Fed. Deposit Ins. Corp. v. Mahajan

• Decision Date: 12 February 2013
• Docket Number: No. 11 C 7590.,11 C 7590.
• Citation: 923 F.Supp.2d 1133
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for Mutual Bank, Plaintiff, v. Amrish MAHAJAN, Arun Veluchamy, Anu Veluchamy, Steven Lakner, Ronald Tucek, Patrick McCarthy, Paul Pappageorge, Richard Barth, Thomas Pacocha, James Regas, and Regas Frezados & Dallas LLP, Defendants.
• Court: U.S. District Court — Northern District of Illinois

923 F.Supp.2d 1133

FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for Mutual Bank, Plaintiff,

v.Amrish MAHAJAN, Arun Veluchamy, Anu Veluchamy, Steven Lakner, Ronald Tucek, Patrick McCarthy, Paul Pappageorge, Richard Barth, Thomas Pacocha, James Regas, and Regas Frezados & Dallas LLP, Defendants.

No. 11 C 7590.

United States District Court,

N.D. Illinois,

Eastern Division.

Feb. 12, 2013.

F. Thomas Hecht, Alexander Jacob Darr, Dean J. Polales, Kristopher J. Stark, Richard Henry Tilghman, Tina B. Solis, Ungaretti & Harris LLP, Chicago, IL, for Plaintiff.

Steven Marc Malina, Beth Anne Black, Greenberg Traurig, LLP, Chicago, IL, for Defendants, Amrish Mahajan, and Thomas Pacocha.

Randall Marc Lending, Chad Allen Schiefelbein, Joshua David Nichols, Vedder Price PC, Chicago, IL, for Defendants, Arun Veluchamy, and Anu Veluchamy.

Kim M. Ruckdaschel–Haley, Kirstin Dawn Kanski, Susan E. Barnes, Lindquist & Vennum, PLLP, Minneapolis, MN, Michael S. Loeffler, Todd H. Thomas, Loeffler Thomas Touzalin LLP, Northbrook, IL, for Defendants, Steven Lakner, Ronald Tucek, Patrick McCarthy, and Paul Pappageorge.

Jeffrey R. Tone, John M. George, Nancy Anne Temple, Katten & Temple, LLP, Chicago, IL, for Defendants, Richard Barth, and James Regas.

Geoffrey Alexander Belzer, Michael P. Tone, Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, Chicago, IL, for Defendants, James Regas.

Alvin R. Becker, Deane B. Brown, Beermann Swerdlove, Woloshin, Barezky, Becker, Et Al, Edward Fitzsimmons Dunne, Newton C. Marshall, Karbal Cohen Economou Silk Dunne LLC, Chicago, IL, for Defendant, Regas, Frezados & Dallas LLP.

MEMORANDUM OPINION AND ORDER

VIRGINIA M. KENDALL, District Judge.

Plaintiff Federal Deposit Insurance Corporation(the “FDIC”) as receiver for Mutual Bank (the “Bank”) sued the Defendants for gross negligence under the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”), together with various state law claims including negligence, breach of fiduciary duty, and the wasting of corporate assets. The claims arise from the Bank's loss of $115 million and subsequent business failure allegedly as a result of risky construction and commercial real estate loans and the improper expenditure of corporate assets for personal use by the Defendants. Defendants have asserted numerous affirmative defenses, including the defenses of failure to mitigate, comparative fault, superseding/intervening cause, lack of proximate cause, and waiver and estoppel. FDIC moves to strike these affirmative defenses ¹ and to strike Defendants' reservation of rights to assert additional defenses. For the reasons stated herein, FDIC's motion is granted.

BACKGROUND²

Starting in 2005, the Illinois Department of Financial and Professional Regulations (the “IDFPR”) began conducting examinations of the investment practices of the Bank and delivering written reports about the results of those examinations and recommended changes to the board of directors of the Bank. Starting in 2006, the FDIC also began examining the Bank and delivering written reports of its findings. After several years of examinations and the delivery of increasingly dire reports and recommendations from both the IDFPR and the FDIC about the Bank's risk management practices, its record asset growth in the high-risk commercial real estate loans for hotels, gas stations, and convenience stores, and its lack of increase in staffing to keep pace the size of the loan portfolio, the IDFPR closed the Bank on July 31, 2009 and appointed FDIC as receiver. As receiver, FDIC succeeded to all rights, titles, power and privileges of the Bank. See12 U.S.C. §§ 1821(d)(2)(A)(i). As receiver, the FDIC is charged with collecting monies owed to the institution and distributing the funds to the Bank's creditors. See12 U.S.C. § 1821(d)(2)(B)(ii); 1821(d)(11). FDIC is also authorized by statute to pursue claims against directors and officers of the Bank for alleged breaches of the applicable standard of care. See12 U.S.C. § 1821(k).

On October 25, 2011, the FDIC initiated this suit against Defendants, each of whom was a director, officer, board member, and/or attorney for the Bank. The Defendants filed motions to dismiss that this Court granted in part and denied in part by opinion dated July 26, 2012, 2012 WL 3061852. Defendants' answers to the Amended Complaint include nine separate affirmative defenses. FDIC has moved to strike six of them, three of which have been pleaded by all Defendants.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(f) the court “may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Fed.R.Civ.P. 12(f). Motions to strike are generally disfavored but may be used to expedite a case and “remove unnecessary clutter.” Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1294 (7th Cir.1989); see also Williams v. Jader Fuel Co., Inc., 944 F.2d 1388, 1400 (7th Cir.1991); Bank of America N.A. v. Shelbourne Dev. Group, Inc., 732 F.Supp.2d 809, 815 (N.D.Ill.2010) (quoting Davis v. Elite Mortgage Servs., 592 F.Supp.2d 1052, 1058 (N.D.Ill.2009) (“It is appropriate for the court to strike affirmative defenses that add unnecessary clutter to a case.”)) Affirmative defenses will be stricken only when it is clear that the plaintiff would “succeed despite any state of the facts which could be proved in support of the defense.” Williams, 944 F.2d at 1400 (internal quotation omitted).

I. Waiver and Estoppel: Pre–Receiver Conduct of the FDIC

The conduct alleged by FDIC against Defendants involves Defendants' management and control of the Bank, the Bank's investments, and the Bank's investment management procedures during the years leading up to the closure of the Bank and the appointment of the FDIC as receiver. See Veluchamy v. FDIC, 706 F.3d 810 (7th Cir.2013) (“The FDIC is most typically known as the federal agency that insures the accounts of a bank's depositors, but it also serves as a bank overseer and regulator.”) Using substantially similar (if not identical) language, each of the Defendants has pleaded the affirmative defense of waiver and estoppel based on the conduct of the FDIC during the regulatory and investigatory phase of the FDIC's examination of the Bank. As pleaded by Defendants, the conduct forming the basis of the waiver and estoppel defenses is conduct that took place prior to the closure of the Bank and appointment of the FDIC as receiver.

The conduct of the FDIC during its pre-receivership regulation of the Bank cannot be grounds for an affirmative defense, because regulatory conduct of the FDIC falls into the “discretionary conduct” exception to the Federal Tort Claims Act (the “FTCA”). See United States v. Gaubert, 499 U.S. 315, 111 S.Ct. 1267, 113 L.Ed.2d 335 (1991) (barring claims asserted against a predecessor of the FDIC premised on that agency's regulatory conduct). The Gaubert court reviewed the history of the “discretionary function” exception to the FTCA as applied to the Federal Home Loan Bank Board (FHLBB), a savings & loan regulatory agency that merged into the FDIC via FIRREA shortly before the Gaubert ruling. See Gaubert, 499 U.S. at 318 n. 1, 111 S.Ct. 1267 (explaining the dissolution of the FHLBB and grant of FHLBB's regulatory authority to the FDIC). See id. at 322–24, 111 S.Ct. 1267 (reviewing history of the discretionary function exception). Applying the exception to the regulatory conduct of the FHLBB, the Gaubert court concluded that “[d]ay-to-day management of banking affairs, like the management of other businesses, regularly requires judgment as to which of a range of permissible courses is the wisest” and that “each of the regulatory actions in question involved the kind of policy judgment that the discretionary function exception was designed to shield.” Id. at 325, 332, 111 S.Ct. 1267. Specifically, Gaubert held as follows: “If a regulation allows the employee discretion, the very existence of the regulation creates a strong presumption that a discretionary act authorized by the regulation involves consideration of the same policies which led to the promulgation of the regulations.” Id. at 324, 111 S.Ct. 1267.

While Gaubert discussed claims made against the United States, the reasoning of the opinion applies with equal force to affirmative defenses pleaded against a government agency because of that agency's discretionary acts. See Resolution Trust Corp. v. Gallagher, 1992 WL 370248 at *5 (N.D.Ill. Dec. 2, 1992) (“Although Gaubert involved an affirmative claim against the government while the present motion addresses the affirmative defenses raised in response to a suit brought by the [Resolution Trust Corporation], the jurisprudence following Gaubert clearly provides that Gaubert is applicable to affirmative defenses.”); see also FDIC v. Wells, 1995 WL 387580 (N.D.Ill. June 27, 1995) (striking affirmative defenses based in improper pre-closing regulatory conduct by the FDIC); FDIC v. Cheng, 832 F.Supp. 181, 186 (N.D.Tex.1993) (finding “affirmative defenses based on federal regulatory conduct before or after the failure of [bank] legally insufficient”)' FDIC v. Stanley, 770 F.Supp. 1281, 1309 (N.D.Ind.1991) (declining to consider regulatory conduct of FDIC in deciding whether to reduce damages because FDIC's actions are discretionary).

Defendants have no response to Gaubert or its direct application to the fact that the parties do not dispute that the FDIC was acting in its regulatory capacity during the pre-receivership period. Rather, Defendants argue that the continued assertion of this affirmative defense against the FDIC will not prejudice the FDIC during discovery since the FDIC will need to investigate the regulatory aspects of the case in any event in order to prove its case in chief. But the fact that the area of discovery may be investigated in any event does not alter the benefit of removing the “unnecessary clutter” of legally impermissible...