The opinion of the court was delivered by: Baker, District Judge.
The Federal Deposit Insurance Corporation (FDIC) brought
this action as the receiver of Mt. Zion State Bank (Mt. Zion)
against three former officers and directors of Mt. Zion. The
FDIC took control of the bank on November 4, 1988. The FDIC
claims that the defendants engaged in unsound loan practices
causing the bank to suffer substantial losses and impairment
of its assets totalling at least $1,089,100.00. In the three
count complaint, the FDIC seeks to recover the losses from the
defendants based on the defendants' breach of fiduciary
duties, negligence, and gross negligence.
The specific allegations of the complaint relate to the
defendants, involvement in Mt. Zion's lending relationship
with Brown/Knox and Associates (Brown/Knox). Brown/Knox is a
Decatur, Illinois investment firm which sold tax shelters.
Many of the investors in the Brown/Knox shelters signed
promissory notes for loans from Mt. Zion and used that money
to purchase the property which became the basis for the tax
shelters. Mt. Zion made eighteen loans to Brown/Knox
investors. The complaint details numerous problems with these
loans which allegedly caused the substantial losses mentioned
above. The problems include: extension of credit to borrowers
residing outside Mt. Zion's trade area, failure to provide
independent appraisals on the property, use of liberal
repayment terms in comparison to the age and condition of the
property, and failure to obtain adequate financial information
on the borrowers. According to the complaint, the defendants
were the loan officers responsible for the Brown/Knox loans
and were the primary contact persons at different points in
time for the Brown/Knox group of loans.
Gregory York has moved to dismiss counts one and two of the
complaint for breach of fiduciary duty and negligence. (docket
# 4) The FDIC has responded to the motion. (docket # 8) Robert
M. Rich, Jr. moved to extend the time to answer the complaint
until after the court ruled on York's motion to dismiss counts
one and two. (docket # 11) Magistrate Judge Kauffman granted
Rich's motion. Galen R. Nihiser also requested an extension of
time to answer. (docket # 13) At a hearing on the motions on
February 20, 1992, the court denied the motion to dismiss. The
court also granted Nihiser's motion for an extension of time
and ordered all three of the defendants to answer the
complaint within fourteen (14) days of the hearing.
York moves to dismiss the claims for breach of fiduciary
duty and negligence for failure to state a claim based on the
Financial Institution's Reform, Recovery, and Enforcement Act
of 1989 (FIRREA), 12 U.S.C. § 1821. According to York, this
statute creates an exclusive remedy against officers and
directors of failed institutions: the FDIC can hold officers
and directors liable for conduct amounting to gross negligence.
12 U.S.C. § 1821(k) (1989) Under this statute, therefore, the
FDIC cannot maintain actions against officers and directors
which arise under federal or state common law, such as claims
for negligence or breach of fiduciary duty. Section 1821(k)
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,
which action is prosecuted wholly or partially
for the benefit of the corporation —
(1) acting as a conservator or receiver of such
(2) acting based upon a suit, claim, or cause
of action purchased from, assigned by, or
otherwise conveyed by such receiver or
12 U.S.C. § 1821(k). The clear language of this act, the
defendant argues, bars director and officer liability based on
a lesser standard of care than gross negligence.
As support for this argument, the defendant cites two
district court cases. In FDIC v. Canfield, the defendants,
former directors and officers of a failed bank, sought to
dismiss the counts which were based on conduct amounting to
less than gross negligence. 763 F. Supp. 533, 534 (D.C.Utah
1991). The defendants argued that section 1821(k) established a
federal standard of gross negligence or a higher degree of
culpability for directors' and officers' liability. Id. at 535.
The Canfield defendants also asserted that Congress implemented
public policy supporting their position by balancing "the
government's need to recover money damages for conduct
amounting to aggravated fault on the part of directors and
officers with the need to insure that competent and qualified
people serve on bank and thrift boards." Id.
The Canfield court agreed with the defendants that, based on
the first sentence of section 1821(k), Congress clearly
intended to create a uniform federal standard of gross
negligence. Id. at 536; see Gaff v. FDIC, 919 F.2d 384, 387
(6th Cir. 1990). According to the court, reading the last
sentence of section 1821(k) to allow varying state standards of
liability below gross negligence would require the court to
ignore the plain meaning of the statute. Canfield, 763 F. Supp.
at 536. Where Congress wanted to refer to state law, as in the
first sentence, the statute explicitly mentions state law. Id.
The court declined to infer the incorporation of state law and
interpret the words "other applicable law" as undermining the
uniform federal standard of gross negligence. Id. at 537.
Instead, the court found that "other applicable law" refers to
other provisions of FIRREA which create different standards of
liability in FDIC actions. Id.; see also FDIC v. Brown, No.
NC89-300, slip. op. at 1-2 (D.Utah Nov. 19, 1991) (granting
motion to dismiss based on Canfield). The Canfield court,
without citing any support for its analysis, also held that the
defendant's interpretation of section 1821(k) best serves
public policy. 763 F. Supp. at 540.
The defendants also cite FDIC v. Swager, 773 F. Supp. 1244
(D.C.Minn. 1991). In Swager, the court dismissed a count
alleging breach of fiduciary duty under Minnesota law. 773
F. Supp. at 1245. The court, like the Canfield court, believed
that section 1821(k) created a federal standard of liability
which precludes actions for conduct amounting to less than
gross negligence. Id. at 1248. Unlike the Canfield ...