Eleventh cirCuit uphOlds Liability of bank directors for negligence

The Eleventh Circuit Court of Appeals released its opinion in Federal Deposit Insurance Corporation v. R. Charles Louderman, Sr., et al on July 22, 2019. The court upheld the District Court for the Northern District of Georgia’s decision finding the directors of the shuttered Buckhead Community Bank jointly and severally liable for negligence.

The Federal Deposit Insurance Corporation (FDIC) closed a failing Georgia bank in 2009 after it suffered millions of dollars in losses due to bad loans. After the FDIC was receiver of the failed bank, the agency sued the directors and officers for negligence and gross negligence for approving ten risky loans resulting from the failure to conduct proper research. The District Court awarded the FDIC nearly $5 million in damages.

The directors were unsuccessful in advancing their arguments that the District Court should have apportioned the director liability because not all of the directors attended the board meetings where the loans were presented and approved. Aside from Georgia law precluding such an argument, the Bank’s quorum-approval policy allowed the Directors’ Loan Committee members “to act as agents for each other.” The policy required unanimous consent for loans to be approved, and at no time did any member - present or absent from the meeting - object to the approval of the loans at issue. As the court stated, “...the absent members, by not exercising their veto power, allowed the quorum to speak for them.”

Lending credence to the negligence claim was the fact that the loan packet information was unreliable. For one of the loans at issue, the loan packet included an appraisal for the land, with the incorrect assumption the land had been rezones at the time of the appraisal. Another loan packet failed to include information related to creditworthiness, but did contain irrelevant information the applicant belonged to a country club.

What can be learned from this case? First, a review of the board policies is in order to determine whether actions taken by those present at meetings can negatively impact those not present when important decisions are made. Second, loan packets should be audited/reviewed before they are presented to the board committee for approval, ensuring all board members receive the information in a sufficient amount of time before the approval vote. Third, board members must be actively engaged by carefully reviewing all submitted information, asking questions, and ensuring all policy requirements have been met before approving any request.

Veronica Madsen
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