J. Scott Watson asked justices to decline an invitation to let bankers be less accountable.
J. Scott Watson asked justices to decline an invitation to let bankers be less accountable. (Photo by John Disney/Daily Report)

The Supreme Court of Georgia is considering whether a Georgia law protects the corporate officers and former executives of a Buckhead bank that failed under their watch from personal liability for the bank’s losses even if they neglected their corporate duties.

The justices heard oral arguments Monday because U.S. District Judge Thomas Thrash sought their interpretation of the state’s business judgment rule and how it may apply to bank directors and officers in a suit brought by the FDIC against them.

The business judgment rule, in general, protects company officers from liability when they make “good faith business decisions in an informed and deliberate manner,” according to a 2009 ruling by the Georgia Court of Appeals (Brock Built v. Blake, 300 Ga. App. 816). The presumption behind the rule, according to the appeals court, is that a company’s corporate officers have acted on an informed basis, in good faith, and with the belief that any actions they took were in the best interests of the company. As a result, they can’t be held personally liable for managerial decisions that turned out badly, caused harm or led to a company’s collapse, and the state courts shouldn’t second-guess those decisions.

Thrash certified this question to the state 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 judge said he had been unable to find any clear precedent set by the Georgia high court that the rule applies to bank officers and directors, whose conduct is governed by separate state statutes.

During oral arguments on Monday, J. Scott Watson of the FDIC in Washington urged the high court to answer Thrash with a resounding no, “and decline an invitation to create a rule to let bankers be less accountable.”

Alston & Bird partner Steven Collins argued on behalf of the defendants—the directors of the Buckhead Community Bank when it collapsed in 2009—that the Supreme Court should answer Thrash’s question in the affirmative because “a standard of personal monetary liability on the part of bank directors and officers simply doesn’t exist.”

Georgia Attorney General Sam Olens filed a friend-of-the-court brief for the Georgia Department of Banking and Finance in support of the defendants, who include some prominent Atlanta businessmen. In it, the banking department argued that if bank officers and directors were held personally liable for “ordinary negligence in discharging their duties,” “the result would be the resignation of many skilled directors and officers and the inability to attract skilled directors and officers.”

The state banking department brief also asserted that if bank directors and bank officers “could be held personally liable under the ordinary negligence standard, it has the potential to detrimentally hamper the necessary and beneficial risk-taking involved in effectively discharging their duties.”

But the banking department’s brief neglected to mention directives printed in its own manual for bank directors. It cites the Financial Institutions Code of Georgia, which says that an “ordinary negligence” standard of performance “has been required” of bank directors for years by Georgia’s courts, which regard bank directors as “owing a fiduciary duty of good faith and due care” to their banks.

“Any failure to meet this legal responsibility subjects the bank director to personal liability for any resulting losses to the bank, its depositors or other creditors,” the handbook states, adding that the state financial institutions code “should be the primary source of guidance” on the question.

On Monday, Justice David Nahmias called the failure of the banking department’s brief to take note of its own directives “troubling.”

The financial stakes in the case are potentially high. The FDIC suit seeks $21.8 million in damages to compensate for losses the federal agency assumed when the Buckhead bank collapsed.

In an order at odds with fellow federal judges who have presided over similar FDIC cases over failed banks, Thrash said he did not agree that the state business judgment rule largely exempts bank officers and directors from liability for the failure of the banks they governed.

The business judgment rule sets a high bar for personal liability, requiring a showing that directors demonstrated “gross negligence” by engaging in fraud, acting in bad faith or demonstrating a reckless indifference in performing their duties.

Lawyers defending the Buckhead bank’s former governing board have argued in the case before Thrash that allegations amounting to “ordinary” or “mere” negligence through carelessness or a “lackadaisical performance” are not sufficient for liability to attach under Georgia’s business judgment rule.

The defendants include Charles Loudermilk Sr., the chairman of national leasing company Aarons Inc. and the Buckhead Community Bank’s founder and major shareholder.

Others are: Hugh Aldredge Sr., president and chairman of the Squire Inn motel chain; David Allman, chairman of the Buckhead real estate company Regent Partners; Marvin Cosgray, the bank’s former president and CEO, who is now the managing director of private banking at Georgia Commerce Bank; Louis “Lou” Douglas III, president and CEO of LJD Partners and LJD Resource Group; and Larry Martindale, chairman and CEO of Northlake Foods, Waffle House’s largest franchisor until Northlake sought federal bankruptcy protection in 2008.

The FDIC suit accused the former bank directors of neglecting their duties by knowingly or recklessly approving loans in violation of bank policies and state and federal banking regulations; extending loans to borrowers who were not creditworthy; extending credit based on inadequate information about the financial condition of prospective borrowers and guarantors; and approving speculative or high-risk commercial real estate acquisition, development and construction loans despite a market that by 2007 was rapidly turning sour.

In December, shortly after Thrash sent his question to the state Supreme Court, the U.S. Court of Appeals for the Eleventh Circuit in Atlanta certified a nearly identical question for the state high court in a suit the FDIC brought against eight former corporate officers and board members of Integrity Bank of Alpharetta.

In that case, the FDIC is seeking to recover more than $70 million in losses from eight former corporate board members and officres, including state Sen. Jack Murphy, R-Cumming, the former chairman of the Senate Banking and Financial Institutions Committee, and Clinton Day, a former state senator and one-time candidate for lieutenant governor who sat on the banking committee while he was a legislator.

Monday’s argument included a lively discourse among the justices. Justice Robert Benham pressed counsel for both as to what extent rulings made by Georgia’s courts may have contributed to Georgia’s banking crisis, during which more than 100 banks have failed over the past seven years.

Benham also asked whether the FDIC’s approach would, as the state banking department claimed, have “a chilling effect on ordinary citizens serving as officers and directors.”

Nahmias suggested during the FDIC attorney’s argument that there is case law “all over the country” where the courts have “quite routinely” added “a business judgment gloss” to rulings in civil cases prompted by a bank’s collapse. “You do run into a pretty heavy body of precedent,” he warned.

Nahmias also wanted to know whether a ruling by the high court in the FDIC’s favor would then extend to corporate officers and directors.

Collins, representing the defendants, ran into Nahmias’ skepticism when the lawyer pushed the banking department’s assertion that the business judgment rule would appear to foreclose claims based on ordinary negligence.

Nahmias called the banking department’s failure in its brief to mention the opposite stance it asserted in the agency’s bank directors manual “troubling.”

“We get an amicus brief saying, ‘This is our longstanding position,’ and it doesn’t even mention the handbook,” he said. “Don’t you find that troubling? Should we give that amicus brief lots of weight?”

But Collins held firm that the state banking department amicus brief “should be given credence.”

Justice Harold Melton pressed Collins on “the plain meaning” of state statutes, suggesting that state law allowed leeway to find bank directors personally liable for a bank’s collapse. “It seems to say if you want to enjoy freedom from liability, you should believe this way. If you don’t believe this way, you shall not enjoy freedom from liability,” he said.