In order to try to defend themselves from claims asserted against them by the FDIC as receiver for a failed bank, the failed bank’s directors and officers often raise affirmative defenses, either based on pre-receivership conduct (as for example, in connection with pre-failure examinations) or post-receivership conduct (as for example in connection with the agency’s management of the liquidation process). Whether or not these defenses can be asserted against the FDIC was litigated extensively in the failed bank litigation arising in the S&L crisis era. These questions were raised again in one of the FDIC’s current bank cases. In a February 12, 2013 order (here), Northern District of Illinois Judge Virginia Kendall granted the FDIC’s motion to strike the directors and officers affirmative defenses.

 

On July 31, 2009, regulators closed the Mutual Bank of Harvey, Illinois and the FDIC was appointed as receiver.  As discussed here, on October 25, 2011, the FDIC initiated a lawsuit in the Northern District of Illinois. The complaint was noteworthy at the time because the bank not only named as defendants eight former directors and two former officers of the bank but also included the complaint also names as defendants the bank’s outside General Counsel, who was also a director of the bank, and well as the General Counsel’s law firm.

The defendants asserted a number of affirmative defenses, including the defenses of failure to mitigate, comparative fault, superseding/intervening cause, lack of proximate cause and waiver and estoppel. The FDIC moved to strike the affirmative defenses.

In her February 12 order, Judge Kendall first addressed the defendants’ defenses that were based on the FDIC’s alleged conduct during the regulatory and investigatory of the FDIC’s examination of the bank (that is, its pre-receivership conduct).  Judge Kendall granted the FDIC’s motion to strike these defenses because the conduct of the FDIC during the pre-receivership regulation of the bank falls into the “discretionary conduct” exception to the Federal Tort Claims Act. Discretionary agency conduct cannot be the basis of a claim against the U.S. or one of its agencies. Judge Kendall said the same reasoning “applies with equal force to affirmative defenses pleaded against a government agency because of that agency’s discretionary acts.”

The defendants also asserted affirmative defenses of failure to mitigate, superseding/intervening cause, comparative fault, which related to the agency’s post-receivership conduct. These defenses relied primarily upon the agency’s alleged post-receivership failure to collect on the bank’s accounts and improperly disposed of the bank’s assets, among other things. After an extensive review of the case law developed during the S&L crisis, Judge Kendall concluded that all of the conduct on which the defendants sought to rely was within the agency’s discretionary functions. Judge Kendall granted the FDIC’s motion to strike these defenses “because they improperly challenge the discretionary power of the FDIC to maintain and dispose of the Bank’s assets post-receivership.”

The defendants also raise affirmative defenses related to causation, such as lack of proximate cause and intervening/superseding causes, based on the general market conditions during the financial downturn. Judge Kendall noted that proximate cause is an element of the FDIC’s case in chief and is not properly pleaded as an affirmative defense. However, she noted, “striking the affirmative defenses related to lack of proximate cause and/or presence of intervening cause by no means bars the defense from asserting that the FDIC has not carried its burden with respect to the element of causation.”

Finally, Judge Kendall also struck the defendants attempt to reserve the right to assert affirmative defenses at a later date. Judge Kendall found that this attempted reservation is an “improper reservation under the Federal Rules.”

Discussion

The FDIC generally argues that when it takes over as receiver, it “stands in the shoes” of the failed bank. That does not seem entirely to be the case, however, at least with respect to some of the affirmative defenses these defendants sought to assert here. Certainly, if the bank were still viable and asserted the claims against the directors and officers of the kind that the FDIC is asserting, the individual defendants would have the right to assert affirmative defenses (or at least to argue that they had that right under applicable state law). However, the agency argued that it is not susceptible to these defenses because of its discretionary agency functions. Clearly, if the agency has the right to make that argument, its receivership status involves something other than just standing in the shoes of the failed bank.

During the current bank failure wave, other failed banks’ directors and officers  have also sought to assert affirmative defenses against the FDIC, and in at least some instances, they have done so with somewhat greater success that the defendants here. For example, as discussed here, in a February 2012 ruling, Northern District of Georgia Judge Steve C. Jones granted in part and denied in part the FDIC’s motion to strike the affirmative defenses of the former directors and officers of the failed Integrity Bank.

Judge Jones granted the FDIC’s motion to strike the directors and officers affirmative defenses based on the agency’s pre-receivership conduct. However, Judge Jones denied the FDIC’s motion to strike the affirmative defenses based on a failure to mitigate, estoppel and reliance “to the extent those defenses are based upon post-receivership conduct by Plaintiff in its capacity as receiver.” 

Judge Jones’s rulings in the Integrity Bank case are now before the Eleventh Circuit on interlocutory appeal, although the principal issue before the appellate court is whether r not under Georgia law the FDIC can assert claims of ordinary negligence against the failed bank’s directors and officers. Interestingly, Judge Kendall’s opinion does not refer to Judge Jones’ s rulings in the Integrity Bank case (perhaps because Judge Jones’s rulings relied to a certain extent on Georgia law).

Whether or not the former directors and officers of a failed bank can assert affirmative defenses against the FDIC represents a significant issue, and one on which the courts appear to be differing conclusions. It remains to be seen whether one or the other line of analysis will control these issues. It should be noted that in both of the two district court opinions, the district court judges did agree that even if the defendants could not argue causation issues as an affirmative defense that the defendants could argue that the FDIC had not carried its burden to establish causation in its case in chief.

Many thanks to a loyal reader for sending me a copy of Judge Kendall’s opinion.