Resolution Trust Corporation v. Henry Chapman

POSNER, Judge, Chief Before ROVNER, Circuit EASTERBROOK Judges.

EASTERBROOK, Judge. Circuit “Congress that ago we held Eight months standard of what directly’ to the issue ‘spoke [Resolu- suits the RTC liability governs officers Corporation] tion finan- federally chartered of failed F.3d institutions.” cial standard, Cir.1993). we That 416, 419 according negligence, concluded, gross U.S.C. terms suing the The RTC go again. Here Sav- former federally Association, failed ings and Loan theory institution, on financial chartered & L’s damaged the S negligence their injured the feder- standing and thus financial portions fund. The insurance deposit al (on an interlocu- us now before complaint 1292(b), after 28 U.S.C. tory appeal under on the claims dismissed district offi- the directors assert pleadings) duty their violated cers to re- seeks the RTC for which negligence, damages. cover Well, Gallagher? How, consistent decision disagrees with for review position its preserve seeks the RTC But Done. Supreme Court. prevail contends it should even if Paper Ouellette, Galla v.Co. gher off; is correct. That is pull hard to 805, 814-16, (1987); L.Ed.2d 883 opinion in Gallagher held that es Acquisition Amanda Corp. v. Universal tablishes standard offi Corp., Foods Cir. cers and federally directors of in chartered 1989); Myrick v. Corp., 13 F.3d Fruehauf stitutions, of which was one. Galla (11th Cir.1994); 1516 Cipollone cf. v. Liggett gher piece is of a with other recent decisions —Inc., Group, U.S. -, 112 2608, S.Ct. emphasizing that when provid (1992). 120 407 L.Ed.2d may Thus expressly ed subject, for some courts should take advantage of any claims to it available principles of federal common law to law. reach different E.g., conclusions. Central Denver, Bank N.A. v. First Interstate any? Has it may — assume Denver, N.A., Bank U.S. -, - - Illinois permits recovery -, against negligent 1439, 1448-52, 114 S.Ct. 128 L.Ed.2d (1994); Musick, 119 directors of financial Peeler & Garrett v. Em — ployers Wausau, incorporated in U.S. -, - - Insurance Chicago that state. Title & -, 2085, 113 2090-91, S.Ct. v. Munday, 555, 124 Co. 297 Ill. 131 N.E. (1993); Pleva, L.Ed.2d 194 (1921). Lampf, Lipkind, 103 pivotal question then is the Prupis Gilbertson, & Petigrow v. 501 U.S. appropriate choice of subject law. When 350, 360-62, 2773, 111 2781, S.Ct. 115 liability is of officers and directors for their (1991). L.Ed.2d 321 Courts leery should be stewardship of corporation, pre the law of all claims invoking law; federal common sumptively applicable is the law of place arising suits out of bank failures are no of incorporation. This venerable choice-of- exceptions. O’Melveny Myers FDIC, & v. principle, known as the internal affairs — U.S. -, 2048, 129 114 S.Ct. L.Ed.2d 67 doctrine, recognized throughout states, (1994). Supreme Court as well. CTS The RTC sees an opening in Corp. Dynamics the fact v. Corp. America, 481 that Gallagher did not decide whether 69, 89-93, U.S. 1637, 107 1649-52, S.Ct. 95 1821(k) § precludes liability under state law. (1987); L.Ed.2d 67 First City National Bank 10 F.3d at According RTC, to the v. Banco Para el Cuba, Comercio Exterior de may recover from Security’s directors and 611, 621, 462 U.S. 2591, 2597, 103 S.Ct. 77 officers for simple negligence under Illinois (1983); L.Ed.2d Edgar 46 MITE Corp., v. law. reply Defendants any 624, 645, 457 2629, U.S. 2642, 102 S.Ct. 73 of state law is preempted, but position this (1982); L.Ed.2d 269 see also 4 Model Busi untenable. 1821(k) The final sentence of ness Corporation (3d Act Annotated 1631-42 says: “Nothing in paragraph shall im 1993) ed. (collecting authority); Debo pair any right or affect Corporation DeMott, rah A. Perspectives on Choice of under other applicable law.” We concluded Law Corporate Affairs, Internal 48 L. & in Gallagher that the minimum effect Contemp. (1985). Prob. 161 Illinois adheres sentence is that the may regulato take principle. 805 ILCS (“nothing 5/13.05 ry actions such as removing directors on the in this Act contained shall be construed to basis of simple negligence. 10 F.3d at 420- authorize this regulate State to organiza 21. Two appeals courts have held that tion or the internal affairs corpora this language also ensures that actions based tion [chartered in jurisdiction].”). another on state law preempted. are not FDIC v. The internal affairs recognizes McSweeney, (9th F.2d 976 Cir. benefits using one rule of 1992); law determine Canfield, FDIC v. 967 F.2d 443 Cir.1992) (en duties and banc). of directors and offi Even if we doubted the cers whose firm may do many correctness of business in holdings, which we do not, states. “[OJtherwise we would a corporation think prudent could be create a among conflict faced conflicting circuits. Edgar, demands.” Clauses similar 457 the final sentence of U.S. at 102 regularly S.Ct. at 2642. See Restate are understood to (2d) save state ment (1971). Laws 302 of Conflict of claims of preemption. E.g., International Cf. Kemper Kamen v. Services, Financial loyalty, and care, duty 1711, duty of Inc., develop are novel judgment business 1721, 114 L.Ed.2d general stan “[T]he corporate law. ments apply the one doubts No was devel imposed on of care dard incorporation aof bank’s place common part of judiciary as oped Paulman See another state. defining this directors; statutes law duties N.E.2d 541 Kritzer, Ill.App.2d phenomenon. relatively recent duty are affirmed, Ill.2d Dist.1966), (2d in the first included was a definition Such Treco, Inc. v. (1967); also see N.E.2d in 1974 Corporation] Act [Business Model Ass’n, 749 Savings Loan& Lincoln Land of to section addition substantial form of a Cir.1984). recently Until 374, 377 2 Model Busi Act.” Model the 1969 35 of applying supposed that might a state (3d ed. 933 Act Annotated Corporation ness savings associ and banks to federal state law ALI, Principles 1 also Supp.). See inconsis 1993 any of risk present would not ations Analysis and Rec Corporate fall Governance: out would therefore and obligations, tent (1992) (“Historically, terms) 134 (if ommendations the formal not logic side the played have legislatures than and in courts Multi-state doctrine. affairs internal regarding the law shaping the 1980s. in until rare the central role banking were ter-state state; corporate no bank banking duty of a unit Illinois was au officers.”). branch no less have have could Federal courts in Illinois doing business that some federal surprising for law shape not a common thority to is therefore es. It incor have had bank’s courts than state corporations courts treated Illinois in Illi irrelevant; incorporated do business firms as poration a common devise bank” without Illinois “an v. Ham to be Bowerman jurisdictions. nois was in their federal 549, 551, between 63 504, 510, regard to the difference ner, 39 S.Ct. 250 U.S. Sax, 123 Ill. v. Fields incorporation. 141 (1919); Spaulding, Briggs v. 1113 L.Ed. 867-68, 864, 463-65, Ill.Dec. 460, (1891). 78 App.3d 924, 662 132, 35 L.Ed. 11 S.Ct. U.S. Dist.1984) (citing (1st 983, 986-87 Friendly, 462 N.E.2d In Praise Henry J. generally See interchangeably for rules federal Federal Common the New Erie — and of bank); v. First Valiquet federally chartered (1964), reprinted 383 Law, N.Y.U.L.Rev. 39 Chicago, Ass’n Loan& Savings Federal (1967). just as But in Benchmarks 212, 42 Ill.Dec. Ill.App.3d 87 spelling adopt statutes begun states Dist.1979) 921, 925-26 N.E.2d 408 has duties, Congress so managers’ out however. changed, (same). All of federally chartered rules some adopted operations, multi-state now allows Illinois regulators banking and authorized banks may find offices one throughout the state is, example, There others. promulgate incorporated else of financial cover regulations of federal set an elaborate in itself multi-state Security was where. corporate major mergers and other ing as Dakota in North stitution, branches thrifts. federally chartered transactions inter-state The advent as Illinois. well OTS, v. Ordower See in question of law choice banking puts rules). Cir.1993) of these (discussing several af internal apply the tous and leads focus en Congress today, relevance particular Of held this case. doctrine fairs Gallagher in concluded acted governs the charter, national so federal adopts this statute their of feder and directors managers management. not devise needWe institutions. al financial doctrine affairs law; the internal has laid down Although common federal law, no federal there is to federal points law. .the this mean Does corporate code. ap however, should Perhaps, Not points nowhere? doctrine choice-of-law for ourselves doctrine affairs internal ply the decade, rules the last necessarily. Until principles what ask but should hold corporations liability for managerial submits, contending that So the apply. developed been had charters ing state Illi requires v. Fields Sax codify Attempts to law fashion. common nois substantive law. It is far from corporations. clear to To the extent the RTC acts as us that any Fields holds such thing; receiver, it inherits corporation’s claims jumbled state and federal togeth cases officers, directors and so the er, apparently believing that the choice of internal affairs applies normally. did matter. After Gallagher, it mat gets The RTC no rights than the firm ters. What law Illinois courts would choose itself had. To the extent the depicts is, however, irrelevant. This is anot diversi itself as a party third like a victim of —more ty case, where Erie require the forum a tort like firm seeking to hold its court to apply the whole law of state, managers accountable for the benefit of in- including its choice of law principles. Klax vestors —that only serves put the case on Co. Stentor Electric Manufacturing squarely in the realm of federal law. Feder- Co., 85 L.Ed. al banking agencies love to remind courts (1941). It is a suit by a agency that, suing corporate their capacities invoking jurisdiction per 12 U.S.C. to collect debts protect deposit insur- 1441a(Z )(1), says that suits to which fund, ance they receive the benefits of feder- party RTC is a “shall be deemed to arise al law D’Oench, Duhme & Co. v. under the laws of the United States”. Fed FDIC, 447, 456, 315 U.S. S.Ct. eral law may well look to state law for sub L.Ed. 956 D’Oench, Even Duhme principles, stantive see United States v. Kim is not apt an analogy, approach the of Kim- Foods, Inc., bell 715, 440 U.S. 99 (the only bell remaining option) does help S.Ct. 1457-59, 59 (1979), L.Ed.2d 711 the RTC. For Kimbell tells us to use state but which law to select is a question itself law unless has enacted a national law, federal as Kimbell Foods and O’Melveny rule. When there is rule, such national Myers & show. Supreme The Court in apply it. Einum, United v. States 992 F.2d O’Melveny Myers & did ask what (7th Cir.1993). 761 Gallagher holds that state court would selected; it ap just such a rule of national law. proached question the as one for independent decision. See also v. Eckstein Balcor Film Doubtless the RTC believes that a need to Investors, 8 Cir. prove gross negligence will unduly diminish 1993). its recoveries. In O’Melveny Myers & the banking agency According RTC, to the wanted the Court apply federal to choice of law, law principles adopt because that state rules of decision increase damages; notwithstanding here banking the agency internal affairs doctrine. clamors law, for state RTC relies on for cases such the same as Anderson reason. In O’Melveny National Luckett, Myers Bank & v. pointed 321 U.S. 64 FDIC out S.Ct. that 88 (1944), L.Ed. California 692 a minority for followed the propo- rule of sition that liability “national accountants’ subject banks are and asked to the Court to laws, go unless with those the dominant infringe approach laws to the sub- ject. national banking In impose laws or this case an undue RTC has located a burden on performance state that applies a minority the banks’ (simple functions.” negligence) Id. at to S.Ct. directors’ See liability officers’ also, e.g., Chipman, McClellan asks us apply to state’s law rather 347, 356-57, 85, 87, than the more L.Ed. 461 common business judgment If question rule that before us managers shelters who did not act whether Security could in establish a bad faith. Principles new See Corporate branch, whether it could redecorate a Governance build- reporter’s 4.01 and note 18 at ing designated an landmark, 160; historic or Model Business Corporation An- Act funds escheat after depositors vanish, notated (in 926.1-958. Both the FDIC observations would be controlling. O’Melveny Delaware & Myers) (in and the RTC petrochemical corporations case) also must follow seem uninterested in applying neutral Illinois law when selling products in principles Illinois. of law. O’Melveny Myers & holds Luckett, McClellan, and similar cases have job is not our to maximize the federal nothing to do with the internal affairs of “take” in bank failures. Our apply task is to negligence, simple held liable can be here which principles, applicable generally year 1821(k),passed the 12 U.S.C. light of say otherwise To §of entail (at least conceded broke and Security went holding of reject to applicable be appeal) purposes do shall both. or Congress, decision ' suit. to this neither. (on David generally see

AFFIRMED. which That statute Comment, Liabil Director Fischer, “Bank B. concurring. Judge, ROVNER, Circuit Defense A New ity FIRREA: under opin Judge Easterbrook’s join Deposito Although I Insolvent and Officers Directors ex the sentiments ion, sympathetic I Noose?” Tighter am ry Institutions —Or ultimately I am dissent. by the (1992)) empowers pressed L.Rev. UCLA however, I dissent, unpersuaded federally insured RTC sue the inter Easterbrook Judge agree or negligence gross institutions financial compels “nothing affairs duty; nal but disregard of any greater of a feder affairs internal to the any or impair affect shall [section] Of institution. financial ally-chartered applicable other right [RTC] inevitably our leads course, conclusion immunize state tries if law.” So Corp. v. Galla in Resolution decision of such Cir.1993), 10 F.3d gher, negli act, grossly even if any nonintentional prove require the sue; by virtue can still gent, the one. as this in a case simple negli simple sue for saving clause can pan concerns with dissent’s share the di makes applicable gence 1127.) (See post at in that case. decision el’s negligence. See liable for rectors unanimous, and panel was Gallagher the Yet 443, 448-49 F.2d Canfield, 967 FDIC v. banc case en the rehear to refused the McSweeney, Cir.1992) (en banc); FDIC v. are therefore year. We last of December in Cir.1992). 532, 537-41 F.2d accordingly and follow to bound if the straightforward and is clear All this today. so do insured, state federally is institution, though dissenting. McSweeney POSNER, Judge, chartered, Chief in the as Canfield (during if, case in this as But what cases. appeal in by the presented The issue Trust Resolution period) relevant the standard liability suit is directors’ (7th Cir. Gallagher, 10 Corp. v. savings the directors to hold which charter, a federal has 1993), the institution Reso- Illinois sued in loan associations holds Gallagher vintage? of recent albeit Security Sav- The Corporation. lution create will not courts case a in such a charter received Loan Association ings & liability, of directors’ common law a opened State of from liabili the standard simply enforce will but century A Peoria. year in business 1821(k). Today we section ty forth in set exchanged its later, in clause, saving that, despite hold later years Seven one. a federal charter in disputes well, because inapplicable is the hands into passed broke it went corporation, aof internal affairs volving suit RTC, brought which their of directors the duties including dam- to obtain former Security’s RTC (in shoes whose shareholders mismanagement negligent their ages char of the by the law stands), governed are activities investment lending and Security’s the federal this ease jurisdiction, tering Secu- after happens, as it period, during the law of applicable government, The directors’ L. S & rity became must So is jurisdiction Securi- have harmed alleged to is though Illinois even negligence, gross prove shareholders, rights the to whose ty’s institu of financial makes which succeeded, that harm and it is to share liable applies its tions to are question we The to redress. seeks suit negligence. holders defendants is whether decide asked neat, This tidy, “logical” chain of rea- states and similar also to the federal common soning, but flattens the internal-affairs doc- liability, directors’ dating from the era trine and like Gallagher 1821(k) applies v. Tyson; and banks and related Swift outside of domain, its intended and with iron- financial institutions were invariably local ic results. These separate errors, are and let multistate, potential so interstate begin me second, with the the statutory er- conflicts in obligations of bank directors ror, my colleagues where culpable are less could not Congress arise. gifted with they because support have the of Gallagher, omniscience and does not have the leisure a recent decision this court. be able to tie pretty ribbon every around piece legislation, and so it often either The purpose 1821(k), of section as the tim overlooks or chooses not attempt to solve ing of the statute’s enactment and other fea problems that present lack salience or urgen- history tures of its clear, make was to cy. The by judges of the form of words floor liability under the of directors of sav Congress has employed to deal with the ings associations, and loan which were falling problem that was case, it —in before ninepins. like A had, number of states be problem of states’ curtailing the liabilities ginning early 1980s, in the passed laws limit directors —to problem solve a of which there ing the liability corporate directors for is no evidence that Congress was even aware mismanagement of corporate affairs. James is a formula perversion for the legislative Hanks, Jr., J. “Evaluating Recent Leg State purpose. playWe “Gotcha!” Congress. islation on Director and Officer Liability traps make of its words. Limitation and Indemnification,” 43 Bus. (1988); Fischer, Law. 1207 supra, 39 UCLA Congress, or precisely those mem- 1739-40; L.Rev. FDIC v. McSweeney, su bers who thought about the issue —but it was pra, 976 F.2d at 539. The purpose of issue, a hot after all—believed that pass- new federal statute was to preempt ing those section it was empowering the laws the extent they shielded directors RTC to obtain damages whenever directors negligence or worse (or grossly negligent worse), regardless 540; misconduct. Id. at 135 Cong.Rec. provisions of state law. There is no (June 1994) (remarks S4278-79 of Sena evidence that believed it was creat- Riegle, tor sponsor). bill’s saving ing a new immunity for directors of federal S clause ensured that if a state went further by & Ls depriving the RTC of the of benefit than the statute, federal punished and simple state laws imposed that higher duties on negligence by directors, the RTC cqiuld directors. state rather than federal law. if Even we indulge the fiction that Con The of directors of S & gress Ls which secretly was aware of the internal- happened to have federal rather than state affairs doctrine of corporation law and se charters discussed, was not even though cretly intended it apply to to by suits the more than half of all S & Ls were federally RTC against federally Ls, chartered S & it chartered. National Commission on Finan- does follow, not as the believes, that cial Reform, Institutional Recovery and En- the doctrine would bar the application of forcement, Origins and Causes the S L& Illinois law in this of Properly case. under Debacle: A Blueprint A Report stood, it would not. In Reform: cases of directors’ to the President and the United liability, automatic of reference to the law of the (G.P.O. 1993) (tab. States 53 July 4). The incorporation of rejected. is E.g., Nor likeliest reason for apparent the oversight is lin Corp. v. Rooney, Inc., Pace 744 F.2d that there history was no of having (2d to decide Cir.1984); 263-64 Hardwood Mansfield jurisdiction’s which govern law would par- Johnson, Lumber Co. v. 268 F.2d dispute ticular over directors’ liability. Di- Cir.1959); Ficor, Inc. McHugh, rectors’ liability had been primarily a com- (Colo.1982). P.2d 385 Instead the doctrine is field; mon law pertinent the common law interpreted only to presumptively apply the (the doctrines business-judgment rule, the law of the of incorporation. Restate duty etc.) of loyalty, had been similar (Second) across ment Laws 309 of Conflict of to rule, in reaction rigid to a presumption can be presumption The c comment approach uncertainty the “modern” of the (among other by reference rebutted Re- law, the Second reflected of conflicts “certainty,” expectations,” “justified things) the worst be (although would statement applica in the determination “ease venture, is it that plain so case 6(d), Id., §§ applied.” be law to the of tion apply, law should than federal Illinois that considerations All are 6(f), 309. 6(2)(g), Congress would unlikely is it that and so law to Illinois of the favor rigidly applied the doctrine wanted have Ev expectations: justified Consider case. standard) if there stricter defeat —and Security have would connected eryone 1821(k), would next issue section no of dispute ato applicable Illinois law thought to do service a standard of the choice be Illinois an had been character. directors’ law rule common the federal nothing in the century, and corporation say what stan- The court does liability. it the statute provision of or text choose, free assume so am it would dard L would &S a federal converted proper that the me agree with that would or liability of its directors that the suggested di- made one that be standard change. 12 by the altered being was officers This negligence. simple liable rectors 97-536, 97th 14646X1); S.Rep. No. U.S.C. Corp. v. in Resolution was assumed (1982), reprinted 13-15, 53 2d Cong., Sess. but at supra, 10 3066-3069, 3107. U.S.C.C.A.N. lot. all over discussed; are cases 1821(k) course, was, no (There 1712-26. at Fischer, UCLA L.Rev. supra, 39 certainty and converted.) next Consider the fed- negligence is simple Assuming that applicable determination in the ease rule, be in or law common eral diffi illustrates well case law. This 1821(k), appreci- can one of section absence if of decision determining rule culty of do made to is that statute mischief what ate juris chartering law, the law federal of section enactment our decision. S of the instead diction, applied is Con- as a declaration taken For it is of business. principal place & L’s of feder- liability of directors gress wants 1821(k), rather section from clear far to be limited institutions al financial to find law, is the common federal (This provided worse. or unclear, as we shall rule, it is also solvent, broke; they are are common see, just what to suits liable remain uncertainty comparable is no There is. negli- simple regulatory bodies of di contents about L.Rev. Fischer, 39 UCLA supra, gence. policy ani Finally, the liabilities. rectors’ abe would otherwise Crazy!) What applying in favor presumption mating the neg- standard, stringent incorporation the state —the a stat- interpretation is diluted ligence, shielding policy liability of to make the ute intended engaged not obligations conflicting legal —is has statute stringent. case, is no there as of this facts head. its on turned been or been that these suggestion by a riven Gallagher is acknowledge that I state. another will be sued might recom I pressed If paradox. similar into are taken considerations When banc, court, sitting en full mend that to be we are be if account, they should as (cf. 7th Cir.R. it to overrule whether consider doctrine to the internal-affairs faithful least recency; but 40(f)), its despite understood, it seems traditionally been from under out get To it. extend require does doctrine plain only hold— need in this ease shadow its That case. of federal understanding the traditional with consistent Gallagher case, and the end be should (and one doctrine the internal-affairs be untouched. then to Con itself have commended likely to most question thought about had it gress, internal-affairs about wrong I am If 1821(k)), section enacted right, but amI doctrine —or saving clause—that statute’s converted be changed, should be should entitled to Security’s hold directors to the

standard of If law. Gallagher

was decided erroneously, let us not com

pound the error misapplying the internal-

affairs doctrine.

Harry GOMEZ, Petitioner-Appellant,

Rodney AHITOW, J. Warden, and Roland Burris,

W. Respondents-Appellees.

No. 92-4058.

United States Appeals, Court of

Seventh Circuit.

Argued Feb. 1994. July

Decided 1994.

Rehearing Suggestion for Rehearing

En Banc Aug. 30, Denied

Case Details

Case Name: Resolution Trust Corporation v. Henry Chapman

Court Name: Court of Appeals for the Seventh Circuit

Date Published: Sep 8, 1994

Citation: 29 F.3d 1120

Docket Number: 93-1514

Court Abbreviation: 7th Cir.