Insurance Corporation (FDIC)?

In the course of a raft of litigation filed by the FDIC against bank officers and directors in Georgia, and notwithstanding what many have viewed as established authority going back many years if not decades, the FDIC has persisted in asserting claims for simple negligence and breach of fiduciary duty, rather than only relying on a gross negligence standard in pursuing the officers and directors of Georgia’s failed financial institutions. The gross negligence standard, which Georgia law defines as the absence of “that degree of care which every man of common sense, however inattentive he may be, exercises under the same or similar circumstances,”requires the FDIC to show more blatantly negligent activity on the part of officers and directors. By contrast, simple or ordinary negligence is defined as the absence of “that degree of care which is exercised by ordinarily prudent persons under the same or similar circumstances.”2

For years, officers and directors of Georgia financial institutions have asserted the protection of the Business Judgment Rule in support of motions to dismiss allegations of simple negligence. Georgia federal courts have agreed, often citing two non-banking Georgia Court of Appeals decisions3 that provide Business Judgment Rule protection for officers and directors of all Georgia corporations.  Thus, when the FDIC as the receiver for a failed bank sues the bank’s officers and directors to recoup damages allegedly resulting from a bank’s failure, the Business Judgment Rule should, as a matter of law, foreclose the FDIC’s ability to base its claim on ordinary negligence, leaving the FDIC in those cases having to satisfy a gross negligence standard.4  

A primary source of contention for the judges in both of the certified cases is whether the two non-banking Georgia Court of Appeals decisions are applicable to bank officers and directors in light of Georgia’s statutory language requiring bank officers and directors to exercise ordinary prudence.5  The Georgia Supreme Court has placed both sets of certified questions on its docket for arguments in March and April 2014 with a decision likely in 2014.

FDIC v. Loudermilk

On November 25, 2013, Judge Thomas W. Thrash, Jr. of the U.S. District Court for the Northern District of Georgia issued his opinion in FDIC v. Loudermilk in which he “respectfully disagree[d]” with precedent and questioned whether the Business Judgment Rule should apply to officers and directors of failed banking institutions.  In the suit against the former members of the Loan Committee at Buckhead Community Bank, Judge Thrash denied the defendants’ motion to dismiss the FDIC’s claim of ordinary negligence. Judge Thrash based his conclusions on three grounds:7 

1) Suits against bank officers and directors differ from shareholder suits against corporate officers and directors where the Business Judgment Rule is applied because the FDIC and the taxpaying public bear the loss of bank failures as opposed to just shareholders;8

2) The language of O.C.G.A. § 7-1-490 requires bank officers and directors to act with the “diligence, care, and skill which ordinary prudent men would exercise under similar circumstances in like positions;” and

3) Suits involving the FDIC as receiver are not private shareholder suits, but suits involving a federal agency that was appointed as the receiver of a failed bank in the midst of a banking crisis.9  This third ground of Judge Thrash’s reasoning appears to imply that the Business Judgment Rule should not apply to bank officers and directors primarily because the plaintiff is a public federal agency.10 

Judge Thrash’s opinion indicates that the “ordinary prudent men” standard imposed on bank officers and directors in O.C.G.A. § 7-1-490 appears to be in tension with the Business Judgment Rule,11  which forecloses ordinary negligence claims. Judge Thrash certified the following “unsettled question of law” to the Georgia Supreme Court:12 

Does the business judgment rule in Georgia preclude as a matter of law a claim for ordinary negligence against the officers and directors of a bank in a lawsuit brought by the FDIC as receiver for the bank?

The certified question is currently on the Georgia Supreme Court’s docket and is set for oral arguments in March 2014.

FDIC v. Skow

FDIC v. Steven Skow, arose out of the failure of Integrity Bank in Alpharetta, Georgia. The defendant bank officers and directors moved to dismiss the FDIC’s claim of ordinary negligence. Relying on Flexible Products and Brock Built, the U.S. District Court for the Northern District of Georgia held that the FDIC did not have the ability to assert claims for ordinary negligence in professional liability suits against bank officers and directors and granted the defendants’ motion.13 

The FDIC appealed the District Court’s decision. Similar to Judge Thrash, the U.S. Court of Appeals for the Eleventh Circuit opined that applying the Business Judgment Rule laid out in Flexible Products and Brock Built to bank officers and directors “might contradict the plain language” of O.C.G.A. § 7-1-490.14  Finding an unresolved question of state law, the Eleventh Circuit certified the following two questions to the Georgia Supreme Court:15

1) Does a bank director or officer violate the standard of care established by O.C.G.A. § 7-1-490 when he acts in good faith but fails to act with “ordinary diligence,” as that term is defined in O.C.G.A. § 51-1-2?

2) In a case like this one, applying Georgia’s business judgment rule, can the bank officer or director defendants be held individually liable if they, in fact as alleged, are shown to have been ordinarily negligent or to have breached a fiduciary duty, based on ordinary negligence in performing professional duties?

The questions have been placed on the Georgia Supreme Court docket and are currently scheduled for argument in April 2014.

Implications of Loudermilk and Skow

The issue of the applicability of the Business Judgment Rule to bank officers and directors likely will play an important role in cases brought by the FDIC as receiver against officers and directors of failed Georgia banks. A Georgia Supreme Court decision that agrees with Judge Thrash’s decision in Loudermilk could expose officers and directors to scrutiny under a lower simple negligence standard. Given that the two prevailing Georgia Court of Appeals decisions are non-bank decisions, it will also be interesting to see how any decision of the Georgia Supreme Court endangers or expands application of the Business Judgment Rule not only to financial institutions but also to non-bank Georgia corporations.

                                      

1 O.C.G.A. § 51-1-4.
2 O.C.G.A. § 51-1-2.
3 The two oft-cited cases are Brock Built, LLC v. Blake, 300 Ga. App. 816, 821-22 (2009) (holding that “[t]he business judgment rule affords an officer the presumption that he or she acted in good faith, and absolves the officer of personal liability unless it is established that he or she engaged in fraud, bad faith or an abuse of discretion.”); and Flexible Products Co. v. Ervast, 284 Ga. App. 178, 182 (2007) (holding that Georgia’s business judgment rule “forecloses liability in officers and directors for ordinary negligence…”).
See FDIC v. Skow, No. 1:11-cv-0111-SCJ, 2012 WL 8503178, at *9 (N.D. Ga. Aug. 14, 2012); FDIC v. Miller, No. 2:12-cv-42-WCO, 2012 WL 9494095, at *3 (N.D. Ga. Dec. 26, 2012) (“[T]he court finds that plaintiff’s claims based on ordinary negligence are foreclosed by the [business judgment rule] and fail as a matter of law.”).
5 O.C.G.A. § 7-1-490.
FDIC v. Loudermilk, No. 1:12-cv-4156-TWT, 2013 WL 6178463, at *4 (N.D. Ga. Nov. 25, 2013).
Id. at *5.
8 Judge Thrash’s conclusion that bank failures cause loss to the public may conflict with Eleventh Circuit precedent. See, e.g., FDIC v. Harrison, 735 F.2d 408, 412 n.5 (11th Cir. 1984) (stating that the FDIC is funded through insurance premiums paid by member banks, and the public is not affected by losses to the FDIC); Skow, 2012 WL 8503178 at *17 n.25 (upholding as binding Eleventh Circuit authority the conclusion in Harrison that FDIC losses are not borne by taxpayers).
9 Loudermilk, 2013 WL 6178463 at *4.
10 See Kevin LaCroix, Are Bank Directors and Officers Entitled to Less Business Judgment Rule Protection Than Other Corporate Directors and Officers?, THE D&O DIARY (Dec. 3, 2013), http://www.dandodiary.com/2013/12/articles/failed-banks/are-bank-directors-and-officers-entitled-to-less-business-judgment-rule-protection-than-other-corporate-directors-and-officers/.
11 Loudermilk, No. 2013 WL 6178463, at *4-5.
12 Id. at *5.
13 See FDIC v. Skow, No. 1:11-cv-0111-SCJ, 2012 WL 8503168, at *8 (N.D. Ga. Feb. 27, 2012).
14 FDIC v. Skow, No. 12-15878, 2013 WL 6726918, at *2 (11th Cir. Dec. 23, 2013).
15 Id. at *3.

If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed or the Sutherland attorney with whom you regularly work.

 

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