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Banking & Finance Law Report

Personal Liability, Bank Directors and the Business Judgment Rule

Posted in Bank Regulation, Community Banking, Corporate Governance, Corporate Law, Regulation and Compliance

Last April, a trade association for bank directors, the American Association of Bank Directors reported the results of a survey designed to measure the impact of concerns about personal liability on the decision of bank board members to resign and by individuals to turn down board seats on banking organizations.

One of the key concerns, the survey highlighted, is the possibility of an FDIC lawsuit against the directors if a bank failure occurs. The fear was bank directors would be liable for decisions made as directors notwithstanding what is commonly referred to as the business judgment rule. Generally, the business judgment rule shields corporate directors, including bank directors, from liability when board decisions result in losses to the corporation or to shareholders.

The AABD mentioned in particular a then pending lawsuit in Georgia arising out of FDIC claims related to the failure of Buckhead Bank. These claims against the directors sounded in simple negligence regarding the making of loans. And the directors had asserted the business judgment as a defense.

A few days ago the Georgia Supreme Court ruled on the matter and the decision is worth a review by bank directors and managers even though they don’t do business in Georgia. The Georgia Supreme Court decision elegantly summarizes the business judgment rule including its history and common law origins. So the opinion is a useful “read” for bankers everywhere because the development of local jurisprudence in most states is likely similar to the process described in the opinion.

The decision concluded the business judgment rule in Georgia does not preclude, as a matter of law, all claims sounding in ordinary negligence against officers and directors of a bank in a lawsuit brought by the FDIC as a receiver for the bank.

The Georgia court notes that the standard of care required of bank directors is to exercise the same skill ordinarily prudent men would exercise in positions at similarly situated banking institutions. The Court also observes that under Georgia law, it is reasonable for an officer or director to rely on information prepared by employees, other officers, counsel and public accountants which the director or officer reasonably believes to be within the preparer’s professional or expert competence.

For some, the ruling will confirm fears expressed in the AABD survey. That survey indicated that in the past 5 years roughly 25% of the 80 banks responding to the survey reported that a director had resigned out of fear of personal liability, a person had refused to serve out of a similar fear or a director had refused to serve on the board loan committee for a similar reason. The cautionary report of the AABD noted, further, anecdotal reports that bank examiners in some instances have sought information from directors concerning their net worth including recent tax returns.

For others, however, the ruling will confirm their understanding of what has always been the basic legal environment for bank directors:

[T]he business judgment rule makes clear that, when a business decision is alleged to have been made negligently, the wisdom of the decision is ordinarily insulated from judicial review, and as for the process by which the decision was made, the officers and directors are presumed to have acted in good faith and to have exercised ordinary care. . . Although this presumption may be rebutted, the plaintiff bears the burden of putting forward proof sufficient to rebut it. All together, the limited standard of care, the conclusive presumptions as to reasonable reliance, and the rebuttable presumptions of good faith and ordinary care offer meaningful protection, we think, to officers and directors who serve in good faith and with due care. The business judgment rule does not insulate “mere dummies or figureheads” from liability, of course, but it never was meant to do so.

The survey regarding bank director participation is available here and Georgia Supreme Court’s opinion is FDIC v. Loudermilk, No. S14Q0454, — S.E.2d —, 2014 WL 3396655 (Ga. July 11, 2014).