A recurring issue in FDIC litigation against the former directors and officers of failed banks has been whether the business judgment rule insulates the defendants from claims of ordinary negligence. This question has been particularly important in Georgia, where there were more bank failures than any in other state and consequently more failed bank litigation.
Several federal district courts, applying Georgia law, have ruled that individual defendants are entitled to have the FDIC’s negligence claims against them dismissed based on the business judgment rule (as discussed, for example, here). However, in the lawsuit the FDIC filed against the former directors and officers of The Buckhead Community Bank, the district judge questioned whether or not the business judgment rule afforded this protection, and certified the question to the Georgia Supreme Court.
On July 11, 2014, the Georgia Supreme Court ruled in Federal Deposit Insurance Corporation v Loudermilk (here) that the common law of Georgia recognizes the business judgment rule and that the rule has not been superseded by Georgia statutory law. But while the Court found that the rule insulates directors ad officers from claims of negligence concerning the wisdom of their judgment, it does not foreclose negligence claims against them alleging that their decision making was made without deliberation or the requisite diligence, or in bad faith.
The Court further elaborated that in connection with the negligence claims not foreclosed by the business judgment rule bank directors and officers are subject only to a limited standard of care, are entitled to a conclusive presumption of reasonableness in connection with their reliance on the information and statement provided to them by bank officers and outside advisors, and are presumed to have acted in good faith and to have exercised ordinary care.
As discussed here, on November 30, 2012, the FDIC as receiver of The Buckhead Community Bank filed a complaint in the Northern District of Georgia against nine former directors and officers of the failed bank. The FDIC’s complaint asserts claims against the defendants for negligence and for gross negligence and alleges that the defendants engaged in “numerous, repeated, and obvious breaches and violations of the Bank’s Loan Policy, underwriting requirements and banking regulations, and prudent and sound banking practices” as “exemplified” by thirteen loans and loan participations the defendants approved that caused the bank damages “in excess of $21.8 million.”
The defendants moved to dismiss the FDIC‘s ordinary negligence claims against them, relying on several prior decisions in failed bank cases in the Northern District of Georgia that bank directors cannot be held liable for ordinary negligence under Georgia’s business judgment rule.
As discussed here, on November 25, 2013, Northern District of Georgia Judge Thomas W. Thrash Jr. said that he “is not convinced that the business judgment rule in Georgia should be applied to bank officers and directors and is not convinced that Georgia law is settled on the issue.” He certified the following question to the Georgia Supreme Court:
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 July 11 Opinion
In a scholarly and detailed July 11, 2014 opinion written by Justice Keith R. Blackwell, a unanimous Georgia Supreme Court held that “the business judgment rule precludes some, but not all claims, against bank directors and officers that sound in ordinary negligence.”
Justice Blackwell opened his consideration of the certified question with an extensive historical review on of prior Georgia Supreme Court case law, concluding based on the prior cases that “if the only dispute is the wisdom of a business judgment” then “the law at least would require something more than a mere want of ordinary care to establish liability.” However if the question was whether a business decision was “a product of deliberation, reasonably informed diligence and made in good faith,” the decision is “open to judicial scrutiny.”
Based on this review, Justice Blackwell concluded that “the business judgment rule is a settled part of our common law in Georgia” that “generally precludes claims against directors and officers for their business decisions that sound in ordinary negligence, except to the extent those decisions are shown to have been made without deliberation, without the requisite diligence to ascertain and asses the facts and circumstances upon which the decisions are based, or in bad faith.” In other words,
the business judgment rule at common law forecloses claims against officers and directors that sound in ordinary negligence when the alleged negligence concerns only the wisdom of their judgment, but it does not absolutely foreclose such claims to the extent that a business decision did not involve “judgment” because it was made in a way that did not comport with the duty to exercise good faith and ordinary care.
Justice Blackwell added that the rule “applies equally at common law to corporate directors and officers generally and to bank directors and officers.”
Justice Blackwell then considered whether the Georgia General Assembly had “modified or abrogated the business judgment rule.” After reviewing OCGA Section 7-1-490(a), Justice Blackwell concluded that the statute “does not supersede the business judgment rule at common law, as the rule was acknowledged in the early decisions of this Court.”
The Court did rule that the common law and the statutory provisions were inconsistent with at least two intermediate appellate court decisions in which the courts had held that the business judgment rule precluded all claims of ordinary negligence against directors and officers. Noting that under the common law and the corollary statutory provisions directors and officers “may be held liable for a failure to exercise ordinary care with respect to the way in which business decisions are made,” the Supreme Court overruled the intermediate appellate opinions.
Interestingly, though the court observed that it could have limited its decision to overrule the intermediate appellate court decisions solely to questions involving bank directors and officers’ liability, leaving questions for another day would “only create needless uncertainty” and so the Court overruled the decisions for all purposes – that is, as to bank directors and officers and as to non-bank directors and officers as well.
The Court acknowledged the defendants’ argument that even if only some claims for ordinary negligence against bank directors and officers are precluded by the business judgment rule, “bank management will be too much deterred from taking risks, to the detriment of Georgia banks and consumers alike.” The Court said that these worries “underestimate, we think, the strength of the business judgment rule acknowledged in our early decisions at common law.”
In addition, the Court noted, there are several features of the standard of care for bank directors and officers under Georgia law as a result of which the individuals still enjoy “meaningful protection to offices and directors who serve in good faith and with due care.”
First the court noted, “the standard of ordinary care for bank officers and directors is less demanding than the standard of ‘ordinary diligence’ with which “most ordinary negligence claims are concerned.”
Second, the statutory law “conclusively presumes that it is reasonable for an officer or director to rely upon information” provided by bank management or outside advisors. If the officer or director “relies in good faith on information” provided by others, “the reasonableness of his reliance cannot be questioned in court.”
Finally, the Court noted, “when a business decision is alleged to have been made negligently, the wisdom of the decision is ordinarily insulated from judicial review, and as for the process by which the decision was made, the officers and directors are presumed to have acted in good faith and to have exercised ordinary care.”
In conclusion, the Court noted that the business judgment rule “never was meant” to protect “mere dummies or figureheads,” but to the extent that “more protection for officers and directors is desirable, the political branches may provide it.”
The Georgia Supreme Court’s decision will have an immediate impact on the many FDIC lawsuits involving failed Georgia banks, as it will substantially affect the ability of the individual defendants to have the claims against them dismissed. The allegations in these cases will all have to be considered in the light of the protections the Supreme Court said the business judgment rule affords business decision making and the limitations on those protections for alleged negligence in the decision-making process.
The likelihood under this standard is that while the directors and officers may succeed in getting some of the negligence claims against them dismissed, they may not be successful in having other negligence claims against them dismissed. Although the FDIC’s allegations in its many complaints vary, its negligence claims do not typically allege merely that the defendants made the wrong decision, bur rather that their decisions were imprudent or made without appropriate deliberation – that is, the kind of allegations with respect to which the Georgia Supreme Court said the business judgment rule does not afford protection.
In other words, the practical implication of the Georgia Supreme Court’s ruling is that many — perhaps even most — of the FDIC negligence claims against former directors and officers of Georgia banks will survive motions to dismiss.
To be sure, the Georgia Supreme Court emphasized that the bank directors and officers subjected to claims not precluded by the business judgment rule are afforded “meaningful protection” as a result of the lower standard of care and presumptions of reasonable reliance and good faith. The individual directors and officers and their counsel will of course endeavor to make the most of these aspects of the Court’s decision, and in cases that are decided on the merits after a full evidentiary hearing, these considerations may indeed afford the individual defendants substantial protection.
The difficulty is that without the ability to have many kinds of negligence claims dismissed at the outset, the individuals must incur the expense and uncertainty of defending against the claims. Facing the prospect of possible liability in a case based on a lower standard of liability (that is, mere negligence rather that gross negligence), the directors and officers may face pressure to settle – and with the increased prospect of liability based on the lower standard of liability, the cost of settlement may be increased as well.
The precedential authority of the Georgia Supreme Court’s decision is limited to cases to which the law of Georgia applies. However, the decision may have persuasive effect in cases to which other jurisdictions’ law applies. It is rare for any state’s Supreme Court to address these kinds of issues, and as the Georgia Supreme Court’s opinion is both a scholarly, thoughtful ruling and the rare pronouncement by a court of highest authority, it undoubtedly will be invoked by parties in other courts and considered by courts in other jurisdictions. Just as the Georgia Court itself took into account cases involving similar laws in other jurisdictions (particularly New York and Florida), the courts in other jurisdictions may look to the Georgia Supreme Court’s analysis to inform their decisions. The Georgia Supreme Court’s opinion potentially could have a substantial impact, even outside of Georgia.
One specific case on which The Buckhead Community Bank decision seemingly would have a direct and immediate impact is the “other” case that had been certified to the Georgia Supreme Court on nearly identical questions of law – that is, the Integrity Bank case, in which the Eleventh Circuit had also certified a question concerning the business judgment rule to the Georgia Supreme Court (as discussed here) The Georgia Supreme Court not only did not issue a decision in the Integrity Bank case on July 11 – the final day of the term — but did not in The Buckhead Community Bank case even refer to the Integrity Bank case, a silence that strikes me as odd.
In response to my question about why the Georgia Supreme Court did not issue opinions in the two cases simultaneously, a lawyer for one of the parties in the Integrity Bank case said “Beats me.” So with the other cases still hanging out there, there is the uncertain possibility that the opinion in the Integrity Bank case may have something more to say on these topics. A ruling in the Integrity Bank case before the end of 2014 seems likely.
One final issue that I was interested to see the Georgia Supreme Court address was the question that Judge Thrash had raised in the District Court, which is whether or not bank directors and officers are entitled to lesser protection from the business judgment rule than are directors and officers of other business corporations. The Court’s answer was not exactly what the bank directors and officers had been hoping for; that is, the Court agreed in the end that the business judgment rule protects bank directors and officers and directors and officers of other corporations in the same way, but that in neither case are directors and officers entitled to absolute immunity from negligence claims.
I would like to thank the several loyal readers who sent me copies of the Georgia Supreme Court opinion. I am very grateful to all of the readers who help supply me with the information to help keep this blog timely and informative.
A New Book About D&O Insurance Underwriting: All readers of this blog, and particularly those interested in learning more about D&O Insurance underwriting, will want to know about a new book written by industry veteran Larry Goanos. The book, which recently became available for purchase here, is entitled “D&O Insurance 101: Understanding Directors and Officers Insurance.” As I wrote in the book’s foreword, the book provides “a detailed overview of all of the basic technical concepts involved with D&O insurance underwriting” and it also “addresses perennial issues, such as limits selection, retentions, coinsurance and much more besides.”
The book represents, I wrote in the foreword, “a valuable resource for anyone involved with the D&O insurance industry or who wants to try to understand how it works at the basic transactional level. The book not only provides a useful introduction to the D&O insurance underwriting process, but it also provides an insider’s look at the way things actually work in the trenches.”
Another reason to recommend this book is that Larry intends to donate the book’s proceeds among six charities: Go Campaign, Lighthouse International, The Carolyn Sullivan Memorial Foundation; The Danielle Kousoulis Memorial Scholarship Fund; The National Kidney Foundation; and The St. Baldrick’s Foundation.
As I said in the final sentence of the book’s foreword, “It is obvious Larry had a lot of fun writing this book. The rest of us get to have the pleasure of reading it.” I recommend this book for everyone.
PLUS Webinar on the Halliburton Decision: On Monday July 14, 2014, at 12:30 pm EDT, the Professional Liability Underwriting Society will be hosting a free webinar on the U.S. Supreme Court’s recent Halliburton decision and its implications for publicly traded companies and for their D&O insurers. This 45-minute webinar will feature Jordan Eth of the Morrison Foerster law firm, Mike Dowd of the Robbins Geller law firm, and Michael Nicholai of Berkley Professional. Registration information about the webinar can be found here.
Time for Nominations to the ABA Journal’s Annual Blawg 100: It is once again time for nominations to the ABA Journal’s annual list of the top 100 law blogs. Everyone should take a moment to nominate their favorite law blogs for inclusion in the list. I would be humbled and grateful if any reader would be willing to nominate my blog. Nominations can be made here. Don’t delay, nominations are due by 5:00 pm EDT on Friday August 8, 2014.