Resolution Trust Corp. v. Franz

• Decision Date: 15 December 1995
• Docket Number: No. 93 C 2477.,93 C 2477.
• Citation: 909 F. Supp. 1128
• Parties: RESOLUTION TRUST CORPORATION, Plaintiff, v. Lydia FRANZ and others, Defendants.
• Court: U.S. District Court — Northern District of Illinois

909 F. Supp. 1128

RESOLUTION TRUST CORPORATION, Plaintiff, v. Lydia FRANZ and others, Defendants.

No. 93 C 2477.

United States District Court, N.D. Illinois, Eastern Division.

December 15, 1995.

Stephen Novack, Patrick A. Fleming, Karen L. Drizin, Timothy John Miller, James Edwin Bayles, Jr., Novack & Macey, Chicago, IL, for Resolution Trust Corporation.

Sean Malone Sullivan, Raymond Hugo Groble, III, Ross & Hardies, P.C., Chicago, IL, for Lydia Franz, Steven A. Kuroski, Nicholas Lash.

James Robert Schirott, Schirott & Luetkehans, P.C., Itasca, IL, William J. Harte, William J. Harte, Ltd., Chicago, IL, Charles Frank Marino, David M. Marino, Chicago, IL, for Henry J. Hyde.

John K. Kneafsey, Donald Cahill Shine, Gregory Canard Ward, Nisen & Elliott, Chicago, IL, for Thomas J. Martin.

MEMORANDUM OPINION

BRIAN BARNETT DUFF, District Judge.

On February 1, 1990, the Office of Thrift Supervision ordered Clyde Federal Savings and Loan Association ("Clyde") into receivership and it appointed the Resolution Trust Corporation ("RTC") as Clyde's receiver. On April 23, 1993, the RTC sued Lydia Franz and others ("Defendants") for their alleged conduct as Clyde's officers and directors. The RTC's Complaint has four counts: (I) Negligence With Respect to Duties Owed To Clyde; (II) Gross Negligence With Respect To Duties Owed To Clyde; (III) Breach of Fiduciary Duty Owed to Clyde; and (IV) Breach Of Contract With Clyde. On July 5, 1995, the Defendants moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6). For the reasons discussed below, we grant in part and deny in part their motion.

I. Background

"At all relevant times prior to February 1, 1990, the Defendants comprised a majority of Clyde's Board and they controlled and dominated the actions and decisions of Clyde." Compl. at 9. The RTC alleges that, while the Defendants comprised a majority, they "recklessly" and "with gross negligence" handled Clyde's Options Trading Program, Aransas Loan, and Landbank Loan. Id. at 10.

The following allegations concern the Options Trading Program. In 1983, the Defendants "passed a resolution authorizing Clyde's Investment Committee members ... to begin options trading as part of a program Clyde called `yield enhancement.'" Id. at 11. At the time, none of the Defendants had "experience or training in options trading." Id. As early as December 1983, the Federal Home Loan Bank Board ("FHLBB") criticized the options trading program. Id. at 12. It criticized, among other things, the "improper options writing procedures," "inadequate record-keeping," "absence of limits on options trading," and "violations of applicable federal law." Id. Despite the criticisms, the Defendants "failed to properly supervise the yield enhancement program." Id. On December 19, 1986, "Clyde entered into a Supervisory Agreement which ... prohibited it from trading options." Id. at 13. "Clyde experienced losses in excess of $10 million from options trading." Id.

The following allegations concern the Aransas Loan. "In early 1984, Clyde funded a $5 million participation in a $28.5 million loan to build luxury, beach-front condominiums in Port Aransas, Texas called the `Aransas Princess.' The Aransas Princess was the first out-of-state construction loan Clyde ever made." Id. "At the time Clyde funded the ... loan, the Defendants had delegated full authority to Clyde's Advisory Committee to approve real estate loans." Id. However, "none of the Defendants on the Committee ... had any experience in underwriting, appraising or funding out-of state participation loans for the construction of real property." Id. Despite the inexperience, Clyde "failed to establish appropriate written loan policies," and it "relied upon information provided and analyzed by a broker who stood to receive a substantial fee if the Aransas Princess loan were made." Id. at 14. "The information and analyses of the broker were insufficient and improper" for a number of reasons." Id. "The borrower defaulted on the loan on or about October 1, 1985." Id. "Clyde lost in excess of $3.7 million on the Aransas loan." Id.

The following allegations concern the Landbank Loan. "In the fall of 1984, Clyde embarked on another out-of-state loan involving a 100% participation in a $10 million pool of first and second residential mortgages on properties located outside of Illinois to be serviced by Landbank Equity Corporation." Id. at 15. "The mortgages contained in the Landbank pool were to be 100% insured by private mortgage insurance. The Defendants assumed that such insurance eliminated any risk to Clyde and, allegedly based on that assumption, they performed no independent underwriting or analyses of the mortgages comprising the pool." Id. The "Defendants' assumption that the private insurance immunized Clyde from risk was incorrect." Id. "The Landbank loan went into default and the insurer notified Clyde that many of the mortgages were excluded from coverage." Id. "Clyde lost in excess of $3.5 million on the Landbank loan." Id.

II. Standard of Review

When a defendant moves pursuant to Rule 12(b)(6), we accept all well pleaded facts as true and we construe those facts in the light most favorable to the plaintiff. We grant the motion only if "`it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" RTC v. Fortunato, 1994 WL 478616, at *1 (N.D.Ill. September 1, 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-6, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)).

III. Discussion

A. Counts I, III and IV

The Defendants argue that, under the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), the RTC may not sue them for negligence, breach of fiduciary duty, or breach of contract. The Defendants rely on RTC v. Gallagher, 10 F.3d 416 (7th Cir.1993), in which the court held that FIRREA pre-empts federal common law and establishes a gross negligence standard of liability for officers and directors of failed federally chartered financial institutions. Id. at 425. They also rely on RTC v. Chapman, 29 F.3d 1120 (7th Cir.1994), in which the court held that, despite FIRREA's savings clause, state law is inapplicable to suits against such officers and directors. Id. at 1124-5. Consequently, they argue that we should dismiss with prejudice the RTC's Counts I, III and IV. The RTC constructively concedes by not responding. Therefore, we dismiss with prejudice the RTC's Counts I, III and IV. See RTC v. Gravee, 1995 WL 75373 (N.D.Ill. Feb. 22, 1995).

B. Count II

1. Applying the Statute of Limitations

The Defendants argue that the RTC's gross negligence claim is time barred. For support, they champion Gravee, in which the court wrote that "the RTC may not avail itself of the adverse domination doctrine to toll the statute of limitations." 1995 WL 75373, at *5. "Based on the reasoning of Gravee and the citations therein, because the RTC was appointed receiver on February 1, 1990, any claims for gross negligence based on actions going back more than five years — i.e., prior to February 1, 1985 — would be stale." Id. at *6. Consequently, because the RTC only alleges actions prior to February 1, 1985, the Defendants argue that we should dismiss the RTC's claim.

The RTC responds that its claim is not time barred. "The RTC respectfully submits that the Defendants' reliance on Gravee ... is misplaced." Pl.'s Br. at 11. Gravee "was erroneously decided and entailed either a failure accurately to predict Illinois law or an erroneous refusal to predict Illinois law." Id. "When one adds (i) Illinois' adoption of a discovery rule grounded in the same policies as that of adverse domination, and (ii) the Illinois decisions recognizing the interrelationship between domination and tolling, it is virtually assured that the Illinois Supreme Court would adopt adverse domination for causes of action based on gross negligence." Id. at 12. Consequently, because we should apply the adverse domination doctrine, the RTC argues that we should not dismiss its claim.

The applicable statute governing limitations on actions is 12 U.S.C. § 1821(d)(14) ("§ 1821(d)(14)"), and it provides: "(A) Notwithstanding any provision of any contract, the applicable statute of limitations with regard to any action brought by the Corporation as conservator or receiver shall be — ... (ii) in the case of any tort claim, the longer of — (I) the 3-year period beginning on the date the claim accrues; or (II) the period applicable under State Law." The applicable state statute of limitations is 735 ILCS 5/13-205, and it provides: "All civil actions not otherwise provided for, shall be commenced within five years next after the cause of action accrued." In this case, the state statute provides a longer period and, therefore, it governs.

Section 1821(d)(14) further provides: "For the purposes of subparagraph (A), the date on which the statute of limitation begins to run on any claim described in such subparagraph shall be the later of — (i) the date of the appointment of the RTC as conservator or receiver; or (ii) the date on which the cause of action accrues." In this case, the date of the appointment was February 1, 1990. That date is the later of the two and, therefore, it governs. So, the statute began to run on February 1, 1990, and it ran for five years, making the time bar fall on February 1, 1995.

In this case, the RTC filed the Complaint on April 23, 1993. Apparently, however, the parties agree that we should deem that it filed the Complaint on January 29, 1993. Pl.'s Br. at 3 n. 3. No matter. Either way, the RTC filed before the time bar fell on February 1, 1995.

The analysis, however, is not so simple because "FIRREA cannot revive stale claims." RTC v. Krantz, 757 F.Supp. 915, 921 (N.D.Ill.1991). In Krantz, the court considered Fed. Deposit Ins. Corp. ("FDIC") v. Hinkson, 848 F.2d 432 (3rd Cir.1988), which "stands for the reasonable proposition that a federal...