United States District Court, Central District of Illinois
February 27, 1992
FEDERAL DEPOSIT INSURANCE CORPORATION, PLAINTIFF,
GALEN R. NIHISER, ROBERT M. RICH, JR., GREGORY YORK, DEFENDANTS.
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)
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
(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
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 court,
however, the court held that section 1821(k) preempted all
state law actions and not federal law actions.
When examined in light of the reference to
"applicable State law" at the close of the first
sentence, logic suggests that Congress intended
the phrase "other applicable" law to mean
applicable law other than state law. The court is
satisfied that, had Congress intended "other
applicable law" to mean "applicable state law,"
Congress would have used those precise words just
as it did at the close of the immediately preceding
Id. In addition, the court found that the statute's statement
that section 1821(k) does not "impair or affect" the FDIC's
rights under other applicable law indicates that Congress
intended to impair the FDIC's rights with section 1821(k). Id.
Therefore, the court reasoned, it could not read section
1821(k) to broaden the FDIC's rights against directors and
The FDIC argues, based on the plain meaning and legislative
history of section 1821(k) and on settled rules of statutory
construction, that federal and state common law causes of
action against officers
and directors are preserved. The FDIC asserts that the first
sentence of section 1821(k), stating that officers and
directors "may be held liable . . . for gross negligence,"
does not create an exclusive remedy. Instead, this sentence
simply preempts state laws seeking to shield officers and
directors from any liability. The sentence insures that the
FDIC, at least, can hold directors and officers liable for
gross negligence. The second sentence of section 1821(k) is a
savings clause which follows from the first sentence and
allows the FDIC to pursue all other remedies, including state
common law negligence actions.
Several courts have considered the preemptive effect of
section 1821(k). The majority of these courts agreed with the
FDIC's analysis and found that the section does not preempt
federal and state common law causes of action. FDIC v. Black,
777 F. Supp. 919 (W.D.Okla. 1991); FDIC v. McSweeney,
772 F. Supp. 1154 (S.D.Calif. 1991); FDIC v. Burrell, 779 F. Supp. 998
(S.D.Iowa 1991); FDIC v. Baker, No. 89-386, 1991 U.S. Dist.
LEXIS 16878 (C.D.Calif. June 24, 1991); FDIC v. Hubbard,
779 F. Supp. 66 (S.D.Tex. 1991); FDIC v. Castetter, No. CV 90-1373
H(M), slip. op. (S.D.Calif. Nov. 29, 1991); FDIC v. Williams,
779 F. Supp. 63 (N.D.Tex. 1991). Two courts took a middle
ground, finding that section 1821(k) precluded federal common
law causes of action but not state common law actions. FDIC v.
Miller, 781 F. Supp. 1271 (N.D.Ill. 1991); FDIC v. Isham,
777 F. Supp. 828, 832 (D.Colo. 1991). Only three courts adopted
York's argument. Brown, No. NC89-300, slip. op. (D.Utah Nov.
19, 1991); Swager, 773 F. Supp. 1244; Canfield,
763 F. Supp. 533.
In interpreting a statutory section such as section 1821(k),
the plain meaning of the statute controls. Kaiser Aluminum &
Chemical Corp. v. Bonjorno, 494 U.S. 827, 835, 110 S.Ct. 1570,
1576, 108 L.Ed.2d 842 (1990) (quoting Consumer Prod. Safety
Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S.Ct.
2051, 2056, 64 L.Ed.2d 766 (1980)) (plain language controls
absent clearly expressed legislative intention to the
contrary). The McSweeney court, reading the plain language of
the statute, found that the first sentence of section 1821(k)
did not indicate that the section provided an exclusive remedy.
772 F. Supp. at 1158. Because the first sentence is
nonexclusive, the use of "other applicable law" in the second
sentence must allow the FDIC to pursue an action under state or
federal laws which provide for a lesser standard of fault. Id.;
Black, 777 F. Supp. at 921-22.
The court concurs with the McSweeney and Black analysis of
the language of section 1821(k). The permissive language of the
first sentence and the broad language of the savings clause
clearly evidence the intent to preserve the FDIC's rights under
other laws, including state and federal common law. See Miller,
781 F. Supp. at 1276 ("it is clear to the court that the broad
language of the savings clause was intended to preserve state
law rights"). Under the defendant's interpretation, section
1821(k) would prevent the FDIC from asserting state and federal
common law causes of action. The court will not find that
section 1821(k) preempts or repeals common law rights unless
the language of the statute demonstrates clearly and explicitly
that this is its purpose. Norfolk Redev. and Hous. Auth. v.
Chesapeake & Potomac Tel. Co., 464 U.S. 30, 35, 104 S.Ct. 304,
307, 78 L.Ed.2d 29 (1983). Section 1821(k) does not indicate an
intent to limit the FDIC's remedies to FIRREA or to federal law
alone. See Black, 777 F. Supp. at 922 (if "other applicable
laws" referred to federal law or only to FIRREA, statute should
have stated "federal law" or "under this Act").
The defendant's reasoning would create a different standard
for directors and officers of failed institutions than for
managers of viable institutions. See McSweeney, 772 F. Supp. at
1159. Once a bank failed, the FDIC could hold the directors and
officers liable only for gross negligence. Whereas, in many
states, directors and officers can be held liable for conduct
amounting to simple negligence while an institution remains
open. At the hearing, the defendant argued that Congress
this result. Congress, for reasons of economic efficiency,
chose to allocate resources to recover for gross negligence
and not simple negligence. Not surprisingly, the defendant's
only support for this assertion is the court's discussion of
public policy in Canfield, 763 F. Supp. at 540. The court is not
persuaded by the defendant's argument.
A court must construe a statute to effectuate its purposes.
Dole v. United Steelworkers, 494 U.S. 26, 35, 110 S.Ct. 929,
934, 108 L.Ed.2d 23 (1990); Isham, 777 F. Supp. at 831. The
purpose of FIRREA was to strengthen the FDIC's enforcement
powers against the managers of failed thrifts. McSweeney, 772
F. Supp. at 1159; Isham, 777 F. Supp. at 831. It would distort
FIRREA's purpose to interpret it as making it more difficult
for the FDIC to recover from negligent directors and officers.
Based on the plain language and purpose of section 1821(k), the
defendant's motion to dismiss counts one and two is denied.
IT IS THEREFORE ORDERED that Gregory York's motion to
dismiss counts one and two (docket # 4) is DENIED.
IT IS FURTHER ORDERED that Galen Nihiser's motion for an
extension of time (docket # 13) is GRANTED. All three
defendant's are ordered to answer the complaint by March 5,
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