Does the Business Judgment Rule Really Exist in Georgia?

by Baker Donelson
Contact

On April 21, 2014, the Georgia Supreme Court heard oral arguments in the case of FDIC v. Loudermilk to determine whether the Business Judgment Rule really exists in Georgia. Claiming contrary decisions on the Business Judgment Rule from various courts and contradictory statutes, Judge Thrash of the Northern District of Georgia has formally asked the Supreme Court of the State to determine whether the Business Judgment Rule protects the actions of bank directors and officers in Georgia.

For years, if not decades, officers and directors of Georgia's companies have relied on the Business Judgment Rule in support of motions to dismiss allegations of ordinary negligence in connection with corporate actions that result in losses for a company. While the Court of Appeals of Georgia has approved of the Business Judgment Rule, it has not been explicitly approved by the Supreme Court.

The Business Judgment Rule is a creation of case law that gives directors and officers a presumption that, in making business decisions, the directors and officers acted in a good-faith, informed manner, and that a business action was taken in the best interest of the company. The Business Judgment Rule protects corporate directors and officers from personal liability unless it can be proved that a director acted in bad faith, showed disloyalty, engaged in self-dealing or abused his or her discretion. Georgia's lower courts regularly invoke the Business Judgment Rule as a recognition that: (1) judges and juries should not be called upon to review business decisions made in the regular course of corporate operations; and (2) businesses should have the ability to take calculated risks. The Official Code of Georgia Section 51-1-2 describes simple or ordinary negligence as "the degree of care which is exercised by ordinarily prudent persons under the same or similar circumstances."

Despite this history, the Federal Deposit Insurance Corporation (FDIC) has repeatedly claimed in court filings that directors and officers may be sued for simple negligence in Georgia. As receiver for a failed financial institution, the FDIC may sue officers, directors and other professionals who played a role in the failure of an insured institution to maximize recoveries to the Deposit Insurance Fund (DIF).

The FDIC has been extremely active in asserting its claims against officers and directors of failed financial institutions for ordinary negligence. In fact, since 2007 the FDIC has authorized over 1,000 liability suits often claiming negligent actions by officers and directors that resulted in bank failures.

The FDIC's claims against the officers and directors of a failed bank has led one judge in the Northern District of Georgia to determine that the Business Judgment Rule's existence presents an unsettled question of state law in the banking context and certified the question to the Georgia Supreme Court for decision. The question certified for decision is: "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 the Loudermilk case, the Federal District Court for the Northern District of Georgia refused to dismiss claims of ordinary negligence against the defendant directors and officers of a failed bank. The Federal District Court in Loudermilk concluded that, absent a clear statutory reference or an explicit ruling from the Georgia Supreme Court, Georgia law does not mandate application of the Business Judgment Rule to preclude ordinary negligence claims against bank officers and directors. Further, the Loudermilk Court provided the Supreme Court with the ability to state that, even if the Business Judgment Rule exists in Georgia, it may not be available to bank directors and officers. The Supreme Court could reason that bank directors and officers should be held to a different standard than directors and officers of other business corporations because, according to the District Court, unlike a business corporation whose stockholders bear the loss if the corporation fails, the FDIC and ultimately taxpayers bear the financial loss when a bank fails.

The Georgia Supreme Court's answer to the certified question posed in the Loudermilk case will have a significant impact on directors and officers of Georgia's banks. Beyond that, the decision could have far-reaching consequences for directors and officers of all Georgia corporate entities and determine the future standard by which all corporate actions will be reviewed.

The Georgia Supreme Court has several options available to it in deciding the case. First, it could explicitly accept the Business Judgment Rule in Georgia and side with the defendants. Second, it could rule that the Business Judgment Rule only applies to directors and officers of institutions that are not insured by a government agency like the FDIC's DIF. Alternatively, the Georgia Supreme Court could determine that the Business Judgment Rule doesn't apply in Georgia, but that result is extremely unlikely due to the policy reasons outlined above. Finally, among other options, the Court could draft a narrowly-tailored decision and leave open the question for a future date. Regardless of the outcome, if the Georgia Supreme Court directly addresses the federal certification, the decision could impact the conduct of thousands of boards of directors and officers of businesses that operate in the state.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Donelson | Attorney Advertising

Written by:

Baker Donelson
Contact
more
less

Baker Donelson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.