Resolution Trust Corp. v. Cityfed Financial Corp.

Decision Date23 June 1995
Docket Number94-5308,No. 94-5308,Nos. 94-5307,No. 94-5307,94-5307,s. 94-5307
Citation57 F.3d 1231
PartiesRESOLUTION TRUST CORPORATION, in its capacity as receiver for City Savings, F.S.B., and the Resolution Trust Corporation, in its corporate capacity v. CITYFED FINANCIAL CORP.; Richard E. Simmons; K. Michael Defreytas; John W. Atherton, Jr.; Gordon E. Allen; Alfred J. Hedden; Peter R. Kellogg; John Kean, Jr.; Gilbert G. Roessner; George E. Mikula; James P. McTernan; Victor A. Pelson; Marshall M. Criser. RESOLUTION TRUST CORPORATION, in its capacity as receiver for City Savings, F.S.B. v. John W. ATHERTON, Jr.; Gordon E. Allen; Alfred J. Hedden; Peter R. Kellogg; John Kean, Jr.; Gilbert G. Roessner; James P. McTernan. Resolution Trust Corporation, in its capacity as Receiver for City Savings, F.S.B., Appellant inRESOLUTION TRUST CORPORATION v. Alfred J. SCHUSTER; Thomas J. Lynam; Martin R. Siegel; Richard P. Pearlman; Joan C. Moonan, individually and as Executrix of the Estate of Robert J. Moonan; Eugene J. Elias; George Hurley; William B. Brick; James W. Dwyer; Harry H. Jaeger; John R. Hipple; John C. Lauricella; Louis A. Iatarola. Martin R. Siegel, and Joan C. Moonan, as Executrix of the Estate of Robert J. Moonan and individually, Appellants in
CourtU.S. Court of Appeals — Third Circuit

David M. Fitzgerald (argued), April A. Breslaw, Resolution Trust Corp., Litigation Div., Washington, DC, Gerald A. Liloia, Glenn D. Curving, Riker, Danzig, Scherer, Hyland & Perretti, Morristown, NJ, for Resolution Trust Corp., appellant in No. 94-5307.

Ronald W. Stevens (argued), Kirkpatrick & Lockhart, Washington, DC, for John W. Atherton, Jr., Alfred J. Hedden and Gilbert G. Roessner, appellees in No. 94-5307.

Douglas M. Kraus, Skadden, Arps, Slate, Meagher & Flom, New York City, Bruce I. Goldstein, Saiber, Schlesinger, Satz & Goldstein, Newark, NJ, for Gordon E. Allen, Marshall M. Criser, Peter R. Kellogg, and Victor A. Pelson, appellees in No. 94-5307.

John F. Cooney, Ronald R. Glancz, William D. Coston, Melissa Landau Steinman, Venable, Baetjer, Howard, & Civiletti, Washington, DC, Laura V. Studwell, Orloff, Lowenbach, Stifelman, & Siegel, Roseland, NJ, for John Kean, Jr., appellee in No. 94-5307.

Edward J. Dauber (argued), Jeffrey S. Berkowitz, Greenberg, Dauber & Epstein, P.C., Newark, NJ, for Martin R. Siegel, appellant in No. 94-5308.

J. Shane Creamer (argued), Majorie Obod, Dilworth, Paxson, Kalish & Kauffman, Philadelphia, PA, for Joan C. Moonan, individually and as Executrix of the Estate of Robert J. Moonan, appellant in No. 94-5308.

Daniel Kinburn (argued), Susan L. Hall, Williams, Caliri, Miller & Otley, P.C., Wayne, NJ, Lloyd S. Markind, Margret E. Anderson, Arnelle & Hastie, Cherry Hill, NJ, for Resolution Trust Corp., appellee in No. 94-5308.

Frederic J. Schragger, Law Offices of Frederic J. Schragger, Lawrenceville, NJ, for Alfred J. Schuster, Richard P. Pearlman, Eugene J. Elias, Harry H. Jaeger, appellees in No. 94-5308.

Rudolph A. Socey, Jr., Lenox, Socey, Wilgus, Formidoni, & Casey, Trenton, NJ, for Thomas J. Lynam, in No. 94-5308.

Daniel J. Graziano, Brotman & Graziano, Trenton, NJ, for James W. Dwyer, appellee in No. 94-5308.

Stephen W. Armstrong, Montgomery, McCracken, Walker & Rhoads, Philadelphia, PA, for John C. Lauricella, appellee in No. 94-5308.

Before: BECKER, MANSMANN, and ALITO, Circuit Judges.

OPINION OF THE COURT

BECKER, Circuit Judge.

In 1989, Congress enacted Sec. 212(k) of the Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") (codified at 12 U.S.C.A. Sec. 1821(k) (1989)), which provides:

Liability of directors and officers.--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 ... acting as conservator or receiver of such institution ... 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.

12 U.S.C.A. Sec. 1821(k) (emphases added). These interlocutory appeals, brought pursuant to 28 U.S.C.A. Sec. 1292(b) (1993), require us to address, with regard to this provision, two important questions of first impression in this circuit--whether Congress, by its enactment of Sec. 1821(k), (1) preempted state law, and/or (2) displaced federal common law actions that impose liability against directors and officers of insolvent federally insured depository institutions for conduct less culpable than gross negligence (e.g. for ordinary negligence).

Section 1821(k) was passed by Congress in response to the enactment by various states, during the middle and late 1980s, of lenient director liability statutes that generally provided directors with protection from gross negligence claims by limiting the grounds for liability to instances of reckless, willful and wanton boardroom misconduct. This section of FIRREA permits the Resolution Trust Corporation ("RTC") to seek recovery for such directors' and officers' gross negligence, while preserving the RTC's rights under "other applicable law." The particular questions raised by these appeals relate to whether Congress intended its reference to "other applicable law" to include state law and federal common law.

The appeals arise from cases brought by the RTC in the district court for the District of New Jersey on behalf of two insolvent depository institutions--United Savings and Loan of Trenton, New Jersey ("United Savings") and City Federal Savings Bank ("City Federal") in Bedminster, New Jersey--against certain former directors, officers and employees of these institutions ("the defendants"). The RTC brought claims under New Jersey law against former directors and officers of United Savings, a state chartered institution (the "United Savings defendants") and federal common law claims against former directors and officers of City Federal, a federally chartered institution (the "City Federal defendants").

In the United Savings action, the district court denied the defendants' motion for dismissal and summary judgment as to the RTC's state law claims, concluding that Sec. 1821(k) did not preempt any available actions for negligence and breach of fiduciary duty under New Jersey law. In the City Federal action, the district court granted the defendants' motion to dismiss the RTC's federal common law claims, concluding that the enactment of Sec. 1821(k) supplanted any available federal common law actions for negligence and breach of fiduciary duty. 1

Courts of appeals that have considered these issues have concluded that Sec. 1821(k) does not preempt state law, 2 but that it does displace federal common law. 3 We agree that this provision does not preempt any available state law negligence or fiduciary duty claims; however, we disagree with the conclusion that Congress intended by enactment of this statute to supplant the RTC's ability to bring such actions under federal common law. Accordingly, we will affirm the district court's order in the United Savings action and reverse the court's order in the City Federal action.

I. FACTS AND PROCEDURAL HISTORY

The RTC, which has been appointed receiver of both United Savings and City Federal, 4 brought these actions on behalf of both insolvent institutions pursuant to 12 U.S.C.A. Sec. 1821(d)(2)(A)(i) (1989), which provides that the RTC succeeds, upon its appointment as receiver, to all rights, titles, powers and privileges of such institutions, including claims arising out of the conduct of the institutions' directors and officers. See O'Melveny & Myers v. FDIC, --- U.S. ----, ----, 114 S.Ct. 2048, 2054, 129 L.Ed.2d 67 (1994) (recognizing that upon its appointment as receiver, the RTC "obtain[ed] the rights 'of the insured depository institution' that existed prior to receivership" (quoting 12 U.S.C.A. Sec. 1821(d)(2)(A)(i))).

A. United Savings

In the United Savings action, the RTC alleges that the defendants failed to discharge their duties and obligations properly as directors, officers and members of United Savings lending committees in connection with their consideration, approval and subsequent oversight of at least ten large acquisition, development and construction loans made to various borrowers between 1984 and 1990. The RTC's complaint alleges breach of fiduciary duty and ordinary negligence under New Jersey law, as well as gross negligence under both New Jersey law and Sec. 1821(k) in the approval of these loans, which allegedly resulted in a loss to United Savings of approximately $12.7 million.

In particular, the RTC alleges that the defendants violated their duty of care by: (1) not hiring experienced lending underwriters or managers; (2) failing to reduce underwriting guidelines to a written form; (3) approving large loans after closing had already taken place; (4) maintaining inadequate appraisal procedures (often relying on appraisals provided by the borrower); (5) failing to maintain adequate internal controls; (6) not returning funds during the construction phase of commercial properties pending issuance of final occupancy permits; and (7) generally operating United Savings in an unsafe and unsound manner. According to the RTC, the defendants continued these practices despite warnings by regulators, outside directors and accountants. The RTC does not allege, however, any self-dealing, conflict of interest, bad faith or fraud on the part of the defendants.

In response to the RTC's complaint, the defendants moved to dismiss, or in the alternative for summary judgment, as to all New Jersey law claims based on ordinary negligence or breach of fiduciary duty, arguing...

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