11th Circuit Sends Major FDIC Case to Ga. High Court

Panel joins district judge asking whether state law shields bank officials from liability

, Daily Report


David Balser
David Balser says the appeals court's ruling on the issue of affirmative defenses has national implications.

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.

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