Eleventh Circuit Rejects Extension of the “No Duty” Rule and Allows D&Os to Pursue State-Law Defenses Based on FDIC Conduct

by Eversheds Sutherland (US) LLP

In a decision announced at the end of 2013 in the case of FDIC v. Steven Skow, et al.,1 the U.S. Court of Appeals for the Eleventh Circuit rejected an argument proposed by the Federal Deposit Insurance Corporation (FDIC) that the FDIC owed “no duty” to bank directors and officers (D&Os). The decision affirmed the denial of the FDIC’s motion to strike the affirmative defenses asserted by former D&Os of Integrity Bank in Alpharetta, Georgia, in a lawsuit arising from that bank’s failure in August 2008.

While the remaining questions raised in Skow on the appropriate standard of liability for Georgia D&Os have been certified to the Georgia Supreme Court, the “no duty” aspect of the decision has immediate implications for D&O defendants in Georgia and throughout the Eleventh Circuit. Currently, 19 suits have been brought by the FDIC against former D&Os of Georgia banks. This decision clears the way to assert state law-based affirmative defenses, such as mitigation of damages, based on the FDIC’s conduct as receiver following the failure of a bank. 

In the district court proceedings, several defendants responded to the FDIC’s complaint by asserting state law-based affirmative defenses, including the defense that any recovery by the FDIC should be reduced as a result of the FDIC’s own post-closing conduct as receiver.  For example, the defendants asserted that the FDIC’s conduct as to certain loans caused or exacerbated the alleged losses rather than any pre-receivership conduct by the D&Os.  In response, the FDIC filed a motion for summary judgment on certain of the defendants’ affirmative defenses. The FDIC took the position that well-established federal common law provided that the FDIC as receiver had “no duty” to a bank’s D&Os, and, consequently, the FDIC was exempt from these state law affirmative defenses.  The district court rejected the FDIC’s position, and the FDIC sought an interlocutory appeal of that ruling.

As the Financial Institutions Reform, Recovery, and Enforcement Act of 19892 (FIRREA) does not specifically discuss the issue, the FDIC needed to demonstrate that, prior to FIRREA’s enactment, “established and long-standing” federal common law exempted the FDIC from state law defenses. The U.S. Supreme Court had previously held, in O’Melveny & Meyers v. FDIC, that “any defense good against the original party is good against the receiver.”3 The FDIC argued that the Skow litigation presented an exception to this holding because federal common law provided for a “no duty” rule. The Eleventh Circuit characterized precedent cited by the FDIC as standing for “at most . . . the proposition that a bank’s D&Os cannot assert tort claims against the FDIC because the FDIC owes them no duty.”4  The Eleventh Circuit instead held that “[f]ederal common law is basically complete and closed” and characterized the FDIC’s position as seeking to “extend a purported federal common law rule to a new and significantly different context,” which the Court refused to do. 

During this wave of bank failures, the FDIC has filed more than 80 actions against former D&Os of failed banks since 2010, —and Georgia remains at the top of the list both for bank failures and professional liability lawsuits.  Skow’s decision  on the “no duty” rule allows former D&Os of failed banks in the Eleventh Circuit—which includes Alabama and Florida in addition to Georgia— to assert, conduct discovery, and seek to prove recognized state law affirmative defenses based on the FDIC’s conduct. 

1 Federal Deposit Insurance Corp. v. Skow, No. 12-15878, 2013 WL 6726918 (11th Cir. Dec. 23, 2013).  In another portion of this same decision, the Eleventh Circuit certified two issues to the Supreme Court of Georgia relating to directors’ and officers’ abilities to rely on the Business Judgment Rule in suits arising out of the failures of financial institutions in Georgia. That portion of the decision has recently been the subject of a Sutherland Legal Alert, available at http://www.sutherland.com/NewsCommentary/Legal-Alerts/160580/Legal-Alert-Two-Certified-Issues-to-the-Georgia-Supreme-Court-Will-Address-Application-of-the-Business-Judgment-Rule-to-Bank-Officers-and-Directors
2 12 U.S.C.A. § 1811.
3 512 U.S. 79, 86 (1994). 
4 Citing Harmsen v. Smith, 586 F.2d 156, 157-58 (9th Cir. 1978); First State Bank v. United States, 599 F.2d 558 (3d Cir. 1979); North Dakota v. Merchants Nat’l Bank & Trust Co., 634 F.2d 368, 379 n.20 (8th Cir. 1980).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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