FEDERAL DEPOSIT INSURANCE CORPORATION v. BRUDNICKI et al

Filing 10

ORDER granting in part and denying in part 3 MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM. Count I is DISMISSED with prejudice as to all Defendants except Defendant Powell. Count II remains. Defendants motion to strike allegations of ordinary negligence is DENIED. Defendants motion for more definite statement is GRANTED as to causation. The FDIC shall file an Amended Complaint including the more definite statement regarding causation not later than 5/29/2013. Signed by JUDGE RICHARD SMOAK on 5/15/2013. (jem)

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IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF FLORIDA
PANAMA CITY DIVISION
FEDERAL DEPOSIT INSURANCE CORPORATION,
Plaintiff,
v.

CASE NO. 5:12-cv-398-RS-GRJ

GREG M. BRUDNICKI, et al.,
Defendants.
_________________________________________/
ORDER
Before me are Defendants’ Motion to Dismiss, Strike, or for More Definite
Statement (Doc. 3) and Plaintiff’s Response (Doc. 5).
Standard of Review
To overcome a motion to dismiss, a plaintiff must allege sufficient facts to state a
claim for relief that is plausible on its face. See Bell Atlantic Corp. v. Twombly, 550 U.S.
544 (2007). Granting a motion to dismiss is appropriate if it is clear that no relief could
be granted under any set of facts that could be proven consistent with the allegations of
the complaint. Hishon v. King & Spalding, 467 U.S. 69, 104 S. Ct. 2229, 2232 (1984). I
must construe all allegations in the complaint as true and in the light most favorable to
the plaintiff. Shands Teaching Hosp. and Clinics, Inc. v. Beech Street Corp., 208 F.3d
1308, 1310 (11th Cir. 2000) (citing Lowell v. American Cyanamid Co., 177 F.3d 1228,
1229 (11th Cir. 1999)).

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While Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain
statement of the claim showing that the pleader is entitled to relief,” a complaint
consisting labels and conclusions or a formulaic recitation of the elements of a cause of
action is subject to dismissal. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing
Twombly, 550 U.S. at 555).
Background
Plaintiff Federal Deposit Insurance Corporation (“FDIC”) filed a two-count
complaint against eight former directors of Peoples First Community Bank (“Peoples
First”) for over $40 million in damages for alleged malfeasance of their duties as
directors in approving eleven specific commercial real estate credit transactions. In its
capacity as receiver for Peoples First, the FDIC seeks to recover for negligence under
Florida law (Count I) and gross negligence under the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (“FIRREA”) (Count II). The FDIC alleges that
Defendants approved the credit transactions in violation of bank and regulatory policies
without sufficient underwriting, appraisals, and valuations by approving credit for
borrowers and guarantors who had demonstrable inability to repay. Defendants seek
dismissal of the complaint, or alternatively, the striking of all allegations of ordinary
negligence and requiring the FDIC to provide a more definite statement concerning ten
out of the eleven loans at issue and each Defendant’s role in each transaction.
Analysis
Count I – Ordinary Negligence

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Count I is based on § 607.0830(1) of the Florida Statutes, which imposes an
ordinary negligence standard of care on corporate directors. Specifically, it provides that
(1) A director shall discharge his or her duties as a director, including his
or her duties as a member of a committee:
(a)

In good faith;

(b) With the care an ordinarily prudent person in a like position would
exercise under similar circumstances; and
(c) In a manner he or she reasonably believes to be in the best interests of
the corporation.
The FDIC relies on this section to impose liability on Defendants. However, Defendants
point to the very next section, which provides that directors are not personally liable for
their votes, decisions, or failures to act except in limited circumstances. The only
circumstance relevant to this action provides that a director is not liable unless he exhibits
“conscious disregard for the best interest of the corporation, or willful misconduct.” Fla.
Stat. § 607.0831(1)(b)(4). As our sister court recently held, clearly this statute conditions
director liability on something beyond ordinary negligence, so Count I must be dismissed
as to all Defendants except Defendant Raymond Powell. See F.D.I.C. v. Price, 2:12-cv148-FTM-99DNF, 2012 WL 3242316, at *2 (M.D. Fla. Aug. 8, 2012).
In addition to serving as a board member, Defendant Powell served as Peoples
First’s President and Chief Executive Officer from 1991 until its failure. The FDIC
argues that he is not entitled to the protection of section 607.0831 because that section
insulates only corporate directors, not officers. The language of the statute would seem
to make it clear that it only applies to directors. Defendant Powell points out that there is

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nothing in the statute that suggests that a director who is also in officer should be
deprived if its protection. Interpreting the statute during its infancy,1 one federal district
court found “that the Florida statute insulates corporate directors and officers . . . .”
F.D.I.C. v. Gonzalez-Gorrondona, 833 F. Supp. 1545, 1556 (S.D. Fla. 1993). Also, in a
case where the statute did not apply, the Eleventh Circuit stated in a footnote that “[t]he
Florida legislature passed Fla. Stat. § 607.1645 (1987), presently codified at Fla. Stat. §§
607.0830, 607.0831 (1989), to afford corporate officers and directors greater protection
from liability.” F.D.I.C. v. Stahl, 89 F.3d 1510, 1516 (11th Cir. 1996).
However, I find that the statute does not afford the same protections to officers as
it does to directors. In the very same act that created section 607.1645, the precursor to
section 607.0831, the legislature added a section with parallel language to the statute
allowing corporations to indemnify officers, directors, employees, and agents. To this
section the legislature added, “indemnification or advancement of expenses shall not be
made to or on behalf of any director, officer, employee, or agent if a judgment or other
final adjudication establishes that his or her actions, or omissions to act, were material to
the cause of action so adjudicated and constitute. . . [w]illful misconduct or a conscious
disregard for the best interests of the corporation.” Fla. Stat. §607.014(7)(d) (1987),
now codified at Fla. Stat. §607.0850(7)(d) (1989) (emphasis added). The standard to
impose director liability was, and remains, “conscious disregard for the best interest of
the corporation, or willful misconduct.” Fla. Stat. § 607.0831(1)(b)(4) (emphasis
1

The statute became effective July 1, 1987. Prior to that time, directors were liable for ordinary negligence.
F.D.I.C. v. Gonzalez-Gorrondona, 833 F. Supp. 1545, 1555 (S.D. Fla. 1993).

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added). These two sections, added by the same legislative act, are clearly related and
plainly show that the legislators intentionally differentiated between directors, officers,
employees, and agents. Directors can only be liable if there is willful misconduct or
conscious disregard for the best interests of the corporation, and the corporation cannot
indemnify them in that situation. Officers, employees, and agents may be liable for
something less than conscious disregard for the best interests of the corporation or willful
misconduct, and can be indemnified by the corporation in that situation. This
differentiation is highlighted by the reasoning behind heightening the standard for
director liability:
The Legislature . . . finds that the service of qualified person on the
governing boards of corporations . . . is in the public interest and that within
reasonable limitations, such persons should be permitted to perform without
undue concern for the possibility of litigation arising from the discharge of
their duties as policy makers. The Legislature further finds that the case
law of the state does not adequately delineate the liability of those serving
on governing boards, and that such delineation through the clarification of
the appropriate standard of care due an individual and a corporation by a
member of a governing board is essential in encouraging the continued
service of qualified persons on such governing boards.
1987 Fla. Laws 1686. The Legislature evinced no concerns about finding qualified
people to serve as presidents and chief executive officers of corporations, which are

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substantially different responsibilities than serving on a board of directors while not a
corporate officer. Thus, Defendant Powell is not entitled to the protection of section
607.0831 in his capacity as an officer.
Count II – Gross Negligence
Defendants argue that Count II must be dismissed with leave to amend to allege
only gross negligence. Defendants argue that throughout the Complaint, the FDIC “has
attempted to impose a duty of ordinary care” on them. Doc.3 at 22. They argue that
Count II itself alleges a breach of the duty of ordinary care. However, what paragraph 65
of the Complaint actually alleges is that Defendants owed a duty of ordinary care; it does
not allege a breach of that duty. In any case, it is not the FDIC’s privilege to decide what
duties were owed by Defendants. For Count II, Defendants will only be held liable if
they were grossly negligent. I will apply the gross negligence standard in any dispositive
motions, and the jury will receive instructions regarding the gross negligence standard.
Defendants need not worry that they will be held to a standard of ordinary negligence.
Defendants next argue that Count II should be dismissed because the FDIC
omitted from the Complaint factual allegations about ten of the eleven loans at issue. In
the Complaint, the FDIC describes in detail the second transaction at issue, called the
“PQH Transaction.” Doc. 1 ¶¶ 45-48. Peoples First approved a $12.2 million loan to
provide funds for development of 239 single-family homes in Polk County, Florida, with
repayment to be made primarily from the proceeds of homes sales. The FDIC details
why the transaction should not have been approved, including a loan-to-value ratio that

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exceeded the bank’s policy’s limit, illiquidity of the borrower’s assets, and other
problems. The FDIC alleges that the PQH Transaction is illustrative of all eleven
transactions, and attached to the complaint a chart listing the eleven loans, their amounts
and approval dates, which board members approved them, and their alleged deficiencies.
For example, the PQH Transaction’s deficiencies are alleged to be (i) insufficient
documentation or analysis relating to financial condition of borrower or guarantor, (ii)
over-reliance on income/sales from completed development as primary repayment
source, (iii) over-reliance on real estate collateral, and (iv) a loan-to-value violation.
Doc. 1-1. Defendants argue that the FDIC must allege the name of each borrower, the
nature of each loan, and what allegedly went wrong with Defendants’ approval process
for each loan. Further, Defendants argue that Count II should be dismissed or the FDIC
should be required to make a more definite statement because all of the Defendants are
lumped together in the allegations.
The Eleventh Circuit has stated that “[w]hen multiple defendants are named in a
complaint, the allegations can be and usually are to be read in such a way that each
defendant is having the allegation made about him individually.” Crowe v. Coleman, 113
F.3d 1536, 1539 (11th Cir. 1997). However, there are cases in which Florida district
courts have required repleading of claims that group defendants together. In George &
Co., LLC v. Alibaba.com, Inc., No. 2:10-cv-719, 2011 WL 6181940, at * 2 (M.D. Fla.
Dec. 13, 2011), the district court held that

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[a]lthough a complaint against multiple defendants is usually read as
making the same allegation against each defendant individually, factual
allegations must give each defendant “fair notice” of the nature of the claim
and the “grounds” on which the claim rests. Accordingly, at times, a
plaintiff's “grouping” of defendants in a complaint may require a more
definite statement.
George & Co., LLC v. Alibaba.com, Inc., 2:10-CV-719-FTM-29, 2011 WL 6181940
(M.D. Fla. Dec. 13, 2011) (internal citations omitted). In another case involving the
FDIC acting as a receiver, a Georgia district court relied on George to, “in the interest of
caution . . . exercise[] its discretion to order that the FDIC-R replead the allegations of its
Complaint to provide specific allegations as to each Defendant’s involvement or
responsibility for the alleged wrongs, decisions, approvals, transactions, and loans
referenced in the original Complaint.” F.D.I.C. v. Briscoe, No. 1:11-cv-2303-SCJ, ECF
35 at 19 (N.D. Ga. Aug. 14, 2012). However, I find that Exhibit A to the Complaint,
which is the chart listing the eleven loans, their amounts and approval dates, which board
members approved them, and their alleged deficiencies, is not only sufficient, but
actually a very efficient way to present the allegations against each Defendant without
requiring dozens of paragraphs of repetitive legalese. Defendants are on notice of the
allegations against them, including which Defendants are charged with specific types of
misconduct for each specific transaction at issue. The identities of the borrowers and
guarantors, identified only by initials in Exhibit A, will be disclosed to Defendants during
discovery, as the FDIC is prohibited by law from making this personal information
public.

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Defendants argue that Count II should be dismissed because it fails to state a claim
for gross negligence. For this argument they rely on the business judgment rule as
interpreted by Delaware courts. However, in Florida, gross negligence is the failure to
exercise “slight care” in circumstances likely to result in injury. Farrell v. Fisher, 578
So. 2d 407, 409 (Fla. Dist. Ct. App. 1991). The Complaint’s factual allegations state a
plausible claim for gross negligence under Florida law. The Complaint does not contain
merely a formulaic recitation of the elements of a gross negligence cause of action.
Rather than alleging that Defendants failed to exercise slight care in approving the loans
which was likely to result in injury, the FDIC alleges, among other things, that:
 Defendants pursued a speculative, high-risk growth strategy despite having been
warned by regulators to curb overconcentration.
 Some of the approved transactions violated the bank’s own concentration limits as
well as regulatory guidelines.
 Transactions were approved despite chronic underwriting and appraisal
deficiencies.
 Defendants approved transaction without analyzing whether borrowers had the
ability to repay and without meaningful deliberation.
These allegations state a plausible claim for gross negligence under Florida law.
Finally, Defendants argue that the entire Complaint should be dismissed because
the FDIC did not properly allege that Defendants’ acts or omissions were the proximate
cause of Peoples First’s losses. In the Complaint, the FDIC alleges that “[a]s a direct and

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proximate result of the Defendants’ grossly negligent actions and omissions . . . the
FDIC-R, as Receiver for Peoples, seeks damages caused thereby, the exact amount to be
proven at trial.” Doc. 1 ¶ 74. Defendants point out that the FDIC does not allege that the
borrowers defaulted on the eleven loans or in what manner Peoples First was harmed.
What the FDIC does allege is that “[d]ue to the deficient underwriting allowed by the
Defendants in approving transactions, . . . Peoples was fatally exposed to the inevitable
cyclical decline in real estate values. . . . The Defendants had failed to take necessary and
timely actions to improve the Bank’s financial condition, and Peoples failed on
December 18, 2009.” Doc. 1 ¶ 32. Exhibit A lists the “credit amount” of each
transaction, but it is unclear if the credit amounts are the same as the alleged loss
amounts. Defendants argue that the FDIC should be required to separate in its Complaint
losses caused by Defendants’ alleged gross negligence and losses caused by the collapse
of the Florida real estate market. While I do not agree with this contention, I do agree
that the FDIC needs to make a more definite statement concerning causation, namely the
manner in which the bank sustained loss.
Conclusion
1. Defendants’ Motion to Dismiss, Strike, or for More Definite Statement (Doc. 3) is
GRANTED in part and DENIED in part.
2. Count I is DISMISSED with prejudice as to all Defendants except Defendant
Powell. Count II remains.
3. Defendants’ motion to strike allegations of ordinary negligence is DENIED.

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4. Defendants’ motion for more definite statement is GRANTED as to causation.
The FDIC shall file an Amended Complaint including the more definite statement
regarding causation not later than May 29, 2013.

ORDERED on May 15, 2013.

/S/ Richard Smoak
RICHARD SMOAK
UNITED STATES DISTRICT JUDGE