May bank directors and officers be held jointly and severally liable for negligence in a tort action challenging their decision making process?

The U.S. Court of Appeals, Eleventh Circuit has certified questions of law on the issue to the Georgia Supreme Court in a case involving a failed bank.

What happened

Buckhead Community Bank failed in December 2009. In 2012, the Federal Deposit Insurance Corp. (FDIC) filed a civil action in Georgia federal court, as receiver of the failed bank, against eight of the former directors and officers. The agency alleged claims for negligence and gross negligence, asserting that the defendants engaged in “numerous, repeated and obvious breaches and violations of the Bank’s Loan Policy, underwriting requirements and banking regulations and prudent and sound banking practices.”

The defendants moved to dismiss the suit, arguing that the business judgment rule insulated them from liability for merely negligent acts. In July 2014, the Georgia Supreme Court upheld the validity of the business judgment rule in the state while leaving the door open for some negligence claims. The case went to trial.

In 2016, a federal jury awarded almost $5 million to the FDIC. The defendants appealed, arguing that the district court erred by not instructing the jurors to apportion fault pursuant to Georgia state law.

The relevant statute, O.C.G.A. Section 51-12-33, states:

(a) Where an action is brought against one or more persons for injury to person or property and the plaintiff is to some degree responsible for the injury or damages claimed, the trier of fact, in its determination of the total amount of damages to be awarded, if any, shall determine the percentage of fault of the plaintiff and the judge shall reduce the amount of damages otherwise awarded to the plaintiff in proportion to his or her percentage of fault.   (b) Where an action is brought against more than one person for injury to person or property, the trier of fact, in its determination of the total amount of damages to be awarded, if any, shall after a reduction of damages pursuant to subsection (a) of this Code section, if any, apportion its award of damages among the persons who are liable according to the percentage of fault of each person. Damages apportioned by the trier of fact as provided in this Code section shall be the liability of each person against whom they are awarded, shall not be a joint liability among the persons liable and shall not be subject to any right of contribution.

For the Eleventh Circuit, the determinative question was whether the phrase “injury to person or property” includes purely pecuniary harm caused by bank officers and directors. The defendants insisted that it does, while the FDIC took the position that the phrase was limited to tangible realty or personalty.

Georgia courts have applied the statute in a wide array of cases—including those involving economic and business torts—the court acknowledged, but case law in the state has also recognized a distinction between economic loss claims and claims typically categorized as injuries to person or property.

The FDIC also argued that, notwithstanding the statute’s impact on joint and several liability in tort claims in general, Georgia’s common-law rule imposing joint liability on tortfeasors who act in concert remained in play. Because the defendants’ approval of the loans at issue amounted to concerted action, joint and several liability was appropriate regardless of Section 51-12-33, the FDIC told the court.

Objecting, the defendants countered that the FDIC’s action was brought against the directors on the basis of their individual behavior and decision making, with arguments at trial by the FDIC calling on each defendant to account for his own conduct in approving the loan(s). Georgia law does not treat a bank’s board as a cartel, the defendants argued.

Stumped, the federal appellate panel turned to the Georgia Supreme Court for help.

“In sum, resolution of this issue depends on the answer to two interdependent questions: first, whether Georgia’s rule imposing joint and several liability on tortfeasors acting in concert survives; and second, if so, whether a decision of a bank’s board members qualifies as such a concerted action when the claim against those directors is premised on each director’s negligence in his decisional processes leading up to the board’s action,” the panel wrote.

“Because no Georgia Supreme Court decision has yet addressed these consequential state-law questions, we respectfully ask the Court to answer them.”

To read the opinion in Federal Deposit Insurance Corporation v. Loudermilk, click here.

Why it matters

The cautionary tale of FDIC v. Loudermilk continues. One of the very few cases brought by the FDIC against a failed bank that did not settle—and one of just two that went to trial and a verdict—the case has made headlines for years. In the latest development, the courts are struggling with the scope of director liability, an issue relevant to all officers and directors. Georgia’s highest court will answer the Eleventh Circuit’s queries with regard to whether joint and several liability can be imposed on the directors and officers pursuant to state law and whether the loan approval decisions qualify as concerted action.