Resolution Trust Corp. v. Hess

• Citation: 820 F. Supp. 1359
• Decision Date: 16 April 1993
• Docket Number: Civ. No. 92-C-141G.
• Parties: RESOLUTION TRUST CORPORATION, Plaintiff, v. Frank C. HESS, William Hinchman, James Needham, and Steven E. Clyde and Betha J. Clyde, as Executors of the Estate of Edward W. Clyde, Defendants.
• Court: U.S. District Court — District of Utah

820 F. Supp. 1359

RESOLUTION TRUST CORPORATION, Plaintiff, v. Frank C. HESS, William Hinchman, James Needham, and Steven E. Clyde and Betha J. Clyde, as Executors of the Estate of Edward W. Clyde, Defendants.

Civ. No. 92-C-141G.

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

April 16, 1993.

COPYRIGHT MATERIAL OMITTED

Jathan W. Janove, Salt Lake City, UT, and Denis F. Shanagher, San Francisco, CA, for plaintiff.

Dale A. Danneman, Phoenix, AZ, John D. Gordan, New York City, and James S. Jardine, Salt Lake City, UT, for defendants.

MEMORANDUM DECISION AND ORDER

J. THOMAS GREENE, District Judge.

This matter came before the court on defendants' Motion to Dismiss, or in the alternative to Strike Allegations of the Complaint and for a More Definite Statement. Plaintiff Resolution Trust Corporation ("RTC") was represented by Jathan W. Janove and Denis F. Shanagher. Defendants were represented by Dale A. Danneman, John D. Gordan, and James S. Jardine. The parties filed extensive memoranda, after which the court heard oral argument and took the matter under advisement. Now being fully advised, the court renders its Memorandum Decision and Order.

FACTUAL BACKGROUND

Resolution Trust Corporation ("RTC") brought this action under state and federal law for negligence, breach of fiduciary duty, and negligence per se against former directors of the now defunct American Savings and Loan Association ("American Savings"), headquartered in Salt Lake City, Utah. Plaintiff RTC alleges that defendants proximately caused damages in excess of $80 million by failing properly to supervise American Savings' lending practices. More particularly, RTC alleges that defendants failed to investigate potential borrowers, failed to institute a reasonable and adequate loan policy, failed to institute sufficient changes in response to regulatory criticism, and failed to restrict lending to a certain geographic area. RTC does not allege gross negligence, self-dealing, or bad faith.

American Savings converted to a federal charter in 1987. The relevant conduct in this action occurred before 1987 while American Savings was a Utah chartered institution. On February 17, 1989, the Federal Home Loan Bank Board ("FHLBB") declared American Savings insolvent, and appointed the Federal Savings and Loan Insurance Corporation ("FSLIC") as conservator. In June, 1990, pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183 (codified as amended in scattered sections of 12 U.S.C.), the FHLBB was replaced by the Office of Thrift Supervision ("OTS"). Pursuant to Title V of FIRREA, the OTS appointed RTC as receiver of American Savings. As receiver, RTC took possession of all of American Savings' assets and liabilities, and succeeded to the rights and privileges of the shareholders, depositors, and creditors pursuant to 12 U.S.C. §§ 1441a(b)(4) and 1821(d)(2)(A).

Defendants filed this Motion to Dismiss contending that RTC has failed to state a claim upon which relief can be granted. In the alternative, defendants move for a more definite statement. After considerable review, the court grants defendants' motion to dismiss in part, and denies it in part.

ANALYSIS

When ruling on a motion to dismiss, the court presumes that the allegations in the plaintiff's complaint are true. Jackson v. Integra, Inc., 952 F.2d 1260, 1261 (10th Cir. 1991). The complaint will not be dismissed unless it appears that the plaintiff cannot prove facts entitling it to relief. Id.; Curtis Ambulance of Florida, Inc. v. Board of County Comm'rs, 811 F.2d 1371, 1375 (10th Cir.1987) (citing Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974)).

I. WHETHER STATE LAW CLAIMS MAY BE ASSERTED AGAINST DIRECTORS OF STATE CHARTERED, FEDERALLY INSURED SAVINGS AND LOAN INSTITUTIONS WHICH LATER CONVERT TO A FEDERAL CHARTER.

RTC's claims for negligence and breach of fiduciary duty are brought under Utah law. Defendants argue that because American Savings became a federally chartered institution in 1987, state law is inapplicable to this case.

A. State Claims Against Directors of Federally Chartered Institutions.

The Supreme Court has recognized that Congress "delegated to the OTS broad authority to establish and regulate `a uniform system of savings and loan institutions where there are not any now' and to `establish them with the force of a national charter.'" Fidelity Fed. Sav. and Loan Ass'n v. de la Cuesta, 458 U.S. 141, 166, 102 S.Ct. 3014, 3029, 73 L.Ed.2d 664 (1982) (citations omitted). In so doing, "Congress plainly envisioned that federal savings and loans would be governed by what the OTS—not any particular State—deemed to be the `best practices.'" Id. at 162, 102 S.Ct. at 3027 (citing 12 U.S.C. § 1464(a)); Downriver Community Fed. Credit Union v. Penn Square Bank, 879 F.2d 754, 758 (10th Cir. 1989), cert. denied, 493 U.S. 1070, 110 S.Ct. 1112, 107 L.Ed.2d 1019 (1990).

In keeping with this broad regulatory mandate, the OTS has been given the "plenary and exclusive authority ... to regulate all aspects of the operations of Federal savings associations...." 12 C.F.R. § 545.2 (1992). When that authority is exercised, it is "preemptive of any state law purporting to address the subject of the operations of a federal savings association." Id. Manifestly, the OTS has a right to preempt conflicting state law. Such a conflict arises (1) "when compliance with both federal and state regulations is a physical impossibility," de la Cuesta, 458 U.S. at 153, 102 S.Ct. at 3022 (quoting Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43, 83 S.Ct. 1210, 1217, 10 L.Ed.2d 248 (1963)), or (2) when state law "stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Id. (quoting Hines v. Davidowitz, 312 U.S. 52, 61 S.Ct. 399, 85 L.Ed. 581

Federal savings and loan institutions are federally chartered, federally regulated, federally insured, and federally organized. Such comprehensive coverage leaves little or no room for state law claims. Resolution Trust Corp. v. Gallagher, 1992 WL 315218 at * 2-3 (N.D.Ill. Oct. 23, 1992); Federal Sav. and Loan Ins. Corp. v. Olano, 1989 WL 54226 at * 1, 1989 U.S.Dist. LEXIS 5469 at * 1 (E.D.La. May 17, 1989). Allowing state law to govern the actions of directors of federal savings and loan associations would result in different and conflicting standards of conduct in the different states, thus impeding Congress' goal of treating such institutions in a uniform manner. For these reasons, it is apparent that as a general rule federal law exclusively governs the internal affairs of federal savings and loan associations, including director liability. However, this determination does not necessarily determine the matter of applicable law in the case of state chartered, federally-insured associations.

B. State Claims Against Directors of State Chartered Institutions Converted to Federally Chartered Institutions.

American Savings was originally a state chartered institution, but converted to a federal charter in 1987. All of the conduct alleged in the complaint occurred while American Savings still operated under its state charter. Defendants argue, however, that federal law should be RTC's exclusive remedy regardless of when American Savings converted to a federal charter.

The Northern District of Illinois, in Federal Deposit Ins. Corp. v. Miller, 781 F.Supp. 1271 (N.D.Ill.1991), faced this same question. The court in Miller held that since state law applied to the directors during the period in which the allegedly negligent conduct took place, state law was applicable to those actions even though the savings and loan institution later converted to a federal charter. Id. at 1276. This court agrees.

In the case at bar, Utah law governed defendants' conduct during the period alleged in the complaint. Defendants should not be able to avoid liability for past acts by simply adopting a federal charter. Hence, for purposes of this action during the relevant time period, American Savings will be treated as a state chartered, federally-insured savings and loan association. Accordingly, for the period prior to its acquisition of a federal charter, RTC may pursue claims against American Savings as provided by Utah law unless such are preempted under federal law.

II. WHETHER FEDERAL LAW (FIRREA) PREEMPTS STATE LAW OR FEDERAL COMMON LAW CLAIMS BASED UPON ORDINARY NEGLIGENCE

In this action, RTC has only alleged ordinary negligence. Defendants contend that § 212(k) of FIRREA, 12 U.S.C. § 1821(k), preempts state law as well as federal common law and establishes a minimum federal liability standard of gross negligence. In this regard, 12 U.S.C. § 1821(k) provides:

A director or officer of an insured depository institution may be held personally liable for monetary damages in any civil action by, on behalf of, or at the request or direction of the Corporation ... for gross negligence, including any similar conduct or conduct that demonstrates a greater disregard of a duty of care (than gross negligence) including intentional tortious conduct, as such terms are defined and determined under applicable state law. Nothing in this paragraph shall impair or affect any right of the Corporation under other applicable law. (Emphasis added.)

In Federal Deposit Ins. Corp. v. Canfield, 967 F.2d 443 (10th Cir.), cert. dismissed, ___ U.S. ___, 113 S.Ct. 516, 121 L.Ed.2d 527 (1992), the Tenth Circuit held that § 1821(k) does not preempt state laws which permit an action against directors based upon simple negligence.¹ The court in Canfield soundly rejected the argument that the purpose of § 1821(k) was to place a limitation on officer and director liability:

"May" is a permissive term, and it does not imply a limitation on the standards of director and officer liability. FIRREA enables the FDIC to stand in the shoes of the failed bank

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