FDIC v. Loudermilk—one of the few cases that was brought by the Federal Deposit Insurance Corporation (FDIC) and made it all the way to trial and a verdict—serves as a cautionary tale for bank officers and directors.
On March 13, 2019, in Loudermilk, the Supreme Court of Georgia issued its most recent opinion in the continuing litigation over whether former directors and officers of a failed bank may be held jointly and severally liable for financial losses from failed commercial real estate loans. The Georgia Supreme Court held that joint and several liability can be imposed on bank directors and officers “who act in concert insofar as a claim of concerted action invokes the narrow and traditional common-law doctrine of concerted action.” Loudermilk, S18Q1233.
The Buckhead Community Bank failed in 2009 after the collapse of several large commercial loans that the bank had issued. As the receiver of the failed bank, the FDIC filed a civil action in a federal district court in Georgia against several of the bank’s former directors and officers, alleging that the directors and officers negligently approved the loans.
The directors and officers moved to dismiss the FDIC’s claims, arguing that Georgia’s business judgment rule precluded them from liability for ordinary negligence. The district court determined that the issue was unsettled as a matter of state law and certified the question to the Georgia Supreme Court. In 2014, the Supreme Court of Georgia held that Georgia law authorizes ordinary negligence claims against bank officers and directors as long as those claims are premised on the officers and directors’ “failure to exercise ordinary care with respect to the way in which business decisions are made.” FDIC v. Loudermilk, S14Q0454 (July 11, 2014).
The case went to trial. In 2016, a federal jury concluded that some of the directors and officers were negligent and awarded the FDIC $4,986,993 in damages. The trial judge found that the defendants were “jointly and severally liable” for the award, meaning that the entire verdict could be collected from any one of the defendants.
The defendants appealed and argued that the Georgia General Assembly had abolished joint and several liability in 2005.
Questions to Be Certified
The Court of Appeals for the Eleventh Circuit sought direction from the Supreme Court of Georgia, certifying the following questions for its consideration:
- Does Georgia’s apportionment statute apply to tort claims for purely pecuniary losses against bank directors and officers?
- Did Georgia’s apportionment statute abrogate Georgia’s common-law rule imposing joint and several liability on tortfeasors who act in concert?
- In a negligence action premised upon the negligence of individual board members in their decision-making process, is a decision of a bank’s board of directors a “concerted action” such that the board members should be held jointly and severally liable for negligence?
The Supreme Court of Georgia held that Georgia’s apportionment statute does not apply to tort claims for purely pecuniary losses against bank directors and officers. The court further concluded that the statute “did not abrogate Georgia’s common-law rule imposing joint and several liability on tortfeasors who act in concert insofar as a claim of concerted action invokes the narrow and traditional common-law doctrine of concerted action based on a legal theory of mutual agency and thus imputed fault.” Loudermilk, S18Q1233.
The court emphasized the narrow definition of concerted action, but it declined to answer the Eleventh Circuit’s third question of whether the officers and directors had actually engaged in concerted action, leaving the question to be resolved by the Eleventh Circuit.
Thus, if directors and officers act in concert, all directors and officers can be held jointly and severally liable, even if one or more were not actually at fault.
The lingering question for many banks, then, is, “What actions qualify as concerted action?” The answer to that question will necessarily follow in further proceedings.
Kaitlin Carreno is an associate at Eversheds Sutherland (US) LLP in Atlanta, Georgia.