Federal Deposit Insurance Company v. Larry B Faigin et al

Filing 70

ORDER DENYING MOTIONS TO DISMISS 31 , 33 , 35 , 37 by Judge Dean D. Pregerson . (lc). Modified on 7/8/2013 (lc).

1
2

O

3
4
5
6
7
8

UNITED STATES DISTRICT COURT

9

CENTRAL DISTRICT OF CALIFORNIA

10
11
12

FEDERAL DEPOSIT INSURANCE
COMPANY AS RECEIVER FOR
FIRST BANK OF BEVERLY HILLS,

13
14
15
16
17
18
19
20
21

Plaintiff,
v.
LARRY B. FAIGIN, CRAIG
KOLASINSKI, ERIC ROSA,
ANNETTE VECCHIO, HOWARD
AMSTER, WILLIAM D. KING,
STEPHEN GLENNON, ROBERT
KANNER, KATHLEEN KELLOGG AND
JOHN LANNAN,
Defendants.
___________________________

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

Case No. CV 12-03448 DDP (CWx)
ORDER DENYING MOTIONS TO DISMISS
[Dkt. Nos. 31, 33, 35, & 37]

Presently before the court are Motions to Dismiss by

22

Defendants Howard Amster, William D. King, Stephen Glennon, Robert

23

Kanner, and Kathleen Kellogg (collectively “Director Defendants”);

24

Annette Vecchio, Craig Kolasinski, and Eric Rosa (collectively

25

“Officer Defendants”); John Lannan, who also joins the Outside

26

Director’s Motion as to the Second and Third Claims for Relief; and

27

Larry B. Faigin, who joins the Director Defendants’ Motion and the

28

Officer Defendants’ Motion.

Having considered the parties’s

1

submissions and heard oral argument, the court adopts the following

2

order.

3

I. Background

4

The Federal Deposit Insurance Company (“FDIC”) as Receiver for

5

the First Bank of Beverly Hills ("FBBH") is asserting claims

6

against Defendants in an amount no less than $100.6 million for

7

losses incurred on nine "acquisition, development, and

8

construction" and "commercial real estate" loans.

9

11.)

(Compl. ¶¶ 1,

Defendants are former directors and officers of FBBH.

10

Kolasinski, Rosa, and Vecchio were officers.

11

Glennon, Kanner, Kellogg, and Lannan were directors.

12

director, officer, and Chief Executive Officer.

13

Amster, King,
Faigin was

FBBH opened as Girard Savings and Loan Association in 1979.

14

In 1997, it became a stock savings bank regulated by the Office of

15

Thrift Supervision and changed its name to First Bank of Beverly

16

Hills.

17

regulated by the California Department of Financial Institutions,

18

and the FDIC became FBBH’s primary regulator.

19

time, the Bank was operating out of branches in Beverly Hills and

20

in Calabasas.

21

of $5 million or less secured by stable income-producing

22

properties.

23

development, and construction loans and into commercial real estate

24

loans.

25

measures were taken to improve underwriting or strengthen FBBH’s

26

capital position.

27

dividend payments were being approved to FBBH’s parent company

28

Beverly Hills Banccorp.

In 2005, FBBH became a state chartered commercial bank

(Id. ¶ 13.)

(Id. ¶ 12.)

At that

FBBH originally focused on making loans

In 2006 the Board began to move into acquisition,

(Id. ¶ 15.)

Those types of loans were riskier, but no

(Id. ¶ 16.)

At the same time, quarterly

(Id. ¶ 17.)
2

On April 24, 2009, the

1

California Department of Financial Institutions closed FBBH and

2

appointed the FDIC as receiver.

3

(Id.

¶ 18.)

This action concerns nine loans made in 2006 and 2007. The

4

FDIC alleges that all nine loans were deficient for ignoring

5

discrepancies in financial evaluations and in analyses of project

6

financials and appraisals, excessive LTV ratios, and prohibited

7

reliance on due diligence of participant banks.

8

of the alleged deficiencies in these loans are the following:

9

With respect to the Monteverde/Hawkbyrn loan: Relying on

10

outdated financials and an outdated appraisal, ignoring a loan to

11

value ratio of 100% and severe flood control issues, and entering

12

into the participation when the loan was set to mature one month

13

after approval without questioning why the loan was not being paid

14

off at maturity.

15

(Id. ¶ 54.)

Some

(Id. ¶¶ 61, 63, 66.)

With respect to the Otay loan: Ignoring that the guarantor’s

16

financials were inflated and that the loan transaction was a “flip”

17

that permitted the principals of the borrower to sell the property

18

back to themselves at a price higher than the actual value, thereby

19

using the proceeds of the loan to make a quick profit and taking

20

equity out of the project before it was completed. (Id. ¶¶ 68, 69.)

21

With respect to the Schaeffer loan: Approving a loan on a

22

nursing home, which was specifically prohibited by the Loan Policy,

23

and relying on guarantors’ net worth as a source of repayment

24

although that net worth was over $5 million less than the Bank’s

25

portion of the Loan.

26

(Id. ¶¶ 75, 76.)

With respect to the Vineyard South loan: Failing to address

27

the fact that the housing project was being built right on top of

28

the San Andreas Fault. (Id. ¶¶ 86, 88.)
3

1

With respect to the River East loan: Approving refinancing of

2

$25.4 million in senior debt with no primary repayment source of

3

the loan, and failing to clarify parking rights, which would

4

significantly affect the value of the property.

5

(Id. ¶¶ 92, 96.)

With respect to the AHCB loan: After requiring $10 million in

6

hard purchase contracts prior to funding, ignoring the very

7

condition they themselves implemented to mitigate risky pre-

8

approving funding of $3.8 million of the loan prior to the receipt

9

of any executed purchase contracts.

10

(Id. ¶ 101.)

With respect to the Las Vegas 215 loan: Approving the loan

11

based upon an allegedly imminent, but ultimately non-existent

12

“verbal agreement” for sale.

13

(Id. ¶ 110.)

With respect to the Las Vegas Mobil 18 loan: Approving the

14

loan based upon a hypothetical appraisal of the subject land only,

15

when the property was not vacant, but had a mobile home park

16

operating on the site, income from which was insufficient to

17

service the loan. (Id. ¶¶ 116, 117.)

18

With respect to the Acacia Investors loan: Failing to follow

19

up on the Phase I Site Assessment, which would have revealed severe

20

restrictions on development of the property due to the Endangered

21

Species Act, and failing to assess the impact on the project of the

22

owner having to build a necessary bridge and road. (Id. ¶¶ 130-

23

134.)

24

All Defendants have filed Motions to Dismiss.

All Defendants

25

contend that the action should be dismissed because the Complaint

26

depends on documents not attached to it, because it does not give

27

notice as to which Defendants are being sued for which acts as

28

Required by Federal Rule of Civil Procedure (“FRCP”) 8, and because
4

1

FRCP 10 requires that each loan be pleaded as a separate count.

2

The Director Defendants also argue that they are protected from

3

claims of breach of fiduciary duty by the business judgment rule

4

and the exculpatory clause in their contract; that the FDIC has not

5

stated a claim for gross negligence; and that the third claim for

6

relief (for breach of fiduciary duty) is duplicative of the gross

7

negligence claim.

8

protected by the business judgment rule from claims of breach of

9

fiduciary duty; that the FDIC has not stated a claim for gross

The Officer Defendants argue that they are also

10

negligence; and that the breach of fiduciary duty claim is

11

duplicative of the simple negligence claim.

12

the Motions of the both Director and Officer Defendants.

13

Lannan joins the Director Defendants’ Motion and also moves to

14

dismiss the negligence claim, arguing that he is protected by the

15

business judgment rule.

16

II. Legal Standard

Defendant Faigin joins
Defendant

17

A complaint will survive a motion to dismiss under Rule

18

12(b)(6) when it contains "sufficient factual matter, accepted as

19

true, to ‘state a claim to relief that is plausible on its face.’"

20

Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009) (quoting Bell Atl.

21

Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

22

Rule 12(b)(6) motion, a court must "accept as true all allegations

23

of material fact and must construe those facts in the light most

24

favorable to the plaintiff."

25

(9th Cir. 2000).

26

factual allegations," it must offer "more than an unadorned,

27

the-defendant-unlawfully-harmed-me accusation."

28

678.

When considering a

Resnick v. Hayes, 213 F.3d 443, 447

Although a complaint need not include "detailed

Iqbal, 556 U.S. at

Conclusory allegations or allegations that are no more than a
5

1

statement of a legal conclusion "are not entitled to the assumption

2

of truth."

3

offers "labels and conclusions," a "formulaic recitation of the

4

elements," or "naked assertions" will not be sufficient to state a

5

claim upon which relief can be granted.

6

internal quotation marks omitted).

7

Id. at 679.

In other words, a pleading that merely

Id. at 678 (citations and

"When there are well-pleaded factual allegations, a court

8

should assume their veracity and then determine whether they

9

plausibly give rise to an entitlement of relief." Id. at 664.

10

Plaintiffs must allege "plausible grounds to infer" that their

11

claims rise "above the speculative level."

12

555-56. "Determining whether a complaint states a plausible claim

13

for relief" is a "context-specific" task, requiring “the reviewing

14

court to draw on its judicial experience and common sense."

15

556 U.S. at 679.

16

III. Discussion

17
18
19

Twombly, 550 U.S. at

Iqbal,

A. 2006 FDIC Report of Examination (“2006 ROE”) and Bank Loan
Policy
The Director Defendants, joined by the Officer Defendants,

20

assert that the FDIC’s Complaint “hinges on its characterization

21

and selective excerpting of two documents: the Bank’s Loan Policy

22

and the 2006 ROE.”

23

to provide the 2006 ROE “pursuant to an appropriate protective

24

order but only on the condition that the Director Defendants not

25

challenge the FDIC-R’s withholding of the Loan Policy,” a condition

26

which was unacceptable to the Director Defendants.

27

n.10.)

28

Bank’s Loan Policy are essential to the Complaint, and they ask the

(Dir. Mot. at 7.)

They assert that FDIC agreed

(Dir. Mot. at 9

According to the Director Defendants, the 2006 ROE and

6

1

court to dismiss the Complaint or strike the portions of the

2

Complaint that rely on those documents.

3

Reply at 2.)

4

depends on but does not attach the two documents.

5

not have access to the documents, and therefore cannot attach them

6

to their Motion.

7

(Dir. Mot. at 10, Dir.

Defendants move to dismiss the Complaint because it
Defendants do

“Ordinarily, a motion to dismiss under Fed. R. Civ. P.

8

12(b)(6) is addressed to the four corners of the complaint without

9

consideration of other documents or facts outside of the

10

complaint.”

11

(E.D.Cal. 1994).

12

generally consider only allegations contained in the pleadings,

13

exhibits attached to the complaint, and matters properly subject to

14

judicial notice. However, in order to prevent plaintiffs from

15

surviving a Rule 12(b)(6) motion by deliberately omitting documents

16

upon which their claims are based, a court may consider a writing

17

referenced in a complaint but not explicitly incorporated therein

18

if the complaint relies on the document and its authenticity is

19

unquestioned.” Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir.

20

2007)(internal quotation marks and citations omitted).

21

Haskell v. Time, Inc., 857 F.Supp. 1392, 1396
“In ruling on a 12(b)(6) motion, a court may

The FDIC concedes that “written instruments may be considered

22

on a motion to dismiss when the allegations are essential to and

23

underlie the conduct at issue.” (Opp. to Dir. Mot. at 26 n.8.)

24

However, the FDIC asserts that the issue of the action is not false

25

or misleading statements in the documents but the conduct of the

26

directors.

27

Defendants’ actionable conduct. Put another way, even if the ROE

28

did not exist, the acts of the Director Defendants, as alleged in

“The ROE only serves to corroborate the Director

7

1

the complaint, would survive.” (Opp. to Dir. Mot. at 27.)

2

also points out that the ROE was not written at the time of the

3

approval of seven of the nine loans, and that therefore it cannot

4

be the basis for Defendants’ actionable conduct.

5

Mot. at 27.)

6

least 50 documents.

The FDIC

(Opp. to Dir.

Finally, the FDIC notes that the Complaint cites at
(Opp. to Dir. Mot. at 25.)

7

The court finds that although the Complaint frequently

8

references the 2006 ROE, the number of references alone does not

9

make that document essential to the Complaint.

The FDIC has

10

grounded its allegations in prima facie deficiencies in the loans

11

presented to the Director Defendants for approval.

12

deficiencies may be corroborated by the 2006 ROE but do not derive

13

from it.

14

of the Complaint, and Defendants’ lack of access to the documents

15

is not a basis on which to dismiss the Complaint or strike the

16

portions of the Complaint that refer to these documents.

17

references to the documents serve to corroborate Defendants’

18

actionable conduct.

Such

Therefore, the court must consider only the four corners

The

19

B. Rules 8 and 10

20

All Defendants argue that the Complaint is deficient because

21

it does not give notice as to which defendants are being sued for

22

doing what as to which loans, as required by Federal Rule of Civil

23

Procedure 8.

24

negligent acts at issue" and "does not indicate which defendants

25

supposedly committed which allegedly negligent acts with respect to

26

which loans."

27
28

It "gives little guidance as to the specific

(Off. Mot. at 28.)

The FDIC responds that it "has pled specific facts as to each
individual Defendant and their participation in the management of
8

1

the Bank and the approval of each loan" and that "To the extent

2

that the Complaint does plead collectively, the pleadings refer to

3

instances where Defendants acted together, failed to take

4

appropriate action together . . ., voted together, approved

5

documents and loans together, and each was equally complicit."

6

(Opp. to Off. Mot. at 22-23.)

7

The court agrees with the FDIC.

The Complaint indicates the

8

dates that each defendant served as an officer or director.

9

(Compl. ¶¶ 20-29.)

It also indicates which loans were approved

10

during each Defendant’s tenure and how each Defendant voted on the

11

loan. (Id. ¶ 57.)

12

deficiencies of each loan.

13

sufficiently alleges with respect to each defendant “the basic

14

questions: who, did what, to whom (or with whom), where, and when.”

15

Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1048 (9th Cir. 2008).

16

The Complaint also explains the specific
(Id. ¶¶ 60-138.)

The Complaint thus

The cases cited by Defendants involved allegations with far

17

less specificity than the allegations of this Complaint.

18

Fennell v. Gregory, 414 F. App'x 32, 35 (9th Cir. 2011), in which

19

the plaintiff alleged First and Fourteenth Amendment violations by

20

various Attorneys General, the Ninth Circuit held that “Fennell's

21

Complaint lacks factual particularity regarding the personal

22

involvement and conduct of the individual Attorneys General.”

23

Here, in contrast, there is sufficient factual particularity

24

regarding each Defendant and each allegedly deficient loan;

25

although the Complaint frequently pleads in the collective, that

26

collective is always defined and the action - approving the loan -

27

is always a genuinely collective action.

28

the Complaint fails “to say which wrongs were committed by which
9

In

This is not a case where

1

defendants.”

2

The Complaint states the wrongs, many of which were collective, and

3

identifies which Defendants were involved in committing each wrong.

4

Defendants thus have sufficient notice of the allegations against

5

them.

6

McHenry v. Renne, 84 F.3d 1172, 1179 (9th Cir. 1996).

The court also finds that Rule 10 does not require the FDIC to

7

plead each loan as a separate count.

Rule 10(b) states that “[i]f

8

doing so would promote clarity, each claim founded on a separate

9

transaction or occurrence - and each defense other than a denial -

10

must be stated in a separate count or defense.”

Fed. R. Civ. P.

11

10(b).

12

repetition of the claims for relief making the Complaint unwieldy

13

without promoting clarity.

Such a structure, here, would likely involve significant

14

C. Motion of Director Defendants

15

The Complaint makes claims for relief against the Director

16

Defendants for gross negligence and breach of fiduciary duty.

17
18

1. Business Judgment Rule
Director Defendants argue that they are protected from claims

19

of breach of fiduciary duty by the business judgment rule.

20

“California Corporations Code § 309 codifies California's business

21

judgment rule.

22

is to afford directors broad discretion in making corporate

23

decisions and to allow these decisions to be made without judicial

24

second-guessing in hindsight.”

25

1044 (9th Cir. 1999)(internal citations and quotation marks

26

omitted).1

The general purpose of the business judgment rule

FDIC v. Castetter, 184 F.3d 1040,

“The California business judgment rule is intended to

27
28

1

The relationship between the business judgment rule and §
(continued...)
10

1

protect a director from liability for a mistake in business

2

judgment which is made in good faith and in what he or she believes

3

to be the best interest of the corporation, where no conflict of

4

interest exists.”

5

omitted).

6

decisions are based on sound business judgment, and it prohibits

7

courts from interfering in business decisions made by the directors

8

in good faith and in the absence of a conflict of interest.”

Berg

9

& Berg Enterprises, LLC v. Boyle, 178 Cal.App.4th 1020, 1045.

The

10

rule does not protect a director “where there is a conflict of

11

interest, fraud, oppression, or corruption,” nor does it protect “a

12

director who has wholly abdicated his corporate responsibility,

13

closing his or her eyes to corporate affairs.”

14

at 1046.

15

Id. (internal citations and quotation marks

“The rule establishes a presumption that directors’

Castetter, 184 F.3d

The court finds that the FDIC has pleaded facts sufficient to

16

overcome the business judgment rule.

17

claim for the directors receiving improper personal benefits,

First, the FDIC has stated a

18
19
20
21
22
23
24
25
26
27
28

1

(...continued)
309 is somewhat complex. While a plain reading of § 309 does
suggest, as the FDIC argues, that a director may be held liable if
the director does not meet a standard of reasonable care, i.e. is
negligent, such a reading would mean that § 309 abolishes the
business judgment rule by making a director always liable for
negligence. See 1 Harold Marsh, Jr., et al., Marsh’s California
Corporation Law 11-26-11-27 (4th Ed. 2012). California courts
appear to agree that § 309 codified rather than abolished the
business judgment rule. See, e.g., Gaillard v. Natomas Co., 208
Cal.App.3d 1250, 1264 (1989)(citations omitted)(“Section 309
codifies California’s business judgment rule. Section 309
incorporates the concept of a director’s immunity from liability
for an honest mistake of business judgment with the concept of a
director’s obligation of reasonable diligence in the performance of
his or her duties.”) Thus, the business judgment rule applies when
the director fails to meet a standard of reasonable care (i.e., is
negligent), but not “where there is a conflict of interest, fraud,
oppression, or corruption” or where a director has “wholly
abdicated his corporate responsibility.”
11

1

which, if true, may deprive them of the protection of the business

2

judgment rule.

3

Additionally, the FDIC has stated a claim for the directors’

4

abdication of corporate responsibility.

Although § 309 allows

5

directors to “rely on information, opinions, reports or statements,

6

including financial statements and other financial data” provided

7

by certain authorized parties, this reliance is authorized only “so

8

long as, in any such case, the director acts in good faith, after

9

reasonable inquiry when the need therefor is indicated by the

10

circumstance and without knowledge that would cause such reliance

11

to be unwarranted.”

12

Cal. Corp. Code § 309.

Here, the FDIC alleges that the directors approved loans so

13

facially deficient that they made reliance upon them unwarranted.

14

See, e.g., Compl. ¶ 61 (“The FBBH Credit Memo . . . showed that the

15

Approving Dependants relied on outdated corporate financials, which

16

were dated as of December 31, 2004, outdated financials of the

17

principal of the borrower, which were dated as of September 2005,

18

and an outdated 2004 appraisal.”); ¶ 68 (“at the time of the CTB

19

deal, the Principals created a new entity to buy the land,

20

essentially from themselves, at a price higher than both the

21

appraisal’s ‘as is’ value and prospective value for finished lots.

22

This fact, which was contained in the CTB Credit Memo given to the

23

Approving Defendants, and altered the Approving Defendants that the

24

Principals ‘flipped’ the property at an inflated sales price, was

25

not addressed by the Approving Defendants, and no further due

26

diligence on this issue was requested by the Approving Defendants

27

or conducted by FBBH underwriters.”); and ¶ 85 (“The FBBH Credit

28

Memo, given to the Approving Defendants, stated that construction
12

1

was 60% complete but that 72% of the loan proceeds had been

2

disbursed, while the CTB Due Diligence Synopsis of August 27, 2006,

3

which Defendants received, described construction as 90%

4

complete.”).

5

abdication of corporate responsibility.

6
7

These allegations, taken as true, state a claim for

The court finds that the FDIC has pleaded facts sufficient to
overcome the business judgment rule.

8

2. Exculpatory Clause

9

Defendants also argue that they are not liable for breach of

10

fiduciary duty because FBBH’s Articles of Incorporation contained

11

an exculpatory clause, under which the "liability of the directors

12

of the Corporation for monetary damages shall be eliminated to the

13

fullest extent permissible under California law."

14

Judicial Notice in Support of Dir. Mot., Exh. A, ("Exculpatory

15

Clause").)

16

"may not eliminate or limit the liability of directors" in certain

17

situations, most relevant here,

(Request for

However, under California law, such exculpatory clauses

18

(ii) for acts or omissions that a director believes to be

19

contrary to the best interests of the corporation or its

20

shareholders or that involve the absence of good faith on

21

the part of the director,

22

(iii) for any transaction from which a director derived

23

an improper personal benefit,

24

(iv) for acts or omissions that show a reckless disregard

25

for the director's duty to the corporation or its

26

shareholders in circumstances in which the director was

27

aware, or should have been aware, in the ordinary course

28

of performing a director's duties, of a risk of serious
13

1

injury to the corporation or its shareholders,

2

(v) for acts or omissions that constitute an unexcused

3

pattern of inattention that amounts to an abdication of

4

the director's duty to the corporation or its

5

shareholders.

6
7

Cal. Corp. Code § 204(a)(10).
The FDIC maintains that the Complaint alleges facts sufficient

8

to trigger the § 204 exceptions and render the Exculpatory Clause

9

invalid.

10

The Complaint alleges that Director Defendants received an

11

improper personal benefit in the Complaint in, for instance, ¶ 9

12

("By approving the Loss Loans despite their myriad obvious

13

deficiencies, the Defendants lined their own pockets when FBBH

14

dividends, boosted by false profits on large problematic loans that

15

were unlikely to be repaid, were upstreamed to the Bank's parent

16

company -- of which numerous Defendants were shareholders."); ¶ 37

17

("During the 2006 examination, Faigin informed examiners that he

18

would recommend that the Bank cease making cash dividend payments

19

to BHBC for 2007, a recommendation with which the examiners agreed.

20

In spite of this, the directors approved quarterly dividends

21

totally $9.6 million in 2007, which amounted to 563.38% of the

22

Bank's net operating income.

23

shareholders in BHBC, collectively owning approximately 23% of

24

outstanding shares."); and ¶ 53 ("The CTB loans were part of a

25

$117.1 million package of eight loan participations with CTB that

26

Rosa, who was CTB's CCO at the time, had referred to Lannan.

27

Lannan voted to approve the purchase of the CTB loan

28

participations, despite the fact that he stood to benefit

Several voting directors were large

14

1

personally from the approval of the loans.

In fact, Lannan

2

received a $75,000 referral fee from the Bank for referring the

3

participations to the Bank.

4

Board approved the CTB participations.").

FBBH hired Rosa immediately after the

5

The court finds that the FDIC has stated a claim under (iii)

6

with the allegations that the Directors approved loans from which

7

they stood personally to benefit and were shareholders in companies

8

that profited from the allegedly facially deficient loans.

9

Director Defendants argue that none of these actions indicate

The

10

improper personal benefit.

11

be the case, the FDIC has stated a claim for such an improper

12

benefit.

13

finder.

14

While that may ultimately turn out to

Whether that claim holds up is a question for the fact-

The court also finds that the FDIC has alleged facts

15

sufficient to trigger (iv) and (v).2

16

amounting to “reckless disregard” under (iv) in allegations such as

17

¶ 2 (“Defendants recklessly implemented an unsustainable business

18

model pursuing rapid asset growth concentrated in large high-risk

19

loans without having adequate loan underwriting policies and

20

practices to manage the risk.”), and ¶¶ 36-38 (failing to address

21

serious criticism of the Bank’s lending and funding policies

22

leveled in the 2006 ROE), and ¶¶ 61, 63, 64, 72, 76-79

23

(disregarding clear deficiencies in Credit Memos regarding various

24

loans).

25
26
27
28

FDIC has pleaded facts

These same facts state a claim for an “unexcused pattern

2

The parties have not provided, and the court has not
discovered, any California or federal interpretations of “reckless
disregard” or “unexcused pattern of inattention.” These two
exceptions to the statute allowing an exculpatory clause are
exclusive to California and not found in the Delaware statute that
served as a model or in comparable legislation of any other state.
Marsh’s Cal. Corp. Law, 4th Ed.§ 11-04 at 11-44.1.
15

1
2

of inattention that amounts to an abdication of duty.”3
For these reasons, the court finds that the FDIC has pleaded

3

sufficient facts to establish that the Exculpatory Clause may be

4

bypassed under § 204.
3. Second Claim for Gross Negligence

5
6

In its second claim for relief, the FDIC seeks to hold the

7

Director Defendants personally liable for money damages under

8

Section 11(k) of the Federal Deposit Insurance Act, as amended by

9

the Financial Institutions Reform, Recovery, and Enforcement Act of

10

1989 (“FIRREA”), 12 U.S.C. § 1821(k).

FIRREA section 1821(k) makes

11

directors and officers of banks liable for gross negligence.

12

Under FIRREA, "state law sets the standard of conduct as long as

13

the state standard (such as simple negligence) is stricter than

14

that of the federal statute."

15

216 (1997).

16

Director Defendants would be liable if they breached the applicable

17

standard of care of gross negligence.

18

532, 539-40 (“Section 1821(k) preempts these state laws to the

19

extent that they insulate officers and directors from liability for

20

gross negligence, because such laws directly conflict with its

Atherton v. F.D.I.C., 519 U.S. 213,

Even if the Exculpatory Clause applies, under FIRREA

FDIC v. McSweeney, 976 F.2d

21
22
23
24
25
26
27
28

3

Defendants assert that this requires a “total abdication” of
duty, but the case they cite, Berg & Berg Enterprises, LLC v.
Boyle, does not support that proposition. The Berg court noted
that “Berg suggests that it has pleaded total abdication by the
directors of their corporate responsibilities” but found that “the
mere fact of the assignment [an alternative to liquidation in
bankruptcy] and the failure by the directors to pursue Berg's
bankruptcy reorganization plan or some other unidentified
alternative do not, as a matter of fact or law, establish
abdication of duty.” Berg & Berg Enterprises, LLC v. Boyle, 178
Cal. App. 4th 1020, 1047 (2009). In other words, the court did not
require Berg to plead a “total abdication of duty;” it found
instead that the facts pleaded by Berg did not amount to an
abdication of duty, despite Berg’s assertion to the contrary.
16

1

grant of authority.”).

"'Gross negligence' long has been defined

2

in California and other jurisdictions as either a 'want of even

3

scant care' or 'an extreme departure from the ordinary standard of

4

conduct.'"

5

747, 754 (2007)(citation omitted).

City of Santa Barbara v. Superior Court, 41 Cal. 4th

The FDIC summarizes its allegations of gross negligence as

6
7

follows: "The Complaint contains allegations that . . .

8

[Defendants] approved nine facially deficient loans that bore an

9

unusually high risk of not being repaid, permitted loans to be made

10

without proper analysis of the borrowers' ability to repay, failed

11

to inform themselves about the risk posed by the loans prior to

12

approval, approved loans with terms inconsistent with the Bank's

13

Loan Policy, and failed to ensure the loans were underwritten in

14

accordance with sound banking principles."

15

21.)

16

(Opp. to Dir. Mot. at

The Director Defendants maintain that they acted with due care

17

by "follow[ing] [the Bank's] established process in approving the

18

nine loans at issue, which involved review of substantial

19

information" and receiving Bank credit memoranda with "substantial

20

information on which the Director Defendants based their approvals

21

of the loans."

22

not have a "duty of inquiry" to independently verify every aspect

23

of each loan.

24

Director Defendants argue, the FDIC has failed to state a claim not

25

only for gross negligence but for simple negligence.

26

(Dir. Mot. at 12-13.)

They maintain that they did

See Castetter, 184 F.3d at 1045.

As a result,

California Corporations Code § 309 sets the standard of care

27

for a director and states that "a director shall be entitled to

28

rely on information, opinions, reports or statements [prepared by
17

1

certain parties] . . . so long as . . . the director acts in good

2

faith, after reasonable inquiry when the need therefor is indicated

3

by the circumstances and without knowledge that would cause such

4

reliance to be unwarranted."

5

loans were facially deficient, the Directors had a duty to

6

investigate.

7

not facially deficient and that some of the purported deficiencies

8

are based in documents that the FDIC-R does not allege were in the

9

possession of the Directors.

The FDIC argues that because the

The Director Defendants respond that the loans were

(Dir. Mot. at 16.)

They argue,

10

further, that the allegations in the Complaint amount to merely

11

"substantive disagreement" with the decision to issue the loans,

12

rather than gross negligence in the process of making loans.

13

If the documents provided to the Director Defendants are as

14

facially deficient as alleged in the Complaint, those documents

15

would trigger a duty to investigate because reliance upon them

16

would be unwarranted.

17

considered as a failure of the Director Defendants’ process of

18

decisionmaking rather than the substance of the decisions.

19

give deference to directors' decisions reached by a proper process,

20

and do not apply an objective reasonableness test in such a case to

21

examine the wisdom of the decision itself.”

22

Mut. Auto. Ins. Co., 166 Cal. App. 4th 1438, 1493 (2008)(internal

23

quotation marks, citations, and alterations omitted).

24

“plaintiffs offered expert testimony to the effect that the Board's

25

decisions on dividends, rate reductions, and the surplus were wrong

26

on the merits” and the court found that “plaintiffs did not make a

27

showing that the Board's decisionmaking process was tainted by

28

fraud, oppression, illegality, or a similar purpose.”

Such misplaced reliance would properly be

18

“Courts

Hill v. State Farm

In Hill, the

Id. at 1494.

1

Instead, it “merely questions the decisions which the directors

2

made. This is exactly the type of second-guessing which the

3

business judgment rule was designed to preclude.”

4

quotation marks, citation, and alterations omitted).

5

contrast, the FDIC alleges not merely that the Director Defendants

6

made unwise decisions, but that their process was flawed insofar as

7

the alleged facial deficiencies in the loans did not trigger

8

further investigation as they should have.

9

that the loans were approved in violation of the Bank’s Loan

10

Policy, which further indicates that the allegations concern

11

decisionmaking procedures rather than substance.

Id.

(internal

Here, in

The FDIC also alleges

Director Defendants assert that the decision-making process

12
13

alleged in the Complaint demonstrates at least “scant care” because

14

FBBH

15

issue and involved reviewing substantial information.

16

that the allegations do not rebut the “‘prima facie showing of good

17

faith and reasonable investigation [that] is established when a

18

majority of the board is comprised of outside directors and the

19

board’ has received the advice of independent consultants.”

20

Castetter, 184 F.3d at 1045 (quoting Katz v. Chevron Corp., 22 Cal.

21

App. 4th 1352, 1368-69 (1994)).

22

true, the allegations that the Director Defendants approved and

23

failed reasonably to investigate facially deficient loans in

24

violation of FBBH’s Loan Policy and sound banking principles are

25

sufficient to rebut the presumption of good faith and reasonable

26

investigation.

27
28

followed its established process in approving the loans at
They argue

The court finds that, taken as

Director Defendants also argue that the FDIC has not pleaded a
causal connection between the alleged deficiencies and violations
19

1

and the FDIC’s losses.

2

that “[a]s a direct and proximate result of these Defendants’ gross

3

negligence, the FDIC suffered damages in an amount to be proven at

4

trial, in excess of $100.6 million.”

5
6

The court disagrees.

The Complaint alleges

(Compl. ¶ 152.)

For these reasons, the court finds that, the FDIC has stated a
claim for gross negligence.
4. Duplication of Claims

7
8

The Director Defendants assert that the third claim for relief

9

(regarding breach of fiduciary duty) should be dismissed because it

10

is "entirely duplicative" of the gross negligence claim.

11

Mot. at 30.)

12

nine loans, the same losses allegedly resulting from the approval

13

of those loans, and the same duty of care to the Bank."

14

(Dir.

"Both claims are based on the approval of the same

(Id.)

Under the Federal Rules, "[a] party may set out 2 or more

15

statements of a claim or defense alternatively or hypothetically,

16

either in a single count or defense or in separate ones.

17

party makes alternative statements, the pleading is sufficient if

18

any one of them is sufficient."

19

embodies a "liberal pleading policy."

20

1016, 1019 (9th Cir. 1985).

21

If a

Fed. R. Civ. P. 8(d)(2). This rule
Molsbergen v. U.S., 757 F.2d

The Director Defendants cite Swartz v. KPMG, LLP in support of

22

the proposition that duplicative claims that add nothing should be

23

dismissed.

24

held that a claim seeking "a declaration of defendants' liability

25

for damages sought for his other causes of action" was "merely

26

duplicative."

27

not only the repetition of the same facts and same plea for

28

damages, but rather the derivative nature of the cause of action,

476 F.3d 756 (9th Cir. 2007).

Id. at 766.

There, the Ninth Circuit

In that case, however, the issue was

20

1

which depends on the other causes of action to succeed at all.

2

Here, the claims regarding gross negligence and breach of

3

fiduciary duty share the same underlying facts, but either could

4

survive on its own.

5

prejudice to them, since the Complaint does not seek a double

6

recovery.

7

other would constrict the "liberal pleading policy" of Rule 8 which

8

does not put any such limits on pleading in the alternative.

9
10
11
12

Director Defendants have not established any

To find that the FDIC must limit itself to one or the

D. Motion of Officer Defendants
1. Whether the BJR Applies to Officer Defendants
a. Choice of Law
In determining the choice of law for actions against a

13

corporation, California courts have used the “internal affairs

14

doctrine.” State Farm Mut. Auto. Ins. Co. v. Superior Court, 114

15

Cal. App. 4th 434, 434, 442-44, 446 (2003); Vaughn v. LJ Int’l

16

Inc., 174 Cal. App. 4th 213, 223 (2009). “The internal affairs

17

doctrine is a conflict of laws principle which recognizes that only

18

one State should have the authority to regulate a corporation’s

19

internal affairs.”

20

The Supreme Court has stated that courts normally “look to the

21

State of a business’ incorporation” to decide which law applies.

22

Atherton v. FDIC, 519 U.S. 213, 224 (1997). Atherton further

23

suggested that the state in which the “bank has its main office or

24

maintains its principal place of business” can be used as the state

25

of incorporation. Id. (citations omitted).

26

Edgar v. MITE Corp., 457 U.S. 624, 645 (1982).

Here, First Bank of Beverly Hills (“FBBH”) has been

27

incorporated and has its principle place of business in California.

28

(Request for Judicial Notice (“RJN”), Dkt. No. 36-1, Ex. A
21

1

(“Articles of Incorporation”).)

2

of Beverly Hills Bancorp, Inc. (“Bancorp”).

3

incorporated in Delaware. Defendant Officers argue that Bancorp and

4

Bank are so intertwined that Delaware law should apply. (Reply at

5

4-5.) They point out that Bancorp provided financial and managerial

6

strength for Bank and that several of Bank’s officers and directors

7

were shareholders of Bancorp. (Id.)

8

Bancorp being incorporated in Delaware, Bancorp’s shareholders

9

expressly determined that Delaware laws would govern. (Id.)

10

FBBH is a wholly owned subsidiary
Bancorp is

Further, they argue that by

The court rejects this line of reasoning.

First, only FBBH,

11

not Bancorp, is not a party to this action.

12

have cited no case where a court has applied the law from the state

13

of a parent company’s incorporation without that parent company

14

being a party to the action.

15

its principal place of business.

16

incorporation indicate that California law governs areas such as

17

liability and indemnification of agents. (Id.)

18

affairs doctrine, the court finds that California law applies.

19

FDIC v. Van Dellen, CV 10-4915 DSF (SHx), 2012 WL 4815159 (C.D.

20

Cal. Oct. 5, 2012).

23

Second, FBBH selected California as
(RJN, Ex. A.)

Its articles of

Under the internal
See

b. Whether the business judgment rule Extends to

21
22

Defendant Officers

Officers
The Officer Defendants argue that even if California law

24

applies, corporate officers are shielded from liability by the

25

business judgment rule.

26

should apply the common law business judgment rule to officers as

27

well as directors.

28

See, e.g., Gaillard v. Natomas Co., 208 Cal. App. 3d 1250, 1265

Officer Defendants argue that the court

This claim is not supported by California law.

22

1

(1989) (holding that because the directors were “acting as officer

2

employees of the corporation . . . the business judgment rule

3

therefore should not apply.”); FDIC v. Van Dellen, 2012 WL 4815159,

4

at *6 (holding that “California courts have not extended the rule

5

to officers and this [c]ourt declines to do so.”).1

6

by Officer Defendants in support of the extension of the business

7

judgment rule to officers, concerned a director-officer who was

8

protected by the business judgment rule, but the court focused on

9

her status as a director rather than her dual status as director-

10

officer. See, e.g., Biren v. Equality Emergency Medical Group, 102

11

Cal. App. 4th 125, 138 (2002)("[Biren] was the director responsible

12

for billing matters.

13

change billing companies to protect the corporation. The trial

14

court could reasonably infer that she mistakenly believed it was in

15

the best interest of the corporation that she act with alacrity

16

because the other directors could not.")

17

reasoning of Judge Wright in FDIC v. Perry,CV-11-5561 ODW (MRWx),

18

2012 WL 589569 (C.D. Cal. 2012), which analyzes California court

19

decisions, statutory language, and legislative history and comes to

20

the conclusion that "[i]n light of the apparent lack of authority

21

and the California legislature's expressed intent not to include

22

corporate officers in codifying common law [business judgment

23

rule], this Court holds that [the business judgment rule] does not

Biren, cited

She believed it was her duty to promptly

The court adopts the

24
25
26
27
28

Officer Defendants rely on Biren v. Equal. Emergency Med. Grp.,
102 Cal. App. 4th 125 (2002), which held that the business judgment
rule protected an officer-director acting in her capacity as the
company’s chief executive officer. (Off. Mot. at 13:3-5.) However,
the Biren court's decision focuses on the protections afforded to
Biren by the BJR based on her status as a director. “[T]he
[business judgment] rule ... protect[s] well-meaning directors who
are misinformed, misguided, and honestly mistaken.” Id. at 137.
1

23

1

protect officers' corporate decisions."

2

Id. at *4.

2. Gross Negligence
In the alternative, the FDIC brings a claim for gross

3
4

negligence under FIRREA § 1821(k) against the Officer Defendants.

5

The court agrees, and the FDIC does not dispute, that the FDIC may

6

bring either the negligence or the gross negligence claim against

7

Officer Defendants, not both.

8

law provides the standard of liability for suits under FIRREA §

9

1821(k) when, as here, the state law standard is more rigorous than

The Supreme Court held that state

10

gross negligence.

See Atherton, 519 U.S. at 216 ("[S]tate law sets

11

the standard of conduct as long as the state standard (such as

12

simple negligence) is stricter than that of the federal statute.

13

The federal statute nonetheless sets a 'gross negligence' floor,

14

which applies as a substitute for state standards that are more

15

relaxed.").

16

shielded by the business judgment rule, they are subject to

17

liability under FIRREA on a simple negligence theory. They cannot

18

also be subject to liability under FIRREA on a gross negligence

19

theory when a stricter state standard applies.

20

3. Breach of Fiduciary Duty

Since under state law the Officer Defendants are not

The Officer Defendants next argue that the court should strike

21
22

the breach of fiduciary duty claim because it is entirely

23

duplicative of the simple negligence claim.

24

identical to the one made by the Director Defendants, and the court

25

rejects it for the same reasons.

26

that plaintiffs must be allowed to plead their claims in the

27

alternative.

28

///

This argument is

Liberal pleading standards mean

24

1

E. Motion of Defendant Faigin

2

Defendant Faigin joins the Motions of both the Director

3

Defendants and the Officer Defendants.

The court’s conclusions

4

with respect to those Motions apply equally to Defendant Faigin’s

5

Motion.

6

F. Motion of Defendant Lannan

7

Defendant Lannan was a director of the Bank from 2003 to 2008.

8

Eric Rosa, employed by China Trust Bank at the time, referred the

9

CTB loans to Lannan.

(Compl. ¶¶ 52, 53, 58.)

Lannan voted to

10

approve these loans, and all of the nine loans at issue.

11

¶¶ 29, 57.)

12

of $75,000 for the four CTB participation loans.

13

When regulators learned that Lannan had voted to approve the CTB

14

participation loans while receiving a referral fee, they required

15

the Board to ratify the purchase without Lannan.

16

Faigin, Amster, Glennon, Kanner, King, and Kellogg voted in favor

17

of ratification a year after the original approval.

18

(Compl.

The Complaint alleges that he received a referral fee
(Compl. ¶ 9.)

Defendants

(Compl. ¶ 58.)

Lannan joins the Outside Director Defendants’ Motion.

19

Additionally, he moves to dismiss the first claim for relief which

20

alleges that he was negligent in voting on loans from the China

21

Trust Bank and then receiving a referral fee of $75,000.

22

the other directors are protected by the business judgment rule for

23

negligence, the FDIC alleges that Lannan had a conflict of interest

24

and therefore is not protected by the business judgment rule.

25

Lannan asserts that his vote was consistent with California

26

Corporations Code § 310 and is therefore protected by the business

27

judgment rule of § 309.

28

relief for breach of fiduciary duty should be dismissed.

Whereas

He also asserts that the third claim for

25

1

California Corporations Code § 309 codifies a director's

2

standard of care.

Under that rule, a contract is not "void or

3

voidable" because a director has a "material financial interest" in

4

the transaction if the following conditions are met:

5

(1) The material facts as to the transaction and as to

6

such director’s interest are fully disclosed or known to

7

the shareholders and such contract or transaction is

8

approved by the shareholders (Section 153) in good faith,

9

with the shares owned by the interested director or

10

directors not being entitled to vote thereon, or

11

(2) The material facts as to the transaction and as to

12

such director's interest are fully disclosed or known to

13

the board or committee, and the board or committee

14

authorizes, approves or ratifies the contract or

15

transaction in good faith by a vote sufficient without

16

counting the vote of the interested director or directors

17

and the contract or transaction is just and reasonable as

18

to the corporation at the time it is authorized, approved

19

or ratified, or

20

(3) As to contracts or transactions not approved as

21

provided in paragraph (1) or (2) of this subdivision, the

22

person asserting the validity of the contract or

23

transaction sustains the burden of proving that the

24

contract or transaction was just and reasonable as to the

25

corporation at the time it was authorized, approved or

26

ratified.

27

Cal. Corp. Code § 310.

28
26

Under § 309, a director is protected by the business judgment

1
2

rule when he or she performs the duties of a director "in good

3

faith, in a manner such director believes to be in the best

4

interests of the corporation and its shareholders and with such

5

care, including reasonable inquiry, as an ordinarily prudent person

6

in a like position would use under similar circumstances."

7

Corp. Code § 309.

8

for a mistake in business judgment which is made in good faith and

9

in what he or she believes to be the best interests of the

Cal.

Under California law, "a director is not liable

10

corporation, where no conflict of interest exists." Gaillard, 208

11

Cal.App.3d at 1263 (1989). "The business judgment rule does not

12

shield actions taken without reasonable inquiry, with improper

13

motives, or as a result of a conflict of interest.”

14

Booth, 185 Cal.App.4th at 728 (2010).

Kruss v.

The FDIC argues that it is undisputed that a conflict of

15
16

interest exists, since Lannan does not deny that he referred the

17

four loans and received a fee for them.

18

because he complied with § 310 and because the referral fee was not

19

improper, the prospect and receipt of "a referral fee for these

20

loans did not impose any legally independent obligations on him to

21

investigate these loans or refrain from voting on them."

22

Mot. at 10.)

23

judgment rule as the other Director Defendants.

24

that his compliance with § 310 means only that the contract is not

25

voidable, not that he did not have a conflict of interest.

Lannan contends that

(Lannan

He claims the same protections of the business
The FDIC counters

In other words, the parties dispute whether compliance with §

26
27

310 annuls what would otherwise be a conflict of interest under §

28

309.

The court finds that as a matter of policy a director with a
27

1

personal interest in the transaction should not benefit from the

2

business judgment rule.

3

to protect disinterested directors making their best efforts at

4

business decisions.

5

transaction, even if it is allowed because of his compliance with §

6

310, he is nonetheless not a disinterested director in the case of

7

that particular transaction.

8

of a conflict of interest so as to create a valid contract, but it

9

does not neutralize a conflict of interest for all purposes.

The aim of the business judgment rule is

When a director has a personal stake in the

Section 310 neutralizes the effects

"The

10

satisfaction of section 310's requirements . . . does not render

11

such contract immune from attack on other grounds, such as

12

corporate waste, and does not render the directors immune from

13

liability for breach of fiduciary duty as a result of their

14

approval of such contract."

15

these reasons, the court finds that Lannan’s compliance with § 310

16

does not result in the protection of the business judgment rule

17

under § 309.

Gaillard, 208 Cal.App.3d at 1273.

18

The court DENIES Lannan’s Motion.

19

IV. Conclusion

20

For

For the reasons stated above, the court DENIES all of the

21
22

Motions to Dismiss.
IT IS SO ORDERED.

23
24
25

Dated: July 8, 2013

26

DEAN D. PREGERSON

27

United States District Judge

28
28