Federal Deposit Insurance Corporation v. Delaney et al

Filing 50

ORDER Denying 34 Motion to Dismiss. Signed by Judge James C. Mahan on 7/2/2014. (Copies have been distributed pursuant to the NEF - SLR)

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UNITED STATES DISTRICT COURT
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DISTRICT OF NEVADA
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FEDERAL DEPOSIT INSURANCE
CORPORATION AS RECEIVER FOR
SUN WEST BANK,

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2:13-CV-924 JCM (VCF)

Plaintiff(s),

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v.

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JACQUELINE DELANEY, et al.,

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Defendant(s).

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ORDER

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Presently before the court is defendant Jacqueline Delaney’s motion to dismiss (doc. # 34),

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in which defendant Kenneth Templeton joined (doc. # 35). Plaintiff, the Federal Deposit Insurance

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Corporation as receiver for Sun West Bank (“FDIC”), has responded. (Doc. # 41). Delaney has

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replied (doc. # 42) and Templeton has also replied (doc. # 47).

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I.

Background

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Sun West Bank (“SWB”) was founded in 1998, with its headquarters in Las Vegas, Nevada.

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On May 28, 2010, the Nevada Department of Business and Industry, Financial Institutions Division

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(“NDBI”) closed SWB and the FDIC was appointed as receiver.

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In the instant action, the FDIC asserts two claims: (1) gross negligence pursuant to § 1821(k)

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of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”); and (2)

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breach of fiduciary duty under Nevada law.

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James C. Mahan
U.S. District Judge

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The complaint alleges that, as directors of SWB, defendants Delaney and Templeton

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(“defendants”) were required to conduct SWB’s business consistent with prudent, safe, and sound

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lending practices, including following SWB’s lending policies and informing themselves about the

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risks of proposed loans. (Doc. # 1, p. 24-25).

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The complaint alleges that in 2005, the board of directors established a ten-year plan to reach

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a $1 billion threshold in assets, and aggressively extended credit–primarily in commercial real estate

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and construction areas–in an effort to quickly grow SWB’s assets. (Doc. # 1, p. 8). The complaint

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outlines six loans that defendants approved (doc. # 1, p. 14-24) and alleges that, between June 12,

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2007, and May 28, 2010, defendants breached various duties by imprudently approving these loans

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to non-creditworthy borrowers and limited liability companies with risky characteristics (doc. # 1,

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p. 8). The complaint states that all six loans defaulted, causing in excess of $8 million in losses.

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In the instant motion, defendants argue that Nevada’s business judgment rule (“BJR”) applies

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and both claims fail under the rule. The court will address each claim in turn.

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II.

Legal Standard

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A court may dismiss a complaint for “failure to state a claim upon which relief can be

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granted.” Fed. R. Civ. P. 12(b)(6). A properly pled complaint must provide “[a] short and plain

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statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2); Bell

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Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). While Rule 8 does not require detailed factual

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allegations, it demands “more than labels and conclusions” or a “formulaic recitation of the elements

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of a cause of action.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted).

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“Factual allegations must be enough to rise above the speculative level.” Twombly, 550 U.S.

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at 555. Thus, to survive a motion to dismiss, a complaint must contain sufficient factual matter to

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“state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. 662, 678 (citation omitted).

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In Iqbal, the Supreme Court clarified the two-step approach district courts are to apply when

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considering motions to dismiss. First, the court must accept as true all well-pled factual allegations

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in the complaint; however, legal conclusions are not entitled to the assumption of truth. Id. at 678-79.

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James C. Mahan
U.S. District Judge

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Mere recitals of the elements of a cause of action, supported only by conclusory statements, do not

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suffice. Id. at 678.

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Second, the court must consider whether the factual allegations in the complaint allege a

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plausible claim for relief. Id. at 679. A claim is facially plausible when the plaintiff’s complaint

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alleges facts that allow the court to draw a reasonable inference that the defendant is liable for the

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alleged misconduct. Id. at 678.

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Where the complaint does not permit the court to infer more than the mere possibility of

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misconduct, the complaint has “alleged–but not shown–that the pleader is entitled to relief.” Id.

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(internal quotations omitted). When the allegations in a complaint have not crossed the line from

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conceivable to plausible, plaintiff's claim must be dismissed. Twombly, 550 U.S. at 570.

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The Ninth Circuit addressed post-Iqbal pleading standards in Starr v. Baca, 652 F.3d 1202,

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1216 (9th Cir. 2011). The Starr court stated, “First, to be entitled to the presumption of truth,

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allegations in a complaint or counterclaim may not simply recite the elements of a cause of action,

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but must contain sufficient allegations of underlying facts to give fair notice and to enable the

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opposing party to defend itself effectively. Second, the factual allegations that are taken as true must

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plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to

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be subjected to the expense of discovery and continued litigation.” Id.

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III.

Analysis

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A.

Claim one - 12 U.S.C. § 1821(k)

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FIRREA provides that “a director or officer of an insured institution may be held personally

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liable for monetary damages in any civil action by . . . [the] receiver . . . for gross negligence,

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including any similar conduct or conduct that demonstrates a greater disregard of a duty of care (than

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gross negligence) including intentional tortious conduct, as such terms are defined and determined

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under applicable [s]tate law.” 12 U.S.C. § 1821(k). Moreover, § 1821(k) contains a savings clause:

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“Nothing in this paragraph shall impair or affect any right of the [c]orporation under other applicable

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law.” Id.

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...

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James C. Mahan
U.S. District Judge

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(1)

Gross negligence under Nevada law

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Under Nevada law, a claim for ordinary negligence requires four elements: (1) defendant

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owed plaintiff a duty of care; (2) defendant breached that duty; (3) that breach of duty caused harm

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to plaintiff that was reasonably foreseeable; and (4) damages. Butler ex. rel. Biller v. Bayer, 168 P.3d

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1055, 1065 (Nev. 2007). “Gross negligence is a manifestly smaller amount of watchfulness and

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circumspection than the circumstances require of a prudent man.” Hart v. Kline, 116 P.2d 672, 674

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(Nev. 1941). “Ordinary and gross negligence differ in degree of inattention, while both differ in kind

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from willful and intentional conduct which is or ought to be known to have a tendency to injure.”

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Id.

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Defendants argue that to state a claim for gross negligence under FIRREA, the FDIC must

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allege facts to satisfy both the legal standard for gross negligence under Nevada law and rebut the

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presumption afforded by Nevada’s BJR. For support, defendants cite to non-binding authority that

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addressed a breach of fiduciary duty under state law, not under FIRREA.

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“[T]he business judgment rule does not protect the gross negligence of uninformed directors.

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. . .” Shoen v. SAC Holding, Corp., 137 P.3d 1171, 1184 (Nev. 2006). Moreover, § 1821(k) expressly

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authorizes the FDIC to sue directors for gross negligence, as defined under the applicable state law.

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“FIRREA was enacted at a time when numerous state legislatures had moved to insulate corporate

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. . . directors from liability.” FDIC v. McSweeney, 976 F.2d 532, 539 (9th Cir. 1992). To the extent

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that the BJR would insulate directors from liability for gross negligence under § 1821(k), it is

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preempted. See id. (“State law is preempted where it stands as an obstacle to the accomplishment

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and execution of the full purposes and objectives of Congress.”) (citing Hines v. Davidowitz, 312

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U.S. 52, 67 (1941)) (internal quotations omitted).

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While defendants also argue that the complaint merely alleges simple negligence, their

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contention is supported only by facts regarding the circumstances surrounding the loans, which are

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in dispute. At this stage, the court must take the factual allegations contained in the complaint as

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true. Iqbal at 1950.

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...

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James C. Mahan
U.S. District Judge

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The complaint alleges that, as directors, defendants had a duty to conduct SWB’s business

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consistent with prudent, safe, and sound lending practices, and that they breached this duty by

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imprudently approving six loans. The complaint states that members of SWB’s board of directors

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had “considerable banking and commercial development experience,” which defendants do not

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dispute. (Doc. # 1, p. 8). The complaint further alleges that, despite such experience, defendants

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negligently approved six high-risk loans in a failed attempt to grow SWB’s assets to over $1 billion.

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The complaint states sufficient facts to support a reasonable inference that default on the six loans

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was reasonably foreseeable.

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Accordingly, based on the allegations of misconduct related to the issuance of the six loans,

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the complaint plausibly states a claim for gross negligence. The court will deny the motion to dismiss

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as to this claim.

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B.

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“[A] board’s power to act on the corporation’s behalf is governed by the directors’ fiduciary

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relationship with the corporation and its shareholders, which imparts upon the directors duties of care

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and loyalty.” Shoen, 137 P.3d at 1178-79 (citations omitted). “[T]he duty of care consists of an

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obligation to act on an informed basis; the duty of loyalty requires the board and its directors to

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maintain, in good faith, the corporation’s and its shareholders’ best interests over anyone else’s

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interests.” Id.

Claim two - breach of fiduciary duty under Nevada law

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Balancing these duties “is the protection generally afforded to directors in conducting the

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corporation’s affairs by the business judgment rule.” Id. at 1179. “[E]ven a bad decision is generally

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protected by the business judgment rule’s presumption . . . .” Id. at 1181. “[T]he Nevada Legislature

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codified the business judgment rule at NRS 78.138.” Id. at 1179.

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Nevada’s business judgment rule states in relevant part:

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3. Directors and officers, in deciding upon matters of business, are
presumed to act in good faith, on an informed basis and with a view
to the interests of the corporation.

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James C. Mahan
U.S. District Judge

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7. [A] director or officer is not individually liable to the corporation
or its stockholders or creditors for any damages as a result of any act
or failure to act in his or her official capacity as a director or officer
unless it is proven that:

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(a) The director’s or officer’s act or failure to act constituted
a breach of his or her fiduciary duty as a director or officer;
and

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(b) The breach of those duties involved intentional
misconduct, fraud or a knowing violation of law.

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NRS 78.138 (emphasis added).

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The complaint alleges that, as directors, defendants owed SWB fiduciary duties to act on an

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informed basis and in the best interest of SWB. Based on the same factual allegations as the FDIC’s

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gross negligence claim, the complaint re-alleges defendants’ same breaches. The FDIC argues that

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the breach of fiduciary duty claim must stand because it has stated a plausible claim for gross

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negligence that is supported by numerous factual allegations.

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The duty alleged in a gross negligence claim is different from the duty alleged in a breach of

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fiduciary duty claim and must be addressed accordingly. The complaint contends that defendants

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imprudently approved six loans despite their experience and knowledge of the loans’ risky

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characteristics. While the complaint does not expressly allege that defendants breached their duty of

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care, it states facts sufficient to support a reasonable inference that defendants breached that duty and,

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if true, that defendants are liable. Specifically, the complaint enumerates several SWB policies that

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defendants neglected to follow and various warnings that defendants ignored in their approval of six

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loans, which all resulted in default.

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In response, defendants argue that “the business judgment rule . . . operates to preclude

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liability for any damages resulting from a breach of fiduciary claim.” (Doc. # 34, p. 16). Defendants

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also argue that the FDIC failed to allege intentional misconduct, fraud, or a knowing violation of law.

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Defendants contend that these deficiencies warrant the dismissal of the FDIC’s breach of fiduciary

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duty claim.

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James C. Mahan
U.S. District Judge

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However, defendants misstate the BJR. The BJR does not “preclude” liability for a breach of

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fiduciary duty; it merely creates a presumption that directors act on an informed basis and in the best

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interest of the corporation. Although the BJR states that a claimant must prove that the breach of

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fiduciary duties involved intentional misconduct, fraud or a knowing violation of the law, such proof

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is not required at this stage of the proceedings. The allegations set forth by the complaint are

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sufficient at this stage to rebut the presumption created by the BJR. While defendants may prevail

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under the BJR at the summary judgment stage or at trial, such a determination is inappropriate at this

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motion to dismiss stage.

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Accordingly, the court will also deny the motion to dismiss as to this claim.
IV.

Conclusion
Defendants motion to dismiss the FDIC’s claims for gross negligence pursuant to § 1821(k)

and breach of fiduciary duty under Nevada law will be denied.

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Accordingly,

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IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that defendants’ motion to

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dismiss (doc. # 34), be, and the same hereby is, DENIED.
DATED July 2, 2014.

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UNITED STATES DISTRICT JUDGE
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James C. Mahan
U.S. District Judge

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