Fed. Deposit Ins. Corp. v. Ching

• Decision Date: 26 May 2016
• Docket Number: No. 2:13-cv-01710-KJM-EFB,2:13-cv-01710-KJM-EFB
• Citation: 189 F.Supp.3d 978
• Court: U.S. District Court — Eastern District of California
• Parties: Federal Deposit Insurance Corporation as Receiver for Butte Community Bank, Plaintiff, v. Robert Ching, et al., Defendant.

189 F.Supp.3d 978

Federal Deposit Insurance Corporation as Receiver for Butte Community Bank, Plaintiff,

v.Robert Ching, et al., Defendant.

No. 2:13-cv-01710-KJM-EFB

United States District Court, E.D. California.

Signed May 26, 2016

Filed May 27, 2016

Anthony S. Burt, PHV, David C. Giles, PHV, Lawrence Heftman, PHV, Schiff Hardin LLP, Chicago, IL, Eliot Steven Jubelirer, Jean-Paul P. Cart, Schiff Hardin, LLP, San Francisco, CA, for Plaintiff.

Kevin Douglas Hughes, Linda Jung Kim, Tisdale and Nicholson, LLP, Los Angeles, CA, for Defendant.

ORDER

Kimberly Mueller, UNITED STATES DISTRICT JUDGE

The Federal Deposit Insurance Corporation (FDIC),¹ acting as receiver for Butte Community Bank (the Bank), brought this lawsuit against several of the Bank's former officers and directors. Its case concerns a series of transactions in the first half of 2008. The FDIC alleges these transactions were the directors' attempt to strip the Bank of cash and assets it desperately needed to weather the 2008 financial crisis. The directors aver they intended nothing untoward but rather designed the transactions to benefit the Bank's shareholder and maintain a respectable return on equity.

In this motion the FDIC seeks summary judgment on all but one of the directors' affirmative defenses. The court held a hearing on February 26, 2016. Jean-Paul Cart and David Giles appeared for the FDIC, and Kevin Hughes appeared for the directors. For the following reasons, the motion is granted in part.

I. EVIDENTIARY OBJECTIONS

As a preliminary matter, the parties have made several evidentiary objections. Because the defendants have withdrawn six of their affirmative defenses, the court overrules as moot any objections to evidence the FDIC relies on solely with respect to these withdrawn defenses. All but one of the remaining evidentiary disputes concern evidence that does not influence the court's decision here, most notably the directors' motivations in approving the transaction at issue and the Bank's financial state between 2006 and 2009. See Defs.' Resp. Stmt. Undisputed Material Facts (UMF) nos. 5–13, ECF No. 128-1. These objections are also overruled as moot.

The exception is Exhibit 31 to the declaration of the FDIC's attorney, Jean-Paul Cart. Exhibit 31 is a copy of an April 11, 2008 email from John Coger to Robert Hartline attaching a "Comparative Statement of Condition and the addendum for the newsletter." Cart Decl. Ex. 31, ECF No. 124-34. Mr. Cart avers Exhibit 31 is a true and correct copy of an exhibit discussed during the deposition of John Coger. Cart Decl. ¶ 32. Mr. Coger agreed during his deposition that he composed the email and described the attachments, providing a sufficient foundation for its consideration in this order. See Coger Dep. 312–18. The directors appear to object, however, that the exhibit is hearsay if relied upon for its truth. See UMF no. 8. That objection is overruled. When presented by the FDIC, Mr. Coger's statements are those of the FDIC's opponent, and are not hearsay. See Fed. R. Evid. 801(d)(2).

II. UNDISPUTED FACTS

The Bank opened in 1990. Compl. ¶ 21, ECF No. 1; Answer ¶ 12, ECF No. 7. Twelve years later, in 2002, Community Valley Bancorp (CVB) acquired all the Bank's outstanding shares. Compl. ¶¶ 25–26; Answer ¶¶ 15–16. CVB existed primarily as a holding company for the Bank and other subsidiaries, and CVB's principle source of income was dividends paid from its shares in the Bank. Compl. ¶ 26; Answer ¶ 16.

The defendants in this case are Robert Ching, Eugene Even, Donald Leforce, Luther McLaughlin, Robert Morgan, James Rickards, Gary Strauss, Hubert Townshend, John Coger and Keith Robbins, who were directors of both the Bank and CVB beginning in 2004, with the exception of Luther McLaughlin, who served in those capacities first in 2006.² See Compl. ¶¶ 6–16; Answer ¶¶ 5–8.

In spring 2008 and "for a long time" before that, the directors were concerned about concentrations of loans in the Bank's debt portfolio. Coger Dep. 317–28. In 2008, John Coger forwarded a statement to include in the Bank's newsletter, which warned that the "subprime housing debacle has had a dramatic effect on real estate construction loans," and that the downturn in the market for subprime loans had a negative effect on the Bank. Id. at 316; Cart Decl. Ex. 31, at 2, ECF No. 124-34. CVB's 2009 Form 10-K reported that between 2007 and 2009, CVB's net income declined from about a positive $6.5 million to a net loss of about $27.5 million. Cart Decl. Ex. 7, at 3, ECF No. 124-10.³

During this same period of time, in early 2008, the directors approved a three-part transaction. See Robbins Decl. ¶ 3, ECF No. 128-3; Coger Decl. ¶ 3 & Ex. A, at 7. First, the Bank would sell seven of its branch properties and lease back the buildings. Robbins Decl. ¶ 3. Second, using the cash influx from the sale, the Bank would distribute a dividend of $8.8 million to CVB, its sole shareholder. Id. And third, CVB would combine that $8.8 million with about $4.2 million of its own cash to fund a $13 million tender offer for about one million CVB shares. Id. The transaction was completed in May 2008. Compl. ¶ 37; Answer ¶ 26.

The directors were among CVB's shareholders at the time of this three-part transaction. See, e.g. , Morgan Dep. 143. The FDIC has presented evidence that at least one of the directors' motivations for this transaction was to allow the directors to sell larger numbers of their shares at higher prices than they would otherwise have been able. Id. at 142–47. Robert Morgan testified in his deposition that the dividend transaction was part of his "exit strategy" for retirement. Id.

On August 20, 2010, the California Department of Financial Institutions closed the Bank, and the FDIC was appointed as receiver. UMF no. 1.

III. PROCEDURAL HISTORY

The FDIC alleges the three-part transaction described above stripped the Bank of needed cash, enriched the directors, and caused the Bank's failure. It filed its complaint in this court on August 19, 2013, asserting four claims: common law negligence; gross negligence under 12 U.S.C. § 1821(k), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA); gross negligence under California Corporations Code section 309 ; and breaches of fiduciary duties. Compl., ECF No. 1.

Early on in the case, the directors moved for summary judgment. They argued several specific provisions of the California Corporations and Finance Codes, the "dividend statutes," preempted the FDIC's claims of negligence and breaches of fiduciary duty. Mot. Summ. J., ECF No. 19. They also challenged the FDIC's standing under FIRREA, and argued Corporations Code section 309 gives rise to no independent right of action. Id. The court denied summary judgment on the second and third claims under FIRREA and section 309. Order July 8, 2014, at 10, ECF No. 40. The court held that section 309 set forth the applicable standard of care, regardless of the directors' compliance with the dividend statutes. Id. at 6–10. The court granted summary judgment on the common law claims for negligence and breach of fiduciary duties, finding these claims were preempted by section 309. Id. at 10.

In December 2014, the directors again moved for summary judgment, arguing section 309 could not serve as the basis of the FDIC's FIRREA and section 309 claims because the dividend statutes addressed in their earlier motion were more specific and relevant, and as a matter of statutory interpretation, these more specific sections provided the rule of decision rather than the general rule of section 309. Mem. Summ. J. at 4–9, ECF No. 45. They also argued the FDIC lacked standing to bring any dividend-related claim. Id. at 9–16. The court determined the FDIC had constitutional and statutory standing and found the directors' statutory interpretation arguments reiterated those of their first motion. Order July 27, 2015, ECF No. 86. The court also disagreed that irreconcilable differences between the dividend statutes and section 309 prevented application of section 309 in this case. Id. at 10–12.

The directors requested clarification and reconsideration of the court's second order in August 2015. ECF No. 94. They requested the court clarify that the FDIC would lack standing under section 309 were it to stand solely in the shoes of the Bank's depositors. Because the court had already concluded the FDIC had standing under section 309, it found the requested additional finding would not meaningfully narrow any dispute and declined to make the clarification requested. Order Dec. 1, 2015, at 2, ECF No. 117. The defendants also requested the court reconsider its decision that a director may be liable under section 309, even if she complied with the specific statutes defining impermissible dividends. The motion was denied because the directors had advanced many of the same arguments raised in their previous motions, or variations of the same arguments. Id. at 3.

The FDIC filed its current motion on January 22, 2016. ECF No. 124-1. It moves for partial summary judgment on seventeen of the directors' eighteen affirmative defenses. The defense it does not address is the directors' assertion that the FDIC's claims are "barred by the business judgment rule." Answer at 11. The defendants opposed the motion in part. ECF No. 128. They withdrew six of their affirmative defenses: failure to mitigate damages, contributory and comparative negligence, supervening causation, estoppel, waiver, and laches. They also clarified that they did not intend their eighteenth affirmative defense as an affirmative defense, but as a reservation of the right to amend their list of defenses. See id. at 15–16. This leaves the following ten defenses within the scope of the FDIC's motion: failure to state a claim upon which relief may be granted; unclean hands; the statute of limitations; accord and satisfaction; release; the FDIC's lack of legal capacity in this case; offset; statutory...