Resolution Trust Corp. v. Chapman

• Decision Date: 08 September 1994
• Docket Number: No. 93-1514,93-1514
• Parties: RESOLUTION TRUST CORPORATION, Plaintiff-Appellant, v. Henry CHAPMAN, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1120

29 F.3d 1120

63 USLW 2049

RESOLUTION TRUST CORPORATION, Plaintiff-Appellant, v. Henry CHAPMAN, et al., Defendants-Appellees.

No. 93-1514.

United States Court of Appeals, Seventh Circuit.

Argued May 20, 1994.

Decided July 12, 1994.

Rehearing and Suggestion for Rehearing

En Banc Denied Sept. 8, 1994. ^*

William A. Spence (argued), Carole A. Corns, Freeborn & Peters, Walter Jones, Jr., Jorge V. Cazares, Pugh, Jones & Johnson, Chicago, IL, Duane Curtis, Resolution Trust Corp., Legal Div./PLS, Overland Park, KS, David M. FitzGerald, Resolution Trust Corp., Washington, DC, for plaintiff-appellant.

Roy G. Davis (argued), Timothy D. Church, David G. Lubben, Keck, Mahin & Cate, Peoria, IL, Gregg N. Grimsley, Vonachen, Lawless, Trager & Slevin, Peoria, IL, for defendants-appellees.

Before POSNER, Chief Judge, and EASTERBROOK and ROVNER, Circuit Judges.

EASTERBROOK, Circuit Judge.

Eight months ago we held that "Congress 'spoke directly' to the issue of what standard of liability governs suits by the RTC [Resolution Trust Corporation] against officers and directors of failed federally chartered financial institutions." RTC v. Gallagher, 10 F.3d 416, 419 (7th Cir.1993). That standard, we concluded, is gross negligence, according to the terms of 12 U.S.C. Sec. 1821(k).

Here we go again. The RTC is suing the former directors and officers of Security Savings and Loan Association, a failed federally chartered financial institution, on the theory that their negligence damaged the S & L's financial standing and thus injured the federal deposit insurance fund. The portions of the complaint now before us (on an interlocutory appeal under 28 U.S.C. Sec. 1292(b), after the district court dismissed the claims on the pleadings) assert that the directors and officers violated their duty of care by simple negligence, for which the RTC seeks to recover damages.

How, consistent with Gallagher? Well, the RTC disagrees with that decision and seeks to preserve its position for review in the Supreme Court. Done. But the RTC contends that it should prevail even if Gallagher is correct. That is hard to pull off; the opinion in Gallagher held that Sec. 1821(k) establishes a gross negligence standard for officers and directors of federally chartered institutions, of which Security was one. Gallagher is of a piece with other recent decisions emphasizing that when Congress has provided expressly for some subject, courts should not use principles of federal common law to reach different conclusions. E.g., Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., --- U.S. ----, ---- - ----, 114 S.Ct. 1439, 1448-52, 128 L.Ed.2d 119 (1994); Musick, Peeler & Garrett v. Employers Insurance of Wausau, --- U.S. ----, ---- - ----, 113 S.Ct. 2085, 2090-91, 124 L.Ed.2d 194 (1993); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 360-62, 111 S.Ct. 2773, 2781, 115 L.Ed.2d 321 (1991). Courts should be leery of all claims invoking federal common law; suits arising out of bank failures are no exceptions. O'Melveny & Myers v. FDIC, --- U.S. ----, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994).

The RTC sees an opening in the fact that Gallagher did not decide whether Sec. 1821(k) precludes liability under state law. 10 F.3d at 424. According to the RTC, it may recover from Security's directors and officers for simple negligence under Illinois law. Defendants reply that any application of state law is preempted, but this position is untenable. The final sentence of Sec. 1821(k) says: "Nothing in this paragraph shall impair or affect any right of the Corporation under other applicable law." We concluded in Gallagher that the minimum effect of this sentence is that the RTC may take regulatory actions such as removing directors on the basis of simple negligence. 10 F.3d at 420-21. Two courts of appeals have held that this language also ensures that actions based on state law are not preempted. FDIC v. McSweeney, 976 F.2d 532, 537-41 (9th Cir.1992); FDIC v. Canfield, 967 F.2d 443 (10th Cir.1992) (en banc). Even if we doubted the correctness of these holdings, which we do not, we would not think it prudent to create a conflict among the circuits. Clauses similar to the final sentence of Sec. 1821(k) regularly are understood to save state law against claims of preemption. E.g., International Paper Co. v. Ouellette, 479 U.S. 481, 497-500, 107 S.Ct. 805, 814-16, 93 L.Ed.2d 883 (1987); Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, 502 (7th Cir.1989); Myrick v. Fruehauf Corp., 13 F.3d 1516 (11th Cir.1994); cf. Cipollone v. Liggett Group, Inc., --- U.S. ----, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992). Thus the RTC may take advantage of any claims available to it under state law.

Has it any? We may assume that Illinois permits recovery against negligent officers and directors of financial institutions incorporated in that state. Chicago Title & Trust Co. v. Munday, 297 Ill. 555, 131 N.E. 103 (1921). The pivotal question then is the appropriate choice of law. When the subject is liability of officers and directors for their stewardship of the corporation, the law presumptively applicable is the law of the place of incorporation. This venerable choice-of-law principle, known as the internal affairs doctrine, is recognized throughout the states, and by the Supreme Court as well. CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89-93, 107 S.Ct. 1637, 1649-52, 95 L.Ed.2d 67 (1987); First National City Bank v. Banco Para el Comercio Exterior de Cuba, 462 U.S. 611, 621, 103 S.Ct. 2591, 2597, 77 L.Ed.2d 46 (1983); Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 2642, 73 L.Ed.2d 269 (1982); see also 4 Model Business Corporation Act Annotated 1631-42 (3d ed. 1993) (collecting state authority); Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 L. & Contemp. Prob. 161 (1985). Illinois adheres to this principle. 805 ILCS 5/13.05 ("nothing in this Act contained shall be construed to authorize this State to regulate the organization or the internal affairs of such corporation [chartered in another jurisdiction]."). The internal affairs doctrine recognizes the benefits of using one rule of law to determine the duties and liability of directors and officers whose firm may do business in many states. "[O]therwise a corporation could be faced with conflicting demands." Edgar, 457 U.S. at 645, 102 S.Ct. at 2642. See Restatement (2d) of Conflict of Laws Sec. 302 (1971). Cf. Kamen v. Kemper Financial Services Inc., 500 U.S. 90, 105-06, 111 S.Ct. 1711, 1721, 114 L.Ed.2d 152 (1991).

No one doubts that Illinois would apply the law of the place of a bank's incorporation if that place were another state. See Paulman v. Kritzer, 74 Ill.App.2d 284, 219 N.E.2d 541 (2d Dist.1966), affirmed, 38 Ill.2d 101, 230 N.E.2d 262 (1967); see also Treco, Inc. v. Land of Lincoln Savings & Loan Ass'n, 749 F.2d 374, 377 (7th Cir.1984). Until recently a state might have supposed that applying state law to federal banks and savings associations would not present any risk of inconsistent obligations, and therefore would fall outside the logic (if not the formal terms) of the internal affairs doctrine. Multi-state and inter-state banking were rare until the 1980s. Illinois was a unit banking state; no bank doing business in Illinois could have branches. It is therefore not surprising that some Illinois courts treated a bank's place of incorporation as irrelevant; to do business in Illinois was to be "an Illinois bank" without regard to the difference between federal and state incorporation. Fields v. Sax, 123 Ill.App.3d 460, 463-65, 78 Ill.Dec. 864, 867-68, 462 N.E.2d 983, 986-87 (1st Dist.1984) (citing federal and state rules interchangeably for federally chartered bank); Valiquet v. First Federal Savings & Loan Ass'n of Chicago, 87 Ill.App.3d 195, 199-200, 42 Ill.Dec. 212, 408 N.E.2d 921, 925-26 (5th Dist.1979) (same). All of that has changed, however. Illinois now allows multi-state operations, and throughout the state one may find offices of financial institutions incorporated elsewhere. Security was itself a multi-state institution, with branches in North Dakota as well as Illinois. The advent of inter-state banking puts the choice of law question in focus and leads us to apply the internal affairs doctrine to this case. Security held a federal charter, so national law governs the liability of officers and directors for their management.

Although the internal affairs doctrine points to federal law, there is no federal corporate code. Does this mean that the choice-of-law doctrine points nowhere? Not necessarily. Until the last decade, the rules of managerial liability for corporations holding state charters had been developed in common law fashion. Attempts to codify the duty of care, the duty of loyalty, and the business judgment rule are novel developments in corporate law. "[T]he general standard of care imposed on directors was developed by the judiciary as part of the common law duties of directors; statutes defining this duty are a relatively recent phenomenon. Such a definition was first included in the Model [Business Corporation] Act in 1974 in the form of a substantial addition to section 35 of the 1969 Model Act." 2 Model Business Corporation Act Annotated 933 (3d ed. 1993 Supp.). See also ALI, 1 Principles of Corporate Governance: Analysis and Recommendations 134 (1992) ("Historically, courts rather than legislatures have played the central role in shaping the law regarding the duty of care of corporate directors and officers."). Federal courts have no less authority to shape a common law for federal corporations than state courts have had to devise a common law for firms incorporated in their jurisdictions. Bowerman v. Hamner, 250 U.S. 504, 510, 39 S.Ct. 549, 551, 63 L.Ed. 1113 (1919); Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, 35 L.Ed. 662 (1891). See generally Henry J. Friendly, In...