As we have reported before, Georgia has the unfortunate distinction of leading the nation in bank failures since the onset of the late-2000s financial crisis. Georgia has also seen far more FDIC bank failure lawsuits than any other state: 15 of the 63 bank failure cases brought by the FDIC since 2010 involve Georgia banks and are currently pending in Georgia federal courts. While some allegations vary from case to case, the general thrust of all of these lawsuits is that the former directors and/or officers of the banks were negligent or grossly negligent in pursuing aggressive growth strategies, with these strategies usually involving a high concentration of risky and speculative speculative real estate and acquisition, construction and development loans. Here is a rundown of the most interesting and significant developments to date:
The most heavily litigated issue has been whether the business judgment rule insulates bank directors and officers from liability for ordinary negligence. Beginning with Judge Steve C. Jones’ decision in FDIC v. Skow, concerning the failure of Integrity Bank, the district courts have consistently dismissed ordinary negligence claims, citing the business judgment rule. As we previously reported in November, the Eleventh Circuit has agreed to hear an interlocutory appeal in the Skow case. That appeal has now been fully briefed by the parties. The FDIC’s briefs can be found here and here, while the Defendants/Appellees’ brief can be found here. The parties’ briefs all focus on the interplay between the business judgment rule and Georgia’s statutory standard of care, with the FDIC arguing that the statute’s expression of an ordinary care standard precludes the application of any more lenient standard, and the Defendants/Appellees arguing that Judge Jones correctly followed the Georgia appellate courts’ interpretation of the business judgment rule. Note: This firm represents the Georgia Bankers Association and Community Bankers Association of Georgia, who have been granted leave to appear as amici curiae in support of the Defendants/Appellees. The amicus brief can be found here.
On May 20, 2013, the Georgia Supreme Court issued a unanimous opinion in the You v. JP Morgan Chase case (Case No. S13Q0040). The You Opinion addresses several questions that the United States District Court for the Northern District of Georgia had certified to the Supreme Court regarding the operation of Georgia’s law governing non-judicial foreclosures.
First, the Supreme Court addressed the question: “Can the holder of a security deed be considered a secured creditor, such that the deed holder can initiate foreclosure proceedings on residential property even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed?” The Supreme Court answered “Yes” to this first question.
Second, the Supreme Court addressed the question “Does O.C.G.A. § 44-14-162.2 (a) require that the secured creditor be identified in the notice described by the statute?” The Supreme Court answered “No” to this second question.
Two recent Georgia Court of Appeals en banc decisions issued on March 29 have weighed in on one aspect of the MERS fallout, holding in favor of the secured lender.
In Montgomery v. Bank of America et al., No. A12A0514, 2013 WL 1277830 (Ga. App. March 29, 2013) and LaRosa v. Bank of America, N.A., et al., No. A12A2393, 2013 WL 1286692 (Ga. App. March 29, 2013), the Court of Appeals was asked whether a security deed which includes a non-judicial power of sale is transferable without evidence of the transfer of the underlying debt instrument. Montgomery at *2; LaRosa at *1. Without discussing the myriad legal issues on both sides of this debate, the Court of Appeals upheld the trial court’s ruling in favor of the mortgagee, citing the lack of statutory authority or case law supporting the mortgagor’s theory that the note and deed must “travel together” for an assignment of the foreclosure remedy to be valid. Montgomery at *2; LaRosa at *2. See also O.C.G.A. §44-14-64(b).
But secured lenders and their servicers initiating non-judicial power of sale foreclosure in Georgia should not breathe a collective sigh of relief just yet. As the dissents in both decisions point out, the Georgia Supreme Court has yet to issue its ruling in You v. JP Morgan Chase Bank, N.A., No. 1:12-cv-202-JEC-AJB (N.D. Ga. Sept. 7, 2012) where the federal court certified the question of note/mortgage severability, along with two related foreclosure notice questions to the Supreme Court of Georgia, citing the “substantial need of federal courts to obtain enlightenment [from the Georgia Supreme Court] on these questions.” (The district court also certified the questions of whether (i) O.C.G.A. § 44-14-162.2(a) requires a secured creditor to be specifically identified in the foreclosure notice and, if yes, whether (ii) “substantial compliance” with the preceding statute suffices.)
This update is provided to our earlier post regarding the passage of HB 683 in 2012 permitting banks to answer garnishments without the need for an attorney. As you may recall, we advised you then that there may subsequently be a challenge to the statute of on the grounds that the statute allegedly violates the separation of power principle set forth in the Constitution of Georgia. As we predicted, Georgia Legal Services Program (“GLSP”) has recently challenged HB 683 on precisely this ground.
GLSP is challenging this law on the grounds that the General Assembly cannot define the practice of law and that defining the practice of law is instead reserved for the Supreme Court of Georgia. Specifically, GLSP is seeking an advisory opinion from the Standing Committee on the Unlicensed Practice of Law of the State Bar of Georgia finding that only lawyers should be permitted to file answers in garnishment cases.
In its brief, GLSP states that “the Act is bad policy for all involved in garnishment proceedings because of the indispensable role that lawyers play in the administration of justice.” GLSP further provides: “[T]he Act, if unchecked, will establish precedent permitting the Georgia General Assembly to determine what constitutes the authorized practice of law – a power vested solely with the judiciary.”
Make your plans now to attend the 2013 Banking and Finance Law seminar. The seminar, sponsored by the Business Law Section of the State Bar of Georgia, will be Feb. 8, at the Bar Center in Atlanta. The seminar chair, Gerald L. Blanchard, Bryan Cave LLP, has put together a terrific set of topics and speakers for this program.
- Reading the Regulatory Tea Leaves: Basel III and Dodd-Frank Update
- Advising Bank Board Directors on Regulatory Relations and Legal Risk Minimization
- Recent Banking Law Cases
- Consumer Financial Protection Bureau – There’s A New Sheriff in Town!
- Regulator Panel Discussion on Bank Examinations Trends
- Challenges to Bank Consolidation
- Recent Trends IN D&O Litigation
The program qualifies for 6 CLE Hours including 1 Ethics Hour and 1 Trial Practice Hour. For additional information and to register for this program, visit the ICLE website.
We have previously summarized an important district court ruling dismissing the FDIC’s ordinary negligence claims against former directors and officers of Integrity Bank of Alpharetta, Georgia. The FDIC asked the U.S. District Court for the Northern District of Georgia to reconsider its decision in that case, but the court recently denied that request and reaffirmed its rationale that Georgia’s version of the Business Judgment Rule bars claims for ordinary negligence against corporate directors and officers. A copy of the court’s recent order in the Integrity Bank case is available here. Although the district court declined to reconsider its prior dismissal of the ordinary negligence claims, it acknowledged that there was “substantial ground for difference of opinion” on that issue, and it granted the FDIC’s request to certify an order of interlocutory appeal to the Eleventh Circuit Court of Appeals. Everyone in the D&O defense community, and especially those here in Georgia, is anxiously awaiting to learn if the Eleventh Circuit will accept interlocutory appeal of the case.
In the meanwhile, district courts in two other cases have weighed in on whether the Business Judgment Rule bars claims for ordinary negligence. The first of these also comes from the Northern District of Georgia, and specifically from the FDIC’s lawsuit against certain former directors and officers of Haven Trust Bank. (We have previously summarized the Haven Trust complaint.) Utilizing the same rationale set forth in the Integrity Bank rulings, the court here ruled that the FDIC’s claims for ordinary negligence are not viable by virtue of the Business Judgment Rule. Furthermore, the court ruled, to the extent that the FDIC’s claims for breach of fiduciary duty are based on the same alleged acts of ordinary negligence, those claims are foreclosed by the Business Judgment Rule as well. The ruling was not a complete victory for the D&O defendants, however, as the court declined to dismiss the FDIC’s claims for gross negligence under FIRREA. Specifically, the court held that the FDIC had alleged, in a collective fashion, sufficient facts on which a jury might reasonably conclude that the defendants had been grossly negligent. Despite that holding, the court took the unusual step, “in the interest of caution,” of ordering the FDIC to replead the gross negligence claim with specific allegations as to each defendant’s involvement or responsibility for the alleged wrongful acts. A copy of the court’s ruling can be viewed here.
Georgia foreclosure law has been given a lot of attention over the last several years, both by the courts as well as the legislature. The Georgia Supreme Court has had to resolve the issue of whether a lender must sue on a note prior to foreclosing under a security deed and held that the choice is up to the lender. (See REL Development, Inc. v. BB&T, 699 SE2d 779 (2010).) Likewise, the legislature addressed a perceived problem in large loan servicing companies foreclosing on real property even though a division of the servicer was still negotiating with the borrower to cure the default. Thus, a lender can rescind a foreclosure, for among other reasons, the fact that it had entered into an agreement when the default was cured prior to the sale or the borrower had entered into an agreement to cure the default. (See OCGA 9-13-172.1.) What happens though if a lender actually conducts a foreclosure sale and then simply decides that it would rather sue on the note. Can it unwind the foreclosure even if its reasons for doing so do not fall with the statutory guidelines?
The Georgia Supreme Court has decided that a lender may in fact rescind a properly conducted foreclosure sale for its own internal business reasons.(See Tampa Investment Group, Inc. v. BB&T, 2012 WL 933110 (Ga.).) From 2005 to 2008, BB&T made 16 loans for residential housing development to two companies secured by various deeds to secure debt. After the borrowers defaulted on the notes, BB&T conducted non-judicial foreclosures on June 2, 2009 on nine of the notes. BB&T credit bid the properties in but later informed the borrowers that it was rescinding the sale. Most importantly, BB&T did not record a deed under power. On June 22, 2009, BB&T brought suit against borrowers and guarantors for more than $19 million then due under the notes.
At the trial on the enforcement of the notes the court found that BB&T could not pursue the notes since it had failed to confirm the initial foreclosure sale. The Georgia Court of Appeals reversed that decision on the basis that acceptance of a bid at a foreclosure sale under power creates an oral contract which is subject to the Statute of Frauds. The Statute of Frauds provides that certain contracts, such as for the sale of real property or an extension of credit, are not enforceable unless they are in writing. In this case, BB&T, either as borrowers’ attorney-in-fact or as the creditor on the notes, never executed a deed under power conveying the borrowers’ interest to itself or any writing showing that it had applied any foreclosure proceeds. The court further found that rescinding the foreclosures did not harm borrowers but left them in the same position as before the auctions.
As many readers are aware, Georgia has led the nation in the number of failed financial institutions in the recent financial crisis. Integrity Bank, of Alpharetta, was one of the first of those banks to fail in Georgia, on August 28, 2008, and drew the first lawsuit filed by the FDIC as receiver against former directors and officers in Georgia. The lawsuit was filed against former members of the Director Loan Committee of the Bank, and asserted claims against the Defendants based on their alleged pursuit of an unsustainable rapid growth strategy, involving high risk lending concentrated in speculative real estate and acquisition, construction and development loans. The suit alleged over $70 million in losses from 21 such loans, between February 4, 2005 and May 2, 2007.
On February 27, 2012, in response to motions to dismiss filed by the defendants, and motions to strike certain affirmative defenses filed by the FDIC as Receiver, Judge Steven C. Jones of the United States District Court for the Northern District of Georgia issued an Order which made some critical rulings regarding the standard of care and the availability of certain defenses in actions brought by the FDIC as receiver in Georgia. A copy of the Order is available here. Given that this is the first such substantive ruling in this context by a court in Georgia, the decision is notable and will likely have a significant impact on future FDIC litigation in Georgia going forward.
Of potentially greatest significance, the Court granted the Defendants motion to dismiss all of the FDIC’s claims based on ordinary, as opposed to gross, negligence. The Court was persuaded that in Georgia, the deviation from the standard of care necessary to state a claim against former bank officers and directors must rise at least to the level of the “gross negligence” floor set by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) . The Court reached this conclusion after determining that Georgia ‘ s Business Judgment Rule protects directors and officers from claims based on simple, or ordinary, negligence. This sets the bar fairly high for the FDIC to prevail on claims against former directors and officers of failed banks,and should provide some comfort in that regard.
Detracting somewhat from the defendants victory on that aspect of the motion to dismiss, however, Judge Jones also ruled that the relatively unexceptional allegations by the FDIC of uncontrolled rapid growth and over concentration in speculative and risky acquisition, development and construction loans were sufficient to withstand a motion to dismiss, even at the heightened “gross negligence” standard. Thus, while the decision sets the bar high for the FDIC to ultimately prevail on these sorts of claims, it does not necessarily provide much ammunition to argue for dismissal at the motion to dismiss stage.
Georgia Governor Nathan Deal recently signed into law HB 683, a bill that reforms the way in which banks and other corporations may respond to a garnishment summons. Under the new law, banks may now use their own employees to respond to a garnishment summons and are no longer required to hire an attorney for this task.
This statute seeks to overrule a 2011 Georgia Supreme Court decision which held that corporations must use a Georgia-licensed attorney to answer garnishments, and that non-lawyer employees who responded to garnishments on behalf of their employers were engaging in the unauthorized practice of law.
If you decide to utilize non-attorney personnel to answer garnishments, as permitted by the new statute, you should keep in mind the following issues:
- The new law only permits non-lawyers to file answers to garnishment summons. If a traverse is filed in response to the answer, an attorney is then required to represent the bank. A traverse is a statement filed by a plaintiff in response to the answer, claiming that the answer is untrue or insufficient. Once a traverse is filed, the bank then must then hire an attorney to represent it further in the case.
On August 16, 2011, the Financial Institutions and Consumer Credit subcommittee of the House Committee on Financial Services held a field hearing in Newnan, Georgia, with a stated topic of “Potential Mixed Messages: Is Guidance from Washington Being Implemented by Federal Bank Examiners?”
Representatives Shelley Moore Capito, Spencer Bachus, Lynn A. Westmoreland and David Scott each heard testimony from panels of federal banking regulators and Georgian bankers about the condition of banking in Georgia, including the effect that federal banking regulations, guidance, policies and actions have had on community banks. Copies of the written testimony submitted, including that of the FDIC, OCC and Federal Reserve are now available on the Subcommittees website.
Although it is hard to draw any overall themes from the hearings (other than possibly that the issues involved aren’t easily addressed in this format), there were several good points made.
From the FDIC’s written testimony, addressing the challenges faced by Georgia banks:
As the Subcommittee has discussed in previous oversight hearings, the collapse of the U.S. housing market in 2007 led to a financial crisis and economic recession that has adversely affected banks and their borrowers in Georgia and nationwide. Georgia’s economy was hit especially hard following years of strong economic growth characterized by rising real estate prices, abundant credit availability, and robust job creation. Financial institutions, whose performance is closely linked to economic and real estate market conditions, have been significantly affected by a rise in the number of borrowers who are unable to make payments.
Gil Barker, the Deputy Comptroller for the Southern District, specifically addressed many concerns expressed by bankers in his written testimony, including statements of regulators criticizing loans to a particular industry, performing non-performing loans, criticizing loans merely because of a decline in collateral value, and the second guessing of independent appraisers. While one can certainly question whether the interpretations provided by Mr. Barker line up with some of the actions of the on-site examiners, it is definitely a good read for anyone dealing with the OCC in the Southern District.
The loss share method of resolving closed institutions seems to have significant benefits over the FDIC retaining the assets for bulk sale, but there is significant disagreement as to whether the loss share agreements properly incent the acquiring bank with regard to working with borrowers to minimize losses. The representatives seemed particularly attuned to the additional issues related to loan participations where the lead bank has gone through receivership.