Are Bank Directors and Officers Entitled to Less Business Judgment Rule Protection Than Other Corporate Directors and Officers?

Are Bank Directors and Officers Entitled to Less Business Judgment Rule Protection Than Other Corporate Directors and Officers?

 Are bank directors and officers sufficiently different from directors and officers of ordinary business corporations that the protections of the business judgment rule available to other directors and officers are not available to protect directors and officers of a bank? That is a question that Northern District of Georgia Judge Thomas W. Thrash, Jr. asked in November 25, 2013 decision in an FDIC failed bank case against certain former directors and officers of the failed Buckhead Community Bank.

In a ruling that is sure to stir up plenty of discussion, Judge Thrash said that he “is not convinced that the business judgment rule in Georgia should be applied to bank officers and directors and is not convinced that Georgia law is settled on the issue.” Judge Thrash denied the defendants’ motion to dismiss the FDIC’s claims against the individual defendants for ordinary negligence and certified the question of the applicability of the business judgment rule to the Supreme Court of Georgia. A copy of Judge Thrash’s November 25, 2013 opinion can be found here.

Background

As discussed here, on November 30, 2012, the FDIC as receiver of The Buckhead Community Bank filed a complaint in the Northern District of Georgia against nine former directors and officers of the failed bank. The FDIC’s complaint can be found here.

The bank failed on December 4, 2009. The FDIC’s complaint asserts claims against the defendants for negligence and for gross negligence and alleges that the defendants engaged in “numerous, repeated, and obvious breaches and violations of the Bank’s Loan Policy, underwriting requirements and banking regulations, and prudent and sound banking practices” as “exemplified” by thirteen loans and loan participations the defendants approved that cause the bank damages “in excess of $21.8 million.”

When I wrote about the filing of this case in a prior blog post I noted that "an interesting feature of the lawsuit is that the FDIC has included allegations of ordinary negligence." I found this interestsing because of the recent decision in the Northern District of Georgia in the Integrity Bank case, applying Georgia law and holding that because of their protection under the business judgment rule, directors cannot be held liable of ordinary negligence. In light of that earlier decision, I noted that “it would seem that the defendants in the new lawsuit have a basis on which to seek to have the negligence claims against them dismissed.” (The Integrity Bank decision itself is before the Eleventh Circuit on an interlocutory appeal).

The defendants in the Buckhead Community Bank case did indeed move to dismiss the FDIC ‘s ordinary negligence claims against them,  arguing that bank directors cannot be held liable for ordinary negligence under Georgia’s business judgment rule. The defendants also moved to dismiss the FDIC”s gross negligence claims, arguing that the agency’s complaint failed to provide sufficient allegations to maintain claims for gross negligence.

The November 2013 Opinion

In his consideration of the defendants’ motion to dismiss the ordinary negligence claims, Judge Thrash reviewed the several recent decisions in which various judges of the Northern District of Georgia held under Georgia law that in light of the protection of the business judgment rule the former directors and officers of failed banks involved in each of the cases could not be held liable for claims of ordinary negligence. 

However, after reviewing these cases and their holdings, Judge Trash said, “I most respectfully disagree with my able and learned friends and colleagues.” Judge Thrash then went on to say the following:

There is every reason to treat bank officers and directors differently from general corporate officers and directors. In general, when a business corporation succeeds or fails, its stockbrokers 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.” (citation omitted). But when a bank, instead of a business corporation fails, the FDIC and ultimately the taxpayer bear the pecuniary loss. The lack of care of the officers and directors 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 care led to the very financial crisis that continues t 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.

Judge Thrash noted that in O.C.G.A. Section 7-1-490, the Georgia legislature had explicitly stated that “directors and officers of a bank or trust company shall discharge the duties of their respective positions in good faith and with that diligence, care and skill which ordinary prudent men would exercise under similar circumstances in like positions.”

He further noted that this is not a case where shareholders are suing their company’s directors and officers, but rather it is a case where the FDIC as receiver “is suing following allegedly negligent banking practices.” When the FDIC proceeds with a case as a receiver, the case “is not simply a private case between individuals but rather a case that involves a federal agency appointed as a receiver of a failed bank in the midst of a national banking crisis.”

Judge Thrash concluded that he “is not convinced that Georgia law affords the Defendants the protection of the business judgment rule in a lawsuit by the FDIC.” After reviewing the case law, he concluded that there is no clear, controlling precedent on the issue. Accordingly, “given the uncertainty surrounding the application of the business judgment rule to bank officers and directors,” he decided to certify to the Georgia Supreme Court “the unsettled question of law of whether the business judgment rule should supplant the standard of care required of bank directors and officers by O.C.G.A. Section 7-1-490 in a suit brought by the FDIC as receiver.”

Judge Thrash then denied the defendants motions to dismiss both the negligence and gross negligence claims, finding that the FDIC’s allegations as to each claim were sufficient. However, in light of the certified question of law, the denial of the motion to dismiss as to the negligence claim was without prejudice.

Discussion

Judge Thrash did not in fact rule that bank directors and officers as such are not entitled to the protection of the business judgment rule. He merely found that he was not persuaded that the business judgment rule applied in this context, and certified to the Georgia Supreme Court the question whether the business judgment rule should be available in a case like this one.

In the current wave of failed bank litigation, a number of courts have wrestled with the question of whether or not the business judgment rule protected the former directors and officers of a failed bank from claims of ordinary negligence. But even in the cases that have held under applicable law that the business judgment rule does not protect the defendants from negligence claims, the court’s conclusion that the business judgment rule did not protect them did not depend on the mere fact that the defendants were bank directors and officers.

The basis upon which Judge Thrash explains his uncertainty about whether or not bank directors and officers are protected by the business judgment rule changed  as he explained his position. He seemed to start with a general assertion that bank directors and officers are simply different than the directors and officers of ordinary business corporations (“there is every reason to treat bank officers and directors differently from general corporate officers and directors”). This opening line of reasoning would seem to suggest that bank directors and officers are held to a different, higher standard than the directors and officers of an ordinary business corporation, and therefore that the business judgment rule is simply not available to them in any circumstance.

But Judge Thrash then focused particularly on the context of a failed bank, within the larger context of a more general banking crisis. In that context, he seems to suggest, and in particular, with respect to claims brought by the FDIC in its capacity as receiver of the failed bank, bank directors and officers should not be entitled to the protection of the business judgment rule. That is, he seems to end up by saying that the business judgment rule is unavailable not  because they are bank directors and officers, but because the claimant is the FDIC as receiver.

It will be interesting to see what the Georgia Supreme Court does with this case. But it does seem that Judge Thrash’s questions about the availability of the business judgment rule has less to do with the rights and responsibilities of directors and officers of a banking institution in Georgia and more to do with the identity of the claimant. It is worth noting in that regard that in asserting its claims as receiver of the failed bank, the FDIC steps into the shoes of the failed institution, with the rights that the institution had against the officers. It would seem that there is nothing about the FDIC’s claims as receiver that should deprive directors and officers of the defenses they would have had  in a claim the bank itself had brought against them.

From my view, unless Georgia law holds bank directors and officers to a higher standard than directors and officers of ordinary business corporation, there would seem to be no basis to deprive them of the right to rely on the business judgment rule that is available to other corporate directors and officers under Georgia law. It would be a hard line of analysis to sustain that the rule is always available except when the FDIC as receiver of a failed bank is asserting the claim.

I recognize that there may be many different views on this topic. I welcome comments from readers who take a different view of this topic.

Very special thanks to a loyal reader for sending me a copy of Judge Thrash’s opinion.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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