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February 27, 1992


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.

Motion to Dismiss

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) states:

  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
  conservator, 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 ...

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