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November 1, 1999


The opinion of the court was delivered by: Gleeson, District Judge.


In December of 1993, Federal Deposit Insurance Corporation ("FDIC") commenced the instant action, seeking to hold Central Federal Savings Bank's ("CFS") directors and officers liable for numerous alleged acts of malfeasance committed by the bank. The only remaining defendants, George Kaminow and Michael Griffith, have asserted a number of affirmative defenses to the claims against them. The FDIC has moved in limine to strike some of these defenses and for an order precluding defendants from introducing any evidence in support of them.

For the reasons discussed below, the motion is granted in part and denied in part.


FDIC's complaint alleges that outside auditors and regulators repeatedly warned CFS's board and senior officers about problems with the bank's finances and lending practices but that CFS took no remedial action. (Amended Complaint ¶¶ 108-22.) In particular, the FDIC alleges that seven loans — all of which led to defaults — were improvidently made. (Id. ¶¶ 179-527.) The FDIC took over CFS as receiver in December 1990 and subsequently initiated this action on behalf of the bank against its directors and officers, alleging negligence, gross negligence, and breach of fiduciary duty.*fn1 (Id. ¶¶ 123-78.)

In their answers, Griffith and Kaminow raise a number of affirmative defenses. The defenses relevant to this motion are: the second (that their conduct should be protected by the business judgment rule); the third (that their actions as directors "were mandated by federal regulatory agencies having or asserting jurisdiction over the acts and actions of the bank and its directors and officers"); the fourth (that any losses were caused not by defendants but by "plaintiff and its predecessor"); the fifth (that the plaintiff failed to mitigate damages); and the sixth (that the plaintiff failed to provide defendants with directors and officers liability insurance). The FDIC has moved to strike each of these defenses and has asked for an order in limine precluding defendants from introducing any evidence regarding pre-failure regulatory conduct or post-intervention actions by government agencies in handling or liquidating CFS's assets.


A. The Standard for Motions to Strike Affirmative Defenses

Rule of Civil Procedure 12(f) authorizes a court to strike from an answer "any insufficient defense." Such motions are "not favored," but will succeed if "it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense." William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d 935, 939 (2d Cir. 1984) (quoting Durham Indus., Inc. v. North River Ins. Co., 482 F. Supp. 910, 913 (S.D.N.Y. 1979)), vacated on other grounds, 478 U.S. 1015, 106 S.Ct. 3324, 92 L.Ed.2d 731 (1986). When an affirmative defense is unsupportable as a matter of law, it should be stricken in order to avoid unnecessary litigation on the question. See FDIC v. Eckert Seamans Cherin & Mellott, 754 F. Supp. 22, 23 (E.D.N.Y. 1990).

The Second Circuit has cautioned against deciding difficult questions of law on a Rule 12(f) motion to strike, given that such motions are typically made at the most preliminary stages of litigation.*fn2 See Envicon Equities, 744 F.2d at 939. This case, however, has been pending for nearly six years; discovery is either complete or very nearly so; and we are on the eve of trial. Moreover, FDIC seeks an order in limine precluding introduction of evidence on the disputed defenses. That application requires an analysis of the legal viability of the defenses. There is no impediment, at this late stage of the case, to engaging in that analysis. For these reasons, the motion to strike provides an appropriate vehicle for resolution of these questions.

B. The Business Judgment Rule

The parties agree that New York law will determine the liability standard applied to defendants' actions, see Atherton v. FDIC, 519 U.S. 213, 226, 117 S.Ct. 666, 136 L.Ed.2d 656 (1997) (rejecting contention that standard of care should come from federal common law), but they disagree on what that standard should be. In their second affirmative defense, the defendants contend that their conduct should be judged against the "business judgment rule." This rule "prohibits judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." Levandusky v. One Fifth Ave. Apartment Corp., 75 N.Y.2d 530, 537-538, 554 N.Y.S.2d 807, 553 N.E.2d 1317 (1990) (internal quotation marks omitted). Short of a breach of fiduciary duty, directors will not be liable for their good faith actions, even if turns out that those actions were "unwise or inexpedient." Id. at 538, 554 N.Y.S.2d 807, 553 N.E.2d 1317.

The FDIC argues that instead of the business judgment rule a simple negligence standard applies, and I agree. In a 1994 opinion, Judge Ross thoroughly examined this question and concluded that New York law holds directors of a "banking institution" liable for simple negligence. See RTC v. Gregor; 872 F. Supp. 1140, 1150-51 (E.D.N.Y. 1994) (citing Litwin v. Alien, 25 N.Y.S.2d 667, 678 (Sup.Ct. 1940); Broderick v. Marcus, 152 Misc. 413, 272 N.Y.S. 455, 461 (Sup.Ct. 1934)). The defendants have not cited any subsequent authority that would undermine the analysis in Gregor, which I adopt. The defendants' second affirmative defense is therefore struck.

C. FDIC Corporate vs. FDIC Receiver

As a threshold matter, the FDIC contends that the affirmative defenses four through six (alleging that any losses were caused by the FDIC or its predecessor; that the FDIC failed to mitigate damages; and that the FDIC failed to provide officers and directors insurance) are unsustainable because they are actually claims against "FDIC Receiver," a distinct legal entity from "FDIC Corporate," which is litigating this action. FDIC Corporate is charged with "insur[ing] the deposits of all insured banks as provided in this chapter." 12 U.S.C. § 1821 (a)(1). FDIC Receiver, on the other hand, steps into the shoes of a financial institution in order to operate it and, if necessary, liquidate its assets. See id. § 1821(d)(2).

The Second Circuit has held that FDIC Corporate and FDIC Receiver are two "discrete legal entities," and, as such, "Corporate FDIC is not liable for wrongdoings by Receiver FDIC." FDIC v. Bernstein, 944 F.2d 101, 106 (2d Cir. 1991) (quoting FDIC v. Roldan Fonseca, 795 F.2d 1102, 1109 (1st Cir. 1986)); see also Dababneh v. FDIC', 971 F.2d 428, 432 (10th Cir. 1992). The facts of Bernstein, however, demonstrate why the rule of that case does not support FDIC Corporate's motion to strike affirmative defenses four through six, all of which pertain to actions or omissions by FDIC Receiver.

Bernstein involved a complicated set of transactions, but for present purposes only certain facts are salient. FDIC, acting as receiver for Guardian Bank, sued Bernstein seeking to collect on a $175 million personal guaranty he had provided for a loan Guardian Bank provided to Guardian Diversified Services, Inc. ("GDSI"). See Bernstein, 944 F.2d at 102. (GDSI's inability to repay this loan had led to the failure of Guardian.) GDSI could not repay the loan because its subsidiary's participation in a mortgage-backed securities program had been terminated. See id. at 103. Bernstein alleged that, because this termination was wrongful and had been instigated by FDIC Corporate, he could not be held liable on the guaranty. See id. at 105. This is the contention that the Circuit concluded was unsustainable as a matter of law: It involved the conduct of an entity not party to the action. See id. at 106.

The defendants' allegations in affirmative defenses four through six are quite different. They involve the conduct of FDIC Receiver, as receiver. True, FDIC Corporate is the plaintiff in this case, but that is so only because FDIC Receiver assigned this cause of action to FDIC Corporate. (FDIC Memorandum of Law at 9 n. 3.) It is horn book law that the assignee of a cause of action takes it subject to any defenses that could have been raised against the assignor. See GA N.Y.Jur.2d Assignments ยง 66 (1997). Therefore, the fact that FDIC Receiver and FDIC Corporate are two separate entities cannot prevent the ...

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