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Federal Deposit Insurance Corporation As Receiver For Wheatland v. Lewis Mark Spangler

November 15, 2012


The opinion of the court was delivered by: Judge Robert M. Dow, Jr.


This matter is before the Court on Plaintiff's motion to strike certain affirmative defenses [132]. For the reasons set forth below, the Court denies in part and grants in part Plaintiff's motion to strike [132].

I. Background

On April 23, 2010, the Illinois Department of Financial and Professional Regulation ("IDFPR") closed Wheatland Bank in Naperville, Illinois, and appointed the FDIC as receiver. Pursuant to that appointment, the FDIC succeeded to all rights, titles, powers and privileges of Wheatland and the stockholders, depositors and other parties interested in the affairs of Wheatland. See12 U.S.C. § 1821(d)(2)(A)(i) (2010). As receiver, the FDIC is charged with collecting monies owed to the institution and distributing the funds to the creditors of Wheatland. See12 U.S.C. §§ 1821(d)(2)(B)(ii); 1821(d)(11). The FDIC is authorized by Congress to act as receiver to pursue claims against directors and officers of failed banks for alleged breaches of the applicable duty of care. See12USC § 1821(k).

In July 2010, after being substituted for Wheatland in two lawsuits pending in the Circuit Court of Cook County, the FDIC removed those cases to the Northern District of Illinois. The first suit was filed by Wheatland in December 2009 against Michael Sykes, Arthur Sundry, and others, alleging breach of fiduciary duty, tortious inducement of breach of fiduciary duty, fraud, negligence, conspiracy, and deceptive trade practices. The second suit was a shareholder derivative action filed by Michael Sykes in May 2010 against Mark Spangler and other former directors, asserting claims of breach of fiduciary duty, gross mismanagement, waste of corporate assets, and negligence. On May 5, 2011, Judge Hart consolidated these cases, after substituting the FDIC as plaintiff in the Sykes v. Spangler matter, and granted the FDIC's motion for leave to file an amended complaint. After the case was transferred to this Court's docket, the FDIC filed its amended complaint and Defendants' motions to dismiss followed. The Court denied Defendant Mary Davolt's motion to dismiss and granted in part and denied in part the motion to dismiss filed by Defendants Lewis Mark Spangler, Arthur P. Sundry, Jr., Michael A. Sykes, Frank Maly, Dolores Ritter, Beverly Harvey, Michael Rees, Norman Beles, and Leonard Eichas. These Defendants, excluding Beverly Harvey, then answered Plaintiffs' complaint and raised twenty-one affirmative defenses. Plaintiffs moved to strike Defendants' affirmative defenses, and Defendants filed their first amended affirmative defenses to the second amended complaint, asserting eight affirmative defenses.*fn1 Plaintiff then filed the instant motion, challenging several of the remaining affirmative defenses.

II. Analysis

A. Legal Standard

Under Federal Rule of Civil Procedure 12(f) "the court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Motions to strike affirmative defenses are generally disfavored but may be used to expedite a case by "remov[ing] unnecessary clutter from the case." Heller Fin., Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1294 (7th Cir. 1989); Man Roland, Inc. v. Quantum Color Corp., 57 F. Supp. 2d 576, 578 (N.D. Ill 1999); Codest Eng'g v. Hyatt Int'l Corp., 954 F. Supp 1224, 1228 (N.D. Ill 1996). Affirmative defenses will be stricken only when they are facially insufficient; therefore it would be inappropriate to strike an affirmative defense where the issues are complex. See United States v. 416.81 Acres of Land, 514 F.2d 627, 630 (7th Cir. 1975). However, affirmative defenses are pleadings and, as such, remain subject to the pleading requirements of the Federal Rules of Civil Procedure. Heller, 883 F.2d at 1294 (citing Bobbitt v. Victorian House, Inc., 532 F. Supp. 734, 736-37 (N.D. Ill 1982)). That being said, a defendant's pleading will be construed liberally.

B.Affirmative Defenses

1.Affirmative defenses 4 and 5

Defendants have alleged that Plaintiff is comparatively negligent (affirmative defense 5) and that Plaintiff's claims are barred because it failed to mitigate the damages (affirmative defense 4). Essentially, Plaintiff's argument rests on the premise that it has no duty to Defendants as a matter of federal common law. In support of its position, Plaintiff relies heavily on the Seventh Circuit's decision in FDIC v. Bierman, 2 F.3d 1424 (7th Cir. 1993). In turn, Defendants contend that the FDIC failed to cite a United States Supreme Court decision which "substantially, if not completely," undermined the holding and rationale of Bierman. See O'Melveny & Myers v. FDIC, 512 U.S. 79 (1994). Indeed, Plaintiff's opening brief failed to acknowledge the decision in O'Melveny, a troubling exclusion given its obvious relevance to this issue. See Resolution Trust Corp. v. Massachusetts Mut. Life Ins. Co., 93 F. Supp. 2d 300, 304- 06 (W.D.N.Y. 2000) ("Both parties agree that O'Melveny represents important precedent in this case.").

Before the Supreme Court's decision in O'Melveny & Myers v. FDIC, 512 U.S. 79 (1994), there was an emerging consensus in the circuit courts of appeals-including the Seventh Circuit-that, as a matter of federal common law, affirmative defenses alleging (for instance) a failure to mitigate damages could not be raised against the FDIC. This conclusion, called the "no duty rule," rested on the premise that the FDIC owed no duty to officers and directors when acting as receiver of a failed financial institution. See FDIC v. Bierman, 2 F.3d 1424, 1438 (7th Cir. 1993) ("[N]othing could be more paradoxical or contrary to sound policy than to hold that it is the public which must bear the risk of errors of judgment made by its officials in attempting to save a failing institution-a risk which would never have been created but for defendants' wrongdoing in the first instance."). In Bierman, the Seventh Circuit concluded that the FDIC must be allowed to fulfill its statutory mandate of replenishing the insurance fund and "maintain[ing] confidence" in the banking system without the fear of judicial second-guessing. See id. at 1439. The court also found support for its conclusion by analogizing to the discretionary function exception to the Federal Tort Claims Act (FTCA). See id. at 1441; see also United States v. Gaubert, 499 U.S. 315, 334 (1991) (holding that the discretionary function exception of the FTCA shielded United States from tort liability for allegedly negligent actions taken by banking regulators). The Fifth Circuit followed Bierman and extended its holding by preventing a defendant from arguing that losses incurred by the failed bank were causally attributable to the FDIC's poor management of its assets after taking it over. See FDIC v. Mijalis, 15 F.3d 1314, 1323--24 (5th Cir. 1994).*fn2

Several courts have concluded that the no duty rule was undermined by the Supreme Court's decision in O'Melveny & Myers, and Defendants urge the Court to follow suit. In O'Melveny, the FDIC, as receiver for American Diversified Savings Bank ("ADSB"), brought a lawsuit against the law firm of O'Melveny & Myers, which had represented ADSB in two real estate transactions. See O'Melveny, 512 U.S. at 81. The FDIC contended that O'Melveny & Myers had been negligent and breached its fiduciary duty in connection with its representation of ADSB. The law firm argued that the knowledge of ADSB's controlling officers (about their fraudulent conduct) was imputed to ADSB; that the same knowledge was therefore imputed to the FDIC, which as receiver stood in the shoes of ADSB; and that the FDIC was therefore estopped from pursuing its claim against O'Melveny & Myers. See id. In response, the FDIC argued that California law was not relevant to the question, which presented a matter of federal common law. Justice Scalia, writing for a unanimous Court, framed the issue to be decided as follows: "[W]hether, in a suit by the Federal Deposit Insurance Corporation * * * as receiver of a federally insured bank, it is a federal-law or rather a state-law rule of decision that governs the tort liability of attorneys who provided services to the bank." Id. at 80--81.

The Court first held that in actions brought by the FDIC as receiver, state common law governed tort liability-including the affirmative defenses of estoppel and imputation. Noting the general rule that "'[t]here is no federal general common law,'" the Court observed that "the remote possibility that corporations may go into federal receivership is no conceivable basis for adopting a special federal common-law rule divesting States of the authority over the entire law of imputation." Id. (quoting Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938)). The Court then ...

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