Federal Deposit Insurance Corporation as Receiver for Broadway Bank v. Giannoulias et al
Filing
209
MEMORANDUM OPINI0N Signed by the Honorable John F. Grady on July 10, 2014. Mailed notice(cdh, )
12-1665.141-RSK
July 10, 2014
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FEDERAL DEPOSIT INSURANCE CORP.,
AS RECEIVER FOR BROADWAY BANK,
Plaintiff,
v.
DEMETRIS GIANNOULIAS, GEORGE
GIANNOULIAS, JAMES MCMAHON, SEAN
CONLON, STEVEN DRY, DONNA
ZAGORSKI, STEVEN BALOURDOS,
GLORIA SGUROS, ANTHONY D’COSTA,
Defendants.
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No. 12 C 1665
MEMORANDUM OPINION
Before the court is the plaintiff’s supplemental motion to
strike.
For the reasons explained below, we grant the motion in
part, and deny it in part.
BACKGROUND
Plaintiff Federal Deposit Insurance Corporation, as receiver
for Broadway Bank (“FDIC–R”), has filed this lawsuit to recover
approximately $114 million in losses that the bank suffered on 20
loans. (See Second Am. Compl. ¶ 1.) It alleges that the defendants
— seven former directors of Broadway Bank and two former officers
— negligently approved the loans. (Id. at ¶ 2.)
that
the
reader
defendants’
motion
is
to
familiar
dismiss
with
the
our
We will assume
opinion
FDIC-R’s
denying
complaint,
discussed the plaintiff’s allegations in more detail.
the
which
See FDIC v.
- 2 -
Giannoulias, 918 F.Supp.2d 768 (N.D. Ill. 2013).
However, the
procedural history of the FDIC-R’s motion to strike requires
additional discussion.
After the parties finished briefing the
plaintiff’s original motion to strike, we ordered the FDIC-R to
amend its complaint to remove surplusage. (See Minute Entry, dated
Oct. 16, 2013, Dkt. 130.)
The defendants answered and filed
amended affirmative defenses, restating their earlier defenses
challenging the FDIC-R’s conduct and adding a new constitutional
claim.1
The FDIC-R then filed a “supplemental” motion to strike
those defenses, which is the motion currently before us.
It
challenges the following amended affirmative defenses: (1) “Waiver
and
Estoppel”
Mitigate”
Negligence”
(Third
(Fourth
Affirmative
Affirmative
(Fifth
Affirmative
Defense);
Defense);
(2)
(3)
Defense);
(4)
Constitutional Standing” (Sixth Affirmative Defense).
“Failure
to
“Comparative
“Lack
of
The FDIC-R
also asks us to strike the defendants’ “Reservation of Right to Add
Affirmative Defenses.”
DISCUSSION
A.
Legal Standard
Federal Rule of Civil Procedure 12(f) provides that we “may
strike from a pleading an insufficient defense or any redundant,
immaterial, impertinent, or scandalous matter.”
1/
Fed. R. Civ. P.
They abandoned their defenses insofar as they were based upon the
FDIC’s pre-receivership conduct. (See, e.g., Giannoulias Defs.' Resp. at 1 n.1.)
- 3 -
12(f).
“Ordinarily, defenses will not be struck if they are
sufficient as a matter of law or if they present questions of law
or fact.”
Heller Financial, Inc. v. Midwhey Powder Co., Inc., 883
F.2d 1286, 1294 (7th Cir. 1989).
B.
The Timeliness of the FDIC-R’s Motion
Under Rule 12(f), a party may file a motion to strike within
21 days after being served with the challenged pleading.
R. Civ. P. 12(f)(2).
See Fed.
The FDIC-R filed its original motion to
strike more than 21 days after all but one of the defendants
(Gloria Sguros) had served their answers and affirmative defenses.
(See FDIC-R’s Mot. for Leave ¶ 6; see also Certain Defs.’ Resp. to
Mot. to Leave at 1, n.1 (acknowledging that the motion was timely
as to Sguros).)
Nevertheless, we retain discretion to strike
material from a pleading after the motion deadline in Rule 12(f)(2)
has passed. See Fed. R. Civ. P. 12(f)(1) (authorizing the court to
strike matters “on its own,” without imposing any particular time
period).)
Given the substantial time that the parties devoted to
their substantive arguments, as well as the fact that the FDIC-R’s
motion was timely as to one of the defendants, we certainly would
have addressed the FDIC-R’s arguments on our own motion.
As it
happens, the defendants reset the clock when they filed their
amended affirmative defenses on November 27, 2013.
The FDIC-R
filed its supplemental motion to strike within 21 days after it was
served with the defendants’ amended affirmative defenses.
So, the
- 4 -
motion was timely under Fed. R. Civ. P. 12(f)(2) as to all
defendants.
C.
Whether the Defendants’ Affirmative Defenses Are Adequately
Pled.
The FDIC-R argues that the defendants’ Third, Fourth, and
Fifth affirmative defenses are insufficiently detailed to satisfy
Rule 8.
“Affirmative defenses are pleadings and, therefore, are
subject to all pleading requirements of the Federal Rules of Civil
Procedure. Thus, defenses must set forth a ‘short and plain
statement,’
Fed.
R
.Civ.
P.
8(a),
of
the
defense.”
Heller
Financial, Inc. v. Midwhey Powder Co., Inc., 883 F.2d 1286, 1294
(7th Cir. 1989). They must contain enough factual content to allow
the court to draw a “reasonable inference” that the defense has
merit.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); see also
Shield Technologies Corp. v. Paradigm Positioning, LLC, No. 11 C
6183, 2012 WL 4120440, *8 (N.D. Ill. Sept. 19, 2012) (Grady, J.)
(concluding that affirmative defenses are governed by the pleading
standard announced in Iqbal and Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 555 (2007)).
The defendants’ Third Affirmative Defense
merely alleges, “[u]pon information and belief,” that “the FDIC-R’s
conduct
in
administering
the
[Federal
Street
material decrease in the value of the loan.”
Loan]
caused
(Id. at 78.)
a
Without
knowing what “conduct” the defendants are challenging, the FDIC
cannot adequately respond.
The defendants’ Fourth and Fifth
Affirmative defenses allege, on information and belief, that the
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FDIC-R “failed to take actions to maximize the value of the
collateral, failed to take the steps necessary to maximize the
collection on the loans, sold loans at unreasonably low values,
created incentives to obtain less than the maximum level of
recovery available on loans, failed to adequately work out loans,
and
failed
to
take
other
actions
which
collateral values and/or the loan recovery.”
adversely
affected
(Id. at 79.)
These
allegations are too generic to put the FDIC-R on notice of the
defendants’ defense.
Rule 8 does not necessarily require a loan-
by-loan analysis of all the ways that the FDIC-R failed to mitigate
its damages.
But the defendants’ current allegations would apply
to any lawsuit in which the FDIC alleges negligence by a bank’s
former executives.
We will strike the defendants’ Third, Fourth,
and Fifth Affirmative Defenses.
The defendants have requested leave to amend their affirmative
defenses
to
allege
inadequately pled.
greater
detail
if
we
find
that
they
(Giannoulias Defs.’ Resp. at 13 n.5.)
are
But it
would be futile to allow them to amend if we accepted the FDIC-R’s
position that these defenses are barred by federal and/or state
law.
So, we will proceed to address the merits of the FDIC-R’s
arguments.
C.
Bierman and O’Melveny
The defendants’ Third, Fourth, and Fifth Affirmative Defenses
are based on their theory that the FDIC-R’s conduct as receiver
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contributed to its losses on the challenged loans.
The FDIC-R
argues that FDIC v. Bierman, 2 F.3d 1424 (7th Cir. 1993) bars the
defendants from challenging its discretionary decisions regarding
Broadway Bank’s assets.
1.
The “No Duty” Rule and the Federal Tort Claims Act
(“FTCA”)
In Bierman, the FDIC, in its corporate capacity (“FDIC-C”),
sued a failed bank’s former officers and directors to recover
losses to its insurance fund.
Id. at 1438.
In response, the
defendants filed an affirmative defense asserting that the FDIC had
failed
to
pursue
claims
mitigated its losses.
Id.
against
guarantors
that
would
have
The Bierman Court noted that several
district courts had held that a bank’s former officers cannot
challenge the FDIC-R’s actions because it owes no duty to those
individuals.
Id.
Instead, its duty “runs to the public.”
Id.
(quoting FDIC v. Greenwood, 719 F.Supp. 749, 751 (C.D. Ill. 1989))
(internal quotation marks omitted).
The Bierman Court extended
this “no duty” rule to affirmative defenses asserted against the
FDIC-C: “[W]hen the FDIC acts to replenish the insurance fund
through the disposition of assets of the failed bank, including the
right of action against the officers and directors, it has no duty
first to attempt to mitigate the damages attributed to those
individuals by seeking other, and perhaps less sure, avenues of
relief.”
Id. at 1439-40.
The Court then went on to address FDIC
v. Carter, 701 F.Supp. 730 (C.D. Cal. 1987), contrary authority
- 7 -
holding that such affirmative defenses “ought to be evaluated in
the context of the substantive provisions of the [FTCA], 28 U.S.C.
§ 2671.”
the
Bierman, 2 F.3d at 1440.
United
States
that
are
The FTCA bars claims against
based
upon
performance of discretionary functions.
a
federal
employee’s
It bars:
Any claim based upon an act or omission of an employee of
the Government, exercising due care, in the execution of
a statute or regulation, whether or not such statute or
regulation be valid, or based upon the exercise or
performance or the failure to exercise or perform a
discretionary function or duty on the part of a federal
agency or an employee of the Government, whether or not
the discretion involved be abused.
28 U.S.C. § 2680(a). The Carter court held that the “activities of
the FDIC in its corporate capacity of disposing of a failed bank’s
assets
are
purely
ministerial
and
therefore
may
not
be
characterized as a discretionary function under the Act.” Bierman,
2 F.3d at 1440; see also Carter, 701 F.Supp. at 736.
The Bierman
Court did not expressly state whether it agreed with the Carter
court’s premise that affirmative defenses “ought to be” evaluated
under the FTCA.
Indeed, it stated in a footnote that a later case
from the same district “chose, rather, to follow the no duty/public
policy rationale annunciated in [FSLIC v. Roy, No. JFM-87-1227,
1988 WL 96570 (D.Md. June 28, 1988)].”
n.18.
Bierman, 2 F.3d at 1440
Nevertheless, it went on to reject the substance of the
Carter court’s FTCA analysis, citing United States v. Gaubert, 499
U.S. 315 (1991).
for
The plaintiff in Gaubert sued federal officials
negligently managing a savings and loan (“S&L”).
The Fifth
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Circuit Court of Appeals held that § 2680 did not apply insofar as
the officials were performing the S&L’s day-to-day business, which
the court characterized as ministerial.
Supreme
Court
reversed:
“[d]ay-to-day
Id. at 321-22.
management
of
The
banking
affairs, like the management of other businesses, regularly require
judgment as to which of a range of permissible courses is the
wisest.” Id. at 325. Applying Gaubert, the Bierman Court concluded
“that
excepting
the
FDIC
from
such
affirmative
defenses
is
consonant with the purpose of the discretionary function exception
to the FTCA.”
Bierman, 2 F.3d at 1441 (emphasis added).
It then
summed up its holding:
In short, even if assets were available on the DeVries
agreements to defray the losses on those loans, and even
if the FDIC’s failure to claim these assets could be said
to have been negligent during the liquidation process,
the discretionary exception to the FTCA and the lack of
a duty to the wrongdoers would prevent the assertion of
affirmative defenses against the FDIC.
Id. (footnote omitted).
The Supreme Court substantially undercut the rationale for the
“no duty” rule in O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994).
In O’Melveny, two former officers of a federally-insured S&L
allegedly deceived investors in connection with two real estate
syndications.
Id. at 81.
After the S&L failed, the FDIC (as
receiver) sued the law firm that had represented the S&L in the
syndications for malpractice and breach of fiduciary duty.
82.
Id. at
The law firm argued that it had no duty to uncover the S&L’s
own fraud, and that knowledge of the fraud should be imputed to the
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FDIC as the S&L’s receiver.
Id.
The Ninth Circuit Court of
Appeals held that the S&L’s knowledge could not be imputed to the
FDIC as a matter of federal common law.
Id. at 83-84.
The Supreme
Court reversed. First, it held that there is no federal common law
of imputation.
Id. at 83-85.
State law governs imputation unless
a federal statute preempts state law.
Id. at 85.
Second, the
Court concluded that the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (“FIRREA”), which governs the FDIC’s
conduct as receiver for failed financial institutions, does not
preempt state law.
Section 1821(d)(2)(A)(i) states that the FDIC
“shall . . . by operation of law, succeed to — all rights, titles,
powers, and privileges of the insured depository institution . . .
.”
12 U.S.C. § 1821(d)(2)(A)(i).
federal
rules
of
decision
regarding
against, the FDIC as receiver.”
e.g.,
12
U.S.C.
§
FIRREA also creates “special
claims
by,
and
defenses
O’Melveny, 512 U.S. at 86; see,
1821(d)(14)
(extending
the
statute
of
limitations); id. at § 1821(e)(1), (3) (authorizing the FDIC to
repudiate contracts and limiting damages caused by repudiation).
Reading these provisions together, the Court concluded that federal
courts
lack
authority
to
supplement
and/or
modify
FIRREA’s
provisions:
Inclusio unius, exclusio alterius. It is hard to avoid
the conclusion that § 1821(d)(2)(A)(i) places the FDIC in
the shoes of the insolvent S & L, to work out its claims
under state law, except where some provision in the
extensive framework of FIRREA provides otherwise. To
create additional “federal common-law” exceptions is not
to “supplement” this scheme, but to alter it.
- 10 -
Id. at 86-87.2
Our Court of Appeals has not addressed the “no duty” rule
after O’Melveny.
But courts in this district have recognized that
O’Melveny undercuts Bierman’s “no duty” analysis.
See FDIC v.
Majahan, 923 F.Supp.2d 1133, 1140 (N.D. Ill. 2013) (concluding that
the "no duty" rule may be in “serious doubt in light of O’Melveny
. . . .”); Spangler, 2012 WL 5558941, at *5 (“The Supreme Court’s
decision in O’Melveny clearly calls into question the Seventh
Circuit's decision in Bierman.”).
The FDIC-R attempts to sidestep
O’Melveny by basing its motion entirely on Bierman’s alternative
FTCA analysis.
In Mahajan, the court reasoned that O’Melveny did
not affect that portion of Bierman’s holding because “O’Melveny did
not discuss the FTCA, discretionary actions by agencies, or the
Gaubert decision at all.” Majahan, 923 F.Supp.2d at 1140 (holding
that the Bierman Court’s FTCA analysis survived O’Melveny). And it
interpreted the Seventh Circuit’s decision in Courtney v. Halleran,
485 F.3d 942 (7th Cir. 2007) as “affirming the continuing viability
of the FDIC’s immunity from suit under the FTCA for its post-
2/
The Court also analyzed the imputation defense under pre-FIRREA law
because it was unclear whether FIRREA applied retroactively to the conduct at
issue in O’Melveny. See O’Melveny, 512 U.S. at 87-89. That portion of the
Court’s ruling does not apply here because all of the events at issue in this
case occurred after Congress enacted FIRREA.
See FDIC v. Spangler, No.
10-cv-4288, 2012 WL 5558941, *4 (N.D. Ill. Nov. 15, 2012) (“To the extent that
O'Melveny governs the question presented by the motion to strike, only the first
part of O'Melveny applies because FIRREA governs this case.”).
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receiver decisions regarding the disposition of assets.”
Mahajan,
923 F.Supp.2d at 1140.
We
respectfully
disagree
with
the
Mahajan
court’s
interpretation of Courtney and with the bright line that it drew
between the two prongs of Bierman’s holding.
analyze (or even mention) the FTCA.
Courtney did not
Rather, it held that FIRREA’s
anti-injunction provision barred a failed bank’s creditors from
challenging
the
FDIC’s
distribution
of
the
bank’s
assets.
Courtney, 485 F.3d at 948-49; see also 28 U.S.C. § 1821(j) (“Except
as provided in this section, no court may take any action, except
at the request of the Board of Directors by regulation or order, to
restrain or affect the exercise of powers or functions of the
Corporation as a conservator or a receiver . . . .”).
The FDIC-R
has not argued that the defendants’ state-law affirmative defenses
“affect or restrain” the FDIC-R within the meaning of § 1821(j).
So, FIRREA itself does not preempt those defenses.
And O’Melveny
teaches that we may not “supplement” or “modify” the statutory
scheme that Congress adopted.
See O’Melveny, 512 U.S. at 86-87.
It is true, as Mahajan points out, that O’Melveny did not discuss
the FTCA or Gaubert.
But we have doubts about whether Bierman
actually held that the FTCA governs true affirmative defenses.
By
its terms, the FTCA applies to “claims,” not affirmative defenses.
Cf. National Union Fire Ins. Co. of Pittsburgh, Pa. v. City Sav.,
F.S.B., 28 F.3d 376, 393 (3d Cir. 1994) (concluding that the word
- 12 -
“claim” in FIRREA did not encompass affirmative defenses); see also
id. (“When a lawyer files a responsive pleading to an action or
claim, she does not say that she is bringing an action or filing a
claim; instead, she says that she is answering, responding to, or
defending against an action.”).
issue.
Bierman did not address this
It assumed that the FTCA applied and distinguished Carter
on its terms, while at the same time noting that Carter had “never
garnered a following, having been criticized in its own district a
few years later . . . .”
Bierman, 2 F.3d at 1440 n.18.
Moreover,
Carter’s premise — that the FTCA applies to affirmative defenses —
is questionable.
The Carter court stated that the “substantive
portions of the FTCA which relate to the determination of liability
do apply both to affirmative suits brought against the government
and to counterclaims and affirmative defenses in suits originally
brought by the government.”
added).
Carter, 701 F.Supp. at 731 (emphasis
The authorities that it cited for this proposition all
dealt with claims against a party entitled to sovereign immunity.
See
Chemehuevi
Indian
Tribe
v.
California
State
Bd.
of
Equalization, 757 F.2d 1047, 1052-53 (9th Cir. 1985) (counterclaim
for unpaid taxes); Fed. R. Civ. P. 13(d) (governing counterclaims
against the United States); see also Federal Deposit Ins. Corp. v.
Jennings, 615 F.Supp. 465, 467 (W.D. Okla. 1985) (third-party tort
claims against the FDIC, in its corporate capacity, and the Office
of the Comptroller of Currency).
A freestanding “claim” for
- 13 -
failing to mitigate damages is nonsensical: even if the defendants
successfully prove the defense, they cannot obtain an affirmative
recovery from the United States. Cf. Federal Deposit Ins. Corp. v.
Citizens Bank & Trust Co. of Park Ridge, Ill., 592 F.2d 364, 374
(7th Cir. 1979) (the FDIC does not waive its sovereign immunity by
filing suit “except with respect to matters in recoupment arising
out of the same transaction or occurrence which is the subject
matter of the suit, to the extent of defeating the plaintiff's
claim.”) (citation and internal quotation marks omitted).
We tend to agree with Spangler that Bierman applied the FTCA
by analogy.
See Spangler, 2012 WL 5558941, *4 (“The [Bierman]
court also found support for its conclusion by analogizing to the
discretionary function exception to the [FTCA].”) (emphasis added).
The FTCA exception for discretionary actions prevents secondguessing, and applying that policy to affirmative defenses is
“consonant with the purpose of” the exception.
1441.
Bierman, 2 F.3d at
Arguably, Bierman applied the policy behind the FTCA’s
discretionary exception to create a bar to affirmative defenses
that does not appear in FIRREA itself.
To that extent, O’Melveny
raises significant doubts about whether any portion of Bierman
survives. As Spangler noted, “FIRREA includes a number of tailored
rules to be applied in suits by federal receivers, yet it does not
include a provision barring the affirmative defense of failure to
mitigate damages.”
Spangler, 2012 WL 5558941, *4 n.3.
O’Melveny
- 14 -
does not so clearly conflict with Bierman that we can declare that
it is no longer good law.
See id. at *5.
But we agree with
Spangler that there is too much legal uncertainty surrounding this
issue to warrant granting a motion to strike at the pleading
stage.3
See
id.;
see
also
FDIC
v.
Skow,
Civil
Action
No.
1:11–CV–0111–SCJ, 2012 WL 8503168, *12 (N.D. Ga. Feb. 27, 2012)
(similar).
2.
Whether State
Defenses
Law
Bars
the
Defendants’
Affirmative
The FDIC-R also argues that Illinois courts have recognized
something akin to the “no duty” rule.
But the cases it cites are
easily distinguishable. In Kirchgessner v. County of Tazewell, 516
N.E.2d 379, 380 (Ill. Ct. App. 1987), the plaintiff alleged that
the defendant negligently allowed a dog to escape from a county
animal shelter.
The plaintiff was injured when his motorcycle
struck the dog on a freeway.
Id.
The court held that the county
owed no duty to the plaintiff, citing the general principle that “a
governmental
body,
when
exercising
authority
pursuant
to
a
governmental duty and for a governmental purpose, cannot be liable
for the negligent exercise of that authority.”
Id. at 382; see
also Bainter v. Chalmers Township, McDonough County, 555 N.E.2d
1195, 1196 (Ill. Ct. App. 1990) (county had no duty to plaintiff to
clear brush from the road); Farmer City State Bank v. Guingrich,
3/
We express no opinion at this time about whether the FDIC-R is a
federal agency for purposes of the FTCA. (See Giannoulias Defs.’ Supp. Mem.
(Dkt. 133); FDIC-R’s Supp. Mem. (Dkt. 143).)
- 15 -
487 N.E.2d 758, 763-64 (Ill. Ct. App. 1985) (dismissing affirmative
defense of negligence because the bank did not owe a fiduciary duty
to its customer).
receiver.
None of these cases involve a state or federal
The FDIC-R stepped into Broadway Bank’s shoes, see
O’Melveny, 512 U.S. at 86-87, and it has not cited any state cases
supporting its argument that it is entitled to greater protections
than the bank would have enjoyed if it had filed a claim against
its former executives in its own name.
many
unresolved
legal
questions
Once again, there are too
to
strike
the
defendants’
affirmative defenses at this stage of the case.
D.
The Defendants’ Sixth Affirmative
Constitutional Standing”)
Defense
(“Lack
of
The defendants argue that Broadway Bank’s due-process and
equal-protection rights were violated because the bank never had an
opportunity to challenge the government’s decision to seize its
property. So, according to the defendants, the FDIC was unlawfully
appointed and cannot pursue claims against the defendants.
Before
addressing the substance of the defendants’ constitutional defense,
we will first address several issues regarding standing.
Among
other
arguments,
the
FDIC
contends
that
it
has
“standing” by virtue of the injury alleged in the complaint (over
$100 million in losses on the challenged loans).
Reply at 3-5.)
(See FDIC-R’s
We think that this argument misconstrues the
defendants’ defense.
The defendants argue that if the FDIC-R
obtained the bank’s assets without due process, then it has no
- 16 -
legal right to pursue claims for losses with respect to those
assets.
Federal Deposit Ins. Corp. v. Ernst & Young LLP, 374 F.3d
579 (7th Cir. 2004) is distinguishable.
In that case, the FDIC-C
sued the auditor of a failed bank for fraud and negligence.
581-82.
Id. at
The district court concluded that the FDIC-C lacked
standing because permitting a direct suit by the FDIC-C would allow
it to jump ahead of other creditors, contrary to FIRREA provisions
governing creditor priority.
Id. at 581.
rejected this line of reasoning.
Our Court of Appeals
See id. (“What this has to do
with ‘standing’ is unfathomable.”).
The FDIC-C had standing
because it was injured when it was required to disburse money from
its insurance fund to satisfy claims originating (in part) from the
auditor’s alleged misconduct.
Id. at 581-82.
In this case, the
defendants are challenging the FDIC-R’s authority to assert claims
for Broadway Bank’s losses.
The parties also disagree about whether the defendants can
assert a defense based upon a constitutional injury that Broadway
Bank, not the individual defendants, suffered.
In its opening
brief, the FDIC argued, without citing any relevant case law, that
the defendants lacked standing to assert their Sixth Affirmative
Defense.
The defendants responded that they were within the “zone
of interests protected by the law involved.”
Resp. at 15.)
(Giannoulias Defs.’
We agree with the FDIC-R that the “zone of
interests” test is irrelevant, inasmuch as the defendants are not
- 17 -
asserting a claim against the FDIC-R under FIRREA or the Illinois
Banking Act.
They are asserting an affirmative defense based upon
the procedures underlying the state’s acquisition of the bank’s
assets and the FDIC-R’s appointment as receiver.
See Costello v.
Grundon, 651 F.3d 614, 629 (7th Cir. 2011) (defendants were not
required to establish that they were within the zone of interests
protected by the Securities Exchange Act and related regulations to
assert a defense based upon violations of those statutes).
But by
the same token, the defendants are not required to prove that they
were injured in order to assert an affirmative defense challenging
the plaintiff’s authority to pursue the claims alleged in the
complaint.
Costello is analogous and supports a finding that the
defendants are entitled to assert their Sixth Affirmative Defense:
The Borrowers do not seek to maintain an action under the
Securities Exchange Act or Regulations G and U, but
rather, to defend against an action based on alleged
violations of the statute and regulations. They therefore
need not establish that they fit within the zone of
interests protected by those laws to be entitled to
assert their affirmative defense.
Id. at 629.
We turn, then, to the substance of the defendants’
affirmative defense.
1.
When
Due Process Clause
analyzing
a
procedural
due-process
claim,
we
must
determine: (1) whether the plaintiff was deprived of a protected
interest; and (2) what process was due.
Leavell v. Illinois Dept.
of Natural Resources, 600 F.3d 798, 804 (7th Cir. 2010).
The
- 18 -
parties in this case tacitly agree that Broadway Bank had a
protected property interest in the assets that the Department of
Financial and Professional Regulation, Division of Banking (the
“Banking Division”) seized.
With respect to the second issue —
what process is due — courts distinguish between “(a) claims based
on established state procedures and (b) claims based on random,
unauthorized acts by state employees.” Id. (citations and internal
quotation marks omitted).
Here, the defendants’ defense is based
upon established state procedures governing when the state may
seize a state-chartered bank’s assets and appoint a receiver to
conduct its affairs.
Ordinarily, this would suggest that a pre-
deprivation hearing is feasible and, perhaps, constitutionally
required. Id. But courts have held that a pre-deprivation hearing
is not feasible in the banking context, where the government must
move quickly to preserve the interests of depositors and other
affected parties.
Fahey v. Mallonee, 332 U.S. 245, 253-54 (1947)
(upholding a provision of the Home Owners’ Loan Act of 1933 that
allowed the government to appoint a conservator without a prior
hearing; this summary procedure was appropriate given “the delicate
nature of the institution and the impossibility of preserving
credit during an investigation . . . .”); see also Haralson v.
Federal Home Loan Bank Bd., 837 F.2d 1123, 1126-27 (D.C. Cir. 1988)
(In giving the Federal Home Loan Bank Board broad powers to take
over insolvent banks, “Congress has obviously weighed the competing
- 19 -
interests of depositors against those of owners and operators in
the drastic circumstances of insolvency or mismanagement.”).
In
such a case, post-deprivation procedures may satisfy due process.
See Fahey, 322 U.S. at 253-54; see also Parratt v. Taylor, 451 U.S.
527, 538-39 (1981) (“We have . . . recognized that postdeprivation
remedies made available by the State can satisfy the Due Process
Clause.”).
avail
Where such procedures exist, “a plaintiff must either
herself
of
the
remedies
guaranteed
by
state
demonstrate that the available remedies are inadequate.”
v. City of Chicago, 75 F.3d 318, 323 (7th Cir. 1996).
law
or
Doherty
A remedy is
“inadequate” if it is “meaningless or nonexistent and, thus, in no
way can be said to provide the due process relief guaranteed by the
fourteenth amendment.” Easter House v. Felder, 910 F.2d 1387, 1406
(7th Cir. 1990).
In light of the just-cited authorities, the defendants concede
that the Constitution did not require a pre-deprivation hearing in
this case.
8 n.2.)4
4/
(See Giannoulias Defs.’ Resp. at 6-8; see also id. at
But they argue that federal and state law do not provide
The FDIC-R argues that Broadway Bank did receive some pre-deprivation
process.
We agree that the bank had opportunities to challenge the Banking
Division’s findings at certain points in the process, prior to its final decision
to seize the bank’s assets. As we read the relevant regulations, the bank could
have requested a hearing challenging the findings underlying the Banking
Division’s February 19, 2010 “Notice of Intent to Take Possession.” (See Notice
of Intent to Take Possession and Control Pursuant to Section 51 of the Illinois
Banking Act (“Section 51 Notice”), attached as Ex. B to FDIC-R's Reply); see also
205 ILCS 5/51 (authorizing such notice); 38 Ill. Adm. Code § 392.30 ("Any party
may file a Request for a Hearing on an administrative decision."); id. at §
392.20 (an "administrative decision" includes "an order, fine, revocation of a
Foreign Bank Representative Office license, or other regulatory action issued by
the Office of Banks and Real Estate pursuant to authority granted under the
Illinois Banking Act [205 ILCS 5] . . . ."). The Section 51 Notice notified the
- 20 -
any post-deprivation procedure when the FDIC is appointed receiver
at the Banking Division’s request.
a.
Federal Law
The parties agree that the bank could not have challenged its
seizure under FIRREA.
The FDIC may become the receiver of a state
depository institution in several ways: (1) it may accept a request
to serve as receiver from the appropriate state agency, 12 U.S.C.
§ 1821 (c)(1) & (c)(3)(A); (2) it may appoint itself as receiver if
certain
conditions
are
met,
id.
at
§
1821(c)(4);
(3)
an
“[a]ppropriate Federal banking agency” may appoint the FDIC as
receiver in some circumstances, id. at § 1821(c)(9); and (4) the
FDIC’s board of directors may appoint the FDIC as receiver to
prevent losses to the deposit insurance fund, id. at § 1821(c)(10).
FIRREA provides for post-deprivation review in federal court when
the FDIC is appointed receiver under § 1821(c)(4),(9), or (10), but
not when the FDIC accepts a state agency’s request to serve as
receiver under § 1821(c)(3)(A):
(7) Judicial review
If the Corporation is appointed (including the
appointment of the Corporation as receiver by the Board
of Directors) as conservator or receiver of a depository
bank that the Division would seize its assets if the bank did not take certain
“corrective actions” before April 20, 2010. (See Section 51 Notice at 2.) But
this issue — the state’s grounds for issuing the notice — is distinct from the
issue of whether the bank had taken the corrective actions before the deadline.
The Banking Division concluded that the bank had not taken those actions, and it
was that finding that prompted it to seize the bank’s assets. (See Letter from
J. Solis to A. Lowe, dated Apr. 23, 2010, attached as Ex. G to the FDIC-R’s
Reply.) As far as the record reveals, it did not conduct a hearing before making
that decision.
- 21 -
institution under paragraph (4), (9), or (10), the
depository institution may, not later than 30 days
thereafter, bring an action in the United States district
court for the judicial district in which the home office
of such depository institution is located, or in the
United States District Court for the District of
Columbia, for an order requiring the Corporation to be
removed as the conservator or receiver (regardless of how
such appointment was made), and the court shall, upon the
merits, dismiss such action or direct the Corporation to
be removed as the conservator or receiver.
12 U.S.C. § 1821(c)(7) (emphasis added). In this case, the Banking
Division asked the FDIC to serve as Broadway’s receiver and the
FDIC accepted. So, judicial review was not available under FIRREA.
In its opening brief, the FDIC-R argued that post-deprivation
review
was
available
under
the
Administrative
Procedures
Act
(“APA”), citing James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085
See id. at 1094 (“In the absence of a statute
(D.C. Cir. 1996).
specifically
providing
for
judicial
review
of
the
FDIC’s
appointment as receiver of national banks, and without clear
evidence that Congress intended either section 1821(j) or section
1821(d)(11) to bar federal court jurisdiction, we hold that the APA
authorizes
federal
courts
to
review
and
set
aside
improper
appointments of the FDIC as receiver of national banks.”).
But at
least one appellate court has held that the APA does not apply
where, as here, a state agency seizes the assets of a statechartered bank.
See Hindes v. F.D.I.C.,
137 F.3d 148, 167 (3d
Cir. 1998) (distinguishing James Madison because that case involved
a national bank, not a state-chartered bank).
“APA review of the
- 22 -
appointment of the FDIC as receiver is not proper here because the
appointment was not made by a federal agency, but rather by the
Secretary, a state official.”
Id.; see also Resident Council of
Allen Parkway Village v. U.S. Dept. of Housing & Urban Development,
980 F.2d 1043, 1055 (5th Cir. 1993) (holding that the APA does not
apply to non-federal agencies); 5 U.S.C. § 701(b)(1) (Under the
APA, “‘agency’ means each authority of the Government of the United
States, whether or not it is within or subject to review by another
agency . . . .”) (emphasis added).
The FDIC-R did not address this
argument in its reply brief, thereby waiving the issue.
b.
State law
Turning to state law, the Illinois Banking Act (like FIRREA)
provides a mechanism for appointing a receiver to operate a
distressed bank:
If the Commissioner determines (which determination may
be made at the time, or any time subsequent to his taking
possession and control of a bank and its assets) that no
practical possibility exists to reorganize the bank after
reasonable efforts have been made and that it should be
liquidated through receivership, he shall appoint a
receiver and require of him such bond and security as the
Commissioner deems proper, and the Commissioner,
represented by the Attorney General, shall, if the
Federal Deposit Insurance Corporation is not acting as
receiver, file a complaint for the dissolution or winding
up of the affairs of such bank in the circuit court of
the county where such bank is located.
205 ILCS 5/58(a).
And also like FIRREA, the Illinois Banking Act
gives
opportunity
banks
the
decision to appoint a receiver:
to
challenge
the
Commissioner’s
- 23 -
Whenever the Commissioner shall have taken possession and
control of a state bank and its assets for the purpose of
examination, reorganization or liquidation through
receivership, or whenever the Commissioner shall have
appointed a receiver for a bank, other than the Federal
Deposit Insurance Corporation, and filed a complaint for
the dissolution or for the winding up of the affairs of
a bank, and the bank denies the grounds for such actions,
it may at any time within ten days apply to the Circuit
Court of Sangamon County, Illinois, to enjoin further
proceedings in the premises; and such court shall cite
the Commissioner to show cause why further proceedings
should not be enjoined, and if the court shall find that
such grounds do not exist, the court shall make an order
enjoining the Commissioner and any receiver acting under
his direction from all further proceedings on account of
such alleged grounds . . . .
205 ILCS 5/67 (emphasis added).
The defendants and the FDIC-R
interpret this language to exclude judicial review if the FDIC is
appointed receiver.
(See Giannoulias Defs.’ Resp. at 5; FDIC-R
Supp. Reply at 9.)5
The FDIC-R argues, instead, that review is
available
under
(“IAPA”).
See
the
205
Illinois
ILCS
Administrative
5/48(10)
decisions of the Commissioner
Procedures
Act
(“All
final
administrative
hereunder
shall
be subject to
judicial review pursuant to the provisions of the Administrative
5/
We are not so sure. Section 5/67 states that a bank can obtain review
if either of the following conditions is satisfied: (1) the Commissioner takes
possession and control of the bank and its assets "for the purpose of
examination, reorganization or liquidation through receivership;” "or" (2) the
Commissioner appoints a receiver, other than the FDIC, and files a complaint to
dissolve the bank or wind up its affairs. 205 ILCS 5/67 (emphasis added). In
his letter asking the FDIC to serve as receiver, the Banking Division’s Director
stated: "I took possession and control of the Bank at 6:00 p.m. CDT on April 23,
2010 for the purpose of examination, reorganization or liquidation through
receivership."
(See Letter from J. Solis to A. Lowe, dated Apr. 23, 2010,
attached as Ex. G to the FDIC-R's Reply.) This language tracks § 67's first
clause and, arguably, triggered the bank's right to seek review of the Director's
actions in state court. The fact that the second condition for judicial review
was not satisfied — because the FDIC accepted the receivership — is arguably
irrelevant.
- 24 -
Review Law.”). The defendants respond that the Banking Division’s
decision
to
seize
the
bank
was
not
a
decision” as the IAPA defines that term.
“final
administrative
(See Giannoulias Defs.’
Supp. Resp. at 9-11; Giannoulias Defs.’ Supp. Sur-Reply at 2-3.)
The FDIC-R does not address this argument.
8-9.)
(See FDIC-R Reply at
Even assuming that Broadway Bank could have obtained
judicial review under the IAPA (or the Illinois Banking Act, see
supra n.5), neither side has addressed whether those procedures
would have been adequate under the circumstances.
Division
seized
the
bank’s
assets,
and
receivership, at essentially the same time.
the
The Banking
FDIC
accepted
So, by the time the
bank filed suit, its assets would have been beyond the state
court’s control.
See 12 U.S.C. § 1821(j) (“Except as provided in
this section, no court may take any action, except at the request
of the Board of Directors by regulation or order, to restrain or
affect the exercise of powers or functions of the Corporation as
a conservator or a receiver.”); 12 U.S.C. § 1821(c)(3)(C) (When
the FDIC is appointed receiver by a state agency, it “shall not be
subject to the direction or supervision of any other agency or
department of the United States or any State in the exercise of
its rights, powers, and privileges.”).
Arguably, the state court
could have enjoined the Banking Division from “further proceedings
in
the
premises,”
administrative
but
it
proceedings
is
unclear
remained
what
once
(if
the
any)
FDIC
state-
obtained
- 25 -
exclusive control over the bank’s assets.
Finally, neither side
has addressed whether the bank could have obtained damages from
the Banking Division for improperly seizing its assets.
Under the
circumstances, we conclude that it would be inappropriate to
strike the defendant’s Sixth Affirmative Defense at this stage of
the case.
2.
Equal Protection
As an alternative basis for their Sixth Affirmative Defense,
the defendants argue that there is no rational basis for providing
judicial review with respect to certain bank closures, but not
when a state official appoints the FDIC as receiver.
Giannoulias Defs.’ Supp. Resp. at 12-14.)
short shrift in the parties’ briefs.
(See
This argument gets
Given our ruling with
respect to the defendants’ due-process arguments, we conclude that
it is unnecessary to analyze their alternative equal-protection
theory at this time.
E.
Reservation of Rights
In their answers, defendants purport to “reserve the right to
assert additional affirmative defenses as this matter progresses.”
(See, e.g., Certain Defs.’ Answer at 76.)
The FDIC-R argues that
we should strike this “reservation of rights” because affirmative
defenses are waived if they are not raised in the first responsive
pleading.
See Visco Financial Servs. Ltd. v. Siegel, No. 08 C
4029, 2008 WL 4900530 (N.D. Ill. Nov. 13, 2008) (“Affirmative
- 26 -
defense 24 states that ‘[Siegel] reserves the right to assert
additional affirmative defenses upon information and discovery,’
which is impermissibly pled because if a party does not bring an
affirmative defense in its first responsive pleading, then it is
waived.”).
The defendants respond that a defendant may move to
amend its affirmative defenses if new information comes to light.
Wallace v. City of Chicago, 472 F.Supp.2d 942, 946 (N.D. Ill.
2004).
We agree, but it is unnecessary to expressly reserve that
right in a pleading.
Id. (“As with all motions for leave to
amend, the district court has the discretion to allow an answer to
be amended to assert an affirmative defense not raised at the
outset.”).
The defendants’ “reservations of rights” are stricken
as a legal nullity.
If they later seek leave to add additional
affirmative defenses, we will address the issue at that time.
CONCLUSION
The FDIC-R’s motion to strike [154] is granted in part and
denied in part.
stricken.
The defendants’ “Reservations of Rights” are
The defendants’ Third, Fourth, and Fifth Affirmative
Defenses are stricken without prejudice.
The motion is denied as
to the defendants’ Sixth Affirmative Defense.
By July 30, 2014,
the defendants may amend their affirmative defenses to provide
additional detail regarding the conduct they are challenging.
status hearing is set for July 16, 2014 at 11:00 a.m.
A
- 27 -
DATE:
July 10, 2014
ENTER:
___________________________________________
John F. Grady, United States District Judge
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