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Judge Holds Execs of Failed Banks Personally Liable in FDIC Suit

The ruling is at odds with other U.S. district court decisions on the business judgment rule

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Judge Thomas Thrash Jr. asked Georgia Supreme Court for help.
Judge Thomas Thrash Jr. asked Georgia Supreme Court for help.

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.

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