High bar for liability affirmed in bank failures

A Georgia judge has affirmed the high bar for personal liability among the officers and directors of failed banks in the state, ruling that it takes more than plain negligence to put bank leaders on the hook for any losses.

The Federal Deposit Insurance Corp., which sued eight former officers and directors of the Alpharetta-based Integrity Bank for $70 million, will have to prove that those officers and directors were grossly negligent in performing their duties before the bank failed in August 2008.

Gross negligence is defined in Georgia as lacking the care "which every man of common sense, however inattentive he may be, exercises under the same or similar circumstances," according to the ruling by Judge Steve Jones in U.S. District Court in Atlanta. Negligence is a decision lacking "what an ordinarily prudent man would do under the same circumstances."

The FDIC had claimed that the defendants in the civil suit -- which include Senate banking committee chairman Jack Murphy, R-Cumming -- were negligent, grossly negligent and breached their fiduciary duties.

But Georgia's business judgment rule generally gives business leaders the benefit of the doubt for decisions made in good faith that ultimately went bad. Judge Jones ruled Monday that it protects the defendants from ordinary negligence as they do business.

Calling the ruling a "mixed bag," Troutman Sanders banking attorney Tom Powell, who is not involved in the case, said gross negligence has been the standard by which a banking officer can be found personally liable for a bank failure, and the ruling indicates that it will continue to be so.

"It's a high bar and it should be a high bar," Powell said. "It's happy news for us who are defending."

Four of the defendants had asked that the FDIC's suit be dismissed, while four others requested early judgment.

In an e-mail, Sen. Murphy said he was "pleased" with the court's ruling, but could not comment further because the case was still being litigated. A spokesman for the FDIC declined comment.

The ruling is important because Georgia has more failed banks than any other state since mid-2008, and more suits are expected. It is important to know what the standards are going to be, said Kevin LaCroix, executive vice president of OakBridge Insurance Services in Ohio and author of The D&O Diary, a respected blog about director and officer liability cases.

"The courts aren't going to substitute their judgment for the judgment of business managers," LaCroix said. "Allegations of negligence alone aren't enough."

LaCroix also noted that Jones' ruling allows the defendants to claim that the FDIC, in its role as regulator, helped cause Integrity's failure through its own lax oversight. The possibility of the defendants making that argument -- which is not an uncommon one -- could make the case significant outside of Georgia, LaCroix said.

In addition to Murphy, the defendants include Steven Skow, Alan Arnold, Douglas Ballard, Clinton Day, Joseph Ernest, Donald Hartsfield and Geraldo Reynolds. Ballard pleaded guilty to fraud charges that authorities said helped lead to the bank's collapse. Another officer, Joseph Todd Foster, pleaded guilty to securities fraud by way of insider trading.

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