F.D.I.C. v. O'Melveny & Meyers

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Citation969 F.2d 744
Docket NumberNo. 90-55769,90-55769
PartiesFEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver; American Diversified Savings Bank; ADC Financial Corp.; American Diversified Wells Park III, et al., Plaintiffs-Appellants, v. O'MELVENY & MEYERS, Defendant-Appellee.
Decision Date29 June 1992

Theodore A. Russell, Pettit & Martin, San Francisco, Cal., for plaintiffs-appellants.

Gregory R. Smith, Irell & Manella, Los Angeles, Cal., for defendant-appellee.

Appeal from the United States District Court for the Central District of California.

Before: POOLE, KOZINSKI, and LEAVY, Circuit Judges.

POOLE, Circuit Judge:

The Federal Deposit Insurance Corporation ("FDIC"), as receiver for the failed savings and loan association American Diversified Savings Bank ("ADSB"), sued the law firm of O'Melveny & Meyers ("O'Melveny" or "the Firm") claiming professional negligence in connection with its legal advice and services to ADSB. After reviewing de novo the district court's grant of O'Melveny's summary judgment motion, we reverse and remand to the district court for further proceedings.

I Facts and Procedural History 1

ADSB was acquired in 1983 by Ranbir Sahni and Lester Day. Sahni served as Chairman and Chief Executive Officer of ADSB, and Day was its President. ADSB's principal activity was the purchase, development and sale of real estate through limited partnerships sponsored by ADSB and its subsidiaries. These activities were funded by ADSB's insured deposits, which totaled $958 million by December, 1985. ADSB's deposits were insured by what was then known as the Federal Savings and Loan Insurance Corporation ("FSLIC"). 2

In September, 1985, ADSB retained O'Melveny, one of the largest and most prominent law firms in the country, to assist with two real estate syndications, Wells Park and Gateway Center. O'Melveny undertook that assistance in the preparation of two "Private Placement Memoranda" ("PPMs"), 300-page documents designed to induce outside investors to become limited partners in the two real estate deals. O'Melveny is described in the Wells Park and Gateway Center PPMs "as special counsel ... to the General Partner and its Affiliates in connection with Federal Securities laws, Federal income tax law, and certain other matters." [Stip. p 133; Exh. 65, 67.] O'Melveny wrote substantial portions of the PPMs, edited other portions and performed a due diligence review to confirm the accuracy and completeness of the PPMs' disclosures. 3

The parties dispute whether the PPMs indicated that the success of the projects was linked to the financial and regulatory health of ADSB, and the extent to which they represented that ADSB was in sound financial and regulatory condition. There is no dispute, however, that ADSB's financial condition was in fact far from sound. The parties agree that Sahni, Day and Wyn Pope, Executive Vice President of ADSB, had intentionally and fraudulently overvalued ADSB's assets, engaged in the sham sale of assets in order to create inflated "profits," and generally "cook[ed] the books." [Stip. pp 74, 75, 94, 95, 216; Exhs. 32, 100, 101.]

In April, 1985, ADSB's officers had decided to terminate Touche, Ross & Co. as the corporation's auditor, alleging publicly that the accounting firm was "too expensive." [Stip. pp 65, 66, 71.] ADSB replaced Touche Ross with Arthur Young & Company. By October, 1985, Arthur Young began to express concerns about ADSB's financial condition. ADSB engaged yet a third accounting firm, Coopers & Lybrand, to review the Gateway Center offering. On May 3, 1985, more than five months before the private placement offerings were sold to the investor, Touche Ross had notified ADSB, Rogers & Wells (then ADSB's attorneys), and federal regulators that they believed ADSB's net worth was less than zero.

In September, 1985, Rogers & Wells determined that up-to-date audited financial statements for ADSB were necessary for the "Hickory Trace" Offering, a private placement it was then preparing. Audited statements were never prepared, that particular private placement never closed, and ADSB completed the transfer of its business from Rogers & Wells to O'Melveny.

In the course of preparing the Gateway Center PPM, O'Melveny never communicated with Arthur Young, Touche Ross, Rogers & Wells, or ADSB's federal or state regulators. Nor did O'Melveny ever communicate with Day, Pope or James Miller, ADSB's Chief Financial Officer. Indeed, Arthur Young was not aware that O'Melveny had included Arthur Young's March 31, 1985 audited financial statement, by then almost six months out of date, in the Gateway Center PPM. The Wells Park and Gateway Center offerings closed on December 31, 1985.

On February 14, 1986, FDIC stepped in as conservator for ADSB, having concluded that ADSB was insolvent and that the corporation had incurred a substantial dissipation of assets and earnings due to its violations of laws and regulations and its unsafe and unsound business practices. On February 19, 1986, FDIC, as conservator for ADSB, filed a lawsuit in the Central District of California alleging breach of fiduciary duty against Sahni and Day, and RICO violations against Sahni.

Shortly after FDIC took over, it began receiving complaints from investors claiming they had been misled by the PPMs and demanding the return of their investments. FDIC, having made its own finding that the PPMs were misleading, offered to have the partnerships that controlled Wells Park and Gateway Center rescind the investments. The rescission was funded by a loan from American Diversified Capital Corporation (ADCC), a wholly-owned subsidiary of ADSB, to the offering partnerships. In accepting the rescission offer, each investor assigned to FDIC "all actions, causes of action, claims, or suits of any kind or nature whatsoever against any person or entity arising from the Initial Offering...." [Offer of Rescission, Exh. 99] On May 12, 1989, FDIC commenced this suit against O'Melveny, charging the Firm with professional negligence, negligent misrepresentation, and breach of fiduciary duty.

At a settlement conference, the parties agreed to stipulate to a single set of facts and to test their legal claims in a summary judgment motion. O'Melveny argued before the district court that (1) it owed no duty to ADSB or its affiliates to ferret out ADSB's own fraud; (2) the conduct of ADSB's wrongdoing officers must be imputed to ADSB, and that FDIC, as receiver, stood in the shoes of ADSB; (3) and that therefore, as an ordinary assignee, FDIC was barred from pursuing any claims against O'Melveny. O'Melveny also argued that the investors' claims had been extinguished by repayment and that the investors' claims were barred by California's statute of frauds. The district court, specifying only that it perceived the existence of no genuine issue of material fact, granted O'Melveny's motion for summary judgment. FDIC appealed. We reverse.

II Standard of Review

A trial judge should grant summary judgment under Fed.R.Civ.P. 56(c) if "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Id.; see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) ("[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial."). We review de novo the district court's grant of summary judgment. See, e.g., Kruso v. International Tel. & Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989), cert. denied, 496 U.S. 937, 110 S.Ct. 3217, 110 L.Ed.2d 664 (1990). The evidence must be viewed in the light most favorable to the nonmoving party to determine whether there are any genuine issues of material fact for trial, and whether the district court correctly applied the relevant substantive law. Gizoni v. Southwest Marine, Inc. 909 F.2d 385, 387 (9th Cir.1990), aff'd, --- U.S. ----, 112 S.Ct. 486, 116 L.Ed.2d 405 (1991).

III The Duty of Care

O'Melveny must have violated a duty in order to be found negligent. The Firm concedes the existence of a duty by a principal and its agent of complete and accurate disclosure to potential investors in a securities offering, but argues that the investors here have all been fully compensated, and that the agent owes no additional duty to the successor in interest of a principal to make inquiries and disclose information which, the Firm argues, the principal already knew and was trying to conceal. In other words, O'Melveny contends that the federal agency created by Congress to rescue the economy and the victims of failing thrifts can claim no stronger ethical position than did the wrongdoers within that corporate entity; that the government agency is subject to all defenses that might lie as between the wrongdoers themselves and those who may have aided and abetted them in bringing about the disaster. We find such a proposition incredible, particularly when applied to the duties of attorneys retained to give advice and assistance with respect to public offerings.

Our starting point is the basic proposition that in general, "it is an attorney's duty to 'protect his client in every possible way....' " Day v. Rosenthal, 170 Cal.App.3d 1125, 1143, 217 Cal.Rptr. 89, 99 (1985) (citations omitted), cert. denied, 475 U.S. 1048, 106 S.Ct. 1267, 89 L.Ed.2d 576 (1986). Attorneys fulfill this duty by performing the legal services for which they have been engaged with "such skill, prudence and diligence as lawyers of ordinary skill and capacity commonly possess...." Id., quoting Lucas v. Hamm, 56 Cal.2d 583, 591, 15 Cal.Rptr. 821, 825, 364 P.2d 685, 689 (1961), cert. denied, 368 U.S. 987, 82 S.Ct. 603, 7 L.Ed.2d 525 (1962). 4

Furthermore, if an attorney "specializes within the profession, he must meet the standards of...

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