Court Opinion

ID: 9487041
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:06:50.933913+00
Date Added: 2024-06-11T17:52:04.170542
License: Public Domain

POSNER, Chief Judge,
dissenting.
The issue presented by the appeal in this directors’ liability suit is the standard of care to which to hold the directors of savings and loan associations in Illinois sued by the Resolution Trust Corporation. The Security Savings & Loan Association received a charter from the State of Illinois in 1880, and opened for business that year in Peoria. A century later, in 1982, Security exchanged its state charter for a federal one. Seven years later it went broke and passed into the hands of the RTC, which brought this suit against Security’s former directors to obtain damages for their negligent mismanagement of Security’s lending and investment activities during the period, as it happens, after Security became a federal S & L. The directors’ negligence is alleged to have harmed Security’s shareholders, to whose rights the RTC has succeeded, and it is that harm which the suit seeks to redress. The question we are asked to decide is whether the defendants can be held liable for simple negligence, in light of 12 U.S.C. § 1821(k), passed the year Security went broke and conceded (at least for purposes of this appeal) to be applicable to this suit.
That statute (on which see generally David B. Fischer, Comment, “Bank Director Liability under FIRREA: A New Defense for Directors and Officers of Insolvent Depository Institutions — Or a Tighter Noose?” 39 UCLA L.Rev. 1703 (1992)) empowers the RTC to sue the directors of federally insured financial institutions for gross negligence or any greater disregard of duty; but “nothing in this [section] shall impair or affect any right of the [RTC] under other applicable law.” So if a state tries to immunize the directors of such institutions from liability for any nonintentional act, even if grossly negligent, the RTC can still sue; and by virtue of the saving clause it can sue for simple negligence if applicable state law makes the directors liable for simple negligence. See FDIC v. Canfield, 967 F.2d 443, 448-49 (10th Cir.1992) (en banc); FDIC v. McSweeney, 976 F.2d 532, 537-41 (9th Cir.1992).
All this is clear and straightforward if the institution, though federally insured, is state chartered, as in the Canfield and McSweeney cases. But what if, as in this case (during the relevant period) and Resolution Trust Corp. v. Gallagher, 10 F.3d 416 (7th Cir.1993), the institution has a federal charter, albeit of recent vintage? Gallagher holds that in such a case the courts will not create a federal common law of directors’ liability, but will simply enforce the standard of liability set forth in section 1821(k). Today we hold that, despite the saving clause, state law is inapplicable as well, because disputes involving the internal affairs of a corporation, including the duties of directors to their shareholders (in whose shoes the RTC stands), are governed by the law of the chartering jurisdiction, in this ease the federal government, and the applicable law of that jurisdiction is 1821(k). So the RTC must prove gross negligence, even though Illinois law makes the directors of financial institutions to which its law applies liable to shareholders for simple negligence.
*1126This is a neat, tidy, “logical” chain of reasoning, but it flattens the internal-affairs doctrine and like Gallagher it applies 1821(k) outside of its intended domain, and with ironic results. These are separate errors, and let me begin with the second, the statutory error, where my colleagues are less culpable because they have the support of Gallagher, a recent decision by this court.
The purpose of section 1821(k), as the timing of the statute’s enactment and other features of its history make clear, was to place a floor under the liability of directors of savings and loan associations, which were falling like ninepins. A number of states had, beginning in the early 1980s, passed laws limiting the liability of corporate directors for mismanagement of corporate affairs. James J. Hanks, Jr., “Evaluating Recent State Legislation on Director and Officer Liability Limitation and Indemnification,” 43 Bus. Law. 1207 (1988); Fischer, supra, 39 UCLA L.Rev. at 1739-40; FDIC v. McSweeney, supra, 976 F.2d at 539. The purpose of the new federal statute was to preempt those laws to the extent they shielded directors from liability for gross negligence or worse misconduct. Id. at 540; 135 Cong.Rec. S4278-79 (June 24, 1994) (remarks of Senator Riegle, the bill’s sponsor). The saving clause ensured that if a state went further than the federal statute, and punished simple negligence by directors, the RTC cqiuld use state rather than federal law.
The liability of directors of S & Ls which happened to have federal rather than state charters was not discussed, even though more than half of all S & Ls were federally chartered. National Commission on Financial Institutional Reform, Recovery and Enforcement, Origins and Causes of the S & L Debacle: A Blueprint for Reform: A Report to the President and Congress of the United States 53 (G.P.O. July 1993) (tab. 4). The likeliest reason for the apparent oversight is that there was no history of having to decide which jurisdiction’s law would govern a particular dispute over directors’ liability. Directors’ liability had been primarily a common law field; the pertinent common law doctrines (the business-judgment rule, the duty of loyalty, etc.) had been similar across states and similar also to the federal common law of directors’ liability, dating from the era of Swift v. Tyson; and banks and related financial institutions were invariably local rather than multistate, so potential interstate conflicts in the obligations of bank directors could not arise. Congress is not gifted with omniscience and does not have the leisure to be able to tie a pretty ribbon around every piece of legislation, and so it often either overlooks or chooses not to attempt to solve problems that lack present salience or urgency. The use by judges of the form of words that Congress has employed to deal with the problem that was before it — in this case, the problem of states’ curtailing the liabilities of directors — to solve a problem of which there is no evidence that Congress was even aware is a formula for the perversion of legislative purpose. We play “Gotcha!” with Congress. We make traps of its words.
Congress, or more precisely those members who thought about the issue — but it was a hot issue, after all — believed that by passing section 1821(k) it was empowering the RTC to obtain damages whenever directors were grossly negligent (or worse), regardless of the provisions of state law. There is no evidence that Congress believed it was creating a new immunity for directors of federal S & Ls by depriving the RTC of the benefit of state laws that imposed higher duties on directors.
Even if we indulge the fiction that Congress was secretly aware of the internal-affairs doctrine of corporation law and secretly intended it to apply to suits by the RTC against federally chartered S & Ls, it does not follow, as the court believes, that the doctrine would bar the application of Illinois law in this case. Properly understood, it would not. In cases of directors’ liability, automatic reference to the law of the state of incorporation is rejected. E.g., Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 263-64 (2d Cir.1984); Mansfield Hardwood Lumber Co. v. Johnson, 268 F.2d 317, 320-21 (5th Cir.1959); Ficor, Inc. v. McHugh, 639 P.2d 385 (Colo.1982). Instead the doctrine is interpreted to only presumptively apply the law of the state of incorporation. Restatement (Second) of Conflict of Laws § 309 and *1127comment c (1971). The presumption can be rebutted by reference to (among other things) “justified expectations,” “certainty,” and “ease in the determination and application of the law to be applied.” Id., §§ 6(d), 6(f), 6(2)(g), 309. All are considerations that favor the application of Illinois law to this case. Consider justified expectations: Everyone connected with Security would have thought Illinois law applicable to a dispute of this character. Security had been an Illinois corporation for a century, and nothing in the text or provision of the statute under which it converted to a federal S & L would have suggested that the liability of its directors or officers was being altered by the change. 12 U.S.C. § 14646X1); S.Rep. No. 97-536, 97th Cong., 2d Sess. 13-15, 53 (1982), reprinted in 1982 U.S.C.C.A.N. 3054, 3066-3069, 3107. (There was, of course, no 1821(k) when it converted.) Consider next certainty and ease in the determination and applicable of the law. This case well illustrates the difficulty of determining the rule of decision if federal law, the law of the chartering jurisdiction, is applied instead of the law of the S & L’s principal place of business. For it is far from clear that section 1821(k), rather than federal common law, is the place to find that rule, and it is also unclear, as we shall see, just what the federal common law rule is. There is no comparable uncertainty about the contents of the Illinois law of directors’ liabilities. Finally, the policy animating the presumption in favor of applying the law of the state of incorporation — the policy of shielding directors and officers from conflicting legal obligations — is not engaged by the facts of this case, as there is no suggestion that these directors have been or will be sued under the law of another state.
When these considerations are taken into account, as they should be if we are to be faithful to the internal-affairs doctrine as it has been traditionally understood, it seems plain that the doctrine does not require the application of federal law in this case. That should be the end of the case, and Gallagher would then be untouched.
If I am wrong about the internal-affairs doctrine — or if I am right, but the doctrine should be changed, should be converted from a presumption to a rigid rule, in reaction to the uncertainty of the “modern” approach to conflicts of law, reflected in the Second Restatement (although this would be the worst case for such a venture, so plain is it that Illinois rather than federal law should apply, and so unlikely is it that Congress would have wanted the doctrine rigidly applied to defeat the stricter standard) — and if there were no section 1821(k), the next issue would be the choice of a standard to do service as the federal common law rule of directors’ liability. The court does not say what standard it would choose, so I am free to assume that it would agree with me that the proper standard would be one that made these directors liable for simple negligence. This was assumed in Resolution Trust Corp. v. Gallagher, supra, 10 F.3d at 423, but not discussed; the cases are all over the lot. Fischer, supra, 39 UCLA L.Rev. at 1712-26. Assuming that simple negligence is the federal common law rule, or would be in the absence of section 1821(k), one can appreciate what mischief that statute is made to do by our decision. The enactment of section 1821(k) is taken as a declaration that Congress wants the liability of directors of federal financial institutions to be limited to gross negligence or worse. (This is provided the institutions are broke; if they are solvent, the directors remain liable to suits by the federal regulatory bodies for simple negligence. Fischer, supra, 39 UCLA L.Rev. at 7160. Crazy!) What would otherwise be a more stringent standard, that of simple negligence, is diluted by interpretation of a statute intended to make the liability of such directors more stringent. The statute has been turned on its head.
I acknowledge that Gallagher is riven by a similar paradox. If pressed I might recommend that the full court, sitting en banc, consider whether to overrule it (cf. 7th Cir.R. 40(f)), despite its recency; but at least I would not extend it. To get out from under its shadow in this ease we need only hold— consistent with the traditional understanding of the internal-affairs doctrine (and the one most likely to have commended itself to Congress, had it thought about the question when it enacted section 1821(k)), and with the statute’s saving clause — that the RTC is *1128entitled to hold Security’s directors to the standard of care in Illinois law. If Gallagher was decided erroneously, let us not compound the error by misapplying the internal-affairs doctrine.