In a unanimous ruling Friday, the state Supreme Court said bank and other company leaders can be held personally liable for the poor choices they make in business if they do not diligently weigh the facts or are not properly engaged in the decision-making process.
The ruling is an important one because it sets a new standard for business leaders. Members of a company’s board of directors, its CEO and other high-ranking officers can be held liable for making uninformed decisions or acting as “mere dummies and figureheads,” the court said.
The case was brought by the Federal Deposit Insurance Corp., which insures bank deposits. It has sued the directors and officers of two dozen Georgia banks that have failed. All told, Georgia led the nation during the financial crisis with 87 bank failures. The number of lawsuits filed against failed banks in Georgia is also the highest in the country.
“The decision will make both sides a little unhappy,” said C. Edward Dobbs, a partner at the law firm Parker Hudson Rainer & Dobbs. “It’s a middle ground.”
The FDIC hoped the court would allow negligent bankers to be found liable for their business mistakes.
Bank attorneys, by contrast, wanted the court to say that simple business mistakes were protected in all instances, so officers and directors would not be held liable. They argued that liability should be reserved for leaders who deliberately harmed the business.
The state Supreme Court came out between the two sides on an issue that had not been resolved by lower courts. The ruling allowed some protection for officers and directors if they made honest mistakes while conducting business. It acknowledged that business leaders take risks and make mistakes, but said they should not be responsible for simply failing to make good decisions.
But the court opened the door for lawsuits if it can be proved that officers and directors made decisions without deliberation, care or assessing the facts in good faith.
It means that leaders cannot be “automatons who simply stamp things with approval” or rely on others to inform them, Dobbs said. They must be engaged and ask questions.
No one from the FDIC would comment on the decision.
Kevin LaCroix, a lawyer and blogger who writes about director and officer lawsuits, said the decision makes it less likely that FDIC suits in Georgia will be dismissed out of hand. It also increases the government’s ability to recoup more of the money it lost from bank failures during future settlement negotiations, he predicted.
“It may produce a different dynamic, more in the FDIC’s favor,” he said.
But an attorney for the Georgia Bankers Association also thought the ruling was a good one.
“I think it’s a win,” said John Bielema, an attorney for association. As long as directors are “fully engaged” like they should be, he said, they will not be held liable for unwise choices. He also said he did not think the ruling would deter potential directors from joining bank boards, which the industry had been concerned about.
Because lawsuits now have to show how a bad decision was arrived at, Chip MacDonald, a banking attorney at Jones Day, anticipates that it will be harder to bring them in the future.
“I think a lot of suits out there are going to fail as a result of this decision,” he said. “It’s an important decision nationally.”
The court’s ruling was being watched across the country. LaCroix, who is based in Ohio, said similar cases rarely make it this far, and the level of responsibility is still undecided in many states.
This case, FDIC v. Loudermilk, stems from the failure of Buckhead Community Bank, started by Charlie Loudermilk, the founder of rent-to-own giant Aaron’s. Bank attorneys could not be reached for comment Friday.
A second case, FDIC v. Skow, asks a similar question about liability. That case, which has not yet been decided, is tied to the failed Integrity Bank.
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