Bender v. Jordan

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 13, 2010 Decided October 22, 2010

No. 08-7150

MORTON A. BENDER AND GRACE M. BENDER,

APPELLEES

v.

CAROLYN D. JORDAN, ET AL.,

APPELLANTS

INDEPENDENCE FEDERAL SAVINGS BANK,

APPELLEE

Appeal from the United States District Court

for the District of Columbia

(No. 1:06-cv-00092-RMC)

Frederick D. Cooke Jr. argued the cause and filed the

briefs for appellants. Peter E. Strand entered an appearance.

Dale A. Cooter argued the cause for appellee

Independence Federal Savings Bank. With him on the brief

was Donna S. Mangold. Griffin V. Canada Jr. entered an

appearance.

2

Before: BROWN, Circuit Judge, and EDWARDS and

WILLIAMS, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: This is a fee dispute

arising out of prolonged litigation between various parties

interested in Independence Federal Savings Bank (“IFSB” or

the “Bank”), a federal stock savings association regulated at

the time of the relevant events by the Office of Thrift

Supervision (“OTS”).1 One substantive phase, possibly the

last, began in 2006 when shareholders Morton and Grace

Bender filed a securities law suit against IFSB, five then

directors and its president and CEO. Those six individuals

executed agreements with IFSB under which the Bank

advanced funds for defense of the suit, on the condition that

each individual would repay the expenses if later determined

not to be entitled to indemnification under an OTS regulation,

12 C.F.R. § 545.121.

On the merits, the district court granted a preliminary

injunction in favor of the Benders, Bender v. Jordan, 439 F.

Supp. 2d 139 (D.D.C. 2006), who soon thereafter acquired

control of the Bank. With them in charge, the district court

dismissed their substantive claims as moot. Bender v. Jordan,

515 F. Supp. 2d 10 (D.D.C. 2007).

1

Under the recently enacted Dodd-Frank Wall Street Reform

and Consumer Protection Act, the Office of Thrift Supervision will

be eliminated and its authority over federal savings associations will

be transferred to the Office of the Comptroller of the Currency.

Pub. L. No. 111-203, §§ 311-13, 369, 124 Stat. 1376, 1520-23,

1557-65 (2010) (to be codified at 12 U.S.C. §§ 5412-13, 1463).

3

ISFB’s new board of directors then unanimously

approved a resolution stating that three of the original six

individual defendants—namely, two former directors and the

former president and CEO—were not entitled to

indemnification and demanding repayment of legal fees

advanced pursuant to their respective agreements. Joint

Appendix (“J.A.”) 130. These three individuals refused to

repay. IFSB filed a cross-claim against them for breach of

contract, and the district court granted summary judgment in

favor of IFSB. Bender v. Jordan, 570 F. Supp. 2d 37 (D.D.C.

2008). The district court also rejected the three cross-

defendants’ argument that the obligation should be split six

ways among the original six individuals, and ruled that each

of the three cross-defendants should be severally liable for

one-third of the entire amount advanced. It absolved the three

original defendants not named by IFSB as cross-defendants,

saying, “Because [the other three defendants] were not found

to be actively involved [in the securities law violations alleged

by the Benders] . . . , it was not unreasonable for the current

Board to decide that their ‘fair share’ of the legal fees and

expenses was $0.00.” Id. at 48.

The three cross-defendants (here called for simplicity’s

sake the “former directors”) appeal on the grounds that IFSB

failed to comply with the procedures set forth in 12 C.F.R.

§ 545.121 and that they therefore are not required to

reimburse IFSB under the terms of the agreements. They also

appear to make an obscure argument that the agreements

themselves obligate the IFSB to initiate procedures alluded to

in the regulation. Because their reading of 12 C.F.R.

§ 545.121 is mistaken (as is their reading of the contract, to

the extent that they rely on it at all), we affirm the judgment of

the district court. In their brief to this court the former

directors did not specifically challenge the district court’s

exclusion of the other three original defendants, and only did

so indirectly at oral argument. See Oral Arg. Recording at

4

38:18-40:18. The apportionment issue is therefore forfeited.

See Williams v. United States, 396 F.3d 412, 415 (D.C. Cir.

2005) (argument inadequately raised in opening brief is

forfeited).

* * *

Although the parties do not raise the issue, we must first

consider whether the district court properly exercised

jurisdiction. A case arises under federal law within the

meaning of 28 U.S.C. § 1331 “if ‘a well-pleaded complaint

establishes either that federal law creates the cause of action

or that the plaintiff’s right to relief necessarily depends on

resolution of a substantial question of federal law.’” Empire

Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 690

(2006) (quoting Franchise Tax Bd. of Cal. v. Construction

Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 27-28

(1983)). IFSB’s cause of action—breach of contract—

appears on its face to be one created by state law. But even

where that is true, the federal courts have jurisdiction when, as

here, it is apparent that the federal questions overwhelmingly

predominate.

For federal courts to have jurisdiction, the state law claim

must turn on an “actually disputed and substantial” issue of

federal law, Grable & Sons Metal Products, Inc. v. Darue

Engineering & Mfg., 545 U.S. 308, 314 (2005), and federal

jurisdiction must be “consistent with congressional judgment

about the sound division of labor between state and federal

courts governing the application of § 1331.” Id. at 313-14.

The Court has said that this depends on such factors as the

strength of the federal interest in a federal forum to resolve

questions of federal law and whether federal jurisdiction

would “materially affect” the “normal currents of litigation.”

Id. at 315, 319. Federal jurisdiction is favored in cases that

5

present “a nearly ‘pure issue of law’ . . . ‘that could be settled

once and for all and thereafter would govern numerous . . .

cases.’” Empire, 547 U.S. at 700 (quoting Richard H. Fallon,

Jr., Daniel J. Meltzer, & Daniel L. Shapiro, Hart &

Wechsler’s The Federal Courts and the Federal System 65

(2005 Supp.)). Conversely, federal jurisdiction is disfavored

for cases that are “fact-bound and situation-specific” or which

involve substantial questions of state as well as federal law.

Empire, 547 U.S. at 701.

As in Grable (but not in Empire), this case presents a

nearly pure issue of federal law, and none of the other relevant

factors weighs against federal jurisdiction. Although breach

of contract is a state law cause of action, the agreements

themselves are “creatures of federal law,” see Jackson Transit

Authority v. Local Division 1285, Amalgamated Transit

Union, 457 U.S. 15, 23 (1982), in the sense of being intended

to implement the scheme designed by 12 C.F.R. § 545.121.

The former directors and IFSB entered into the agreements

because federal law requires the execution of such contracts

before legal fees can be advanced to defendant officers and

directors. Id. § 545.121(e). And the parties’ legal duties turn

almost entirely on the proper interpretation of that regulation.

The federal interest in a federal forum for this case is

substantial. At stake is the interpretation of a federal

regulation that governs the conduct of a federal agency—the

Office of Thrift Supervision—and federally chartered savings

associations. By contrast, there is no discernable state interest

in a state forum.

The Court’s opinions in this area call on the federal courts

to make predictive judgments about, for example, whether

jurisdiction over such actions as the one in question will

“materially affect, or threaten to affect, the normal currents of

litigation,” Grable, 545 U.S. at 319, presumably by leading to

a wave of new filings in federal court. Creation of precedent

6

interpreting 12 C.F.R. § 545.121 is likely in fact to reduce the

frequency of disputes over contracts under 12 C.F.R.

§ 545.121(e). And in many instances (indeed, it may be the

case here, but we need not reach it), the federal courts would

have supplemental jurisdiction over 12 C.F.R. § 545.121(e)

breach of contract claims. Here we have turned first to federal

question jurisdiction primarily because idiosyncrasies of the

record pose special problems for supplemental jurisdiction. In

any case, we do not anticipate that this exercise of federal

jurisdiction will portend any more than “a microscopic effect

on the federal-state division of labor.” Grable, 545 U.S. at

315.

Our finding of jurisdiction under Empire and Grable

makes it unnecessary to consider alternative grounds. These

include federal question jurisdiction under the opinion in

Jackson Transit (for cases where Congress has intended that

“all rights and duties stemming from” a contract should be

governed by federal law, see Empire, 547 U.S. at 693) and

supplemental jurisdiction under 28 U.S.C. § 1367.

* * *

Thus we reach the merits, which depend on the federal

regulation and, to a much lesser extent, on the identically

worded agreements seeking to implement that regulation. We

start with the latter:

Pursuant to Regulations of the Office of Thrift

Supervision (the “OTS”) governing advancement of

expenses to directors and officers of a federal savings

association, 12 C.F.R. § 545.121(e), (the “Regulation”),

with respect to claims brought against a director or officer

arising from service as a director or officer of a federal

savings association, I hereby request that Independence

7

Federal Savings Bank (the “Bank”) pay reasonable

expenses and costs that have been or will be incurred in

the defense or settlement of the litigation styled as

Morton A. Bender, et al. v. Carolyn D. Jordan, et al.

Under the Regulation, I hereby agree that I will repay the

Bank any amounts so paid on my behalf by the Bank if it

is later determined that I am not entitled to

indemnification with respect to the litigation under 12

C.F.R. § 121 [sic], and I represent that I have sufficient

assets to repay my fair share of such amounts.

J.A. 109-11 (punctuation as in original). The parties agree

that the second reference to the regulation should be

understood to refer to 12 C.F.R. § 545.121 (as does the first,

accurately).

Although 12 C.F.R. § 545.121(f) authorizes covered

banks to enact bylaws governing indemnification of officers

and directors, IFSB did not do so. Thus the former directors’

claim of a violation by the Bank turns on the indemnification

provisions of 12 C.F.R. § 545.121(b) and (c):

(b) General. Subject to paragraphs (c) and (g) of this

section, a savings association shall indemnify any person

against whom an action is brought or threatened because

that person is or was a director, officer, or employee of

the association, for:

(1) Any amount for which that person becomes

liable under a judgment if [sic; presumably in] such

action; and

(2) Reasonable costs and expenses, including

reasonable attorney's fees, actually paid or incurred

by that person in defending or settling such action, or

in enforcing his or her rights under this section if he

8

or she attains a favorable judgment in such

enforcement action.

(c) Requirements. Indemnification shall be made to such

period [sic; presumably person] under paragraph (b) of

this section only if:

(1) Final judgment on the merits is in his or her

favor; or

(2) In case of:

(i) Settlement,

(ii) Final judgment against him or her, or

(iii) Final judgment in his or her favor, other

than on the merits, [¶]

if a majority of the disinterested directors of the

savings association determine that he or she was

acting in good faith within the scope of his or her

employment or authority as he or she could

reasonably have perceived it under the circumstances

and for a purpose he or she could reasonably have

believed under the circumstances was in the best

interests of the savings association or its members.

12 C.F.R. § 545.121 (b), (c). We have inserted a ¶ sign in

brackets before the “if” clause at the very end, to make clear

that, as all parties agree, that clause governs indemnification

under any of the subsections of § 545.121(c)(2).

In the useful nomenclature adopted by the court in Harris

v. Resolution Trust Corporation, 939 F.2d 926 (11th Cir.

1991), this regulation allows for two types of

indemnification—“mandatory indemnification” under 12

9

C.F.R. § 545.121(c)(1) for directors who receive final

judgment in their favor on the merits, and “permissive

indemnification” under 12 C.F.R. § 545.121(c)(2) for those

who do not. In the second case indemnification is proper only

if a majority of disinterested directors make certain prescribed

findings.

Because the former directors did not receive final

judgment in their favor on the merits, they are not entitled to

“mandatory indemnification.” They argue, however, that they

are not in breach of contract until a majority of disinterested

new directors has determined, in good faith, that each former

director was not “acting in good faith within the scope of his

or her employment or authority as he or she could reasonably

have perceived it under the circumstances and for a purpose

he or she could reasonably have believed under the

circumstances was in the best interest of the savings

association and its members.” 12 C.F.R. § 545.121(c)(2). In

essence, they claim that the regulation obliges a bank to

launch a process that might create a permissive entitlement.

Thus, the board would have to take whatever steps are

necessary to assure the presence of directors qualifying

thereunder as disinterested and to be sure that such directors

then determine whether the former directors were acting in

good faith and for purposes that they could reasonably believe

were in the best interest of the savings association. If these

disinterested persons found that these conditions were met,

then the Bank would be required to indemnify the former

directors.

The former directors’ interpretation of the regulation is

mistaken. 12 C.F.R. § 545.121(c) does not require a board of

directors to indemnify directors and officers in any

circumstances in which the officers or directors have not

received final judgment on the merits in their favor.

Permissive indemnification is discretionary. 12 C.F.R.

10

§ 545.121(c)(2) provides a standard that must be met for a

board of directors to grant permissive indemnification; it goes

on, in a passage not quoted, to require notice to the OTS 60

days before a bank provides indemnification under either

subsection of 12 C.F.R. § 545.121(c), and to bar

indemnification if the OTS states an objection within the

notice period. The policy manifested by 12 C.F.R.

§ 545.121(c)(2) is one of protecting the financial health of

savings associations by limiting the ability of boards to

indemnify undeserving officers and directors and by providing

for regulatory review. For us to find that the regulation

mandates that directors jump through the hoops required for

permissive indemnification would, inconsistently with that

purpose, impose a potentially costly burden on savings

associations (even if we were to disregard the attendant risks

of litigation). There is no requirement for a board of directors

to do anything at all under 12 C.F.R. § 545.121(c)(2) and

therefore no entitlement to indemnification for officers and

directors beyond 12 C.F.R. § 545.121(c)(1) unless and until

the disinterested directors have approved permissive

indemnification in accordance with 12 C.F.R. § 545.121(c)(2)

and the OTS has not objected during the 60-day notice period.

The former directors cite Resolution Trust Corporation v.

Nicholson, Civ. No. 3-88-163, 1991 U.S. Dist. LEXIS 21143

(E.D. Tenn. Sept. 5, 1991), in support of their interpretation of

12 C.F.R. § 545.121(c)(2). The Nicholson court stated in

dictum that a board of directors’ decision not to indemnify a

director under 12 C.F.R. § 545.121(c)(2) “is to be made in

good faith and based on the board’s fiduciary

responsibilities.” Nicholson, 1991 U.S. Dist. LEXIS 21143 at

*18 (citing OTS Opinion Letter, 1989 FHLBB LEXIS 458,

1989 WL 1114183 (October 6, 1989)). Because the court

determined that Nicholson’s claim was not ripe, it did not rule

on the exact scope of the board of directors’ duties. Id. at *19.

In contrast to Nicholson, we reach the merits of the argument.

11

We agree that insofar as the new directors are acting in their

official capacity, they are bound by their fiduciary duties to

IFSB. But 12 C.F.R. § 545.121(c)(2) imposes no additional

duty of good faith for board members to undertake the

procedures prerequisite to permissive indemnification. It

therefore creates no general entitlement to indemnification

under 12 C.F.R. § 545.121(c)(2) where the board of directors

does not consider the determinations necessary to create a

permissive entitlement.

In their opening brief the former directors hint, in the

most subtle way imaginable, at a claim that the agreements

themselves created a duty on the Bank’s part to launch the

procedures for finding a permissive entitlement. The

argument becomes explicit in the reply brief, but of course we

typically disregard arguments that pop up only at that stage,

when the appellee’s chance to respond has passed. Carducci

v. Regan, 714 F.2d 171, 177 (D.C. Cir. 1983).

In any event, the argument’s lack of merit is plain. To be

sure, the agreements call for the recipients of advances to

repay them “if it is later determined that I am not entitled to

indemnification” under the regulation. J.A. 109-11. The

board in fact made such a determination, adopting a resolution

to the effect that the former directors were not entitled to

indemnity. The board did not purport to address the

possibility of permissive indemnification. Presumably the

parties could have assigned the board a duty to address that

issue, a duty altogether outside 12 C.F.R. § 545.121, but it

used no language purporting to do so. Especially in

agreements declaring themselves to be “[p]ursuant” to OTS’s

regulations, where the former directors agreed to repay

“[u]nder” 12 C.F.R. § 545.121, it would take far clearer

language to impose any such burden on the board.

12

The former directors’ brief is replete with assertions that

the Bank’s new board directors are subject to a general duty of

good faith. No doubt. But that general interpretive gloss is no

basis for generating a whole new duty ex nihilo.

As the former directors have satisfied neither the

conditions for mandatory nor those for permissive entitlement,

and the board has made a determination embodying that fact,

the former directors are obligated under the agreements to

repay IFSB for the cost of their legal defense.

* * *

The judgment of the district court is therefore

Affirmed.