Federal Deposit Ins. Corp. v. Paul

• Decision Date: 06 March 1990
• Docket Number: Civ. No. 89-C-0065-S.
• Citation: 735 F. Supp. 375
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff, v. Richard PAUL, et al., Defendants.
• Court: U.S. District Court — District of Utah

735 F. Supp. 375

FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff, v. Richard PAUL, et al., Defendants.

Civ. No. 89-C-0065-S.

United States District Court, D. Utah, C.D.

March 6, 1990.

Jathan W. Janove, Fabian & Clendenin, Salt Lake City, Utah, Bruce J. Pederson, Rita W. Ross, Washington, D.C., Denis F. Shanagher, Donald P. Rubenstein, Bronson & McKinnon, San Francisco, Cal., for plaintiff.

John M. Wunderli, Ray G. Martineau, Gary R. Howe, Callister, Duncan & Nebeker, Edward M. Garrett, Garrett & Sturdy, James L. Christensen, Corbridge, Baird & Christensen, Mary A. Wood, John B. Wilson, Parsons, Behle & Latimer, Richard S. Nemelka, Neil A. Kaplan, Clyde & Pratt, Thomas J. Klc, Salt Lake City, Utah, for defendants.

MEMORANDUM DECISION

SAM, District Judge.

This action is before the court on the motion of plaintiff Federal Deposit Insurance Corporation (FDIC) for partial summary judgment and to strike, the motions of defendants Edward Burton and Graham Doxey for summary judgment, and the motion of defendant Robert Rice to dismiss. The remaining defendants join on Doxey's motion for summary judgment.

The FDIC sues former Utah Firstbank (UFB) officers and directors (collectively "the directors"), alleging negligence; breach of fiduciary duties; and breach of contract for their mismanagement of UFB assets, particularly its loan portfolio. The relevant federal statute of limitations bars claims not brought within three years from the date the right of action accrues. This action was commenced three years less one day from the date UFB closed and the FDIC acquired the claims. The directors seek dismissal or summary judgment on their affirmative defense that the action is time-barred under the Utah and federal statutes of limitations. The FDIC moves to strike the affirmative defense and seeks partial summary judgment that the claims were alive under Utah law when the FDIC acquired them and that the action was timely commenced under federal law. Issues central to the present motions are (1) whether, under the doctrine of adverse domination or Utah statute, the claims were alive when the FDIC acquired them, and (2) whether the federal statute of limitations began to run on the date the FDIC acquired the claims or on various earlier dates. After hearing oral argument and reviewing relevant law, the court concludes that both the state and federal statutes of limitations were tolled until the FDIC acquired the claims.¹ Therefore this action was timely commenced, and the directors' affirmative defense is stricken.

I. Facts

From September 14, 1978 to January 24, 1986, UFB was a Salt Lake City, Utah banking corporation with deposits insured under the Federal Deposit Insurance Act. Defendant Richard Paul served, from August 17, 1978 to April 25, 1985, as chairman of the UFB Board of Directors and as a member of the Directors Loan Committee. At various times during this period, Paul acted as chairman of the UFB Loan Committee and as a member of the Asset/Liability Management and Steering Committees. He was also president and CEO of the First Bancorporation (FBC), UFB's holding company, and president of the Foothill Thrift and FTL Leasing, both subsidiaries of FBC. Defendant Harold Turley served, from April 17, 1978 to May 22, 1985, as UFB's president and CEO and as a member of the UFB Board of Directors. The remaining defendants were members of the UFB Board of Directors and held positions on the UFB loan committees; some also acted as directors for FBC and Foothill Thrift.

Soon after UFB was formed, bank examiners began warning its directors of liquidity problems resulting from their lack of supervision over the loan portfolio which showed numerous delinquencies and documentation exceptions, as well as loans allegedly made in violation of state and federal laws. The directors were also criticized for not controlling discretionary expenses. Continual decline in asset quality prompted the Federal Reserve Board to issue a cease and desist order in 1983 which required the directors to improve UFB's loan portfolio. But despite its owning over $50 million in total assets, UFB experienced a net loss of $1.4 million in 1984. The Utah Department of Financial Institutions then imposed on UFB another cease and desist order which found UFB was conducting its business in an unauthorized and unsafe manner that injured its depositors and the public. The order included specific findings that UFB was operating with (1) unsafe lending and collection practices, (2) a disproportionately large volume of poor quality loans, (3) an inordinately large volume of volatile liabilities without sufficient liquidity to meet its obligations, (4) inadequate capital, (5) management whose policies were detrimental to the bank, and (6) a board of directors that had failed to provide adequate direction for active management of the bank. The order also found UFB was expending amounts inconsistent with safe and sound banking practices with respect to senior executive compensation, entertainment and travel, and fees paid to FBC. By the end of 1985, UFB losses exceeded $5 million.

In the spring of 1985, Paul and Turley were forced to resign their UFB positions. Except for defendants Robert Busch, Blaine Hale and Robert Rice,² the remaining defendants continued in their positions until, on January 24, 1986, the Commissioner of Financial Institutions for the State of Utah ordered UFB closed. The same day the FDIC was appointed UFB's receiver and took possession and control of UFB's assets, property and affairs, which were then assigned to the FDIC in its corporate capacity. Among the assets were the instant claims against the officers, directors and employees for the non-performance or manner of performance of their duties. The FDIC commenced this action on January 23, 1989.

The court will first discuss the motions for summary judgment then Rice's motion to dismiss.

II. The Summary judgment motions

Under Fed.R.Civ.P. 56, summary judgment is proper only when the pleadings, affidavits, depositions or admissions establish there is no genuine issue regarding any material fact and the moving party is entitled to judgment as a matter of law. The burden of establishing the nonexistence of a genuine issue of material fact is on the moving party. E.g., Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Whether a fact is material is determined by looking to relevant substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The substantive law governing this case requires consideration of only the undisputed facts.

It is established law that the FDIC may proceed only on claims alive under state law when the FDIC receives them. See Guaranty Trust Co. v. United States, 304 U.S. 126, 58 S.Ct. 785, 82 L.Ed. 1224 (1938) (claim expired under state statute not revived by transfer to federal agency). Therefore the court is presented with a two-step analysis: first, whether the instant claims were time-barred under Utah law when the FDIC received them; and, second, whether the claims are time-barred under § 2415(b). See, e.g., FDIC v. Hudson, 673 F.Supp. 1039 (D.Kan.1987).

A. The viability of the claims under Utah law

The "adverse domination" doctrine tolls statutes of limitations until the allegedly culpable directors no longer control or dominate the bank. FDIC v. Bird, 516 F.Supp. 647, 651 (D.P.R.1981) (fact-similar to this case). The pith of adverse domination is that shareholders have no realistic opportunity to bring suit against the directors because the directors' control of the bank could result in concealment or nondisclosure of the grounds for a cause of action. Bird best expresses the necessity for the doctrine:

Is it logical to assume that the directors, in whom the bank had entrusted the discretion to sue, would authorize the initiation of an action against themselves for their own improprieties? To permit bank directors who control and dominate the affairs of a bank to benefit from their own inaction by finding that, as a matter of law, limitations run from the moment of their commission of improprieties, is a result which justice could not tolerate.

Id. Bird's response to the query is that "in no meaningful sense" could claims against bank directors be sued upon before the bank fails and a receiver is appointed. Id. That reasoning is widely accepted; and, to this court's knowledge, adverse domination principles have been considered expressly or implicitly in every reported decision related to actions against directors of failed banks. See infra note 7 and cases cited infra pp. 379-80.

Utah codified the adverse domination doctrine in Utah Code Ann. § 7-2-23, effective May 1, 1989, which provides in relevant part:

(2) No statute of limitations as to any cause of action against an officer or director of a depository institution begins to run as to the commissioner or any receiver or liquidator appointed under Section 7-2-9 until the date the commissioner takes possession of the institution under this chapter....

Because § 7-2-23 was enacted nearly three months after this action was commenced, the court must determine if the statute should apply to these claims. "Whether legislation affects litigation pending when the legislation becomes effective depends on whether the legislation is substantive or procedural." Docutel Olivetti Corp. v. Dick Brady Systems, Inc., 731 P.2d 475, 478 (Utah 1986); see also Stephens v. Henderson, 741 P.2d 952, 953-54 (Utah 1987). "`Procedural statutes enacted subsequent to the initiation of a suit which do not enlarge, eliminate or destroy vested or contractual rights apply not only to future actions, but also to accrued and pending actions as well.'" Docutel, 731 P.2d at 478 (emphasis added) (quoting State Department of Social Services v. Higgs, 656 P.2d 998 (Utah 1982)); see also Petty v. Clark, 113 Utah 205, ...