The opinion of the court was delivered by: HOLDERMAN
Plaintiff, Federal Deposit Insurance Corporation ("FDIC") filed this action against nine former directors and officers of Lyons Federal Trust and Savings and its subsidiary service corporations. The FDIC's complaint alleges breach of fiduciary duty (Counts I, II and III), fraud (Counts IV and V), negligence (Counts VI and VII) and breach of contract (Count VIII). Six defendants Barbara Miller, Edwin Carey, Gilbert Demange, William Lancaster, Charles Marshall and Kenneth Phillips have moved to dismiss the FDIC's claim under Federal Rule of Civil Procedure 12(b)(6). For the reasons stated in this memorandum opinion and order the motions are granted in part and denied in part.
In ruling on a motion for dismissal pursuant to Federal Rule of Civil Procedure 12(b)(6) the court must presume all of the well-pleaded allegations of the complaint to be true. Miree v. DeKalb County, Georgia, 433 U.S. 25, 27, 53 L. Ed. 2d 557, 97 S. Ct. 2490 n.2 (1977). The facts, as alleged in the complaint, are summarized as follows.
Lyons Savings and Loan Association was an Illinois chartered savings and loan from 1922 until August 1986, when Lyons converted to a federal charter and was renamed Lyons Federal Trust and Savings Bank ("Lyons"). (Complaint, para. 22.) On September 24, 1987, the Federal Home Loan Bank Board ("FHLBB") appointed the Federal Savings and Loan Insurance Corporation ("FSLIC") as receiver for Lyons, which by that time had become insolvent. (para. 38.)
In the years before its insolvency, Lyons management had pursued a strategy of rapid growth. Departing from the traditional reliance on residential mortgage lending, Lyons invested heavily in real estate development and other higher risk ventures. (para. 26-28.) The Federal Home Loan Bank Board and the Illinois Commissioner of Savings and Residential Finance, who considered Lyons' new lending and investment practices to be unsound, became concerned about the situation at Lyons as early as 1983. From 1984 until its insolvency in 1987, Lyons had been operated under a number of consent agreements and FHLBB supervisory directives restricting its activities. (para. 29-38.)
Defendants Barbara and Laurence Miller (collectively referred to as "the Miller defendants") are the daughter and son-in-law of the founder of Lyons. They each served as officers and directors of Lyons at various times from 1963 until September 24, 1987. (para. 13-14, 24-25.) The other named defendants (collectively referred to as "the Director defendants"), with the exception of defendant Mary Stanley, were at various times each members of the Board of Directors of Lyons during the period relevant to this lawsuit, which is the early to middle 1980's. (para. 15-20.) Defendant Mary Stanley was "at all relevant times" director and president of two Lyons service corporations, Century Universal Enterprises and G.R. Urban Renewal Investment Corporation. (para. 21.)
According to the complaint, more than $ 20 million in losses at Lyons were caused by the Lyons' officers' and directors' breaches of fiduciary duty, breaches of contract, negligence and, in certain transactions, by the Miller defendants' fraud. The complaint details a number of allegedly unsound financial transactions in which the Miller defendants caused Lyons to be engaged and to which the Director defendants either assented or failed to prevent. (para. 39-136.)
One transaction detailed in the complaint is of particular significance to this motion. Count V of the complaint describes a transaction in which Lyons, at the direction of the Miller defendants, sold property in Lombard, Illinois to a group of developers in November 1985. This transaction resulted in a 10% commission paid to a Lyons' borrower Judy Thornber, a friend of the Miller defendants and a consultant to Lyons, totalling $ 165,000. A substantial part of that commission, $ 160,000, was paid to Lyons to cover a loss on a Thornber project in Cincinnati, Ohio called Kenwood Green. (para. 156-63.)
I. DIRECTOR DEFENDANTS' MOTIONS TO DISMISS
In Counts III, VII and VIII, the FDIC alleges breach of fiduciary duty, negligence and breach of contract against defendants Carey, Demange, Lancaster, Marshall, Phillips, Zak and Stanley.
Director defendants Carey, Marshall, Lancaster, Demange and Phillips (collectively "moving Director defendants") have moved to dismiss these counts. Their motions rely on identical arguments and will be treated together.
The moving Director defendants contend that the FDIC has failed to state a claim under either state or federal law. According to their motions, Counts III, VII and VIII do not state claims under federal law, because these counts fail to allege gross negligence as is required by the applicable federal statute, Title 12 U.S.C. § 1821(k). As for state law, the moving Director defendants argue that the counts are barred by an Illinois doctrine prohibiting the recovery of "economic damage" in negligence actions.
A. Federal Law Cause of Action and 12 U.S.C. § 1821(k)
The court's approach to the issues raised by the motions hinges on the interpretation given the section of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") which explicitly grants the FDIC a cause of action against the directors of insured financial institutions. 12 U.S.C. § 1821(k). The provision ("§ 1821(k)") reads 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 ...