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FMG Law Blog Line

Federal Court Changes Liability Standard for Georgia’s Directors and Officers

Posted on: July 30th, 2012

By: Mary Anne Ackourey and Kelly Morrision

In the wake of the mortgage housing crisis, more banks have failed in Georgia than in any other state.  A reflection of this troubling statistic is that a number of cases have been filed by the Federal Deposit Insurance Corporation (FDIC) against bank officers and directors.  These cases allege personal liability due to their alleged breach of fiduciary duty.

In a recent ruling, FDIC v. Skow, et al., Northern District of Georgia Judge Steve C. Jones took advantage of the proliferation of FDIC litigation to clarify Georgia’s Directors and Officers (D&O) liability standards for breach of duty claims.  These claims arise not only in the context of bank failures, but also in cases of bankruptcy, when a company is sold, or when a business decision is alleged to have lost the shareholders substantial stock value.

After summarizing the case law interpreting the business judgment rule under Georgia law, Judge Jones found that directors and officers are shielded from liability for “ordinary negligence”—which encompasses claims that directors or officers were “careless” or “lackadaisical” in the performance of their duties.

Specifically, Judge Jones noted that Georgia’s business judgment rule, “affords an officer the presumption that he or she acted in good faith, and absolves the officer of personal liability unless it is established that he or she engaged in fraud, bad faith or an abuse of discretion.” Thus, “allegations amounting to mere negligence, carelessness or ‘lackadaisical performance’ are insufficient.”   Finding this principle determinative, the court held that claims against directors and officers for ordinary negligence, as well as claims for breach of fiduciary duty based on ordinary negligence, are precluded by the business judgment rule under Georgia law.

Judge Jones also held, however, that the business judgment rule does not protect “grossly negligent” acts and omissions by directors and officers.  The Court noted that the legal definition of “gross negligence” is arcane and unhelpful, referencing “the common sense” exercised by even an “inattentive man.”  Importantly, Judge Jones’ opinion clarified that gross negligence, in a business judgment rule context, is fairly synonymous with illegal conduct.

For instance, in the case before Judge Jones, the FDIC alleged the directors and officers instituted lending policies which directly circumvented Georgia law regarding lending limits.  Indeed, several of these allegations already have led to federal criminal charges, to which two former directors have entered a guilty plea.

This holding is important for directors and officers of any bank or corporation, as it sets out conduct that cannot form the basis of a typical D&O suit, and therefore are subject to a motion to dismiss.  Cases dismissed through an early motion of this type avoid the expense and hassle associated with lengthy litigation.  Although in this case, some claims survived because of the alleged illegal conduct of the officers and directors (which stated a claim for “gross negligence”), the case makes clear there is a relatively high bar to bring such a claim.  The standard articulated by Judge Jones offers an argument to officers and directors in future cases that their case should be dismissed, because their conduct did not approach the criminal ambit of “gross negligence,” and demonstrated at most, a lack of care protected by the business judgment rule.

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