| Insights | Authored Article

Eleventh Circuit Affirms Bank Directors’ Negligence in Approving Risky Loans

The Eleventh Circuit recently considered a negligence claim brought by the FDIC against directors of a Georgia community bank. Before the 2008 financial crisis, Buckhead Community Bank undertook a growth strategy to expand the bank’s loan portfolio. That strategy proved unsuccessful when many of the loans failed and the Georgia Department of Banking and Finance closed the bank and appointed the FDIC as the bank’s receiver. Following a jury trial in which several of the bank’s former directors were found to have been negligent in approving loans, the directors appealed to the Eleventh Circuit Court of Appeals. Three of the central issues before the court were (i) whether a bank director could be liable for negligently approving a loan if he or she did not attend the board meeting in which the loan was approved; (ii) whether the directors’ liability should be joint and several or apportioned among the directors; and (iii) whether the district court abused its discretion by excluding evidenced related to the Great Recession as an intervening cause to mitigate the defendants’ liability.  

In deciding the first question, the Court considered the particular measures Buckhead Community Bank followed when approving the loans at issue. A loan officer first originated the loans and then submitted information about the loans and borrowers to the directors’ loan committee at one of the committee’s weekly meetings. While a quorum of three voting members were required to approve a loan, any member of the committee could veto a loan, regardless of whether the member was in attendance at the weekly meeting or not. Based on this approval structure, the Eleventh Circuit held that any of the bank’s directors could be liable for approving a risky loan despite being absent from the committee meeting because “even if [the director] didn’t attend the approval meeting and cast a yes vote on the record, [the director] still approved the loan by not using his veto power at any point during the approval process.” The court explained that “because each Committee member had absolute veto power  . . . every time a member failed to use that veto power, he implicitly stamped his approval on the loan and allowed it to move through the process.” 

As to the second issue, the Eleventh Circuit applied Georgia law in resolving how to apportion liability among the bank’s directors. Jury instructions adopted by the district court did not permit the jury to apportion damages based on each director’s percentage of liability. The district court held that the directors of the bank were acting in concert, and, as such, Georgia’s apportionment statute did not apply to the directors’ actions.  The Eleventh Circuit agreed, holding that because there was no evidence contradicting that approval of a loan was a group decision, it would be unreasonable to task a jury with assigning percentages of fault to individual directors. Doing so, the court explained, would contradict Georgia case law which has previously held that “liability cannot rest upon guesswork, conjecture, or speculation beyond inference reasonably to be drawn from the evidence.”

Finally, as to the third issue, whether the directors could present evidence of the Great Recession as an intervening cause, the court concluded that because the directors withdrew that defense at the summary judgment stage and did not challenge the district court’s evidentiary ruling at trial, that defense was waived. This decision leaves open the possibility that a well-preserved defense by a director citing the Great Recession as an intervening cause could come before the Eleventh Circuit in the future. 

The Eleventh Circuit’s decision in FDIC v. Loudermilk et. al., highlights the attentiveness a bank director must give to his or her duties as liability may be attributed to the director despite his or her absence from a particular meeting or vote. This requires directors to take an active role in executing their duties, look beyond the mere facts of a loan officer’s approval memo, and seek satisfactory answers prior to affirming bank actions. In addition to those individual duties, directors must also take steps to ensure that fellow directors are fulfilling their duties in an effort to to avoid the potential consequences of joint and several liability.