A federal judge in Atlanta has taken issue with his fellow judges over whether a Georgia law protects the corporate officers and former executives of a failed bank from personal liability for the bank’s losses if they are found to have neglected their corporate duties.

In ongoing civil litigation stemming from the December 2009 collapse of the Buckhead Community Bank, U.S. District Judge Thomas Thrash Jr. said he disagreed with other judges of the U.S. District Court for the Northern District of Georgia in Atlanta who have ruled 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 have held 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.

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 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.

The Federal Deposit Insurance Corporation, which sued nine former corporate officers and directors of the Buckhead Community Bank last year, contends the bank’s corporate officers and directors—and the members of its loan committee, in particular—were negligent and grossly negligent in their management of the bank’s loan portfolio, which led to the collapse.

Thrash decided to ask the Supreme Court of Georgia for help in interpreting the business judgment rule, writing in a Nov. 25 order that he had been unable to find any clear and controlling precedent that the rule applies to bank officers and directors being sued by a government agency to recoup taxpayer money as it does to officers and directors of a corporation being sued by its shareholders.

Thrash certified the following question to the 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?”

He also refused to dismiss the FDIC suit, saying he would not apply the state business judgment rule to the FDIC’s ordinary negligence claim.

The Georgia Supreme Court is not the only appellate court that has been asked to determine whether the state’s business judgment rule applies to executives and directors of failed banks. Right now, the U.S. Court of Appeals for the Eleventh Circuit is considering the same issue, the result of an appeal by the FDIC in a case it filed against the officers and directors of the defunct Integrity Bank, which collapsed in 2008. The FDIC has appealed a ruling by one of Thrash’s colleagues, U.S. District Judge Steve Jones. The FDIC challenged Jones decision 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. Oral arguments were held in the case on Nov. 20, five days before Thrash decided to ask the state Supreme Court to weigh in. The federal appellate case is being watched not only by the FDIC but by lawyers defending former bank executives in similar cases stemming from bank failures in Florida, Alabama and Georgia.

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

The defendants 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 franchisor until it filed for federal bankruptcy protection in 2008.

The FDIC is seeking to recoup $21.8 million in damages to compensate for losses the federal agency assumed when the Buckhead Community Bank collapsed.

Alston & Bird lawyer Robert Long, who is representing the defendants, said in a written statement emailed to the Daily Report: “We believe there is no sound public policy justification—certainly no statutory basis—for holding Georgia bank officers and directors to a different standard of personal liability than is routinely applied to every other officer and director in this state. If the General Assembly had wanted to achieve such a counterintuitive result, it could have done so, but it hasn’t. And if there is to be such a sweeping policy shift at this point, the General Assembly is where it should happen.

“As Judge Thrash noted,” Long’s statement continued, “other district courts in Georgia share our view that the business judgment rule protects Georgia bank officers and directors from personal liability based on ordinary negligence claims, just as it protects all other officers and directors from liability on such claims. Such claims are barred because bank directors and officers such as our clients would otherwise be exposed to opportunistic claims that second-guess their legitimate business decisions. Given Judge Thrash’s doubt about the matter, we certainly agree with his decision to certify the question to the Georgia Supreme Court so that the question can be resolved once and for all.”

In an order he issued the same day he asked the state Supreme Court for guidance, Thrash refused to dismiss the FDIC case against the former Buckhead bank executives and directors.

“Although the [Georgia] Court of Appeals has held that in general the business judgment rule precludes claims for ordinary negligence against the officers and directors of a corporation, no Georgia state court has explicitly extended the business judgment rule to protect the officers and directors of a bank being sued by the FDIC as receiver,” Thrash wrote. “Federal courts in this district, however, have uniformly applied the business judgment rule to protect bank officers and directors.”

Thrash called the Buckhead bank loan committee’s expansion of its commercial real estate loan portfolio “a total failure.” From 2005 to 2007, he said the bank’s troubled assets skyrocketed from 12.62 percent to 236 percent of its equity capital and reserves.

Among them he said were Jones, whose case, FDIC v. Skow, is now before the Eleventh Circuit; and U.S. District Judge Richard Story, who ruled last year in FDIC v. Blackwell that the state business judgment rule precluded any claim for negligence against former bank officers of the defunct Alpha Bank and Trust. In the latter case, the FDIC said the bank failed to adhere to sound lending practices, ignored its own lending policies and disregarded the advice of regulators.

Wrote Thrash: “I most respectfully disagree with my able and learned friends and colleagues. There is every reason to treat bank officers and directors differently from general corporate officers and directors.

“In general,” he said, “when a business corporation succeeds or fails, its stockholders bear the gains and losses. The business judgment rule is primarily applied in Georgia because the right to control the affairs of a corporation is vested by law in its stockholders—those whose pecuniary gain is dependent upon its successful management.

“But when a bank, instead of a business corporation, fails, the FDIC and ultimately the taxpayer bear the pecuniary loss,” the judge continued. “The lack of care of the officers and directors of banks can lead to bank closures which echo throughout the local and national economy. To some extent, the failure of bank officers and directors to exercise ordinary diligence led to the very financial crisis that continues to affect the national economy. By all accounts, the loose lending practices alleged by the FDIC in this case were rampant within Georgia’s community banks.”