F.D.I.C. v. Jackson, s. 96-16157

• Decision Date: 05 January 1998
• Docket Number: 96-16465,Nos. 96-16157,s. 96-16157
• Parties: 97 Cal. Daily Op. Serv. 47, 98 Daily Journal D.A.R. 93 FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant-Cross-Appellee, v. Richard A. JACKSON, Wanda A. Jackson, Harry J. Cavanagh, Geri Cavanagh, Clifton B. Cox, Helen Cox, Joseph A. Dupont, Marilyn Dupont, James D. Fox, Geneva E. Fox, Louis S. Grubb, Evelyn F. Grubb, William M. Kipp, Gayle Kipp, Clyde B. Smith, Peggy J. Smith and John B. Stiteler, Defendants-Appellees- Cross-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 694

133 F.3d 694

97 Cal. Daily Op. Serv. 47, 98 Daily Journal

D.A.R. 93

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant-Cross-Appellee, v. Richard A. JACKSON, Wanda A. Jackson, Harry J. Cavanagh, Geri Cavanagh, Clifton B. Cox, Helen Cox, Joseph A. Dupont, Marilyn Dupont, James D. Fox, Geneva E. Fox, Louis S. Grubb, Evelyn F. Grubb, William M. Kipp, Gayle Kipp, Clyde B.

Smith, Peggy J. Smith and John B. Stiteler,

Defendants-Appellees- Cross-Appellants.

Nos. 96-16157, 96-16465.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Aug. 4, 1997.

Decided Jan. 5, 1998.

Ann S. DuRoss, Robert D. McGillicuddy, Michelle Kosse, Kathleen V. Gunning, Karen Caplan (argued), Federal Deposit Insurance Corporation, Washington, D.C., and Marc Kalish, Kalish, Forrester & Torres, Phoenix, Arizona, for appellants.

Lonnie J. Williams (argued), Martha E. Gibbs, Brian J. Foster, Snell & Wilmer, Phoenix, Arizona, for appellees Harry and Geri Cavanagh.

Bart J. Patterson, Daughton & Patterson, Phoenix, Arizona, for appellees Richard and Wanda Jackson.

Hubert W. Green, Michael L. McReynolds, Green, McReynolds & Harkins, San Antonio, Texas, for appellees Clyde and Peggy Smith.

Daniel Cracchiolo, David M. Villadolid, Burch & Cracchiolo, Phoenix, Arizona, for appellees Clifton and Helen Cox, Louis and Evelyn Grubb, and John Stiteler.

David A. Damore, Vogel & Damore, Scottsdale, Arizona, for appellee James Fox.

Joseph A. Schenk, Hebert, Schenk & Johnsen, Phoenix, Arizona, and Daniel Cracchiolo, David M. Villadolid, Burch & Cracchiolo, Phoenix, Arizona, for appellees and cross-appellants Joseph and Marilyn Dupont.

Appeals from the United States District Court for the District of Arizona; Paul G. Rosenblatt, District Judge, Presiding. D.C Nos. CV-92-1945-PGR, CV-93-0128-PGR and CV-93-0193-PGR.

Before: FLETCHER and REINHARDT, Circuit Judges, and WARDLAW, District Judge. ^*

WARDLAW, District Judge:

The Federal Deposit Insurance Corporation ("FDIC") appeals adverse rulings in its actions asserting breach of fiduciary duty, negligence, and gross negligence against the directors of a failed Arizona bank, Century Bank ("Century" or the "Bank"), as well as spousal liability. It is the culmination of a sorry saga of alleged mismanagement by defendants, members of the Board of Directors of Century, a state-chartered, federally insured banking institution, at various times from the Bank's opening in January 1981 through October 1989. During most of this time, from October 1981 through October 1989, the FDIC, alone or jointly with the Arizona State Banking Department ("ASBD"), conducted yearly examinations of the Bank. These examinations repeatedly identified deficiencies in lending practices, including poor loan documentation, inadequate loss reserves, and inadequate commercial loan supervision. Each set of findings was presented to and acknowledged by the Board. Over the course of the Bank's existence, the examinations resulted in two memoranda of understanding between the regulators and the bank directors and two cease and desist orders. In October 1989, the FDIC and the ASBD jointly determined that Century was insolvent. The ASBD took control of Century and the Maricopa County Superior Court appointed the FDIC as receiver. These consolidated actions followed in 1992.

The district court in a series of orders resolved all issues in favor of the Bank's directors on various bases, with the result that all defendants were absolved of liability. On appeal the FDIC challenges the district court's interpretation of Arizona law; to wit, it held that an action against bank directors for negligence accrues at the date an improper loan is made; the doctrine of adverse domination does not toll the running of the statute of limitations absent fraudulent conduct; bank directors whose actions are unprotected by the business judgment rule are liable only for gross negligence. It also challenges the grant of summary judgment in favor of director Harry Cavanagh.

Defendants Joseph and Marilyn Dupont cross-appeal the denial of their motion to dismiss as to them. The district court held that the second amended complaint ("SAC") related back to the date of the original complaint, avoiding dismissal under Bankr.R. 4007(c); and that the SAC alleged sufficient facts to state a claim for fraud or defalcation against the Duponts as fiduciaries pursuant to 11 U.S.C. § 523(a)(4). ¹

A. Accrual Date Under the Statute of Limitations

We agree that under Arizona law the cause of action for negligence accrues against directors at the time of the approval of bad loans. See RTC v. Blasdell, 930 F.Supp. 417 (D.Ariz.1994).

In Blasdell, the Resolution Trust Corporation ("RTC") sued the directors of a failed bank for negligence, gross negligence, negligence per se, and breach of fiduciary duty. Blasdell, 930 F.Supp. at 419. The RTC argued there that the causes of action accrued at the time it became known that the loans would not be repaid, while the directors argued for accrual at the time the loans were approved or funded. Id. at 428. The court acknowledged that the RTC's argument which "focuse[d] on loss rather than conduct, [was] not without some force." Id. at 429. "The incentive to bring suit based on the imprudent approval of a loan, other than to avoid limitations problems, is very low until the loan has gone into default or been declared a loss." Id.

Nonetheless, the court agreed with the directors:

Notwithstanding these considerations, director approval of bad loans is not something that cannot be discovered until default occurs, assuming that nothing is done to conceal the circumstances surrounding the loan approvals. In fact, as made clear by the RTC's evidence, federal regulators were aware of allegedly bad loans made by [the bank] long before default. In addition, banks sustain injury as soon as bad loans are funded: money that should not have left the bank is gone. The general rule is that "a statute of limitations begins to run against an action against directors of a corporation for malfeasance or nonfeasance from the time of the perpetration of the wrongs complained of." No Arizona case cited to the court calls into question the general rule. Thus, the court concludes that the cause of action accrued at the time the allegedly bad loans were made.

Blasdell, 930 F.Supp. at 430.

The rule of Blasdell has particular force here. The complaint alleges damages not from nonpayment of the loans, but from negligent practices over time which led to nonpayment.

The FDIC relies upon cases involving suits for collection of unpaid monies. However, collection causes of action accrue when the money is due. Such cases are inapplicable to the claims here. ² See, e.g., Baca v. Bank of Am. Nat'l Trust & Sav. Ass'n, 99 Ariz. 352, 409 P.2d 52, 52 (.1965); Groves v. Sorce, 161 Ariz. 619, 780 P.2d 452, 454 (1989); Cheatham v. Sahuaro Collection Serv., Inc., 118 Ariz. 452, 577 P.2d 738, 740 (1978).

The FDIC further analogizes to Arizona case law regarding accrual of causes of action for professional negligence. Yet the reasoning of these cases generally supports the district court's finding. See Kenyon v. Hammer, 142 Ariz. 69, 688 P.2d 961, 965 (1984) (cause of action accrues at date patient experienced harm from negligence, which in that case was the date of the negligent act although the patient did not know she was harmed until years later); Sato v. Van Denburgh, 123 Ariz. 225, 599 P.2d 181 (1979) (cause of action for accountant's negligence accrued when the negligent acts were done). Legal negligence cases have favored a later date, but are based on policy rationales absent here. See, e.g., Amfac Distr. Corp. v. Miller, 138 Ariz. 152, 673 P.2d 792, 794 (1983) (no cause of action for legal malpractice occurring during litigation until final harm has occurred, even where the negligence is known earlier); Environmental Liners, Inc. v. Ryley, Carlock & Applewhite, 187 Ariz. 379, 930 P.2d 456, 461-62 (1996) (legal malpractice claimant must sustain actual, irremediable, nonspeculative harm in order to sue, requiring a resolution of pending litigation); cf. Taylor v. State Farm Mut. Auto. Ins. Co., 185 Ariz. 174, 913 P.2d 1092, 1096-97 (1996) (indicating that because harm from legal malpractice is not known until the appellate process is complete, and because the attorney/client relationship must be respected until conclusion of the matter giving rise to the claim, the cause of action accrues later).

We hold that the district court correctly interpreted Arizona law to place the accrual date of the cause of action at the time the negligence itself occurred. Any possible inequity in this result due to the FDIC's prior inability to sue may be mitigated by the application of the adverse domination doctrine.

B. Tolling of the Statute of Limitations Under the Theory of Adverse Domination

The more significant issue in this case is whether the doctrine of adverse domination, which may allow tolling for claims alleging wrongdoing by those who control the corporation, would act to toll the statute of limitations. We disagree with the district court's conclusion that Arizona would apply the doctrine only where fraudulent director conduct is alleged.

Logical and practical inconsistencies result from the district court's holding that adverse domination tolls the statute of limitations only in instances of fraudulent director conduct. As both the district court in this case and the Blasdell court correctly held, a cause of action in Arizona for negligent loan approval accrues at the date the loan is approved. However, the district court's ensuing interpretation of the adverse domination doctrine would virtually preclude the FDIC from ever pursuing negligent directors.

The Blasdell decision, followed by the district court, ³ recognized that Arizona law controls, and that although no Arizona case had expressly adopted it, "Arizona courts would recognize...