The "intentional wrongdoing" theory is viable. First, the adverse domination doctrine presumes that those who engage in culpable activity will make it difficult for others to discover their misconduct. Similarly, it presumes that, if others discover the misconduct, the culpable directors will make it difficult for the company to pursue its claims. Both presumptions imply that the culpable directors take an active, intentional role. Blasdell, 1994 WL 583131, at *14. Second, "if [the] adverse domination [doctrine] is not to overthrow the statute of limitations completely in the corporate context, it must be limited to those cases in which the culpable directors have been active participants in wrongdoing or fraud." Dawson, 4 F.3d at 1312. Third, in the Illinois cases that come closest to endorsing the adverse domination doctrine, Auer and Butts, the culpable trustees were just such active participants. Therefore, perhaps we should adopt the "intentional wrongdoing" theory here.
On the other hand, the "at least negligence" theory is also viable. First, under this theory, courts again consider the adverse domination doctrine's presumptions, but they reach a different conclusion. "Because of a lack of information on the part of innocent actors, or unwillingness on the part of the culpable directors to sue themselves" the doctrine tolls the statute of limitations. Fiala, 870 F. Supp. at 974-5. "This rationale applies even if the board's conduct does not rise to the level of fraud or purposeful conduct." Id. at 975. Therefore, it is "consistent with the rationale of the adverse domination [doctrine] to apply [it] in cases involving breach of fiduciary duty, negligence, or gross negligence." Id. at 974. Second, we should be most concerned with the Illinois cases that apply the discovery rule because they are the basis for our derivation of the adverse domination doctrine. In Hermitage, the Illinois Supreme Court applied the discovery rule to negligence claims. 166 Ill. 2d at 74 and 87. Therefore, perhaps we should adopt the "at least negligence" theory here.
To resolve this issue, we step back and consider what the plaintiff has to prove if a defendant raises a statute of limitations defense. "When a plaintiff uses the discovery rule to delay commencement of the statute of limitations, the plaintiff has the burden of proving the date of discovery." Hermitage, 166 Ill. 2d at 85. In the corporate context, that means that the plaintiff must prove the date on which the company knew or should have known of its cause of action. In turn, that means that the plaintiff must prove the date on which the majority of the directors knew or should have known of the cause of action. For a plaintiff to prove that date, how culpable must the directors be? To take care of the "knew" part, their culpability level must include knowledge. But what about the "should have known" part? For that, their culpability level must be the point at which the plaintiff may impute knowledge to them. That point is recklessness. Below, we discuss how in Illinois recklessness is equivalent to gross negligence. So if the plaintiff can prove that the directors exhibited recklessness/gross negligence, the plaintiff can carry its burden and prevail against a statute of limitation defense. This result perhaps jibes best with the "more than mere negligence" theory, but it pinpoints the culpability floor at recklessness/gross negligence.
We consider whether the RTC adequately pleads that a majority of the Defendants exhibited recklessness/gross negligence until at least February 1, 1985. The RTC pleads that, until February 1, 1990, the Defendants "comprised a majority of Clyde's Board and [they] controlled and dominated the actions and decisions of Clyde." Compl. at 9. Moreover, it pleads that, while the Defendants comprised a majority, they acted "recklessly" and with "gross negligence." Id. at 10 and 17. For example, "in 1983 and thereafter," they failed to "heed regulatory criticisms as set forth in the [FHLBB] Examination reports, correspondence and supervisory meetings." Id. at 10. Particularly in the context of a motion to dismiss, that example sounds sufficiently in recklessness/gross negligence. See Id. at 13 and 15 (providing other examples sounding sufficiently in recklessness/gross negligence). Therefore, the RTC adequately pleads facts sufficient for us to apply the adverse domination doctrine and toll the accrual of its claim for gross negligence until after February 1, 1985.
Next, however, the Defendants argue that, if we apply the doctrine, we should limit the application because the FHLBB knew or reasonably should have known of their alleged wrongdoing as early as 1983. Defs'. Rep. Br. at 3. "It is simply not sound policy to allow federal regulators to ignore problems as they happen, and then years later come back and impose substantial burdens on defendants to defend and the courts to decide events that happened in the distant past." Id. at 4. "Because the FHLBB knew or reasonably should have known . . . long before the limitations date and also possessed the power to address that wrongdoing, any state law claims against [the Defendants] would not have been tolled during that time." Id. at 5. Consequently, the Defendants argue that those claims were "stale at the time the RTC was appointed receiver." Id. at 5.
The RTC responds that we should not limit the application of the adverse domination doctrine. "The FHLBB's knowledge of [the] Defendants' wrongdoing and possible ability to place Clyde into receivership . . . is irrelevant to the [doctrine]." Pl.'s Br. at 10. "There are many complex issues that federal regulators consider in deciding whether or not to close a financial institution." Id. Under the Defendants' argument, "these complicated issues . . . would all be reduced to a single question -- the need to file a professional liability claim." Id. Moreover, "unlike [the] Defendants, regulators were not charged with protecting Clyde's interests, and [the] Defendants should not avoid the consequences of their gross negligence on the basis of the regulators' knowledge thereof." Id. at 11. Consequently, the RTC argues that we should continue to toll the statute of limitations until at least February 1, 1985, which would make its claim not stale at the time it was appointed receiver.
In Farmer, the court considered whether a regulatory body may "qualify as an informed, empowered, but not culpable person" such that it may negate adverse domination. 865 F. Supp. at 1158. The court wrote that:
virtually every court that has addressed this issue, in whatever guise the defendants raised it, has held that the fact that a regulatory body -- even the eventual plaintiff -- acquired knowledge of the wrong and possessed certain power over the institution, including the ability to request director resignations, does not negate the [doctrine] or constitute, standing alone, the necessary cessation of domination . . . .
Id. (citing RTC v. Hecht, 833 F. Supp. 529, 533 (D. Md. 1993); RTC v. Fleischer, 826 F. Supp. 1273, 1277-8 (D. Kan. 1993); FDIC v. Howse, 736 F. Supp. 1437, 1442 (S.D. Tex. 1990); FDIC v. Buttram, 590 F. Supp. 251, 254 (N.D. Ala. 1984)). Subsequent courts that have considered the issue, however, suggest that the Farmer court's view may be overstated. See RTC v. Barton, 1995 U.S. Dist. LEXIS 5567, 1995 WL 241849, at *4 (E.D. La. April 24, 1995); RTC v. Wood, 870 F. Supp. 797, 808-9 (W.D. Tenn. 1994); O'Bear, 886 F. Supp. at 666-7.
O'Bear and Barton are distinguishable because the agencies assumed active or latent control of the financial institutions. In O'Bear, the limitations period began to run when, "as a result of [a] . . . Consent Agreement, the FHLBB assumed and acquired complete managerial and operational control of [the financial institution] and its Board of Directors." 886 F. Supp. at 666-7. In Barton, the limitations period began to run when, as a result of the OTS declaring the financial institution insolvent, the institution's "Board served at the mercy of the OTS." 1995 U.S. Dist. LEXIS 5567, 1995 WL 241849, at *4 At that point, the Board "was not adversely dominating anything but instead was required to ask permission before making any loans." Id. In this case, however, at least before February 1, 1985, the FHLBB did not impose a Consent Agreement or declare Clyde insolvent. Or more generally, it did not assume active or latent control of Clyde.
Wood is also distinguishable, and it is an outlier. In that case, the limitations period began to run when, as a result of the FHLBB's "awareness of the [financial institution's] declining net worth position and resultant decreased life expectancy," the FHLBB could no longer "reasonably claim lack of knowledge" of its claim. 870 F. Supp. at 808. At that point, the FHLBB "possessed the authority to appoint a conservator." Id. In effect, the court decided not to toll the accrual because the FHLBB had the authority to assume active or latent control, even if it did not exercise that authority. In this case, however, the FHLBB did not clearly have the authority to appoint a receiver before February 1, 1985. Further, in this case, there is no evidence that the FHLBB was "willfully blind" to its authority such that it injured the Defendants' rights and implicated their policy concerns. See Id. at 809. In any event, the Wood court's decision, made without the benefit of briefing or citations to authority, is uncompelling precedent.
On the facts of this case, the Farmer court's result remains persuasive. Therefore, we apply the adverse domination doctrine and toll the accrual of the RTC's claim until at least February 1, 1985. And therefore, its claim is timely.
2. Stating a Cause of Action
The Defendants argue that the RTC may not sue for gross negligence. "Under FIRREA, the Court must turn to applicable state law to determine and define the appropriate standard for gross negligence." Def. Br. at 8. Illinois law, however, does not "recognize degrees of negligence" and does "not recognize a separate and independent tort of [gross negligence]." Id. "If the governing state law does not create a cause of action for gross negligence or similar conduct, then there is no 'applicable' state law to which the court can turn to define and determine those terms for the purposes of imposing liability." Id. at 8-9. Consequently, the Defendants argue that we should dismiss the RTC's claim.
The RTC responds that we should not dismiss it. It argues that federal law provides that it may sue for gross negligence; that federal law provides that state law should provide only the definition of gross negligence; and that Illinois law provides such a definition. Pl.'s Br. at 13. Consequently, the RTC argues that we should not dismiss its claim.
The applicable statute governing liability of directors and officers is 12 U.S.C. § 1821(k) ("§ 1821(k)"), and it provides:
A director or officer of an insured depository institution may be personally liable for monetary damages in a civil action . . . for gross negligence, including 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 under applicable State law.
In Gravee, the court rejected the Defendants' argument. It wrote that "under Chapman, it is perfectly clear that § 1821(k) creates a federal cause of action for gross negligence." 1995 U.S. Dist. LEXIS 2107, 1995 WL 75373, at *4; see Chapman, 29 F.3d at 1124. The Gravee court explained that there is a qualitative difference between providing the rule of decision and the definition of a term. Id. In this case, Section 1821(k) provides the rule of decision, and, because of unfortunate congressional drafting, Illinois law provides the definition of the term. Moreover, Illinois does not need to have a cause of action for gross negligence for it to define the concept of gross negligence. Therefore, we agree with the Gravee court's reasoning and result, and we deny the Defendant's motion to dismiss the RTC's claim on this ground.
Next, the Defendants argue that, even if the RTC may bring a gross negligence claim, it fails to allege facts sufficient to sustain the claim in this case. "In the place of gross negligence, Illinois courts employ the concept of 'willful and wanton misconduct.'" Def.'s Br. at 8. "Since [the RTC's] allegations relate to breaches of fiduciary duty, the court should use the standard of willful and wanton misconduct that is employed by Illinois courts in the context of breaches of fiduciary duties." Id. at 11. "In that context, a piaintiff must plead and prove intentional breach of duty to establish willful and wanton misconduct." Id. Consequently, the Defendants argue that, because the RTC's "complaint contains not a single allegation of intentional wrongdoing," we should dismiss the RTC's claim. Id.
The RTC responds that it does not fail to allege sufficient facts. The RTC argues that the definition of gross negligence is very great negligence, which is something less than willful and wanton conduct. Pl.'s Br. at 14. Moreover, "to the extent that Ziarko [v. Soo Line R.R., 161 Ill. 2d 267, 641 N.E.2d 402, 204 Ill. Dec. 178 (1994),] was blurring the distinction between gross negligence and willful and wanton conduct, it is because the court was lessening the willful and wanton standard, not increasing the gross negligence standard." Id. at 15. "Even if the Court concludes that the RTC must plead willful and wanton conduct, Ziarko confirms that willful and wanton conduct does not rise to the level of intentional conduct." Id. Consequently, the RTC argues that, because its complaint contains allegations of very great negligence, we should not dismiss its claim.
Illinois civil law provides no practical, affirmative definition of gross negligence. In Chicago, Rock Is. & Pac. Ry. Co. v. Hamler, 215 Ill. 525, 74 N.E. 705 (1905), the court discussed the issue of comparative negligence. It wrote that, "formerly, this court, in expounding the doctrine of comparative negligence, classified negligence into three degrees, as slight, ordinary and gross; but that doctrine was long ago abolished." Id. at 533. "One of the reasons given by the courts for disregarding supposed distinctions in degrees of negligence [was] the inability to give the terms 'slight,' 'ordinary' and 'gross' any definite meaning and the impracticability of applying any rule based on the supposed distinction." Id. at 536. Courts were unable to give the terms meaning because "negligence cannot be divided into three compartments by mathematical lines." Id. at 535. Courts often speculated on meanings, but their "speculations on that subject [led] to no practical result." Id. at 534.
Illinois civil law, however, provides a practical, negative definition of gross negligence. In other words, the law provides a sense of what gross negligence excludes. Most importantly, it excludes willful conduct, where such conduct is similar to intentional conduct. "Negligence and willfulness are as unmixable as oil and water." Id. at 540; see Bartolucci v. Falleti, 382 Ill. 168, 176, 46 N.E.2d 980 (1943) (same). In Massa v. Dep't of Registration and Educ., 116 Ill. 2d 376, 507 N.E.2d 814, 107 Ill. Dec. 661 (1987), the court affirmed the exclusion, writing that 'gross negligence is commonly understood to encompass 'very great negligence, . . . but it is something less than . . . willful, wanton and reckless conduct.'" Id. at 387 (quoting Black's Law Dictionary 932 (5th ed. 1979)). In Burke v. 12 Rothschild's Liquor Mart, Inc., 148 Ill. 2d 429, 593 N.E.2d 522, 170 Ill. Dec. 633 (1992), the court again affirmed the exclusion, writing that, "in order to find [quasi-intentional willful and wanton] conduct[,] 'a state of mind different from that needed in ordinary and gross negligence is required.'" Id. at 449 (quoting Morrow v. L. A. Goldschmidt Assocs., Inc., 126 Ill. App. 3d 1089, 1095, 468 N.E.2d 414, 82 Ill. Dec. 152 (1st. Dist. 1984), judgment rev'd on other grounds, 112 Ill. 2d 87, 492 N.E.2d 181, 96 Ill. Dec. 939 (1986)). And in Ziarko, the court yet again affirmed the exclusion, approving of the Burke court's "perception of a 'qualitative difference' between negligent [conduct] and willful and wanton conduct . . . that amounts to intentional behavior." 161 Ill. 2d at 273 and 279.
Meanwhile, § 1821(k) excludes culpability for simple negligence. The statute's plain language requires more; it requires gross negligence "or conduct that demonstrates a greater disregard of a duty of care than gross negligence." Id. Moreover, the Seventh Circuit interprets the statute as requiring more. Gallagher, 10 F.3d at 418 (finding that FIRREA "pre-empts federal common law and establishes a gross negligence standard of liability for officers and directors of failed federally chartered institutions"); Gravee, 1995 U.S. Dist. LEXIS 2107, 1995 WL 75373, at *3 (writing that "after Gallagher, O'Melveny, and Chapman, the RTC cannot proceed against the directors and officers of such an institution on a claim of simple negligence, whether under state law or federal common law").
So we return to Illinois law with the parameters that the term gross negligence must mean something less than intent and something more than negligence, and, on our return, we discover that Illinois criminal law defines gross negligence as recklessness. In Illinois v. Khan, 136 Ill. App. 3d 754, 483 N.E.2d 1030, 91 Ill. Dec. 544 (1st Dist. 1985), the court wrote that "the terms 'gross carelessness' and 'gross neglect' or 'gross negligence' are the historical predecessors of the term 'recklessness' and have the same meanings." Id. at 760; see Illinois v. Howard, 232 Ill. App. 3d 386, 392, 597 N.E.2d 703, 173 Ill. Dec. 729 (1st Dist.), appeal denied, 146 Ill. 2d 639, 602 N.E.2d 464 (1992) (same). The term recklessness denotes "'a course of action which . . . shows an utter indifference to or a conscious disregard for a person's own safety and the safety of others.'" Ziarko, 161 Ill. 2d at 279 (quoting IPI Civil 3d No. 14.01).
Defining gross negligence as recklessness is consistent with horn book law. In William Prosser, The Law of Torts § 34 (4th ed. 1971), the professor writes:
The result is that "wilful," "wanton" or "reckless" conduct tends to take on the aspect of highly unreasonable conduct, or an extreme departure from ordinary care, in a situation where a high degree of danger is apparent. As a result there is often no clear distinction at all between such conduct and "gross" negligence, and the two have tended to merge and take on the same meaning, of an aggravated form of negligence, differing in quality rather than in degree from ordinary lack of care.