Palmetto State Bank v. Riley et al

Filing 52

ORDER AND OPINION adopting the 37 Report and Recommendation and denying 13 Defendants' Motion to Dismiss Counter-Defendant and Remand. Signed by Honorable J. Michelle Childs on 9/19/2017. (bgoo)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
AIKEN DIVISION
Palmetto State Bank,

)
)
Plaintiff,
)
)
v.
)
)
Marion F. Riley, Jr., M.F. Riley Funeral Home,
)
Riley’s Funeral Home Inc.,
)
)
Defendants,
)
)
v.
)
)
Federal Deposit Insurance Corporation, as
)
Receiver for Allendale County Bank,
)
)
Counter-Defendant.
)
__________________________________________)
)
Marion F. Riley, Jr.,
)
)
Third-Party Plaintiff,
)
)
v.
)
)
Walker Harter, Jr., Walker Harter, Sr.,
)
)
Third-Party Defendants.
)
__________________________________________)

Civil Action No.: 1:16-cv-03842-JMC

ORDER AND OPINION

This matter is before the court on Defendants Marion F. Riley, Jr., M.F. Riley Funeral
Home, and Riley’s Funeral Home, Inc.’s (“Defendants”) Motion to Dismiss Counter-Defendant
and Remand. (ECF No. 13.) In accordance with 28 U.S.C. § 636(b) and Local Civil Rule 73.02,
D.S.C., the matter was referred to United States Magistrate Judge Paige J. Gossett for a Report and
Recommendation (“Report”).

On July 18, 2017, the Magistrate Judge issued a Report

recommending that the court deny Defendants’ Motion. (ECF No. 37.) For the reasons stated

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herein, the court ADOPTS the Magistrate Judge’s Report and Recommendation (ECF No. 37),
thereby DENYING Defendants’ Motion to Dismiss Counter-Defendant and Remand (ECF No.
13).
I.

FACTUAL AND PROCEDURAL BACKGROUND

On April 25, 2014, the South Carolina Commissioner of Banking declared Allendale
County Bank (“ACB”) insolvent and appointed the Federal Deposit Insurance Corporation
(“FDIC-R”) as its receiver. (ECF No. 1 at 2.) The FDIC-R as receiver for ACB succeeded to all
rights, titles, powers and privileges of ACB pursuant to 12 U.S.C. § 1821(d)(2)(A). (Id.) Also on
April 25, 2014, pursuant to a Purchase and Assumption Agreement between the FDIC-R and
Plaintiff, Plaintiff purchased certain assets of the failed ACB, including the subject loan, while the
FDIC-R retained certain liabilities. (Id.)
On March 15, 2016, Plaintiff filed a Complaint against Defendant Marion F. Riley, Jr. in
the Allendale County Magistrate’s Court for Defendant’s failure to make payments on his loan.
(Id.) On April 28, 2016, Defendant filed his Answer and raised defenses and counterclaims that
were based on the actions of Allendale County Bank. (Id.) Thereafter, the matter was transferred
to the Allendale County Court of Common Pleas because the amount in controversy exceeded the
jurisdictional limit of the Magistrate’s Court. (Id.)
On June 29, 2016, the FDIC-R filed its Motion to Join, or Alternatively, to Intervene in the
State Court Action based on the FDIC-R’s agreement to indemnify Plaintiff for actions of ACB
prior to its closing. (Id. at 3.) On September 6, 2016, Plaintiff filed an Amended Complaint that
also sought judgment against Defendants M.F. Riley Funeral Home and Riley’s Funeral Home,
Inc. for loans that are purportedly in default. (Id.) On October 3, 2016, the parties, including
Defendants, consented to the joinder of the FDIC-R to the action as to Defendants’ counterclaims,

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and consequently, to the substitution of the FDIC-R for Plaintiff as the only proper counterclaim
defendant. (Id.) On November 21, 2016, Defendants filed an Amended Answer that did not
include any counterclaims, but still included defenses based on the actions of ACB and a request
for a set-off. (Id. at 4.)
On December 8, 2016, the FDIC-R removed the matter to this court, asserting jurisdiction
pursuant to 12 U.S.C. § 1819 (b)(2)(A) & (B). (Id.) On January 6, 2017, Defendants filed a Motion
to Dismiss Counter-Defendant and Remand, asserting the court lacks subject matter jurisdiction. 1
(ECF No. 13 at 1.)
On January 20, 2017, Plaintiff filed a response in opposition to Defendants’ Motion,
asserting (1) Defendants have waived their right to seek dismissal of the FDIC-R, (2) regardless
of whether Defendants label their allegations as counterclaims or defenses, the FDIC-R is still a
necessary and proper party, (3) even if the FDIC-R is dismissed as a party, this court retains subject
matter jurisdiction over the action, and (4) strong public policy concerns require this court to deny
Defendants’ Motion. (ECF No. 17.)
Also on January 20, 2017, the FDIC-R filed a response in opposition to Defendants’
Motion, asserting (1) the FDIC-R is a real party in interest and must remain a party to the action,
and (2) even if the court finds that the FDIC-R is no longer a proper party to the action, the court
nevertheless retains jurisdiction over the entire action. (ECF No. 18.)
On January 27, 2017, Defendants filed a Reply to Plaintiff and the FDIC-R, re-asserting
their position in their Motion to Dismiss Counter-Defendant and Remand. (ECF Nos. 19, 20.)

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Although Defendants’ motion does not state so explicitly, the court construes their argument as
assuming that the court’s sole basis for jurisdiction in this matter is the presence of the FDIC-R as
a party pursuant to 12 U.S.C. § 1819(b)(2)(A) & (B), and therefore, dismissal of the FDIC-R would
require that the matter be remanded to state court.
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On July 18, 2017, the Magistrate Judge issued her Report recommending that the court
deny Defendants’ Motion because the FDIC-R is a proper and interested party in this matter, and
thus the court should retain jurisdiction. (ECF No. 37 at 7.) Defendants were advised of their
right to file objections to the Report. (Id. at 8.) On August 2, 2017, Defendants filed an Objection
to the Report (“Objection”). (ECF No. 40.)
II.

JURISDICTION

A defendant is permitted to remove a case to federal court if the court would have original
jurisdiction over the matter. 28 U.S.C. § 1441(a) (2012). A federal district court has “original
jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States.”
28 U.S.C. § 1331. Any civil suit in which the FDIC, in any capacity, is a party is “deemed to arise
under the laws of the United States.” 12 U.S.C. § 1819(b)(2)(A); see also Bullion Servs, Inc., v.
Valley State Bank, 50 F.3d 705, 707 (9th Cir. 1995). Additionally, when the FDIC is a party, the
entire action is deemed to arise under the laws of the United States. See Fed. Deposit Ins. Corp.,
58 F.3d 1041, 1045 (4th Cir. 1995).
Further, the FDIC has a statutory right in each case in which it is a party to remove a case
from state court to federal court pursuant to the Financial Institution Reform, Recovery and
Enforcement Act of 1989, Pub. L. No. 101-73, § 209, 103 State. 1983 et seq. Specifically, the
FDIC has 90 days from the date it is substituted as a party to remove the action from state court to
the appropriate United States district court. 12 U.S.C. § 1819(b)(2)(B).
III.

LEGAL STANDARD

The Magistrate Judge’s Report is made in accordance with 28 U.S.C. § 636(b)(1) and Local
Civil Rule 73.02 for the District of South Carolina.
recommendation to this court.

The Magistrate Judge makes only a

The recommendation has no presumptive weight.

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The

responsibility to make a final determination remains with this court. See Matthews v. Weber, 423
U.S. 261, 270-71 (1976). This court is charged with making a de novo determination of those
portions of the Report to which specific objections are made, and the court may accept, reject, or
modify, in whole or in part, the Magistrate Judge’s recommendation, or recommit the matter with
instructions. See 28 U.S.C. § 636(b)(1). Objections to a Report and Recommendation must
specifically identify portions of the Report and the basis for those objections. Fed. R. Civ. P. 72(b).
“[I]n the absence of a timely filed objection, a district court need not conduct a de novo review,
but instead must ‘only satisfy itself that there is no clear error on the face of the record in order to
accept the recommendation.’” Diamond v. Colonial Life & Acc. Ins. Co., 416 F.3d 310, 316 (4th
Cir. 2005) (quoting Fed. R. Civ. P. 72 advisory committee’s note).
IV.

ANALYSIS

In their Objection, Defendants asserted that the Magistrate Judge erred in failing to fully
address the exception to the general rule regarding federal jurisdiction involving the FDIC in 12
U.S.C. § 1819 (b)(2)(D), which Defendants contend applies to this case. (ECF No. 40 at 1.)
12 U.S.C. § 1819(b)(2)(A) provides:
Except as provided in subparagraph (D), all suits of a civil nature at common law
or in equity to which the Corporation, in any capacity, is a party shall be deemed to
arise under the laws of the United States.
12 U.S.C. § 1819(b)(2)(D) provides:
Except as provided in subparagraph (E), any action–
(i) to which the Corporation, in the Corporation’s capacity as receiver of a State
insured depository institution by the exclusive appointment by State authorities, is
a party other than as a plaintiff;
(ii) which involves only the preclosing rights against the State insured depository
institution, or obligations owing to, depositors, creditors, or stockholders by the
State insured depository institution; and

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(iii) in which only the interpretation of the law of such State is necessary, shall not
be deemed to arise under the laws of the United States.
12 U.S.C § 1819 (b)(2)(E), Rule of Construction, provides:
Subparagraph (D) shall not be construed as limiting the right of the Corporation to
invoke the jurisdiction of any United States district court in any action described in
such subparagraph if the institution of which the Corporation has been appointed
receiver could have invoked the jurisdiction of such court.
Defendants contend that there is no federal question or diversity jurisdiction in this case, and thus
Plaintiff could not have invoked the jurisdiction of this court. 2 (ECF No. 40 at 2.) Therefore,
Defendants assert subparagraph (E) does not apply. (Id. at 3.) Defendants give six arguments why
the court should look to subparagraph (D), the exception to the rule, and apply it to this case. (Id.)
Below, the court responds to each argument, pointing the parties to Defendants’ failure to meet 12
U.S.C. § 1819(b)(2)(D)(ii), as discussed under Defendants’ argument (4).
(1) “the FDIC is acting as a receiver for a failed state-insured bank (Allendale County Bank);”
(ECF No. 40 at 3.)
The court does not disagree with this statement, as discussed in the Factual and Procedural section.
(2) “the FDIC was appointed as receiver April 25, 2014, by a state authority (South Carolina
Office o[f] Commissioner of Banking);” (ECF No. 40 at 3.)
The court does not disagree with this statement, as discussed in the Factual and Procedural section.
(3) “the FDIC is not a plaintiff;” (ECF No. 40 at 3.)
The court does not disagree with this statement, as discussed in the Factual and Procedural section.

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In their Objection, Defendants assert that Plaintiff could not have invoked the jurisdiction of this
court (emphasis added). (ECF No. 40 at 2.) However, the court assumes Defendants meant to
name ACB, not Plaintiff, because 12 U.S.C. § 1819(b)(2)(E) does not limit the right of the
Corporation to invoke jurisdiction of any United States district court “if the institution of which
the Corporation has been appointed receiver could have invoked the jurisdiction of such court.”
ACB is the institution of which the Corporation has been appointed receiver, not Plaintiff, as
Defendants stated.
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(4) “the lawsuit involves the preclosing rights of the debtors, Mr. Riley and his businesses,
namely rights stemming from alleged notes with Allendale County Bank, before the bank
was closed and before the FDIC was appointed as receiver;” (ECF No. 40 at 3.)
Defendants’ argument here attempts to assert that this case meets subsection (ii) under 12 U.S.C.
§ 1819(b)(2)(D). However, unlike the rule stated in 12 U.S.C. § 1819(b)(2)(D)(ii), this action does
not “involve[] only the preclosing rights against the State insured depository institution, or
obligations owing to, depositors, creditors, or stockholders by the State insured depository
institution” (emphasis added). The action also involves the indemnification of Plaintiff by the
FDIC-R. (ECF No. 17-1.) As such, it is irrelevant that Defendants point to the lawsuit involving
actions that occurred “before the bank was closed and before the FDIC was appointed as receiver.”
(ECF No. 40 at 3.) The FDIC-R may be liable to Plaintiff pursuant to the indemnity provision of
the Purchase and Assumption Agreement between the two entities. (ECF No. 17-1.) The
indemnity provision states in part,
[T]he Receiver agrees to indemnify and hold harmless the Indemnitees against any
and all costs, losses, liabilities, expenses (including attorneys’ fees) incurred prior
to the assumption of defense by the Receiver pursuant to Section 12.2(d),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with claims against any Indemnitee based on liabilities of the Failed
Bank that are not assumed by the Assuming Institution pursuant to this Agreement
or subsequent to the execution hereof by the Assuming Institution or any Subsidiary
or Affiliate of the Assuming Institution for which indemnification is provided:
claims based on any action or inaction prior to the Bank Closing Date of
the Failed Bank, its directors, officers, employees or agents as such, or any
Subsidiary or Affiliate of the Failed Bank, or the directors, officers,
employees or agents as such of such Subsidiary or affiliate[.] (Id. at 1, 2.)
Therefore, the FDIC-R must indemnify Plaintiff against any liabilities incurred prior to its
appointment as receiver for ACB (emphasis added). (ECF No. 17-1 at 1.)
Moreover, Defendants’ Amended Answer contains multiple defenses to Plaintiff’s claims
that are based on actions by ACB. (ECF No. 6.) Specifically, the fifth, sixth, eighth, fifteenth,

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and sixteenth defenses all seek to lessen Defendants’ liability based on actions by ACB. (Id.) If
Defendants were successful in raising those defenses, it could lessen the amount of debt owed to
Plaintiff based on the actions of ACB, for which the FDIC-R has agreed to indemnify Plaintiff.
Accordingly, the FDIC-R remains a real party in interest in this matter, regardless of whether
Defendants’ allegations are styled as defenses or counterclaims. See Pernie v. Bailed Drilling Co.
v. Fed. Deposit Ins. Corp., 905 F.2d 78, 80 (5th Cir. 1990) (“The designation of FDIC as a proper
party stems in part from its obligation to indemnify [the assignee bank] under the terms of the P &
A Agreement.”). Therefore, the court does not find this argument by Defendants to be viable.
(5) “to decide the case, only the interpretation of the insuring state’s law is required; and”
(ECF No. 40 at 3.)
Because any civil suit in which the FDIC, in any capacity, is a party is “deemed to arise under the
laws of the United States,” the court acknowledges that federal question jurisdiction exists. See
12 U.S.C. § 1819(b)(2)(A). However, the court does not disagree with Defendants that state
substantive law would be applied to decide the case.
(6) “ACB itself could not have invoked federal court jurisdiction.” (ECF No. 40 at 3.)
The court does not disagree with this statement because there would not have been diversity of
citizenship between ACB and Defendants or a federal question at issue.
Based on the above analysis, the court does not find that the exception in 12 U.S.C. §
1819(b)(2)(D) applies in this case. The FDIC-R is a necessary party to this action, and thus the
court retains jurisdiction over this matter.
V.

CONCLUSION

After a thorough review of the Report and the record in this case, the court finds the Report
provides an accurate summary of the facts and law. The court ADOPTS the Magistrate Judge’s
Report and Recommendation (ECF No. 37). Defendants’ Motion to Dismiss Counter-Defendant
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and Remand is DENIED (ECF No 13).

IT IS SO ORDERED.

United States District Judge
September 19, 2017
Columbia, South Carolina

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