FDIC v. Raffa

Decision Date30 March 1995
Docket NumberCiv. No. 3:94CV21(AVC).
Citation882 F. Supp. 1236
PartiesFEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of Community National Bank of Glastonbury v. Frank S. RAFFA, George W. Hannon, Jr., Allen M. DePersia, Peter B. Deich, Robert B. Doyle, William A. Fochi, Barbara K. Bailey, Raymond S. Derr, Pamela S. Diamond, Robert F. Dickau, Sr., Paul E. DiSanto, George E. Durstin, and Robert Saglio.
CourtU.S. District Court — District of Connecticut

COPYRIGHT MATERIAL OMITTED

Steven L. Feldman, Mark S. Baldwin and John Russotto of Brown, Rudnick, Freed & Gesmer, Hartford, CT, and Jane W. Glander, Emmett, Fins & Glander, Stamford, CT, for F.D.I.C.

Kenneth A. Cohen, Goodwin, Procter & Hoar, Boston, MA, for defendants.

COVELLO, District Judge.

Over objection, the recommended ruling is approved, ratified and adopted.

It is so ordered.

RECOMMENDED RULING ON DEFENDANTS' MOTIONS TO DISMISS AND MOTIONS FOR PARTIAL JUDGMENT ON THE PLEADINGS

(# 105, 107, 114, 124, 125, 138, 190, 195-1, 195-2)

EAGAN, United States Magistrate Judge.

This Court has been asked to determine the appropriate standard of liability to which the officers and directors of Community National Bank of Glastonbury, Connecticut (CNB), a federally chartered financial institution, are to be held accountable.

The FDIC contends that the officers and directors of CNB are liable for simple negligence, gross negligence, and for breach of fiduciary duty in violation of applicable Connecticut law,1 as well as gross negligence in violation of applicable federal law. The defendants contend they are liable only for gross negligence, or conduct in excess of gross negligence, in accord with federal law.2

The defendants set forth three reasons why these motions should be granted. First, 12 U.S.C. § 1821(k) explicitly preempts state law and establishes a uniform standard of liability of gross negligence for officers and directors of financial institutions. Second, even if state law were applicable in general, here, CNB is a federally chartered bank. Defendants contend that only federal law applies to the liability of officers and directors of a federally chartered bank. Third, the defendants assert that the application of state law to a federally chartered bank violates principles of federalism.

For the following reasons, the Court finds that 12 U.S.C. § 1821(k) does not preempt state law. Officers and directors of CNB may be liable for simple negligence, gross negligence, or for breach of fiduciary duty. Further, the fact that CNB is federally chartered does not immunize CNB's officers and directors from liability under state law. Finally, the application of state law to a federally chartered financial institution does not violate principles of federalism. Therefore, defendants' Motions to Dismiss and Motions for Judgment on the Pleadings are all DENIED.3

I. BACKGROUND

When determining the validity of a motion to dismiss, the Court must assume all facts alleged to be true, drawing all reasonable inferences in favor of the plaintiff. Update Traffic Systems, Inc. v. Gould, 857 F.Supp. 274, 279 (E.D.N.Y.1994) (citing, Ferran v. Town of Nassau, 11 F.3d 21, 22 (2nd Cir.1993)). See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). A motion to dismiss will be granted only if it is clear that the plaintiff can prove no set of facts as grounds for relief. Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2nd Cir.1994) (citing, Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957)).

For the purposes of deciding these motions, the Court accepts as true the following facts and allegations. CNB commenced banking operations on July 15, 1985, as a national banking institution. On January 11, 1991, the Office of the Comptroller of the Currency declared CNB to be insolvent and the bank was closed. The defendants in this action all served as either officers or directors of CNB during its period of operation. The FDIC contends that the failure of CNB was due, in part, to the misconduct of the defendants. This action has been brought against thirteen (13) former officers and directors of CNB. The complaint sets forth four causes of action: (1) state common law negligence, (2) state common law gross negligence, (3) gross negligence under 12 U.S.C. § 1821(k); and (4) state law breach of fiduciary duty.4 The defendants seek to dismiss Counts I, II, and IV of the Complaint.

II. DISCUSSION

Courts are sharply divided over the determination of the proper standard of care applicable to an officer or director of a financial institution. Some courts hold that officers and directors are only liable for gross negligence under federal law.5 Other courts hold that officers and directors may also be liable for claims of simple negligence, or breach of fiduciary duty, if such claims are cognizable pursuant to state law.6 This issue has even split district courts within the Second Circuit.7

A. 12 U.S.C. § 1821(k)

A determination of the applicable liability of an officer or director of a financial institution requires the construction of Section 212(k) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 12 U.S.C. § 1821(k). Statutory interpretation begins with the plain language of the law. Federal Deposit Insurance Corp. v. Canfield, 967 F.2d 443, 445 (10th Cir.), cert. dismissed, ___ U.S. ___, 113 S.Ct. 516, 121 L.Ed.2d 527 (1992). Absent a clearly expressed legislative intent to the contrary, that language must ordinarily be regarded as conclusive. Id. (quoting Kaiser Aluminum & Chemical Corp. v. Bonjorno, 494 U.S. 827, 833-34, 110 S.Ct. 1570, 1574-75, 108 L.Ed.2d 842 (1990)).

12 U.S.C. § 1821(k) provides:

A director or officer of an insured depository institution may be held personally liable for monetary damages in any civil action by, on behalf of, or at the request or direction of the Corporation, which action is prosecuted wholly or partially for the benefit of the Corporation —
(1) acting as conservator or receiver of such institution,
(2) acting based upon a suit, claim or cause of action purchased from, assigned by, or otherwise conveyed by such receiver or conservator, or
(3) acting based upon a suit, claim or cause of action purchased from, assigned by, or otherwise conveyed in whole or in part by an insured depository institution or its affiliate in connection with assistance provided under § 1823 of this title, for gross negligence, including any similar conduct or conduct that demonstrates a greater disregard of a duty of care (than gross negligence) including intentional tortious conduct, as such terms are defined under applicable State law. Nothing in this paragraph shall impair of affect any right of the Corporation under other applicable law.

12 U.S.C. § 1821(k) (emphasis added).

1. § 1821(k) Does Not Explicitly Preempt State Law

The defendants contend that the first sentence of § 1821(k) establishes a uniform standard of liability of gross negligence for officers and directors of financial institutions and explicitly preempts state law recognizing claims for simple negligence or for breach of fiduciary duty. The defendants argue that an important purpose of federal banking regulation is to establish uniform national standards governing the operation of federally insured financial institutions. Defendants assert that FIRREA was enacted to establish such a uniform standard of liability for directors and officers of financial institutions. Defendants reason that state law allowing a lesser standard of liability conflicts with FIRREA's purpose of national uniformity. Further, the defendants contend that the preservation of state law simple negligence claims would eviscerate 1821(k)'s gross negligence standard. The Court does not agree.

Preemption of state law should not be presumed absent a clear manifestation of federal intent. Canfield, 967 F.2d at 448. Here, the plain language of § 1821(k) states: "a director or officer of an insured depository institution may be held personally liable ... for gross negligence." 12 U.S.C. § 1821(k) (emphasis added). If Congress intended to preempt state law and limit the FDIC only to claims alleging gross negligence, Congress would have inserted the words "may only ... be liable for gross negligence" in the statute. Federal Deposit Insurance Corp. v. McSweeney, 976 F.2d 532, 537 (9th Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 2440, 124 L.Ed.2d 658 (1993). Defendants' interpretation tortures the statutory language chosen by Congress. Id. See Rose v. Rose, 481 U.S. 619, 627-628, 107 S.Ct. 2029, 2034-35, 95 L.Ed.2d 599 (1987) (Congress' choice of word "may" authorizing action by federal agency does not imply exclusivity and does not imply preemption of state law); Resolution Trust Corp. v. Lightfoot, 938 F.2d 65, 66-67 (7th Cir.1991) ("may" does not, on its face, mean "may only"); Federal Deposit Insurance Corporation v. McSweeney, 772 F.Supp. 1154, 1158 (S.D.Cal. 1991) (standard norms of statutory construction prohibit court from implying exclusivity when Congress has not used exclusive language), affirmed, 976 F.2d 532 (9th Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 2440, 124 L.Ed.2d 658 (1993).

The last sentence of § 1821(k) also supports the conclusion that § 1821(k) does not preempt state law. The last sentence is a savings clause which provides: "Nothing in this paragraph shall impair or affect any right of the FDIC under other applicable law." See 12 U.S.C. § 1821(k). If Congress intended to protect officers and directors of financial institutions from state claims for simple negligence or for breach of fiduciary duty, Congress would have no reason to preserve "other applicable law."

By saving "other applicable law," Congress left it to the states to decide the propriety of a simple negligence standard. Canfield, 967 F.2d at 448. Unlike a legislature, this Court is not in a position to consider the possible detrimental...

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