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RESOLUTION TRUST CORP. v. GREGOR

December 1, 1994

RESOLUTION TRUST CORPORATION, in its corporate capacity, Plaintiff, against HARRY C. GREGOR, et al., Defendants.


The opinion of the court was delivered by: ALLYNE R. ROSS

 ROSS, United States District Judge:

 This motion to dismiss, like many others which have been decided in a number of courts during the last several years, requires an interpretation of the preemptive force of both the Home Owners' Loan Act of 1933 ("HOLA") and § 212(k) of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") (codified at 12 U.S.C. § 1821(k)). The Resolution Trust Corporation (the "RTC") brings this suit in its corporate capacity against the former directors of Westerleigh Savings, FSLA ("Westerleigh"), seeking to recover losses resulting from the federally-chartered savings and loan's ("S&L") 1991 failure.

 Defendants now seek to dismiss the First and Fourth Claims, which are premised on simple negligence, and the Third and Sixth Claims, alleging liability for defendants' negligent breach of their fiduciary duty of care. While all parties acknowledge that the RTC's "gross negligence" claims are viable under the section, defendants urge a holding that § 1821(k) precludes the RTC from seeking any damages premised on simple negligence. *fn1" Based on the extensive briefing and oral argument that both sides have provided on this topic, I find defendants' conclusion unwarranted by the language of the statute, and I deny in its entirety their motion to dismiss.

 FACTUAL BACKGROUND

 Westerleigh began in 1894 as a state-chartered S & L servicing the neighborhoods of Staten Island. With deregulation, Westerleigh, like many other S & Ls, converted from a state - chartered institution to a federally -chartered one in 1982, although it remained a primarily local institution. Transcript of Oral Argument held Nov. 10, 1994 (hereinafter "Tr.") at 49-50, 53-54. A period of expansion ensued, after which, on May 30, 1991, the Office of Thrift Supervision declared Westerleigh insolvent and appointed the RTC receiver. The following year, the RTC in its capacity as receiver of Westerleigh transferred various assets to the RTC in its corporate capacity, including rights in all actions, judgments or claims possessed by RTC-receiver against the former directors of Westerleigh.

 In its efforts to recoup costs, the RTC now seeks damages from the former directors of numerous S & Ls, including Westerleigh. Among its claims are several premised on a "simple negligence" standard.

 As defendants acknowledged at oral argument, Tr. at 5, the success of their primary argument hinges on a single premise - that federally-chartered savings and loans since their inception have been creatures of federal law, wholly-governed by HOLA. Defendants' Reply Brief (hereinafter "Def. Repl.") at 7. According to defendants, if HOLA mandates the exclusive application of federal law to all aspects of the federal savings and loan industry, then HOLA's silence on any issue involving federal S & Ls obligates courts to fashion a federal common law rule. For example, HOLA does not address the specific standard of liability of federal S & L directors, and therefore defendants contend that, before the passage of FIRREA, federal courts by necessity created their own rule of decision on this issue.

 Defendants' argument continues that in enacting FIRREA's § 1821(k), Congress specifically intended to legislate a uniform standard of "gross negligence" for director liability. Because all federal common law in conflict with the language of a specific federal statute is preempted, defendants urge that § 1821(k) necessarily preempts the federal common law of director liability, leaving viable only actions charging "gross negligence" or worse, and warranting dismissal of the RTC's claims for simple negligence and breach of fiduciary duty. Under this line of reasoning, regardless of whether applicable state law might remain intact under § 1821(k), all federal common law is preempted, and because federal S & Ls are wholly governed by federal law, federal S & Ls are, post-FIRREA, wholly governed by the "gross negligence" standard.

 Although the Second Circuit has not explicitly addressed this issue, defendants cannot have failed to note the all-but-unanimous case law in other jurisdictions concluding that § 1821(k) does not preempt any otherwise applicable state law imposing on directors a stricter standard of care than gross negligence. See, generally, Ronald W. Stevens and Bruce H. Nielson, The Standard of Care for Directors and Officers of Federally Chartered Depository Institutions, 13 Ann. Rev. Banking L. 169, 173 n. 17 (1994) (discussing the majority rule). As a result, defendants argue that their case is not governed by this settled case law, but rather by certain emerging (and unsettled) authority in other circuits - best exemplified by the opinion in RTC v. Gallagher, 800 F. Supp. 595, 602 (N.D.Ill. 1992), as aff'd by 10 F.3d 416 (7th Cir. 1993) - holding that § 1821(k) preempts federal common law to set a national standard of gross negligence for the directors of federal institutions. It is this authority that defendants seek to invoke to shield themselves against the RTC's claims.

 DISCUSSION

 HOLA Preemption

 The necessary starting point in this discussion is HOLA and an analysis of whether, as defendants assert, Congress intended HOLA to preempt any and all state laws speaking to the liability of directors of federally-chartered S & Ls. Congress enacted HOLA in the early 1930s, during the Depression, to ameliorate conditions created by widespread failures in the savings and loan industry. The scheme was intended as "a radical and comprehensive response to the inadequacies of the existing state systems." Conference of Federal Sav. & Loan Assocs. v. Stein, 604 F.2d 1256, 1257 (9th Cir. 1979), aff'd, 445 U.S. 921, 63 L. Ed. 2d 754, 100 S. Ct. 1304 (1980). In enacting HOLA, Congress set out a general framework and left the regulatory details to the Federal Home Loan Bank Board (the "Bank Board"). *fn2" The Supreme Court held that the Bank Board's authority to regulate federal S & Ls was virtually unlimited. Fidelity Federal Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 162-63, 73 L. Ed. 2d 664, 102 S. Ct. 3014 (1982). Therefore, where either HOLA or the Bank Board's regulations addressed a particular question pertaining to federal S & Ls, any conflicting state rule was automatically preempted. But the different question presented here is whether, even in the absence of an explicit federal statute or regulation governing some aspect of federal S & Ls, a nonconflicting state rule is preempted nevertheless.

  As the Supreme Court has noted, the preemption doctrine is rooted in the Supremacy Clause, U.S. Const., Art. VI, cl. 2. de la Cuesta, 458 U.S. at 152. If Congress intends, either explicitly or implicitly, to displace state law completely, the federal statute or regulation will supersede the state rule. Rice v. Santa Fe Elevator Corp, 331 U.S. 218, 230, 91 L. Ed. 1447, 67 S. Ct. 1146 (1947), rev'd on other grounds, Rice v. Board of Trade of City of Chicago, 331 U.S. 247, 91 L. Ed. 1468, 67 S. Ct. 1160 (1947). Where Congress has not completely displaced state regulation in a particular area, federal law may still preempt state law where "compliance with both federal and state [law] is a physical impossibility," Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-143, 10 L. Ed. 2d 248, 83 S. Ct. 1210 (1963), or where the state rule is "an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Hines v. Davidowitz, 312 U.S. 52, 67, 85 L. Ed. 581, 61 S. Ct. 399 (1941).

 Defendants argue that federal law exclusively governs federally-chartered savings and loans. Def. Repl. at 7 ("state law can have no application to federally-chartered savings and loan associations"). There is indeed authority in other circuits holding that the federal HOLA scheme has since its inception completely preempted state law. As one article concluded,

 
a consensus existed among the federal courts that because federally chartered savings and loan associations were subject to comprehensive federal regulation 'from [their] corporate cradle to [their] corporate grave,' federal law alone governed their internal affairs, including the issue of officers' and directors' liability.

 (internal citations omitted) Stevens and Nielson, The Standard of Care, 13 Ann. Rev. Banking L. 169, 173-74 (1994). *fn3"

 The statutes and regulations governing federally-chartered savings and loans are broad. Nevertheless, as defendants acknowledge, the federal scheme does not address director liability. Tr. at 6, 9 (defendants' counsel stated that "there is not a specific CFR cite that we could locate that talks about the duty of care . . . admittedly, we look to the regulation to see if there is something that speaks directly to fiduciary duties and, admittedly, that's not there").

 Rather than point to a specific federal rule governing director liability, defendants - and some case law - conclude that because HOLA governs federally-chartered institutions for many things, federal law must be applicable as well to the standard of care governing a director's fiduciary duties despite the statutory silence on the subject. Indeed, defendants assert that the entire field has been preempted by the "comprehensive" regulatory banking scheme, although the federal statutes and regulations themselves leave significant issues unaddressed. For support, they cite to de la Cuesta, 458 U.S. 141, 73 L. Ed. 2d 664, 102 S. Ct. 3014. But de la Cuesta, which involved a conflict between state law and federal regulations, is unavailing. The de la Cuesta Court noted that because "Congress expressly contemplated, and approved, the [Bank] Board's promulgation of regulations superseding state law," federal regulations would necessarily preempt any conflicting state law. Id. at 162. This holding is inapposite to the question before this court, however, because there is no conflict between state law and federal statute or regulation on the issue of S & L directors' duty of care to their shareholders.

 Furthermore, as discussed below pp. 10-13, courts in the Second Circuit have apparently never endorsed the view that there exists a body of federal common law of director liability that defendants now wish to see preempted. Indeed, the creation of federal common law is an option courts are increasingly unwilling to consider. RTC v. Chapman, 29 F.3d 1120, 1122 (7th Cir. 1994) ("Courts should be leery of all claims invoking federal common law"); Amerifirst Bank v. Bomar, 757 F. Supp. 1365, 1372 (S.D.Fla. 1991) (declining to create federal common law where state law claims are sufficient basis for federally-chartered savings and loan to bring suit against directors for breach of their fiduciary duty). The near-prohibition on the creation of federal common law has become more clear in the wake of O'Melveny & Myers v. FDIC, 129 L. Ed. 2d 67, 114 S. Ct. 2048 (1994), in which the Supreme Court refused to adopt a federal common law banking rule to supplement the extensive federal regulatory framework. Because "there is no federal general common law," any matters not specifically addressed by the federal scheme are governed by state law. Id. at 2053, citing Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). The federal courts, "unlike their state counterparts, are courts of limited jurisdiction that have not been vested with open-ended lawmaking powers." Id. at 2056 (concurrence, Stevens, Blackmun, Connor and Souter, quoting Northwest Airlines v. Transport Workers, 451 U.S. 77, 95, 67 L. Ed. 2d 750, 101 S. Ct. 1571 (1981)). The RTC under the O'Melveny analysis is permitted to pursue state law claims except where some provision of the federal scheme "specifically creates a special federal rule of decision." Id. at 2051. O'Melveny holds that where a federal scheme provides explicitly for preemption of state law in certain instances, to find implicit preemption where the statute is silent is not permissible. Id. at 2054.

 Although O'Melveny involved a state -chartered S & L, the opinion uniformly discourages the application of federal common law where a body of state law exists. At least one district court has held that the O'Melveny decision applies with equal force regardless of the jurisdiction of the charter. RTC v. Farmer, Civ. 92-3310, 1994 WL 564569 at *6 (E.D.Pa. Sept. 16, 1994). See also RTC v. Blasdell, CIV 93-199, 1994 WL 583131 at *13 (D.Ariz. Sept. 15, 1994) ("O'Melveny makes clear that federal common law is to be applied only sparingly"). *fn4"

 Furthermore, courts in this circuit have held that federal courts do not even have jurisdiction over disputes involving federally-chartered institutions, casting great doubt on the defendants' assertion that the nature of HOLA mandates the creation and application of federal common law to such institutions. Seen in this context, O'Melveny serves to reinforce strongly the soundness of the reasoning and conclusions of these decisions. For example, in Curiale v. Reissman, 798 F. Supp. 141 (S.D.N.Y. 1992), note-holders brought suit against the directors of a federally-chartered bank alleging breach of fiduciary duty. The court dismissed the action for lack of federal question jurisdiction, holding that fiduciary duty claims against directors "are defined by state law," and that "the mere fact that [an institution] is federally chartered is insufficient to merit the creation of a federal common law of directors duties." Id. at 144-45. The court observed that the parties "have not identified any existing federal statute or regulation defining the fiduciary duties of directors of federal savings banks, or explicitly authorizing courts to do so." The court thus rejected the contention that because an institution "is subject to comprehensive federal regulation of many areas of its activities and organization," federal courts are obligated to fill in the gaps and create law on which the federal scheme is silent. The court dismissed contrary case law on which instant defendants now rely as "not persuasive." *fn5" Id. at 146. See also Austin v. Altman, 332 F.2d 273, 276 (2d Cir. 1964) (refusing to find jurisdiction over an action against bank directors, and dismissing the contention that jurisdiction exists "merely because the bank is chartered under federal law"); Cooper v. Baldwin-Bellmore Federal Savings and Loan Assoc., 390 F. Supp. 874, 876-77 (E.D.N.Y. 1975) (holding that in a federal S & L dispute in an area in which the Bank Board has "promulgated no regulation", and where "the plaintiffs have remedies under New York State statutes", federal courts lack jurisdiction) *fn6" ; Ochs v. Washington Heights Federal Sav. and Loan Assoc., 17 N.Y.2d 82, 85, 268 N.Y.S.2d 294, 215 N.E.2d 485 (1966) ("Congress has not pre-empted the entire field" of federal S & L regulation, and a federal S & L is therefore "subject to the law of the State unless it conflict[s] with a Federal law, policy or preemption by Congress").

 Defendants try to distinguish Austin and Curiale as cases involving federally-chartered banks and not federally-chartered S & Ls. Specifically, they cite National State Bank, Elizabeth, N.J. v. Long, 630 F.2d 981, 989 (3d Cir. 1980) and Conference of Federal Sav. & Loan Ass'ns v. Stein, 604 F.2d 1256 (9th Cir. 1979), aff'd, 445 U.S. 921, 63 L. Ed. 2d 754, 100 S. Ct. 1304 (1980), for the contention that because S & Ls "do not have the lengthy history of dual regulation that characterizes the national banking system," they should be treated differently from national banks. Def. Repl. at 4 n. 2, citing Long at 989. When the quoted language is placed in context, however, it is evident that the Long court actually reached the opposite conclusion. Long holds that, although savings and loans and national banks have been subject to somewhat dissimilar regulatory control, "nevertheless, we believe that the federal interests implicated in the two situations are sufficiently similar to warrant like results." Id.. Likewise, the holding of Stein is somewhat different from defendants' interpretation: the court there noted that in the area of "redlining" actions taken against federal S & Ls, "state-conferred rights" were permitted if they grant "greater protection" than the federal scheme. 15 U.S.C. § 1691d(f). The court concluded, however, that only the federal Bank Board had the power to enforce such state-conferred rights. Stein, 604 F.2d at 1260. Further arguing against the defendants' S & L/bank distinction is the fact that the conclusions drawn by the Ochs and Cooper courts apply specifically to S & Ls.

 Defendants also attempt to distinguish Austin by arguing that "nowhere in the opinion is there any suggestion that . . . federal law is inapposite in suits against former directors of federally-chartered banks." Def. Repl. at 4. n. 2. On the contrary, however, Austin stated that

 
the federal courts do not have jurisdiction over suits to recover damages for the alleged misconduct of national bank directors . . . Actions by or against national banks may be brought in the federal courts only where an essential element of ...

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