One of the most contentious issues in the litigation the FDIC has been pursuing in its capacity as receiver of various failed banks is whether the defendant former directors and officers can assert affirmative defenses against the FDIC for the agency’s own conduct.
In a part of a December 23, 2013 Eleventh Circuit opinion that may have been overlooked because the same opinion also certified to the Georgia Supreme Court important questions involving the business judgment rule under Georgia law, the Eleventh Circuit affirmed the district court’s denial of the FDIC’s effort to strike the individual defendants’ affirmative defenses based on the agency’s alleged post-receivership conduct. . The Eleventh Circuit’s opinion in the case, which arises out of the failure of Integrity Bank of Alpharetta, Georgia, can be found here.
Though the Eleventh Circuit’s certification of the legal questions to the Georgia Supreme Court rightfully has drawn attention, the Court’s ruling on the affirmative defenses may actually be the more interesting part of the opinion. As the first appellate court decision directly on point on the affirmative defenses question, the Eleventh Circuit’s ruling could prove to be very helpful to individual defendants seeking to defend themselves from claims asserted against them by the FDIC.
Integrity Bank of Alpharetta, Georgia was one of the first banks in Georgia to fail as part of the current bank failure wave when it was closed on August 28, 2008. As discussed here, on January 14, 2011, in what was the third FDIC lawsuit overall against former officials of a failed bank and the first in Georgia, the FDIC filed a lawsuit against eight former officials of Integrity Bank. The FDIC’s complaint can be found here.
The FDIC, which filed the lawsuit in its capacity as Integrity Bank’s receiver, seeks to recover “over $70 million in losses” that the FDIC alleges the bank suffered on 21 commercial and residential acquisition, development and construction loans between February 4, 2005 and May 2, 2007. The defendants filed a motion to dismiss. The FDIC filed a motion to strike certain of the defendants’ affirmative defenses.
As discussed at length here, on February 27, 2012, Northern District of Georgia Judge Steve C. Jones held that the FDIC’s claims for ordinary negligence and for breach of fiduciary duty based on ordinary negligence were, as a matter of law, precluded by Georgia’s business judgment rule, and granted the defendants’ motion to dismiss those claims. Judge Jones also granted the FDIC”s motion for summary judgment to strike the defendants’ affirmative defenses based on the FDIC’s pre-receivership conduct, but denied the FDIC”s motion with respect to the affirmative defenses that the defendants asserted based on the FDIC’s post receivership conduct. (The specific post-receivership defenses that the defendants asserted were based on the FDIC’s failure to mitigate damages, reliance and estoppel.) Judge Jones’s opinion can be found here.
The FDIC appealed the district’s dismissal of the negligence and negligent breach of fiduciary duty claims and also appealed the denial of its summary judgment motion to strike the defendants’ affirmative defenses based on the agency’s post-receivership conduct. (The district court’s grant of summary judgment to strike the individual defendants’ affirmative defenses based on the FDIC’s pre-receivership conduct was not appealed and was not considered by the Eleventh Circuit.)
Importantly, and as discussed here, in November 2013, and while the FDIC’s appeal in the Integrity Bank case was pending before the Eleventh Circuit, Northern District Judge Tom Thrash, considering the motion to dismiss of individual defendants in a case involving the failed Buckhead Community Bank, certified to the Georgia Supreme Court the question of whether or not the business judgment rule under Georgia law precluded the FDIC’s claims against the individuals for negligence and for negligent breach of fiduciary duty.
The Eleventh Circuit’s Opinion
In a per curiam opinion of a three-judge panel, the Eleventh Circuit elected to certify to the Georgia Supreme Court the question of whether or not the Georgia business judgment rule barred the FDIC’s claims for negligence and for negligent breach of fiduciary duty. The appellate court affirmed the district court’s denial of the FDIC’s motion for summary judgment to strike the individual defendants’ affirmative defenses based on the agency’s post-receivership conduct.
The Court’s decision to certify the business judgment rule question was based on its identification of a “plausible conflict” between the statutory language of Georgia’s business judgment rule and the case law interpreting the language. The Court acknowledged (in a footnote) that similar questions had already been certified to the Georgia Supreme Court in the Buckhead Community Bank case. The appellate court said it was certifying the question that it was asking “broadly for the state court’s help in getting the state law right in this case.”
In affirming the summary judgment denial, the Eleventh Circuit rejected the FDIC’s so-called “no duty” argument. The FDIC argued (as if often does when individual defendants assert affirmative defenses against the agency in failed bank cases) that “under well-established federal common law, the FDIC owes no duty to bank directors and officers,” and accordingly affirmative defenses cannot be asserted against it as a matter of law.
The Eleventh Circuit expressly concluded that there is no “previously established and long-standing” rule of federal common law to support the FDIC’s “no duty” argument. The Court found that the appellate decisions on which the agency sought to rely “stand at most for the proposition that a bank’s officers and directors cannot assert tort claims against the FDIC because the FDIC owes them no duty.” The appellate court also said that the “sprinkle” of four pre-FIRREA district court cases on which the FDIC relies “completely fails to demonstrate the real existence of the indispensable ‘established and long-standing’ federal common law rule: one exempting the FDIC from defenses under state law.”
The Court went on to say that
In asking this Court to apply a “no duty” rule – which bars tort actions brought by a bank’s directors and officers against the FDIC – to bar affirmative defenses asserted against the FDIC when it is the one advancing claims, the FDIC is asking us to extend a purported federal common law rule to a new and significantly different context. In other words the FDIC is asking this Court to act like a common law court and to create federal common law to fit this case.
The Court concluded the opinion by declining to create a federal common law rule on which the FDIC sought to rely, noting that the federal common law is “basically complete and closed” and that this case did not present the rare case of “a significant conflict” between some federal policy or interest and the use of state law that would otherwise permit the creation of a federal common law rule.
In light of the previous certification to the Georgia Supreme Court in the Buckhead Community Bank case of the business judgment rule question, the Eleventh Circuit’s certification of the question in this case is hardly a surprise. Given that Georgia’s highest Court would be weighing in on the very Georgia state law issues that would otherwise determine the business judgment rule question in this case, it made no sense for the Eleventh Circuit to go out on a limb by propounding its views about the rule, with the possibility that the Georgia court could undercut the federal appellate court’s determination.
But rather than just come right out and say it was certifying the issue because the relevant questions were already going to be considered by the Georgia court, the Eleventh Circuit pronounced that there was a potential conflict in the law requiring certification. (I am sure I am not the only one who wonders if the Eleventh Circuit would have certified the question if the same basic question had not already been certified in the Buckhead Community Bank case.)
Much of the attention to this appellate ruling has been based on the Court’s certification of the business judgment rule question. However, the Court’s ruling that the individuals are not barred from asserting affirmative defenses may be even more significant, particularly the appellate court’s rejection of the FDIC’s “no duty” rule.
In many of the current failed bank cases that the FDIC has filed against former bank directors and officers, the individual defendants have tried to assert affirmative defenses against the agency. The post-receivership defenses involve the agency’s alleged failure to collect on the failed bank’s account or alleged improper disposal of the bank’s assets. The FDIC has generally sought to strike these defenses in reliance on the “no duty” argument.
The district courts have been divided on the question of whether or not the individuals can assert affirmative defenses based on the agency’s post-receivership conduct. Thus, though the district court in this case held that the defendants can assert post-receivership affirmative defenses, other courts --- for example, the Northern District of Illinois in a February 2013 opinion in the Mutual Bank of Harvey case (refer here) – have held that the individual defendants cannot assert post-receivership affirmative defenses.
The Eleventh Circuit’s ruling that these defendants can assert the post-receivership affirmative defenses is significant, and not just because it is the first ruling on point from a federal appellate court on the issue. It is very significant that the Eleventh Circuit expressly rejected the FDIC”s “no duty” argument. The Court’s express holding that the FDIC had “failed to demonstrate the existence of an established and long-standing common law rule barring Defendants’ affirmative defenses” should prove to be very helpful to individual defendants in other cases. If there is no established and long-standing rule, the FDIC has no basis for asserting its “no duty” argument to try to block individual defendants from asserting affirmative defenses based on the agency’s post-receivership conduct.
I have long thought that the agency ought not to be able to block the post-receivership affirmative defenses. The FDIC generally argues that when it takes over as receiver that it “stands in the shoes” of the failed bank. If the bank were still viable and asserted the claims the the agency was asserting against the bank’s directors and officers, the individuals would have the right to assert affirmative defenses against the bank. If the agency is merely standing in the bank’s shoes, then the individuals ought to be able to assert those same defenses against the FDIC.
Of course, merely because the individuals have the right to assert the affirmative defenses does not mean that they will succeed in establishing the defenses as a factual matter or that they will gain as a result of the defenses.
Nevertheless, the Eleventh Circuit’s ruling in this case on the affirmative defenses will be important for many individuals caught up in the failed bank litigation. I frequently hear from individuals involved in these cases that the FDIC itself caused the very losses on which they are trying to collect by the way the agency managed the loans on which the agency’s claims are based or based on how the agency managed the collateral. The Eleventh Circuit’s ruling suggests that the FDIC’s conduct as receiver at least potentially can serve as a basis on which individuals can try to defend themselves and contest the agency’s claims against them.
Special thanks to a Charlie Whorton of the Rivero Mestre law firm in Miami for providing me with a copy of the Eleventh Circuit opinion and for calling my attention to the significance of the ruling on the “no duty” issue.
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
For more information about LexisNexis products and solutions connect with us through our corporate site.