RTC v. O'Bear, Overholser, Smith & Huffer, Civ. No. H 83-164.

• Decision Date: 14 December 1993
• Docket Number: Civ. No. H 83-164.
• Citation: 840 F. Supp. 1270
• Parties: RESOLUTION TRUST CORPORATION, Plaintiff, v. O'BEAR, OVERHOLSER, SMITH & HUFFER, an Indiana partnership, d/b/a Rider, John J. Barber, Opal F. Bowman, William H. Bradshaw, John P. Erickson, Dean A. Hudson, Carl D. Overholser, Fred R. Rodkey, and Raymond J. Todd, Defendants.
• Court: U.S. District Court — Northern District of Indiana

840 F. Supp. 1270

RESOLUTION TRUST CORPORATION, Plaintiff, v. O'BEAR, OVERHOLSER, SMITH & HUFFER, an Indiana partnership, d/b/a Rider, John J. Barber, Opal F. Bowman, William H. Bradshaw, John P. Erickson, Dean A. Hudson, Carl D. Overholser, Fred R. Rodkey, and Raymond J. Todd, Defendants.

Civ. No. H 83-164.

United States District Court, N.D. Indiana, Hammond Division.

December 14, 1993.

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William A. Spence, Beverly L. Bailey, Freeborn and Peters, Steven A. Ramirez, Robinson Curley and Clayton, Rhiannon E. Schmieg, Chicago, for plaintiff.

Richard A. Mayer, Spangler Jennings and Dougherty P.C., Merrillville, IN, for defendant Obear Overholser Smith and Huffer.

George L. Hanna, Hanna Gerde and Burns, Lafayette, IN, James H. Falk, Jr., Falk Law Firm, Washington, DC, for defendants John J. Barber, Opal F. Bowman, John P. Erickson, Carl D. Overholser, Fred R. Rodkey, Raymond J. Todd.

David A. Rosenthal, Rosenthal Greives and O'Bryan, Lafayette, IN, for defendant William H. Bradshaw.

Christine A. DeSanctis, Robert E. Poynter, Bennett Boehning Poynter and Clary, Lafayette, IN, for defendant Dean A. Hudson.

MEMORANDUM and ORDER

MOODY, District Judge.

On June 8, 1990, the Resolution Trust Corporation "RTC" was appointed receiver for Hometown Federal Savings Bank "Hometown". See 12 U.S.C. § 1821. In that capacity, RTC has brought this action, alleging ten counts against various defendants, all either former Hometown directors or counsel to Hometown's former board of directors. The matter is now before the court upon certain of these defendants' motions to dismiss counts I-III and VII-X of RTC's complaint pursuant to FED.R.CIV.P. 12(b)(6).¹ The motions to dismiss are hereby GRANTED in part, DENIED in part.

Rule 12(b)(6) permits defendants to challenge the sufficiency of a complaint. Accordingly, any discussion of Rule 12(b)(6) motions must begin with the allegations of the complaint. These are to be construed "liberally," and "in the light most favorable to the plaintiff." Resolution Trust Corporation v. Gallagher, 800 F.Supp. 595, 598 (N.D.Ill.1992). No count of a complaint should be dismissed "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his or her claim which would entitle him or her to relief." See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

RTC's complaint concerns five loans that Hometown became involved with over an eight month period between June, 1983 and February, 1984. These loans involved investment outside the geographic and risk boundaries within which Hometown had previously operated. When the higher risk involved was realized, Hometown lost money on the loans. RTC, acting in its capacity as receiver, and under the authority of the Financial Institutions Reform, Recovery, and Enforcement Act "FIRREA", see 12 U.S.C. §§ 1821(d) & (k), now seeks to recover that loss from those it deems responsible: (1) in counts I-III, Hometown's former board of directors; (2) in counts IV-VI, Hometown's former counsel; and, (3) in counts VII-X, defendant Todd, in his capacity as appraiser for Hometown. Defendants' motions attack counts I-III and VII-X. The court takes up their arguments in turn.

I. Counts I-III.

A. The allegations.

Counts I-III seek damages against Hometown's former board of directors, i.e. defendants Barber, Bowman, Bradshaw, Erickson, Hudson, Overholser, Rodkey and Todd "the defendants", for their role in involving Hometown with the five high-risk loans at issue. The complaint asserts generally that:

As directors of Hometown, these defendants ... owed Hometown the fiduciary duty to use reasonable care, skill and diligence in the performance of their duties....

Complaint ¶ 20. The complaint defines the defendants' duties as including responsibility for conducting Hometown's affairs in compliance with the law while executing prudent lending, investment, and underwriting policies and exercising "reasonable business judgment with respect to all facts which a reasonable investigation would have disclosed." Complaint ¶ 20. Counts I-III all concern the defendants' alleged derogation of these duties. All three counts refer to the defendants' alleged failure:

... (a) to obtain complete and reliable credit information on the borrowers and guarantors in accordance with Hometown's lending policies and safe and sound banking practices; (b) to obtain independent appraisals (required by federal regulations) on the projects being relied on for the repayment of loans; (c) to obtain accurate and unbiased information on the real estate markets in the areas for which the loans were made; (d) to ascertain whether these loans violated the federal loans-to-one-borrower regulations; and (e) to hire consultants to provide the board with needed information and guidance about the new type of lending activity.

Complaint ¶ 50.

Count I states that these failures amount to negligence and/or gross negligence with regard to the defendants' duty to act "with reasonable skill, care, and diligence" in carrying out their responsibilities. Count II alleges that the defendants' failures breached "a fiduciary duty in the management, supervision, and direction of Hometown." Count III alleges that the defendants' failures breached alleged contracts. All three counts allege that the defendants' breaches of duty caused Hometown to suffer "substantial damage and loss."

The court first discusses whether counts I-III may state claims under Indiana law; the court then turns to whether they state claims under federal law.

B. State-law claims.

Counts I-III all allege that the defendants breached their duties as directors of Hometown. All three counts can be construed to allege claims under Indiana common law. Determining whether counts I-III state state-law claims for which relief can be granted therefore requires an answer to whether Congress, through its enactment of 12 U.S.C. § 1821(k), has pre-empted state common law claims brought by RTC against former officers and directors of federally insured financial institutions.

The Seventh Circuit recently held that § 1821(k) pre-empts federal common law with regard to claims like those alleged in counts I-III. Resolution Trust Corp. v. Gallagher, 10 F.3d 416, 423-24, (7th Cir. 1993) "Gallagher II". Gallagher II concluded that § 1821(k) established a "gross negligence" standard for director liability under federal law. Id. The Seventh Circuit was not presented with, however, and so did not reach, the question of whether § 1821(k) also pre-empts state common-law claims. Id. This court now determines that § 1821(k) does pre-empt RTC's state-law claims.

There is authority contrary to the court's conclusion. In fact, the two courts of appeals that have considered whether § 1821(k) preempts state common law each concluded that it did not. See Federal Deposit Ins. Corp. v. McSweeney, 976 F.2d 532, 537 (9th Cir.1992); Federal Deposit Ins. Corp. v. Canfield, 967 F.2d 443, 446 (10th Cir.1992). Further, Canfield noted that "the district courts that have considered this question are split, but a clear majority agrees with the FDIC's interpretation," i.e., that state common law is not pre-empted by § 1821(k). 967 F.2d at 446 n. 6. Nonetheless, because McSweeney, Canfield, and the district court decisions cited in Canfield are founded on premises rejected by the Seventh Circuit in Gallagher II, the court does not follow those decisions.

"The starting point for the interpretation of a statute `is the language of the statute itself. Absent a clearly expressed legislative intention to the contrary, that language must ordinarily be regarded as conclusive.'" Kaiser Aluminum & Chem. Corp. v. Bonjorno, 494 U.S. 827, 835, 110 S.Ct. 1570, 1575, 108 L.Ed.2d 842 (1990) (citation omitted). As relevant to this discussion, § 1821(k) provides that:

• "A director or officer of an insured depository institution may be held personally liable ... for gross negligence," and,

• "Nothing in this paragraph shall impair or affect any right of the RTC under other applicable laws."

12 U.S.C. § 1821(k) (Emphasis added.) The cases holding that § 1821(k) does not preempt state-law claims do so based upon their interpretation of the plain meaning of this language. See, e.g., McSweeney, 976 F.2d at 537-38; Canfield, 967 F.2d at 446-47. These courts conclude that the first clause's use of "may", rather than "may only", evinces congressional intent that § 1821(k) be "non-limiting," that is, § 1821(k) provides a non-exclusive option for RTC. See McSweeney, 976 F.2d at 537-38. They buttress this argument with reference to the second, "savings," clause, arguing that state common law actions are among the "other applicable laws" not to be affected by the provision. See id. at 538.

Gallagher II rejected these interpretations of the "plain language" of § 1821(k). Regarding the use of "may", the court stated that, "`read in context, the word `may' refers to the right of the RTC to bring an action under this section. `May' cannot reasonably be read to qualify the gross negligence standard and is therefore irrelevant to the substance of the provision.'" Gallagher II, 10 F.3d at 419 (quoting Canfield, 967 F.2d at 450 n. 4 (Borby, J., dissenting)). Thus, the Seventh Circuit read the first clause to state simply that the RTC "may", as a matter of right, bring an action under § 1821(k).

Regarding the savings clause, Gallagher II rejected a construction identical to that adopted by Canfield and McSweeney, concluding that

a better reading of the savings clause is that it was drafted to preserve the RTC's ability to take other regulatory actions based on simple negligence. For example, it preserves the RTC's power to remove directors for simple negligence and its power to issue "cease and desist" orders in cases of simple negligence.

Id. at 420 (citing 12 U.S.C. §§ 1818(b)-(g)). The court reasoned that "it...