The opinion of the court was delivered by: ROYCE C. LAMBERTH
This case, now in its fifth year, stems from the failure of the National Bank of Washington (NBW), a federally-insured national bank, chartered in the District of Columbia, which failed in 1990. In August of that year, FDIC was named receiver for NBW, and it is as receiver for NBW that FDIC brings the present suit.
In July of 1992, after an intensive two-year investigation, FDIC brought suit against eleven defendants: ten directors and one officer of NBW. In its forty-two count amended complaint, FDIC brought ten counts each of negligence, gross negligence, breach of fiduciary duty, and breach of contract against various combinations of defendants and one count each of rescission and restitution against former Chairman of the Board and Chief Executive Officer Luther Hodges. The claims are predicated on loans made by NBW to a bank holding company and to a major law firm (sixteen and twelve counts, respectively), board approval and Hodges' acceptance of a "golden parachute" payment (six counts), and profits made by Luther Hodges incident to the purchase of property sold by NBW (eight counts).
Each defendant filed a motion to dismiss or, in the alternative, for summary judgement as to each of the forty-two counts.
As to twenty-six of the counts, FDIC opposed the motions. However, FDIC acknowledged that sixteen of the counts, those based upon NBW's loan to Royal Windsor Holding Company, were not ripe; it therefore moved to dismiss these counts voluntarily - and without prejudice - under Fed. R. Civ. P. 41(a)(2). The defendants agreed that the counts should be dismissed, but insisted that the dismissal be done with prejudice. They also moved for the imposition of Rule 11 sanctions against FDIC for bringing these sixteen claims with full knowledge that they were not ripe. In light of defendants' position, FDIC hedged on its motion for voluntary dismissal and asserted 1) that the loan could technically be considered in default; and/or 2) that the claims should be treated as praying for declaratory relief.
As a side issue, the parties also hotly contested the content of the record. In FDIC's oppositions to defendants' motions for dismissal/summary judgment, FDIC did not include affidavits but rather seven non-sworn, non-authenticated documents. Certain defendants
moved to strike this evidentiary submission, as well the Statement of Genuine Issues of Material Fact which it ostensibly supported, claiming that they violated Fed. R. Civ. Pro. 56 and Local Rule 108(h). FDIC responded to this motion by asserting that it needed further discovery of defendants before the court could rule on the summary judgment issues.
Thus, the case came before the court for oral argument on January 22, 1993, on defendants' motions for dismissal/summary judgment, FDIC's two oppositions, and defendants' replies thereto; defendants' motions for Rule 11 sanctions, FDIC's opposition, and defendants' replies thereto; and defendants' motion to strike FDIC's general issues of material fact, FDIC's combined response and motion to deny summary judgment, defendants' responses, and FDIC's reply. Also before the court are FDIC's motion to strike defendants' affirmative defenses or for summary judgment, defendants' oppositions, and FDIC's reply.
In addressing a party's motion to dismiss, the court must construe all facts in the light most favorable to the non-moving party. Therefore, it is customary for a court to use plaintiff's complaints as the basis for its statement of facts. With this in mind, in each of the following sections, the first portion of the statement of facts is drawn from FDIC's amended complaint.
However, FDIC's complaint incorporated a selective recital of the facts and omitted a significant number of highly relevant details which are, needless to say, very favorable to defendants. Many of these facts, made part of the record by defendants in their motions for dismissal/summary judgment, make clear that FDIC's version of the facts is not only incomplete but also quite misleading as to several key elements of the charged transactions. Therefore, after relating FDIC's statement of the facts, the court also summarizes defendants' version. As these facts have not been controverted by FDIC, the following may be treated as findings of fact for Rule 56 purposes.
1. Mr. Hodges, Mr. Wall, and the "Special Fund."
FDIC: Luther Hodges was CEO and Chairman of the Board of NBW from 1980 to January 31, 1990. During that time, Mr. Hodges participated in decisions to extend credit to two companies controlled by, among others, E. Craig Wall, Jr., a friend and business associate of Mr. Hodges. Mr. Wall also controlled an account at North Carolina National Bank, sometimes termed the "Special Fund." This fund loaned money to Luther Hodges, allegedly on favorable terms.
Defendants: The Special Fund, an outgrowth of Mr. Wall's investments, served as Mr. Hodges primary account beginning in the 1970s and continuing in the 1980s. It served as Mr. Wall's investment vehicle, and funds were shifted among the investments of Mr. Wall and the other investors in the Special Fund. The Special Fund treated Mr. Hodges like any other investor. The court will not further detail the workings of the Special Fund as the fund is not charged in the complaint.
FDIC: In January of 1986, Mr. Hodges created a blind trust controlled by Mr. Wall. The trust invested in four entities, each of which was a customer of NBW at some time. Mr. Hodges provided Mr. Wall with confidential information regarding one of the companies, Envipco, which NBW's Audit Committee found to be a violation of NBW's code of ethics. Mr. Hodges did not reveal the existence of the blind trust to NBW until it was revealed in discovery in this litigation in September 1989.
Defendants: Two of the companies in which the trust invested became customers of NBW only after they were part of the blind trust; both paid their loans in full. Upon learning of the blind trust, several of NBW's outside directors asked outside counsel, including John Olsen of Gibson, Dunn & Crutcher, to examine the matter; his reports were made to special meetings of the NBW and WBC boards in October and November of 1989. During the same months, NBW informed the Office of the Comptroller of the Currency ("OCC") about the blind trust; OCC and its counsel did not take action - or even suggest that action should be taken - against Mr. Hodges. The Audit Committee, using a memorandum which was prepared by New's general counsel (Kathleen Collins, the author of NBW's code of ethics) and based upon a joint analysis prepared by Gibson, Dunn & Crutcher and Wilmer, Cutler & Pickering, found that the blind trust did not constitute a violation of the code of ethics; it further determined that disciplinary action was inappropriate.
3. The Green Line Transaction.
FDIC: In 1984, NBW received a tract of land in connection with a work-out of a failed loan. It was termed the Green Line property because of its anticipated future use: as a station on Washington's Metro system. The property was received by NBW at a value of approximately $ 2 million. Mr. Hodges brought the property to Mr. Wall's attention, and Wall Associates purchased the property for $ 3.75 million on December 30, 1985, even though an October 15, 1985, appraisal had set the value of the property at $ 6.62 million. Several years later, Wall Associates resold the property for approximately $ 7.6 million, netting Mr. Hodges (who had acquired an interest in the property from Mr. Wall) a profit of $ 360,000.
Defendants: G. William Hollar, NBW's Senior Vice President and Manager of its Real Estate Division, determined that the $ 6.62 million appraisal was severely overvalued; his evaluation revealed a value of about $ 3.8 million. (Mr. Hollar has not been charged by FDIC for underrepresenting the value of the land.) Under OCC regulations, NBW was required to sell the Green Line land promptly, and no later than a time when it could recoup the amount of the original loan plus any expended costs. Mr. Hollar contracted to sell the land to Conrad Monts in October 1984 for $ 3.75 million, but the deal fell through. One year later, Mr. Hollar attempted to sell the land to another group of investors for $ 3.75 million, but again the deal failed. Finally, Wall Associates purchased the land for the same $ 3.75 million. The sale thus kept NBW within OCC regulations and netted to NBW a profit of over $ 1 million.
4. Royal Windsor Transaction.
FDIC: In 1987, a group of investors, including defendants Del Col and Hawes, formed Royal Windsor Holding Company ("RWHC") in order to purchase a troubled Louisiana bank, Jefferson Guaranty Bank ("JGB"). On July 15, 1987, at a WBC
board meeting at which several defendants were present (including Messrs. Del Col and Hawes, who did not vote due to their interest in the transaction), the WBC board approved the purchase of approximately $ 6.5 million in RWHC preferred and common stock. After FDIC agreed to contribute $ 57.5 million in capital to JGB, and in conjunction with the FDIC loan, NBW loaned RWHC $ 6 million. FDIC admits in the complaint that the loan is not due for two more years, but claims that a $ 6 million loss "is reasonably certain to occur."
Defendants: Pursuant to NBW's regular loan review procedures, no NBW board approval of the loan to RWHC was required. The loan is current and there has not been an actual or anticipatory breach.
5. Mr. Hodges' Golden Parachute.
FDIC: In January 1988, NBW and WBC's boards approved an employment contract for Luther Hodges which provided for "golden parachute" payments if Mr. Hodges were terminated prior to the end of the contract. In a settlement agreement approved by this court, Mr. Hodges agreed to resign from NBW and WBC's boards, thus triggering a "change in control" and obligating NBW to make the golden parachute payments. Even though the board learned of Mr. Hodges' blind trust in the fall of 1989, it nonetheless paid Mr. Hodges the contractual termination payments, a value of $ 1.6 million.
Defendants: Mr. Hodges employment contract was reviewed and approved by OCC. The contract specified that Mr. Hodges would receive his severance pay unless Mr. Hodges had been terminated for cause; cause was specifically defined, and it is undisputed that Mr. Hodges did not violate any of the "for cause" provisions that would justify a refusal by NBW to make the severance payments.
6. The Finley, Kumble Transaction.
FDIC: In 1986, NBW granted the law firm of Finley, Kumble ("FK") a $ 10 million line of credit which was paid back, in full, in January 1987. On January 21, while waiting for FK's FY 1987 financial data (for the year February 1986 - January 1987), NBW's board unanimously approved a ninety-day extension of the line of credit. Defendant Neitzey was the loan officer on this account. On April 15, 1987, NBW's board unanimously approved a sixty-day extension of the line of credit. On June 8, 1987, FK drew down the entire $ 10 million line of credit, and on July 15, 1987, the NBW board unanimously approved the loan. The firm folded in November 1987.
Defendants: The loan to Finley, Kumble was a renewal of a performing line of credit to a highly-desired customer. The April extension was granted so that NBW could review FK's FY 1987 data and further negotiate the terms of the loan. On June 3, 1987, defendant Washington (a member of NBW's board as well as one of three managing partners of FK), signed loan papers and averred that there had been no material adverse change in FK's financial condition since October 1986. Six members of NBW's management had approved the loan, and three major New York banks were making contemporaneous and equivalently-large loans to FK. Moreover, when FK began foundering, NBW did not call the loan only because it had agreed with FK's other major creditors that to call any of the loans would be imprudent as it would send FK immediately into bankruptcy.
II. TRANSACTIONAL DISMISSALS.
Twenty of the counts in the amended complaint may be dismissed because the facts of the underlying transaction do not support the cause of action FDIC claims. This section addresses these transactions and their respective counts, all of which are dismissed for failing to state a claim under Fed. A. Civ. P. 12(b)(6).
A. The Green Line Transaction.5
FDIC charges Luther Hodges with four counts based on the sale of the Green Line property, alleging that Mr. Hodges' improper actions caused NBW to consummate the sale at $ 3.75 million, $ 3 million less than the land's appraised value. The complete version of the (undisputed) facts, rather than FDIC's highly selective recital of them, demonstrate why these counts must be dismissed pursuant to Rule 56.
The uncontroverted facts are as follows:
o Under 12 U.S.C. § 375, Mr. Hodges, despite his status as CEO and Chairman of the Board, could purchase the property legally, so long as the sale was on terms not more favorable than those offered to the general public.
o The terms of the Green Line sale to Wall Associates were identical to those offered in two previous, but unsuccessful, attempts to sell the property to outsiders.
o NBW was required to sell the property as soon as it could recoup its "investment" and expended costs. Thus, NBW was not able to retain the land for speculation; nor could it develop the land to enhance its sale value. The value of the land, as far as NBW was concerned, was the lowest price - above the investment plus expended cost threshold - at which NBW could sell the land. Given NBW's two prior attempts to sell the property, that value could not be in excess of $ 3.75 million. And,
o Rather than suffering a loss on the sale of the Green Line property, NBW actually realized a profit in excess of $ 1 million.
In order to recover on these four counts, FDIC can state a claim only if it can show an injury, that is, that Mr. Hodges' improper conduct caused NBW to realize less on the sale than it otherwise would have. See 3 William M. Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 992 (perm ed. rev. vol. 1986). This proof is impossible. Regardless of the existence of the blind trust, the transaction was legal under 12 U.S.C. § 375. Given that the record of NBW's efforts to sell the land indicate that the terms of the sale to Wall Associates were identical to those given to two outside parties over the course of a year, the fact that § 375's terms were satisfied cannot seriously be questioned. On the sale of the Green Line property, therefore, NBW received a profit of $ 1 million, more than satisfying § 375, and the alleged or actual participation of Mr. Hodges - via the blind trust - is irrelevant. In short, this was an entirely proper sale, according to statute, and NBW has suffered no actionable loss.
Thus, these counts must be dismissed under Rule 12(b)(6) for failing to state a claim on which relief may be granted.
B. The Royal Windsor Loan.7
FDIC has brought sixteen counts against the various directors based upon NBW's loan to Royal Windsor Holding Company, a loan that is not due for two more years. Thus, NBW has of yet suffered no damages.
Under Article III, this court has jurisdiction only over cases and controversies, that is, claims where damages have been incurred, see Warth v. Seldin, 422 U.S. 490, 45 L. Ed. 2d 343, 95 S. Ct. 2197 (1975), or where there is an immediate threat of injury. See, e.g., Babbitt v. United Farm Workers Nat'l Union, 442 U.S. 289, 60 L. Ed. 2d 895, 99 S. Ct. 2301 (1979). This court can not - and will not - render advisory opinions about what liability defendants might have should RWHC default on its loan at some time in the future. See United Transp. Union v. ICC, 282 U.S. App. D.C. 38, 891 F.2d 908, 911-15 (D.C. Cir. 1989), cert. den'd, 497 U.S. 1024 (1990). These counts therefore are dismissed, with prejudice,
pursuant to Fed. R. Civ. P. 12(b)(6).
III. CAUSE OF ACTION-BASED DISMISSALS.
Having addressed these twenty counts, twenty-two remain. However, although these counts cannot be dismissed on a transaction-by-transaction basis, eighteen may be dismissed for other reasons. Each cause of action will be addressed separately.
FDIC alleges that each of the defendants is guilty of negligence in the performance of his duties towards NBW. Defendants move to dismiss each of these counts under Rule 12(b)(6), or, in the alternative, for summary judgment under Rule 56. Their arguments are several: 1) that 18 U.S.C. § 1821(k) sets a federal standard of gross negligence, thus precluding a claim of simple negligence; 2) that § 1821(k) preempts any state law causes of action; 3) that, even if state law causes of action are not preempted, the appropriate state standard is gross negligence; and 4) that, on the uncontested facts, none of the counts survives summary judgment. Although the court does not agree with defendants in toto, it does believe that these counts do not state claims on which relief may be granted.
18 U.S.C. § 1821(k) was adopted as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and provides that FDIC may sue officers and directors of failed financial institutions for gross negligence. In addition, the section contains a savings clause which reserves to the FDIC all other claims it might have against such officers and directors under other law. Several federal courts, including two courts of appeals, have addressed the preemptive nature of § 1821(k). With two exceptions,
these courts have uniformly held that § 1821(k) does preempt state law; however, the preemption applies only if the state law precludes suit against officers and directors under at least a gross negligence theory (for instance, if the state allows suit only in the case of intentional wrongdoing). FDIC v. McSweeney, 976 F.2d 532 (9th Cir. 1992); FDIC v. Canfield, 967 F.2d 443 (10th Cir.), cert. den'd, 113 S. Ct. 516 (1992). Thus, contrary to defendants' assertions, the court holds that FIRREA does not establish a gross negligence standard for bank officers and directors, and does not preclude suit if applicable state law allows for a claim of simple negligence.
Less clear, however, is the preemptive effect of § 1821(k) on federal common law.
Defendants argue that, at the least, § 1821(k) preempts federal common law, thus making state law the determinant of the duty of care these defendants owed to NBW. The court finds that it need not address this issue.
NBW was a corporation chartered in the District of Columbia. Therefore, if defendants' argument concerning § 1821(k)'s preempting federal common law were correct, D.C. law would define the appropriate standard of care. That standard is singularly unclear. Moreover, although FDIC and defendants suggest that the court should look to relevant Maryland and Delaware law for guidance, the court finds that the Maryland cases do not provide much assistance in resolving this issue. Therefore, the court believes it appropriate to turn to general principles of corporation law, particularly those decisions rendered in Delaware, to determine the appropriate standard of care. For the purposes of this discussion, these general principles of corporation law are in agreement with the federal common law as enunciated by the Supreme Court in Briggs v. Spaulding, 141 U.S. 132, 35 L. Ed. 662, 11 S. Ct. 924 (1890). Thus, whether under state law (that is, D.C. law as derived) or federal common law, the appropriate standard is the same.
Determining the source of the standard does not, however, make plain the definition of that standard. Rather, even though courts frequently speak as if simple and gross negligence were subject to simple and distinct classification and application, in truth there is no exact standard as to what conduct constitutes negligence or gross negligence in a given situation:
It is perhaps unnecessary to attempt to define with precision the degree of care and prudence which directors must exercise in the performance of their duties. The degree of care required depends upon the subject to which it is to be applied, and each case has to be determined in view of all the circumstances.
Briggs, 141 U.S. at 146. Despite the casuistic nature of this standard, the Court did provide the following definition, which, although vague, serves as the benchmark for all discussions of negligence:
. . . the degree of care to which these defendants were bound is that which ordinarily prudent and diligent men would ...