Federal Deposit Insurance Corporation v. Arthur et al

Filing 31

MEMORANDUM OPINION. Signed by Judge Richard D Bennett on 3/2/2015. (jnls, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

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FEDERAL DEPOSIT INSRUANCE
CORPORATION I\S RECEIVER
FOR BRADFORD BANK,

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Plaintiff,

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Civil Action No. RDB-14-604

v.

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DALLAS R. ARTHUR, et aI.,

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Defendants.

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MEMORANDUM OPINION

Plaintiff Federal Deposit Insurance Corporation ("FDIC"), as Receiver for Bradford
Bank, brings this suit pursuant
Enforcement

to the Financial Institutions

Reform,

Recovery, and

Act of 1989, 12 U.S.c. ~ 1821 ("FIRREA"). The FDIC seeks damages in

excess of $7.4 million from Defendants

Dallas R. Arthur, Mary Beth Taylor, Gilbert D.

Marsiglia, and John O. Mitchell, III (collectively, "Defendants"),
Bradford Bank. Defendants

four former officers of

filed a Joint Motion to Dismiss, or, in the Alternative, Motion

for Summary Judgment (ECF No. 10). The Motion was fully and adequately briefed by both
parties. The parties' submissions have been reviewed, and a hearing was held on February
24, 2015. See ECF No. 30. For the reasons that follow, Defendants'
Dismiss

I

(ECF No. 10) is GRANTED

IN Pl\RT and DENIED

Joint Motion to

IN Pl\RT. Specifically, it is

The subject :fvlotionis t.reatedas a Motion to Dismiss, and not addressed alternatively as a Motion for Summary
Judgment.
1

1

GRANTED

as to Plaintiff's negligence claims (Counts I and III), which are dismissed, but it

is DENIED

as to the gross negligence claims (Counts II and IV).
BACKGROUND

In a ruling on a motion to dismiss, this Court must accept the factual allegations in
the plaintiff's complaint as true and construe those facts in the light most favorable to the
plaintiffs. See, e.g., Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999).
The FDIC was appointed as receiver for Bradford Bank ("the Bank") on August 28,
2009. PI.'s Compl. ""1-2,

ECF No. 1. The FDIC brings this suit seeking damages in excess

of $7.4 million from Defendants,

four former officers of the bank. Jd. FDIC alleges that

Defendants were negligent, grossly negligent, and breached their fiduciary duties to the Bank
by ignoring the Bank's Loan Policy and failing to exercise due care in recommending and/or
2

approving seven commercial loan transactions, resulting in substantial losses to the Bank

See !d. '\1'\1 2-6.
Defendant Dallas R. Arthur ("Arthur") was President of Bradford Bank from March
26,2001, a director from July 18, 2001, and a member of the Bank's Loan Committee (the
"Loan Committee") from February 20, 2002 until the Bank failed in 2009.
Defendant

Mary Beth Taylor ('Taylor")

Jd. '\18.

was the Bank's Senior Executive Vice

President of Commercial Lending from July 26, 2001, until she resigned on November

17,

2008. Jd. '\19. In this capacity, Taylor earned ten percent commissions on fees generated by
the bank's commercial loan unit. Jd.
Defendant Gilbert D. Marsiglia ("Marsiglia") was a director of the Bank beginning in
The loans at issue are described in Plaintiffs Complaint as Loans A-G, and, collectively, as the "Loss
Transactions." PI.'s Compl. mJ 2-6.

2

2

February 19, 2003, and a member of the Loan Committee from July 23, 2003, until the Bank
failed. Id. ~ 10.
Defendant John O. Mitchell, III ("Mitchell") was a director of the Bank from April
20, 1983, and a member of the Loan Committee from February 29, 2002, until the Bank
failed. Id. ~ 11.
STANDARD OF REVIEW

Under Rule 8(a)(2) of the Federal Rules of Civil Procedure, a complaint must contain
a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.
R. Civ. P. 8(a)(2). Rule 12(b)(6) of the Federal Rules of Civil Procedure

authorizes the

dismissal of a complaint if it fails to state a claim upon which relief can be granted. The
purpose of Rule 12(b)(6) is "to test the sufficiency of a complaint and not to resolve contests
surrounding the facts, the merits of a claim, or the applicability of defenses." Pre.rley v. City of
Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006).
The Supreme Court's recent opinions in Bell Atlantic
(2007), and AJh,mji

11.

Corp.

11.

Twombly, 550 U.S. 544

Iqbal, 556 U.S. 662 (2009), "require that complaints in civil actions be

alleged with greater specificity than previously was required." Walters
435, 439 (4th Cir. 2012) (citation omitted). The Supreme Court's

11.

M,MahCll, 684 F.3d

decision in Twombly

articulated "[t]wo w-orking principles" that courts must employ when ruling on Rule 12(b)(6)
motions to dismiss. Iqbal, 556 U.S. at 678. First, while a court must accept as true all the
factual allegations contained in the complaint, legal conclusions drawn from those facts are
not afforded such deference. Id. (stating that "[t]hreadbare recitals of the elements of a cause
of action, supported by mere conclusory statements, do not suffice" to plead a claim); see af.ro
3

,-------------------------------------~------~---~--

lVag More DogJ:. LLC v. Cozart,

-

680 F.3d 359, 365 (4th Cir. 2012) ("Although we are

constrained to take the facts in the light most favorable to the plaintiff, we need not accept
legal conclusions couched as facts or unwarranted inferences, unreasonable conclusions, or
arguments." (internal quotation marks omitted».
Second, a complaint must be dismissed if it does not allege "a plausible claim for
relief." Iqbal, 556 U.S. at 679. Under the plausibility standard, a complaint must contain
"more than labels and conclusions" or a "formulaic recitation of the elements of a cause of
action." Twombly, 550 U.S. at 555. Although the plausibility requirement does not impose a
"probability requirement,"

id. at 556, "[a] claim has facial plausibility when the plaintiff

pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678; Jee also Robertson

Ii.

Sea

PineJ Real EJtate COJ., 679 F.3d 278, 291 (4th Cir. 2012) ("A complaint need not make a case
against a defendant or fore(Jj"t evidemt sufficient to prove an element of the claim. It need only
aliegefactJ sufficient to Jtate elements of the claim." (emphasis in original) (internal quotation
marks and citation omitted». In making this assessment, a court must "draw on its judicial
experience and common

sense" to determine whether the pleader has stated a plausible

claim for relief. Iqbal, 556 U.S. at 679. "At bottom, a plaintiff must nudge [its] claims across
the line from conceivable to plausible to resist dismissal." Wag More Dogs, LLC, 680 F.3d at
365 (internal quotation marks omitted).3

ANALYSIS
:;As this Court is treating the subject Motion as a 1\10tiol1 to Dismiss, and not addressing the l\1otion alternatively
as a Motion for Swnmary Judgment, the standard of review for Rule S6 of the Federal Rules of Civil Procedure is
not set forth above.
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I.

Plaintiffs Claims Are Not Barred by FIRREA's Statute of Limitations
In moving to dismiss the subject Complaint, Defendants

claims are time-barred by the statute of limitations. Plaintiffs

first argue that FDIC's
claims arise from alleged

tortious acts by Defendants in relation to the review and approval of seven commercial loans
in 2006 and 2007. Under Maryland law, tort actions are subject to a three year statute of
limitations. Md. Code Ann., Cts. & Jud. Proc. ~ 5-101. Plaintiff thus had until 2009 or 2013,
respectively, to bring suit on the basis of these alleged tortious acts.
The Financial Institutions
USc.

Reform, Recovery, and Enforcement

Act of 1989, 12

~ 1821 ("FIRREA"), however, extends the time in which a claim may be filed beyond

the period set by state law. See O'Melveny & Myers

1/.

FDIC, 512 U.S. 79, 86 (1994). For this

reason, courts commonly refer to Section 1821(d)(14) of FIRREA as the "Extender Statute."

See id. Specifically, the Extender Statute provides that "the date on which the statute of
limitations begins to run ... shall be the later of - (i) the date of appointment

of the

Corporation (that is, of FDIC) as conservator or receiver; or (li) the date on which the cause
of action accrues." 12 U.S.c. ~ 1821(d)(14).
The FDIC was appointed receiver for Bradford Bank on August 28, 2009. Under the
Extender Statute, Plaintiff thus was required to bring suit within three years of August 28,
2009 - that is, August 28, 2012. Based on the parties' submissions to this Court, it is evident
that the parties recognized the impending August 28, 2012 statute of limitations, see Pl.'s
Opp. Ex. 4, ECF No. 24-5. The FDIC then entered into a "Tolling Agreement"

with

Defendants to suspend the operation of the statute of limitations. See id. The agreement was

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signed by Plaintiff and all Defendants on dates ranging from on July 8, 2012 to August 21,
2012. Defs.' Mot. to Dismiss Ex. 1, ECF No. 10-2.
The purpose

of the Tolling Agreement

was to allow the Parties "to continue

settlement discussions further prior to the initiation of any formal proceeding by the FDIC
against the Respondents."

Jd. In the event that settlement was not achieved, the "FDIC

reserve[d] the right to file any of the Claims against any of the Respondents after providing
seven (7) days prior written notice ... " Id. The Agreement
Respondents

further provides that, "[t]he

(here, Defendants] agree not to assert any defense based on Limitation Periods

that may pass between the Effective Date and the Tertnination Date other than as specified
herein." Jd. The parties repeatedly extended the Tolling Agreement, with the fifth such
amendment granting the FDIC the right to pursue claims until February 28, 2014. Plaintiff
filed this action on that date. Defs.' Mot. to Dismiss Ex. 2, ECF No. 10-3.
Not\vithstanding

Defendants'

voluntary submission to the Tolling Agreement and

their willingness to extend the Agreement five times, Defendants now argue that the FDIC's
claims must fail because Plaintiff filed this on February 28, 2014, nearly one-and-a-half years
after the original August 28, 2012 deadline set by the Extender Statute of FIRREA. Defs.'
Mot. to Dismiss, at 6-15. Defendants ask this Court to disregard the Tolling Agreement into
which they previously entered. Despite their repeated consent to the Agreement, Defendants
now dispute the validity of the Tolling Agreement, arguing that the express language of
Section 1821(d)(14) prohibits contractual circumvention of FIRREA's statute of limitations.
The text of the statute provides, in pertinent part:

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"Notwithstanding any provision of any contract, the applicable statute of
limitations \vith regard to any action brought by the Corporation as
conserva tor or receiver shall be--

(ii) in the case of any tort claim (other than a claim which is subject to section
1441a(b)(14) of this tide), the longer of-(I) the 3-year period beginning on the date the claim accrues; or
(II) the period applicable under State law."
12 U.S.c. ~ 1821 (d)(14). Defendants

thus argue that the Tolling 1\greement's attempt to

extend the FIRREA statute of limitations is unenforceable.
While the Defendants point to the United States District Court of Kansas's decision
in National Credit Union Admin. Bd.
Kan. 2013), the overwhelming

1'.

Credit SuirJe Se,.. (USA) U~C, 939 F. Supp. 2d 1113 (D.

weight of authority does not support

the Defendants'

position. Numerous federal district courts confronting this same issue have clearly held that
parties may willingly contract around FIRREA's proscribed limits. See }-<lJICv. Kime, 12 F.
Supp. 3d 1113, (S.D. Ind. 2014); FDIC v. WilliamJ, No. 13-883, slip op. (D. Utah Oct. 8,

2014); FDIC v. Bridges, No. 13-347, slip op. (M.D. Ga. Sept. 30, 2014);/-'lJIC v. JoneJ, No. 13168, slip op. (D. Nev. Sept. 19, 2014); FDIC

1).

Baldini, 983 F. Supp. 2d 772 (S.D. W. Va.

2014); FDIC v. Coleman, No. 1:14-cv-00310-CWD, 2015 \XiL 476234 (D. Idaho Feb. 5,2015).
The question of whether parties may toll the statute of limitations by contract is a question
of law for this Court to determine. Kime, 12 F. Supp. 3d at 1119. In this case, the Tolling
Agreement at issue does not replace FIRREA's statute of limitations, but rather suspends its
operation until a later date. It is thus enforceable, even given the express language of the
Extender Statute.

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Alternatively, Defendants

contend that FIRREA's

extender provlSlon makes the

statute one of repose - not of limitations4 Defs.' Mot. to Dismiss, at 11-14. As such,
Defendants

argue, this Court may not rely on equitable doctrines to enforce the Tolling

Agreement. Id. In support of this argument, Defendants rely on the distinction between the
two types of statutes enunciated by the United States Supreme Court in

as

Corp.

Ii.

WaJdbufl!,er, 134 S. Ct. 2175, 2183 (2014). The Supreme Court's analysis in WaJdbufl!,er,
however, addressed a different question than that presented here. In Waldbufl!,er, the Court
held that, while the Comprehensive Environmental Response, Compensation, and Liability
Act, 42 U.S.c.

S 9601

et seq. ("CERCLA"), preempts state statutes of limitations, CERCLA

does not preempt state statutes of repose. Id. at 2187 ("In light of the distinct purpose for
statutes of repose, ...

S 9658(b )(2) is besrread

to encompass only statutes of limitations ... ").

Finding the underlying North Carolina law to be a statute of repose, the Court held that
CERCLA did not preempt this state law restriction.
There is no dispute regarding preemption present in this case. The parties agree that
FIRREA's extender provision expressly allows claimants to bring suit even after state law

S

statutes of limitations have passed. 12 U.S.c.

1821(d)(14). Rather, Defendants argue that

this Court should disregard Congress's use of the term "statute of limitations" as employed
in Section 1821(d)(14) of FIRREA. Id. While the legislative label affixed to a statute "is
instructive, but it is not dispositive," Waldbufl!,er, 134 S. Ct. at 2185, there is simply no basis

A "statute of limitations" sets a "time limit for suing in a civil case, based on the date when the claim accrued."
Black's Law Dictionary 1546 (9th ed. 2009). In contrast, a "statute of repose" places an "outer limit on the right to
bring a civil action. That limit is measured not ITom the date on which the claim accrues, but instead ITom the date of
the last culpable act or omission of the defendant." Waldhurger, 134 S. Ct. at 2182 (citing Black's Law Dictionary
1546). A statute of repose is "equivalent to a cutoff ... in essense an absolute bar on a defendant's temporal
liability." Waldhurger, 134 S. Ct. at 2 I83 (internal citations omitted).
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for this Court to disregard the plain language of FIRREA. As the United States Court of
Appeals for the Seventh Circuit noted, "Congress enacted FIRREA in the face of a national
banking crisis, with the intent of maximizing the recovery of assets that the federal receivers
(FDIC, RTC) held in the failed banks they inherited." RTC CommmiafAJJets

TruJt 1995-NP3-

1 v. Phoenix Bond & Indem. Co., 169 F.3d 448, 456 (7th Cir. 1999). Interpreting FIRREA as a
statute of limitations (rather than a statute of repose) both respects the plain language of the
statute and is consistent

\'lith Congress's

aim to "maximize[e] the recovery of assets"

through the statute. !d.; see alJOBridgeJ, No. 13-347 at *5.
As FIRREA contains only a statute of limitations, the question of whether to enforce
the statute is within this Court's equitable powers. Waldburger, 134 S. Ct. at 2183. In light of
the Tolling Agreement into which the Parties entered and Ivtilingly extendedfil!e timeJ, this Court
holds that it would be inequitable to bar Plaintiffs claims as untimely. Indeed, a defendant
who enters into a contract while believing the contract unenforceable cannot be said to be
acting in good faith. See QueJtar Builders. In" v. CB Flooring, liC, 978 A.2d 651, 670 (Md.
2009). This Court also notes that Defendants

expressly agreed not to assert any defenses

based on the statute of limitations. Defs.' Mot. to Dismiss Ex. 1 ("The Respondents agree
not to assert any defense based on Limitation Periods that may pass between the Effective
Date and the Termination Date other than as specified herein."). 1\S a matter of equity, this
Court will give effect to the parties' Tolling Agreement.
Defendants finally argue that even if the Tolling Agreement is enforceable, the FDIC
IS

still unable to proceed due to its alleged failure to satisfy the notice terms of the

Agreement.

Defs.'s

j'vlot. to Dismiss,

at 14-15. In light of the ongoIng

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settlement

negotiations between the parties, the purpose of a notice provision was largely superfluous.
See Pl.'s Opp. Exs. 4-A, 4-B, ECF Nos. 24-5,25-6. There is little doubt that Defendants were
aware that failure to reach an agreement on the FDIC's claims would result in the FDIC's
bringing suit. Id. Moreover, Defendants suffer no material prejudice from Plaintiffs failure
to comply strictly \vith the Tolling Agreement's notice provision, as they had more than
ample time in which to reach a settlement before this action was filed.
For the foregoing reasons, the FDIC's action is not untimely under the Extender
Statute of FIRREA. Defendants'

Motion to Dismiss all claims as barred by the statute of

limitations is thus DENIED.

II.

Gross Negligence

- Not Mere Negligence

- Is the Correct

Standard

of

Liability for Director and Officer Conduct
In the event that Plaintiffs claims are not time-barred under FIRREA, Defendants
move to dismiss Counts I and III of the subject Complaint for failure to state a claim for
which relief may be granted. In Count I, the FDIC alleges that Defendants Arthur, Marsiglia,
and Mitchell negligently breached the duty of care each owed as officers of Bradford Bank.
Similarly, the FDIC contends in Count III that Defendant Taylor negligently breached her
fiduciary duties as an officer of the Bank, but especially in her role overseeing the review and
approval of loans by the Loan Committee. Defendants contend that gross negligence is the
appropriate standard through which to judge their alleged acts, not ordinary negligence.
The starting point for this inquiry is the text of FIRREA itself. The statue provides,
in pertinent part:
"A director or officer of an insured depository institution
personally liable for monetary damages ...
10

may be held

for gross negligence, including any similar conduct or conduct that
demonstrates a greater disregard of a duty of care (than gross negligence)
including intentional tortious conduct, as such terms are defined and
determined under applicable State law."
12 U.s.c.A.

5 1821(k). FIRREA

defers to state law on the question of what constitutes gross

negligence, but makes clear that gross negligence - not mere negligence - is a statutory
prerequisite to recovery.
The parties dispute whether negligence or gross negligence applies to the conduct of
corporate officers and directors in Maryland. The FDIC points to Maryland's codification of
the business judgment

rule to argue that corporate

negligence. Md. Code Ann., Corps. & Ass'ns

directors may be liable for mere

5 2-405.1(a)(3)

("1\ director shall perform his

duties as a director, including his duties as a member of a committee of the board on which
he serves ...

(3) With the care that an ordinarily prudent person in a like position would use

under similar circumstances."). Defendants, however, aptly note that Maryland case law both
predating and following the 1976 enactment of the above provision explains that a plaintiff
may only overcome the business judgment rule with a showing of gross negligence.
Maryland courts have long held that the appropriate test to determine director liability
is one of gross negligence. The Maryland Court of Appeals explicitly reasoned that:
"The conduct of the corporation's affairs are placed in the hands of the board
of directors and if the majority of the board properly exercises its business
judgment, the directors are not ordinarily liable. This sound general rule,
however, is subject to the important exception that directors will be held liable
if they permit the funds of the corporation or the corporate property to be
lost or wasted by their gross or culpable negligence."
Parish

11.

Maryland & Vi'll,inia Milk ProducersAn'n,

242 A.2d 512, 540 (Md. 1968). This

standard was also upheld after the 1976 codification of the business judgment rule in

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Maryland5 See Billman v. State Of Md. DepoJitIns. Fund Cop., 593 A.2d 684, 698 (Md. Ct. Spec.
App. 1991). As a leading commentator on Maryland corporate law explains, "[t]here is no
known indication that the General Assembly, in enacting Section 2-405.1 in 1976, thought
that it 'was changing the prevailing gross and/or

culpable negligence standard of Parish."

James Hanks, Jr., Maryland Coporations Law ~ 6.6.
In this case, the conduct giving rise to the FDIC's Complaint consists of a series of
business decisions made by Defendants

as directors and officers of Bradford Bank. The

business judgment rule's requirement that plaintiffs allege gross negligence therefore apply.
This conclusion is consistent with the statutory language of FIRREA, which, while relying
on state law standards of liability, sets a minimum floor - consistent with the business
judgment rule - and expressly limits directors'

and officers' liability to acts of gross

negligence. 12 U.S.CA. ~ 1821 (k). },ccordingly, Defendants'

Motion to Dismiss Counts I

and III of Plaintiffs Complaint alleging simple negligence is GRANTED.
CONCLUSION

For the foregoing reasons, Defendants' Joint Motion to Dismiss (ECF No. 10) is
GRANTED

IN PART and DENIED

IN PART. Specifically, it is GRANTED

Plaintiffs negligence claims (Counts I and III), which are dismissed, but it is DENIED

as to
as to

The Pan'sh statement of the business judgment rule is also consistent with the Delaware Supreme Court's
subsequent, landmark decision in Smith P. Van Gorkom, 488 A.2d 858, 873 (Del. 1985) (''\\le think the concept of
gross negligence is also the proper standard for dctcrmin.ing whether a business judgment reached by a board of
directors was an informed one."). Maryland courts routinely refer to "Delaware's acknowledged leadership in
developing a coherent body of corporate law to which we and many other states ordinarily look for guidance."
Shellker v. Laureate Edue., Inc, 983 A.2d 408, 427 (Md. 2009).
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the gross negligence claims (Counts II and IV).

A separate Order follows.

/s/

Dated: March 2, 2015

Richard D. Bennett
United States District Judge

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