Resolution Trust Corporation v. Henry Chapman

29 F.3d 1120, 1994 WL 328531

• Court: Court of Appeals for the Seventh Circuit
• Decided: September 8, 1994
• Docket: 93-1514
• Status: Published

Opinions

EASTERBROOK, Circuit Judge.

Eight months ago we held that “Congress ‘spoke directly’ to the issue of what standard of liability governs suits by the RTC [Resolution Trust Corporation] against officers and directors of failed federally chartered financial institutions.” RTC v. Gallagher, 10 F.3d 416, 419 (7th Cir.1993). That standard, we concluded, is gross negligence, according to the terms of 12 U.S.C. § 1821(k).

Here we go again. The RTC is suing the former directors and officers of Security Savings and Loan Association, a failed federally chartered financial institution, on the theory that their negligence damaged the S & L’s financial standing and thus injured the federal deposit insurance fund. The portions of the complaint now before us (on an interlocutory appeal under 28 U.S.C. § 1292(b), after the district court dismissed the claims on the pleadings) assert that the directors and officers violated their duty of care by simple negligence, for which the RTC seeks to recover damages.

How, consistent with Gallagher? Well, the RTC disagrees with that decision and seeks to preserve its position for review in the Supreme Court. Done. But the RTC contends that it should prevail even if Gallagher is correct. That is hard to pull off; the opinion in Gallagher held that § 1821(k) establishes a gross negligence standard for officers and directors of federally chartered institutions, of which Security was one. Gallagher is of a piece with other recent decisions emphasizing that when Congress has provided expressly for some subject, courts should not use principles of federal common law to reach different conclusions. E.g., Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., — U.S. -, - - -, 114 S.Ct. 1439, 1448-52, 128 L.Ed.2d 119 (1994); Musick, Peeler & Garrett v. Employers Insurance of Wausau, — U.S. -, - - -, 113 S.Ct. 2085, 2090-91, 124 L.Ed.2d 194 (1993); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 360-62, 111 S.Ct. 2773, 2781, 115 L.Ed.2d 321 (1991). Courts should be leery of all claims invoking federal common law; suits arising out of bank failures are no exceptions. O’Melveny & Myers v. FDIC, — U.S. -, 114 S.Ct. 2048, 129 L.Ed.2d 67 (1994).

The RTC sees an opening in the fact that Gallagher did not decide whether § 1821(k) precludes liability under state law. 10 F.3d at 424. According to the RTC, it may recover from Security’s directors and officers for simple negligence under Illinois law. Defendants reply that any application of state law is preempted, but this position is untenable. The final sentence of § 1821(k) says: “Nothing in this paragraph shall impair or affect any right of the Corporation under other applicable law.” We concluded in Gallagher that the minimum effect of this sentence is that the RTC may take regulatory actions such as removing directors on the basis of simple negligence. 10 F.3d at 420-21. Two courts of appeals have held that this language also ensures that actions based on state law are not preempted. FDIC v. McSweeney, 976 F.2d 532, 537-41 (9th Cir.1992); FDIC v. Canfield, 967 F.2d 443 (10th Cir.1992) (en banc). Even if we doubted the correctness of these holdings, which we do not, we would not think it prudent to create a conflict among the circuits. Clauses similar to the final sentence of § 1821(k) regularly are understood to save state law against claims of preemption. E.g., International Paper Co. v. Ouellette, 479 U.S. 481, 497-500, 107 S.Ct. 805, 814-16, 93 L.Ed.2d 883 (1987); Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, 502 (7th Cir.1989); Myrick v. Fruehauf Corp., 13 F.3d 1516 (11th Cir.1994); cf. Cipollone v. Liggett Group, Inc., — U.S. -, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992). Thus the RTC may take advantage of any claims available to it under state law.

Has it any? We may assume that Illinois permits recovery against negligent officers and directors of financial institutions incorporated in that state. Chicago Title & Trust Co. v. Munday, 297 Ill. 555, 131 N.E. 103 (1921). The pivotal question then is the appropriate choice of law. When the subject is liability of officers and directors for their stewardship of the corporation, the law presumptively applicable is the law of the place of incorporation. This venerable choice-of-law principle, known as the internal affairs doctrine, is recognized throughout the states, and by the Supreme Court as well. CTS Corp. v. Dynamics Corp. of America, 481 U.S. 69, 89-93, 107 S.Ct. 1637, 1649-52, 95 L.Ed.2d 67 (1987); First National City Bank v. Banco Para el Comercio Exterior de Cuba, 462 U.S. 611, 621, 103 S.Ct. 2591, 2597, 77 L.Ed.2d 46 (1983); Edgar v. MITE Corp., 457 U.S. 624, 645, 102 S.Ct. 2629, 2642, 73 L.Ed.2d 269 (1982); see also 4 Model Business Corporation Act Annotated 1631-42 (3d ed. 1993) (collecting state authority); Deborah A. DeMott, Perspectives on Choice of Law for Corporate Internal Affairs, 48 L. & Contemp. Prob. 161 (1985). Illinois adheres to this principle. 805 ILCS 5/13.05 (“nothing in this Act contained shall be construed to authorize this State to regulate the organization or the internal affairs of such corporation [chartered in another jurisdiction].”). The internal affairs doctrine recognizes the benefits of using one rule of law to determine the duties and liability of directors and officers whose firm may do business in many states. “[OJtherwise a corporation could be faced with conflicting demands.” Edgar, 457 U.S. at 645, 102 S.Ct. at 2642. See Restatement (2d) of Conflict of Laws § 302 (1971). Cf. Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 105-06, 111 S.Ct. 1711, 1721, 114 L.Ed.2d 152 (1991).

No one doubts that Illinois would apply the law of the place of a bank’s incorporation if that place were another state. See Paulman v. Kritzer, 74 Ill.App.2d 284, 219 N.E.2d 541 (2d Dist.1966), affirmed, 38 Ill.2d 101, 230 N.E.2d 262 (1967); see also Treco, Inc. v. Land of Lincoln Savings & Loan Ass’n, 749 F.2d 374, 377 (7th Cir.1984). Until recently a state might have supposed that applying state law to federal banks and savings associations would not present any risk of inconsistent obligations, and therefore would fall outside the logic (if not the formal terms) of the internal affairs doctrine. Multi-state and inter-state banking were rare until the 1980s. Illinois was a unit banking state; no bank doing business in Illinois could have branches. It is therefore not surprising that some Illinois courts treated a bank’s place of incorporation as irrelevant; to do business in Illinois was to be “an Illinois bank” without regard to the difference between federal and state incorporation. Fields v. Sax, 123 Ill.App.3d 460, 463-65, 78 Ill.Dec. 864, 867-68, 462 N.E.2d 983, 986-87 (1st Dist.1984) (citing federal and state rules interchangeably for federally chartered bank); Valiquet v. First Federal Savings & Loan Ass’n of Chicago, 87 Ill.App.3d 195, 199-200, 42 Ill.Dec. 212, 408 N.E.2d 921, 925-26 (5th Dist.1979) (same). All of that has changed, however. Illinois now allows multi-state operations, and throughout the state one may find offices of financial institutions incorporated elsewhere. Security was itself a multi-state institution, with branches in North Dakota as well as Illinois. The advent of inter-state banking puts the choice of law question in focus and leads us to apply the internal affairs doctrine to this case. Security held a federal charter, so national law governs the liability of officers and directors for their management.

Although the internal affairs doctrine points to federal law, there is no federal corporate code. Does this mean that the choice-of-law doctrine points nowhere? Not necessarily. Until the last decade, the rules of managerial liability for corporations holding state charters had been developed in common law fashion. Attempts to codify the duty of care, the duty of loyalty, and the business judgment rule are novel developments in corporate law. “[T]he general standard of care imposed on directors was developed by the judiciary as part of the common law duties of directors; statutes defining this duty are a relatively recent phenomenon. Such a definition was first included in the Model [Business Corporation] Act in 1974 in the form of a substantial addition to section 35 of the 1969 Model Act.” 2 Model Business Corporation Act Annotated 933 (3d ed. 1993 Supp.). See also ALI, 1 Principles of Corporate Governance: Analysis and Recommendations 134 (1992) (“Historically, courts rather than legislatures have played the central role in shaping the law regarding the duty of care of corporate directors and officers.”). Federal courts have no less authority to shape a common law for federal corporations than state courts have had to devise a common law for firms incorporated in their jurisdictions. Bowerman v. Hamner, 250 U.S. 504, 510, 39 S.Ct. 549, 551, 63 L.Ed. 1113 (1919); Briggs v. Spaulding, 141 U.S. 132, 11 S.Ct. 924, 35 L.Ed. 662 (1891). See generally Henry J. Friendly, In Praise of Erie—and of the New Federal Common Law, 39 N.Y.U.L.Rev. 383 (1964), reprinted in Benchmarks 155-95 (1967). But just as states have begun to adopt statutes spelling out managers’ duties, so Congress has adopted some rules for federally chartered banks and authorized the banking regulators to promulgate others. There is, for example, an elaborate set of federal regulations covering mergers and other major corporate transactions of federally chartered thrifts. See Ordower v. OTS, 999 F.2d 1183 (7th Cir.1993) (discussing several of these rules). Of particular relevance today, Congress enacted § 1821(k). We concluded in Gallagher that this statute adopts gross negligence as the rule for managers and directors of federal financial institutions. We need not devise federal common law; Congress has laid down .the law.

Perhaps, however, we should not apply the internal affairs doctrine for ourselves but should ask what principles Illinois would apply. So the RTC submits, contending that Fields v. Sax requires the application of Illinois substantive law. It is far from clear to us that Fields holds any such thing; the court jumbled state and federal cases together, apparently believing that the choice of law did not matter. After Gallagher, it matters. What law Illinois courts would choose is, however, irrelevant. This is not a diversity case, where Erie would require the forum court to apply the whole law of the state, including its choice of law principles. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). It is a suit by a federal agency invoking federal jurisdiction per 12 U.S.C. § 1441a(Z)(1), which says that suits to which the RTC is a party “shall be deemed to arise under the laws of the United States”. Federal law may well look to state law for substantive principles, see United States v. Kimbell Foods, Inc., 440 U.S. 715, 727-29, 99 S.Ct. 1448, 1457-59, 59 L.Ed.2d 711 (1979), but which law to select is itself a question of federal law, as Kimbell Foods and O’Melveny & Myers show. The Supreme Court in O’Melveny & Myers did not ask what law a state court would have selected; it approached the question as one for independent decision. See also Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1126-27 (7th Cir.1993).

According to the RTC, federal choice of law principles adopt state rules of decision notwithstanding the internal affairs doctrine. The RTC relies on cases such as Anderson National Bank v. Luckett, 321 U.S. 233, 64 S.Ct. 599, 88 L.Ed. 692 (1944), for the proposition that “national banks are subject to state laws, unless those laws infringe the national banking laws or impose an undue burden on the performance of the banks’ functions.” Id. at 248, 64 S.Ct. at 607. See also, e.g., McClellan v. Chipman, 164 U.S. 347, 356-57, 17 S.Ct. 85, 87, 41 L.Ed. 461 (1896). If the question before us were whether Security could establish a new branch, whether it could redecorate a building designated an historic landmark, or when funds escheat after depositors vanish, these observations would be controlling. Delaware petrochemical corporations also must follow Illinois law when selling products in Illinois. Luckett, McClellan, and similar cases have nothing to do with the internal affairs of corporations. To the extent the RTC acts as receiver, it inherits the corporation’s claims against the directors and officers, so the internal affairs doctrine applies normally. The RTC gets no more rights than the firm itself had. To the extent the RTC depicts itself as a third party — more like a victim of a tort than like a firm seeking to hold its managers accountable for the benefit of investors — that serves only to put the case squarely in the realm of federal law. Federal banking agencies love to remind courts that, when suing in their corporate capacities to collect debts and protect the deposit insurance fund, they receive the benefits of federal law under D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447, 456, 62 S.Ct. 676, 679, 86 L.Ed. 956 (1942). Even if D’Oench, Duhme is not an apt analogy, the approach of Kim-bell (the only remaining option) does not help the RTC. For Kimbell tells us to use state law unless Congress has enacted a national rule. When there is such a national rule, we apply it. United States v. Einum, 992 F.2d 761 (7th Cir.1993). Gallagher holds that § 1821(k) is just such a rule of national law.

Doubtless the RTC believes that a need to prove gross negligence will unduly diminish its recoveries. In O’Melveny & Myers the banking agency wanted the Court to apply federal law, because that would increase damages; here the banking agency clamors for state law, for the same reason. In O’Melveny & Myers the FDIC pointed out that California followed a minority rule of accountants’ liability and asked the Court to go with the dominant approach to the subject. In this case the RTC has located a state that applies a minority rule (simple negligence) to directors’ and officers’ liability and asks us to apply that state’s law rather than the more common business judgment rule that shelters managers who did not act in bad faith. See Principles of Corporate Governance § 4.01 and reporter’s note 18 at 160; 2 Model Business Corporation Act Annotated 926.1-958. Both the FDIC (in O’Melveny & Myers) and the RTC (in this case) seem uninterested in applying neutral principles of law. O’Melveny & Myers holds that it is not our job to maximize the federal “take” in bank failures. Our task is to apply generally applicable principles, which here entail the use of § 1821(k). To say otherwise is to reject the holding of Gallagher, the decision of Congress, or both. We shall do neither. '

AFFIRMED.