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Posts Tagged ‘banks’

Georgia’s Failed Bank Litigation Addresses “Insured vs. Insured” Coverage Exclusion

Posted on: January 10th, 2013

By: Kelly Morrison

Georgia is no stranger to failed banks, and thus continues to host to a number of FDIC lawsuits against former directors and officers.  Not surprisingly, these lawsuits are testing the legal waters regarding several coverage exclusions, as D&O insurers batten down the hatches in anticipation of further lawsuits.

On January 4, 2013, Northern District of Georgia Judge Robert L. Vining, Jr., issued an opinion regarding the common “insured vs. insured” coverage exclusion.  This recurring issue addresses whether the FDIC’s claims as receiver for a failed bank against the bank’s former officers and directors triggers the standard D&O policy’s “insured vs. insured exclusion.”

The case arose from the failure of Omni National Bank of Atlanta.  After suit was instituted in March 2012, the bank’s D&O insurer filed a separate declaratory judgment action, seeking a holding that no coverage existed due to the FDIC’s role as receiver for Omni.  Essentially, the D&O insurer argued that the FDIC had “stepped into the shoes” of Omni Bank, and their subsequent claims against former officers and directors were thus barred under the insured vs. insured exclusion.

Judge Vining rejected this argument, finding the policy language ambiguous due to the FDIC’s “multiple roles” as governmental regulator and receiver, noting that receivership gave the agency power to act on behalf of the bank’s depositors, creditors, and shareholders.  This reasoning is consistent with an earlier holding from the District of Puerto Rico in October 2012.

Although the insurer can develop and renew this argument in the FDIC’s lawsuit, this is undoubtedly a negative development for D&O insurers, who can now expect to defend FDIC actions through the summary judgment stage, a much more expensive proposition than the quick exit offered by a declaratory judgment.

FDIC Ramps Up Failed-Bank Litigation in Georgia, Re-Asserts Ordinary Negligence Arguments

Posted on: October 26th, 2012

By: Kelly Morrison

Though the FDIC remained quiet through summer vacation and into early fall, they have once again filed suit against a failed Georgia bank, American United Bank of Lawrenceville, which was closed by regulators on October 23, 2009.  A copy of the complaint can be viewed here.

Notably, the new complaint includes allegations of ordinary negligence.  Similar factual and legal allegations were recently dismissed by Northern District Judge Steve C. Jones based upon the protections of the business judgment rule.  Apparently looking for another bite at this apple, the FDIC has attempted to assert that the business judgment rules does not apply due to the defendants’ undertaking of “unreasonable” lending risks.

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.