2013 Georgia Corporation and Business Organization Case Law Developments
by Thomas S. Richey and Michael P. Carey
This article presents an overview from a survey of Georgia corporate and business organization case law developments in 2013. The full version of the survey, which can be downloaded or printed at http://www.bryancave.com/2013-ga-survey/, contains a more in-depth discussion and analysis of each case. This article is not intended as legal advice for any specific person or circumstance, but rather a general treatment of the topics discussed. The views and opinions expressed in this article are those of the authors only and not Bryan Cave LLP.
This article catalogs case law developments dealing with Georgia corporate and business organization law issues handed down by Georgia state and federal courts during 2013. Several of 2013's decisions have significant precedential value, while others address less momentous questions of law as to which there is little settled authority. Even those cases in which the courts applied well-settled principles are instructive for the types of claims and issues that are currently being litigated in corporate and business organization disputes.
The year 2013 is probably most notable for two unresolved issues arising from the Federal Deposit Insurance Corporation's litigation against directors and officers of failed banks: first, whether bank officers and directors can be held to a simple negligence standard of care, an issue now before the Supreme Court of Georgia on certified questions from the federal courts and, second, whether the insured-versus-insured exclusions in director and officer insurance policies bar claims by the FDIC as receiver for the insured bank, with disagreement at the federal district court level on both issues.
The Georgia federal courts were also unusually active in deciding other business organization issues in 2013—48 out of the 86 decisions profiled in this article were handed down by federal district, bankruptcy and appellate courts, including potentially significant decisions regarding permissible restrictions on the transfers of corporate stock and the accrual of the statute of limitations on claims among partners. Five decisions by the Georgia courts in 2013 involved interpretation and/or enforcement of business and nonprofit corporation bylaws. There were also a comparatively large number of cases in 2013 ruling on partnership issues. Transactional cases focused mainly on the results of corporate deals—the transfer of assets by operation of law in mergers and claims of successor liability in asset sales. Among litigation issues, the cases included an important ruling upholding the dismissal of a derivative action at the corporation's request based on the results of an investigation by a special litigation committee of the board and a decision considering the requirements for criminal liability of an LLC.
The decisions are organized first by entity type—those specific to business corporations, nonprofit corporations, limited liability companies and partnerships. The remaining sections of the survey deal with (1) transactional issues potentially applicable to all forms of business organizations, and (2) litigation issues, including derivative action procedure, alter ego and other forms of secondary liability, jurisdiction and insurance issues. Finally, we cover several significant decisions handed down by the Fulton County Business Court during the year 2013.
Duties and Liabilities of Corporate Directors, Officers and Employees
The most significant development of 2013 is as of yet unresolved. In two separate decisions, FDIC v. Loudermilk, ___ F. Supp.2d ___, 2013 WL 6178463 (N.D. Ga. Nov. 25, 2013) (Thrash, J.) and FDIC v. Skow, 741 F.3d 1342 (11th Cir. 2013), a Georgia federal district court and the 11th Circuit asked the Supreme Court of Georgia to decide whether the business judgment rule insulates bank directors from liability for claims of ordinary negligence. The Supreme Court of Georgia has docketed the two appeals as S14Q0454 and S14Q0623, with briefing underway and oral argument currently scheduled for April and May, 2014, respectively.
The immediate question before the Supreme Court is whether the FDIC, acting as receiver for failed Georgia banks, may rely on an ordinary negligence theory in pursuing claims against the banks' former directors and officers. The FDIC has filed 21 such suits in Georgia federal district courts since the onset of the financial crisis of the late 2000's, and the defendants have moved to dismiss the FDIC's ordinary negligence claims in several of the cases. Beginning with the district court's February 2012 decision in Skow, the initial decisions agreed that the business judgment rule as described in Flexible Products Co. v. Ervast, 284 Ga. App. 178, 182 (2007) and Brock Built, LLC v. Blake, 300 Ga. App. 816 (2009) foreclosed the FDIC's ordinary negligence claims.
In early 2013, the district court in FDIC v. Adams, 2013 WL 604411 (N.D. Ga. Apr. 10, 2013) (Forrester, J.), broke from these early decisions, holding that the business judgment rule applied but that its presumption could be overcome by allegations of ordinary negligence. In November, the district court in Loudermilk, supra, went a step further, stating that it was "not convinced" that the business judgment rule applied to bank directors in the first place. The court specifically questioned whether it made sense to treat bank directors and officers in the same manner as corporate directors and officers, reasoning that bank failures harm not only shareholders but also the FDIC and ultimately, taxpayers. While the court clearly hinted at a policy-based rationale for denying business judgment rule protection to bank directors and officers, it did not resolve the question, instead certifying to the Supreme Court of Georgia the following question: "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?"
Shortly thereafter, in the Skow appeal, the 11th Circuit also decided to certify questions to the Supreme Court of Georgia. The 11th Circuit did not address the policy points raised in Loudermilk, but instead found that Flexible Products and Brock Built may conflict with the statutory standard of care set forth in the Banking Code, O.C.G.A. § 7-1-490, which it (like many previous courts) interpreted as an ordinary negligence standard. The court thus certified its own questions to the Supreme Court of Georgia: (1) "Does a bank director or officer violate the standard of care established by O.C.G.A. § 7-1-490 when he acts in good faith but fails to act with "ordinary diligence," as that term is defined in O.C.G.A. § 51-1-2?" and (2) "In a case like this one, applying Georgia's business judgment rule, can the bank officer or director defendants be held individually liable if they, in fact as alleged, are shown to have been ordinarily negligent or to have breached a fiduciary duty, based on ordinary negligence in performing professional duties?" The Supreme Court's response to the certified questions will undoubtedly be significant to the ongoing FDIC litigation and to any litigation involving bank officers and directors. The Court's response may also have wider effects on the business judgment rule in Georgia generally, particularly if the Court addresses the interplay between the rule and the statutory standard of care. Notably, the standard set forth in the Banking Code, O.C.G.A. § 7-1490, uses substantially the same wording as its counterparts in the Corporations Code, see O.C.G.A. §§ 14-2-830 (applicable to corporate directors) and 14-2-842 (applicable to corporate officers).
The Adams decision was significant in a second respect: it also addressed a failure of oversight claim under the principles established in In re Caremark Int'l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996), making it the second decision in two years to consider applying Caremark to a Georgia banking corporation. Without deciding whether Georgia would follow Caremark in adjudicating director liability claims not involving business decisions, the court held that the FDIC failed to allege the complete absence of internal controls or the conscious failure to monitor such controls, and thus failed to meet the "high threshold" for a Caremark claim. Another issue regarding claims against failed bank directors and officers was decided in FDIC v. Cameron, ___ F. Supp.2d___, 2013 WL 6490247 (N.D. Ga. Dec. 11, 2013), in which the court held that the Georgia statute of limitations for claims of negligence and gross negligence against bank directors and officers runs from the time of making bad loans, not the time when loans went into default.
A different standard of care issue was pending before the Supreme Court of Georgia at the end of 2013 in an appeal from Rollins v. Rollins, 321 Ga. App. 140, 741 S.E.2d 251 (2013). There, the Court of Appeals of Georgia held that trustees managing family business entities in which the trusts held minority interests may be held liable to beneficiaries under trust standards of care for their actions at the entity level and they may also be required under trust law principles to provide an accounting of those entities. The Supreme Court of Georgia recently reversed the Court of Appeals on both counts, holding that because the trusts owned minority interests in the entities, the trustees' conduct as officers and directors must be governed by corporate law principles. As for the accounting, the Court of...
