In a landmark ruling for officers and directors of Georgia’s financial institutions, the Supreme Court of Georgia held in FDIC v. Loudermilk, S14Q0454 (Ga. July 11, 2014), that officers and directors of banks are protected by the business judgment rule, which affords officers and directors a presumption of good faith and ordinary care in the performance of their duties.

The standard of liability has been litigated heavily by the Federal Deposit Insurance Corporation (FDIC) acting as receiver for various failed banks in Georgia. Officer and director defendants argued that Georgia’s business judgment rule bars claims for ordinary negligence, and the FDIC responded that the business judgment rule either does not exist or does not apply. The federal district courts generally sided with the defendants, relying on decisions from intermediate state courts for interpretation of Georgia law. Other judges disagreed. Recognizing the potential ambiguity, one federal district court and the U.S. Court of Appeals for the Eleventh Circuit sought guidance from the Georgia Supreme Court.

In a lengthy and unanimous decision, the Court described the business judgment rule as a “settled part of our common law in Georgia” and emphasized that “[i]f 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.”

Moreover, the Court held that “the business judgment rule applies equally at common law to corporate officers and directors generally and to bank officers and directors.” Though the Court did not thoroughly review the statutes applicable to corporate officers and directors, the Court did state “the Corporation Code seems to leave room for the sort of business judgment rule acknowledged at common law in the decisions of this Court.”

The Court did not accept all of the defendants’ arguments. Notably, the Court distinguished between two types of ordinary negligence claims: (1) claims that allege ordinary negligence in the wisdom of the decisions made by the defendants; and (2) claims that allege ordinary negligence in the process by which those decisions were made. The Court held that the first category of claims, but not the second, is wholly barred by the business judgment rule. As the Court put it, “the business judgment rule at common law forecloses claims against officers and directors that sound in ordinary negligence when the alleged negligence concerns only the wisdom of their judgment, but it does not absolutely foreclose such claims to the extent that a business decision did not involve ‘judgment’ because it was made in a way that did not comport with the duty to exercise good faith and ordinary care.”

Even in this latter category of claims focusing on the decision-making process, the Court held that “officers and directors are presumed to have acted in good faith and to have exercised ordinary care. Although this presumption may be rebutted, the plaintiff [here the FDIC] bears the burden of putting forward proof sufficient to rebut it.”

The Court held that the standard of ordinary care is “less demanding” for bank officers and directors than in most business circumstances: “In other words, bank officers and directors are only expected to exercise the same diligence and care as would be exercised by ‘ordinarily prudent’ officers and directors of a similarly situated bank.” They are not expected to exercise the same degree of care as others would in operating their daily business.

The Court also emphasized the importance of O.C.G.A. § 7-1-490(a), which states that bank officers and directors “shall be entitled to rely upon information, opinions, reports, or statements, including financial statements and other financial data” prepared or presented by bank employees, counsel, accountants, and other experts and professionals. The Court held that this statute “conclusively presumes that it is reasonable for an officer or director to rely upon certain information as a part of the diligence with which the standard of ordinary care is concerned... If an officer or director relies in good faith on information described in subsection (a), the reasonableness of his reliance cannot be questioned in court.”

The Loudermilk decision enumerates a number of key defenses for bank officers and directors, but it remains to be seen whether those defenses can be raised effectively in motions to dismiss or motions for summary judgment. The federal district courts may have to engage in a more searching review of the FDIC’s claims to determine which claims meet the process-oriented definition carved out in Loudermilk.