United States Court of Appeals,
Fifth Circuit.
No. 91-6315.
FEDERAL DEPOSIT INSURANCE CORPORATION, etc., Plaintiff-Appellant,
v.
SHRADER & YORK, etc., et al., Defendants-Appellees.
May 20, 1993.
Appeal from the United States District Court for the Southern District of Texas.
Before DAVIS and JONES, Circuit Judges, and PARKER1, District Judge.
W. EUGENE DAVIS, Circuit Judge:
The Federal Deposit Insurance Corporation (FDIC) appeals the summary judgment dismissal
of its legal malpractice action against the law firm of Shrader & York, its individual partners, and
successor organizations (Shrader & York). We affirm.
I.
A.
The FDIC brought this legal malpractice action against Shrader & York in May of 1991. It
alleges that Shrader & York negligently contributed to the failure of two of the law firm's clients, City
Savings & Loan Association (City), and Lamar Savings Association (Lamar). Specifically, the FDIC
points to work Shrader & York did on the following five transactions: (1) City's acquisition of Realty
Development Corporation (RDC) in 1983; (2) Lamar's merger with Brazos Savings Association
(Brazos) in 1983; (3) the 1984 sale by a Lamar subsidiary of property known as 8214 Westchester;
(4) Lamar's acquisition of CTC (USA) Corporation (CTC) in 1985; and (5) Lamar's 1985 purchase
of Stone Oak Corporation (Stone Oak).
The district court granted summary judgment in favor of the defendants, relying on the
following grounds: (1) the Texas two year statute of limitations for legal malpractice claims expired
before the FDIC acquired City and Lamar; (2) the FDIC lacked standing to sue Shrader & York for
1 Chief Judge of the Eastern District of Texas, sitting by designation. legal malpractice; (3) the individually named defendants were not partners in the law firm at the time
of the alleged acts of malpractice; and (4) the law firm's alleged acts of malpractice could not have
proximately caused the losses alleged by the FDIC, 777 F.Supp. 533. This appeal followed.
B.
Stanley E. Adams, Jr. (Adams) and his wife, Christie Bell, purchased Lamar in 1969. In 1979
Adams formed Lamar Financial Corporation (LFC) as Lamar's holding company. In 1983 LFC
purchased City. Adams served as chairman of the board of directors and chief executive officer of
Lamar from January of 1980 through December of 1985; as a director of LFC during the same time
period, and as chairman of the board of directors of LFC from January of 1983 through December
of 1985. Adams served as City's vice president from January of 1983 until May of 1986, and as a
director of City from December of 1985 to April of 1986. From December of 1985 until October of
1986, Adams owned 100% of City's stock. In February of 1992, Adams pled guilty to conspiracy
to defraud the United States, and false entries in savings association records, in violation of 18 U.S.C.
§§ 371, 657, 1006, and 1001.
On May 18, 1988, the Federal Home Loan Bank Board (FHLBB) determined that City and
Lamar were insolvent, and appointed the Federal Savings and Loan Insurance Corporation (FSLIC)
as their receiver. The FSLIC-Receiver sold to the FSLIC, in its corporate capacity, City and Lamar's
claims against professionals providing services to these thrifts. The FDIC acquired these causes of
action by operation of § 401 of the Financial Institutions, Reform, Recovery and Enforcement Act
of 1989 (FIRREA).
The FDIC alleges that Shrader & York contributed to the collapse of City and Lamar by doing
faulty legal work in the five transactions at issue. With respect to all five transactions the FDIC
alleges that Shrader & York failed to give City and Lamar competent legal advice to the point that
some transactions violated federal laws. The FDIC contends that Shrader & York allowed Adams
to deceive the Lamar and City directors. According to the FDIC's theory of the case, if Shrader &
York had alerted the City and Lamar boards of the illegal nature of the five transactions, the boards
would have blocked the transactions, thereby averting huge losses. The FDIC describes the five transactions as follows:
1. City's acquisition of RDC: In 1983 City paid $30 million for RDC, a troubled asset. RDC's
principals then purchased $10 million of LFC preferred stock. Thus LFC used the RDC acquisition
to funnel $10 million of City's cash to LFC, allowing LFC to repay the loan LFC secured to purchase
City. The FDIC contends that this violated federal regulations prohibiting a holding company's
subsidiary thrift from investing its funds in an affiliate's obligation. The FDIC further contends that
Shrader & York knew that the transaction was unlawful, but failed to inform any disinterested officer
or director of City. According to the FDIC, City's losses from the RDC acquisition exceeded $5
million.
2. Lamar's acquisition of Brazos: In July of 1982 Lamar agreed to acquire Brazos. The
acquisition agreement provided that compensation to Brazos officers and directors would increase
only in the ordinary course of business, and that Lamar and Brazos would bear their own merger
expenses. In July of 1983 Shrader & York certified that the merger complied with the acquisition
agreement and applicable laws. The FDIC claims that Shrader & York failed to repo rt numerous
violations of the merger agreement. For example, the FDIC alleges that Brazos paid $155 thousand
of Lamar's merger-related expenses. More significantly, the FDIC alleges that officers and directors
of Lamar and Brazos wasted nearly $8 million in Brazos assets through conduct such as (1) paying
nearly $1 million in bonuses to senior officers of Lamar and Brazos; (2) giving 71 automobiles to
officers, directors and employees of Lamar, City, and Brazos; (3) giving Rolex watches to Brazos
directors; (4) constructing a greenhouse at Adams's house and an airstrip at Adams's ranch; and (5)
buying a $72 thousand diamond ring for Adams's wife.
3. Lamar's sale of 8214 Westchester: Lamar loaned $10.5 million to Drew Mortgage
Company, an entity owned by Lamar and City, for development and construction of 8214
Westchester, Lamar's Dallas headquarters. The FDIC alleges that in 1984 Shrader and York formed
a limited partnership, 8214 Westchester Ltd., to purchase the property. The limited partnership
borrowed $15 million in purchase financing fro m Mainland Savings (Mainland). Mainland
participated $8.8 million of the loan back to Lamar. Later, Lamar purchased the remaining $6.2 million of the loan. The FDIC claims that the sale was a scheme to avoid classifying the loan as a
non-performing depreciable asset, for 1984. It also alleges that Lamar lost $4 million on this
transaction.
4. Lamar's acquisition of CTC: In 1985 Lamar made a direct investment in CTC, a software
development corporation. The FDIC alleges that Lamar's regulatory capital was below the minimum
level necessary to make direct investments unsupervised by federal regulators. The FDIC further
alleges that Shrader & York prepared the documentation for the investment, but failed to advise
Lamar's board of directors of the need to obtain regulatory approval for the investment. The FDIC
alleges that Lamar lost over $1 million on the transaction.
5. Lamar's purchase of Stone Oak: In 1985 Lamar and LFC acquired Stone Oak, a real estate
development corporation, for $84.2 million. Again, the FDIC alleges that Lamar had insufficient
regulatory capital to make unsupervised direct investments. It alleges that Shrader & York failed to
advise Lamar's board of the need to obtain prior approval of the investment. The FDIC alleges that
Lamar lost $25 million on the investment.
II.
Because the FDIC's standing to sue is a threshold inquiry, we deal with it first. The district
court concluded that the FDIC's st anding to sue Shrader & York was based on Lamar and City's
shareholders' right to sue. Because the shareholders lacked standing, the district court concluded that
the FDIC also lacked standing.
The FSLIC-Receiver, as successor to Lamar and City, acquired all of the two thrifts' assets,
including their claims against Shrader & York. 12 C.F.R. §§ 548.2(f), 549.3 (FSLIC regulations in
effect at the time the FSLIC was appointed receiver of City & Lamar). The FSLIC-Receiver then
assigned these to the FSLIC-Corporate. See 12 U.S.C. § 1729(f)(2)(A) (1989). By operation of
FIRREA, the FSLIC was abolished and the FDIC succeeded to all of the FSLIC's assets. 12 U.S.C.
§ 1821a(a)(1). The FDIC therefore has standing to sue Shrader & York.2
III.
2 We discuss the FDIC's standing in further detail in section III of this opinion. The district court concluded that City and Lamar's legal malpractice claims against Shrader
& York were time barred before the FSLIC acquired them on May 18, 1988. FIRREA's statute of
limitations, 12 U.S.C. § 1821(d)(14) does not revive stale state law claims acquired by the FSLIC or
FDIC. F.D.I.C. v. Belli, 981 F.2d 838, 842 (5th Cir.1993); see also Federal Deposit Ins. Corp. v.
Hinkson, 848 F.2d 432, 434 (3rd Cir.1988). The FSLIC acquired City and Lamar's legal malpractice
claims against Shrader & York in May of 1988. Thus if City and Lamar's claims against Shrader &
York expired before May of 1988, Shrader & York's statute of limitations defense is meritorious.
The Texas limitation period for legal malpractice claims is two years. Tex.Civ.Prac. &
Rem.Code Ann. § 16.003 (Vernon 1986); Willis v. Maverick, 760 S.W.2d 642, 644 (Tex.1988).
The parties do not dispute that the occurrences giving rise to the legal malpractice claims against
Shrader & York took place well before May of 1986. So the claims all expired before May of 1988
unless one of the equitable doctrines urged upon us by the FDIC operates to extend the limitation
period.
The FDIC argues that two equitable doctrines should extend the limitation period. First, it
argues, Texas's discovery rule kept the statute of limitations from running before May of 1988.
Second, it argues, the doctrine of adverse domination tolled the running of the statute of limitations.
Summary judgment is appropriate if, after discovery, there is no genuine dispute over any
material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986),
Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); see also
Fed.R.Civ.P. 56. Material facts are those that will affect the outcome of the lawsuit. Anderson, 477
U.S. at 247, 106 S.Ct. at 2510. A genuine dispute requires more than metaphysical doubt; there
must be an issue for trial. Matsushita, 475 U.S. at 586, 106 S.Ct. at 1355-56. Once the m oving
party for summary judgment shows the absence of a material factual dispute, the burden shifts to the
non-moving party to designate specific facts establishing an issue for trial. Celotex, 477 U.S. at 323,
106 S.Ct. at 2552-53.
In Texas, the party seeking to benefit from the discovery rule "bear[s] the burden of proving and securing favorable findings thereon." Woods v. William M. Mercer, Inc., 769 S.W.2d 515, 518
(Tex.1988). A Texas rule of summary judgment procedure requires the moving party to negate the
discovery rule by proving as a matter of law that no issue of material fact exists concerning when the
plaintiff discovered or should have discovered its cause of action. Woods, 769 S.W.2d at 518 n. 2.
However federal courts follow the federal rule of summary judgment procedure. Impossible
Electronic Techniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d 1026, 1036 n. 10 (5th
Cir.1982); Schultz v. Newsweek, Inc., 668 F.2d 911, 917 (6th Cir.1982). "[W]here the nonmoving
party will bear the burden of proof at trial on a dispositive issue," the nonmoving party must go
"beyond the pleadings" and produce summary judgment evidence designating " "specific facts
showing that there is a genuine issue for trial.' " Celotex, 477 U.S. at 324, 106 S.Ct. at 2553 (quoting
Fed.R.Civ.Pro. 56(e)). So the FDIC bore the burden of producing some summary judgment evidence
in support of its discovery rule argument. See McLaren v. Imperial Cas. and Indem. Co., 767
F.Supp. 1364, 1378 (N.D.Tex.1991), aff'd in part without op., 961 F.2d 213 (5th Cir.1992).
In its first response to Shrader & York's limitations defense, the FDIC asserts that Texas's
discovery rule kept the statute of limitations from expiring before May of 1988. Under Texas's
discovery rule, the statute of limitations for legal malpractice actions does not begin to run until "the
claimant discovers or should have discovered through the exercise of reasonable care and diligence
the facts establishing the elements of his cause of action." Willis, 760 S.W.2d at 646. In Willis, the
Texas Supreme Court noted that clients often lack the expertise to recognize a lawyer's negligence,
and that "[f]acts which might ordinarily require investigation likely may not excite suspicion where
a fiduciary relationship is involved." Willis, 760 S.W.2d at 645-46.
In Texas, a legal malpractice claim, which is based on negligence, requires proof of four legal
malpractice elements: (1) the existence of a duty on the part of one party to another; (2) breach of
that duty; and (3) injury (4) proximately caused by the breach. Lucas v. Texas Industries, Inc., 696
S.W.2d 372, 376 (Tex.1984). Proximate cause includes foreseeability and cause in fact. McClure
v. Allied Stores of Texas, Inc., 608 S.W.2d 901, 903 (Tex.1980). After reviewing the record, we conclude that the district court correctly determined that Texas's discovery rule did not keep the
statute of limitations from expiring before May of 1988.
1.
Texas's discovery rule does not operate to extend the time limitation on the RDC acquisition,
the 8214 Westchester transaction, the CTC acquisition, or the Stone Oak acquisition past May of
1988. The summary judgment record demonstrates that Adams was intimately familiar with these
four transactions and knew the facts that the FDIC contends Shrader & York should have cautioned
City and Lamar about. We conclude that Adams's knowledge should be imputed to City and Lamar.
The FDIC vigorously challenges both conclusions, particularly the second.
The FDIC co ntends that the district court erroneously presumed that because Adams had
knowledge of Shrader & York's activities he knew of Shrader & York's malpractice. The FDIC's
argument assumes that Texas's discovery rule requires actual knowledge. In fact, the limitations
period on a legal malpractice claim begins to run when "the claimant discovers or should have
discovered through the exercise of reasonable care and diligence the facts establishing the elements
of his cause of action." Willis, 760 S.W.2d at 646.
As the majority owner of LFC, the chairman of LFC's board of directors from January of 1983
through December of 1985, chairman of the board of directors, chief executive officer and a director
of Lamar from January of 1980 t hrough December of 1985, and sole shareholder of City from
October of 1984 to December of 1985, Adams was intimately involved with the transactions at issue.
In a related action, Lamar Financial Corporation v. Adams, No. Civ. A. A-88-CA-183 (W.D.Tex.),
the FDIC's second amended complaint pled that Adams and his family were the majority shareholders
of LFC during the periods relevant to this suit. It further alleges that "Adams was in control of the
affairs of LFC, Lamar and City."
In Lamar Financial Corporation v. Adams, the FDIC accused Adams of "deliberately ...
entering into unsafe and unsound transactions" that "generated no new cash to Lamar," but
"dramatically increased [Lamar's] exposure to risk," and caused Lamar to sustain losses. Moreover,
the FDIC pled that Adams and others "carried out a scheme" to "disguis[e] and hid[e], from regulatory authorities, depositors, creditors and others, the negative impact of these risky loans and
investments upon [Lamar's] regulatory worth." According to the FDIC's second amended complaint,
one of Adams's schemes was to sell real estate securing delinquent loans and real estate acquired
through foreclosure to third party "strawmen" to boost Lamar's regulatory net worth. This pattern
matches the FDIC's description of the 8214 Westchester transaction. The second amended complaint
further contended that Adams was involved in City's acquisition of RDC, "caus[ing]" City to purchase
RDC and then "fund RDC through capital contributions in excess of $85 million."
The FDIC claims, in one breath, that Adams engaged in elaborate schemes to circumvent
banking regulations. It cannot claim in the next breath that Adams was not aware that Shrader &
York negligently facilitated those schemes. Thus the summary judgment evidence establishes that
Adams should have discovered, through the exercise of reasonable care and diligence, the losses
caused by the schemes and the other facts establishing City and Lamar's legal malpractice claims
against Shrader & York. We also conclude, as a matter of law, that Adams's knowledge should be
imputed to City and Lamar. This is consistent with the generally accepted rule that a bank officer or
director's knowledge is imputed to the bank. F.D.I.C. v. Ernst & Young, 967 F.2d 166, 170 (5th
Cir.1992).
Texas has applied imputation principles to determine when the statute of limitations began to
run on a corporation's cause of action. Alice Roofing & Sheet Metal Works, Inc. v. Halleman, 775
S.W.2d 869 (Tex.App.1989) (Alice Roofing). In Alice Roofing, a corporation took out a loan and
repaid it with corporate funds. However, the sole shareholder of the corporation used the proceeds
of the loan for noncorporate purposes, thus making himself liable to the corporation. Alice Roofing,
775 S.W.2d at 869-70. The sole shareholder then sold the corporation to two other individuals,
allegedly concealing documents evidencing his debt to the corporation. Alice Roofing, 775 S.W.2d
at 870. When the new owners learned of the debt the corporation sued the former shareholder. Alice
Roofing, 775 S.W.2d at 870. The court of appeals held that the statute of limitations on the
corporation's cause of action began to run when the corporation took out the loan, not when the new
owners learned of the debt. Alice Roofing, 775 S.W.2d at 870. It said: "When the 1973 transaction took place, the corporation had full knowledge of the transaction because it was acting through [the
former sole shareholder], its agent." Alice Roofing, 775 S.W.2d at 870.
The FDIC strenuously urges that several exceptions preclude us from applying this general
rule of imputation. The FDIC first argues that we should consider its special status as successor to
the FSLIC as receiver of City and Lamar and not hold it to the general rule of imputation. Next, the
FDIC contends that Adams's knowledge cannot be imputed to City or Lamar because he acted
adversely to their interests. Relatedly, the FDIC maintains that Adams was not disinterested. Finally,
the FDIC agues that we should not apply the general rule of imputation in favor of Shrader & York
because it is not an "innocent party" and had a duty to protect the thrifts from Adams's misconduct.
We will consider each argument in turn.
The FDIC argues first that, as statutory representative of the insolvent institutions' creditors,
it is not an ordinary assignee. Therefore, it argues, even if imputation might have been appropriate
against City and Lamar, it is not appropriate against the FDIC. We rejected this argument in Ernst
& Young, 967 F.2d at 169, 170, which involved an FDIC professional malpractice suit against a failed
S & L's former outside auditor. At issue was whether the knowledge of the failed S & L's former
dominating director could be imputed to the FDIC. We acknowledged that D'Oench, Duhme & Co.,
Inc. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and its progeny give specific rights
to the FDIC when it seeks to recover on defaulted loans from borrowers of failed banks. However
we held that "the FDIC is not entitled to special protection when it brings a tort claim against a third
party on behalf of a defunct financial entity." Ernst & Young, 967 F.2d at 170. In reaching this
conclusion, we relied on FDIC v. Cherry, Bekaert & Holland, 742 F.Supp. 612, 615 (M.D.Fla.1990)
(Cherry), which found "no reason" to treat the FDIC "differently than any other assignee" when it
prosecutes a professional liability suit. Because the FDIC could only recover " "those damages
potentially available to [its] assignor,' " we held that the bank officer's knowledge, which would have
been imputed to the bank, was i mputable to the FDIC. Ernst & Young, 967 F.2d at 169, 170
(quoting State Fidelity Mortgage Co. v. Varner, 740 S.W.2d 477, 480 (Tex.App.1987)).
The FDIC attempts to distinguish Ernst & Young, arguing that, in this case, it is suing on behalf of depositors and other creditors, not just on behalf of the failed institutions. Ernst & Young
is indistinguishable. There, as here, the FSLIC was appointed receiver of a failed institution and
transferred the institution's claims against professionals to the FSLIC-Corporate. In both cases, the
FDIC acquired the claims pursuant to FIRREA. See F.D.I.C. v. Ernst & Young, 1991 WL 197111
(N.D.Tex.). The FDIC cites 12 U.S.C. § 1821(d)(2)(A)(i), and 12 C.F.R. §§ 549.3(a), 549.2(f) for
the proposition that it may assert claims on behalf of both the insolvent institution and its creditors.
The FDIC brought the same argument and the same authority to the attention of this Court in Ernst
& Young. We rejected the FDIC's argument and concluded with respect to its malpractice suit against
the failed bank's accountants that "the FDIC does not cite any statutory authority affording it special
protection.' " Ernst & Young, 967 F.2d at 169, 170 (quoting Cherry, 742 F.Supp. at 614, 615).
Moreover, in this case, the FDIC has not pled or offered summary judgment evidence that City and
Lamar's depositors and other creditors were clients of Shrader & York, and thus able to sue Shrader
& York for professional malpractice. See Thomas v. Pryor, 847 S.W.2d 303, 304 (Tex.App.1992)
("Under Texas law, an attorney can be held liable for professional malpractice only to a person with
whom the attorney has privity, meaning to a client."); First Mun. Leasing v. Blankenship, Potts, 648
S.W.2d 410 (Tex.App.1983). So the FDIC fails to explain how it improves its position by standing
in the shoes of depositors and other creditors. Ernst & Young therefore controls this issue, and we
hold that imputation is appropriate in this case. If City and Lamar knew what Adams knew, before
May of 1986, the FSLIC acquired only stale claims against Shrader & York when it was appointed
receiver of City and Lamar.
We now turn to the FDIC's argument that Adams acted adversely to City and Lamar. As the
FDIC contends, courts will generally not impute a bank officer or director's knowledge to the bank
if the officer or director acts with an interest adverse to the bank. F.D.I.C. v. Lott, 460 F.2d 82, 88
(5th Cir.1972). The Restatement (2d) of Agency formulates the adverse interest exception as
follows: "A principal is not affected by the knowledge of an agent in a transaction in which the agent
secretly is acting adversely to the principal and entirely for his own or another's purposes...."
Restatement (2d) of Agency § 282(1) (1957), cited with approval in Forest Park Lanes, Ltd. v. Keith, 441 S.W.2d 920, 931 (Tex.Civ.App.1969). According to this formulation, an agent's knowledge falls
within this exception only if the agent acts "entirely for his own or another's purposes." In other
words, "knowledge is imputed in a case of "joint' interests even though the agent's primary interest
is inimical to that of the principal." 3 Fletcher Cyclopedia Corporations § 822 at 126 (perm. ed.).
The paradigm case for applying this exception is where a bank's officer, on behalf of his bank, gives
a corporation in which he has an interest a concession to which it is not entitled, such as a
below-market price or rate of interest. 3 Fletcher Cyclopedia Corporations § 823 at 127.
Our understanding of this exception is further guided by three cases. The first, Goldstein v.
Union Nat. Bank, 109 Tex. 555, 213 S.W. 584, 590-91 (1919), was cited to us by the FDIC.
According to Goldstein, we should ask whether, under all the circumstances of the particular case,
the agent's interests are so incompatible with the interests of his principal as practically to destroy the agency or to render it reasonably probable that an ordinary person, in the agent's position, under such circumstances, will neither act in behalf of his principal upon his so acquired knowledge, nor disclose that knowledge t o his principal, but, because of such incompatibility in interests, will withhold knowledge from the principal.
Goldstein, 213 S.W. at 590-91. It is "inaccurate" and goes "too far" to say that the exception
involving adverse interest applies if "the individual interests of an agent are to any extent adverse to
that of his principal." Goldstein, 213 S.W. at 590.
Second, we look to our recent decision in Ernst & Young, 967 F.2d at 168-71. In that case
the FDIC, as receiver of a failed savings and loan, sued the S & L's outside auditor for professional
malpractice. Ernst & Young, 967 F.2d at 168. The S & L's sole shareholder, who was also its
chairman of the board and chief executive officer had brought losses to the S & L through fraudulent
and illegal activities. Ernst & Young, 967 F.2d at 168. Those activities included pursuing "complex
commercial ventures that were often based on unsafe and unsound underwriting practices," entering
into transactions that generated "paper profits, making [the S & L] appear solvent," making false
entries in the S & L's books "with intent to deceive [the S & L's] board and government regulators,"
conspiring to misapply the S & L's funds, and "numerous violations of Bank Board regulations."
Ernst & Young, 967 F.2d at 168.
In Ernst & Young, we explained that facts acquired by the officer committing fraud against the corporation are not imputed to the corporation. We applied an explanation of "fraud against the
corporation" given in Cenco Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.), cert. denied, 459
U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145 (1982). We explained that "fraud against the corporation
usually hurts just the corporation; the stockholders are the principal if not only victims...." Ernst &
Young, 967 F.2d at 171. On the other hand, we explained, "fraud for the benefit of the corporation"
primarily benefits the corporation's stockholders and injures "outsiders to the corporation." Ernst &
Young, 967 F.2d at 171. Applying this explanation, we held that the officer's knowledge should be
imputed to the S & L: the officer "acted on the corporation's behalf because by serving [the S & L],
he served himself, [the S & L's] sole owner. As the sole owner, [the officer's] fraudulent activities
on [the S & L's] behalf benefitted himself and injured ... depositors and creditors." Ernst & Young,
967 F.2d at 171.
In Cenco, insiders of a corporation were "deeply involved" in a "massive fraud" that consisted
mainly of "inflating inventories in the Medical/Health Division far above their actual value." Cenco,
686 F.2d at 451. This fraud increased Cenco's apparent worth, as well as the market price of its
stock. Cenco, 686 F.2d at 451. Thus, Cenco was able to "buy up other companies on the cheap" as
well as "borrow money at lower rates than if its inventories had been honestly stated." Cenco, 686
F.2d at 451. In the litigation that followed discovery of the fraud, the company asserted a cross claim
against its independent auditor for failing to prevent the fraud. Cenco, 686 F.2d at 451. The Seventh
Circuit said that the fraud was on behalf of the corporation: "those involved in the fraud were not
stealing from the company, as in the usual corporate fraud case, but were instead aggrandizing the
company (and themselves) at the expense of outsiders...." Cenco, 686 F.2d at 451, 456.
At trial, to successfully establish that Adam's knowledge of the fraudulent activity was not
imputed to the corporation under the discovery rule, the FDIC would have to prove that Adams acted
adversely to or committed fraud against City and/or Lamar. Therefore, to avoid summary judgment
dismissal, it bore the burden of producing some summary judgment evidence in support of this
argument.
The summary judgment evidence indicates that Adams misappropriated funds in connection with the Brazos merger.3 However the FDIC did not offer summary judgment evidence that Adams
embezzled, looted, or otherwise personally profited at the expense of City or Lamar in connection
with the other four transactions. The five transactions at issue are independent. So Adams's possible
adverse interest in one transaction does not spill over into other transactions for purposes of the
imputation rule.
The FDIC urges us to infer t hat Adams breached his fiduciary duty to the institutions'
depositors and creditors. Creditors were injured when Adams's frauds were uncovered. However,
Cenco and Ernst & Young teach that fraud on behalf of a corporation, as opposed to fraud against
the corporation, almost always injures a corporation's creditors. Ernst & Young, 967 F.2d at 171,
Cenco, 686 F.2d at 456.
The FDIC also argues from the summary judgment evidence that Adams fraudulently inflated
Lamar's regulatory net worth, and that he concocted sham transactions to deceive federal regulators
so that he could retain his control over the institutions. However, the summary judgment evidence
indicates that any fraudulently inflated profits went on the books of Lamar and City, not into Adams's
personal account. Adams's desire to maintain control over City and Lamar, by itself, does not bring
Adams's conduct within the adverse interest exception, under any of the formulations we have
discussed.
An examination of the individual transactions reveals the inadequacy of the FDIC's summary
judgment evidence on this issue. Concerning the RDC transaction, the FDIC alleges that City paid
too much for a worthless asset in order to bypass regulations forbidding City from "upstreaming"
capital to LFC. The FDIC's complaint can be broken down into two elements: that City paid too
much for RDC, and t hat City gave $10 million to its sole shareholder, LFC.4 The FDIC does not
present evidence raising a fact question of whether Adams personally profited from City getting a bad
3 Because the Brazos merger was unusual in this respect, we discuss it in the next section of this opinion. 4 The number is closer to $8.5 million. The FDIC's second amended complaint in Lamar Financial Corporation v. Adams claimed that, by the Fall of 1983, LFC had repurchased the stock held by RDC's principals for approximately $1.5 million. deal on RDC. The FDIC's pleadings suggest that Adams, as majority owner of LFC, might have
personally benefitted from City's capital contribution to LFC. However the upstreaming violation did
not change the value of LFC's total assets. So the value of Adams's LFC stock presumably did not
increase either. If the upstreaming violation rendered City undercapitalized, it may have given Adams
an advantage over City's creditors. But the FDIC has not produced summary judgment evidence that
the transaction left City undercapitalized. Moreover, as we have explained, an advantage over
creditors does not come within the adverse interest exception. Ernst & Young, 967 F.2d at 171.
Ernst & Young is made more applicable to this transaction by the fact that Adams acquired 100% of
City's stock in December of 1985. After October of 1986, Adams was no longer City's sole
shareholder. However, we cannot say that City, at that point, ceased to know what it already knew.
Alice Roofing, 775 S.W.2d at 870.
Concerning the 8214 Westchester transaction, the FDIC alleges that Lamar lost $4.5 million
trying to hide a bad loan from federal regulators through a series of sham transactions. This attempt
to make it appear that Lamar had a positive net worth resembles the frauds in Ernst & Young and
Cenco. Ernst & Young, 967 F.2d at 171; Cenco, 686 F.2d at 451. Again the FDIC fails to offer
evidence that Adams personally profited from this transaction at Lamar's expense. The inflated net
worth went on to Lamar's books, not into Adams's personal account.
The FDIC also fails to meet its burden with respect to Lamar's direct investments into CTC
and Stone Oak. The FDIC alleges that Lamar directly invested in CTC and Stone Oak when its
capital was too low to lawfully do so. If these ventures had succeeded, Lamar, not Adams, would
have reaped the profits. Although hindsight reveals that Lamar paid too much for its investments,
the summary judgment evidence does not allow an inference that Adams personally profited from
Lamar's unwise investments.
Moreover, the record shows that federal regulatory officials made Lamar's board aware of the
regulatory violations. In June of 1985, LFC received a letter from the FHLBB expressing "concern
with [Lamar's] financial condition." The letter explained that Lamar had a current negative net worth
and was losing "approximately $1,000,000" per month. The FHLBB explained that it would request a supervisory agreement if LFC did not infuse Lamar with new capital or take other steps to correct
the problem.
In November of 1985 Lamar received another letter from the FHLBB. That letter explained
that Lamar had "failed to meet its net worth requirements." In the letter, the FHLBB made clear that
it considered unauthorized direct investments during the quarter following June 30, 1985 a "direct
violation of the Insurance Regulations." It further explained that Lamar's "failure to maintain an
adequate level of net worth" was "exacerbated by investment in acquisition, development, and
construction loans and real estate that is substantially higher than the national average for such
investments." The FHLBB prohibited direct investments made without prior written approval of the
Supervisory Agent. These letters bolster our conclusion that Lamar should have discovered the facts
establishing any possible malpractice claims against Shrader and York arising out of the CTC and
Stone Oak investments.
We next consider the FDIC's argument that Shrader & York is not entitled to the benefit of
the general rule of imputation because it is not an innocent party and had a duty to protect City and
Lamar from Adams's misconduct. Application of such an exception would require a showing that
Shrader & York colluded with Adams to defraud City and Lamar. See, e.g., Crisp v. Southwest
Bancshares Leasing Co., 586 S.W.2d 610, 615 (Tex.Civ.App.1979) ("The [imputation] rule is for
the protection of innocent third parties and does not protect those who collude with the agent to
defraud the principal.") (emphasis added). The FDIC has not alleged or produced summary
judgment evidence that Shrader & York colluded with Adams, or that it did so to defraud City and
Lamar. It has only alleged that Shrader & York performed its duties negligently. This argument
therefore has no merit.
2.
We also affirm the district court's ruling as to the malpractice claims arising out of the Brazos
merger. The FDIC claims that Adams used the Brazos merger to waste millions of dollars of Lamar
assets. So Adams's knowledge with respect to this transaction might not be imputable to Lamar.
Still, the reco rd reveals that Lamar's Board of Directors had a considerable amount of concrete information about the Brazos merger that should have put it on notice of potential legal malpractice
claims arising out of Shrader & York's work on that merger. In November of 1983 Lamar's board
received a letter from Peat Marwick, the accounting firm that represented Brazos in the merger. The
letter pointed out that "[G]eneral and administrative expenses for the [April 1, 1983-June 30, 1983]
period were appro ximately $9.2 million (unaudited), as compared to approximately $1.2 million
(unaudited) for the prior three-month period." Commenting on the unusual nature of the expenses,
the letter noted that some of the "$9.2 million was expended on automobiles for the benefit of certain
directors, officers, or employees of Lamar and Brazos." The letter drew attention to fact that the
merger agreement between Lamar and Brazos forbade salary increases outside the ordinary course
of business. Peat Marwick considered this activity so serious that its earlier report of July 5, 1983
could "no longer be relied on."
The FDIC argues that a subsequent investigation of the expenses, conducted by the outside
law firm of McKenna, Connor & Cuneo, did not accuse Shrader and York of any wrongdoing. The
scope of the investigation included "the records" of Lamar and Brazos relating to the acquisition of
Brazos by Lamar, and the "related public disclosures and filings with the Bank Board." The outside
law firm was to "prepare a report of its investigation and recommendations to correct improper
actions to the board of directors." Even though the investigation's scope was potentially expansive,
the investigation focused mainly on the actions of Lamar and Brazos insiders. We still conclude that
a reasonable person, armed with this information, exercising reasonable care and diligence, would
have discovered facts establishing Lamar's causes of action against Shrader and York.
The FDIC argues that Adams adversely dominated City and Lamar, and that, therefore, City
and Lamar's causes of action against Shrader and York did not begin to run until Adams lost his grip
on City and Lamar. Because the FDIC is suing the corporations' outside counsel, and not their
officers or directors, the district court declined to apply the adverse domination doctrine.
This very narrow doctrine has been applied to suits by a corporation against the officers or
directors of that company. In appropriate cases, it tolls the statute of limitations for claims against wrongdoing officers and directors of a co rporation until they relinquish control of the institution.
F.D.I.C. v. Howse, 736 F.Supp. 1437, 1442 (S.D.Tex.1990). The doctrine's primary policy rationale
is that a wrongdoing corporate officer or director will seek to hide his or her wrongful conduct from
the corporation. Howse, 736 F.Supp. at 1442.
The FDIC contends that the adverse domination doctrine is not limited to suits against a
corporation's officers and directors. In the FDIC's view, the policy rationale for the doctrine applies
in this case because Adams prevented City and Lamar from suing Shrader & York in order to avoid
exposure of his own wrongdoing.
The FDIC has not produced any cases from Texas or this Court that extend the adverse
domination doctrine beyond corporate officers and directors. Moreover, the FDIC does not allege
that Shrader and York committed intentional torts, or conspired with Adams to defraud City or
Lamar. Thus we agree with the district court that, in t his particular case, Texas's discovery rule
adequately addresses the FDIC's policy concern.
IV.
For the reasons stated above, we AFFIRM the district court's order.
AFFIRMED.