Resolution Trust Corp. v. Gregor

• Decision Date: 01 December 1994
• Docket Number: No. 94 CV 2578 (ARR).,94 CV 2578 (ARR).
• Citation: 872 F. Supp. 1140
• Parties: RESOLUTION TRUST CORPORATION, in its corporate capacity, Plaintiff, v. Harry C. GREGOR, et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

872 F. Supp. 1140

RESOLUTION TRUST CORPORATION, in its corporate capacity, Plaintiff, v. Harry C. GREGOR, et al., Defendants.

No. 94 CV 2578 (ARR).

United States District Court, E.D. New York.

December 1, 1994.

Richard W. Beckler, Michael G. McGovern, Fulbright & Jaworski, Washington, DC, Edward Dolido, Fulbright & Jaworski, New York City, for defendant Anthony A. Sirianni.

Jonathan Sinnreich, Jay Safar, Sinnreich, Wasserman, Grubin & Cahill, New York City, for plaintiff Resolution Trust Corp.

CORRECTED OPINION AND ORDER

ROSS, District Judge:

This motion to dismiss, like many others which have been decided in a number of courts during the last several years, requires an interpretation of the preemptive force of both the Home Owners' Loan Act of 1933 ("HOLA") and § 212(k) of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") (codified at 12 U.S.C. § 1821(k)). The Resolution Trust Corporation (the "RTC") brings this suit in its corporate capacity against the former directors of Westerleigh Savings, FSLA ("Westerleigh"), seeking to recover losses resulting from the federally-chartered savings and loan's ("S & L") 1991 failure.

Defendants now seek to dismiss the First and Fourth Claims, which are premised on simple negligence, and the Third and Sixth Claims, alleging liability for defendants' negligent breach of their fiduciary duty of care. While all parties acknowledge that the RTC's "gross negligence" claims are viable under the section, defendants urge a holding that § 1821(k) precludes the RTC from seeking any damages premised on simple negligence.¹ Based on the extensive briefing and oral argument that both sides have provided on this topic, I find defendants' conclusion unwarranted by the language of the statute, and I deny in its entirety their motion to dismiss.

FACTUAL BACKGROUND

Westerleigh began in 1894 as a state-chartered S & L servicing the neighborhoods of Staten Island. With deregulation, Westerleigh, like many other S & Ls, converted from a state-chartered institution to a federally-chartered one in 1982, although it remained a primarily local institution. Transcript of Oral Argument held Nov. 10, 1994 (hereinafter "Tr.") at 49-50, 53-54. A period of expansion ensued, after which, on May 30, 1991, the Office of Thrift Supervision declared Westerleigh insolvent and appointed the RTC receiver. The following year, the RTC in its capacity as receiver of Westerleigh transferred various assets to the RTC in its corporate capacity, including rights in all actions, judgments or claims possessed by RTC-receiver against the former directors of Westerleigh.

In its efforts to recoup costs, the RTC now seeks damages from the former directors of numerous S & Ls, including Westerleigh. Among its claims are several premised on a "simple negligence" standard.

Defendants' Contentions

As defendants acknowledged at oral argument, Tr. at 5, the success of their primary argument hinges on a single premise—that federally-chartered savings and loans since their inception have been creatures of federal law, wholly-governed by HOLA. Defendants' Reply Brief (hereinafter "Def.Repl.") at 7. According to defendants, if HOLA mandates the exclusive application of federal law to all aspects of the federal savings and loan industry, then HOLA's silence on any issue involving federal S & Ls obligates courts to fashion a federal common law rule. For example, HOLA does not address the specific standard of liability of federal S & L directors, and therefore defendants contend that, before the passage of FIRREA, federal courts by necessity created their own rule of decision on this issue.

Defendants' argument continues that in enacting FIRREA's § 1821(k), Congress specifically intended to legislate a uniform standard of "gross negligence" for director liability. Because all federal common law in conflict with the language of a specific federal statute is preempted, defendants urge that § 1821(k) necessarily preempts the federal common law of director liability, leaving viable only actions charging "gross negligence" or worse, and warranting dismissal of the RTC's claims for simple negligence and breach of fiduciary duty. Under this line of reasoning, regardless of whether applicable state law might remain intact under § 1821(k), all federal common law is preempted, and because federal S & Ls are wholly governed by federal law, federal S & Ls are, post-FIRREA, wholly governed by the "gross negligence" standard.

Although the Second Circuit has not explicitly addressed this issue, defendants cannot have failed to note the all-but-unanimous case law in other jurisdictions concluding that § 1821(k) does not preempt any otherwise applicable state law imposing on directors a stricter standard of care than gross negligence. See, generally, Ronald W. Stevens and Bruce H. Nielson, The Standard of Care for Directors and Officers of Federally Chartered Depository Institutions, 13 Ann.Rev.Banking L. 169, 173 n. 17 (1994) (discussing the majority rule). As a result, defendants argue that their case is not governed by this settled case law, but rather by certain emerging (and unsettled) authority in other circuits—best exemplified by the opinion in RTC v. Gallagher, 800 F.Supp. 595, 602 (N.D.Ill.1992), as aff'd by 10 F.3d 416 (7th Cir.1993)—holding that § 1821(k) preempts federal common law to set a national standard of gross negligence for the directors of federal institutions. It is this authority that defendants seek to invoke to shield themselves against the RTC's claims.

DISCUSSION

HOLA Preemption

The necessary starting point in this discussion is HOLA and an analysis of whether, as defendants assert, Congress intended HOLA to preempt any and all state laws speaking to the liability of directors of federally-chartered S & Ls. Congress enacted HOLA in the early 1930s, during the Depression, to ameliorate conditions created by widespread failures in the savings and loan industry. The scheme was intended as "a radical and comprehensive response to the inadequacies of the existing state systems." Conference of Federal Sav. & Loan Assocs. v. Stein, 604 F.2d 1256, 1257 (9th Cir.1979), aff'd, 445 U.S. 921, 100 S.Ct. 1304, 63 L.Ed.2d 754 (1980). In enacting HOLA, Congress set out a general framework and left the regulatory details to the Federal Home Loan Bank Board (the "Bank Board").² The Supreme Court held that the Bank Board's authority to regulate federal S & Ls was virtually unlimited. Fidelity Federal Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 162-63, 102 S.Ct. 3014, 3027, 73 L.Ed.2d 664 (1982). Therefore, where either HOLA or the Bank Board's regulations addressed a particular question pertaining to federal S & Ls, any conflicting state rule was automatically preempted. But the different question presented here is whether, even in the absence of an explicit federal statute or regulation governing some aspect of federal S & Ls, a nonconflicting state rule is preempted nevertheless.

As the Supreme Court has noted, the preemption doctrine is rooted in the Supremacy Clause, U.S. Const., Art. VI, cl. 2. de la Cuesta, 458 U.S. at 152, 102 S.Ct. at 3022. If Congress intends, either explicitly or implicitly, to displace state law completely, the federal statute or regulation will supersede the state rule. Rice v. Santa Fe Elevator Corp, 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947), rev'd on other grounds, Rice v. Board of Trade of City of Chicago, 331 U.S. 247, 67 S.Ct. 1160, 91 L.Ed. 1468 (1947). Where Congress has not completely displaced state regulation in a particular area, federal law may still preempt state law where "compliance with both federal and state law is a physical impossibility," Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143, 83 S.Ct. 1210, 1217-18, 10 L.Ed.2d 248 (1963), or where the state rule is "an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 404, 85 L.Ed. 581 (1941).

Defendants argue that federal law exclusively governs federally-chartered savings and loans. Def.Repl. at 7 ("state law can have no application to federally-chartered savings and loan associations"). There is indeed authority in other circuits holding that the federal HOLA scheme has since its inception completely preempted state law. As one article concluded,

a consensus existed among the federal courts that because federally chartered savings and loan associations were subject to comprehensive federal regulation `from their corporate cradle to their corporate grave,' federal law alone governed their internal affairs, including the issue of officers' and directors' liability.

(internal citations omitted) Stevens and Nielson, The Standard of Care, 13 Ann.Rev.Banking L. 169, 173-74 (1994).³

The statutes and regulations governing federally-chartered savings and loans are broad. Nevertheless, as defendants acknowledge, the federal scheme does not address director liability. Tr. at 6, 9 (defendants' counsel stated that "there is not a specific CFR cite that we could locate that talks about the duty of care ... admittedly, we look to the regulation to see if there is something that speaks directly to fiduciary duties and, admittedly, that's not there").

Rather than point to a specific federal rule governing director liability, defendants—and some case law—conclude that because HOLA governs federally-chartered institutions for many things, federal law must be applicable as well to the standard of care governing a director's fiduciary duties despite the statutory silence on the subject. Indeed, defendants assert that the entire field has been preempted by the "comprehensive" regulatory banking scheme, although the federal statutes and regulations themselves leave significant issues unaddressed. For support, they cite to de la Cuesta, 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d...