Resolution Trust Corp. v. Camhi

• Decision Date: 26 August 1994
• Docket Number: Civ. No. 3:93CV01257 (TFGD).
• Parties: RESOLUTION TRUST CORPORATION, Plaintiff, v. Ellen P. CAMHI, Anthony W. Caporizzo, William F. Malloy, Jr., Michael G. Morgan, Michael Nadel, William J. Selsberg, and Chester P. Soling, Defendants.
• Court: U.S. District Court — District of Connecticut

861 F. Supp. 1121

RESOLUTION TRUST CORPORATION, Plaintiff, v. Ellen P. CAMHI, Anthony W. Caporizzo, William F. Malloy, Jr., Michael G. Morgan, Michael Nadel, William J. Selsberg, and Chester P. Soling, Defendants.

Civ. No. 3:93CV01257 (TFGD).

United States District Court, D. Connecticut.

August 26, 1994.

COPYRIGHT MATERIAL OMITTED

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Benjamin A. Solnit, David W. Schneider, Patricia E. Reilly, Tyler, Cooper & Alcorn, New Haven, CT, for plaintiff.

J. Daniel Sagarin, Margaret E. Haering, David A. Slossberg, Hurwitz & Sagarin, Milford, CT, for deft. Camhi.

Donna M. Lattarulo, Bruce L. Lev, Lev, Spalter & Berlin, Norwalk, CT, for deft. Caporizzo.

Philip D. Russell, Roy S. Ward, Russell & Ward, Greenwich, CT, for deft. Malloy.

John L. Altieri, Jr., Mudge, Rose, Guthrie, Alexander & Ferdon, New York City, for deft. Morgan.

Elliot R. Warren, Westport, CT, for deft. Nadel.

Garie J. Mulcahey, Bai, Pollock & Dunnigan, Bridgeport, CT, for deft. Selsberg.

Carl M. Porto, Louis M. Federici, Jr., James J. Givlietti, Parrett, Porto, Parese, Colwell & Givlietti P.C., New Haven, CT, for deft. Soling.

RULING ON OBJECTIONS TO RECOMMENDED RULING

DALY, District Judge.

Following the failure of Charter Federal Savings and Loan Association ("Charter Federal"), the Resolution Trust Corporation ("RTC") brought this action against its seven former directors.¹ The defendants moved to dismiss Counts One and Three of the complaint on the ground that the claims they assert are preempted by section 212(k) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. § 1821(k). Upon referral Magistrate Judge F. Owen Eagan recommended that the motions be denied, and the defendants filed timely objections. After de novo review, and for the reasons stated below, the defendants' objections are sustained and the motions to dismiss are granted.

BACKGROUND

True to its name, Charter Federal was a federally chartered savings and loan association which was established on April 19, 1984 and which began operations in Stamford, Connecticut on May 11, 1984. Charter Federal was regulated by the Federal Home Loan Bank Board ("FHLBB"), which required the defendants, as the bank's directors,² to sign a supervisory agreement with the FHLBB on behalf of the institution effective February 16, 1988. The RTC alleges that, despite the FHLBB's warnings and instructions, the defendants authorized unsafe and illegal loans that ultimately led to Charter Federal's collapse on June 30, 1990 with losses of over $5.7 million. The RTC then filed the instant action as receiver of the bank on June 25, 1993, alleging that the defendants' conduct constituted negligence (Count One), gross negligence (Count Two), and a breach of fiduciary duty (Count Three). The defendants have each moved to dismiss Counts One and Three, and Magistrate Judge F. Owen Eagan has recommended that the motions be denied. See Resolution Trust Corp. v. Camhi, 1994 U.S. Dist. LEXIS 8679 (D.Conn. April 6, 1994). Upon the defendants' objections, and pursuant to Federal Rule of Civil Procedure 72, the Court reviews the defendants' motions de novo.

DISCUSSION

Section 212(k) of FIRREA, codified at 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 —

(1) 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 RTC under other applicable law.

12 U.S.C. § 1821(k) (emphasis added).

The defendants argue that Counts One and Three of the complaint should be dismissed because section 1821(k) establishes gross negligence as the exclusive standard of director liability, preempting causes of action predicated on a lesser degree of fault. The defendants further assert that federal law provides the exclusive remedy in an action against former directors of a federally chartered financial institution. The RTC argues in response that both state and federal law apply, and it urges the Court to interpret section 1821(k) to preempt only those state laws that set the standard for director liability at a level higher than gross negligence.

While the interpretation of section 1821(k) is a matter of first impression in this Circuit, various federal courts have found that section 1821(k) preempts state law,³ preempts federal common law,⁴ or preempts neither.⁵ Further, several courts have held that, regardless of the preemptive force of section 1821(k), state law claims cannot be brought against federally chartered financial institutions.⁶ Magistrate Judge Eagan resolved these issues in favor of the RTC, holding that both state and federal law should apply in this action and interpreting section 1821(k) to permit the RTC to bring claims that require less than gross negligence where applicable state law would permit such claims. See Resolution Trust Corp. v. Camhi, 1994 U.S. Dist. LEXIS 8679, *11-13. After careful review of the statute and its legislative history, and in light of several persuasive decisions that were unavailable to the Magistrate Judge, the Court overrules both these findings.

I. Applicability of State Law

Counts One and Three of the complaint can be construed to allege claims under either state or federal common law, requiring the Court to determine which law to apply. The defendants argue that, as Charter Federal was a creature of federal law, only federal law should apply, and they further argue that section 1821(k) establishes the sole standard of director liability under federal law. See, e.g., Deft. Camhi's Mem. at 1, 16. The RTC suggests that the Court may apply Connecticut law to this action. See RTC's Mem. at 6-8, 28. The Court finds the defendants' argument persuasive, particularly in light of the Seventh Circuit's recent decision in Resolution Trust Corp. v. Chapman, 29 F.3d 1120 (7th Cir.1994).

The RTC invokes federal jurisdiction in this action pursuant to 12 U.S.C. § 1441a(l)(1), which states that suits to which the RTC is a party "shall be deemed to arise under the laws of the United States." The Court therefore applies federal choice-of-law principles. See United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). In Chapman the Seventh Circuit addressed the question of which law to apply in a suit pursuant to section 1821(k). See Chapman, 29 F.3d at 1124. On directly analogous facts the Chapman Court applied the "internal affairs" doctrine to hold that federal courts should apply federal law to suits by the RTC against former directors of federally-chartered financial institutions. Id. at 1124.

The internal affairs doctrine developed on the principle that, in order to prevent corporations from being faced with conflicting demands, the authority to regulate a corporation's internal affairs should not rest with several jurisdictions. See Edgar v. Mite Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 2642, 73 L.Ed.2d 269 (1982). Rather, the law of the state of incorporation determines issues relating to a corporation's internal affairs, providing certainty and predictability while generally protecting the justified expectations of parties with interests in the corporation. See CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89-93, 107 S.Ct. 1637, 1649-1652, 95 L.Ed.2d 67 (1987); First Nat. City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 621-22, 103 S.Ct. 2591, 2597-98, 77 L.Ed.2d 46 (1983). The doctrine does not apply where the rights of third parties external to the corporation are at issue, but instead applies to the relationships among or between the corporation and its directors, officers and shareholders. See Banco Para El Comercio, 462 U.S. at 622, 103 S.Ct. at 2597; Rogers v. Guaranty Trust Co., 288 U.S. 123, 130-31, 53 S.Ct. 295, 297-98, 77 L.Ed. 652 (1933); Sadler v. NCR Corp., 928 F.2d 48, 54-55 (2d Cir.1991); CRTF Corp. v. Federated Dept. Stores, Inc., 683 F.Supp. 422, 427 (S.D.N.Y.1988).

The internal affairs doctrine determines the law to apply to this action. Charter Federal was chartered, organized, regulated and insured under federal law, and subsequently also was placed into receivership pursuant to federal law. In essence, Charter Federal "was a creature of federal law `from its cradle to its corporate grave.'" Resolution Trust Corp. v. Gallagher, 800 F.Supp. 595, 603 (N.D.Ill.1992) (quoting Rettig v. Arlington Heights Federal Savings & Loan Assoc., 405 F.Supp. 819, 823 (N.D.Ill. 1975)), aff'd, 10 F.3d 416 (7th Cir.1993). As the receiver for Charter Federal, RTC inherits the corporation's claims, acquiring no more rights against its directors than were possessed by the bank itself. Coit Independence Joint Venture v. Federal Sav. and Loan Ins. Corp., 489 U.S. 561, 585, 109 S.Ct. 1361, 1374, 103 L.Ed.2d 602 (1989).⁷ Federal courts do not apply federal law in order to maximize the federal return following bank failures, however, see O'Melveny & Myers v. Federal Deposit Ins. Corp., ___ U.S. ___, ___, 114 S.Ct. 2048, 2055, 129 L.Ed.2d 67 (June 13, 1994), and courts must "consider the extent to which application of a federal rule would disrupt commercial relationships predicated on state law." Kimbell Foods, 440 U.S. at 729, 99 S.Ct. at 1459 (footnote omitted). The RTC's claims derive solely from the rights of Charter Federal against its former directors, and no rights of third parties are alleged to be at issue. The internal affairs doctrine therefore governs this action and directs the application of federal and not state law. See Banco Para El Comercio, 462...