Director’s Note: Another Important Ruling in Loudermilk

By:  Jonathan Hightower and Crystal Huffman

Readers may also view this article at the Georgia Bankers Association website here

On July 22, 2019, the U.S. Court of Appeals for the Eleventh Circuit dealt another blow to bank directors, upholding the award of damages to the FDIC in the case FDIC v. Loudermilk, which involved the former directors of Buckhead Community Bank.  The case was perhaps best known for defining Georgia’s business judgment rule, at least until the Georgia General Assembly reacted by defining the standard of liability for directors and officers in a manner more consistent with prior expectations.

The Recent Ruling

In this particular ruling, the Court of Appeals addressed whether the directors should properly be viewed as acting in concert in approving loans (rather than acting individually as directors) such that damages would not be apportioned among them, making them jointly liable to the FDIC for the damages award.

The Georgia Supreme Court previously ruled in March 2019 in response to certified questions from the Eleventh Circuit that (i) Georgia’s apportionment statute, which requires damages to be individually apportioned among defendants, applies to cases involving pecuniary losses such as Loudermilk and (ii) the requirement to apportion damages can be overcome via the common law doctrine of concerted action.  The Georgia Supreme Court declined to respond to the certified question of whether the directors in Loudermilk had engaged in concerted action, deferring to the Eleventh Circuit to address the record of the case.

The Eleventh Circuit determined, much to the surprise of many in banking circles, that the directors had engaged in concerted action in approving the loans for which they were found liable.  This result was particularly surprising considering the facts in the record that in several cases certain of the defendant directors were not present at the meeting at which the loans were considered for approval.

The Court, however, agreed with the FDIC’s position in the case, relying primarily on two theories.  First, the Court focused on the theory that director liability did not rest solely on the decision – the vote to approve the loans – but rather the entire process by which the directors reached their decision.  In the view of the Court, the fact that certain directors were not present to vote on a loan was a symptom of the problem (a bad process) rather than a defense.  The Court took an expansive view of the approval process that essentially began with the circulation of the loan package to the committee members.

Second, and perhaps the more important theory relied on by the Court, is the theory that providing directors with veto power on individual loans results in every director making a decision with regard to each loan.  The Court focused heavily on the practice of Buckhead Community Bank to allow any director voicing an objection to a loan to practically veto its origination.  In the view of the Court, this veto right meant that every director on the loan committee was equally involved in the approval of each loan, even if he or she never commented on the loan package or attended the meeting at which the loan was considered.  In the view of the Court, these facts gave rise to a finding of concerted action that led to joint liability for the director defendants.

Practical Implications for Today’s Bank Directors

One bit of good news in the ruling is that cases based upon current processes and decisions, should there be any, will be decided under Georgia’s revised statutory regime.  It creates a presumption of adherence to the standard of care required of directors if directors were not grossly negligent in their decision-making process.  In addition, Georgia banks can now provide in their articles of incorporation a limitation of liability provision that will exculpate directors from a liability for monetary damages to the bank’s shareholders or the bank itself (through which the FDIC may sue) related to a wide variety of claims.  These statutory enhancements will undoubtedly be beneficial in defending such actions.

Unfortunately, notwithstanding those improvements to the legal framework, this decision is a very challenging one for Georgia bank directors.  In our view, the Court’s findings were contradictory in many cases, creating a challenge for boards and their advisors to create processes that will comply with legal standards while being practically effective.

The Court’s finding of concerted action based upon the supposed veto right of a director implies that boards that engage in a practice of desiring unanimity in order to move forward may be creating a scenario in which directors are found to act in concert, rather than independently, in their actions.  We have admired the cohesion of boards that will not move forward in the face of concerns expressed by an individual director; however, there may now be a legal reason to occasionally move forward over a “no” vote, as strange as that may seem.

Moreover, the Court’s finding that silence on a particular matter can result in liability raises a number of questions.  What if a director is unavailable due to medical absence during the consideration of a matter?  More to the point of a case, many practitioners have suggested to boards that they remove the loan committee’s responsibility to vote on particular loans while keeping the committee in the flow of information on the loans and allowing them to object to their origination.  This Loudermilk opinion suggests that a court might still find such a construct to be tantamount to having the directors vote on approval of the loans.


Given the surprising outcome of this Loudermilk decision, we are more convinced than ever that boards should not attempt to shape their processes strictly in anticipation of how a court might view the process in the event of litigation:  litigation is too unpredictable for that exercise to be effective.  Instead, we believe boards should develop thoughtful processes around their decision-making that are effective from a business standpoint, then consider whether those business-oriented processes can be fine-tuned to manage legal risk.  In our experience, best practices from a business standpoint are often aligned with legal requirements, and ultimately all constituencies should be interested in aligning processes with optimal business outcomes.

Questions for the authors? Contact Jonathan Hightower here and Crystal Huffman here