FDIC Lawsuits Against Insiders at Failed Banks -- Is Loudermilk Just the Beginning?
In the current economic downturn, the State of Georgia has seen more bank failures than any other state in the nation. Because of Georgia’s disparate portion of the country’s bank failures to date, other states have looked to what has happened in Georgia to gauge the outcome, results, and effects of bank failures on lenders, borrowers, and the economy. There are signs that the worst may be behind the State of Georgia, but the fallout continues for past directors and executives at some of the failed banks. The FDIC has elected to sue insiders at 11 of the failed Georgia banks. Most recently, on November 30, 2012, the FDIC brought suit in the Northern District of Georgia, Atlanta Division, against nine former insiders of the failed Buckhead Community Bank. The insiders included Charlie Loudermilk, who is the founder of the rent-to-own chain of stores Aaron’s Inc. Based on the allegations contained in the Complaint, the factual basis for the FDIC’s claims appears to include the Bank’s allegedly high concentration of its loans in commercial real estate (“CRE”) and acquisition, development, and construction (“ADC”) loans.In the Complaint, the FDIC has brought actions for ordinary negligence and gross negligence against all of the defendants. Factually, the FDIC argues that the bank was damaged by the defendants’ “negligence and gross negligence in their numerous, repeated, and obvious breaches and violations of the Bank’s Loan Policy, underwriting requirements, banking regulations, and prudent and sound banking practices.” The FDIC uses 13 CRE and ADC loans as examples to show the defendants’ alleged negligence and gross negligence. It is clear from reading the Complaint that the primary factual basis for the FDIC’s claims are the defendants’ alleged violations of the Bank’s own loan policy. However, other factual bases for liability outlined in the Complaint include that the defendants’ allegedly ignored repeated warnings from federal bank regulators about the Bank’s allegedly risky lending practices and that they allegedly failed to comply with the Safety and Soundness Standards propounded by the Comptroller of the Currency, found at 12 C.F.R. § 30. The FDIC has alleged that the Bank’s growth in ADC and CRE loans was “extreme by any objective standard” and “far-surpassed the concentrations of these types of loans held by other similarly-sized banks.” Based on these facts, the FDIC brought claims against the defendants for negligence and gross negligence.The negligence claim is a standard negligence claim under Georgia law, which would require the FDIC to prove the existence of a duty of care, breach of the duty of care by the defendants, causation, and damages resulting from the breach. See Bradley Ctr. V. Wessner, 296 S.E.2d 693, 694 (Ga. 1982). In Georgia, a statute provides the duty of care that bank officers and directors must meet. They “shall discharge the duties of their respective positions in good faith and with that diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like positions.” O.C.G.A. § 7-1-490. There is a “business judgment rule” under Georgia law that “relieves officers and directors from liability for acts or omissions taken in good faith compliance with their corporate duties.” Flexible Prods. Co. v. Ervast, 643 S.E.2d 560, 564 (Ga. Ct. App. 2007); O.C.G.A. §§ 14-2-830(d), 14-2-842(d). The FDIC is attempting to get around the business judgment rule in its Complaint by stating that the defendants did not act in good faith because they allegedly blatantly ignored warnings from the bank regulators about their actions.It will be interesting to see how this negligence claim plays out. Both the statutory standard of care and the business judgment rule reference “good faith.” It seems clear that a large part of the parties’ arguments will have to focus on whether the defendants exercised their duties in “good faith.” Given that each of the defendants most likely had substantial financial interests in the wellbeing of the Bank, it seems like it will be difficult for the FDIC to prove that the defendants acted in “bad faith” with respect to the Bank. The FDIC seems to believe that the defendants’ alleged failures to follow the Bank’s own loan policy amount to bad faith.The second claim against the defendants is gross negligence. This claim was brought under section 1821(k) of the Financial Institutions Reform, Recovery and Enforcement Act, which allows directors and officers of failed banks to be held liable to FDIC receiverships for loss or damage caused by “gross negligence,” as that term is defined by applicable state law. 12 U.S.C. § 1821(k). Under Georgia law, “gross negligence” is defined as “the failure to exercise that degree of care that every man of common sense, however inattentive he may be, exercises under the same or similar circumstances; or lack of diligence that even careless men are accustomed to exercise.” Currid v. DeKalb State Court Probation Dep’t, 618 S.E.2d 621, 625 (Ga. Ct. App. 2005). Like the negligence claim, the FDIC argues that the defendants were grossly negligent in performing their duties to the bank and uses their actions with respect to the 13 CRE and ADC loans as examples of this alleged gross negligence.Notably, since 2007, approximately 85 banks have failed in Georgia, and the FDIC has only pursued insiders at 11 of the 85 failed banks to date, approximately 13%. Therefore, it seems clear that, as bank failures continue across the country, that FDIC’s pursuit of personal liability against directors and officers of the failed banks will likely be somewhat rare. However, the fact that the FDIC is pursuing personal liability against these directors and officers should be a cautionary tale to existing bank officers and directors and provides a partial explanation to real estate developers as to why it is so difficult to get a bank loan in this current economic and legal climate. Even if you are able to secure financing, the process will likely be more laborious than it has been in recent years because of the FDIC’s aggressive actions as represented by this case.My home state of Tennessee has only seen 3 banks fail since 2007, all during 2012. Most notably for the Nashville area, Tennessee Commerce Bank failed in January 2012. The other two bank failures were BankEast in Knoxville and The Farmers Bank of Lynchburg in Lynchburg, Tennessee. It will be interesting to see if the FDIC authorities in Tennessee or any other state follow the lead of their Georgia counterparts and pursue the directors and officers of any of these failed banks or of any banks in Tennessee that may fail in the future.