First, there were the bank failures. Eighty-seven in the past six years, more than any other state.
Now, there is the reckoning.
Seeking to recover millions of dollars lost to those failures, the Federal Deposit Insurance Corp. has filed lawsuits against the directors and officers of two dozen closed Georgia banks.
Some of those cases have been settled, but two have ended up, in part, in front of the state’s highest court.
There, justices will decide if the FDIC can only seek money from bank leaders if they deliberately acted in ways likely to harm the bank, or if directors and officers can be held liable — and therefore bear the responsibility — for bad decisions due to simple negligence.
“It’s a debate that echoes in other courtrooms, even when Georgia law doesn’t apply,” said Kevin LaCroix, a lawyer and blogger who writes about director and officer suits and is the executive vice president of the insurance intermediary RT ProExec. “A lot of people around the country are watching what’s happening very closely.”
The court's decision could shape the way banks — especially smaller ones — do business. During the last boom, banks issued real estate loans seemingly willy-nilly. In future real estate booms, the greater threat of liability might make them more cautious or responsible.
Some argue changes could hamper credit, while others say it will make the industry safer.
Additionally, the ruling could affect how many directors and officers pay for the poor choices they made through the crisis. Rulings in the FDIC’s favor would mean future bank leaders would have to weigh the possibility of personal liability for bad business choices against their interest in serving.
The two cases question whether bank officers and directors are covered by Georgia’s business judgment rule, which applies to non-profit and corporate officers and directors and shields them, essentially, from legal responsibility for negligence — or mere mistakes.
In other words, if Home Depot directors make decisions that harm the business but do not rise to the level of recklessness, they are protected for the risks they took.
The FDIC contends bank directors and officers should be held to a higher standard.
The agency’s position is “scary,” said C. Edward Dobbs, a partner at the law firm Parker Hudson Rainer & Dobbs. “Sometimes, fault is just the fault of our being human. Mistakes are negligence — they’re mistakes.”
The Georgia Department of Banking and Finance has filed friend-of-the-court briefs in both cases, urging the state Supreme Court justices to side with the bank directors who are pushing banks to be subject to the same standards as other corporate officers. If the FDIC is allowed to pursue claims against bank directors for ordinary negligence, the department says, qualified bank directors probably would resign.
Already, commissioner Kevin Hagler said, it is “extremely difficult” to recruit board members to banks — a far cry from the time before the crisis, when small banks mushroomed and founders had little trouble filling a board roster.
But in the first case — FDIC v. Loudermilk, which the court heard Monday — attorneys for the FDIC argued that bank directors and officers have to act both in good faith and with a degree of care that ordinary people would exercise under similar circumstances. Not doing both those things opens bank leaders to liability, the FDIC claims.
“The plain language, we submit, is unequivocal,” FDIC attorney J. Scott Watson said during arguments. He also said that the handbook given to new officers and directors by the state Department of Banking and Finance supports the FDIC’s claim.
Language there says the “‘ordinary negligence’ standard of performance has been required for years by Georgia courts.” The passage continues, “any failure to meet this legal responsibility subjects the bank director to personal liability for any resulting losses to the bank, its depositors or other creditors.”
The language in the handbook is internally inconsistent, Hagler said, and that portion is “outdated” and “inaccurate.”
“It’s guidance given to directors to shake them a bit, to get them to take this seriously,” he said. “It’s confusing and it’s wrong.”
The court will take several months to decide on the Loudermilk case, which stems from the failure of Buckhead Community Bank, started by Charlie Loudermilk, the founder of rent-to-own giant Aaron’s.
A second case, FDIC v. Skow, asks a similar question about liability. That case is tied to the failed Integrity Bank, whose sued board members included state Sen. Jack S. Murphy, R-Cumming, who once headed the Senate Banking Committee and now leads the Regulated Industries and Utilities committee, and Clinton M. Day, a former state senator and one-time Republican candidate for lieutenant governor who once served on the Senate banking committee. Arguments in that case are scheduled to be heard next month.
The FDIC has so far filed 95 suits across the country naming 730 former directors and officers; those include 24 Georgia cases, more than in any other state. Some states already prohibit the FDIC from seeking money on the lesser simple negligence charges.
In deciding which cases to file, the FDIC looks at the ability of those sued to repay, whether from their own pocket or via insurance policies that protect bank insiders.
“This is a search for money, make no mistake about it,” said Chip MacDonald, a banking attorney at Jones Day. “Claiming a state’s corporate law shouldn’t apply to banks is pretty damn novel. …Banks are not some kind of special entity.”
But in many ways, banks are special. Customer deposits are insured by the FDIC, a backstop to buttress the integrity of the nation’s financial system. The costs of that insurance are paid by other banks, who pass those costs on to customers.
During Monday’s FDIC v. Loudermilk arguments, Alston & Bird attorney Steven Collins urged the justices to find that merely exercising poor judgement when making loans is not enough to presume liability.
“There’s no need to do violence to the banking code in order to find in favor of the (bank directors and officers) here,” he said.
So far, lower courts have agreed that bank directors and officers need to be reckless, and not just make ordinary mistakes, to be liable for losses in the state.
“If Georgia departs from the prevailing view, eyebrows will be raised,” Dobbs said.
