July 16, 2014

In a highly-anticipated decision, the Georgia Supreme Court last Friday answered the following question posed in the case of FDIC v. Loudermilk: “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?”

The Court concluded that the business judgment rule exists to protect Georgia directors and officers from challenges to the substance of business decisions. However, the Court also decided that the business judgment rule does not preclude all claims for ordinary negligence against bank directors and officers. The business judgment rule will protect business decisions made by bank (and non-bank) directors and officers, so long as the directors and officers are not negligent in the process by which they made those decisions. Bank directors and officers may be liable for a failure to exercise ordinary care with respect to the way in which business decisions are made. Stated another way, the business judgment rule will not protect decisions shown to have been made without deliberation, without diligence to assess facts and circumstances upon which decisions are based or in bad faith.

The Court also clarified the standard of care owed by bank directors and officers in the discharge of their duties. According to the decision, bank officers and directors “are only expected to exercise the same diligence and care as would be exercised by ‘ordinarily prudent’ officers and directors of a similarly situated bank.” As noted by the Court, this standard is less demanding than a pure negligence standard. The Court further stated that bank officers and directors are presumed to have acted in good faith and used ordinary care in their decision-making process – the challenger must prove otherwise to have a viable claim.

In light of this decision, there are a few take-aways bank directors and officers should consider to help protect themselves from liability. Directors and officers should create and adhere to a decision-making process that documents the “judgment” followed in their deliberative process. This includes being particularly vigilant about maintaining Board and committee meeting minutes that reflect meaningful and thoughtful participation, specifically including discussions held and information relied on in connection with decision making. Importantly, directors and officers should be aware that any facts and circumstances not reflected in meeting minutes will be difficult to prove if their decision-making process is later called into question.

Although the Court’s ruling is generally favorable to bank directors and officers, the application of this decision in future cases will shape the manner and extent to which the business judgment rule will protect bank directors and officers. From a litigation perspective, the decision makes it more difficult to have a case dismissed at the outset. As litigation continues to refine the application of the business judgment rule in Georgia, bank officers and directors should prepare themselves to defend their decision-making processes and the decisions themselves. Click here to view the Court’s opinion. Click here to view the entire newsletter.

James-Bates-Brannan-Groover-LLP’s Financial Institutions Practice represents community banks throughout Georgia.

Written by: Dan BrannanJo Meeks and Michael White

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