|July 23, 2014|
Previously published on July 16, 2014
The Georgia Supreme Court has, for the first time, affirmed the existence of the business judgment rule in Georgia common law. More specifically, however, the state Supreme Court held that the business judgment rule does not automatically prevent all claims for ordinary negligence against corporate officers and directors for their business decisions. It will bar a claim for a business action that was made in good faith, after deliberation and upon reasonable due diligence.
This opinion, Federal Deposit Ins. Corp. v. Loudermilk, No. S14Q0454, -- S.E.2d --, 2014 WL 3396655 (Ga. Jul. 11, 2014), arises from the Northern District of Georgia's certification of the following question to the Georgia Supreme Court:
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?
Answering in the negative, the Georgia Supreme Court focused on the distinction between "claims of unreasoned and uninformed decisions and claims of unreasonable decisions," holding that the business judgment rule:
forecloses claims against officers and directors that sound in ordinary negligence when the alleged negligence concerns only the wisdom of the 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.
The opinion, which also held that the business judgment rule applies equally to officers and directors of both banks and corporations, is likely to have a wide-ranging impact in Georgia, which has led the nation in bank failures during the Great Recession, and may inform other and future cases brought by the FDIC. Under this ruling, officers and directors of a bank who made decisions in the context of some process, examined appropriate documents and attended board meetings, for example, are likely to obtain dismissal, while a claim that includes allegations of such procedural failings will likely survive a motion to dismiss.
Finally, the Georgia Supreme Court explained that corporate and bank officers' and directors' business decisions enjoy a presumption of good faith and ordinary care under Georgia law and that the plaintiff bears the burden of rebutting this presumption with sufficient proof.
In conclusion, the Georgia Supreme Court has clarified that courts will be the referees over the process undertaken by bank (and other corporate) officers and directors in making business decisions, but shall not be the arbiters over the merit or wisdom of those business decisions. In so doing, the court has refused to insulate actions taken with "unthinking acquiescence" or by "mere dummies or figureheads" with the protections of the business judgment rule. The court's opinion, however, did not discuss the FDIC's underlying claims in the federal court case and, otherwise, did not focus on exactly what conduct by officers and directors will or will not "comport with the duty to exercise good faith and ordinary care." Such boundaries will be left for the lower courts to flesh out.