A federal jury in Georgia awarded almost $5 million to the Federal Deposit Insurance Corporation (FDIC) in one of the few suits against the directors of a failed bank that made it all the way to trial.

What happened

Buckhead Community Bank failed in December 2009. In 2012, the FDIC filed a civil action in Georgia federal court as receiver of the failed bank against nine 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 FDIC highlighted a total of 13 loans and loan participations that demonstrated the defendants' illegal behavior that the agency said caused the bank damages in excess of $21.8 million.

The case immediately made headlines, in part due to the defendants' high profiles in the community but also because new law developed as a result. As part of the pretrial proceedings, the defendants argued that the business judgment rule insulated them from liability for merely negligent acts—an issue that took the case all the way to the state's highest court.

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. State statute has not overruled the business judgment rule—enshrined in state case law since 1913—but negligence claims alleging that directors or officers made decisions without deliberation or the requisite due diligence, or in bad faith, could be actionable, the court said.

Trial began on October 12 against nine of the defendants, with the number of challenged loans down to ten. The FDIC told jurors that as a group, the defendants owned 30 percent of the bank's outstanding shares and were motivated solely by profit. As a result, the FDIC lawyer argued, the defendants signed off on risky loans in violation of state and federal banking regulations, prudent banking practices, and their own bank policies.

Counsel for the defendants countered that the jury would be presented with no evidence of fraud or self-dealing, with the defendants guilty of one fault: failing to predict the future.

After two weeks of trial, the jury rendered a mixed verdict. Jurors found in favor of the defendants on six of the loans and found some of the defendants liable for some of the other four loans, with a total liability of $4,986,993.

To read the verdict form in FDIC v. Loudermilk, click here.

Why it matters

The case against the Buckhead Community Bank directors and officers was one of very few against failed banks that the FDIC did not settle and one of only two that actually went to trial and resulted in a verdict. (The other case yielded a $168.8 million verdict against former directors and officers of the California-based IndyMac Bank in December 2012.)