Resolution Trust Corp. v. Sands

• Decision Date: 09 September 1994
• Docket Number: Civ. A. No. 3:93-CV-0956-D.
• Parties: RESOLUTION TRUST CORPORATION, in its corporate capacity, Plaintiff, v. John B. SANDS, David K. Sands, Laurie H. Sands Harrison, Martin Hearne, Curtis Todd Miller, Richard L. Park, James D. Alexander, Donald W. Crisp, individually and as Trustee of the Caroline Hunt Trust Estate, and William F. Conger, Defendants.
• Court: U.S. District Court — Northern District of Texas

863 F. Supp. 365

RESOLUTION TRUST CORPORATION, in its corporate capacity, Plaintiff, v. John B. SANDS, David K. Sands, Laurie H. Sands Harrison, Martin Hearne, Curtis Todd Miller, Richard L. Park, James D. Alexander, Donald W. Crisp, individually and as Trustee of the Caroline Hunt Trust Estate, and William F. Conger, Defendants.

Civ. A. No. 3:93-CV-0956-D.

United States District Court, N.D. Texas, Dallas Division.

September 9, 1994.

COPYRIGHT MATERIAL OMITTED

John A. Scully, John M. Sjovall, and Mike Bennett (argued), of Cowles & Thompson, and Sabrina C. Arellano and Andrew F. Emerson, of Arellano & Emerson, Dallas, TX, for plaintiff.

Schuyler B. Marshall (argued) and Stephen C. Rasch, of Thompson & Knight, George M. Kryder, III and J. Stuart Tonkinson, of Carrington, Coleman, Sloman & Blumenthal, L.L.P., and Rosemary Stewart of Akin, Gump, Strauss, Hauer & Feld, Dallas, TX, for defendants.

FITZWATER, District Judge:

In this action by plaintiff Resolution Trust Corporation, in its corporate capacity ("RTC"), to recover from directors and officers of a failed savings and loan on theories of negligence, gross negligence, and breach of fiduciary duty, the RTC moves to strike certain affirmative defenses. One of the principal questions presented by the motion is whether the Supreme Court's recent decision in O'Melveny & Myers v. FDIC, ___ U.S. ___, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994), displaces Fifth Circuit law that precludes directors and officers from maintaining certain affirmative defenses. The RTC also moves the court to limit the scope of discovery regarding alleged negligence of pre-closure regulatory activities and post-closure regulatory management of the assets of the failed institution.

For the reasons set out, the court holds that O'Melveny & Myers does not disturb existing Fifth Circuit precedent, at least insofar as it controls resolution of the present motion, and that the RTC's motion to strike and to limit discovery should be granted in part and denied in part.

I

Plaintiff RTC brings this action in its corporate capacity against certain directors and officers of the failed Southwest Savings Association ("Southwest"), contending they are liable on claims of negligence, gross negligence, and breach of fiduciary duty for acts or omissions committed in these capacities.¹ In sum, the RTC alleges that defendants failed to exercise adequate care and diligence in the administration, direction, and management of the affairs of Southwest, and generally failed to carry out their respective duties as directors or officers, thereby causing or allowing Southwest to make, secure, renew, or collect loans (particularly commercial real estate loans) in an abnormal, imprudent, or unsafe manner, and causing or allowing Southwest to operate in a way that was fiscally unsound. The RTC charges that defendants' failure properly to discharge their duties proximately caused Southwest to incur substantial damages arising from various commercial real estate transactions.

Defendants are litigating this case in two groups. The first is composed of defendants who served at relevant times as directors of Southwest (the "Director Defendants"), including John B. Sands, David K. Sands, Laurie Sands Harrison, and Donald W. Crisp ("Crisp"), individually and as Trustee of the Caroline Hunt Trust Estate.² The second consists of defendants who served at relevant times as Southwest officers (the "Officer Defendants"), including H. Martin Hearne ("Hearne"), C. Todd Miller ("Miller"), Richard L. Park ("Park"), and James D. Alexander.³

According to the RTC's complaint, Southwest was a state-chartered stock savings and loan association. Following multimillion dollar losses in 1988 and 1989 attributable to deficient commercial real estate loans, the Office of Thrift Supervision ("OTS") placed Southwest under RTC conservatorship on May 18, 1990. On June 15, 1990 the OTS appointed the RTC as receiver of Southwest. As receiver, the RTC succeeded to all rights, titles, and privileges of Southwest with respect to its assets, including claims against Southwest's officers and directors. On the same day that the RTC became receiver, it transferred all of Southwest's assets, including the claims the RTC asserts in this lawsuit, to Southwest Federal Savings Association ("Southwest Federal"). Also on the same day, the OTS appointed the RTC as conservator of Southwest Federal. On July 26, 1991 the OTS appointed the RTC as receiver of Southwest Federal. As receiver, the RTC succeeded to all of the rights, titles, and privileges of Southwest Federal with respect to its assets, including the claims against Southwest's officers and directors. On or about the same day, the RTC as receiver of Southwest Federal entered into a contract of sale whereby it transferred certain of Southwest Federal's assets, including the claims asserted in the present case, to the RTC in its corporate capacity.

The RTC moves pursuant to Fed.R.Civ.P. 12(f)⁴ to strike certain of the affirmative defenses⁵ that defendants have alleged.⁶ It also asks the court to limit the scope of discovery concerning the alleged negligence of pre-closure regulatory activities and post-closure regulatory management of South-west's assets.

Pursuant to Rule 12(f), the court may strike "from any pleading any insufficient defense." Fed.R.Civ.P. 12(f). An affirmative defense is insufficient, within the meaning of Rule 12(f), if the defense cannot as a matter of law succeed under any circumstance. FDIC v. Isham, 782 F.Supp. 524, 530 (D.Colo.1992). Although motions made pursuant to Rule 12(f) are viewed with disfavor and are infrequently granted, see FDIC v. Niblo, 821 F.Supp. 441, 449 (N.D.Tex.1993) (Cummings, J.), the court may strike affirmative defenses in appropriate cases. See, e.g., id. (granting motion to strike certain affirmative defenses).

Rule 26(c)(4) permits the court to limit the scope of discovery.

II

Before reaching the specific grounds of the RTC's motion, the court determines whether the Supreme Court's recent decision in O'Melveny & Myers alters in any material respect the Fifth Circuit's earlier opinion in FDIC v. Mijalis, 15 F.3d 1314 (5th Cir.1994), aff'g in part, rev'g in part 800 F.Supp. 397 (W.D.La.1992). The question whether O'Melveny & Myers has an effect on Mijalis must be addressed because Mijalis directly controls the resolution of certain of the issues presented by this motion. This court is obligated to follow a legally indistinguishable Fifth Circuit panel opinion unless the decision has been "overruled en banc or by the United States Supreme Court." Campbell v. Sonat Offshore Drilling, Inc., 979 F.2d 1115, 1121 n. 8 (5th Cir.1992); MCI Tel. Corp. v. United Showcase, Inc., 847 F.Supp. 510, 512 (N.D.Tex.1994).

Both O'Melveny & Myers and Mijalis were decided after the parties completed their briefing of the instant motion, but prior to oral argument. Defendants maintain that O'Melveny & Myers "absolutely overruled" the rationale of Mijalis and like cases. See Tr. Oral Arg. at 57. The RTC counters that Mijalis and similar opinions stand undisturbed. The court holds, for the reasons discussed below, that O'Melveny & Myers does not overrule Mijalis insofar as it is apposite to the RTC's motion to strike.⁷

A

The starting point for analyzing this question is the Mijalis opinion and a Seventh Circuit decision, FDIC v. Bierman, 2 F.3d 1424 (7th Cir.1993), aff'g FDIC v. Stanley, 770 F.Supp. 1281 (N.D.Ind.1991), from which Mijalis draws some of its reasoning. See Mijalis, 15 F.3d at 1324 (agreeing with Bierman's "cogent analysis" of question whether the FDIC has post-closure duty to mitigate damages in suit against former officers and directors of failed financial institution).

In Mijalis the Fifth Circuit addressed inter alia whether the affirmative defense of failure to mitigate damages could be asserted against the FDIC "when it sues former directors and officers in its corporate capacity to recover losses sustained by an insolvent financial institution and covered by the national insurance fund." Id. The panel agreed with the Seventh Circuit's Bierman decision and held, "for the reasons stated in that case," that the FDIC is not subject in such circumstances to the affirmative defense of failure to mitigate damages. Id. (citing Bierman, 2 F.3d at 1438-41). Bierman had reasoned that an action by the FDIC in its corporate capacity against directors and officers who allegedly have breached their duties to the bank is an asset purchased by the FDIC. Bierman, 2 F.3d at 1439. The FDIC has a duty to manage such assets in order to replenish funds expended from the insurance fund that have been used to cover the losses that the directors and officers allegedly caused. Id. When the FDIC undertakes this task it must act in the public interest, replenish the insurance fund, and maintain confidence in the soundness of the national banking system. Id. "Congress has made it clear that the FDIC is to exercise its discretion in choosing a course of action in its efforts to replenish the fund." Id. When the FDIC acts to refill the fund, "it has no duty to attempt to mitigate the damages attributed to the directors and officers by seeking other, perhaps less sure, avenues of relief." Id. at 1439-40. Further, when the FDIC initiates a suit against such persons, it is performing a discretionary function. The discretionary function exception to the Federal Tort Claims Act ("FTCA"), 28 U.S.C. § 2680(a), insulates the FDIC from affirmative defenses when it sues in its corporate capacity to recover from directors and officers. Id. at 1440-41.

The Mijalis panel also decided that, because the FDIC is not subject to the affirmative defense of mitigation of damages, the defendants were "not entitled to attack the causation element of the FDIC's case by showing that the FDIC's acts and omissions caused the damages it sought to recover from the defendants." Mijalis, 15 F.3d at 1327....