On August 14, 2012, the U.S. District Court for the Northern District of Georgia affirmed the applicability of the business judgment rule in connection with actions taken by bank directors and officers and dismissed ordinary negligence and breach of fiduciary duty claims brought by the Federal Deposit Insurance Corporation (FDIC) against various former directors and officers of a now-defunct Georgia bank. The court also required the FDIC to replead its gross negligence claims, directing it to allege specifically how each defendant acted with gross negligence.
In the action, FDIC v. Briscoe, the FDIC filed a complaint for damages against certain former directors and officers of Haven Trust Bank (the “Bank”) for negligence, breach of fiduciary duty, gross negligence and violation of the Financial Institutions Reform, Recovery and Enforcement Act. Seeking to recover approximately $40 million, the FDIC alleged that the directors and officers wrongfully (1) pursued high-risk acquisition, development and construction loans and commercial real estate loans; (2) provided improper loans to the Bank’s insiders; and (3) made irresponsible dividend payments to the Bank’s parent company.
The directors and officers moved to dismiss the FDIC claims, arguing that Georgia’s business judgment rule shields bank directors and officers from personal liability for ordinary negligence and—absent allegations of fraud, abuse of discretion or bad faith—for breaches of fiduciary duty. The directors and officers further argued that the FDIC’s gross negligence claims were insufficient because the FDIC failed to provide specific allegations as to each defendant’s responsibility for the alleged wrongful conduct.
Following oral argument on April 17, 2012, the Northern District of Georgia ruled in favor of the directors and officers. As a preliminary matter, the court found that the business judgment rule is properly considered at the motion to dismiss stage, at least where “the issue of the applicability of the [business judgment rule] appears on the face of the Complaint and is limited by the law of Georgia, not dependent upon additional evidentiary facts.” Also of note, the court took judicial notice of an FDIC Office of Inspector General Report because (1) it was central to the FDIC’s claims and (2) its authenticity had not been challenged.
Citing Flexible Products Co. v. Ervast, 284 Ga. App. 178, 643 S.E.2d 650 (2007) and Brock Built, LLC v. Blake, 300 Ga. App. 816, 686 S.E.2d 425 (2009), the court held that the business judgment rule shields corporate directors and officers from liability for ordinary negligence and—absent fraud, abuse of discretion or bad faith— for breaches of fiduciary duty. The court explained that the standard of care for bank directors found under O.C.G.A. § 7-1-490 did not alter this protection, reasoning that there is a “difference between the standard of care, which is the standard of conduct expected of directors in their decision making, and the business judgment rule, which is the standard of review that determines whether directors will be held liable for a poor decision.” In contemplation of these authorities, the court concluded that the business judgment rule applies equally in the banking context, stating that “[t]he mere exercise by directors of poor judgment in making loans is not sufficient to form a basis for liability; for the directors merely assume the obligations to manage the affairs of the institution with diligence and good faith.”
With regard to the FDIC’s gross negligence claims, and in response to the directors’ and officers’ argument that the FDIC did not adequately identify the specific conduct of each individual defendant, the court adopted the U.S. District Court for the Middle District of Florida’s holding in George & Co., LLC v. Alibaba.com, Inc., No. 2:10-cv-719, 2011 WL 6181940, at *2 (M.D. Fla. Dec. 13, 2011), in which the court concluded:
Although a complaint against multiple defendants is usually read as making the same allegation against each defendant individually, factual allegations must give each defendant “fair notice” of the nature of the claim and the “grounds” on which the claim rests. Accordingly, at times, a plaintiff’s “grouping” of defendants in a complaint may require a more de finite statement.
In consideration of several Florida district court cases that dismissed similar group pleading allegations without prejudice, the court elected not to dismiss the FDIC’s gross negligence claims. Instead, the court required the FDIC to replead its allegations within 10 days, with specific reference to the wrongful actions taken by each individual defendant.
Interestingly, on the very same day the Northern District of Georgia issued its opinion in FDIC v. Briscoe, the court also issued an order denying the FDIC’s motion for reconsideration of the exact same business judgment rule issue in a similar case, FDIC v. Skow. In Skow, the Northern District of Georgia dismissed nearly identical claims by the FDIC for ordinary negligence and breach of fiduciary duty, citing the protections afforded by Georgia’s business judgment rule. On the FDIC’s motion for reconsideration, the court found no clear error of law and denied the motion; however, the court certified the entire order for interlocutory appeal. Although it is unclear at this point whether the thrust of the interlocutory appeal will involve (1) the propriety of Georgia’s business judgment rule in connection with the actions of bank directors and officers or (2) an alternative issue addressed by the FDIC’s motion for consideration involving the applicability of the federal common law “no duty” rule, rest assured, Alston & Bird will provide a prompt update if and when the Eleventh Circuit decides to hear the interlocutory appeal.