The Atlanta-based federal appeals court has ruled in part against the Federal Deposit Insurance Corp. in a decision with the potential to affect the FDIC’s cases across the country.
The Dec. 23 decision by the U.S. Court of Appeals for the Eleventh Circuit ruled that—contrary to what the FDIC has reportedly argued in all of its cases—bank directors and officers named as defendants may at least in some instances raise affirmative defenses based on the FDIC’s own conduct.
In a another part of the decision, the Eleventh Circuit punted to the Georgia Supreme Court a key issue affecting the liability of directors and officers of failed Georgia banks. The panel joined a federal district court judge in asking the state’s highest court to decide whether bank officers and directors can be held individually liable under Georgia law if they are shown to have been ordinarily negligent or breached a fiduciary duty. The appeals court said two decisions by the Georgia Court of Appeals, which arguably shield bank directors and officers from liability except in cases of fraud or bad faith, may contradict the language of the relevant Georgia statute.
In the case decided by the Eleventh Circuit, the FDIC has sued eight former corporate officers and board members of Integrity Bank of Alpharetta, one of dozens of Georgia banks that have collapsed since 2008. Among the defendants are state Sen. Jack Murphy, R-Cumming, a longtime member and former chairman of the Senate Banking and Financial Institutions Committee, and Clinton Day, a former state senator and onetime candidate for lieutenant governor who sat on the banking committee.
The FDIC is seeking to recover from the defendants more than $70 million in losses on nearly two dozen commercial and residential acquisition, development and construction loans that the bank’s loan committee approved between February 2005 and May 2007. The FDIC has blamed the bank’s losses on the defendants’ pursuit of an “ill-conceived and unsustainable growth strategy based on high-risk lending heavily concentrated in the speculative real estate ventures of a small number of preferred individual developers.” Attorneys defending the bank’s former corporate officers have countered that the bank’s failure stemmed from “the worst economic crisis since the Great Depression,” as well as the FDIC’s own conduct.
U.S. District Judge Steve Jones granted in part a defense motion to dismiss based on Georgia’s business judgment rule. That rule is embodied in a Georgia statute that says directors and officers of a bank cannot be liable if they discharge the duties “in good faith and with that diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like positions.”
Jones cited two Georgia Court of Appeals decisions—Flexible Products Co. v. Ervast, 284 Ga. App. 178 (2007), and Brock Built LLC v. Blake, 300 Ga. App. 816 (2009)—as holding that unless a presumption that corporate officers have acted in good faith is rebutted, they cannot be held personally liable for managerial decisions. While allowing the FDIC’s claims for gross negligence and breach of fiduciary duty based on gross negligence to go forward, Jones said the state business judgment rule meant the FDIC’s claims for ordinary negligence and breach of fiduciary duty based on ordinary negligence were not viable.
Jones also denied the FDIC’s motion for partial summary judgment to strike the defendants’ affirmative defenses to the extent they applied to the FDIC’s conduct after it became the bank’s receiver. (The district judge earlier had struck the defendants’ affirmative defenses to the extent they were based on the FDIC’s pre-receivership conduct performed in its regulatory capacity, a ruling not at issue in the appeal.) Among other things, the defendants argue the FDIC failed to mitigate its damages.
Jones rejected the FDIC’s argument that the defenses were barred by a federal common law rule that the FDIC owes no duty to bank directors or officers.
Jones allowed the FDIC to take an interlocutory appeal to the Eleventh Circuit. While the appeal was pending, U.S. District Judge Thomas Thrash Jr. of Atlanta asked the Georgia Supreme Court for help in interpreting the business judgment rule in another case. Ruling last month in a case brought by the FDIC against former corporate officers and directors of the Buckhead Community Bank, Thrash said 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 opposed to officers and directors of a corporation being sued by its shareholders.
The Eleventh Circuit followed suit in the Integrity Bank case, saying it was all right to certify both cases, given possible differences in the cases and the possibility that a settlement or stay could prevent one of the cases from reaching the state high court. The unsigned opinion issued by the panel of Eleventh Circuit Judge Stanley Marcus, Senior Judge J.L. Edmondson and visiting Senior U.S. District Judge C. Roger Vinson of Florida said that the question of whether Georgia bank officers and directors may be subject to claims for ordinary negligence is “debatable.”
Noting that the Georgia statute gives directors and officers the duty to act with both good faith and diligence, the Eleventh Circuit opinion said it appeared that a bank director or officer who acts in good faith still might be subject to a claim for ordinary negligence if he failed to act with ordinary diligence. “[I]n attempting to ascertain the law of Georgia on director liability, it appears to us that the state appellate court opinions in Flexible Products and Brock Built might contradict the plain language of the pertinent Georgia statute,” said the appeals panel.
The Eleventh Circuit affirmed Jones’ denial of the FDIC’s motion for partial summary judgment on the issue of the defendants’ ability to raise affirmative defenses. The appeals panel said that, at most, the decisions from other federal circuits cited by the FDIC stand for the proposition that a bank’s officers and directors cannot assert tort claims against the FDIC because the FDIC owes them no duty. The panel said that, although a few district court decisions from the 1980s might support the FDIC’s “asbtract” argument that it has “no duty,” they fail to clearly establish a federal common law rule exempting the FDIC from defenses under state law.
“[T]he FDIC is asking this Court to act like a common law court and to create federal common law to fit this kind of case,” said the appeals court opinion. “We cannot do it now because we are constrained by Supreme Court precedent.”
Atlanta King & Spalding lawyer David Balser, whose Washington partner Jeffrey Bucholtz argued for the defendants at the Eleventh Circuit, said the appeals court’s ruling on the issue of affirmative defenses has national implications, saying he understands the FDIC takes the same position on the issue in all of its cases. “It’s an important victory for officers and directors of banks who now are going to be permitted to inquire into and investigate the manner in which the FDIC handled the assets and contributed to the loan losses for which they now seek recovery against the officers and directors,” said Balser.
As for the decision to certify questions about the meaning of the Georgia business judgment rule to the state Supreme Court, Balser said the state court’s ruling could affect five to 10 pending and yet-to-be-filed cases.
Washington FDIC attorney J. Scott Watson argued for the FDIC at the Eleventh Circuit. FDIC spokesman David Barr declined to comment on the decision.
The case is FDIC v. Skow, No. 12-15878.