* District Judge of the Northern District of Texas, sitting by designation. IN THE UNITED STATES COURT OF APPEALS 1

FOR THE FIFTH CIRCUIT 2

_______________ 3

No. 94-10375 4

_______________ 5

RESOLUTION TRUST CORPORATION, 6

in its corporate capacity, 7

Plaintiff-Appellant, 8

VERSUS 9

CHARLES D. ACTON, 10

DAVID CLAYTON, 11

WILLIAM F. COURTNEY, 12

RICHARD L. DAVIDSON and 13

JOHN R. RITTENBERRY, 14

Defendants-Appellees. 15

_________________________ 16

Appeal from the United States District Court 17

for the Northern District of Texas 18

_________________________ 19

(April 4, 1995) 20

Before SMITH and BARKSDALE, Circuit Judges, and BUCHMEYER, District 21

Judge. * 22

JERRY E. SMITH, Circuit Judge: 23

Plaintiff, the Resolution Trust Corporation ("RTC"), appeals 24

a summary judgment in favor of defendants, Charles D. Acton, David 25

Clayton, William F. Courtney, Richard L. Davidson, and John R. 26

Rittenberry. Finding no error, we affirm. 272 I. 28

A. 29

Defenda nts are the former directors of HeritageBanc Savings 30

Association ("HeritageBanc"), a state-chartered, federally-insured 31

savings and loan association based in Duncanville, Texas. In April 32

1989, HeritageBanc was placed into conservatorship. On August 9, 33

1989, the RTC succeeded the Federal Savings and Loan Insurance 34

Corporatio n as HeritageBanc's conservator. The bank was placed 35

into receivership in April 1990 by the Office of Thrift Supervi36

sion. The RTC was appointed the receiver and became the bank's 37

successor in interest. The RTC, in its corporate capacity, 38

purchased several of the bank's assets, including the claims at 39

issue in this case. 40

The claims surround the operation of the bank from 1983 to 41

1988 ("the relevant time period"). On April 1, 1992, the RTC 42

brought t his case against five of HeritageBanc's directors, 43

asserting state claims for breach of fiduciary duty, negl igence, 44

and gross negligence. 45

Acton was the president and chairman of t he board of 46

HeritageBanc from 1962 until the conservatorship. Rittenberry was 47

an executive vice-presi dent and director. The three other 48

defendants served as outside directors for at least twelve years, 49

including the relevant time period. 50

Acton's wife, two daughters, and father-in-law were officers 51

of HeritageBanc and Oak Tree Land Development Company, Inc. ("Oak 52

Tree"), a subsidiary of HeritageBanc. Acton's two sons-in-law, 533

Patrick McElroy and Edward Cummings, were active in the operations 54

of the bank. Cummings also allegedly ran Oak Tree and was the 55

highest paid individual associated with HeritageBanc. 56

The RTC's claims focu s on the defendants' alleged failure 57

adequately to oversee the actions of Acton and the members of his 58

family. Specifically, the RTC alleges that the defendants bear 59

responsibility for the approval of a series of real estate loans 60

that went sour. 61

Oa k Tree was formed in January 1984 as a wholly-owned 62

subsidiary of HeritageBanc. The RTC alleges that Cummings remained 63

a de facto officer of Oak Tree after the acquisition. The RTC also 64

asserts that, at the time of the acquisition, HeritageBanc shifted 65

a large amount of its resources from home lending to the riskier 66

commercial real estate market. 67

In April 1984, the Texas Savings and Loan Department required 68

HeritageBanc to reduc e its investment in Oak Tree to below a 10% 69

c ap within 18 to 24 months. The RTC alleges that HeritageBanc 70

circumvented this requirement through a series of transactions that 71

form the basis of the RTC's allegations. 72

Block A Transaction 73

Cummings and HeritageBanc owne d tracts of land in a 74

subdivision called Hollywood Park. HeritageBanc sold one tract to 75

Cummings at $0.64 per square foot and financed the transaction with 76

a loan. The Duncanville Planning Commission revised the relevant 77

plat and combined Cummings's new tract with other land he owned and 784

called the new land Block A. Four months after the initial sale, 79

HeritageBanc bought Block A from Cummings for $6.50 per square 80

foot. 81

Whittern/Turner Loans 82

In 1985, HeritageBanc provided all of the financing for Ollie 83

Whittern to buy two tracts of land, owned by HeritageBanc and the 84

other by Cummings. The RTC alleges that Cummings was intimately 85

involved with the discussions leading up to the deal and signed the 86

contracts of sale for both tracts on behalf o f himself and Oak 87

Tree. The RTC alleges that the transaction provided a sizeable 88

profit to Cummings. 89

Danny Smith Construction Loans 90

The RTC alleges that a series of loans were made to an officer 91

and employee of Oak Tree named Danny Smith, who personally owned a 92

company called Danny Smith Construction. In 1985, the bank 93

allegedly loaned him $2.8 million for the purchase and development 94

of land owned by Oak Tree. Smith was earning $86,000 a year at the 95

time, and the company was worth approximately $49,000. The bank 96

supposedly represented to Smith that he would not be personally 97

liable in the event of a default. The company became insolvent by 98

1986, but the company was subsequently loaned $374,000. Later 99

loans of $160,000 and $611,576 were also made to Smith. 1005

Berkeley Development Loans 101

The RTC alleges that a transaction al most identical to the 102

Danny Smith loans took place involving Chris Escobedo, an Oak Tree 103

employee, and his company, Berkeley Development. An initial loan 104

of $4,250,000 was made to purchase and develop Oak Tree land. 105

Again, Escobedo apparently was told that he would not face personal 106

liability. At the time of the loan, Escobedo had an income of 107

$41,960, and Berkeley Development was a company formed solely for 108

this transaction. Later, another $1,500,000 was loaned to Berkeley 109

Development, though it was insolvent. 110

Whittern/Turner, Danny Smith Construction, and Berkeley 111

Development defaulted on the loans. The loss is estimated at 112

$7,000,000. There does not appear to be an allegation that any of 113

the defendants personally profited from the transactions. 114

B. 115

The RTC commenced its suit on April 1, 1992. The RTC filed a 116

motion to strike certain affirmative de fenses, including those 117

based upon the statute of limitations. The RTC argued, at that 118

time, that the adverse domination doctrine had tolled any statute 119

of limitations. The court converted the motion to one for partial 120

summary judgment. 121

On July 9, 1993, the district court granted the RTC's motion 122

and dismissed the affirmative defenses based upon the statute of 123

limitations. By January 4, 1994, all five of the defendants had 124

filed motions for reconsideration of the dismissal of the 1256

limitations defenses in light of FDIC v. Dawson , 4 F.3d 1303 (5th 126

C ir. 1993). The district court reconsidered and reversed its 127

earlier ruling on the defen se. R TC v. Acton

, 844 F. Supp. 307 128

(N.D. Tex. 1994). 129

Because of the court's ref usal to toll the statute of 130

limitations in this case, all claims before April 5, 1987, were 131

time barred. The RTC claims that all of the original loan 132

transactions in this case originated before that date. 133

The RTC filed a report on the impact of the rulings at the 134

direction of the court on February 2, 1994. Clayton and Davidson 135

also filed a statement with the c ourt on that day. The RTC then 136

filed a response. The RTC argued that the limitations ruling made 137

it impossible for it to pursue the post-April 5, 1987, claims, as 138

those transactions are "interrelated" with the pre-April 5, 1987, 139

transactions. As a result, the RTC sought a final judgment on all 140

the claims so that it could pursue this appeal. Defendants 141

maintain that the RTC had $700,000 in claims that emanated from 142

loans made after April 5, 1987, which it now has forfeited. Final 143

judgment was entered dismissing the RTC's claims on the merits on 144

March 15, 1994. 145

II. 146

On appeal, the defendants raise a number of preliminary issues 147

that are meritless. According to the RTC, the only issue for this 148

appeal is whether gross negligence is enough to establish adverse 149

domination. Courtney alleges that the RTC has failed to challenge 1507

a f inding of fact, conclusion of law, or ruling of the district 151

court. The district court obviously concluded, as a legal matter, 152

that the RTC had not established adverse domination. As a result, 153

all of the RTC's claims that were dated prior to April 5, 1987, 154

were dismissed. Courtney's claim is absurd. 155

Clayton and Davidson ask this court to determine whether the 156

RTC has waived the right to pursue claims dated after A pril 5, 157

1987. The RTC may or may not have foregone the pursuit of possible 158

post-April 5, 1987, claims in order to pursue this appeal, but this 159

issue is not properly before us now. 160

Defendants aver that the RTC failed ad equately to plead 161

adverse domination and cannot raise the defense. There is no 162

mention of this argument by the district court. It appears that 163

the defendant s are the ones who are now raising the argument for 164

the first time on appeal. In any event, this court has held that 165

a party need not plead adverse domination in its original or 166

amended complaint. S ee Daws on , 4 F.3d at 1308. Defendants had 167

ample opportunity to present affidavit evidence and brief the issue 168

for the district court. See id. 169

III. 170

We now review the summary judgment on the limitations issue. 171

The RTC's claims are founded on Texas state law. To be validly 172

pursu ed by the RTC, state law claims must be viable under the 173

applicable state statute of limitations at the time federal 174

regulators take over. R andolph v. RTC

, 995 F.2d 611, 619 (5th Cir. 1758

1993). In addition, the RTC must comply with the applicable 176

federal limitations period when bringing suit. S ee Dawson, 4 F.3d 177

at 1307; 12 U.S.C. § 1821(d)(14). 178

The Texas statute of limitations for negligence and breach of 179

fiduciary duty is two years. T E X

. C IV

. P RAC

. & R EM

. C ODE A NN

. 180

§ 16.003(a). The same period applies to allegations of gross 181

negligence. S ee American Centennial Ins. Co. v. Canal Ins. Co.

, 182

810 S.W.2d 246, 255 (Tex. App. )) Houston [1st Dist.] 1991), aff'd in 183

part, rev'd in part on other grounds , 843 S.W.2d 480 (Tex. 1992). 184

The applicable state limitations period for all of the state claims 185

in this case is two years. The conservatorship of HeritageBanc 186

began on April 5, 1989. The RTC therefore is time-barred from 187

pursuing claims arising from conduct that occurred prior to April 188

5, 1987, unless limitations is tolled. 189

This court in Dawson , 4 F.3d at 1310, held that in order for 190

the government to obtain a tolling of limitations under the 191

doctrine of adverse domination, it must prove two things. First, 192

it must show that a majority of the bank's board was composed of 193

alleged wrongdoers "during the period the [RTC] seeks to toll the 194

statute." I d. Whether there exists a genuine issue of fact on 195

this element is not in dispute on this appeal. Second, the RTC 196

must show that those directors were "more than negligent for the 197

desired tolling period." Id. at 1313. 198

The district court found that limitations had not been tolled, 199

because the RTC failed to allege that the directors had been more 200

than negligent. A cton

, 844 F. Supp. at 317. The court noted that 2019

the Dawson panel had refused to state exactly what level of 202

culpability above simple negligence would be sufficient to toll the 203

statute. The RTC argued that allegations of "gross negligence" 204

were enough. The district court, however, found as a matter of law 205

"that gross negligence is a degree of negligence for statute of 206

limitations purposes." I d. As a result, the court decided that 207

summary judgment was proper for defendants on the limitations 208

issue. 209

IV. 210

The district court's dismissal of the RTC's claims was based 211

solely upon the resolution of a pure question of law. We now 212

decide whether meeting the gross negligence standard is sufficient 213

to trigger the doctrine of adverse domination under Texas law. 214

While the Dawson court specifically did not decide this issue, we 215

are guided by Dawson

. 216

The level of culpability required to trigger adve rse 217

domination is a Texas state law question, though "Texas case law 218

provides little guidance to this court on this issue." Dawson , 4 219

F.3d at 1311. It is plain that no court in Texas has invoked the 220

adverse domination doctrine based upon the "mere negligence" of a 221

majority of the directors. Id. 222

The court in Dawson held that the doctrine of adverse 223

domination is "very narrow." I d. at 1312. According to the court: 224

If adverse domina tion theory is not to overthrow the 225

statute of limitations completely in the corporate 226

context, it must be limited to those cases in which the 227

culpable directors have been active participants in 22810

wrongdoing or fraud, rather than simply negligent. 229

Id. We are given two pieces of relevant information. First, the 230

relevant conduct must be more than "simply negligent," and second, 231

it must amount to active participation in wrongdoing or fraud. 232

In Burk Royalty v. Walls

, 616 S.W.2d 911 (Tex. 1981), the 233

court recounted the history of "gross negligence" in Texas. It 234

defined the standard as 235

that ent ire want of care which would raise the belief 236

that the act or omission complained of was the result of 237

a conscious indifference to the right or welfare of the 238

person or persons to be affected by it. 239

Id. at 920. In 1987, the Texas Legislature modified the common law 240

definition: 241

"Gross negligence" means more than momentary 242

thoughtlessness, inadvertence or error of judgment. It 243

means such an entire want of care as to establish that 244

the act or omission was the res ult of actual conscious 245

indifference to the rights, safety, or welfare of the 246

person affected. 247

T EX

. C IV

. P RAC

. & R EM

. C ODE A NN . § 41.001(5). According to the Texas 248

Supreme Court, this statutory definition, as compared to the common 249

law definition, "emphasizes that the evidence must 'establish' the 250

d efendant's a ctual conscious indifference

, rather than raise the 251

mere belief that conscious indifference might be attributable to a 252

hypothetical reasonable defendant." T ransportatio n Ins. Co. v. 253

Moriel

, 879 S.W.2d 10, 20 (Tex. 1994) (emphasis added). This 254

definition of gross negligence plainly contains a subjective 255

component. 256

There is no doubt that gross negligence and simple negligence 257

are separate standards at some level of analysis. Moreover, it is 25811

more difficult for a party to establish gross negligence than to 259

show simple negligence because of the subjective component of gross 260

negligence. See Wal-Mart Stores, Inc. v. Alexander , 868 S.W.2d 261

322, 326 (Tex. 1993). The Texas Supreme Court, however, has stated 262

that "[n]o exact line can be drawn between negligence and gross 263

negligence." W illiams v. Steves Indus.

, 699 S.W.2d 570, 573 (Tex. 264

1985). 265

Thus, while gross negligence certainly is "more" than simple 266

negligen ce under Texas law, the question is whether it is 267

sufficiently "more" to encompass the requirement that the directors 268

have been active participants in wrongdoing or fraud. We conclude 269

that it is not. 270

While there is a difference between negligence and gross 271

negligence, i t is only a difference of degree and not kind. S ee 272

Trevino v. Lightning Laydown, Inc. , 782 S.W.2d 946, 949 (Tex. 273

App. )) Austin, 1990, writ denied). Gross negligence has a 274

subjective co mponent but not an element of intent. W al-Mart 275

Stores

, 868 S.W.2d at 325. The plaintiff must show "actual 276

conscious indifference" rather than pur poseful conduct. I d. at 277

325-26; Morie l , 879 S.W.2d at 20. Gross negligence in Texas is 278

akin to criminal recklessness. Moriel , 879 S.W.2d at 20 n.10. 279

Dawson requires intentional conduct. The words "active 280

participants in wrongdoing or fraud" are more consistent with 281

intentional conduct than with negligent conduct. The fact that the 282

Dawson court required not only fraudulent conduct or wrongdoing but 2831 For example, in Texas fraudulent conduct does not necessarily involve

an element of intent:

The essential elements of fraud do not include knowledge of

falsity or an intent to deceive except in certain circumstances.

Thus, a person who negligently makes a misrepresentation may be

liable for fraud, that is assuming other elements to be present,

fraud may be found where a person with a duty to know facts that

are susceptible of being known makes a false statement with

respect to those facts.

Donald P. Duffala, F RAUD AND D ECEIT, 41 T EX. J UR. 3 D 254 (citations omitted).

12 also "active participation" therein is significant. 1 284

Furthermore, the Dawson court was ver y critical of the way 285

that the doctrine of adverse domination had been "lib erally286

applied" in other federal courts: 287

Federal district courts have liberally applied the 288

doctrine in favor of government-appointed receivers when 289

they sue the directors of a failed bank, regardless of 290

the natu re of the claims. The court in H echt [ RTC v. 291

Hecht

, 818 F. Supp. 894, 896, 898 (D. Md. 1992)] applied 292

the doctrine in a case in which the RTC alleged breach of 293

fiduciary duty, negligence, gross negligence, and breach 294

of contract, but did not allege any form of self-dealing 295

or fraudulent conduct

. 296

Dawson

, 4 F.3d at 1312 (emphasis added). Our court in D awson 297

rejected this liberal application. Therefore, the implication is 298

that some sort of self-dealing or fraudulent conduct is required 299

and that the level of culpability associated with that conduct is 300

distinct from gross negligence. The self-dealing or fraudulent 301

conduct must be more than negligent or grossly negligent to 302

constitute an active participation in wrongdoing or fraud. 303

This court's most recent rele vant, though not controlling, 304

pronouncement came in RTC v. Seale , 13 F.3d 850 (5th Cir. 1994). 305

In that case, the RTC pled adverse domination and argued gross 306

negligence. The court, however, rejected the argument because the 30713

RTC's proof was no more than conclusory assertions. The court did 308

not state whether gross negligence would suffice, but we did say 309

that the "RTC has not created any fact issues of regulatory 310

violations or fraud, concealment or other illegal activity 311

amounting to more than negligence." Id. at 854-55. 312

One possible implication from this language is that some sort 313

of intentional conduct, rather than some degree of negligence, is 314

required. Of course, the court also may have understood gross 315

negligence to constitute enough culpability for the doctrine of 316

adverse domination and simply may have felt that the RTC had not 317

created an issue of f act under that standard. Either way, the 318

Seale court's pronouncement does not constitute a holding t hat 319

binds us on this issue. 320

Because we conclude that the difference between gross 321

negligence and negligence in Texas is more one of degree rather 322

than kind, and in light of the plain desire of the Dawson court to 323

limit the doctrine of adverse domination to "active participants in 324

wrongdoing or fraud," we reason that an allegation of gross 325

negligence is not enough to toll limitations in this case under the 326

doctrine of adverse domination. The district court, therefore, was 327

correct to dismiss the RTC's claims as time barred under the state 328

statute of limitations. 329

AFFIRMED. 330