As many readers are aware, Georgia has led the nation in the number of failed financial institutions in the recent financial crisis.   Integrity Bank, of Alpharetta, was one of the first of those banks to fail in Georgia, on August 28, 2008, and drew the first lawsuit filed by the FDIC as receiver against former directors and officers in Georgia.  The lawsuit was filed against former members of the Director Loan Committee of the Bank, and asserted claims against the Defendants based on their alleged pursuit  of an unsustainable rapid growth strategy, involving high risk lending concentrated in speculative real estate and acquisition, construction and development loans.   The suit alleged over $70 million in losses from 21 such loans, between February 4, 2005 and May 2, 2007.

On February 27, 2012, in response to motions to dismiss filed by the defendants, and motions to strike certain affirmative defenses filed by the FDIC as Receiver, Judge Steven C. Jones of the United States District Court for the Northern District of Georgia issued an Order which made some critical rulings regarding the standard of care and the availability of certain defenses in actions brought by the FDIC as receiver in Georgia.  A copy of the Order is available here.  Given that this is the first such substantive ruling in this context by a court in Georgia, the decision is notable and will likely have a significant impact on future FDIC litigation in Georgia going forward.

Of potentially greatest significance, the Court granted the Defendants motion to dismiss all of the FDIC’s claims based on ordinary, as opposed to gross, negligence.    The Court was persuaded that in Georgia, the deviation from the standard of care necessary to state a claim against former bank officers and directors must rise at least to the level of the “gross negligence” floor set by the Financial Institutions Reform, Recovery and Enforcement Act of 1989  (FIRREA) .   The Court reached this conclusion after determining that Georgia ‘ s Business Judgment Rule protects directors and officers from claims based on simple, or ordinary, negligence.   This sets the bar fairly high for the FDIC to prevail on claims against former directors and officers of failed banks,and should provide some comfort in that regard.

Detracting somewhat from the defendants victory on that aspect of the motion to dismiss, however, Judge Jones also ruled that the relatively unexceptional allegations by the FDIC of uncontrolled rapid growth and over concentration in speculative and risky acquisition, development and construction loans were sufficient to withstand a motion to dismiss, even at the heightened “gross negligence” standard.   Thus, while the decision sets the bar high for the FDIC to ultimately prevail on these sorts of claims, it does not necessarily provide much ammunition to argue for dismissal at the motion to dismiss stage.

In another significant aspect of the ruling, the court considered the FDIC receivers motion to dismiss certain affirmative defenses based on the FDIC’s own conduct.   In analyzing this issue, the Court made a distinction between affirmative defenses based on conduct of the FDIC in its corporate capacity, which occurred prior to the bank’s failure, and conduct by the FDIC as receiver following the failure of the bank.   The Court held that affirmative defenses based on the conduct of the FDIC in its corporate capacity prior to receivership, such as reliance on bank examinations,  were not available to the defendants and thus granted the motion to strike as to those defenses.  However, the Court held that affirmative defenses based on the conduct of the FDIC as receiver after the failure of the Bank, such as failure to mitigate damages, were available to the defendants and should not be stricken.   Interestingly, the Court noted that certain issues relating to the conduct of the FDIC in its corporate capacity prior to receivership may in fact go toward key issues such as causation, as opposed to affirmative defenses, and may be admissible in the case on that basis, thus leaving the door open to this type of defense down the road.

Finally, the Court rejected the defendants argument that certain exculpatory provisions in the Bank’s articles of incorporation barred the FDIC’s claims, holding that such provisions could not be used to bar claims by the FDIC as receiver.

All in all, the Integrity bank decision is somewhat of a mixed bag.    Directors can take some comfort in the holding that the FDIC as receiver must prove a claim of gross negligence, not simple negligence, in order to prevail in Georgia, and also in the holding that certain defenses based on the FDIC’s conduct as receiver, and potentially based on conduct of the FDIC while the bank was still open, may provide viable defenses.  However, the holding that relatively straightforward allegations of uncontrolled growth and real estate lending are sufficient to survive a motion to dismiss even under the gross negligence standard suggest that it may be difficult to get out of these cases entirely on an early dispositive motion.   Additionally, exculpatory clauses in the bank’s articles of incorporation and affirmative defenses based on the conduct of FDIC in its corporate capacity prior to the bank’s failure are not available to defendants under the holding in this case.