Opposition Brief — Lee v. Federal Deposit Insurance Corp.

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: F. SPANIOL, JF

Jn the Supreme Court of the United

OCTOBER TERM, 1989

FRANK LEE, ET AL., PETITIONERS,

Vv.

FEDERAL DEPOSIT INSURANCE CORPORATION

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE RESPONDENT

IN OPPOSITION

KENNETH W. STARR

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 514-2217

MARK I. ROSEN

Deputy General Counsel

DOROTHY L. NICHOLS

Associate General Counse!

ANN S. DUROSS

Assistant General Counsel

JOAN E. SMILEY

Senior Counsel

MICHAEL F. RUGGIO

ROBERT D. MCGILLICUDDY

Counsel

Federal Deposit Insurance Corporation

Washington, D.C. 20429

CLERK

QUESTIONS PRESENTED

1. Whether the statute of limitations for claims acquired

by the FDIC from an insolvent financial institution begins

to run on the date the FDIC is appointed conservator or

receiver of the financial institution.

2. Whether, in an action by the FDIC against former

officers and directors of a failed financial institution, federal

common law governs the characterization of the FDIC’s

claims as sounding in tort or contract for purposes of deter-

mining the applicable limitations period.

(1)

TABLE OF CONTENTS

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TABLE OF AUTHORITIES

Cases:

Badaracco v. Commissioner, 464 U.S. 386

ee ey ee en ba wes aiiue es

Bradley v. Richmond School Bd., 416 U.S. 696

As coc wks aad a bo ode a% oleae oc

Clearfield Trust Co. v. United States, 318 U.S.

EE on eee eg eg al

D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447

EM Rte Son ct Ua wy we ee ere as

E.I. Dupont de Nemours & Co. v. Davis, 264

ss a as wg ok a ewe

FDIC v. Bank of San Francisco, 817 F.2d 1395

ee ee cis kaka pas een eens

FDIC v. Blue Rock Shopping Center, 766 F.2d

ee ug saan ore wpa

FDIC v. Braemoor Assocs., 686 F.2d 550 (7th

Cir. 1982), cert. denied, 461 U.S. 927 (1983)

FDIC v. Cardona, 723 F.2d 132 (1st Cir.

Aa Seay ies 6 hes does veuwe aes

FDIC v. First Interstate Bank, 885 F.2d 423 (8th

Ns os vind vw wk EA eed oe ee

FDIC v. Galloway, 856 F.2d 112 (10th Cir.

ra fo on a ede. ener eer

Cases — Continued: Page

FDIC v. Hinkson, 848 F.2d 432 (3d Cir.

POE Nic dota obs oe bt he Sole eal OES 5

FDIC v. Hudson, 673 F. Supp. 1039 (D. Kan.

P cowhsoe ku wean ad Cade cerekwaness 5

FDIC v. Niver, Civ. No. 85-2642-S (D. Kan.

a Es 55 4 55 5040 Rae Ewes eee es 5

FDIC v. Palermo, 815 F.2d 1329 (10th Cir.

PE Do wast ca kad sees ceceh eek eee kaa, 7-8

FDIC v. Petersen, 770 F.2d 141 (10th Cir.

SE (halon D yoo 5 us-0.6 xo ab ae 5

FDIC v. Robertson, Civ. No. 87-2623-S (D.

EE wens po oe nee eheneke « 5

Santoni v. FDIC, 677 F.2d 174 (Ist Cir.

nia a i a cls eee ee ai . 8

United States v. Cardinal, 452 F. Supp. 542 (D.

TE ek oe heey se eek ad whe 3

United States v. Kimbell Foods, Inc., 440 U.S.

yp RES ie ree NGO ey eth eee 7

United States v. Limbs, 524 F.2d 799 (9th Cir.

Toe gtk male ee ae ol 8

United States v. Lovasco, 431 U.S. 783

RE ons aces ooo ble oe ward wna es ek as 6

United States v. Neidorf, 522 F.2d 916 (9th Cir.

1975), cert. denied, 423 U.S. 1087 (1976) . 8

Statutes:

Financial Institutions Reform, Recovery, and

Enforcement Act of 1989, Pub. L. No.

101-73, § 212(a), 103 Stat. 232-233 (12 U.S.C.

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Statutes — Continued: Page

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In the Supreme Court of the United States

OCTOBER TERM, 1989

No. 89-1549

FRANK LEE, ET AL., PETITIONERS,

FEDERAL DEPOSIT INSURANCE CORPORATION

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR THE RESPONDENT

IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 2-23) is

reported at 884 F.2d 1304. The opinion of the district court

(Pet. App. 24-67) is reported at 705 F. Supp. 505.

JURISDICTION

The judgment of the court of appeals was entered ca

September 13, 1989. A petition for rehearing was denied

on December 22, 1989 (Pet. App. 23a-23b). The petition

for a writ of certiorari was filed on March 22, 1990. The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

(1)

STATEMENT

1. In January 1983, three financially troubled Oregon

state banks, Metropolitan State Bank (Metropolitan), In-

dependent Bank of Sandy (IBS), and Willamette Falls State

Bank (Willamette Falls), were merged to form the United

Bank of Oregon (UBO). UBO’s board of directors was com-

posed entirely of former directors of Metropolitan, IBS or

Willamette Falls. In March 1984, the Oregon Superinten-

dent of Banks declared UBO insolvent and appointed the

Federal Deposit Insurance Corporation (FDIC) as receiver

of UBO. FDIC, as receiver, assigned to FDIC, in its cor-

porate capacity, all UBO’s claims against its officers and

directors.

2. In February 1987, FDIC filed a complaint in district

court against UBO’s former officers and directors, alleg-

ing causes of action for breach of fiduciary duty, negligence,

statutory violations, and indemnification (Pet. App. 36,

' 70-71, 77). Several of the defendants moved for summary

judgment on the ground that FDIC’s claims were barred

by the three-year statute of limitations for tort actions

brought by the United States or federal agencies. See 28

U.S.C. 2415(b).' The district court entered summary judg-

' Section 2415 of Title 28, U.S.C., provides, in relevant part:

(a) Subject to the provisions of section 2416 of this title, and

except as Otherwise provided by Congress, every action for money

damages brought by the United States or an officer or agency

thereof which is founded upon any contract express or impiied in

law or fact, shall be barred unless the complaint is filed within six

years after the right of action accrues or within one year after final

decisions have been rendered in applicable administrative pro-

ceedings required by contract or by law, whichever is later * * *.

(b) Subject to the provisions of section 2416 of this title, and

except as otherwise provided by Congress, every action for money

damages brought by the United States or an officer or agency

thereof which is founded upon a tort shall be barred unless the

ment in favor of the defendants. The court, applying federal

law, concluded that each of FDIC’s asserted causes of ac-

tion sounds in tort rather than in contract or quasi-contract,

and therefore is subject to the three-year limitations period

of Section 2415(b) rather than the six-year period of Sec-

tion 2415(a). The court further held that the three-year

period began to run when Metropolitan, IBS and Willamette

Falls were merged to form UBO. Relying on United States

v. Cardinal, 452 F. Supp. 542 (D. Vt. 1978), the court re-

jected the FDIC’s arguments that the claims did not accrue

until institution of the receivership, and that the statute was

tolled while the defendants dominated UBO’s board. Pet.

App. 43-50. On motion for reconsideration, the district

court reaffirmed its decision. /d. at 52-67.

3. FDIC appealed and the court of appeals reversed.

It held that the FDIC’s claim for breach of fiduciary duty

sounds in contract, and therefore is subject to the six-year

limitation period of 28 U.S.C. 2415(a). Pet. App. 12-15.

The court concluded that there is a “substantial question

as to whether FDIC’s claims sounded in tort or in contract,”

and stated that where such doubt exists, the longer period

should apply. Pet. App. 11-13 (citing authorities). The court

of appeals also held that the six-year period did not begin

to run until the FDIC was appointed as receiver. /d. at 21-23.

The court observed that 28 U.S.C. 2415 expressly makes

the statute of limitations subject to the conditions of 28

U.S.C. 2416, and that Section 2416(c) provides that periods

during which material facts are unknown and could not

complaint is filed within three years after the right of action first

accrues °° °.

> The district court also dismissed the indemnity claims on the ground

that the depositors had no direct claim against the former officers and

directors. Pet. App. 36-38. The FDIC did not appeal this ruling.

reasonably be known to federal officials with responsibili-

ty to act must be excluded from the limitations period.* The

court regarded the policy arguments as “fairly evenly bal-

anced,” but viewed this case as “particularly appropriate”

for application of the principle that “[s]tatutes of limita-

tions sought to be applied to bar rights of the Government,

must receive a strict construction in favor of the Govern-

men. ” Pet. App. 20-22, quoting Badaracco v. Commis-

sioner, 464 U.S. 386, 391 (1984) (quoting E.J. Dupont de

Nemours & Co. v. Davis, 264 U.S. 456, 462 (1924)).

ARGUMENT

1. Petitioners contend that this Court should grant cer-

tiorari to resolve a purported conflict among the courts of

appeals over when the statute of limitations begins to run

on claims inherited by the FDIC from insolvent financial

institutions (Pet. 7-15). Contrary to petitioners’ contentions,

the decision of the court of appeals is correct and does not

conflict with any decision of another court of appeals. In

addition, the issue has been recently and authoritatively

resolved by Congress. Accordingly, further review by this

Court is not warranted.

The court of appeals correctly held that the statute of

limitations on claims of mismanagement against a bank’s

directors and officers does not begin to run until the FDIC

is in a position to pursue such claims. As a practical mat-

> Section 2416 provides, in relevant part:

For the purpose of computing the limitations periods established

in section 2415, there shall be excluded all periods during which —

* * * * *

reasonably could not be known by an official of the United States

charged with the responsibility to act in the circumstances * * *.

ter, directors and officers will not authorize a suit against

themselves while they remain in control of the bank. Con-

sequently, the statute of limitations should not begin run-

ning while the potential defendants remain in a position to

prevent the filing of a complaint. Understandably, no court

of appeals has held to the contrary.‘ In addition, only one

other court of appeals has considered the effect of Section

2416(c) on claims of wrongdoing obtained by the FDIC from

a failed bank, FDIC v. First Interstate Bank, 885 F.2d 423,

434 (8th Cir. 1989), and that court agrees with the Ninth

Circuit that the “FDIC’s cause of action did not accrue until

* * * the FDIC was appointed receiver.” Jd. at 434. In short,

there is no conflict among the circuits as to the application

of Sections 2415 and 2416(c) of Title 28 to directors’ and

officers’ liability cases.

* The Eighth Circuit, the Third Circuit, and the First Circuit, as well

as the Ninth Circuit in the instant case, have concluded that the statute

of limitations does not begin to run until the FDIC is appointed receiver.

FDIC v. First Interstate Bank, 885 F.2d 423 (8th Cir. 1989); FDIC v.

Hinkson, 848 F.2d 432, 435 (3d Cir. 1988); FDIC v. Cardona, 723 F.2d

132, 134 (Ist Cir. 1983). The Tenth Circuit, in cases not involving claims

against officers and directors, has concluded that the statute of limita-

tions begins to run on the date on which the cause of action first ac-

crues, not when it is later acquired by the FDIC. FDIC v. Galloway,

856 F.2d 112, 115-117 (1988); FDIC v. Petersen, 770 F.2d 141, 142-143

(1985). Both Petersen and Galloway were FDIC actions to recover from

guarantors amounts owing on defaulted promissory notes. Neither case

Suggests any reason why the banks could not be relied on to pursue

claims against the guarantors; neither case involved claims against of-

ficers and directors who could not be expected to sue themselves while

they remained in office. At least one district court within the Tenth

Circuit has not applied the rule of Petersen and Galloway to FDIC

claims against officers and directors for mismanagement. See FD/C

v. Hudson, 673 F. Supp. 1039, 1042-1043 (D. Kan. 1987); FDIC v.

Niver, Civ. No. 85-2642-S (D. Kan. Nov. 6, 1987); FDIC v. Robert-

son, Civ. No. 87-2623-S (D. Kan. July 24, 1989).

In any event, the issue petitioner raises is largely academic,

because Congress has now specified the applicable rule in

Section 212(a) of the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA), Pub.

L. No. 101-73, 103 Stat. 232-233 (to be codified at} 12

U.S.C. 1821(d)(14)). Section 212(a) of FIRREA expressly

provides that the statute of limitations begins to run on the

date of FDIC’s appointment as conservator or receiver or

on the date the cause of action accrues, whichever is later.°

Section 212(a) of FIRREA now governs this case. See

Bradley v. Richmond School Bd. , 416 U.S. 696, 715 (1974).

2. Petitioners also contend (Pet. 15-23) that the Ninth

Circuit should have applied Oregon law to decide whether

the FDIC’s claims are more appropriately characterized as

tort or contract claims, and that the courts of appeals are

in conflict over whether state law or federal common law

governs such determinations. Petitioners concede (Pet. 16

n.17) that the choice of law issue was not presented to the

lower courts. For that reason alone, it should not be con-

sidered by this Court. See United States v. Lovasco, 431

U.S. 783, 788 n.7 (1977).

In any event, the court of appeals’ decision is correct and

does not create a conflict among the circuits. The appellate

courts agree that federal law, not state law, governs the

rights of the FDIC in this action. D’Oench, Duhme & Co.

v. FDIC, 315 U.S. 447, 456 (1942); FDIC v. Bank of San

Francisco, 817 F.2d 1395, 1398 (9th Cir. 1987); FDIC v.

5 Section 212(a) of FIRREA, 103 Stat. 232-233 (to be codified at 12

U.S.C. 1821(d)(14)(B)), provides in pertinent part:

{T]he date on which the statute of limitations begins to run on any

claim * * * shall be the later of —

(i) the date of the appointment of the Corporation as conser-

vator or receiver; or

(ii) the date on which the cause of action accrues.

Braemoor Assocs. , 686 F.2d 550, 553-554 (7th Cir. 1982),

cert. denied, 461 U.S. 927 (1983). Where no federal statute

provides the rule of decision in a case governed by federal

law, courts must fashion federal common law. Clearfield

Trust Co. v. United States, 318 U.S. 363, 367 (1943). In

so doing, courts may either create a uniform federal rule

or adopt relevant state law; the choice depends on considera-

tions such as whether a uniform national rule is needed,

whether adoption of state law would frustrate the objec-

tives of federal programs, and whether adoption of a na-

tional rule would disrupt commercial relationships based

on state law. See United States v. Kimbell Foods, Inc., 440

U.S. 715, 728-729 (1979).

Contrary to pecitioners’ assertions (Pet. 17-19), the cases

cited in the petition do not demonstrate any conflict on a

choice of law issue. Some of the cases cited by petitioners

adopt state law as the federal rule of decision. See, e.g.,

FDIC v. Palermo, 815 F.2d 1329, 1334-1335 (10th Cir. 1987)

(arplying Oklahoma law to determine the elements of

fraud); FDIC v. Braemoor Assocs., 686 F.2d at 554 (ap-

plying a presumption in favor of state law in suit to impose

constructive trust on monies funneled to defendant by bank

president). Other cases conclude that a uniform federal rule

is necessary to answer the particular questions presented,

see, e.g., FDIC v. Blue Rock Shopping Center, 766 F.2d

744, 747-749 (3d Cir. 1985) (explicitly creating federal com-

mon law based on UCC to govern availability of particular

defense to FDIC’s action on negotiable instrument), or con-

clude that state law and federal common law lead to the

same result, see, e.g., FDIC v. Bank of San Francisco, 817

F.2d at 1398 (applying Uniform Commercial Code). Each

of these cases employs the analysis outlined in Kimbell

Foods, either explicitly, see Braemoor Assocs., 686 F.2d at

554; Bank of San Francisco, 817 F.2d at 1398; Blue Rock

Shopping Center, 766 F.2d at 747-748; Palermo, 815 F.2d

at 1335; or implicitly, see Santoni v. FDIC, 677 F.2d 174,

178 (1st Cir. 1982). There is no conflict between these deci-

-sions and the present case. Indeed, none of these cases even

addressed whether a uniform federal rule should apply to

the characterization of causes of action for limitations

purposes.

In this case, the court of appeals correctly concluded that

a uniform rule should govern the application of a federal

statute of limitations to claims asserted by a federal agency

in carrying out a nationwide federal program. Two leading

cases on the chojce between Section 2415(a) and (b), United

States v. Neidorf, 522 F.2d 916, 919 (9th Cir. 1975), cert.

denied, 423 U.S. 1087 (1976), and United States v. Limbs,

524 F.2d 799, 801 (9th Cir. 1975), both characterize claims

for this purpose by reference to federal law. The Neidorf

court concluded that when the United States brings suit,

even if the substantive claim arises under state law,

the limitation must be determined by reference to sec-

tion 2415. The characterization of the claim as one in

tort, contract or quasi-contract must also be a matter

of federal law since the uniform limitations established

by the statute would be compromised if limitations

varied according to the labels attached to identical

causes of action by different states.

522 F.2d at 920 n.6 (citation omitted).

Finally, even if Oregon law were applicable and

characterized the FDIC’s claims as sounding in tort rather

than contract, the outcome of this case would be unchanged.

This action'was filed within three years of the FDIC’s ap-

pointment as receiver, and Section 212(a) of FIRREA pro-

vides that the limitations period does not begin to run until

the appointment of the FDIC. Thus nothing turns on the

question whether the three-year period (for torts) or the six-

year period (for contracts) applies in this case.

CONCLUSION

The petition for writ of certiorari should be denied.

Respectfully submitted.