F.D.I.C. v. Shrader & York
| Decision Date | 20 May 1993 |
| Docket Number | No. 91-6315,91-6315 |
| Parties | FEDERAL DEPOSIT INSURANCE CORPORATION, etc., Plaintiff-Appellant, v. SHRADER & YORK, etc., et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Robert D. McGillicuddy, Deputy Sr. Cnsl., F.D.I.C., Washington, DC, David F. Webb, Diane M. Guariglia, Lorance & Thompson, Houston, TX, for plaintiff-appellant.
Eugene B. Wilshire, Jr., Patrick Joseph Dyer, Wilshire, Scott & Dyer, Houston, TX, for Shrader & York, Clote, Grote, and Hinds.
Frank G. Jones, Fulbright & Jaworski, Houston, TX, Sarah B. Duncan, Fulbright & Jaworski, San Antonio, TX, for Lee H. Henkel.
Appeal from the United States District Court for the Southern District of Texas.
Before DAVIS and JONES, Circuit Judges, and PARKER 1, District Judge.
The Federal Deposit Insurance Corporation (FDIC) appeals the summary judgment dismissal of its legal malpractice action against the law firm of Shrader & York, its individual partners, and successor organizations (Shrader & York). We affirm.
The FDIC brought this legal malpractice action against Shrader & York in May of 1991. It alleges that Shrader & York negligently contributed to the failure of two of the law firm's clients, City Savings & Loan Association (City), and Lamar Savings Association (Lamar). Specifically, the FDIC points to work Shrader & York did on the following five transactions: (1) City's acquisition of Realty Development Corporation (RDC) in 1983; (2) Lamar's merger with Brazos Savings Association (Brazos) in 1983; (3) the 1984 sale by a Lamar subsidiary of property known as 8214 Westchester; (4) Lamar's acquisition of CTC (USA) Corporation (CTC) in 1985; and (5) Lamar's 1985 purchase of Stone Oak Corporation (Stone Oak).
The district court granted summary judgment in favor of the defendants, relying on the following grounds: (1) the Texas two year statute of limitations for legal malpractice claims expired before the FDIC acquired City and Lamar; (2) the FDIC lacked standing to sue Shrader & York for legal malpractice; (3) the individually named defendants were not partners in the law firm at the time of the alleged acts of malpractice; and (4) the law firm's alleged acts of malpractice could not have proximately caused the losses alleged by the FDIC, 777 F.Supp. 533. This appeal followed.
Stanley E. Adams, Jr. (Adams) and his wife, Christie Bell, purchased Lamar in 1969. In 1979 Adams formed Lamar Financial Corporation (LFC) as Lamar's holding company. In 1983 LFC purchased City. Adams served as chairman of the board of directors and chief executive officer of Lamar from January of 1980 through December of 1985; as a director of LFC during the same time period, and as chairman of the board of directors of LFC from January of 1983 through December of 1985. Adams served as City's vice president from January of 1983 until May of 1986, and as a director of City from December of 1985 to April of 1986. From December of 1985 until October of 1986, Adams owned 100% of City's stock. In February of 1992, Adams pled guilty to conspiracy to defraud the United States, and false entries in savings association records, in violation of 18 U.S.C. §§ 371, 657, 1006, and 1001.
On May 18, 1988, the Federal Home Loan Bank Board (FHLBB) determined that City and Lamar were insolvent, and appointed the Federal Savings and Loan Insurance Corporation (FSLIC) as their receiver. The FSLIC-Receiver sold to the FSLIC, in its corporate capacity, City and Lamar's claims against professionals providing services to these thrifts. The FDIC acquired these causes of action by operation of § 401 of the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (FIRREA).
The FDIC alleges that Shrader & York contributed to the collapse of City and Lamar by doing faulty legal work in the five transactions at issue. With respect to all five transactions the FDIC alleges that Shrader & York failed to give City and Lamar competent legal advice to the point that some transactions violated federal laws. The FDIC contends that Shrader & York allowed Adams to deceive the Lamar and City directors. According to the FDIC's theory of the case, if Shrader & York had alerted the City and Lamar boards of the illegal nature of the five transactions, the boards would have blocked the transactions, thereby averting huge losses. The FDIC describes the five transactions as follows:
1. City's acquisition of RDC: In 1983 City paid $30 million for RDC, a troubled asset. RDC's principals then purchased $10 million of LFC preferred stock. Thus LFC used the RDC acquisition to funnel $10 million of City's cash to LFC, allowing LFC to repay the loan LFC secured to purchase City. The FDIC contends that this violated federal regulations prohibiting a holding company's subsidiary thrift from investing its funds in an affiliate's obligation. The FDIC further contends that Shrader & York knew that the transaction was unlawful, but failed to inform any disinterested officer or director of City. According to the FDIC, City's losses from the RDC acquisition exceeded $5 million.
2. Lamar's acquisition of Brazos: In July of 1982 Lamar agreed to acquire Brazos. The acquisition agreement provided that compensation to Brazos officers and directors would increase only in the ordinary course of business, and that Lamar and Brazos would bear their own merger expenses. In July of 1983 Shrader & York certified that the merger complied with the acquisition agreement and applicable laws. The FDIC claims that Shrader & York failed to report numerous violations of the merger agreement. For example, the FDIC alleges that Brazos paid $155 thousand of Lamar's merger-related expenses. More significantly, the FDIC alleges that officers and directors of Lamar and Brazos wasted nearly $8 million in Brazos assets through conduct such as (1) paying nearly $1 million in bonuses to senior officers of Lamar and Brazos; (2) giving 71 automobiles to officers, directors and employees of Lamar, City, and Brazos; (3) giving Rolex watches to Brazos directors; (4) constructing a greenhouse at Adams's house and an airstrip at Adams's ranch; and (5) buying a $72 thousand diamond ring for Adams's wife.
3. Lamar's sale of 8214 Westchester: Lamar loaned $10.5 million to Drew Mortgage Company, an entity owned by Lamar and City, for development and construction of 8214 Westchester, Lamar's Dallas headquarters. The FDIC alleges that in 1984 Shrader and York formed a limited partnership, 8214 Westchester Ltd., to purchase the property. The limited partnership borrowed $15 million in purchase financing from Mainland Savings (Mainland). Mainland participated $8.8 million of the loan back to Lamar. Later, Lamar purchased the remaining $6.2 million of the loan. The FDIC claims that the sale was a scheme to avoid classifying the loan as a non-performing depreciable asset for 1984. It also alleges that Lamar lost $4 million on this transaction.
4. Lamar's acquisition of CTC: In 1985 Lamar made a direct investment in CTC, a software development corporation. The FDIC alleges that Lamar's regulatory capital was below the minimum level necessary to make direct investments unsupervised by federal regulators. The FDIC further alleges that Shrader & York prepared the documentation for the investment, but failed to advise Lamar's board of directors of the need to obtain regulatory approval for the investment. The FDIC alleges that Lamar lost over $1 million on the transaction.
5. Lamar's purchase of Stone Oak: In 1985 Lamar and LFC acquired Stone Oak, a real estate development corporation, for $84.2 million. Again, the FDIC alleges that Lamar had insufficient regulatory capital to make unsupervised direct investments. It alleges that Shrader & York failed to advise Lamar's board of the need to obtain prior approval of the investment. The FDIC alleges that Lamar lost $25 million on the investment.
Because the FDIC's standing to sue is a threshold inquiry, we deal with it first. The district court concluded that the FDIC's standing to sue Shrader & York was based on Lamar and City's shareholders' right to sue. Because the shareholders lacked standing, the district court concluded that the FDIC also lacked standing.
The FSLIC-Receiver, as successor to Lamar and City, acquired all of the two thrifts' assets, including their claims against Shrader & York. 12 C.F.R. §§ 548.2(f), 549.3 (). The FSLIC-Receiver then assigned these to the FSLIC-Corporate. See 12 U.S.C. § 1729(f)(2)(A) (1989). By operation of FIRREA, the FSLIC was abolished and the FDIC succeeded to all of the FSLIC's assets. 12 U.S.C. § 1821a(a)(1). The FDIC therefore has standing to sue Shrader & York. 2
The district court concluded that City and Lamar's legal malpractice claims against Shrader & York were time barred before the FSLIC acquired them on May 18, 1988. FIRREA's statute of limitations, 12 U.S.C. § 1821(d)(14), does not revive stale state law claims acquired by the FSLIC or FDIC. F.D.I.C. v. Belli, 981 F.2d 838, 842 (5th Cir.1993); see also Federal Deposit Ins. Corp. v. Hinkson, 848 F.2d 432, 434 (3rd Cir.1988). The FSLIC acquired City and Lamar's legal malpractice claims against Shrader & York in May of 1988. Thus if City and Lamar's claims against Shrader & York expired before May of 1988, Shrader & York's statute of limitations defense is meritorious.
The Texas limitation period for legal malpractice claims is two years. Tex.Civ.Prac. & Rem.Code Ann. § 16.003 (Vernon 1986); Willis v. Maverick, 760 S.W.2d 642, 644 (Tex.1988). The parties do not dispute that the occurrences giving rise to the legal malpractice claims against Shrader & York took place well before May of 1986. So the claims all expired before May of 1988 unless one of the equitable doctrines urged upon us by the FDIC operates to extend the...
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