Title: FDIC v. Smith
Citation: N/A
Docket Number: S43258
State: Oregon
Issuer: Oregon Supreme Court
Date: April 22, 1999

Filed:  April 22, 1999

IN THE SUPREME COURT OF THE STATE OF OREGON

FEDERAL DEPOSIT INSURANCE CORPORATION, a federal corporation,

as manager of the FSLIC Resolution Fund,

	Plaintiff,

		v.

KENNETH H. SMITH, RICHARD HOFFMAN, ROBERT DENE BATEMAN,

WILLIAM M. DALTON, JACK C. DARLEY, STANLEY N. HAMMER, and

ROBERT B. LORENCE,

	Defendants.

(USDC CV-93-01112-HJF; USCA 95-35312; SC S43258)

	On certified questions from the United States Court of
Appeals for the Ninth Circuit dated April 30, 1996.

	Honorable Stephen Reinhardt, United States Circuit Judge.

	Argued and submitted November 8, 1996; reassigned
February 3, 1998; reassigned September 16, 1998.

	E. Joseph Dean, of Stoel Rives LLP, Portland, argued the
cause for defendants Kenneth H. Smith, Robert Dene Bateman,
William M. Dalton, Jack C. Darley, Stanley N. Hammer, and
Robert B. Lorence.  With him on the briefs was Steven T.
Lovett, Portland.

	No appearance for defendant Richard Hoffman.

	Kathryn Norcross, Washington, D.C. argued the cause for
plaintiff Federal Deposit Insurance Corporation.  With her on
the brief were William R. Turnbow, of Hershner, Hunter,
Moulton, Andrews &amp; Neill, Eugene, and Ann S. Duross and Thomas
L. Hindes, Washington D.C. 

	Lori Irish Bauman, of Ater Wynne Hewitt Dodson &amp;
Skerritt, Portland, filed a brief on behalf of amicus curiae
Oregon Association of Defense Counsel.		

	John W. Stephens, of Esler, Stephens, and Buckley,
Portland, filed a brief on behalf of amicus curiae Oregon
Trial Lawyers Association.		

	Before Carson, Chief Justice, and Gillette, Van
Hoomissen, and Durham, Justices.*

	GILLETTE, J.

	Certified questions answered.

	*Fadeley, J., retired January 31, 1998, and did not
participate in this decision; Graber, J., resigned March 31,
1998, and did not participate in this decision; Kulongoski,
J., did not participate in the consideration or decision of
this case.

		GILLETTE, J.

		The questions presented in this case have been
certified to us by the United States Court of Appeals for the
Ninth Circuit under the Uniform Certification of Questions of
Law Act, ORS 28.200 et seq., and ORAP 12.20.  See
generally Western Helicopter Services v. Rogerson Aircraft,
311 Or 361, 811 P2d 667 (1991) (discussing factors court
considers in exercising discretion to accept certified
questions).  The certified questions involve whether Oregon
applies the doctrine of "adverse domination" in the context of
a corporation suing its directors and officers and, if it
does, what version of that doctrine applies.  For the reasons
that follow, we conclude that Oregon does apply the doctrine
and that the "disinterested majority" version of the doctrine
applies in this case.

		We take the facts from the Ninth Circuit
certification order:

		"Family Federal Savings &amp; Loan Association
(Family Federal) was a federally insured thrift
headquartered at Dallas, Oregon.  On January 10,
1990, the Office of Thrift Supervision determined
that Family Federal was insolvent.  The Office,
therefore, appointed the Resolution Trust
Corporation [(RTC)] as receiver for Family Federal,
and on that date, RTC purchased all of Family
Federal's claims against its directors and officers. 
Over three years later, on September 8, 1993, RTC,
as successor in interest to Family Federal, filed
this action against Kenneth Smith, Richard Hoffman,
Robert Bateman, William Dalton, Jack Darley, Stanley
Hammer, and Robert Lorence.  It alleged causes of
action for negligence, breach of fiduciary duty, and
breach of contract.[(1)]

		"In January of 1984, Smith, Dalton, Darley,
Hammer and Lorence were members of the board of
directors of Family Federal.  Bateman became a
member in 1984, after the death of another member. 
At all relevant times, they constituted the majority
of the board of directors of Family Federal. 
Hoffman was * * * Family Federal's Loan Manager at
all relevant times.

		"In January of 1984, the Board of Directors
approved the purchase of a $2,000,000 participation
in a $31,000,000 loan to finance construction of a
hotel, and by May of that year the directors and
officers were aware of difficulties which had come
to light; it then appeared that the loan had been
ill advised.

		"In May of 1985, the directors agreed to fund
$2,900,000 of time share loan paper, which involved
time share units located at Indian Wells Resort. 
That also turned out to be a poor investment, which
was criticized by federal examiners as early as
April of 1986.

		"Stephen Way, who did not participate in those
transactions, became a director in August of 1987. 
Before that, he had been an officer and had attended
board meetings from at least November 1983 forward. 
Other officers also attended board meetings
throughout that time."

F.D.I.C. v. Smith, 83 F3d 1051, 1052 (9th Cir 1996). 

		 RTC's claims are based on defendants' approval of
the multi-million dollar investments described above.  RTC's
complaint alleges negligence, breach of fiduciary duty, and
breach of contract, but does not accuse defendants of acting
in their own interests or allege fraud or intentional
misconduct.

		RTC is a federal entity that is asserting a claim
against the officers and directors of Family Federal.  It
received the claim by assignment upon being appointed as
receiver for Family Federal.  When a federal entity attempts
to assert a claim under such circumstances, the court must
conduct a two-step analysis to determine what statute of
limitations applies.  See, e.g., F.D.I.C. v. Dawson, 4 F3d
1303, 1306-97 (5th Cir 1993) (explaining that 12 USC §
1821(d)(14) does not revive stale state law claims and
describing two-step process).  First, the court must determine
whether the applicable state limitations period expired before
the assignment.  If it expired, there is no claim to be
assigned, and the action is barred as a matter of law.  If a
viable claim existed at the time of assignment, however, then
the court must determine whether the applicable federal
statute of limitations has expired.(2)  The question of adverse
domination is relevant to the first prong of the foregoing
analysis, viz., determining whether the state statute of
limitations already had expired before the federal entity
stepped in.

		After RTC filed its action, defendants moved for
summary judgment on the ground that RTC's claims were barred
by Oregon's two-year statute of limitations contained in ORS
12.110(1).(3)

  The district court denied defendants' motion,
concluding that, in this case, Oregon would recognize the
doctrine of "adverse domination" and would hold that, under
that doctrine, accrual of the claims was delayed until RTC
took control of Family Federal in 1990, making RTC's complaint
timely under an applicable three-year federal statute of
limitations.  Resolution Trust Corp. v. Smith, 872 F Supp 805,
813-15, amended 879 F Supp 1059 (D Or 1995).  The district
court granted defendants' motion for an interlocutory appeal
of that ruling.

		Because Oregon appellate courts have not previously
decided the issue whether Oregon recognizes the doctrine of
adverse domination, the Ninth Circuit certified the following
two questions to this court:  

		"(1)  Under Oregon law[,] does the doctrine of
adverse domination delay the running of the statute
of limitations for causes of action based upon
negligence?  Does it do so for causes of action
based upon breach of fiduciary duty?  Does it do so
for causes of action based upon breach of contract?

		"(2)  If the doctrine of adverse domination does
apply to any or all of the mentioned causes of
action, what version is applied, the disinterested
majority version or the single disinterested
director version?"

Smith, 83 F3d at 1053.	

	Before turning to an analysis of Oregon law, some
background information is helpful.  The doctrine of adverse
domination has gained currency in recent years in the context
of litigation against directors and officers of insolvent
financial institutions.  The doctrine serves either to delay
the accrual of a claim by a corporation against its directors
and officers, or, in the alternative, to toll the running of
the applicable statute of limitations.  The doctrine is
premised on the theory that it is impossible for the
corporation to bring the action while it is controlled, or
"dominated," by culpable officers and directors.  Courts
applying the doctrine of adverse domination have reasoned that
corporations act only through their officers and directors,
and those officers and directors cannot be expected to sue
themselves or to initiate any action contrary to their own
interests.(4)

  See, e.g., Hecht v. Resolution Trust, 333 Md 324,
340, 635 A2d 394, 402 (Md 1994) (explaining the rationale
behind the doctrine); Federal Sav. and Loan Ins. Corp. v.
Williams, 599 F Supp 1184, 1194 (D MD 1984) (same); Federal
Deposit Ins. Corp. v. Bird, 516 F Supp 647, 651 (D PR 1981)
(same).  Similarly, culpable corporate officers and directors
cannot be expected to disclose their wrongful conduct to the
corporation.  Hecht, 333 Md at 340, 635 A 2d at 402; Williams,
599 F Supp at 1194; Bird, 516 F Supp at 651.  				

	Courts that apply the doctrine of adverse domination
have developed two versions of the doctrine, the
"disinterested majority" version and the "single disinterested
director" version.  The versions differ with respect to the
degree of control or domination considered necessary to delay
accrual of a claim or to toll the otherwise applicable statute
of limitations.  Under the disinterested majority version, a
plaintiff benefits from a presumption that the cause of action
does not accrue or the statute of limitations does not run so
long as the culpable directors remain in the majority, i.e.,
until the corporation has a disinterested majority of
nonculpable directors.  See, e.g., Resolution Trust Corp. v.
Scaletty, 257 Kan 348, 351-52, 891 P2d 1110, 1113 (Kan 1995)
(explaining the two versions of the doctrine); Williams, 599 F
Supp at 1193-94 (describing the "disinterested majority"
version).  Defendants can rebut that presumption with evidence
that someone other than the wrongdoing directors had knowledge
of the basis for the cause of action, combined with the
ability and the motivation to bring an action.  Resolution
Trust Corp. v. Grant, 901 P2d 807, 816 (Okl 1995). 

	In contrast, under the single disinterested director
version of the doctrine, statutes of limitations are tolled
only so long as there is no director with knowledge of facts
giving rise to possible liability who could have induced the
corporation to bring an action.  Under that version, a
plaintiff has the burden of showing that the culpable
directors had full, complete, and exclusive control of the
corporation, and must negate the possibility that an informed
director could have induced the corporation to sue.  Scaletty,
257 Kan at 352, 891 P2d at 1113; see also Farmers &amp; Merchants
Nat. Bank v. Bryan, 257 Kan at 352, 902 F2d 1520, 1523 (10th
Cir 1990) ("'[O]nce the facts giving rise to possible
liability are known, the plaintiff must effectively negate the
possibility that an informed director could have induced the
corporation to sue.'" (quoting International Rys. of Cent. Am.
v. United Fruit Co., 373 F2d 408, 414 (2d Cir 1967)).

	With that background in mind, we turn now to the
first certified question, which we repeat here for
convenience:

     "Under Oregon law does the doctrine of adverse
domination delay the running of the statute of
limitations for causes of action based upon
negligence?  Does it do so for causes of action
based upon breach of fiduciary duty?  Does it do so
for causes of action based upon breach of contract?"	We begin our analysis with the primary issue, viz.,
whether Oregon recognizes the doctrine of adverse domination. 
In considering that question, the federal district court
treated adverse domination as a corollary to Oregon's
"discovery" rule, a rule of interpretation of statutes of
limitation that has the effect of tolling the commencement of
such statutes under certain circumstances.(5)  See Huff v. Great
Western Seed Co., 322 Or 457, 461 n 3, 909 P2d 858 (1996) (so
defining discovery rule).  The district court concluded that
Oregon would adopt the adverse domination doctrine and applied
the doctrine in the context of RTC's claims for simple
negligence, breach of fiduciary duty, and breach of contract. 
Smith, 872 F Supp at 815 ("The court concludes that the
defendants have failed to establish as a matter of law that
the claims for negligence, breach of fiduciary duty, and
breach of contract accrued before January 10, 1988.").

	Like the district court, we also use the discovery
rule as a starting point in our analysis.  In general terms, a
cause of action does not accrue under the discovery rule until
the claim has been discovered or, in the exercise of
reasonable care, should have been discovered.  Gaston v.
Parsons, 318 Or 247, 256, 864 P2d 1319 (1994).  This court
explained in Gaston, in the context of a medical negligence
claim, that, under the discovery rule, a plaintiff must have a
reasonable opportunity to become aware of the following three
elements before the statute of limitations will begin to run: 
(1) harm; (2) causation; and (3) tortious conduct.  318 Or at
255-56.  See also Doe v. American Red Cross, 322 Or 502, 513,
910 P2d 364 (1996) (identifying tortious conduct as the third
element of the discovery rule in the context of ORS
12.110(1)).  The Gaston court explained that

"the statute of limitations begins to run when the
plaintiff knows or in the exercise of reasonable
care should have known facts which would make a
reasonable person aware of a substantial possibility
that each of the three elements * * * exists."

318 Or at 256.

  	Gaston and Doe concern an individual's knowledge or
discovery that he or she may have a claim.  If the principles
discussed in those cases also pertain to the corporate
context, they do so by analogy.  To complete the analogy,
then, we must determine when, under Oregon law, a corporation can be deemed
to "know" that it has a claim.  

	A potential corporate plaintiff is not a sentient
being and, therefore, cannot "know," be aware of, or discover
anything, except through the agency of its officers,
directors, and employees.  A corporation generally is charged
with knowledge of facts that its agents learn within the scope
of their employment. 

State Farm Fire v. Sevier, 272 Or 278, 288, 537 P2d 88 (1975);
Woodtek, Inc. v. Musulin, 263 Or 644, 650, 503 P2d 677 (1972);
Phillips v. Colfax Company, Inc., 195 Or 285, 300, 243 P2d 276
(1952); Fleishhacker v. Portland News Pub. Co., 158 Or 476,
486-87, 77 P2d 141 (1938).  However, while it is appropriate
to impute knowledge of an agent to its principal in order to
protect innocent third parties, that rule should not be used
to shield agents whose wrongful conduct harms their own
principal, where the action is one brought by the principal
against the agent.  See Sutherland v. Wickey, 133 Or 266, 286,
289 P 375 (1930) (noting the principle that notice to an agent
whose interests are conflicting with his principal is not
notice to the principal, applies to public agents).  

	Oregon courts long have recognized such an "adverse
interest" exception.  As the court stated in Saratoga Inv. Co.
v. Kern, 76 Or 243, 254, 148 P 1125 (1915), a corporation is
charged with knowledge of what its agent knows, unless "the
agent's relations to the subject matter are so adverse as to
practically destroy the relationship, as when the agent is
acting in his own interest and adversely to that of his
principal, or is secretly engaged in attempting to accomplish
a fraud which would be defeated by a disclosure to his
principal."  (Emphasis added.)  See also Restatement, Agency,
§ 279 (1958) ("The principal is not affected by the knowledge
of an agent as to matters involved in a transaction in which
the agent deals with the principal * * * as * * * an adverse
party.").  

	Defendants argue that a director's good faith
actions in approving a loan, with the belief that he or she is
acting in the best interests of the bank, cannot reasonably be
characterized as being "so adverse as to practically destroy
the relationship."  Rather, according to defendants, a
director's acts must constitute intentional misconduct, self-dealing, or fraud in order to rise to that level.  We do not
believe that the principle variously described in Saratoga and
the Restatement is (or should be) so limited.

	The "subject matter" to be considered when
evaluating the degree of the director's adverse interest is
the decision whether to make a claim, not the underlying acts
that gave rise to that claim.  The culpable directors'
interest in bringing a claim against themselves certainly is
adverse to that of the corporation.  In Saratoga terms, at
least as to that issue, the agent/principal relationship is
nonexistent.  Of course, in a corporate mismanagement case,
the wrongdoers, who are running the corporation, necessarily
possess personal knowledge of the facts that would support a
claim against them.  Realistically, however, the corporation
has neither meaningful knowledge nor the ability to act on
such knowledge, until the wrongdoing directors and officers no
longer control it.  We conclude that knowledge of the
wrongdoing directors or officers of facts that would give rise
to legal liability to the corporation on the part of those
directors or officers will not be imputed to the corporation
so long as those directors or officers control the
corporation.(6)  

	Based on the foregoing, we hold that Oregon
recognizes the adverse domination doctrine, which is analogous
to Oregon's discovery rule in the context of a claim by a
corporation against its former directors and officers for
their alleged mismanagement of corporate affairs.  The
question remains whether this court would apply that doctrine
to claims of the kind asserted here, viz., negligence, breach
of fiduciary duty, and breach of contract.

	 This court has applied the discovery rule to
negligence actions subject to the statutes of limitations
expressed at ORS 12.110(1) and ORS 12.010.(7)

  See, e.g., U.S.
Nat'l Bank v. Davies, 274 Or 663, 669 n 1, 548 P2d 966 (1976)
(legal malpractice action governed by ORS 12.110(1) does not
accrue under ORS 12.010 until the client becomes aware or
should have become aware of the malpractice); Frohs v. Greene,
253 Or 1, 452 P2d 564 (1969) (medical malpractice, negligent
diagnosis and treatment).  By extension, the doctrine of
adverse domination also would apply to claims governed by
those statutes, i.e., negligence actions.  Actions for breach
of fiduciary duty are governed, for limitations purposes, by
the same limitations provision that applies to negligence
actions, viz., ORS 12.110(1).  Although this court has not
applied the discovery rule specifically in that context, we
see no reason to treat the matter differently, especially
given the close relationships ordinarily involved and the
degree of trust extended to the fiduciary.  Accordingly, we
also accept the doctrine of adverse domination in that
context.

	With respect to whether the doctrine of adverse
domination applies in the context of a breach of contract
action, it does not appear from the facts reported in the
Ninth Circuit's certification order, quoted at ___ Or at ___
(slip op at 1-2), that the issue is presented by this case. 
RTC succeeded to First Family's assets within six years of the
date of the earliest loan that RTC now claims was
inappropriate.  Oregon's statute of limitations for contract
actions is six years.  ORS 12.080(1).  Thus, the statute had
not run on any of RTC's contract claims and RTC had six more
years under 12 USC § 1821(d)(14) to bring its contract claims. 
It has done so.  Because the issue proffered by the Ninth
Circuit is not presented as to RTC's breach of contract
claims, we do not answer it.

	We turn to the second certified question:

     "If the doctrine of adverse domination does
apply to any or all of the mentioned causes of
action, what version is applied, the disinterested
majority version or the single disinterested
director version?"

	As noted, the "disinterested majority" version of
the adverse domination doctrine creates a rebuttable
presumption that a corporation does not have a full and fair
opportunity to bring claims against its directors during the
time that culpable directors constitute a majority of the
board.  Defendants may overcome that presumption by showing
that some person or group had both sufficient knowledge and
power to bring an action against the majority of the board. 
The single disinterested director version, by contrast, places
the burden on the corporate plaintiff to show that no one was
in a position to bring an action on behalf of the corporation.

	We conclude that the "disinterested majority"
version of the doctrine more closely mirrors human nature. 
Because a board composed of a majority of culpable directors
will rarely, if ever, facilitate the assertion of claims
against its members, it is appropriate that those directors
bear the burden of proving otherwise.  Other courts reaching
this conclusion have reasoned similarly:

"As long as the majority of the board of directors
are culpable they may continue to operate the
association and control it in an effort to prevent
action from being taken against them.  While they
retain control they can dominate the non-culpable
directors and control the most likely sources of
information and funding necessary to pursue the
rights of the association.  As a result, it may be
extremely difficult, if not impossible, for the
corporation to discover and pursue its rights while
the wrongdoers retain control." 

Federal Sav. and Loan Ins. Corp. v. Williams, 599 F Supp 1184,
1193-94 n 12 (D Md 1984).  See also, e.g., Resolution Trust
Corp. v. Grant, 901 P2d 807, 818 (Okl 1995); Hecht v.
Resolution Trust, 333 Md 324, 349-51, 635 A2d 394, 407-08 (Md
1994) (both to the same effect).

	Defendants argue that the foregoing approach does
not comport with the currently accepted approach to the
discovery rule.  According to defendants, because

"Oregon places the burden on the plaintiff to submit
facts showing why initiation of the action was
delayed based on the discovery rule[,] * * * it
follows that a plaintiff trying to delay the statute
of limitations on adverse domination grounds should
likewise bear the burden to plead and prove the
reason for delay."  

Defendants conclude that only the single disinterested
director version of the adverse domination doctrine follows
that principle.  That conclusion, however, is not compelled by
defendants' premise:  A plaintiff still would be required to
plead and prove facts showing that it was adversely dominated,
i.e., that the board was composed of a majority of culpable
directors, under the disinterested majority version of the
adverse domination doctrine.

	We conclude that Oregon applies the doctrine of
adverse domination to causes of action based on negligence and
breach of fiduciary duty.  We decline to address whether the
doctrine of adverse domination applies to causes of action
based on breach of contract.  We further conclude that Oregon
applies the disinterested majority version of the doctrine in
contexts in which it is applicable.

	Certified questions answered.

1. 	This action originally was brought by the Resolution
Trust Corporation (RTC), the predecessor in interest to the
Federal Deposit Insurance Corporation (FDIC).  FDIC
statutorily succeeded RTC when RTC ceased to exist in 1995. 
See 12 USC 

§ 1441 a(m)(1) (accomplishing the changeover).  For purposes
of simplicity and consistency, we refer to RTC throughout this
opinion.

2. 	When a federal entity becomes conservator of a
financial institution, acquiring the assets of that
institution, 12 USC § 1821(d)(14) of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989
provides that the entity will have three additional years from
the date of conservatorship or accrual, whichever is later, in
which to file suit on a tort claim and six additional years in
which to file suit on a contract claim.  

3. 	ORS 12.110(1) provides, in part:

		"An action * * * for any injury to the * * *
rights of another, not arising on contract, and not
especially enumerated in this chapter, shall be
commenced within two years; provided that in an
action at law based upon fraud or deceit, the
limitation shall be deemed to commence only from the
discovery of the fraud or deceit."

4. 	A minority of courts that have considered this issue
have declined to recognize the doctrine of adverse domination,
concluding that the doctrine is inconsistent with applicable
state law tolling doctrines and policies of strictly
construing statutes of limitations.  See, e.g., Resolution
Trust Corp. v. Armbruster, 52 F3d 748, 752 (8th Cir 1995)
(concluding that Arkansas courts do not recognize the doctrine
of adverse domination); Resolution Trust Corp. v. Artley, 28
F3d 1099, 1102 (11th Cir 1994) (finding the doctrine
inapplicable under Georgia law); F.D.I.C. v. Cocke, 7 F3d 396,
402-03 (4th Cir 1993) (declining, under Virginia law, to apply
the doctrine to the case at issue but noting that Virginia
recognizes the tolling doctrine of equitable estoppel in cases
involving intentional concealment).

5. 	Other courts that have considered this issue have
treated the matter similarly.  See, e.g., Resolution Trust
Corp. v. Chapman, 895 F Supp 1072, 1078 (CD Ill 1995) ("In
sum, the adverse domination doctrine is simply a common sense
application of the discovery rule to a corporate plaintiff.").

6. 	We address the issue of when a corporation is deemed
to be "controlled" by those individuals in connection with our
response to the Ninth Circuit's second question.  See ___ Or
at ___ (slip op at 14-16).

7. 	ORS 12.110(1) is quoted at ___ Or at ___ (slip op at 4 n 3).

		ORS 12.010 provides:

		"Actions shall only be commenced within the
periods prescribed in this chapter, after the cause
of action shall have accrued, except where a
different limitation is prescribed by statute."