Opinion ID: 774960
Heading Depth: 2
Heading Rank: 1

Heading: Kim's Statutory Standing to Sue on Behalf of Delta Under FIRREA

Text: 13 On October 30, 1997, District Court Judge Byrne granted the defendant's Motion for Partial Summary Judgment, dismissing all claims brought by Delta and those brought by Kim, in his capacity as a stockholder, officer, or director of Delta. Kim's claims brought in his individual capacity remained. 14 The RTC had been named the conservator and then the receiver of Delta. The district court reasoned that the clear language of the Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA), 12 U.S.C.§§ 1821a, et seq., transferred any rights that Kim once may have had as a stockholder, officer, and director of Delta to the RTC (and then to the FDIC). According to the district court, the rights transferred included the right to sue on behalf of Delta. It reasoned that [t]he FDIC's position as receiver or conservator provides it with the exclusive right to file suit against those who injure the institution over which it exercises supervision. 15 Under FIRREA, FDIC-appointed conservators and receivers shall . . . by operation of law, succeed to -(i) all rights, titles, powers, and privileges of the insured depository institution. 12 U.S.C. §§ 1821(d)(2)(A).It is hard to avoid the conclusion that §§ 1821(d)(2)(A)(i) places the FDIC in the shoes of the insolvent S&L, . . . except where some provision in the extensive framework of FIRREA provides otherwise. O'Melveny & Myers v. FDIC, 512 U.S. 79, 86-87 (1994). We have held that one of the rights transferred to the FDIC as receiver is the right to sue on behalf of the institution. Pareto v. FDIC, 139 F.3d 696, 700 (9th Cir. 1998) (Congress has transferred everything it could to the FDIC, and that includes a stockholder's right, power, or privilege to demand corporate action or to sue directors or others when action is not forth-coming.). 16 Despite such unequivocal language, plaintiffs make a simple plea to logic: the FDIC should not have the final say on whether it is in Delta's best interests to sue the OTS. The OTS and the FDIC are interrelated agencies with overlapping personnel, structures, and responsibilities, and thus, according to plaintiffs, the FDIC faces a conflict of interests when it contemplates a suit against the OTS. Even though the FDIC, as receiver, is supposed to represent the best interest of Delta, the FDIC may be unwilling to bring a lawsuit against the OTS because of the close ties that bind the two agencies. We agree. 17 In First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279 (Fed. Cir. 1999), the Federal Circuit adopted a conflict of interests exception to the FIRREA which is similar to the exception urged by plaintiffs in this case. A large shareholder of a bank, which had been seized and placed under the receivership of the FDIC, brought suit against the United States alleging that the FDIC had breached contracts and committed unlawful takings in handling the troubled bank. Id. at 1284. The lower court -the Court of Federal Claims -had held that the shareholder lacked standing because only the FDIC, as receiver, had the authority to sue on the bank's behalf. Id. at 1294 (citing 42 Fed. Cl. 599, 612-16 (1998)). The Court of Federal Claims based its ruling, in part, on our court's holding in Pareto. 194 F.3d at 1294. 18 The Federal Circuit agreed that, as a general proposition, the FDIC's statutory receivership authority includes the right to control the prosecution of legal claims on behalf of the insured depository institution now in its receivership. First Hartford, 194 F.3d at 1295. In ruling, however, that the lower court had erred, the Federal Circuit made an analogy between the lawsuit brought by the plaintiff and corporate derivative lawsuits. The point of a derivative lawsuit is toplace in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of faithless directors and managers. Id. (quoting Kamen v. Kemper Fin. Serv., 500 U.S. 90, 95 (1991)). 19 Continuing the analogy to derivative lawsuits, the court focused on conflicts of interest. [T]he FDIC was asked to decide on behalf of the depository institution in receivership whether it should sue the federal government based upon a breach of contract, which, if proven, was caused by the FDIC itself. Id. The court implied that, just as directors can fall prey to misfeasance and conflict[s] of interest, so too might the FDIC suffer from a conflict of interest. Id. Without inferring any bad faith or improper motive on the part of the FDIC the court held that because of the manifest conflict of interest presented, plaintiff had standing to sue derivatively. Id. 20 We note that the Federal Circuit expressly limited its holding in First Hartford. [O]ur holding is limited to the situation here in which a government contractor with a putative claim of breach by a federal agency is being operated by that very same federal agency, as is the case in the receivership context. Id. (emphasis added) (further saying that the holding was applicable only in a very narrow range of circumstances). 21 In the instant case, charges were brought against the OTS while the bank was in receivership under the RTC (which was succeeded by the FDIC). We hold that the fact that this case involves separate federal agencies does not distinguish it from First Hartford and we adopt the First Hartford exception. Based on the inter-relatedness of these agencies, a manifest conflict of interest has arisen. These are interdependent entities with managerial and operational overlap and thus this lawsuit raises the same kind of conflict that was at issue in First Hartford. 22 The government responds that the FDIC is independent from the OTS and cites statutes and cases that supposedly attest to their independence from one another. We disagree. These are not two disengaged bodies on the opposite ends of an organizational chart; these are closely related entities. The Director of the OTS is, by statute, a member of the Board of Directors of the FDIC. 12 U.S.C. §§ 1812(a)(1)(B). Until the RTC ceased to exist, the Director of the OTS was also a member of the Thrift Depositor Protection Oversight Board, which had oversight over the RTC. 12 U.S.C. §§ 1441a(a)(3)(A). An employee of the OTS can simultaneously serve as a deputy or assistant to a member of the Board of Directors of the FDIC, and in such cases, he or she is considered an employee of the FDIC  under Title 12. 12 U.S.C. §§ 1812(f)(2). The FDIC and OTS jointly publish regulations, issue reports, and conduct cooperative investigations. The OTS and RTC even share a common genesis, both having been created in FIRREA. 23 Furthermore, the two agencies play complementary roles in the process of bailing out failing thrifts. The OTS examines and supervises thrift institutions and can declare a bank insolvent or place it under the control of a conservator or receiver to ensure compliance with federal laws and regulations. 12 U.S.C. §§ 1464(d)(2)(B). The OTS may choose the FDIC to be the conservator or receiver in such cases. See 12 U.S.C. §§ 1464(d)(2)(E)(ii). Given the nature and extent of the relationship between the FDIC and the OTS, we conclude that the FDIC cannot be expected to objectively pursue lawsuits against the OTS, even when it is in the best interest of the failing bank to do so. The conflict of interest thus raised is significant and manifest. We do not suggest that the FDIC-as-receiver is faced with a disqualifying conflict every time a bank-in-receivership is asked to sue another federal agency; it is the nature of the OTS-FDIC relationship that raises the conflict here. 24 None of the cases cited by the defendant contradict the rule in First Hartford. O'Melveny, cited supra, stands for the proposition that the FDIC steps into the shoes and obtains the rights of the institution. 512 U.S. at 86. The Court specifically held that because California state law imputes the knowledge of corporate officers to their corporation, the FDIC is treated no differently when it steps into the shoes of a failing bank; the knowledge possessed by the former bank directors is imputed to the FDIC. Id. The strongest proposition that can be drawn from this holding is that the FDIC cannot escape the limitations that a state imposes on other corporations just because the language of FIRREA is expansive. In fact, in O'Melveny, the Court explicitly noted that there might be exceptions to the absolute rule it put forth, where some provision in the extensive framework of FIRREA provides otherwise. Id. at 87, 114 S. Ct. 2048. 25 The defendant also points to Pareto. In Pareto, we spoke with clarity, holding that, Congress has transferred everything it could to the FDIC [through FIRREA], and that includes a stockholder's right, power, or privilege to demand corporate action or to sue directors or others when action is not forthcoming. 139 F.3d at 700. In the very next sentence, however, we noted that exceptions to this absolute rule were justified if the result would otherwise be absurd or impracticable. Id. In Pareto, the result was not absurd or impracticable because the FDIC was qualified to decide, on behalf of the former stockholders, whether the bank should sue the directors for breaching the duty of loyalty and for misrepresenting information. Id. at 698. In the instant case, strict adherence to an absolute rule would be at least impracticable, and arguably absurd. The FDIC was asked to demand a lawsuit, refuse this demand, and proceed derivatively with the lawsuit against one of its closely-related, sister agencies. This was one hat too many to be placed atop the head of the FDIC. 26 We hold, following First Hartford and consistent with O'Melveny and Pareto, that a common-sense, conflict of interest exception to the commands of FIRREA warrants granting standing to Kim as a representative of Delta in this case. However, because we hold in Part II(B) that Delta has no cause of action against the United States under the FTCA, although we reverse the Court's finding of insufficient standing, we need not remand.