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Resolution Trust Corp. v. Cityfed Financial Corp.

filed: June 23, 1995; As Corrected June 28, 1995.

RESOLUTION TRUST CORPORATION, IN ITS CAPACITY AS RECEIVER FOR CITY SAVINGS, F.S.B., AND THE RESOLUTION TRUST CORPORATION, IN ITS CORPORATE CAPACITY
v.
CITYFED FINANCIAL CORP.; RICHARD E. SIMMONS; K. MICHAEL DEFREYTAS; JOHN W. ATHERTON, JR.; GORDON E. ALLEN; ALFRED J. HEDDEN; PETER R. KELLOGG; JOHN KEAN, JR.; GILBERT G. ROESSNER; GEORGE E. MIKULA; JAMES P. MCTERNAN; VICTOR A. PELSON; MARSHALL M. CRISER RESOLUTION TRUST CORPORATION, IN ITS CAPACITY AS RECEIVER FOR CITY SAVINGS, F.S.B. V. JOHN W. ATHERTON, JR.; GORDON E. ALLEN; ALFRED J. HEDDEN; PETER R. KELLOGG; JOHN KEAN, JR.; GILBERT G. ROESSNER; JAMES P. MCTERNAN RESOLUTION TRUST CORPORATION, IN ITS CAPACITY AS RECEIVER FOR CITY SAVINGS, F.S.B., APPELLANT IN NO. 94-5307 RESOLUTION TRUST CORPORATION V. ALFRED J. SCHUSTER; THOMAS J. LYNAM; MARTIN R. SIEGEL; RICHARD P. PEARLMAN; JOAN C. MOONAN, INDIVIDUALLY AND AS EXECUTRIX OF THE ESTATE OF ROBERT J. MOONAN; EUGENE J. ELIAS; GEORGE HURLEY; WILLIAM B. BRICK; JAMES W. DWYER; HARRY H. JAEGER; JOHN R. HIPPLE; JOHN C. LAURICELLA; LOUIS A. IATAROLA MARTIN R. SIEGEL, AND JOAN C. MOONAN, AS EXECUTRIX OF THE ESTATE OF ROBERT J. MOONAN AND INDIVIDUALLY, APPELLANTS IN NO. 94-5308



On Appeal From the United States District Court For the District of New Jersey. D.C. Civ. Nos. 92-cv-05261, 93-cv-01811, 93-cv-02569.

Before: Becker, Mansmann, and Alito, Circuit Judges.

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

In 1989, Congress enacted § 212(k) of the Financial Institutions, Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") (codified at 12 U.S.C.A. § 1821(k) (1989)), which provides:

Liability of directors and officers. -- 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 . . . 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 Corporation under other applicable law.

12 U.S.C.A. § 1821(k) (emphases added). These interlocutory appeals, brought pursuant to 28 U.S.C.A. § 1292(b) (1993), require us to address, with regard to this provision, two important questions of first impression in this circuit -whether Congress, by its enactment of § 1821(k), (1) preempted state law, and/or (2) displaced federal common law actions that impose liability against directors and officers of insolvent federally insured depository institutions for conduct less culpable than gross negligence (e.g. for ordinary negligence). Section 1821(k) was passed by Congress in response to the enactment by various states, during the middle and late 1980s, of lenient director liability statutes that generally provided directors with protection from gross negligence claims by limiting the grounds for liability to instances of reckless, willful and wanton boardroom misconduct. This section of FIRREA permits the Resolution Trust Corporation ("RTC") to seek recovery for such directors' and officers' gross negligence, while preserving the RTC's rights under "other applicable law." The particular questions raised by these appeals relate to whether Congress intended its reference to "other applicable law" to include state law and federal common law.

The appeals arise from cases brought by the RTC in the district court for the District of New Jersey on behalf of two insolvent depository institutions -- United Savings and Loan of Trenton, New Jersey ("United Savings") and City Federal Savings Bank ("City Federal") in Bedminster, New Jersey -- against certain former directors, officers and employees of these institutions ("the defendants"). The RTC brought claims under New Jersey law against former directors and officers of United Savings, a state chartered institution (the "United Savings defendants") and federal common law claims against former directors and officers of City Federal, a federally chartered institution (the "City Federal defendants").

In the United Savings action, the district court denied the defendants' motion for dismissal and summary judgment as to the RTC's state law claims, concluding that § 1821(k) did not preempt any available actions for negligence and breach of fiduciary duty under New Jersey law. In the City Federal action, the district court granted the defendants' motion to dismiss the RTC's federal common law claims, concluding that the enactment of § 1821(k) supplanted any available federal common law actions for negligence and breach of fiduciary duty.*fn1

Courts of appeals that have considered these issues have concluded that § 1821(k) does not preempt state law,*fn2 but that it does displace federal common law.*fn3 We agree that this provision does not preempt any available state law negligence or fiduciary duty claims; however, we disagree with the Conclusion that Congress intended by enactment of this statute to supplant the RTC's ability to bring such actions under federal common law. Accordingly, we will affirm the district court's order in the United Savings action and reverse the court's order in the City Federal action.

I. Facts And Procecural History

The RTC, which has been appointed receiver of both United Savings and City Federal,*fn4 brought these actions on behalf of both insolvent institutions pursuant to 12 U.S.C.A. § 1821(d)(2)(A)(i) (1989), which provides that the RTC succeeds, upon its appointment as receiver, to all rights, titles, powers and privileges of such institutions, including claims arising out of the conduct of the institutions' directors and officers. See O'Melveny & Myers v. FDIC, ___ U.S. ___, 129 L. Ed. 2d 67, 114 S. Ct. 2048, 2054 (1994) (recognizing that upon its appointment as receiver, the RTC "obtained the rights 'of the insured depository institution' that existed prior to receivership" (quoting 12 U.S.C.A. § 1821(d)(2)(A)(i))).

A. United Savings

In the United Savings action, the RTC alleges that the defendants failed to discharge their duties and obligations properly as directors, officers and members of United Saving's lending committees in connection with their consideration, approval and subsequent oversight of at least ten large acquisition, development and construction loans made to various borrowers between 1984 and 1990. The RTC's complaint alleges breach of fiduciary duty and ordinary negligence under New Jersey law, as well as gross negligence under both New Jersey law and § 1821(k) in the approval of these loans, which allegedly resulted in a loss to United Savings of approximately $12.7 million.

In particular, the RTC alleges that the defendants violated their duty of care by: (1) not hiring experienced lending underwriters or managers; (2) failing to reduce underwriting guidelines to a written form; (3) approving large loans after closing had already taken place; (4) maintaining inadequate appraisal procedures (often relying on appraisals provided by the borrower); (5) failing to maintain adequate internal controls; (6) not returning funds during the construction phase of commercial properties pending issuance of final occupancy permits; and (7) generally operating United Savings in an unsafe and unsound manner. According to the RTC, the defendants continued these practices despite warnings by regulators, outside directors and accountants. The RTC does not allege, however, any self-dealing, conflict of interest, bad faith or fraud on the part of the defendants.

In response to the RTC's complaint, the defendants moved to dismiss, or in the alternative for summary judgment, as to all New Jersey law claims based on ordinary negligence or breach of fiduciary duty, arguing that § 1821(k) preempts the RTC's right to bring such claims. The district court entered an order denying defendants' motion and then granted the defendants' request to certify the court's order for interlocutory appeal pursuant to 28 U.S.C.A. § 1292(b) (1993).*fn5 We granted the petition for leave to appeal.*fn6

B. City Federal

In the City Federal action, the RTC alleged that the defendants failed to discharge their duties and obligations properly as directors and officers of City Federal in connection with their consideration, approval and subsequent oversight of several large acquisition, development and construction loans made to various borrowers during 1985 through 1989. The RTC's complaint alleges breach of fiduciary duty, negligence under federal common law, and gross negligence under both federal common law and § 1821(k) in the approval of these loans, which allegedly resulted in damages to City Federal of approximately $100 million. In particular, the RTC alleges that the defendants violated their duty of care by: (1) failing to obtain and verify necessary financial information from borrowers; (2) maintaining inadequate appraisal procedures; (3) consistently loaning funds based on excessively high loan-to-value ratios that violated mandatory limits placed on such ratios; (4) making repeated imprudent long-range commitments to future lending or funding; (5) failing to monitor loan disbursements and the ongoing status of projects and loans; (6) improperly waiving risk limitations and other conditions contained in loan commitments to certain borrowers; (7) failing to require and verify that necessary permits and approvals were obtained before funding the loans; (8) improperly assessing the value of guarantees given as security for the loans; and (9) not requiring adherence to the Bank's lending policies and procedures. In this action, the RTC does not allege any self-dealing, conflict of interest, bad-faith or fraud on the part of the defendants.

The City Federal defendants responded to the RTC's complaint by moving to dismiss all claims, other than gross negligence, arguing that § 1821(k) established an exclusive federal gross negligence standard of care for directors and officers of failed federally chartered financial institutions which supplanted any simple negligence claims available under federal common law. The district court agreed with the defendants' argument and accordingly granted their motion to dismiss the RTC's complaint to the extent that it alleged claims other than gross negligence. The district court granted the RTC's request to certify the court's order pursuant to 28 U.S.C. § 1292(b), and we granted the petition for leave to appeal.

II. Financial Institutions, Reform, Recovery, And Enforcement Act Of 1989

All parties agree that in enacting § 1821(k) Congress intended to preempt state laws that limit the liability of directors and officers to instances of conduct more culpable than gross negligence (i.e., intentional misconduct). At issue in these appeals is whether Congress, by its enactment of § 1821(k), also preempted state law or displaced federal common law actions that impose liability for conduct less culpable than gross negligence (e.g., ordinary negligence). As we have stated, the question of the interpretation of § 1821(k) is one of first impression in this circuit. Our review of the construction of federal statutes is plenary. See Doherty v. Teamsters Pension Trust Fund, 16 F.3d 1386, 1389 (3d Cir. 1994).

A. The Plain Meaning of the Statute

"The starting point for 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) (internal quotation marks omitted).

The Disposition of these appeals turns on the breadth of § 1821(k)'s last sentence, which has become known as the "savings clause." Congress provided that "nothing in this paragraph shall impair or affect any right of the Corporation under other applicable law." 12 U.S.C.A. § 1821(k) (emphases supplied). The RTC contends that this sentence manifests congressional intent to preserve the RTC's ability to seek recovery from directors and officers under all "other applicable laws," including the less forgiving negligence and fiduciary duty standards of care under state law and federal common law. We agree.*fn7

The defendants contend that, when Congress referred to "other applicable law" in § 1821(k), it intended to refer only to the RTC's ability to pursue regulatory actions under other sections of FIRREA, such as the RTC's rights under 12 U.S.C.A. § 1818(b)-(g) (West Supp. 1995) to seek removal of negligent directors and officers and to issue "cease and desist" orders in cases of simple negligence. But Congress could not have intended to restrict the RTC to such a limited and specific set of legal claims by a general reference in this provision to "other applicable law." When Congress limited its reference to the law of a particular jurisdiction in other sections of FIRREA, it did so with specific language. See, e.g., 12 U.S.C.A. § 1821(c)(3)(B) (1993) ("powers imposed by State law " (emphasis added)); 12 U.S.C.A. § 1821(c)(4) (1993) ("notwithstanding any other provision of Federal law, the law of any State, or the constitution of any State " (emphasis added)). In particular, when Congress limited its reference to other portions of FIRREA itself, it also did so specifically. See, e.g., 12 U.S.C.A. § 1821(e)(3)(C)(ii) (West Supp. 1995) ("except as otherwise specifically provided in this section " (emphasis added)). Given the specific nature of these references in other portions of FIRREA, we think that § 1821(k)'s reference to other applicable law plainly demonstrates an intent to refer to all other applicable law.

Such a reading of the statutory language is consistent with the Supreme Court's decision in Patterson v. Shumate, 504 U.S. 753, 112 S. Ct. 2242, 119 L. Ed. 2d 519 (1992), where the Court read a reference to "applicable nonbankruptcy law" in 11 U.S.C.A. § 541(c)(2) to encompass "any relevant nonbankruptcy law, including federal law such as ERISA." Id. at 759, 112 S. Ct. at 2247. See also Reich v. Webb, 336 F.2d 153, 158 (9th Cir. 1964) (reading the language "any other law" of 12 U.S.C. § 1464(d)(1) as authorizing federal regulators to enforce "common law fiduciary responsibilities . . . through appropriate court action"), cert. denied, 380 U.S. 915, 13 L. Ed. 2d 800, 85 S. Ct. 890 (1965).

Moreover, reading the savings clause to provide for a broad retention of existing rights is supported by its placement at the Conclusion of the statutory provision. In Abbott Laboratories v. Gardner, 387 U.S. 136, 145, 87 S. Ct. 1507, 1513-14, 18 L. Ed. 2d 681 (1967), the Court affirmed that "it is difficult to think of a more appropriate place to put a general saving clause than where Congress placed it -- at the Conclusion of the section setting out a special procedure for use in certain specified instances." Id. (emphases added).

B. The Legislative History

Our reading of § 1821(k)'s language is supported by clear legislative history, which, in our view, manifests an effort to place a floor, not a ceiling, on the liability of directors and officers. See Chapman, 29 F.3d at 1126 (Posner, C.J., Dissenting) ("The purpose of section 1821(k), as the timing of the statute's enactment and other features of its history make clear, was to place a floor under the liability of directors of savings and loan associations, which were falling like ninepins."). We necessarily begin our examination of § 1821(k)'s legislative history with an inspection of "the provisions of the whole law, and . . . its object and policy." Dole v. United Steelworkers, 494 U.S. 26, 35, 110 S. Ct. 929, 934, 108 L. Ed. 2d 23 (1990).

Section 1821(k) was enacted as part of FIRREA, a massive 371-page legislative package that had among its primary purposes, as evident in the opening provision of the statute, "strengthening the enforcement powers of Federal regulators of depository institutions" and "strengthening the civil sanctions and criminal penalties for defrauding or otherwise damaging the depository institutions and their depositors." Pub. L. No. 101-73, § 101(9)-(10), 103 Stat. 183, 187 (1989) (emphasis added) (reprinted in 12 U.S.C.A. § 1811 note (West Supp. II 1990)). An overriding purpose in enacting this legislation was to facilitate an effort to "seek out and punish those that have committed wrongdoing in the management of the failed institutions,"*fn8 not to protect such directors and officers from claims of ordinary negligence.

Section 1821(k), in particular, was, as we have already noted, a reaction to the enactment by various states, during the middle and late 1980s, of lenient director liability statutes that protected directors from gross negligence claims by limiting their liability to instances of reckless, willful and wanton boardroom misconduct.*fn9 States enacted these laws out of a policy concern that too stringent a standard of care would impede the ability of a corporation to attract and retain the most qualified individuals as corporate directors. This "race to the bottom"*fn10 among certain states was a reaction to the Delaware Supreme Court's decision in Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), which held the directors of Trans Union Corporation liable for their ostensible gross negligence in approving a cash-out merger notwithstanding the absence of any allegations of fraud, bad-faith or self-dealing. The various states enacting these statutes rejected the result in Van Gorkom and sought to ensure that their domestic corporations could attract and retain qualified directors and officers by protecting them from claims of gross negligence.*fn11

At the same time that states were extending protection from liability to corporate directors, the regulators of federally insured depository institutions were embarking on a concerted litigation campaign to recoup from allegedly corrupt and incompetent directors a portion of the billions of federal dollars lost in the bankruptcy of federally insured thrifts. The enactment of § 1821(k) represents an attempt to facilitate this litigation in the wake of the impediments posed by state statutes insulating directors and officers from liability for gross negligence. The debates over § 1821(k) in the Senate demonstrate this intent to facilitate the recovery effort.*fn12

The original Senate provision, § 214(n) of the Act, would have allowed the RTC to sue directors and officers under "any cause of action available at common law, including, but not limited to, negligence . . . [and] breach of fiduciary duty." S. 774, 101st Cong., 1st Sess. § 214(n) (1989). During the Senate debate, this proposal was modified so as to scale back the extent of state law ...


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