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Federal Deposit Insurance Corporation, Etc v. the Coleman Law Firm

May 22, 2012

FEDERAL DEPOSIT INSURANCE CORPORATION, ETC., PLAINTIFF,
v.
THE COLEMAN LAW FIRM, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Milton I. Shadur Senior United States District Judge

MEMORANDUM OPINION AND ORDER

In its role as receiver for the George Washington Savings Bank (the "Bank"), Federal Deposit Insurance Corporation ("FDIC") has brought suit against the Coleman Law Firm ("Coleman") and Kevin Flynn & Associates ("Flynn"), seeking recovery of funds paid to them by the Bank in alleged violation of 12 U.S.C. §1828(k)(3).*fn1 Defendants filed a motion to dismiss the action under Fed. R. Civ. P. ("Rule") 12(b)(6), and the litigants have briefed the matter. For the reasons stated here, Count I is dismissed as moot, while the motion is denied as to Counts II and III.

But before this opinion turns to its substantive discussion, something should be said about the very fact that there are three "counts" over which the parties have crossed their litigation swords. In truth FDIC has a single "claim for relief," the operative concept in federal practice (see the lucid discussion in NAACP v. Am. Family Mut. Ins. Co., 978 F.2d 287, 291-92 (7th Cir. 1992))--and yet FDIC's counsel, infected by the same virus that tends to inflict itself on virtually all Illinois lawyers, have carved up that single claim into so-called "counts"*fn2 to separate out different theories of liability. Such separation is of course the hallmark of a "cause of action," a state law concept that should play no role in federal pleading.

Despite the passage of two decades since the teaching essayed in the NAACP case, this Court finds itself part of a small minority that follows its lead. It may or may not be too late to hope for a restoration to first principles (remember that Cato the Elder was ultimately successful in his ubiquitous efforts that had concluded every speech on the floor of the Roman Senate, whatever the subject matter, with "Delenda est Carthago"--"Carthage must be destroyed." But in this instance the parties' usage has compelled this Court to follow their lead by dividing up the discussion in terms of the Complaint's three "counts."

Rule 12(b)(6) Standards

Under Rule 12(b)(6) a party may move for dismissal of a complaint on the ground of "failure to state a claim upon which relief can be granted." By now it is stale news that nearly five years ago Bell Atl. Corp. v. Twombly, 550 U.S. 544, 562-63 (2007) repudiated, as overly broad, the then half-century-old formulation in Conley v. Gibson, 355 U.S. 41, 45-46 (1957) "that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Twombly held that to survive a Rule 12(b)(6) motion a complaint must provide "only enough facts to state a claim to relief that is plausible on its face" (550 U.S. at 570). Or put otherwise, "[f]actual allegations must be enough to raise a right of relief above the speculative level" (id. at 555). Since then Erickson v. Pardus, 551 U.S. 89 (2007) (per curiam) and Ashcroft v. Iqbal, 556 U.S. 662 (2009) have provided further Supreme Court enlightenment on the issue.

Familiar Rule 12(b)(6) principles--still operative under the new pleading regime--require this Court to accept as true all of FDIC's well-pleaded factual allegations, with all reasonable inferences drawn in its favor (Christensen v. County of Boone, 483 F.3d 454, 457 (7th Cir. 2007) (per curiam)). What follows in this opinion adheres to those principles, with allegations in the Complaint cited "¶ --" and its exhibits cited "Ex. --."

Background

In or around June 2009*fn3 FDIC noted a significant decline in the Bank's overall financial condition and alerted the Bank to its concerns in a September 9 letter and a September 24 meeting with the Bank's Board of Directors (the "Board") (¶29). During that meeting FDIC advised the Bank that its tentative off-site rating under the Uniform Financial Institutions Rating System had fallen and notified the Board that an early comprehensive examination was being scheduled (¶31). One of the Bank's inside directors, Mark J. Weigel ("Mark"), pointed out at a September meeting of the Bank's senior management that the Bank was burdened by the high cost of funds and that its liquidity remained critical (¶32). Throughout October and November the Bank repeatedly sought legal advice from its regulatory counsel about its precarious financial position (¶33). In late October or early November one of the Bank's outside directors, John Kovatch ("Kovatch"), repeatedly observed that the Bank was going to be closed, and in a November 10 meeting of the Bank's senior management Mark noted the likelihood that FDIC would place the Bank under some kind of disciplinary constraint (¶¶34-35).

On November 19 Mark and another inside director of the bank, George E. Weigel ("George"), executed an Advance Payment Retainer Agreement with Coleman (the "Coleman Agreement") under which Coleman would represent Mark and George "in any action, suit or proceeding...in which [Mark or George] are made, or are threatened to be made, a party to, or a witness in, such action, suit or proceeding by reason of the fact that he is or was an officer, director or employee of [the Bank]" (Ex. 1). On November 20 the Bank paid Coleman $150,000 pursuant to the Coleman Agreement in prepayment for future legal services to be rendered to Mark or George relating to their positions at the Bank (¶24).

FDIC notified the Bank of the early comprehensive examination's findings in a November 24 letter (¶36). It concluded among other things that (a) the Bank's asset quality was of significant concern, (b) the Bank had an excessive amount of adversely classified loans, including approximately $154 million substandard, $2 million doubtful and $33 million in loss status and (c) the Bank should make an immediate adjustment to its Allowances for Loans and Lease Losses account--which provides an estimate of uncollectible debts used to reduce the book value of a bank's loans and leases--to lower its Tier 1 leverage capital (id.). Such an adjustment would cause the Bank to become critically undercapitalized (id.).

By an agreement dated November 30 (the "Flynn Agreement") the Bank retained Flynn to "advise, counsel and defend" various outside directors, including Kovatch, in any proceeding in which an outside director was made or threatened to be made a party or witness by virtue of his or her role as an officer, director or employee of the Bank (¶25, Ex. 2). On December 2 the Bank paid Flynn $100,000 pursuant to the Flynn Agreement in prepayment for future legal services to be rendered to outside directors relating to their positions at the Bank (¶27).

Both the Coleman and Flynn Agreements (Exs. 1 and 2) contain this provision:

[U]nder the unique and special circumstances present at this time, the Law Firm,*fn4 Clients and [the Bank] believe the use of an Advance Payment Retainer is advantageous to the Clients because of the present and likely risk that [the Bank] will be seized or otherwise taken over by [FDIC] before the services provided herein are fully provided. As a consequence, the Clients may be left with inadequate ...


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