Justice Keith R. Blackwell
Justice Keith R. Blackwell (John Disney/Daily Report)

In a case closely watched by banking lawyers across the state, the Supreme Court of Georgia has opened the door for bank directors and executives in the state to be held personally liable for a failed bank’s losses if they are found to have neglected their corporate duties.

The ruling gives new life to a federal suit filed by the Federal Deposit Insurance Corp., which has sought to claw back millions of dollars from the directors and corporate officers who oversaw the Buckhead Community Bank before its 2009 collapse.

The high court also overturned two state Court of Appeals rulings that created a virtual exemption from personal liability for all company officers and directors whose ordinary negligence may have led to a company’s collapse.

In doing so, the high court suggested that its ruling may clear the way for future claims against corporate officers and directors of companies, in addition to banks, whose decisions may have led to the collapse of the firms they governed but did not constitute gross or criminal negligence.

Justice Keith Blackwell, with the unanimous concurrence of his colleagues, said in a 34-page opinion that the state’s “business judgment rule” does not always bar claims based on “ordinary negligence” against bank officers and directors, with one important exception.

Blackwell cautioned that mistakes in the exercise of “honest business judgment” will not subject bank officers and directors to liability for ordinary negligence if they arrived at a decision for which there is a reasonable basis. Officers and directors also may likely sidestep personal liability if they acted in good faith based on their independent judgment and were governed only by what they believed to be the best interests of the company, the opinion said.

The state high court distinguished between the wisdom of a business decision after the fact, which it said was shielded by the business judgment rule, and how a decision came to be made. Wrote Blackwell:”[W]hether a business decision was, in fact, an exercise of ‘judgment’—whether it was a product of deliberation, reasonably informed by due diligence, and made in good faith—is open to judicial scrutiny.”

The ruling was made in response to a question that U.S. District Judge Thomas Thrash certified to the state high court last December.

FDIC attorney J. Scott Watson, who argued the appeal on behalf of the agency, declined comment on the ruling and referred the Daily Report to FDIC spokesman David Barr who also would not comment.

A joint written statement from Alston & Bird attorneys Steven Collins and Robert Long, who are defending the Buckhead bank’s former officers and directors, focused on one aspect of the case in which the defendants prevailed. “We are very pleased that the Georgia Supreme Court rejected the FDIC’s argument that the business judgment rule does not exist for Georgia’s directors and officers, and confirmed that legitimate business decisions of directors and officers are not subject to hindsight criticism.”

The FDIC had argued that state law bank officers and directors could be held personally liable if they demonstrated ordinary negligence in the performance of their duties because state banking laws held them to a stricter standard than the business judgment rule as laid out by the state Court of Appeals rulings that the high court overturned.

“With this ruling,” the defense team statement continued, “the FDIC cannot continue to make scattershot allegations, but instead must focus on a very narrow issue: whether directors or officers, in making business decisions, totally abdicated their responsibilities, had improper information-gathering processes, or engaged in bad faith. This will be a significant burden for the FDIC and one they will be unable to meet as to our clients.”

David Balser, a King & Spalding attorney who is among a team of attorneys defending four former directors of the now defunct Integrity Bank in a similar case brought by the FDIC, called the opinion important.

“For the first time, the Supreme Court squarely addresses the extent to which directors and officers are insulated for decisions made in running and managing the affairs of a business,” Balser said.

The high court’s decision, he said, also “makes clear the decision reaches farther than the banking industry.”

“What the Supreme Court has done is to make a distinction between the process by which a decision is reached and the substance of that decision,” Balser explained.

Balser would not comment on how he thought the ruling might affect the Integrity Bank case, which also is awaiting a decision by the state Supreme Court to a certified question from the U.S. Court of Appeals for the Eleventh Circuit. But he questioned whether the recent case was a significant win for the FDIC.

“I’m not sure the decision helps the FDIC, because as long as banks had a process—in other words, they had a loan committee and there were documents presented to the loan committee and decisions were made in the context of a defined process—I’m not sure this decision will enable them to create liability for a director who … was involved in the process,” he said.

Friday’s opinion was issued in response to a question U.S. District Judge Thomas Thrash Jr. certified to the state high court this past December.

Thrash had asked 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?”

In litigation stemming from the collapse of the Buckhead bank, Thrash had disagreed with other judges of the U.S. District Court for the Northern District of Georgia, who had held that the state’s business judgment rule largely exempts corporate officers and directors from liability for the failure of the banks they governed.

Those rulings said that, before a failed bank’s corporate executives and directors can be held personally liable for taxpayer losses associated with the bank’s collapse, the business judgment rule would require a showing that they demonstrated “gross negligence” by engaging in fraud, acting in bad faith or demonstrating a reckless indifference in performing their duties.

The rulings have depended largely on two state Court of Appeals opinions that interpreted the business judgment rule as extending a blanket protection from personal liability in the event of a company’s collapse to corporate directors and officers even if they demonstrated “ordinary negligence” on the job.

Blackwell labeled the business judgment rules as spelled out in Flexible Products Co. v. Ervast, 284 Ga. App. 178 (2007) and Brock Built v Blake, 300 Ga. App. 816 (2009) as having “no support in our common law.”

Both cases shielded corporate officers and directors from any personal liability associated with ordinary negligence claims in the discharge of their corporate duties.

Wrote Blackwell: “To the extent that Flexible Products and Brock Built recognize an absolute bar against all claims premised on a want of ordinary care—even claims premised on allegations that business decision was uninformed or unreasoned—such a rule finds no support in our common law, which, as we have explained, reflects a more modest business judgment rule.”

The high court also held that it also found no support for the appellate court’s two rulings—and how they defined the business judgment rule—in state law.

Defense attorneys for the Buckhead bank’s former officers and directors in the case before Thrash contend 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 FDIC, which sued nine former corporate officers and directors of the Buckhead Community Bank, has contended that the bank’s corporate officers and directors—and the members of its loan committee, in particular—demonstrated both ordinary and gross negligence in their management of the bank’s loan portfolio, which led to the collapse.

In its opinion, the Georgia Supreme Court offered its qualified support to Thrash and the FDIC. Wrote Blackwell: “The business judgment rules precludes some, but not all claims, against bank officers and directors that sound in ordinary negligence.”

The business rule, the high court held, “does not insulate ‘mere dummies or figureheads’ from liability” and “was never meant to do so.”

Bank officers and directors may be held peronally liable “to the extent that those decisions are shown to have been made without deliberation, without the requisite diligence to ascertain and assess the facts and circumstances upon which the decisions are based, or in bad faith,” Blackwell wrote.

The justice also noted that while the case before the Supreme Court involves only bank officers and directors, the business judgment rule applies not only to bank officers and directors but also to corporate officers and directors.

Overturning both cases, Blackwell wrote: “This case, of course, involves only bank officers and directors, and so, we could leave Flexible Products and Brock Built as applied to non-bank officers and directors for another day. But what must be done with these precedents is clear enough, and waiting for another case to do so would only create needless uncertainty.”

The FDIC suit before Thrash names some of metro Atlanta’s most prominent business people as defendants.

They include Charles Loudermilk Sr., chairman of national leasing company Aarons Inc. and the Buckhead Community Bank’s founder and major shareholder; Hugh Aldredge Sr., president and chairman of the Squire Inn motel chain; and David Allman, chairman of the Buckhead Community Improvement District and founder of Buckhead real estate company Regent Partners, which developed Tower Place and owns the King and Queen Concourse towers at the junction of I-285 and Georgia 400.

Other defendants include 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 past chairman of both the Greater North Fulton Chamber of Commerce and the Gwinnett County Chamber of Commerce; and Larry Martindale, chairman and CEO of Northlake Foods, Waffle House’s largest franchisee. The suit accuses them 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.

Pending before the state Supreme Court is a nearly identical question certified by the U.S. Court of Appeals for the Eleventh Circuit in Atlanta involving another suit the FDIC brought in connection with the collapse of a metro Atlanta bank. That suit named as defendants eight former corporate officers and board members of the now-defunct Integrity Bank of Alpharetta. In that case, the FDIC has sought to recover more than $70 million in losses from eight former corporate board members and officers, including state Sen. Jack Murphy, R-Cumming, the former chairman of the Senate Banking and Financial Institutions Committee, and Clint Day, a former state senator and one-time candidate for lieutenant governor who sat on the banking committee while he was a legislator.

The FDIC challenged a decision by U.S. District Judge Steve Jones last year that the state’s business judgment rule requires more than ordinary negligence of one’s corporate duties before a failed bank’s corporate officers can be held personally liable for its losses.

[W]hether a business decision was, in fact, an exercise of ‘judgment’—whether it was a product of deliberation, reasonably informed by due diligence, and made in good faith—is open to judicial scrutiny.—Justice Keith Blackwell