Federal Deposit Ins. V. Schuchmann
Decision Date | 19 December 2000 |
Docket Number | No. 99-2085,99-2085 |
Citation | 235 F.3d 1217 |
Parties | (10th Cir. 2000) FEDERAL DEPOSIT INSURANCE CORPORATION, as successor to the RESOLUTION TRUST CORPORATION, as receiver for First American Savings Bank, Plaintiff - Appellant, v. BERNARD SCHUCHMANN, Defendant - Appellee, and TARA SCHUCHMANN, Defendant |
Court | U.S. Court of Appeals — Tenth Circuit |
Appeal from the United States District Court for the District of New Mexico. (D.C. No. CIV-93-1024) [Copyrighted Material Omitted]
[Copyrighted Material Omitted] F. Thomas Hecht, Hopkins & Sutter, Chicago, Illinois, (Claudette P. Miller, Hopkins & Sutter, Chicago, Illinois; Ann S. DuRoss, Assistant General Counsel, Robert D. McGillicuddy, Senior Counsel, and J. Scott Watson, Counsel, Federal Deposit Insurance Corporation, Washington, DC, with him on the briefs) for the appellant.
Alice T. Lorenz, Miller, Stratvert & Torgerson, Albuquerque, New Mexico, (Douglas P. Lobel and John M. Lambros, Kelley, Drye & Warren, LLP, Washington, DC, with him on the brief) for the appellee.
Before ANDERSON, BRORBY and LUCERO, Circuit Judges.
Resolution Trust Corporation ("RTC"), succeeded by the Federal Deposit Insurance Corporation ("FDIC"), brought suit against Bernard Schuchmann alleging state common law claims for breach of fiduciary duty, gross negligence, and negligence for his role in various transactions while chairman of the board and controlling shareholder of First American Savings Bank ("First American"). Following trial, a jury entered a verdict for Schuchmann on all claims. Appealing to us, FDIC primarily challenges several of the court's jury instructions and evidentiary rulings. We consider, inter alia, whether under New Mexico law the district court abused its discretion in failing to instruct the jury that the violation of federal regulations governing savings and loan institutions was negligent as a matter of law. Exercising jurisdiction pursuant to 28 U.S.C. 1291, we affirm in part, reverse in part, and remand to the district court for proceedings consistent with this opinion.
In 1985, a group of Dallas investors led by Bernard Schuchmann acquired First American, a state-chartered savings and loan association. First American converted to a federally-chartered savings and loan in August 1986. At all relevant times the Federal Savings and Loan Insurance Company insured First American. First American's financial condition worsened, and it was put under the receivership of RTC.
In 1993, RTC brought suit against Schuchmann, alleging state common law claims of breach of fiduciary duty, gross negligence, and negligence for his role in various transactions while chairman of the board and controlling shareholder of First American.1 By operation of law, in 1996 FDIC succeeded to the interests of RTC as receiver and was substituted as plaintiff. See 12 U.S.C. 1441a(m)(1).
Three sets of transactions are at issue in this appeal: (1) a $1.8 million loan made to Custer Road Investments in April 1985 ("Custer Road") and subsequently modified; (2) a $1.65 million loan to Omni Real Estate Investments in June 1985 ("Omni"); and (3) the acquisition from 1985-1987 of a group of promissory notes collectively valued at approximately $20 million from Intervest Mortgage Partners I and Intervest Equity Partners (collectively "Intervest").
At trial, evidence of conflicts of interest, adverse domination, and statutory and regulatory violations was presented to the jury. The jury found Schuchmann negligent as to the Custer Road and Omni transactions but declined to award damages because of a lack of proximate cause. The jury found against FDIC on the Intervest note acquisitions and on the issues of gross negligence, breach of fiduciary duty, and adverse domination. FDIC appeals.
We first address FDIC's allegations of erroneous jury instructions. "We review the district court's decision to give a particular jury instruction for abuse of discretion and consider the instructions as a whole de novo to determine whether they accurately informed the jury of the governing law." United States v. Cerrato-Reyes 176 F.3d 1253, 1262 (10th Cir. 1999). "The instructions as a whole need not be flawless, but we must be satisfied that, upon hearing the instructions, the jury understood the issues to be resolved and its duty to resolve them." Medlock v. Ortho Biotech, Inc., 164 F.3d 545, 552 (10th Cir. 1999) (citing Brodie v. Gen. Chem. Corp., 112 F.3d 440, 442 (10th Cir. 1997)).
FDIC contends the district court "gutted" its case when the court refused to give the jury its tendered instruction entitled "Conflicts of Interest." Although a party "is entitled to an instruction on his theory of the case if the instruction is a correct statement of the law and if he has offered sufficient evidence for the jury to find in his favor, [i]t is not error to refuse to give a requested instruction if the same subject matter is adequately covered in the general instructions." Cerrato-Reyes, 176 F.3d at 1262 (internal quotations omitted); see also Woolard v. JLG Indus., Inc., 210 F.3d 1158, 1177 (10th Cir. 2000).
The instruction proffered by FDIC stated:
[A] conflict of interest exists when an officer or director allows an institution to enter into a transaction such that the officer or director puts him or herself into a position in which a conflict may arise between the best interests of the Association and the officer's or director's personal loyalties or personal financial interest, whether direct or indirect.
(Appellant's App. at 237.) It permitted a finding of liability if "the Schuchmanns caused or allowed First American to enter into transactions whereby they placed themselves in a position creating or which could lead to a conflict of interest." (Id.) Similarly, FDIC's second proffered instruction stated that "federal regulations prohibit[] First American's directors from placing themselves in positions creating, or which could lead to, a conflict of interest or even the appearance of a conflict of interest." (Id. at 242.)
As controlling authority for the instructions it proffered, FDIC cites 12 C.F.R. 571.7(b) (1993), which states "each director, officer, or other affiliated person of a savings association has a fundamental duty to avoid placing himself or herself in a position which creates, or which leads to or could lead to, a conflict of interest or appearance of a conflict of interest." The Third Circuit conducted a detailed analysis of the language and history of 571.7(b) and concluded that it does not establish an enforceable standard of care: "[T]he sweeping language of section 571.7(b) indicates it is no more than a statement of policy that a director of a banking institution . . . should use as a guide for personal conduct, not a rule whose violation triggers" liability. Seidman v. OTS (In re Seidman), 37 F.3d 911, 932 (3d Cir. 1994). Relying on Seidman, appellee argues that 571.7(b) does not impose liability but was rather issued merely "as a caution against the risk that is added when an affiliated person . . . has a personal stake in a business transaction his savings institution is considering, a risk inherent in self-dealing." Id. at 931 (citing First Nat'l Bank v. Smith, 610 F.2d 1258, 1265 (5th Cir. 1980)).
The court in Seidman reasoned that "interpretive rules simply state what the administrative agency thinks the statute means, and only remind affected parties of existing duties[, whereas] . . . a substantive or legislative rule, pursuant to properly delegated authority, has the force of law, and creates new law or imposes new rights or duties." Id., 37 F.3d at 931 (internal quotations omitted). We have also held that such a policy statement is "a purely interpretive rule, unpromulgated under the Administrative Procedure Act, see 5 U.S.C. 553(b)(A), and added . . . to help clarify the meaning and application of the various promulgated rules that follow it." Headrick v. Rockwell Int'l Corp., 24 F.3d 1272, 1282 (10th Cir. 1994) (citing Chrysler Corp. v. Brown, 441 U.S. 281, 301-04 (1979)) (further citation omitted). Consequently, although we are sympathetic to the goals of 571.7(b), we are bound by the earlier determination of our Circuit that it does not carry the force of law, and we need not afford it any special deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). See Headrick, 24 F.3d at 1282.
Turning to the district court's instructions, we easily conclude that its fiduciary duty instruction accurately stated the governing law. The trial court also adequately addressed FDIC's conflict of interest theory; it refused FDIC's conflict of interest instructions and instead used an instruction entitled "Breach of Fiduciary Duties." The instruction directed the jury to find against defendant on this claim if plaintiff proved by a preponderance of the evidence that defendant had breached its duty of care or duty of loyalty. It defined the duty of care to require "defendant . . . to exercise the degree of care that an ordinarily prudent and diligent director would exercise under similar circumstances," and defined the duty of loyalty to require defendant "to act with undivided good faith and in the best interests of the institution" and to prohibit "self-dealing." (Appellant's App. at 421.) This instruction is consistent with New Mexico law under which a fiduciary breaches his duty of loyalty "by placing his interests above those of the beneficiary." See Kueffer v. Kueffer, 791 P.2d 461, 464 (N.M. 1990).2 While the instruction does not employ FDIC's preferred wording, it makes clear that defendant could be held liable if he failed to act in the best interest of the bank or if he engaged in self-dealing.
The New Mexico Supreme Court has adopted the following test for determining whether a negligence per se instruction is appropriate:
(1) [T]here must be a statute which prescribes certain...
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