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Posts Tagged ‘FDIC’

It’s A Business Not A Criminal Enterprise (Any Longer)

Posted on: December 17th, 2018

By: David Molinari

The operation of a commercial cannabis business presents a host of unique issues. Security is a concern when the business stores hundreds of thousands of dollars in “inventory” on site. Banking regulations present another problem requiring these enterprises to be a cash-based business; a requirement brought on by federal forfeiture laws if revenues are deposited into any federal banking institution insured by the Federal Deposit Insurance Corporation. Another aspect of operating a cannabis business: the smell. While state legislatures wrestle with how to balance the exercise of police powers with accepting tax revenues generated by a multi-billion-dollar industry, the day to day practical operation forces business and land owners to live and work next to one another; and where the relationship breaks down, neighboring business owners  turn to the courts.

For the cannabis industry, local regulations authorizing permits for operation are developed utilizing combinations of zoning and land use restrictions that have the potential, once a permit is issued, to provide some level of protection against neighboring business owners trying to impose common law remedies such as nuisance or trespass to control greater influx of traffic, odor and diminished land value.  Suits for nuisance or trespass may not allow a disgruntled neighboring land owner relief. The perceived lack of state remedies forces neighboring owners to try alternative jurisdiction and relief theories. In one instance, a neighboring commercial land owner decided to file a federal racketeering, influence and corrupt organization (RICO) civil suit seeking to close down the neighboring commercial cannabis business.

Although various states have enacted legislation legalizing medicinal and recreational cannabis, the fact remains that cannabis is a controlled federal substance, the possession or sale of which constitutes a federal crime.

Hope and Michael R. owned a neighboring commercial tract to Parker W’s cannabis cultivation business. The Hope and Michael claimed that Parker’s cannabis business inundated their neighboring property with the scent of cannabis as well as incessant noise from air conditioners.

Rather than attempting to enforce common law nuisance or trespass theories of relief, Hope and Michael filed a lawsuit based upon federal law and particularly that the product sold and cultivated is illegal under Federal Law; and such illegality had negative effects on the value of other neighboring parcels in the business park. They claimed the presence of the cannabis facility itself dropped the value of the land.

The case made it to trial where Parker argued that the business was legally zoned, housed in a business park that was commercial and agricultural. Other businesses in the park included an animal feed lot. Any scent or odor of cannabis was no different than the smell from an animal feed lot or a nearby landfill. The business itself was legal under state zoning and land use laws.

A federal jury rejected the claim that operation of a cannabis-based business in violation of federal law is inherently racketeering. As to the question of whether the operation of the cannabis business caused damage to neighboring land, the expert opinions presented by the parties actually showed the cannabis business resulted in an increase in the business park land values. One could argue under the Doctrine of Implied Findings, the jury found the smell of pot is preferable to animal feed or a landfill.

The cannabis industry, medicinal or recreational, may enjoy acceptance in a growing number of state legislatures. However, such acceptance in the legislature may not filter down to business to business levels. The economic impact of cannabis, including the influx of sales taxes to local economies as may negate the “stench” of marijuana in the halls of state senate and house chambers; but not to the neighboring small business owners that believe such an industry is only a business in which criminals or cartels profit. Neighboring business owners may not care about broader economic impact of sales taxes and look only to shelter their local investment in their business. The relationship among various commercial activities, be it manufacturing, technology or cannabis is an evolving process. The relationship among business owners will have its ups and downs and the cannabis industry will be subject to every variation of challenge at the local business to business level. Cannabis may be here to stay because of its commercial and economic impact being too great to ignore or confine. In the west, we now have emerging precedent that it is not a racketeering or corrupt business.

If you have any questions or would like more information, please contact David Molinari at [email protected].

Courts Continue to Question Protections Afforded By Iconic Business Judgment Rule – Georgia Joins the Trend

Posted on: July 21st, 2014

By: Michael Wolak, III

The business judgment rule is an iconic fixture in American corporate jurisprudence reflecting a strong judicial reluctance to question the business judgments of directors and officers.  In its classic form, the business judgment rule insulates a company’s directors and officers from liability for negligence in the discharge of their fiduciary duties for mistakes in the exercise of honest business judgment.  The rule’s underlying rationale is that it is not the function of courts to second guess the business decisions of those who are entrusted with management of the affairs of the corporation, if they arrive at a decision for which there is a reasonable basis, they act in good faith and exercise independent judgment, and are uninfluenced by any consideration other than what they honestly believe is in the best interests of the corporation.

Several cases over the past few years, however, reflect a judicial trend towards questioning, and in some instances diluting, the scope of the rule’s protections.  For example, while most jurisdictions have uniformly applied the business judgment rule to both directors and officers, federal district courts in California have continued to follow the 2011 decision in F.D.I.C. v. Perry, 2012 WL 589569 (C.D. Cal. Feb. 21, 2012), which held that California’s common law and statutory business judgment rule applies only to directors, not officers.  See, e.g., F.D.I.C. v. Faigin, 2013 WL 3389490 (C.D. Cal. July 8, 2013).  The Perry court observed that California’s statutory codification of the business judgment rule does not mention “officers” and concluded that the legislative history suggests that the exclusion of officers was intentional because officers are more knowledgeable of the company’s operations and affairs than directors.  The hallmark of the business judgment rule, however, is that courts are not equipped to second guess the business decisions made by those who manage the company’s affairs, which includes directors and officers.  Thus, the underlying rationale for the rule clearly applies to both directors and officers.

Other courts continue to clarify and limit the scope of protection afforded by the business judgment rule.  For example, directors and officers typically could prove that a challenged decision was made with the requisite due diligence with evidence that they engaged the advice of outside consultants or experts to assist them in making an informed decision.  The Third Circuit Court of Appeals, however, reversed the grant of summary judgment to directors of a failed non-profit based on application of Pennsylvania’s business judgment rule, despite similar evidence of due diligence.  In Official Committee of Unsecured Creditors v. Baldwin, et al., 659 F.3d 282 (3d Cir. 2011), the district court relied on evidence showing that the directors engaged the advice of outside counsel and considered several options before making the challenged decision to file bankruptcy.  While acknowledging that this evidence could support application of the business judgment rule, the Third Circuit reversed and held that plaintiffs presented evidence demonstrating that the Board received several red flags as to the diligence and competence of two senior officers it relied on in making the decision to file bankruptcy, and eschewed a viability study.  This opinion underscores the need for directors and officers to ensure that each and every component of their decision is fully informed by all material facts available to them.

Georgia has now joined this growing trend of judicial questioning and clarification of the business judgment rule’s protections.  On July 11, 2014, the Georgia Supreme Court in F.D.I.C. v. Loudermilk, et al., (Case No. S14Q0454) answered the following question certified by Judge Thomas W. Thrash of the Northern District of Georgia:  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?  In a comprehensive opinion written by Justice Keith R. Blackwell, a unanimous Georgia Supreme Court answered this question with a qualified negative, holding that “the business judgment rule precludes some, but not all, claims against bank officers and directors that sound in ordinary negligence.”  In enunciating a more “modest” business judgment rule, the Court first reaffirmed that the business judgment rule is a settled part of Georgia common law and that the rule has not been abrogated by Georgia statutory law.  While the Court made clear that the business judgment rule precludes ordinary negligence claims against officers and directors concerning “only the wisdom of their judgment,” the rule is not an absolute bar to ordinary negligence claims alleging that the challenged decision was made without deliberation or requisite due diligence, or in bad faith, thereby overruling Flexible Products Co. v. Ervast, 284 Ga. App. 178, 643 S.E.2d 560 (2007) and Brock Built, LLC v. Blake, 300 Ga. App. 816, 686 S.E.2d 425 (2009), which recognized an absolute bar against all claims premised on a want of ordinary care.  Although Loudermilk involved only bank officers and directors, the Court emphasized its desire to avoid “needless uncertainty” and overruled Flexible Products and Brock Built as to bank and non-bank officers and directors.

Whether other jurisdictions will be informed by the Georgia Supreme Court’s decision remains to be seen, but we can likely expect the FDIC and other plaintiffs litigating outside of Georgia to urge their respective courts to adopt the Georgia decision or to look to it for persuasive authority and guidance.  Here in Georgia (or cases in which Georgia law governs), the immediate impact of the decision is that it will now be more difficult for directors and officers to have ordinary negligence claims dismissed at an early stage, especially since sophisticated plaintiffs will not likely challenge merely the wisdom of the business decision.  Directors and officers may feel pressured to settle early to avoid the expense of discovery and protracted litigation, as well as the related risk and uncertainty of defending against mere negligence claims, as opposed to the higher standard of gross negligence.  In the meantime, any future expansion of the protections afforded to officers and directors in Georgia will have to be provided by the Georgia legislature.

If the judicial trend towards limiting the business judgment rule’s protections continues, directors and officers will continue to face increased liability exposure.  Whether or not this trend is short-lived, directors and officers should take appropriate steps to maximize the applicability of the business judgment rule to their future decisions, with the view that every business decision will be scrutinized in the future by disgruntled shareholders or creditors.  These steps should include, but are not limited to:

  • Ensuring that each decision is made with due consideration of the interests of shareholders, creditors, and other interested parties
  • Ensuring that each decision has the benefit of outside expert or other professional advice
  • Ensuring that all available material facts are considered and the decision is informed by those facts
  • Ensuring active participation by all directors, especially independent/outside directors
  • Ensuring that all available options or alternative transactions are considered
  • Ensuring that each decision is the product of active and comprehensive deliberation
  • Ensuring that board minutes and other documents accurately memorialize the deliberations, considerations, judgment-calls, rejected alternatives, and written materials that inform the decision

FDIC Publicizes Failed Bank Settlements

Posted on: March 28th, 2013

By: Kelly Morrison

In an apparent response to criticism for their lack of transparency, the FDIC has published dozens of settlement agreements arising out of the now 106 lawsuits the agency has filed against failed banks. The FDIC has indicated that it will post additional settlement information by March 31.

These settlement agreements provide valuable insight to both insurance carriers and former directors and officers sued in their individual capacities. For instance, an August 2012 settlement agreement between the FDIC and Heritage Community Bank reflects a payment of $3.15 million—exclusively funded by the Bank’s D&O insurer.  Conversely, an April 2012 settlement arising from the Corn Belt Bank and Trust Company litigation shows that the individual defendants paid $266,000 out of pocket, while the D&O insurer chipped in another $700,000.

Those interested in perusing these settlement agreements for valuable insights on current cases may locate them here.

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.