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Courts disagree on post-FIRREA landscape.

The recent collapse of many savings and loan institutions has heightened the concern over the extent to which officers and directors of defunct financial institutions may be held liable for their role in the collapses.

In response to these failures, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Part of the act, 12 USC Section 1821(k), states: "A director or officer of an insured depository institution may be held personally liable for monetary damages in any civil action ... for gross negligence, including any similar conduct or conduct that demonstrates a greater disregard of a duty of care (than gross negligence) including intentional tortious conduct, as such terms are denied and determined under applicable state law. Nothing in this paragraph shall impair or affect any right of the corporation under other applicable law."

Thus, under FIRREA, officers and directors of insured depository institutions are to be held personally liable only for their own gross negligence and intentionally tortious conduct. Some states have traditionally permitted suits against officers and directors based on the lower standard of "ordinary" negligence. The enactment of FIRREA raises the question of whether the existence of federal legislation precludes bringing a state law claim based on mere negligence.

In FDIC v. McSweeney last year, the Federal Deposit Insurance Corp. sought to recover from directors some of the $80 million of losses incurred by California's Central Savings and Loan Association. The FDIC, acting as receiver, claimed that the defendants had negligently breached their fiduciary duties to the insolvent institution. The defendants moved to dismiss the case, arguing that mere negligence was insufficient to hold them liable because FIRREA created a cause of action only for grossly negligent or more derelict conduct, and precluded the FDIC from suing based on mere negligence pursuant to state law. The FDIC contended that although FIRREA did not create a cause of action based on negligence, it should be allowed to bring suit under the more expansive California common law which does permit suits against officers and directors for ordinary negligence.

The U.S. District Court for Southern California recognized in the McSweeney decision that because FIRREA created a federal cause of action based on gross negligence or intentional tort, the federal statute pre-empted state law. The court concluded that Section 1821(k) preserved the right to sue under state law if the state imposes a higher standard of care on officers and directors than FIRREA. In rendering its decision, the court relied primarily on the plain language of the statute. In addition, it considered the legislative history of FIRREA which suggests that Congress' goal in enacting the statute was to strengthen federal regulators' ability to pursue those responsible for mismanaging failed institutions, and that Congress' real concern was to pre-empt state legislation that insulated officers and directors from suit.

The court interpreted Section 1821(k) as an expansion of the FDIC's ability to "sue a director or officer guilty of gross negligence or willfull misconduct, even if state law did not allow it," according to the April 19, 1989, edition of the Congressional Record. The court thus allowed the FDIC to sue the Central Savings and Loan Association's directors based on allegations of conduct that were merely negligent and which did not rise to the level of gross negligence.

Courts in other jurisdictions, however, have reached the opposite conclusion. For example, in FDIC v. Canfield in 1991, the U.S. District Court for Utah held that the phrase "other applicable law" in the last sentence of Section 1821(k) refers only to other sections of FIRREA and not to state law.

Under this interpretation, Section 1821(k) does not impair corporate rights, such as the right to sue, that may exist pursuant to other sections of FIRREA, but pre-empts entirely the ability to sue officers and directors of insured depository institutions under state laws. This interpretation would create a national standard allowing damages only if an officer or director has behaved in a grossly negligent or more culpable manner.

To date, only one federal appellate court has considered whether the establishment in FIRREA of a federal cause of action for gross negligence and intentional tort pre-empts suits under state law for ordinary negligence. In that 1990 case, Gaff v. FDIC, the Court of Appeals for the 6th Circuit determined that Congress intended to occupy the entire field of national bank insurance by enacting FIRREA, thereby making the federal statute the exclusive means by which the FDIC may hold accountable officers and directors of insured depository institutions. Thus, in the 6th Circuit, the FDIC may not premise an action against a bank or savings and loan officer or director on ordinary negligence. It is still unclear in what direction the other appellate courts will go.

P. Bruce Wright is a member of the law firm LeBoeuf, Lamb, Leiby and MacRae in New York.
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Title Annotation:Legal Considerations
Author:Wright, P. Bruce
Publication:Risk Management
Date:Feb 1, 1992
Words:815
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