Fed. Deposit Ins. Corp. v. Thomas Beere, Keith Blumer, David Boilini, Frank Cannella, Brantly Chappell, John Ernster, Robert Fait, Daniel Jacobson, James Scherrer, John Smith, Richard Torhorst, Charles Wellington, & St. Paul Mercury Ins. Company/Travelers Indem. Co.

FEDERAL DEPOSIT INSURANCE CORPORATIONas Receiver for First Banking Center, Plaintiff, v. THOMAS BEERE, KEITH BLUMER, DAVID BOILINI,FRANK CANNELLA, BRANTLY CHAPPELL, JOHN ERNSTER,ROBERT FAIT, DANIEL JACOBSON, JAMES SCHERRER,JOHN SMITH, RICHARD TORHORST, CHARLES WELLINGTON,and ST. PAUL MERCURY INSURANCE COMPANY/TRAVELERS INDEMNITY COMPANY, Defendants.

Case No. 14-C-0575

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN

September 25, 2015

DECISION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS (DOC. 18) AND DENYING WITHOUT PREJUDICE MOTION TO STRIKE AFFIRMATIVE DEFENSES (DOC. 16)

The Federal Deposit Insurance Corporation ("FDIC-R"), as receiver for First Banking Center (the "Bank"), sues twelve directors of the Bank (two of whom were also officers) (the "Individual Defendants") for negligence (count I) and violation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. § 1821(k) ("FIRREA"). In addition, the FDIC-R asserts a direct action claim (count III) against the directors' and officers' liability policy insurer, St. Paul Mercury Insurance Company/Travelers Indemnity Company ("Travelers"). The Bank failed, and the FDIC-R claims that the Individual Defendants were negligent and grossly negligent in approving seven loans to three borrowers between December 2006 and May 2008. According to the complaint, the loan approvals violated the Bank's loan policy and were contrary to prudent, safe, and sound lending practices. (Doc. 1, ¶ 2.) Moreover, the complaint charges the IndividualDefendants' negligence and gross negligence caused damages of at least $11.8 million. (Doc. 1, ¶ 3.)

Travelers answered the complaint and offered affirmative defenses. The FDIC-R has moved to strike several of them. (See Doc. 16.) Briefing and court consideration of that motion to strike was stayed when the Individual Defendants moved to dismiss counts I and II of the complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim (see Doc. 18). In their joint motion to stay the affirmative-defenses challenge, the FDIC-R and Travelers acknowledged that issues in the motion to strike likely will be streamlined or eliminated following resolution of the Individual Defendants' motion to dismiss. (Doc. 20, ¶ 7.)

In an unusual briefing move regarding the Individual Defendants' motion to dismiss, codefendant Travelers waited three weeks then filed a "response" in which it did not oppose the Individual Defendants' motion to dismiss. Instead, it joined in the motion. That unorthodox move resulted in two additional briefs, as the FDIC-R, which had already responded in opposition to the Individual Defendants' motion, otherwise would not have had a chance to respond to Travelers' arguments, and, predictably, Travelers then wanted to reply to the FDIC-R's additional brief.

The court permitted that additional briefing as well as a surreply by the FDIC-R to an argument the Individual Defendants raised for the first time in their reply brief. In sum, the court has six briefs (plus two additional filings regarding a recently issued case fromthe Fourth Circuit), although there is only one motion to dismiss claims in the complaint, concerning counts I and II.¹

MOTION TO DISMISS COUNTS I AND II

A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint to state a claim upon which relief may be granted. See Fed. R. Civ. P. 12(b)(6). Rule 12(b)(6) requires a plaintiff to clear two hurdles. EEOC v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007). First, the complaint must describe the claim in sufficient detail to give a defendant fair notice of the claim and the grounds on which it rests. Id. Although specific facts are not necessary, "at some point the factual detail in a complaint may be so sketchy that the complaint does not provide the type of notice of the claim to which the defendant is entitled under [Fed. R. Civ. P.] 8." Airborne Beepers & Video, Inc. v. AT&T Mobility LLC, 499 F.3d 663, 667 (7th Cir. 2007). Second, the complaint must set forth a claim that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct. 1955, 1974 (2007); St. John's United Church of Christ v. City of Chicago, 502 F.3d 616, 625 (7th Cir. 2007). The "allegations must plausibly suggest that the plaintiff has a right to relief, raising that possibility above a 'speculative level'; if they do not, the plaintiff pleads itself out of court." EEOC, 496 F.3d at 776 (citing Bell Atl. Corp., 550 U.S. at 555-56, 569 n.14 (2007)). When considering a Rule 12(b)(6) motion, the court must construe the complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded facts and drawing all possible inferences in the plaintiff's favor. Tamayo v. Blagojevich, 526 F.3d 1074, 1081 (7th Cir. 2008).

The Individual Defendants' motion to dismiss primarily involves legal arguments. Specific allegations of the complaint will be referenced below only as needed.

A. Count I: Dismissed as to Directors, Continues as to Officers

1. Claims Against Directors

The Individual Defendants contend that Wis. Stat. § 221.0618(1) protects them from liability for the FDIC-R's negligence claim. As to state-law matters, this court must apply substantive state law as enacted by the state legislature and as interpreted or declared by the state's highest court. See Home Valu, Inc. v. Pep Boys—Manny, Moe and Jack of Del., Inc., 213 F.3d 960, 963 (7th Cir. 2000); see also Erie R.R. Co. v. Thompkins, 304 U.S. 64, 78-79 (1938). If the Supreme Court of Wisconsin has not spoken on the issue and the law is unclear, this court must predict how that court would decide the question presented. Rodman Indus., Inc. v. G & S Mill, Inc., 145 F.3d 940, 942 (7th Cir. 1998). In that instance, decisions of the state's intermediate appellate courts are authoritative unless there is a split among those courts or "there is a compelling reason to doubt that the courts have got the law right." Rekhi v. Wildwood Indus., Inc., 61 F.3d 1313, 1319 (7th Cir. 1995), quoted in Home Valu, Inc., 213 F.3d at 963. Federal courts sitting in diversity should hesitate to expand state law in the absence of any indication of intent by the state courts or legislature. King v. Damiron Corp., 113 F.3d 93, 97 (7th Cir. 1997). Generally, when faced with equally plausible interpretations of state law, the federal court should choose the interpretation that restricts liability, rather than an expansive interpretation that creates substantially more liability. Home Valu, Inc., 213 F.3d at 963.

Section 221.0618(1), titled "Limited liability of directors" provides that

a director is not liable to the bank, its shareholders, or any person asserting rights on behalf of the bank or its shareholders, for damages, settlements, fees, fines, penalties or other monetary liabilities arising from a breach of, or failure to perform, any duty resulting solely from his or her status as a director, unless the person asserting liability proves that the breach or failure to perform constitutes any of the following:

(a) A willful failure to deal fairly with the bank or its shareholders in connection with a matter in which the director has a material conflict of interest.

(b) A violation of criminal law . . . .

(c) A transaction from which the director derived an improper personal profit.

(d) Willful misconduct.

No cases are listed in the Wisconsin Statutes Annotated as discussing this provision, and the parties indicate that no cases interpreting this provision exist. However, a nearly identically worded and titled statute exists regarding corporations—the only difference being the use of the word "corporation" instead of "bank." See Wis. Stat. § 180.0828(1). This court believes that the Supreme Court of Wisconsin would apply cases interpreting § 180.0828 to cases involving § 221.0618 as well. The statutes are virtually identical—simply applying to different entity forms, corporations versus banks. Regarding the language at issue in this case, in particular, case law regarding § 180.0828 applies equally to § 221.0618.

The FDIC-R does not contend in its briefs, nor does the complaint assert, that any of the four exceptions (a) to (d) in § 221.0618(1) is met by the allegations in this case. Instead, the FDIC-R argues that § 221.0618 does not apply at all to actions by the FDIC-R for negligence. However, this court finds that § 221.0618 protects the Bank's directors against damages liability for negligence as alleged in count I.

The Individual Directors and Travelers argue that as a receiver, the FDIC-R constitutes a "person asserting rights on behalf of the bank or its shareholders" fordamages arising from negligence, i.e., a breach of duty, by the Individual Directors while performing as directors of the Bank. The FDIC-R responds that as receiver, it asserts rights on behalf of depositors, creditors and a federal insurance fund as well as the Bank and its shareholders, acting more like a trustee in bankruptcy. Therefore, it reasons that § 221.0618(1) is no bar to its claim of negligence.

The name of the plaintiff as set forth in the caption of the complaint reads: "Federal Deposit Insurance Corporation as receiver for First Banking Center." (Doc. 1 at 1.) As explained by the Seventh Circuit, the Federal Deposit Insurance Corporation generally operates as two entities: FDIC-Receiver (FDIC-R) and FDIC-Corporate (FDIC-C). FDIC v. Ernst & Young LLP, 374 F.3d 579, 581 (7th Cir. 2004). The FDIC-C "acts as guardian of the public fisc, disburses proceeds from the insurance fund, and having paid insurance claims is subrogated to rights of the bank's depositors against the failed institution." Id. FDIC-R prosecutes claims held by a failed bank (as opposed to its depositors). Id.; cf. Atherton v. FDIC as Receiver for City Savings F.S.B., 519 U.S. 213, 225, 117 S. Ct. 666 (1997) ("[T]he FDIC is acting only as a receiver of a failed institution; it is...