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The Business Judgment Rule Shields Corporate Officers and Directors from Liability for Acts of Negligence and Carelessness

Previously, I wrote about the responsible corporate officer doctrine which permits in some circumstances a finding of personal liability against an officer of a corporation for liability that has been imposed upon the corporation. The responsible corporate officer doctrine can be applied if a corporate officer participates in the wrongful conduct, or with knowledge approves of the wrongful conduct, of the corporation. The doctrine serves as a vehicle for a plaintiff to impose personal liability against the corporate officer.
A similar doctrine, but one that creates a defense against personal liability for a corporate officer, is the business judgment rule. The business judgment rules states that an officer or director of a corporation is not liable for acts of mere negligence. The basis of the business judgment rule was explained in a recent case from Georgia, Brock Built, LLC v. Blake, 300 Ga. App. 816 (Ga. Ct. App. 2009).
The plaintiff in Brock Built, LLC v. Blake negotiated an employment contract to serve as the president of defendant corporation, a builder. The contract permitted the termination of the employment relationship at any time, but called for the plaintiff to receive severance benefits if he was terminated without cause. A few months later, the plaintiff left the position, claiming that he was discharged without cause. The defendant asserted that the plaintiff voluntarily resigned, for which severance benefits were not required to be paid. The plaintiff filed a lawsuit seeking the severance benefits and also seeking incentive compensation that was not paid during the time that he served as the president of the defendant. The defendant counterclaimed, alleging that the plaintiff had violated his fiduciary duties to the defendant. The trial court found that the plaintiff did not voluntarily resign, was entitled to both the severance benefits and the additional incentive compensation, and that the defendant’s counterclaim was unfounded because of the business judgment rule.
The defendant’s counterclaim that the plaintiff had violated his fiduciary duty to the defendant was based upon two allegations. First, the defendant alleged that in order to maximize his incentive compensation for the year in which he was appointed president, the plaintiff had attempted to artificially maximize the defendant’s annual profit by accelerating the construction of houses that were not scheduled to close until the following year and by delaying the payment of invoices and bonuses until the following year. Secondly, the defendant asserted that the plaintiff had neglected to properly oversee the affairs of the defendant by failing to adequately manage the purchase order system, by failing to budget engineering features in the sale prices of certain specific homes, and by failing to use proper building materials for noise abatement in other specific homes.
Georgia applies the business judgment rule to determine if corporate officers and directors discharge their statutory duties in good faith and with the care of an ordinary prudent person in a like position. The business judgment rule establishes a presumption of good faith in favor of a corporate officer or director, as the court explained:
“The business judgment rule affords an officer the presumption that he or she acted in good faith, and absolves the officer of personal liability unless it is established that he or she engaged in fraud, bad faith or an abuse of discretion….The business judgment rule protects officers from liability when they make good faith business decisions in an informed and deliberate manner. The presumption is that they have acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. Unless this presumption is rebutted, they cannot be held personally liable for managerial decisions. However, officers may be held liable where they engage in fraud, bad faith, or an abuse of discretion….Allegations amounting to mere negligence, carelessness, or "lackadaisical performance" are insufficient as a matter of law.”
In affirming the trial court’s dismissal of the defendant’s breach of fiduciary duty counterclaim, the court found that the defendant had raised, at the most, allegations of negligent or careless performance by the plaintiff. The plaintiff had submitted evidence that he had not accelerated house closings or delayed payment of invoices for the year that he was appointed president. The defendant failed to rebut this evidence, and in addition, the court pointed out “that corporate officers or directors may stand to gain personally from their actions does not obviate the application of the business judgment rule.” Furthermore, the allegations that the plaintiff had failed to properly manage the defendant were simply allegations of negligent or careless performance, which were insufficient to show a breach of fiduciary duty as a matter of law. The court concluded by explaining that “The business judgment rule is a policy of judicial restraint born of the recognition that [officers] are, in most cases, more qualified to make business decisions than are judges."
Is there value in analyzing Brock Built, LLC v. Blake if you do not practice in Georgia? Yes, with some limitations. The business judgment rule has been frequently litigated in Georgia, in both the state and the federal courts, so a review of the Georgia interpretation of the business judgment rule is worthwhile. In addition, the Brock Built, LLC v. Blake decision not only provides citations to Georgia case law, but it includes citations and references to other states. The reader should recognize, though, that as with many decisions, the facts are important here. Both the trial court and the appellate court clearly viewed the plaintiff to be the victim in this litigation. Furthermore, the breach of fiduciary duty claim was in a counterclaim by the defendant, which is an unusual assertion by an employer against a former employee. Generally the business judgment rule is applied when a third party brings a claim against a corporate officer or director, and the facts and the procedural stance of Brock Built, LLC v. Blake provided an excellent opportunity for the court to apply the business judgment rule.
In summary, the business judgment rule provides protection for corporate officers and directors, but also opportunities for plaintiffs who claim that they have been the victims of corporate misdeeds. The rule provides corporate officers and directors with a presumption of good faith and thus an opportunity for quick resolution of claims through summary judgment. On the other side of the coin, though, the rule provides a personal liability avenue for plaintiffs to follow if they can demonstrate that the activities of the corporate directors or officers constituted fraud, bad faith, or an abuse of discretion. An additional research resource on the business judgment rule, as it has been applied in Delaware, is an excellent 2009 article by Professor Clark W. Furlow of the Stetson University College of Law, Good Faith, Fiduciary Duties, and the Business Judgment Rule in Delaware, 2009 Utah L. Rev. 1061 (2009).