Federal Sav. and Loan Ins. Corp. v. Butler
| Decision Date | 31 May 1990 |
| Docket Number | 88-15601,Nos. 88-15600,s. 88-15600 |
| Citation | 904 F.2d 505 |
| Parties | FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, a corporation, * Plaintiff-Appellant, v. David L. BUTLER, Defendant-Appellant, and Miles A. Cobb; James Grauer; Bryant J. Brooks, Jr.; Fred F. Enemark; E. Tim Ching; John Y. Chiang; Joseph L. Loetterle; Cynthia Murphy; William Nagel; Michael A. Heren; and Richard A. Bryant, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Eugene J. Comey, Tuttle & Taylor, Daniel Johnson, Jr., and William S. Freeman, Cooley Godward Castro Huddleson & Tatum, Washington, D.C., for plaintiff-appellant.
William M. Goodman, Topel & Goodman, San Francisco, Cal., for defendant-appellant Butler.
Gary S. Anderson, Farella, Braun & Martel, San Francisco, Cal., for defendant-appellee Cobb.
Barry D. Hovis, Adams, Sadler & Hovis, San Francisco, Cal., for defendant-appellee Grauer.
Nance F. Becker, Rogers, Joseph, O'Donnell & Quinn, San Francisco, Cal., for defendant-appellee Ching.
James A. Lassart, Ropers, Majeski, Kohn, Bentley, Wagner & Kane, San Francisco, Cal., for defendant-appellee Chiang.
Karl Olson, Cooper, White & Cooper, San Francisco, Cal., for defendant-appellee Loetterle.
Susan Raffanti, Law Offices of Paul Delano Wolf, Oakland, Cal., for defendant-appellee Murphy.
David M. Blicker, Sacramento, Cal., for defendant-appellee Nagel.
Paul J. Dion, Feldman, Waldman & Kline, San Francisco, Cal., for defendants-appellees Heren and Bryant.
Jonathan Bass, Coblentz, Cahan, McCabe & Breyer, San Francisco, Cal., for defendant-appellee Brooks.
Appeal from the United States District Court for the Northern District of California.
Before WRIGHT, HUG, and LEAVY, Circuit Judges.
This interlocutory appeal under 28 U.S.C. Sec. 1292(b) (1988) concerns an action by the Federal Savings and Loan Insurance Corporation ("FSLIC") against officers and directors of Bell Savings and Loan Association ("Bell Savings"), alleging that they wrongfully caused Bell Savings to lose millions of dollars as a result of reckless and speculative lending, fraudulent transactions, and self-dealing. FSLIC entered into a settlement agreement with one defendant, David Butler ("Butler"). The agreement specified that it was to be governed and construed under the laws of California. FSLIC and Butler moved to confirm the settlement as being in good faith under applicable California statutes. The effect of the statutes is to establish the amount to be set off against the claims of nonsettling defendants and to bar contribution and indemnity claims by them against Butler. The district court ruled that the settlement was in good faith and that under the terms of the settlement agreement the claims against the nonsettling defendants are to be reduced by $165.5 million. FSLIC contends that the district court misinterpreted California law and that the setoff should only be $8.4 million.
The issue specified by FSLIC in its section 1292(b) petition to this court was that the district court erred in construing California law concerning the effect of the settlement agreement. For the first time on appeal, FSLIC contends in its opening brief that federal common law should apply in construing the effect of the settlement agreement and that the district court erred in not applying it.
We hold that California law applies in this case, but that the district court erred in applying it. We therefore reverse and remand.
This action was initially brought by Bell Savings after a regular examination revealed evidence that Butler, Bell Savings' board chairman and largest shareholder, had profited from undisclosed self-dealing transactions involving Bell Savings. Butler's resignation was demanded, further investigation ensued, and this action was instituted.
In July, 1985, the Federal Home Loan Bank Board ("FHLBB") placed Bell Savings, a California state-chartered, federally insured thrift institution, in receivership pursuant to 12 U.S.C. Sec. 1729(c)(1) (1988) (repealed 1989). FHLBB then appointed FSLIC as receiver, which immediately assigned the claims asserted in this action to FSLIC in its corporate capacity.
FSLIC substituted itself for Bell Savings as plaintiff, and filed a Second Amended Complaint against 33 defendants, alleging that certain officers, directors, borrowers, and others wrongfully caused Bell Savings to incur millions of dollars of damages as a result of reckless and speculative lending, fraudulent transactions, and self-dealing. Specifically, the complaint asserts 46 state law counts (including fraud, conspiracy to defraud, breach of fiduciary duty, breach of indemnity agreement, fraudulent conversion, negligence, and unjust enrichment and constructive trust) and one federal law count (for violations of the Racketeer Influenced and Corrupt Organizations ("RICO") statute, 18 U.S.C. Secs. 1962(a)-(d) (1988)).
On February 16, 1987, Butler, the only person named in all 47 counts of FSLIC's complaint, entered into a settlement agreement with FSLIC. In this agreement, Butler admitted defrauding Bell Savings in connection with five transactions and breaching his fiduciary duties in connection with more than 50 other loan transactions. FSLIC and Butler stipulated that Butler was obligated to pay damages of $165.5 million. According to FSLIC, the $165.5 million figure was based on the actual losses of over $220 million incurred by Bell Savings as a result of the more than 50 loan transactions in which Butler and the other director and officer defendants were involved, discounted by a factor representing litigation risk.
Under the terms of the settlement agreement, Butler agreed to transfer to FSLIC all his stock in Bell National Corporation, the bankrupt parent of Bell Savings, and $290,000 in cash. He also agreed to cooperate with FSLIC in prosecuting its claims against the remaining defendants. Finally, Butler agreed to assign 90% of his rights to the proceeds of specified insurance policies, and all of his rights to pursue claims for breach of the covenant of good faith and fair dealing by the insurance carrier. 1 The directors' and officers' liability insurance issued to Bell Savings contained a limit of liability equal to $10 million for each loss and a $10 million aggregate limit of liability each policy year for each director and officer. Butler made a demand on the insurance carrier to accept an offer by FSLIC to settle its claims against Butler for his policy limits of $10 million, less defense costs. The insurance carrier rejected the offer. It contended that $10 million was the total coverage existing for all officers and directors in all of the transactions.
FSLIC placed considerable significance on the value of the insurance claim. It contended that under the language of the policy and California insurance law, the carrier could be liable for more than the policy limits for a bad faith refusal to settle. Thus, FSLIC contended that Butler's acknowledgement of liability for $165.5 million and the refusal to settle within policy limits could result in the insurance carrier's obligation to cover this entire amount.
At the time of the settlement agreement, there were alternate methods by which an injured party could proceed against the carrier of the insured tortfeasor for bad faith refusal to settle. One alternative was a direct action under Cal.Ins.Code Sec. 790.03 (West Supp.1990), which had been held to be authorized under Royal Globe Ins. Co. v. Superior Court, 23 Cal.3d 880, 153 Cal.Rptr. 842, 592 P.2d 329 (Cal.1979). The second alternative was to bring an action against the insurance carrier as the assignee of the insured. In either case, it was essential that the liability of the insured first be determined before the action was brought. A judgment after a trial on the claim of the injured party against the insured obviously would be such a determination of liability. There also was case authority, however, that an admission of liability by the insured was adequate to meet the determination of liability requirement. See Heninger v. Foremost Ins. Co., 175 Cal.App.3d 830, 833, 221 Cal.Rptr. 303, 305 (Cal.Ct.App.1985); Rodriguez v. Fireman's Fund Ins. Co., Inc., 142 Cal.App.3d 46, 53, 190 Cal.Rptr. 705, 709 (Cal.Ct.App.1983). FSLIC states that the purpose for requiring Butler's admission of liability for $165.5 million was to meet the foundational requirement of "a determination of liability." 2
One of the provisions of the settlement agreement expressly stipulated that California law would govern the terms of the agreement. In March, 1988, Butler filed a motion, which was joined by FSLIC, for the court to determine that the settlement was made in good faith pursuant to Cal.Civ.Proc.Code Secs. 877, 877.6 (West Supp.1990). The settling parties requested that Butler's consideration under the agreement be valued at $8.4 million and the setoff be in that amount. 3 Several of the nonsettling defendants filed a cross-motion to set off their pending claims by $165.5 million, the amount of Butler's admitted liability stipulated in the agreement.
Applying California law, the district court ruled that the settlement did not qualify for good faith approval if the setoff was $8.4 million because that amount was disproportionately low as compared to Butler's proportionate share of liability. The trial court granted the nonsettling defendants' cross-motion, holding that the nonsettling defendants were entitled to a $165.5 million setoff against their potential liability to FSLIC. In granting this motion, the court also found the agreement, as thus interpreted, to be made in good faith. The court then certified the order for interlocutory appeal under 28 U.S.C. Sec. 1292(b) (1988). FSLIC and Butler both appealed, and we permitted the interlocutory appeal. 4
FSLIC argues on appeal that this court should adopt a federal common law settlement bar rule for FSLIC...
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