The opinion of the court was delivered by: BY THE COURT; JAMES T. GILES
The Resolution Trust Corporation ("RTC") as receiver for Horizon Financial F.A. ("Horizon"), a former savings and loan association, files this action seeking damages against Horizon's former directors and officers ("Director/Officer Defendants")
for gross negligence, negligence, and breach of fiduciary duty, and against Horizon's general counsel, the law firm of Stuckert & Yates ("S & Y") and its partners (collectively, the "Attorney Defendants"),
for negligence, breach of contract, breach of fiduciary duty and aiding and abetting.
The gravamen of RTC's amended complaint is that the defendants, in their various capacities, permitted Horizon to engage in highly speculative, unsound and poorly-documented lending practices, particularly with regard to certain automobile and second mortgage consumer loans know as the "SBL/Brokers South Portfolio." See Amended Complaint, at 9-10.
Specifically, the RTC alleges that Horizon's directors and officers made and approved loans in the absence of adequate lending policies and procedures, documentation and due diligence, and in a manner which often exceeded the authority of the lending officers with no regard for the loans' potentially devastating impact upon the institution. Id. at 7-8. Additionally, the RTC alleges that Horizon's longtime general counsel, S & Y, whose senior partner, Yates, was primarily responsible for Horizon matters, neither cautioned the institution that it lacked adequate lending policies and procedures nor that the loans were poorly documented and underwritten. Id. at 9. The RTC alleges that the S & Y attorneys affirmatively encouraged and participated in the making of such loans by reviewing and approving relevant loan agreements and by attorney Marshall's service on Horizon's Loan Committee during critical times. Id.
Further, the RTC alleges that despite clear warnings, including cautions from federal regulators, the defendants continued to make, approve and otherwise encourage the loans, thereby causing million of dollars of losses. Id. 16.
Defendants have responded to the RTC's amended complaint by answering some counts, filing motions to dismiss other counts, raising a number of affirmative defenses, and filing a counterclaim.
Addressed herein are the Director/Officer Defendants' motion to dismiss count II (negligence) and count III (breach of fiduciary duty), the Attorney Defendants' motion to dismiss count V (breach of contract) and count VIII (aiding and abetting), the RTC's motion to strike affirmative defenses, to dismiss the counterclaim, and to limit discovery.
APPLICABLE LEGAL STANDARDS
In deciding a motion to dismiss for failure to state a cognizable claim, the court must accept as true all of plaintiff's factual allegations and draw from them all reasonable inferences favorable to the plaintiff. D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984). However, the court need not accept as true legal conclusions or unwarranted factual inferences. Gomez v. Toledo, 446 U.S. 635, 636, 64 L. Ed. 2d 572, 100 S. Ct. 1920 n.3 (1980). A case should not be dismissed for failure to state a claim unless it appears certain that no relief can be granted under any set of facts that could be proved consistent with plaintiff's allegations. Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984).
I. Director/Officer Defendants' Motion to Dismiss Counts II & III of the Amended Complaint
Defendants move to dismiss the RTC's negligence claim (count II) arguing that "Pennsylvania law requires a showing of at least gross negligence in order to establish the personal liability of bank directors and officers." Defendants' Motion, at 2. Additionally, they move to dismiss the RTC's breach of fiduciary duty claim (count III) arguing that "[such claim] . . . is subsumed in the gross negligence count." Id.
Alternatively, defendants argue that both claims should be dismissed because they are preempted by Section 1821(k) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. § 1821(k) (supp. 1992). Id.
In response, the RTC makes two arguments. First, it urges that Pennsylvania law is inapplicable because Horizon is a federally chartered institution. The RTC's Brief, 14. The RTC contends that the duties of the directors and officers of a federally chartered financial institution are governed by federal common law which imposes a simple negligence standard of liability. Id.
Secondly, the RTC urges that defendants have misconstrued Section 1821(k) in advancing the proposition that gross negligence is the minimum standard of liability for bank directors and officers. In contrast, the RTC contends that Section 1821(k) does not preempt either federal or state common law and, indeed, preserves liability claims based upon simple negligence. Id.
Section 1821(k) of FIRREA provides as follows:
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, which action is prosecuted wholly or partially for the benefit of the Corporation --
(1) acting as conservator or receiver of such institution,
(2) acting based upon a suit, claim or cause of action purchased from, assigned by, or otherwise conveyed by such receiver or conservator, or
(3) acting based upon a suit, claim or cause of action purchased from, assigned by or otherwise conveyed in whole or in part by an insured depository institution or its affiliate in connection with assistance provided under Section 1823 of this title, 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.
The third circuit has not construed Section 1821(k). However, some courts have held that Section 1821(k) does not preempt either federal or state law as to the standard of liability for directors and officers.
Some courts have held that Section 1821(k) does preempt both federal and state law.
Still, other courts have taken a middle ground and have ruled that Section 1821(k) of FIRREA preempts federal common law and not state common or statutory law.
After analysis of the statute and relevant case law, this court finds Section 1821(k) preempts preceding federal common law standard of liability for directors and officers. In doing so, the court follows the reasoning set forth in Federal Deposit Ins. Corp. v. Mintz, 816 F. Supp. 1541 (S.D. Fla. 1993). In Mintz, the FDIC
brought suit against former directors and officers of a failed bank seeking to hold them liable for their alleged negligent management of the bank. The district court granted, in part, the defendants' motion to dismiss the FDIC's negligence claims. It held that Section 1821(k) of FIRREA preempts federal common law, permitting actions for simple negligence.
Mintz noted that those courts which have interpreted FIRREA as not preempting federal common law have placed great emphasis on the "savings clause" of Section 1821(k). The last sentence of the statute reads: "Nothing in this paragraph shall impair or affect any right of the Corporation under other applicable law." 12 U.S.C. § 1821 (k). "While such an interpretation is supportable, that result may be attributed to losing 'sight of the forest but for a single tree.'" Id. citing Canfield, 967 F.2d at 449.
A reading of the savings clause to include federal common law makes the rest of the statute a nullity. Why would Congress need to pass Section 1821(k) if the FDIC already had the ability to defeat state laws with the federal common law of simple negligence? If Congress intended for the federal standard to be the common law simple negligence threshold, then such could have been codified. Instead, Congress chose to enact the gross negligence threshold as the federal standard.
We agree with the Mintz rationale and hold that all prior federal common law is preempted by Section 1821(k).
In so ruling, the court does not reach the issue of whether Pennsylvania liability standards allow claims for simple negligence (and/or for breach of fiduciary duty) since the bank is federally chartered and is not incorporated under and regulated by state law. See Resolution Trust Corporation v. Hess, 1993 WL 121299 (D. Utah); ("Federal savings and loan institutions are federally chartered, federally regulated, federally insured, and federally organized. Such comprehensive coverage leaves little or no room for state law claims). See, also, 15 Pa.C.S.A. § 512 (Pennsylvania standard of care for directors and officers applies only to domestic corporations). Therefore, the court finds ...