The FDIC’s lawsuit against former directors and officers of the failed Buckhead Community Bank, one of the most closely watched Georgia corporate governance cases in years, went to trial in October, 2016. The jury returned a verdict of nearly $5 million against the defendants for their role in the approval of four large commercial development loans that later defaulted. FDIC v. Loudermilk, No. 1:12-cv-04156-TWT (N.D. Ga. Oct. 26, 2016). It was less than a complete victory for the FDIC, which had sought over $21 million in damages based on ten bad loans, but the verdict nonetheless represents a significant recovery against directors and officers of a Georgia bank. The case is all the more significant because it was the first known jury trial to evaluate a negligence claim under the business judgment rule as defined by the Georgia Supreme Court earlier on in the proceedings.
Editor’s Note: This piece is an excerpt from the author’s 2016 Georgia Corporation and Business Organization Case Law Developments, which addresses decisions handed down in 2016 by Georgia state and federal courts addressing questions of Georgia corporate and business organization law. The year saw a large number of decisions involving limited liability companies, continuing a trend from recent years. The Georgia Supreme Court addressed some interesting and novel questions of corporate law, including whether an out-of-state LLC (or corporation) can avail itself of the removal right that permits Georgia-based companies to shift certain tort litigation from the county in which it is brought to the county where it maintains its principal office, and whether a nonprofit corporation has standing to pursue a write of quo warranto against public officials.
Buckhead Community Bank was closed by the Georgia Department of Banking and Finance in December, 2009, during the heart of the financial crisis. The FDIC was named as receiver for the Bank. In 2012, the FDIC filed suit against the Bank’s former directors and officers, alleging that they pursued an aggressive growth strategy aimed at building a “billion dollar bank,” causing the Bank’s loan portfolio to become heavily concentrated in commercial real estate acquisition and development loans. The FDIC’s allegations were highly similar to allegations it made in dozens of other cases involving similarly situated banks that failed during the Great Recession. In all, the FDIC filed over 100 civil actions between 2010 and 2015 in its capacity as its receiver for failed banks throughout the country, 25 of which were filed in Georgia against directors and officers of Georgia banks. The vast majority of these cases have settled. In fact, Loudermilk was only the second of these cases to proceed all the way to trial, and the first in Georgia.
As the case progressed to trial, it eventually focused on ten specific loans that were approved directly by the defendants acting as members of the Bank’s loan committee. As to each of these loans, the FDIC alleged that approving the loans violated the Bank’s own loan policy, banking regulations, prudent underwriting standards and sound banking practices. For instance, it was alleged that some loans exceeded the Bank’s loan-to-value guidelines but were approved anyway. Other loans were approved without certain documentation that the FDIC alleged was necessary, such as current financial statements of borrowers and guarantors. Other loans were allegedly approved before the loan application paperwork was final. There was no claim that any of the loans were “insider” loans that provided a direct or indirect personal benefit to any of the defendants.