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RESOLUTION TRUST CORP. v. FRANZ

December 15, 1995

RESOLUTION TRUST CORPORATION, Plaintiff,
v.
LYDIA FRANZ and others, Defendants.



The opinion of the court was delivered by: DUFF

 On February 1, 1990, the Office of Thrift Supervision ordered Clyde Federal Savings and Loan Association ("Clyde") into receivership and it appointed the Resolution Trust Corporation ("RTC") as Clyde's receiver. On April 23, 1993, the RTC sued Lydia Franz and others ("Defendants") for their alleged conduct as Clyde's officers and directors. The RTC's Complaint has four counts: (I) Negligence With Respect to Duties Owed To Clyde; (II) Gross Negligence With Respect To Duties Owed To Clyde; (III) Breach of Fiduciary Duty Owed to Clyde; and (IV) Breach Of Contract With Clyde. On July 5, 1995, the Defendants moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons discussed below, we grant in part and deny in part their motion.

 I. Background

 "At all relevant times prior to February 1, 1990, the Defendant[s] comprised a majority of Clyde's Board and they controlled and dominated the actions and decisions of Clyde." Compl. at 9. The RTC alleges that, while the Defendants comprised a majority, they "recklessly" and "with gross negligence" handled Clyde's Options Trading Program, Aransas Loan, and Landbank Loan. Id. at 10.

 The following allegations concern the Options Trading Program. In 1983, the Defendants "passed a resolution authorizing Clyde's Investment Committee members . . . to begin options trading as part of a program Clyde called 'yield enhancement.'" Id. at 11. At the time, none of the Defendants had "experience or training in options trading." Id. As early as December 1983, the Federal Home Loan Bank Board ("FHLBB") criticized the options trading program. Id. at 12. It criticized, among other things, the "improper options writing procedures," "inadequate recordkeeping," "absence of limits on options trading," and "violations of applicable federal law." Id. Despite the criticisms, the Defendants "failed to properly supervise the yield enhancement program." Id. On December 19, 1986, "Clyde entered into a Supervisory Agreement which . . . prohibited [it] from trading options." Id. at 13. "Clyde experienced losses in excess of $ 10 million from options trading." Id.

 The following allegations concern the Aransas Loan. "In early 1984, Clyde funded a $ 5 million participation in a $ 28.5 million loan to build luxury, beach-front condominiums in Port Aransas, Texas called the 'Aransas Princess.' The Aransas Princess was the first out-of-state construction loan Clyde ever made." Id. "At the time Clyde funded the . . . loan, the [Defendants] had delegated full authority to Clyde's Advisory Committee to approve real estate loans." Id. However, "none of the Defendants on the [Committee] . . . had any experience in underwriting, appraising or funding out-of state participation loans for the construction of real property." Id. Despite the inexperience, Clyde "failed to establish appropriate written loan polices," and it "relied upon information provided and analyzed by a broker who stood to receive a substantial fee if the Aransas Princess loan were made." Id. at 14. "The information and analyses of the broker [were] insufficient and improper" for a number of reasons." Id. "The borrower defaulted on the loan on or about October 1, 1985." Id. "Clyde lost in excess of $ 3.7 million on the Aransas loan." Id.

 II. Standard of Review

 When a defendant moves pursuant to Rule 12(b)(6), we accept all well pleaded facts as true and we construe those facts in the light most favorable to the plaintiff. We grant the motion only if "'it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" RTC v. Fortunato, 1994 U.S. Dist. LEXIS 12326, 1994 WL 478616, at *1 (N.D. Ill. September 1, 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-6, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).

 III. Discussion

 A. Counts I, III and IV

 The Defendants argue that, under the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), the RTC may not sue them for negligence, breach of fiduciary duty, or breach of contract. The Defendants rely on RTC v. Gallagher, 10 F.3d 416 (7th Cir. 1993), in which the court held that FIRREA pre-empts federal common law and establishes a gross negligence standard of liability for officers and directors of failed federally chartered financial institutions. Id. at 425. They also rely on RTC v. Chapman, 29 F.3d 1120 (7th Cir. 1994), in which the court held that, despite FIRREA's savings clause, state law is inapplicable to suits against such officers and directors. Id. at 1124-5. Consequently, they argue that we should dismiss with prejudice the RTC's Counts I, III and IV. The RTC constructively concedes by not responding. Therefore, we dismiss with prejudice the RTC's Counts I, III and IV. See RTC v. Gravee, 1995 U.S. Dist. LEXIS 2107, 1995 WL 75373 (N.D. Ill. Feb. 22, 1995).

 B. Count II

 1. Applying the Statute of Limitations

 The Defendants argue that the RTC's gross negligence claim is time barred. For support, they champion Gravee, in which the court wrote that "the RTC may not avail itself of the adverse domination doctrine to toll the statute of limitations." 1995 U.S. Dist. LEXIS 2107, at *7, 1995 WL 75373, at *5 "Based on the reasoning of Gravee and the citations therein, because the RTC was appointed receiver on February 1, 1990, any claims for gross negligence based on actions going back more than five years -- i.e., prior to February 1, 1985 -- would be stale." Id. at 6. Consequently, because the RTC only alleges actions prior to February 1, 1985, the Defendants argue that we should dismiss the RTC's claim.

 The RTC responds that its claim is not time barred. "The RTC respectfully submits that [the] Defendants' reliance on Gravee.. . . is misplaced." Pl.'s Br. at 11. Gravee "was erroneously decided and entailed either a failure accurately to predict Illinois law or an erroneous refusal to predict Illinois law." Id. "When one adds (i) Illinois' adoption of a discovery rule grounded in the same policies as that of adverse domination, and (ii) the Illinois decisions recognizing the interrelationship between domination and tolling, it is virtually assured that the Illinois Supreme Court would adopt adverse domination for causes of action based on gross negligence." Id. at 12. Consequently, because we should apply the adverse domination doctrine, the RTC argues that we should not dismiss its claim.

 Section 1821(d)(14) further provides: "For the purposes of subparagraph (A), the date on which the statute of limitation begins to run on any claim described in such subparagraph shall be the later of - (i) the date of the appointment of the [RTC] as conservator or receiver; or (ii) the date on which the cause of action accrues." In this case, the date of the appointment was February 1, 1990. That date is the later of the two and, therefore, it governs. So, the statute began to run on February 1, 1990, and it ran for five years, making the time bar fall on February 1, 1995.

 In this case, the RTC filed the Complaint on April 23, 1993. Apparently, however, the parties agree that we should deem that it filed the Complaint on January 29, 1993. Pl.'s Br. at 3 n.3. No matter. Either way, the RTC filed before the time bar fell on February 1, 1995.

 The analysis, however, is not so simple because "FIRREA cannot revive stale claims." RTC v. Krantz, 757 F. Supp. 915, 921 (N.D. Ill. 1991). In Krantz, the court considered Fed. Deposit Ins. Corp. ("FDIC") v. Hinkson, 848 F.2d 432 (3rd Cir. 1988), which "stand[s] for the reasonable proposition that a federal agency . . . takes assignments of claims subject to the claims' 'pre-existing infirmity,' and if the limitations period expired before the assignment, the infirmity is complete." Id. (quoting Hinkson, 848 F.2d at 434); see O'Melveny & Myers v. FDIC, U.S. , 114 S. Ct. 2048, 2054, 129 L. Ed. 2d 67 (1994). Based on that proposition, Hinkson held that FIRREA does not revive stale claims. The Krantz court "completely agreed." Id. Subsequently, the RTC v. Gallagher, 800 F. Supp. 595, 599 (N.D. Ill. 1992), aff'd, 10 F.3d 416 (7th Cir. 1993), and RTC v. Chapman, 895 F. Supp. 1072, 1075 (C.D. Ill. 1995) courts also agreed. Now we agree.

 To determine whether the RTC's claim is stale, we must determine when it accrued, and, to do that, we must determine whether the claim sounds in contract, tort, or a hybrid such as a tort arising out of a contractual relationship. The RTC alleges that, based on certain misconduct, the Defendants breached their "express or implied contracts" with Clyde. Compl. at 20. It also alleges that, based on that same misconduct, the Defendants were grossly negligent "with respect to duties owed to Clyde." Id. at 17. So the RTC's claim is a hybrid; it is a tort arising out of a contractual relationship. See FDIC v. Greenwood, 701 F. Supp. 691, 694 (C.D. Ill. 1988). "Where a tort arises out of a contractual duty, the period of limitations begins to run at the time the contract is breached, not at the time the damage is sustained or discovered." Rock Is. Bank v. Aetna Casualty & Surety Co., 692 F.2d 1100, 1103 (7th Cir. 1982); see W. Am. Ins. Co. v. Lobianco & Son Co., Inc., 69 Ill. 2d 126, 132, 370 N.E.2d 804, 12 Ill. Dec. 893 (1977). "The principal reason is that the breach itself is actionable." W. Am. Ins., 69 Ill. 2d at 132.

 The Defendants allegedly breached their contractual duties at three points. First, in 1983, they initiated the Options Trading Program, and, among other things, they failed to heed the FHLBB criticisms. Compl. at 11. Second, in early 1984, they funded the Aransas Loan, and, among other things, they relied on information from an interested broker. Id. at 13. Third, in the fall of 1984, they funded the Landbank Loan, and, among other things, they failed to investigate the risk. Id. at 15. Therefore, the RTC's cause of action accrued before February 1, 1985, and its claim is stale, unless there is some basis for tolling.

 "Generally, the statute is tolled while a corporate plaintiff continues under the domination of the wrongdoers. In other words, the statute does not begin to run until they cease to be directors." 3A James Solheim and Kenneth Elkins, Fletcher Cyc. Corp. § 1306.20 (1994). This is the adverse domination doctrine, and it appears applicable. The problem is that the Illinois courts have not expressly accepted or rejected it.

 In O'Melveny, the Supreme Court discussed how we should proceed without express guidance from state courts. It wrote that we should anticipate or divine state law.

 
Unless Congress has otherwise directed, the federal court's task is merely to interpret and apply the relevant rules of state law. Cases like this one, however, present a special problem. They raise issues . . . that may not have been definitely settled in the state court jurisdiction in which the case is brought, but that nevertheless must be resolved by federal courts . . . . Federal judges must do their best to estimate how the relevant state courts would perform their lawmaking task, and then emulate that sometimes purely hypothetical model.

 114 S. Ct. at 2056 (Stevens, J. concurring) (paragraph omitted).

 Similarly, in Huff v. White Motor Corp., 565 F.2d 104 (7th Cir. 1977), the Seventh Circuit discussed how we should proceed. It wrote that we "must decide what rule the [Illinois] Supreme Court would adopt . . . and apply it." Id. at 106; see Smith v. Pena, 621 F.2d 873, 878 (7th Cir. 1980) (following the Huff rule in a federal question case). "In doing so[,] court[s] should consider all the data which the highest court of the state would consider." Id. In 19 Federal Practice and Procedure § 4507 (1982), Charles Wright & Arthur Miller, list the data. "In vicariously creating state law . . ., the federal court may consider all available legal sources, including the Restatements of Law, treatises, law review commentaries, decisions from other jurisdictions whose doctrinal approach is substantially the same, and the 'majority rule.'" Id. at 101-2. "The federal court must keep in mind, however, that its function is not to choose the rule that it would adopt for itself; it must choose the rule that it believes the state's highest court, from all that is known about its methods of reaching decisions, is likely to adopt sometime in the future." Id. at 103.

 Considering O'Melveny and Huff, we must "do [our] best" to decide whether the Illinois Supreme Court would adopt the adverse domination doctrine. O'Melveny, 114 S. Ct. at 2056; see Chapman, 895 F. Supp. at 1076 (deciding whether the Illinois Supreme Court would recognize the doctrine of adverse domination); but see Gravee, 1995 U.S. Dist. LEXIS 2107, at *7, 1995 WL 75373, ...


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