Georgia Supreme Court Clarifies Business Judgment Rule for Directors and Officers of Georgia Corporations and Banks
On July, 11, 2014, the Georgia Supreme Court issued its highly-anticipated decision in FDIC v. Loudermilk where it confirmed that Georgia’s business judgment rule applies to directors and officers of banks and clarified the protections afforded by the business judgment rule to directors and officers of banks and corporations. In Loudermilk, the Supreme Court addressed the following question certified from the United States District Court for the Northern District of Georgia:
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?
In a 34-page, unanimous opinion delivered by Justice Blackwell, the Court held that Georgia’s business judgment rule protects bank and corporate officers and directors from ordinary negligence claims that question the wisdom of corporate decisions, but does not "absolutely foreclose" ordinary negligence claims that challenge the process by which the decisions were made.
The Protections Afforded to Directors and Officers by Georgia’s Business Judgment Rule
The Court first analyzed the protections afforded by the business judgment rule under Georgia common law, concluding that:
[T]he business judgment rule is a settled part of our common law in Georgia, and it generally precludes claims against officers and directors for their business decisions that sound in ordinary negligence, except to the extent that those decisions are shown to have been made without deliberation, without the requisite diligence to ascertain and assess the facts and circumstances upon which the decisions are based, or in bad faith. Put another way, 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. We note as well that the business judgment rule applies equally at common law to corporate officers and directors generally and to bank officers and directors.
The Court then held that this common law standard is consistent with, and was not altered or superseded by, the statutory standard of care imposed on bank directors and officers by the Georgia Banking Code, O.C.G.A. § 7-1-490(a). Moreover, although the question certified to the Supreme Court addressed the application of the business judgment rule only to bank directors and officers, the Court explicitly held that the same formulation of the business judgment rule applies to directors and officers of Georgia corporations.
In holding that Georgia’s business judgment rule does not preclude ordinary negligence claims related to the decision-making process, the Supreme Court explicitly overruled two Georgia Court of Appeals decisions – Flexible Products Co. v. Ervast, 284 Ga. App. 178 (2007) (holding that the business judgment rule “forecloses liability in officers and directors for ordinary negligence in discharging their duties”) and Brock Built, LLC v. Blake, 300 Ga. App. 816 (2009) (holding that “[a]llegations amounting to mere negligence, carelessness, or ‘lackadaisical performance’ are insufficient as a matter of law [to overcome the business judgment rule]”). The Court held that these decisions’ absolute bar against all claims based on a lack of ordinary care was contrary to Georgia common law, the Banking Code, and the Corporation Code.
Application of the Business Judgment Rule to Process Claims
Having held that the business judgment rule does not foreclose claims alleging that bank directors and officers failed to exercise “ordinary care” with respect to the process employed in making a decision, the Court went on to: (i) clarify how the business judgment rule applies to process claims; and (ii) define “ordinary care” in the context of process claims.
Initially, the Court held that, even though process claims could sound in ordinary negligence, “officers and directors are presumed to have acted in good faith and to have exercised ordinary care.” Thus, in order to proceed with process claims, a “plaintiff bears the burden of putting forward proof sufficient to rebut [the presumption].”
Relying on the Banking Code, the Court also held that “the standard of ordinary care for bank officers and directors is less demanding than the standard of ‘ordinary diligence’ with which most ordinary negligence claims are concerned.” Specifically, the Court noted that O.C.G.A. § 7-1-490 “requires only the ‘diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like positions’” – i.e., they are held to the same standard of care as “ordinarily prudent” officers and directors of a similarly situated bank.
The Court further held that Section 7-1-490(a) “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.” Among other things, bank officers and directors can rely on information, opinions, reports, or statements, including financial statements and other financial data, prepared or presented by officers, employees, legal counsel, accountants, and board committees. Consequently, the Court held that if a director or officer relies in good faith on these categories of information, “the reasonableness of his reliance cannot be questioned in court.”
The Court did not address whether the same or a similar standard of ordinary care applies to directors and officers of corporations; however, the duties and protections set forth in Sections 14-2-830 (directors) and 14-2-842 (officers) of the Corporate Code are substantially similar to the provisions of O.C.G.A. § 7-1-490 on which the Court relied. Thus, it appears that the “ordinary care” standard established in Loudermilk for bank officers and directors also will apply to corporate officers and directors.
Conclusion
Although the Court in Loudermilk overruled the blanket prohibition against all negligence claims that the Court of Appeals previously had articulated in Flexible Products and Brock Built, the Court opined that adequate protections remain in place for corporate and bank officers and directors because:
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The “wisdom” of corporate decisions continues to be shielded from claims of ordinary negligence;
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The business judgment rule continues to create a rebuttable presumption that directors and officers acted in good faith and exercised ordinary care in making corporate decisions; and
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Directors and officers benefit from a conclusive presumption that they exercised ordinary care if they reached a corporate decision in reliance upon statutorily-prescribed categories of information.
Ultimately, the full impact of Loudermilk will depend on lower state courts’ and federal district courts’ interpretation and application of the Supreme Court’s decision.
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