The FDIC’s lawsuit against former directors and officers of the failed Buckhead Community Bank, one of the most closely watched Georgia corporate governance cases in years, went to trial in October, 2016.  The jury returned a verdict of nearly $5 million against the defendants for their role in the approval of four large commercial development loans that later defaulted.  FDIC v. Loudermilk, No. 1:12-cv-04156-TWT (N.D. Ga. Oct. 26, 2016).  It was less than a complete victory for the FDIC, which had sought over $21 million in damages based on ten bad loans, but the verdict nonetheless represents a significant recovery against directors and officers of a Georgia bank.  The case is all the more significant because it was the first known jury trial to evaluate a negligence claim under the business judgment rule as defined by the Georgia Supreme Court earlier on in the proceedings.

Editor’s Note:  This piece is an excerpt from the author’s 2016 Georgia Corporation and Business Organization Case Law Developments, which addresses decisions handed down in 2016 by Georgia state and federal courts addressing questions of Georgia corporate and business organization law.  The year saw a large number of decisions involving limited liability companies, continuing a trend from recent years.  The Georgia Supreme Court addressed some interesting and novel questions of commercial law, including whether an out-of-state LLC (or corporation) can avail itself of the removal right that permits Georgia-based companies to shift certain tort litigation from the county in which it is brought to the county where it maintains its principal office, and whether a nonprofit corporation has standing to pursue a write of quo warranto against public officials.

Buckhead Community Bank was closed by the Georgia Department of Banking and Finance in December, 2009, during the heart of the financial crisis.  The FDIC was named as receiver for the Bank.  In 2012, the FDIC filed suit against the Bank’s former directors and officers, alleging that they pursued an aggressive growth strategy aimed at building a “billion dollar bank,” causing the Bank’s loan portfolio to become heavily concentrated in commercial real estate acquisition and development loans.  The FDIC’s allegations were highly similar to allegations it made in dozens of other cases involving similarly situated banks that failed during the Great Recession.  In all, the FDIC filed over 100 civil actions between 2010 and 2015 in its capacity as its receiver for failed banks throughout the country, 25 of which were filed in Georgia against directors and officers of Georgia banks.  The vast majority of these cases have settled.  In fact, Loudermilk was only the second of these cases to proceed all the way to trial, and the first in Georgia.

As the case progressed to trial, it eventually focused on ten specific loans that were approved directly by the defendants acting as members of the Bank’s loan committee.  As to each of these loans, the FDIC alleged that approving the loans violated the Bank’s own loan policy, banking regulations, prudent underwriting standards and sound banking practices.  For instance, it was alleged that some loans exceeded the Bank’s loan-to-value guidelines but were approved anyway.  Other loans were approved without certain documentation that the FDIC alleged was necessary, such as current financial statements of borrowers and guarantors.  Other loans were allegedly approved before the loan application paperwork was final.  There was no claim that any of the loans were “insider” loans that provided a direct or indirect personal benefit to any of the defendants.

The FDIC asserted gross negligence claims based on Georgia law and the federal Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), which establishes gross negligence as the national minimum standard for bank director and officer liability.  FIRREA does not preclude the FDIC from recovering under a state law standard that is stricter than gross negligence.  Accordingly, the FDIC also included an ordinary negligence claim under Georgia law.  It did the same in all of its other complaints against Georgia bank directors and officers.  The defendants in many of the cases, including Loudermilk, moved to dismiss the ordinary negligence claims, arguing that such claims were barred by Georgia’s business judgment rule as interpreted by the Georgia Court of Appeals.  In most of these cases, the district court agreed and dismissed the ordinary negligence claims.  But in Loudermilk, Judge Thrash expressed doubt that the business judgment rule could be applied to eliminate liability for ordinary negligence in cases involving banks, citing the perceived role that imprudent lending played in bringing about the financial crisis.  Rather than rule on the motion, Judge Thrash posed certified questions to the Georgia Supreme Court as to how the business judgment rule was to be applied to an ordinary negligence claim against the directors and officers of a bank.  At about the same time, the Eleventh Circuit, hearing an appeal from a similar motion to dismiss that had been granted in FDIC v. Skow, expressed doubt that the Court of Appeals’ business judgment rule decisions were reconcilable with the Banking Code’s statutory standard of care, O.C.G.A. § 7-1-490, because of the statute’s description of an ordinary prudence standard.  The Eleventh Circuit certified Skow to the Supreme Court as well.

The Supreme Court responded to the questions posed by the federal courts in a landmark opinion that clarified Georgia’s business judgment rule.  FDIC v. Loudermilk, 295 Ga. 579, 761 S.E.2d 332 (2014).  The Supreme Court recognized that the business judgment rule was a settled part of Georgia common law and was not abrogated by the adoption of § 7-1-490 or the substantially similar standard of care provisions for corporate directors and officers at O.C.G.A. § 14-2-830 and § 14-2-842, respectively.  The Court nonetheless overruled the Court of Appeals decisions that the Loudermilk and Skow defendants had relied on, holding that insofar as those decisions established a gross negligence floor for liability in all cases, they could not be squared with the standard of care statutes.  Instead, the Court drew a distinction between negligence allegations directed at the process employed by the directors and officers on one hand, and negligence allegations challenging only the wisdom of the resulting decisions on the other.  The Court held that negligence claims going only to the wisdom of decisions were clearly barred by the business judgment rule, but claims alleging that the process failed to comport with the statutory standard of care were not barred.  In short, the Supreme Court recognized the theoretical existence of an ordinary negligence claim based on a violation of the statutory standard of care—i.e., that a director or officer failed to exercise the care of an ordinarily prudent director or officer of a similarly situated bank (or corporation), which was not barred by the business judgment rule at the motion to dismiss stage.  The Court gave no direction as to how its analysis should be applied in any specific case, but the obvious import in the case at bar was that the FDIC could proceed against the defendants on a negligence theory based on lack of process due care.

As the case neared trial, the district court made a number of significant pretrial rulings.  The court granted a motion in limine that prohibited the defendants from introducing evidence that the Bank’s losses were caused by intervening economic factors, including the widespread collapse of financial and real estate markets starting in 2008.  The court found that the Great Recession and other events subsequent to the making of the loans were irrelevant to causation.  The court denied a separate motion in limine which would have prevented the defendants from using examination reports that were generally favorable to the Bank prior to the Great Recession.  Though the defendants were permitted to use the reports, they could not do so to prove the applicable standard of care, only to show their state of mind at the time.  Finally, the court rejected a verdict form proposed by the defendants that would have required the jury to apportion fault among the defendants, rather than impose joint and several liability.  The final approved verdict form permitted the jury to determine that particular defendants were not liable for particular loans, but the court declined to adopt the defendants’ position that individual directors who were not present for the meetings in which particular loans were approved cannot have any liability for those loans.

At trial, the FDIC presented the defendants as pursuing an aggressive growth strategy and identified various ways in which the ten loans deviated from the Bank’s policies.  The defense emphasized that the FDIC’s allegations were not grounded in fraud or any claim of self-dealing.    Both sides presented expert testimony on the standard of care and whether the defendants had met it.  The defendants also presented testimony from a representative of the Department of Banking and Finance, who testified as a friendly witness to the defense.  (The DBF had also submitted an amicus brief in the earlier Supreme Court proceedings expressing agreement with the defendants’ position and concern that an ordinary negligence floor of liability would create disincentives to service on Georgia bank boards.)

At the end of the two-week trial, the jury returned a verdict for the defense as to six of the ten loans and for the FDIC as to the other four.  All of the defendants were charged with at least some liability.  Some defendants were assigned no liability for certain loans; however, there were also instances in which a defendant was held liable for a loan that was approved in his absence.  (There does not appear to have been any finding that any defendant was chronically absent from meetings.)  Consistent with the court’s earlier rulings, the jury did not apportion fault among defendants.  The final compensatory damages award was $4,986,993, more than half of which related to a single $3.4 million loan for the acquisition and development of a 30-acre parcel in Douglasville.  The verdict form did not ask the jury to make findings that were specific as to each liability theory; i.e., whether the defendants were grossly negligent or merely negligent.  Thus it is difficult to determine what effect the insertion of a negligence claim had on the result of the trial, or how it may have proceeded differently had only gross negligence claims gone forward.

The defendants have appealed the verdict to the Eleventh Circuit.  The FDIC did not file any cross-appeal.  The defendants’ appeal focuses on three issues:  (1) whether the trial court erred in not applying Georgia’s apportionment statute, which had the effect of making the defendants jointly and severally liable; (2) whether the court erred in permitting the jury to find individual defendants liable in connection with loans approved at meetings in which the defendant did not attend, and (3) whether the court erred in excluding evidence about the Great Recession.  The appeal does not directly address whether the business judgment rule was properly applied by the court and jury following the Supreme Court’s opinion.