WASHINGTON — A decision by a Georgia judge this week raised new obstacles in the Federal Deposit Insurance Corp.'s claims against former managers of the failed Integrity Bank.
Judge Steve Jones of the U.S. District Court in Atlanta ruled that the FDIC must prove the defendants had committed "gross negligence" while operating the Alpharetta-based bank. He said state law shielding executives who err in business judgment bars the FDIC from using the easier standard of "ordinary negligence."
"The court finds that the plaintiff's claims for ordinary negligence and breach of fiduciary duty based upon ordinary negligence fail to state a claim upon which relief can be granted," Jones said in the decision Monday.
Lawyers have hailed the ruling, saying it has the potential to assist defendants in other regions where business-judgment rules apply to simple-negligence claims.
"This decision, while limited to Georgia law, could be applied to cases brought in any state," said Robert Ambler, an attorney at Womble Carlyle Sandridge & Rice, LLP, who has worked on the defense.
Yet the case, in which the FDIC is seeking $70 million from the defendants for decisions related to troubled real estate loans, appears far from over. In allowing the gross-negligence claims to proceed, Jones said, "Assuming these allegations are true, a jury might reasonably conclude that defendants were 'grossly negligent.'" Moreover, two figures tied to the bank — including Douglas Ballard, an executive named in the FDIC case — pled guilty in 2010 to criminal charges.
The August 2008 failure of the $1.1 billion-asset bank was estimated to cost the Deposit Insurance Fund between $250 million and $350 million.
The FDIC's 77-page complaint, filed in January 2011, targeted eight former directors and officers, including former chief executive Steven Skow. The agency alleged the bank established an overheated growth strategy, and executives failed to ease up when the market suffered, making "little or no effort to diversify the bank's real estate portfolio, enhance oversight of the lending function or otherwise mitigate the increased risk they created by following a growth-at-all cost strategy."
Ambler called Jones' decision a victory for the defense, and said the ruling offers hope for officers and directors in states with similar business judgment laws.
"There is nothing especially unique about Georgia's business judgment rule. As far as I know, every jurisdiction in the country has a business judgment rule," he said.
Ambler said in trying director-and-officer suits following the recent failure wave, the FDIC has typically attempted ordinary-negligence claims, but "this is the first case that has answered the question: What standard can the directors be held to?"
Yet other observers said the nuanced ruling does not mean former failed-bank officials are out of the woods. Despite the ruling on business-judgment, Jones rejected a defense argument that the bank's articles of incorporation offered more protection, and sided in part with an FDIC motion arguing a separate portion of the defense should be excluded.
Kevin M. LaCroix, an attorney and executive vice president at OakBridge Insurance Services, wrote Wednesday on his blog "The D&O Diary" that "the ultimate significance of this decision, whether in the case itself or in other cases in Georgia or elsewhere, remains to be seen."
"Judge Jones's rulings in the Integrity Bank case may be the first under Georgia law in the failed bank context saying that, in light of the business judgment rule, the standard of liability for former directors and officers of the failed bank is gross negligence. To that extent, his ruling is positive for the many directors and officers of failed banks facing liability claims from the FDIC," LaCroix wrote.
"However, Judge Jones also found that the relatively unexceptional allegations in the FDIC's complaint were sufficient to state a claim for gross negligence. To that extent, Judge Jones's ruling is less helpful to those many Georgia failed bank officials, because it seems less likely those individuals might be able to get out of an FDIC failed bank lawsuit on a motion to dismiss."