Opinion ID: 6933480
Heading Depth: 2
Heading Rank: 2

Heading: The O’Melveny decision.

Text: O’Melveny involved a suit brought in 1989 by the FDIC, acting as receiver for a failed savings and loan (“S & L”), against the law firm that had represented the S & L in two 1985 real estate syndications. The FDIC asserted state-law tort claims of professional negligence and breach of fiduciary duty. The defendant law firm, O’Melveny & Myers, successfully moved for summary judgment on the grounds (1) that it owed no duty to the bank or its affiliates to uncover the S & L’s own fraud; (2) that knowledge of misconduct by S & L officers is imputed to the S & L, and therefore to a receiver that stands in its shoes; and (3) that the FDIC was es-topped by that imputed knowledge from pursuing its tort claims against the law firm. O’Melveny, — U.S. at -, 114 S.Ct. at 2052. The Ninth Circuit reversed the district court’s grant of summary judgment in favor of the law firm. FDIC v. O’Melveny & Meyers, 969 F.2d 744 (9th Cir.1992). The Supreme Court granted certiorari to consider two issues: (1) whether federal common law, rather than state law, “determines whether the knowledge of corporate officers acting against the corporation’s interest will be imputed to the corporation;” and (2) even if state law decides that question, whether federal common law will “deter-minen the more narrow question whether knowledge by officers so acting will be imputed to the FDIC when it sues as receiver of the corporation.” O’Melveny, — U.S. at -, 114 S.Ct. at 2052. Noting that “the FDIC was asserting in this case causes of action created by California law,” the Court answered the first question in the negative, finding the Ninth Circuit’s reliance on federal common law “plainly wrong.” Id. The circuit court had relied on three eases in divining a federal common-law basis for its decision. The Supreme Court distinguished those cases on the principle that, while a federal cause of action may be governed by federal policies, state-law causes of action are properly governed by state law: In Cenco, where the cause of action similarly arose under state common law, the Seventh Circuit’s analysis of the “circumstances under which the knowledge of fraud on the part of the plaintiffs directors [would] be imputed to the plaintiff corporation [was] merely an attempt to divine how Illinois courts would decide that issue.” Schacht, 711 F.2d, at 1347 (citing Cenco, 686 F.2d, at 455). Likewise, in Investors Funding, the District Court analyzed the potential affirmative defenses to the state-law claims by applying “[t]he controlling legal principles [of] New York law.” 523 F.Supp., at 540. In Schacht, the Seventh Circuit expressly noted that “the cause of action [at issue] arises under RICO, a federal statute; we therefore write on a clean slate and may bring to bear federal policies in deciding the estoppel question.” 711 F.2d, at 1347. O’Melveny, — U.S. at -, 114 S.Ct. at 2053 (discussing Cenco Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.1982), In re Investors Funding Corp. of N.Y. Securities Litigation, 523 F.Supp. 533 (S.D.N.Y.1980), and Schacht v. Brown, 711 F.2d 1343 (7th Cir.1983)) (alterations in original). We quote this passage at length because, as discussed below, it furnishes a principal point of distinction from Diamond. The Supreme Court in O’Melveny “turn[ed], then, to the more substantial basis for the [Ninth Circuit decision], which asserts federal pre-emption not over the law of imputation generally, but only over its application to the FDIC suing as receiver.” — U.S. at -, 114 S.Ct. at 2053. That question is made to depend in part on the statutory provision that provided the FDIC with the authority to bring the action in the first instance — 12 U.S.C. § 1821(d)(2)(A)(i)— which is captioned “Powers and duties of [the FDIC] as ... receiver,” and which states that “the [FDIC] shall ... by operation of law, succeed to ... all rights, titles, powers, and privileges of the insured depository insti-tution_” The O’Melveny opinion construed this language to place the FDIC as receiver “into the shoes of the failed S & L, obtaining the rights of the insured depository institution that existed prior to receivership.” O’Melveny, — U.S. at -, 114 S.Ct. at 2054 (internal quotations and citations omitted). The Court rejected the FDIC’s argument that this statutory provision “should be read as a nonexclusive grant of rights to the FDIC receiver, which can be supplemented or modified by federal common law,” concluding that the argument is “demolished by those provisions of FIRREA which specifically create special federal rules of decision regarding claims by, and defenses against, the FDIC as receiver.” Id. (citing, inter alia, 12 U.S.C. §§ 1821(e)(1), (3)). Because Congress demonstrated that it could provide a federal rule of decision where it so intended, it became “hard to avoid the conclusion that § 1821(d)(2)(A)(i) places the FDIC in the shoes of the insolvent S & L, to work out its claims under state law, except where some provision in the extensive framework of FIRREA provides otherwise.” Id. That, however, did not completely put the appeal to rest. The Court noted that the FDIC’s receivership began in 1986, some three years prior to the effective date of FIRREA. Reluctant to address the question of FIRREA retroactivity where the issue had not been briefed by the parties, the Court instead proceeded to analyze the case “assuming the inapplicability of FIR-REA. ...” — U.S. at -, 114 S.Ct. at 2055. The outcome did not change. The Court ruled that the FDIC could not prevail because its claim was not “one of those cases in which judicial creation of a special federal rule would be justified.” Id. The judicial creation of a federal rule of decision is justified only to resolve a “‘significant conflict between some federal policy or interest and the use of state law.’ ” Id. (quoting Wallis v. Pan American Petroleum Corp., 384 U.S. 63, 68, 86 S.Ct. 1301, 1304, 16 L.Ed.2d 369 (1966)). In O’Melveny, “[t]he closest [the FDIC came] to identifying a specific, concrete federal policy or interest that is compromised by California law [was] its contention that state rules regarding the imputation of knowledge might ‘deplet[e] the deposit insurance fund.’” — U.S. at -, 114 S.Ct. at 2055 (quoting FDIC brief). The court rejected this argument emphatically: neither FIRREA nor the prior law sets forth any anticipated level for the fund, so what [the FDIC] must mean by “depletion” is simply the foregoing of any money which, under any conceivable legal rules, might accrue to the fund. That is a broad principle indeed, which would support not just elimination of the defense at issue here, but judicial creation of new, “federal-common-law” causes of action to enrich the fund. Of course we have no authority to do that, because there is no federal policy that the fund should always win. Orn-eases have previously rejected “more money” arguments remarkably similar to the one made here. Id. (citing United States v. Kimbell Foods, Inc., 440 U.S. 715, 737-38, 99 S.Ct. 1448, 1463-64, 59 L.Ed.2d 711 (1979); United States v. Yazell, 382 U.S. 341, 348, 86 S.Ct. 500, 504, 15 L.Ed.2d 404 (1966)). The Court found no more persuasive the FDIC’s even broader argument that it would somehow “ ‘disserve the federal program’ ” to permit state law to create defenses to lawsuits that would “impos[e] costs ‘on the nation’s taxpayers, rather than on the negligent wrongdoer.’ ” O’Melveny, — U.S. at -, 114 S.Ct. at 2055 (quoting FDIC brief). In short, the Court categorically rejected arguments that do no more than “demonstrate[ ] the runaway tendencies of ‘federal common law1 untethered to a genuinely identifiable (as opposed to judicially constructed) federal policy.” Id. Holding that “this is not one of those extraordinary eases in which the judicial creation of a federal rule of decision is warranted,” id. at -, 114 S.Ct. at 2056, the Court reversed the decision, and remanded to the Ninth Circuit to decide what the state law actually provides.