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Federal Deposit Insurance Corp. v. Loudermilk

Supreme Court of Georgia

July 11, 2014


Page 333

Certified question from the United States District Court for the Northern District of Georgia.

Miller & Martin, Michael P. Kohler, Charles B. Lee, Laura E. Ashby, J. Scott Watson, David C. Joseph, for appellant.

Womble, Carlyle, Sandridge & Rice, Robert T. Ambler, Jr., Alston & Bird, Robert R. Long IV, Elizabeth G. Greenman, Steven M. Collins, Brian D. Boone, Jeffrey J. Swart, for appellees.

Samuel S. Olens, Attorney General, W. Wright Banks, Jr., Senior Assistant Attorney General, Stephanie K. Burnham, Assistant Attorney General, Bryan Cave Powell Goldstein, Michael P. Carey, John R. Bielema Jr., Sutherland, Asbill & Brennan, W. Scott Sorrels, Thomas W. Curvin, Valerie S. Sanders, Samuel J. Casey, Nkoyo-Ene R. Eiffiong, Buckley Sandler, Joseph J. Reilly, Katherine B. Katz, amici curiae.


Page 334


As the receiver of the Buckhead Community Bank, the Federal Deposit Insurance Corporation sued nine former officers and directors of the bank,[1] alleging that they were negligent with respect to the making of loans, which led the bank, the FDIC says, to sustain nearly $22 million in losses. The defendants moved to dismiss the lawsuit, arguing that the business judgment rule relieves officers and directors of any liability for ordinary negligence. The FDIC responded that such a business judgment rule is no part of the common law in Georgia, and even if it were, it does not apply to bank officers and directors, insofar as the statutory law in Georgia explicitly requires bank officers and directors to exercise ordinary diligence and care. Unable to " discern clear and controlling precedent from the Supreme Court of Georgia," the United States District Court for the Northern District of Georgia certified the following question to us:

Does the business judgment rule in Georgia preclude as a matter of law a claim for ordinary negligence against the officers and directors of a bank in a lawsuit brought by the FDIC as receiver for the bank?

With an important qualification, we answer this question in the negative.

1. To begin, we consider whether the business judgment rule is even a part of the common law in Georgia. The business judgment rule is a fixture in American law, and it is a settled part of the common law in many of our sister states. See S. Samuel Arsht, " The Business Judgment Rule Revisited," 8 Hofstra L. Rev. 93, 97-100 (1979). But defining the rule is " no easy task," Franklin A. Gevurtz, " The Business Judgment Rule: Meaningless Verbiage or Misguided Notion?," 67 S. Cal. L. Rev. 287, 289 (1994), insofar as the particulars of the rule [295 Ga. 580] may vary a bit from one jurisdiction to another. See Arsht, supra at 100-110. Nevertheless, we find a classic statement of the rule in Casey v. Woodruff, 49 N.Y.S.2d 625 (N.Y. Sup. 1944):

Mistakes in the exercise of honest business judgment do not subject the directors to liability for negligence in the discharge of their fiduciary duties. ... The directors are entrusted with the management of the affairs of the [corporation]. If in the course of management they arrive at a decision for which there is a reasonable basis, and they act in good faith, as the result of their independent judgment, and uninfluenced by any consideration other than what they honestly believe to be for the best interests of the [corporation], it is not the function of the court to say that it would have acted differently and to charge the directors for any loss or expenditures incurred.
Prescience is always desirable, but failure to foresee what at best is uncertain does not give rise to liability. The law recognizes that no director is infallible and that he will make mistakes, but if he is honest and uses reasonable diligence, he will be absolved from liability although his opinion may turn out to have been mistaken and his judgment faulty. ...
The question is frequently asked, how does the operation of the so-called business judgment rule tie in with the concept of negligence? There is no conflict between the two. When courts say that they will not interfere in matters of business judgment, it is presupposed that judgment -- reasonable diligence -- has in fact been exercised. A d[i]rector cannot close his eyes to what is going on about him in the conduct of the business of the corporation and have it said that he is exercising business judgment. Courts have properly decided

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to give directors a wide latitude in the management of the affairs of a corporation provided always that judgment, and that means an honest, unbiased judgment, is reasonabl[y] exercised by them.
Applying the foregoing tests I find no negligence on the part of the directors in this case. They may have been mistaken; they may have erred, but they did not act blindly, recklessly, or heedlessly. They studied the financial problems of the [corporation]. They were diligent in attending to their duties. These directors fully recognized their responsibilities [295 Ga. 581] as agents and fiduciaries; they did not act as mere dummies or figureheads.

49 N.Y.S.2d at 642-644 (citations omitted).

As the rule pertains to the liability of officers and directors for money damages, it distinguishes between the merits of their business decisions, on the one hand, and the basis of those decisions, on the other. If an officer or director has honestly exercised " judgment" with respect to a business matter -- that is, if her decision was made in a deliberative way, was reasonably informed by due diligence, and was made in good faith -- the wisdom of the judgment cannot ordinarily be questioned in court. See Auerbach v. Bennett, 47 N.Y.2d 619, 629, 393 N.E.2d 994, 419 N.Y.S.2d 920 (N.Y. 1979). See also In re Munford, Inc., 98 F.3d 604, 611 (B) (11th Cir. 1996) (" The business judgment rule protects directors and officers from liability when they make good faith business decisions in an informed and deliberate manner." (citation omitted)). But whether a business decision was, in fact, a product of deliberation, reasonably informed by due diligence, and made in good faith are matters that may properly be questioned.[2] See Casey, 49 N.Y.S.2d at 643-644 (" [The directors] may have erred, but they did not act blindly, recklessly, or heedlessly. They studied the financial problems of the [corporation]. They were diligent in attending to their duties ... . [T]hey did not act as mere dummies or figureheads ... ." ). So understood, the rule reflects the principle that managing the affairs of a corporation is a matter committed by law to the discretion of the directors, the reality that the making of profits involves the taking of some risks, and the recognition that businesspeople generally are more competent than judges to exercise business judgment. See Janssen v. Best & Flanagan, 662 N.W.2d 876, 882 (I) (A) (Minn. 2003) (citing Auerbach, 47 N.Y.2d at 619).

Although this Court never has spoken of the " business judgment rule" in so many words, we find an implicit acknowledgment of the rule in a number of our decisions. At common law, corporate officers and directors in Georgia owed a duty to exercise ordinary care. See McEwen v. Kelly, 140 Ga. 720, 723 (1) (79 S.E. 777) (1913) (" [T]hose who accept the position of directors impliedly undertake to exercise [295 Ga. 582] ordinary care and diligence in discharge of the duties thus committed to them." ). The same was true of bank officers and directors. See Woodward v. Stewart, 149 Ga. 620, 628 (101 S.E. 749) (1919) (" [T]he general rule in this State is that directors of a bank must exercise ordinary care and diligence in the administration of the affairs of the bank ... ." ). But in several cases in which business decisions by officers and directors were alleged to be negligent, this Court distinguished between claims of unreasoned and uninformed decisions and claims of unreasonable decisions. That is, we distinguished between cases in which a business decision was assailed for the way in which it was made -- that the decision amounted to unthinking acquiescence, for instance, or was made without reasonable diligence to ascertain the relevant facts -- and those in which the merit alone of the decision was disputed.

Three of our decisions at common law are, we think, especially instructive. First, in

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McEwen, the bankruptcy trustee of the Southern Iron Company sued the three directors of the corporation, alleging that one director had misappropriated corporate assets, and asserting that the other two were negligent when they elected the first as the corporate treasurer and when they failed to discharge him sooner. On appeal from the dismissal of the lawsuit, we explained that, " [w]hile [officers and directors] are not held responsible for ordinary mistakes or errors of judgment, they are liable for losses and waste of money and property occurring from neglect or inattention to the business ." 140 Ga. at 723 (1) (citation and punctuation omitted; emphasis supplied). We then observed a distinction between cases involving the mere " exercise of discretion by directors" -- which, we supposed, might form a basis for liability if " gross[ly] or flagrant[ly] abuse[d]" -- and cases in which " directors ... [act] as figureheads and dummies[,] ... allowing the corporation to be looted while they sat negligently by and looked wise." Id. at 723-724 (1). Ultimately, we reversed the dismissal of the lawsuit as to the director charged with willful misappropriation, but we sustained the dismissal as to the other two directors, noting that these directors had made inquiry about the misappropriated funds, that they had made some efforts to recover those funds, and that there was no evidence that any additional diligence on the part of these directors would have uncovered the misappropriation sooner. Id. at 725-726 (4). To conclude, we said:

[T]here is no complaint that their efforts were not diligent, though in part unavailing. ... In its last analysis, the effort to hold Totten and Satterfield liable rests on alleged negligence in the election of Kelly to the position of secretary and treasurer, and the failure to discharge him sooner. The [295 Ga. 583] petition is not lacking in adjective characterizations of the conduct of these two defendants; but under the vague, general allegations, we do not think that it makes out a case of breach of duty on their part ... .

Id. at 726 (4).

Next, in Shannon v. Mobley, 166 Ga. 430 (143 S.E. 582) (1928), the state superintendent of banks had taken over the affairs of the failed Twiggs County Bank, and he sued its officers and directors for negligent mismanagement. According to his petition, the officers and directors had turned over the investments of the bank to the Bankers Trust Company, which then invested the deposits of the bank in commercial paper that was unsecured and not worth what the bank had paid for it. Among other things, the superintendent alleged that the officers and directors " accepted and paid for [the commercial papers] without question" and " without proper investigation," and he alleged as well that they were " on notice that [the commercial paper] was of questionable character, yet no investigations were made ... ." 166 Ga. at 432. Concluding that the petition stated a claim against the officers and directors, we pointed to our statement in McEwen about " directors ... acting as figureheads and dummies." Id. at 436 (citing McEwen ). We noted as well that " [a] director of a bank has duties to perform more essential than that of allowing his name to be printed on the bank's stationery; and negligent ignorance is sometimes equivalent to knowledge." Id. (citation and punctuation omitted).

Last, in Mobley v. Russell, 174 Ga. 843 (164 S.E. 190) (1932), this Court again dealt with investments for a bank by the Bankers Trust Company. In Russell, the superintendent of banks had sued the officers and directors of the Taylor County Bank, making allegations like those in Shannon . See 174 Ga. at 844-845. The case had been tried by a jury, which returned a verdict for the officers and directors. The ...

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