Ever had one of those days where you think you’re acting with good faith, diligence, and care, and yet you still get sued by the FDIC?  The directors and officers of the now defunct Buckhead Community Bank in Georgia find themselves in the government’s crosshairs and, unlike their D-and-O counterparts at public companies, a federal court in Georgia thinks it’s not so clear that they’ll be able to claim the protections of the business judgment rule to avoid the FDIC’s claim that they caused the bank to lose millions of dollars.

The background in this case reads like so many others in similar suits around the country.  According to the FDIC, the bank implemented an “aggressive growth strategy” beginning in 2005 that resulted in a 240 percent increase in the bank’s loan portfolio through 2007, primarily from gains in the bank’s “high-risk real estate and construction loans.”  The bank’s adversely classified assets grew from twelve percent to more than 200 percent of its tier-1 capital, and by December 2009 the bank had landed in FDIC receivership.  The FDIC later sued the bank’s directors and officers in federal court alleging that they were negligent for repeated violations of the bank’s loan policy, underwriting requirements, banking regulations, and “prudent and sound banking practices.”

As many defendants in suits relating to the mortgage meltdown have, the bank’s directors and officers asserted that the FDIC was merely looking to hold someone accountable for what was, in reality, an unprecedented and unforeseeable financial crisis.  Regardless, the directors and officers claimed, their actions were shielded from liability under Georgia law by the business judgment rule.  Indeed, on its face, the defendants appeared to be correct.  Georgia statute requires that bank directors and officers act in good faith and with the diligence, care, and skill of an ordinarily prudent person in similar circumstances and a like position.  Similarly, the business judgment rule protects directors and officers from liability when they make good faith decisions in an informed and deliberate manner.  So far, so good.

So what was the problem?  First, as the court observed, the FDIC’s allegations suggested that the defendants “failed to exercise even slight diligence when acting as directors and officers of the Bank.”  So the FDIC would have a good chance of rebutting the presumptions under the business judgment rule—assuming it even applied.  And that leads to the second problem raised by the court:  do the defendants even fall under the business judgment rule?  The court began by acknowledging that courts in the Northern District of Georgia had uniformly applied the business judgment rule to protect bank officers and directors.  But while application of the rule in this situation might seem clear, the court cited public policy concerns that suggest otherwise.  The court distinguished banks from public companies, noting that while shareholders bear the losses for the latter, when a bank fails “the FDIC and ultimately the taxpayer bear the pecuniary loss.”  Then, citing more global concerns, the court noted that bank closures in this context “echo throughout the local and national economy,” and further explained that, “[t]o some extent, the failure of bank officers and directors to exercise ordinary diligence led to the very financial crisis that continues to affect the national economy.”  The court thus certified to the Georgia Supreme Court the question whether bank directors and officers may enjoy the protections of the business judgment rule in light of public policy.

Whether the Georgia Supreme Court will carve out bank directors and officers from the business judgment rule is unclear.  The court here was perhaps echoing the sentiments of other federal courts that have shown their frustration with defendants and government plaintiffs in seeking to hold someone—anyone—accountable for the financial crisis.  But narrowing the scope of the business judgment rule could certainly have a chilling effect on the decisions of bank directors and officers, beyond courts merely venting at financial sector defendants.