The Federal Deposit Insurance Corporation, et al v. Killinger et al

Filing 76

REPLY, filed by Defendants Kerry K Killinger, Linda C Killinger, TO RESPONSE to 55 MOTION to Dismiss (Romero, Tobin)

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The Honorable Marsha J. Pechman

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UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF WASHINGTON

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THE FEDERAL DEPOSIT INSURANCE
CORPORATION, as RECEIVER of
WASHINGTON MUTUAL BANK,

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Plaintiff,
v.

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KERRY K. KILLINGER, STEPHEN J.
ROTELLA, DAVID C. SCHNEIDER,
LINDA C. KILLINGER, and ESTHER T.
ROTELLA,

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Defendants.

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No. 2:11-cv-00459-MJP
DEFENDANTS KERRY K. AND LINDA
C. KILLINGER’S REPLY IN SUPPORT
OF MOTION TO DISMISS
NOTED FOR CONSIDERATION:
September 15, 2011
ORAL ARGUMENT REQUESTED

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Killinger Reply ISO Motion to Dismiss
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TABLE OF CONTENTS

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TABLE OF AUTHORITIES ......................................................................................................... ii

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I.

INTRODUCTION ............................................................................................................. 1

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II.

ARGUMENT ..................................................................................................................... 1

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A.

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The Negligence-Based Claims Are Barred By the Business
Judgment Rule. ...................................................................................................... 1

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1.

The Business Judgment Rule Provides a Basis for 12(b)(6)
Dismissal. ................................................................................................... 1

2.

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The Allegations in the Complaint Attacking Management’s
Historical Business Decisions Fail to Rebut the Substantive
Protections of Washington’s Business Judgment Rule. ............................. 4

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a)

The Receiver Distorts the Business Judgment Rule. ..................... 5

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b)

The Complaint Attacks the Substantive Merit of Mr.
Killinger’s Historical Business Decisions. .................................... 9

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B.

The Breach of Fiduciary Duty Claim Is Duplicative of the
Negligence Claims. .............................................................................................. 11

C.

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The Remedial Claims Should Be Dismissed Since the Substantive
Claims Fail. .......................................................................................................... 12

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III.

CONCLUSION ................................................................................................................ 12

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TABLE OF AUTHORITIES

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FEDERAL CASES

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1st Valley Credit Union v. Bland, No. 10-1597 (C.D. Cal. Dec. 20, 2010)............................... 2, 9

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Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) .................................................................................. 4, 5
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Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) ................................................................... 4

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Estate of Detwiler v. Offenbecher, 728 F. Supp. 103 (S.D.N.Y. 1989) ....................................... 10

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FDIC v. Castetter, 184 F.3d 1040 (9th Cir. 1999) ....................................................................... 10

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FDIC v. Stahl, 89 F.3d 1510 (11th Cir. 1996) ............................................................................... 7

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Grassmueck v. Barnett, 2003 WL 22128263 (W.D. Wash. July 7, 2003) ................................. 2, 3

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Grassmueck v. Barnett, 281 F. Supp. 2d 1227 (W.D. Wash. 2003) ............................................ 12

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Gundaker/Jordan Am. Holdings, Inc. v. Clark, 2008 WL 4550540 (E.D. Ky. Oct. 9,
2008) ........................................................................................................................................ 6

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Heard v. Perkins, 441 B.R. 701 (N.D. Ala. 2010) ......................................................................... 4

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Hua v. Boeing Corp., 2009 WL 1044587 (W.D. Wash. Apr. 17, 2009) ..................................... 11

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In re Consumers Power Co. Deriv. Litig., 132 F.R.D. 455 (E.D. Mich. 1990) ........................... 10

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In re Fleming Packaging Corp., 351 B.R. 626 (Bankr. C.D. Ill. 2006) ........................................ 3

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In re IT Grp. Inc., 2005 WL 3050611 (D. Del. Nov. 15, 2005) .................................................... 4

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In re Tower Air, Inc., 416 F.3d 229 (3d Cir. 2005) ................................................................... 3, 4

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Jacobson v. Wash. State Univ., 2007 WL 26765 (E.D. Wash. Jan. 3, 2007) .............................. 11

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Kaye v. Lone Star Fund V (U.S.), L.P., ___ B.R. ___, 2011 WL 1548967 (Bankr. N.D.
Tex. Apr. 26, 2011) .............................................................................................................. 3, 4

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Kloha v. Duda, 246 F. Supp. 2d 1237 (M.D. Fla. 2003) ............................................................... 7

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National Credit Union Administration v. Siravo, No. 10-1597 (C.D. Cal. Jan. 31, 2011) ............ 2

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National Credit Union Administration v. Siravo, No. 10-1597 (C.D. Cal. July 7, 2011) ......... 2, 9

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National Credit Union Administration v. Siravo, No. 10-1597 (C.D. Cal. July 25, 2011) ........... 1

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RTC v. Hess, 820 F. Supp. 1359 (D. Utah 1993) ......................................................................... 12
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RTC v. Rahn, 854 F. Supp. 480 (W.D. Mich. 1994) .................................................................... 10

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Swartz v. KPMG LLP, 476 F.3d 756 (9th Cir. 2007) .................................................................. 12

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Talib v. Skyway Communications Holding Corp., 2005 WL 1610707 (M.D. Fla. July 7,
2005) ........................................................................................................................................ 3

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Washington Bancorp. v. Said, 812 F. Supp. 1256 (D.D.C. 1993) ................................................. 3

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STATE CASES

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Citron v. Fairchild Camera & Instrument Corp., 1988 WL 53322 (Del Ch. May 19,
1988), aff’d, 569 A.2d 53 (Del. 1989) ................................................................................... 10

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Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53 (Del. 1989) ................................. 8

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Cuker v. Mikalauskas, 692 A.2d 1042 (Pa. 1997) ......................................................................... 8

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Equipto Div. Aurora Equipment Co. v. Yarmouth, 950 P.2d 451 (Wash. 1998) ........................... 6
Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049 (Del. Ch. 1996) .............................................. 11

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Henrichs v. Chugach Alaska Corp., 250 P.3d 531 (Alaska 2011)................................................. 6

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Hines v. Data Line Sys., Inc., 787 P.2d 8 (Wash. 1990) ................................................................ 6

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Humphrey Indus., Ltd. v. Clay Street Associates, LLC, 242 P.3d 846 (Wash. 2010) .................... 6

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In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106 (Del. Ch. 2009) ......................... 2, 5, 11

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In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036 (Del. Ch. Jan. 31, 1989) .................... 10

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In re Spokane Concrete Prods., Inc., 892 P.2d 98 (Wash. 1995) .................................................. 7

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Matthew G. Norton Co. v. Smyth, 51 P.3d 159 (Wash. Ct. App. 2002) ........................................ 6

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MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003) ......................................................... 9
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Nursing Home Bldg. Corp. v. DeHart, 535 P.2d 137 (Wash. Ct. App. 1975) ............................... 5

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Riss v. Angel, 934 P.2d 669 (Wash. 1997) ............................................................................. 6, 7, 8

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Shinn v. Thrust IV, Inc., 786 P.2d 285 (Wash. Ct. App. 1990) .................................................. 6, 7

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OTHER AUTHORITIES

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Adam J. Richins, Note, Risky Business: Directors Making Business Judgments in
Washington State, 80 Wash. L. Rev. 977, 984 (2005) ..................................................... 4, 8, 9

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Black’s Law Dictionary (9th ed. 2009).......................................................................................... 3

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Fla. Stat. § 607.0830 ...................................................................................................................... 7

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Fed. R. Civ. P. 12(b)(6).......................................................................................................... 1, 3, 4

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2 Senate Journal, 51 Leg., Reg. Sess. (Wash. 1989)...................................................................... 6

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Washington Rev. Code § 23A.08.343 ........................................................................................... 6

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Washington Rev. Code § 23B.08.300 .................................................................................... 5, 6, 7
Washington Rev. Code § 23B.08.420 .................................................................................... 5, 6, 7

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Killinger Reply ISO Motion to Dismiss
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I.

INTRODUCTION

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The Receiver’s opposition is fraught with legal error and provides no basis for sustaining

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the Complaint. The Receiver contends that the business judgment rule is an affirmative defense

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when it is not; it asserts that the business judgment rule is inapplicable in circumstances so

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expansive as to eviscerate the doctrine; and it argues that it would be premature to dismiss a

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breach of fiduciary duty claim that it concedes is duplicative of other claims. These contentions

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are without basis, and the Complaint should be dismissed.

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II.

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ARGUMENT
A.

The Negligence-Based Claims Are Barred By the Business Judgment Rule.

The Receiver advances two reasons why, in its view, the business judgment rule does not

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preclude its negligence-based claims: first, that the doctrine is a “fact-bound affirmative

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defense” and thus unfit for resolution on a 12(b)(6) motion; and second, that the business

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judgment rule and the statutory standards of care are equivalent, and the Complaint alleges

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sufficient facts to state a breach of the statutory standards of care. Opp. 2-3. Each of these

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contentions lacks merit.

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1.

The Business Judgment Rule Provides a Basis for 12(b)(6) Dismissal.

The Receiver first contends (Opp. 5-8) that the business judgment rule “cannot be

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properly decided” on a Rule 12(b)(6) motion purportedly because it is an affirmative defense.

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Opp. 8. But fewer than two months ago, under circumstances strikingly similar to those here, the

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United States District Court for the Central District of California invoked the business judgment

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rule to dismiss a complaint against corporate decisionmakers under Rule 12(b)(6). See National

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Credit Union Admin. v. Siravo, No. 10-1597 (C.D. Cal. July 25, 2011) (Romero Decl., Ex. 1). In

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Siravo, as here, a federal regulator took over a failed financial institution and brought suit against

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the institution’s former directors, alleging, inter alia, that in 2002, they “departed from [the

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institution’s] traditional business model” and instead focused on amassing “risky” mortgage-

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backed securities in the company’s investment portfolio—all “without taking steps to monitor or

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control the risk” inherent in such a strategy, and all to “justify [their] increased compensation.”

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Second Am. Compl. ¶¶ 31, 43, 70, Siravo (Romero Decl., Ex. 2). By 2006, despite being aware
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of “escalating delinquencies and the inability of borrowers to refinance,” and despite believing

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that the housing market was “in the most precarious position ever seen in the United States,” the

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directors “continued to cause [the company] to increase the concentration of” such risky

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investments in its portfolio. Id. ¶¶ 139, 140, 144. Following the collapse of the real estate

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market, the institution recorded $6.8 billion in losses, “effectively rendering it insolvent.” Id.

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¶ 40. The federal government’s complaint alleged that the directors “were negligent and grossly

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negligent” and “breached their fiduciary duties” to the institution. Id. ¶ 43.

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The court dismissed the suit against the directors “because of the effect of the business

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judgment rule.” National Credit Union Admin. v. Siravo, No. 10-1597, at 4 (C.D. Cal. July 7,

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2011) (Romero Decl., Ex. 3). The court referred to an earlier decision in the same litigation in

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which it had concluded that the government failed to allege sufficient facts to rebut the

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“presumption afforded by the business judgment rule.” 1st Valley Credit Union v. Bland, No.

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10-1597, at 4-9 (C.D. Cal. Dec. 20, 2010) (Romero Decl., Ex. 4); see also National Credit Union

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Admin. v. Siravo, No. 10-1597 (C.D. Cal. Jan. 31, 2011) (Romero Decl., Ex. 5). Notably, the

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court expressly addressed “the procedural setting in which this issue has been raised” and held

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that “[b]usiness judgment rule applications can (and arguably should, at least where the

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allegations are as detailed as they are here) be made at the motion-to-dismiss stage.” Romero

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Decl., Ex. 4, at 8; see also id. (describing the business judgment rule as “the rough corporate

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equivalent of the government actor’s qualified immunity motion”).1
The reasoning in Siravo applies here and is consistent with the well-established principle,

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recognized by this Court, that the business judgment rule is a “rebuttable presumption” that

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requires a plaintiff to “assert[] facts to show” that the defendant is not entitled to the rule’s

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protections at the outset. Grassmueck v. Barnett, 2003 WL 22128263, at *3 (W.D. Wash. July 7,

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2003) (Pechman, J.); see also In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 124 (Del.

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Ch. 2009) (“The business judgment rule is a presumption . . . . The burden is on plaintiffs . . . to

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The court permitted claims to proceed against former officers of the institution, but only
because applicable state law did not extend the business judgment rule to officers. Romero
Decl., Ex. 4, at 9-11. The Receiver does not dispute that under Washington law, the business
judgment rule applies to both directors and officers. See Mot. 5.
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rebut this presumption.”). Indeed, were the Receiver’s claim that it is “premature” to invoke the

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business judgment rule at this stage true, this Court in Grassmueck would have had no need to

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assess whether the plaintiff in that case had “rebutted the presumption of good faith” by alleging

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that “the Defendants acted in bad faith and in self-interest.” 2003 WL 22128263, at *3. Rather,

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it simply would have denied the motion outright as inappropriate at the 12(b)(6) stage. But it did

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not do so, as the Receiver disingenuously suggests. See Opp. 5. Nor is the Receiver’s position

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supported by Washington Bancorp. v. Said, 812 F. Supp. 1256 (D.D.C. 1993), which expressly

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rejected the argument—then, as now, propounded by the FDIC—that the business judgment rule

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“is merely a defense and has no part in the decision of whether to grant a motion to dismiss or for

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summary judgment.” Id. at 1268. To the contrary, “[t]he business judgment rule . . . is most

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applicable” when “facing one of these motions.” Id. Likewise, the court in Talib v. Skyway

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Communications Holding Corp., 2005 WL 1610707 (M.D. Fla. July 7, 2005), denied dismissal

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not because reliance on the business judgment rule was “premature,” but because the plaintiffs

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had adequately alleged fraud, rebutting the rule’s presumptive protections. Id. at *6.

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The Receiver argues that the business judgment rule is an affirmative defense that cannot

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be resolved on a motion to dismiss unless it is “explicitly raised on the face of the plaintiff’s

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complaint.” Opp. 5-6. But nearly all of the decisions it cites trace back to a single Third Circuit

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opinion that, in passing and without analysis, labeled the business judgment rule an “affirmative

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defense.” See In re Tower Air, Inc., 416 F.3d 229, 238 (3d Cir. 2005). Other courts have

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consistently and correctly rejected the argument that the business judgment rule “is merely a

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defense.” Said, 812 F. Supp. at 1268; see also, e.g., Kaye v. Lone Star Fund V (U.S.), L.P., ___

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B.R. ___, 2011 WL 1548967, at *27 (Bankr. N.D. Tex. Apr. 26, 2011) (“[D]escribing the

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presumption created by the business judgment rule as an affirmative defense is, at best, a dubious

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characterization of the rule”); In re Fleming Packaging Corp., 351 B.R. 626, 634-35 (Bankr.

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C.D. Ill. 2006) (“[T]he business judgment rule is not a true affirmative defense.”). Rather than

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an affirmative defense that, by definition, “[t]he defendant bears the burden of proving,” Black’s

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Law Dictionary 482 (9th ed. 2009), the business judgment rule is a “rebuttable presumption,”

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Grassmueck, 2003 WL 22128263, at *3. As such, “the initial burden of pleading and the
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ultimate burden of persuasion are placed on the challenger to prove the inapplicability of the

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business judgment rule,” Adam J. Richins, Note, Risky Business: Directors Making Business

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Judgments in Washington State, 80 Wash. L. Rev. 977, 984 (2005).

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Tower Air has also been justly criticized for its peculiar conclusion that the business

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judgment rule can be invoked on a motion to dismiss so long as the complaint explicitly raises it.

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Such a rule “provides plaintiffs a powerful and perverse incentive to ‘dummy-up’ about the

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obvious implications of the business judgment rule when drafting their complaints in the first

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instance.” Kaye, 2011 WL 1548967, at *28 (internal quotation marks omitted). Furthermore,

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Tower Air was decided before Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), and Bell Atlantic Corp.

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v. Twombly, 550 U.S. 544 (2007), which “appear to expand the right to have business judgment

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considered pursuant to a motion to dismiss.” Heard v. Perkins, 441 B.R. 701, 711 (N.D. Ala.

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2010). In short, neither Tower Air nor the cases relying on it provides a basis for deviating from

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the well-taken principle, recognized by this Court, that the business judgment rule is a rebuttable

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presumption that may serve as a basis for 12(b)(6) dismissal in federal court.

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Finally, whether or not the Delaware courts require greater specificity in pleading than

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the federal courts, see Opp. 6-7, that concern goes toward the sufficiency of the allegations to

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survive a motion to dismiss—not whether the business judgment rule is a basis for dismissal in

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the first place. “[T]he protections of the business judgment rule . . . are a substantive point of

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law that . . . stands largely independent both of the procedural distinction between direct and

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derivative actions and of the notice purpose inherent in procedural rules of pleading.” In re IT

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Grp. Inc., 2005 WL 3050611, at *8 n.10 (D. Del. Nov. 15, 2005). As this Court and other

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federal courts have recognized, the substantive protections of the business judgment rule apply

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ab initio, and it is that substance-based presumption—not any procedure-based “heightened

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pleading requirements,” Opp. 7—that the Receiver must surmount in order for its suit to proceed.

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2.

The Allegations in the Complaint Attacking Management’s
Historical Business Decisions Fail to Rebut the Substantive
Protections of Washington’s Business Judgment Rule.

As set forth in Mr. Killinger’s opening brief, “the business judgment rule ‘is process
oriented’” and “permits liability only if management reached its decision in bad faith or made an
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uninformed decision.” Mot. 6. In large part, the Receiver does not take issue with those

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principles. It does not dispute—nor could it—that the business judgment rule focuses “on the

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decision-making process,” In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d at 122, not on the

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substantive merits of a business decision, i.e., whether it was “wise in retrospect,” Nursing Home

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Bldg. Corp. v. DeHart, 535 P.2d 137, 143-44 (Wash. Ct. App. 1975). It agrees that the business

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judgment rule fails to protect decisions made in bad faith, and it does not seriously contend that

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the Complaint alleges bad faith, fraud, or dishonesty.2 And the Receiver does not claim that Mr.

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Killinger was uninformed about the risks of the “Higher Risk Lending Strategy” in planning and

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executing that business strategy; to the contrary, the Receiver asserts (as the Complaint alleges)

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that Mr. Killinger had actual knowledge of those risks. Opp. 15-16.

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The Receiver instead argues that the business judgment rule and Washington Rev. Code

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§§ 23B.08.300 and 23B.08.420 are equivalent—that the business judgment rule “expressly

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incorporates the statutory ordinary care standard.” Opp. 8-9. According to the Receiver,

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because the Complaint adequately alleges violations of that broad statutory standard, the

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business judgment rule does not apply at this stage. Id. at 13. But that argument is without basis

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in Washington law, effectively encompasses the very review of substantive decisionmaking the

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Receiver purportedly disclaims, and would eliminate the business judgment rule in practice.

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Properly understood, the business judgment rule is not rebutted by the Receiver’s allegations,

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and Counts I and II should be dismissed.
a)

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The Receiver Distorts the Business Judgment Rule.

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The Receiver first errs in asserting that the Washington Supreme Court “has held that”

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§§ 23B.08.300 and 23B.08.420 “are a ‘codification’” of Washington’s business judgment rule.

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Opp. 9. To be sure, those statutes set forth current standards of care for corporate directors and

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officers—requiring, inter alia, “the care an ordinarily prudent person in a like position would

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exercise under similar circumstances.” But the cases cited by the Receiver merely noted—in

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Its arguments to this end are limited to two conclusory footnotes, only one of which
identifies an allegation that is itself a “naked assertion[] devoid of further factual enhancement”
not “entitled to the assumption of truth.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949, 1951 (2009)
(quotation marks omitted); Opp. 13 n.7, 18 n.8 (citing Compl. ¶ 9).
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dicta, no less—that a predecessor statute, § 23A.08.343, codified the business judgment rule.

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See Riss v. Angel, 934 P.2d 669, 681 n.5 (Wash. 1997) (en banc); Hines v. Data Line Sys., Inc.,

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787 P.2d 8, 18 (Wash. 1990). Prior to the alleged conduct here, that statute was repealed and

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replaced by current Title 23B of the Washington Code, which adopted the ABA’s Revised

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Model Business Corporations Act (RMBCA). See Equipto Div. Aurora Equip. Co. v. Yarmouth,

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950 P.2d 451, 453 (Wash. 1998) (en banc); Matthew G. Norton Co. v. Smyth, 51 P.3d 159, 163

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n.2 (Wash. Ct. App. 2002). Significantly, the comments to the RMBCA—which the Washington

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legislature published in the Senate Journal and thereby constitute “persuasive authority,”

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Humphrey Indus., Ltd. v. Clay Street Associates, LLC, 242 P.3d 846, 852 n.9 (Wash. 2010)—

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expressly state that the new statute only “defines the general standard of conduct” for corporate

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executives and “does not try to codify the business judgment rule.” 2 S. Journal, 51 Leg., Reg.

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Sess. at 3041-42 (Wash. 1989) (emphasis added); see also Shinn v. Thrust IV, Inc., 786 P.2d 285,

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834 n.1 (Wash. Ct. App. 1990) (noting that the comments “indicate that the statutory language is

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not intended to be a codification of the business judgment rule”). Rather, “[t]he elements of the

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business judgment rule . . . are continuing to be developed by the courts in Washington and

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elsewhere.” 2 S. Journal, at 3042. The Washington Supreme Court has not addressed the

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question under the new statute, but courts in other states addressing materially identical statutes

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modeled on the RMBCA have held that they do not codify the business judgment rules of those

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particular states. See, e.g., Henrichs v. Chugach Alaska Corp., 250 P.3d 531, 538 (Alaska 2011);

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Gundaker/Jordan Am. Holdings, Inc. v. Clark, 2008 WL 4550540, at *2 (E.D. Ky. Oct. 9, 2008).

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Additional statutory comments explain how the separate concepts of the statutory

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standards of care and the business judgment rule are intended to interact: “If compliance with

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the standard of conduct set forth in [the statute] is established, there is no need to consider

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possible application of the business judgment rule. . . . The possible application of the business

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judgment rule need only be considered if compliance with the standard of conduct set forth in

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[the statute] is not established.” 2 S. Journal, at 3044 (emphasis added). The Washington

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legislature has thus recognized not only that current §§ 23B.08.300 and 23B.08.420 (as opposed

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to predecessor statutes) do not codify the state’s business judgment rule, but also that the
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business judgment rule only comes into play after directors or officers fail to comply with the

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statutory standards of care. In other words, the business judgment rule provides additional

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protections beyond the safe harbor of compliance with the statutory standards of care.

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The Receiver’s expansive view of conduct that removes the protections of the business

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judgment rule is premised on the faulty assumption that the statutory standards of care and the

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business judgment rule are equivalent—that because §§ 23B.08.300 and 23B.08.420 “include an

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ordinary care standard,” then “[t]he test for applying the business judgment rule in Washington

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. . . expressly incorporates the statutory ordinary care standard.” Opp. 9. In the Receiver’s view,

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any conduct that does not satisfy an “ordinary care standard” necessarily precludes application of

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the business judgment rule. But as explained above, that position is not the law. To this end, the

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Receiver’s reliance on FDIC v. Stahl, 89 F.3d 1510 (11th Cir. 1996) is unavailing. Opp. 11-12.

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The Florida statute that Stahl examined was a pre-RMBCA provision enacted in 1975. The court

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thus had no occasion to consider statutory commentary like that recognized by the Washington

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legislature in connection with §§ 23B.08.300 and 23B.08.420—commentary that expressly

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recognizes statutory standards of care and the business judgment rule as separate, distinct, and

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not coextensive. Indeed, after the Florida legislature replaced the pre-RMBCA provision

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addressed in Stahl with an RMBCA-modeled law, see Fla. Stat. § 607.0830, courts have held that

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Stahl’s impact is “unclear.” Kloha v. Duda, 246 F. Supp. 2d 1237, 1244 n.20 (M.D. Fla. 2003).

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Proceeding on this errant understanding of the interplay between the statutory standards

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of care and the business judgment rule, the Receiver contends that any conduct that fails to

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satisfy an “ordinary care standard” removes the protections of the business judgment rule, and it

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misconstrues cases stating that the doctrine does not apply if there is evidence of “incompetence

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(i.e., failure to exercise proper care, skill, and diligence).” Opp. 9-10 (citing Riss, Shinn, and In

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re Spokane Concrete Prods., Inc., 892 P.2d 98 (Wash. 1995)). But “competence”—as well as

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“proper care, skill, and diligence”—must mean something more than acting in compliance with

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“the broad statutory ‘due care’ language that exists in Washington,” as the Receiver argues. Id.

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at 11. Otherwise, contrary to the view of the legislature, the business judgment rule would

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merely replicate the statutory standards of care, rather than serving as a separate (and
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subsequent) inquiry. The “competence” requirement, as defined by the Receiver, would swallow

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the business judgment rule entirely, dictating that the doctrine protects decisionmakers from

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mistakes, except when they have made mistakes (by failing to act with “due care”). As such, a

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failure to act with “competence” or “proper care, skill, and diligence” must necessarily address a

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narrower range of conduct than that which fails to comply with statutory standards.

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As Mr. Killinger has explained, leading authorities have repeatedly defined

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“competence”—i.e., “proper care, skill, and diligence”—as “act[ing] in an informed manner.”

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Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 66 (Del. 1989); Mot. 6-7. That is

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also how other state courts interpreting statutory standards materially identical to Washington’s

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have held. See, e.g., Cuker v. Mikalauskas, 692 A.2d 1042, 1045-47 (Pa. 1997) (“The business

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judgment rule insulates an officer or director of a corporation from liability for a business

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decision made in good faith if he is not interested in the subject of the business judgment, is

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informed with respect to the subject of the business judgment to the extent he reasonably believes

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to be appropriate under the circumstances, and rationally believes that the business judgment is

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in the best interests of the corporation.” (emphasis added)).

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The Receiver claims that Mr. Killinger is “narrowly limit[ing] th[e] ordinary care

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standard,” Opp. 10, but that contention is unavailing. First, as the Washington legislature has

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recognized, the prerequisites for losing the business judgment rule’s protections are distinct from

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the statutory “ordinary care standard,” and by necessity must be confined to a more limited set of

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misconduct. The Receiver cannot explain how the business judgment rule would remain viable

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in Washington under its approach. Second, while the Receiver claims that Mr. Killinger fails “to

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cite a single Washington case that supports [his] proposition,” Opp. 10, Mr. Killinger noted that

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in Riss, the Washington Supreme Court identified the “failure to adequately investigate” as

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conduct that would rise to “incompetence.” Mot. 6 (citing 934 P.2d at 681). That holding is

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notable because while the Washington Supreme Court has “stated that the term ‘incompetence’

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is related to the concept of ‘proper care, skill, and diligence,” it has otherwise “never

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substantially elaborated on the meaning of these standards.” Richins, supra, at 1007.

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Accordingly, what little that court has said on the issue is significant and supports Mr. Killinger.
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Third, the Receiver seeks to undermine Mr. Killinger’s citation of Delaware authority by noting

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differences in statutory language. But Delaware’s business judgment rule—like Washington’s—

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is a common-law, not statutory, doctrine. MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1127

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(Del. 2003). Notably, the Receiver does not dispute the primacy of Delaware authority on

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corporate law matters, which is significant given the relative paucity of and “inconsistencies” in

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Washington case law regarding these issues. Richins, supra, at 979; see also Mot. 7.

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b)

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The Complaint Attacks the Substantive Merit of Mr.
Killinger’s Historical Business Decisions.

Armed with its unduly restrictive definition of the business judgment rule, the Receiver
identifies three categories of allegations that purportedly preclude the rule’s protections at this
stage. Opp. 13-19. But notwithstanding the Receiver’s claims that they involve the “process” of
decisionmaking, these allegations, at bottom, all challenge the substantive correctness of
management’s historical business decisions. That is precisely what the business judgment rule—
properly characterized—prohibits.
To begin with, the complaint’s allegations bear a striking resemblance to those in the
Siravo case, which was recently dismissed on business judgment rule grounds. There, as here, a
federal regulator alleged, inter alia, that a failed financial institution’s executives “departed from
[the institution’s] traditional business model” by amassing “risky” mortgage-backed securities in
the institution’s portfolio without “taking steps to monitor or control the risk” inherent in such a
strategy, despite their awareness of “escalating delinquencies and the inability of borrowers to
refinance” and their belief that the housing market was “in the most precarious position ever seen
in the United States.” See pp. 1-2, supra. Notably, Siravo was dismissed under California’s
business judgment rule, which the Receiver argues is premised on the same statutory standards
as Washington’s business judgment rule. See Opp. 12; Romero Decl., Ex. 3, 4.
The Receiver recites a laundry list of allegations that confirm that the Receiver simply
takes issue with the substantive merits of the Defendants’ decisions. For example, the Receiver
refers to “a number of contemporaneous warnings that the Defendants received” regarding
supposedly inadequate risk management infrastructure. Opp. 15-16. But those allegations only
confirm that the Defendants were informed about circumstances at WaMu, consistent with other
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allegations in the complaint—curiously unmentioned in the Receiver’s opposition—that Mr.

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Killinger repeatedly met with risk managers and was aware of the risks associated with the

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“Higher Risk Lending Strategy.” See Mot. 10-11. These allegations flatly contradict the

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Receiver’s current claim that Mr. Killinger “clos[ed] [his] eyes to corporate affairs,” as is

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required to remove the rule’s protections. Opp. 19 (citing FDIC v. Castetter, 184 F.3d 1040,

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1046 (9th Cir. 1999)). In truth, the Receiver takes issue with its own Complaint, which alleges

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that, after receiving information concerning the risks of their business strategy, the Defendants

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nevertheless elected to continue with it, on the belief that it would lead to greater returns and thus

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be in the company’s best interests. See Mot. 11; Compl. ¶¶ 22, 25, 53, 65. That is an attack on

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management’s substantive decisionmaking, which the business judgment rule squarely prohibits.
Likewise, the Receiver asserts that Defendants “purposely excluded risk managers from

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having a meaningful voice in their decision-making process.” Opp. 16. The Receiver also

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contends that Defendants made their decisions “knowing that [WaMu] lacked the infrastructure

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to properly measure and manage” risk. Id. at 14. But these, too, are claims that challenge the

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substantive merits of Defendants’ business decisions. The Receiver’s argument—aided, of

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course, by perfect information in retrospect—is that certain officers of a company should have

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given more of a voice to certain other officers, and they should have implemented a different

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(and purportedly more robust) infrastructure. But the business judgment rule is designed to

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prevent such “judicial second-guessing in hindsight.” Castetter, 184 F.3d at 1044. Indeed, “the

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amount of information that it is prudent to have before a decision is made is itself a business

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judgment of the very type that courts are institutionally poorly equipped to make.” In re RJR

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Nabisco, Inc. S’holders Litig., 1989 WL 7036, at *19 (Del. Ch. Jan. 31, 1989); see also RTC v.

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Rahn, 854 F. Supp. 480, 490 (W.D. Mich. 1994); Estate of Detwiler v. Offenbecher, 728 F. Supp.

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103, 152 (S.D.N.Y. 1989); Citron v. Fairchild Camera & Instrument Corp., 1988 WL 53322, at

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*17 (Del Ch. May 19, 1988), aff’d, 569 A.2d 53 (Del. 1989). Under the business judgment rule,

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“courts are not to second-guess the corporate decision makers’ choice of procedures.” In re

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Consumers Power Co. Deriv. Litig., 132 F.R.D. 455, 483 (E.D. Mich. 1990). The choices of

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how much information to obtain from other officers before making a decision, or what kind of
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infrastructure to implement or maintain in order to execute a business strategy, are committed to

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the discretion of business decisionmakers, and to impose liability “for making a ‘wrong’

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decision” in those respects would “cripple [executives’] ability to earn returns for investors.” In

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re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d at 126.

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Finally, the Receiver cites Mr. Killinger’s purported “failure to create and implement an

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exit strategy” in the event of the bursting of the housing bubble. Opp. 18. It is difficult to

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imagine a more glaring example of second-guessing substantive business decisions than the

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contention that a company’s executives should have implemented a particular business strategy.

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Whether the Receiver regards Mr. Killinger’s actions (or inactions) “as unwise, foolish, or even

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stupid in the circumstances” is “not legally significant.” Gagliardi v. TriFoods Int’l, Inc., 683

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A.2d 1049, 1053 (Del. Ch. 1996). Indeed, that the Receiver believes this allegation to constitute

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a “flaw in the Defendants’ decision-making process,” Opp. 18, confirms the infirmity of the

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Receiver’s understanding of the business judgment rule and its misguided conception of the

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decisionmaking “process,” as explained above. For if this allegation sufficed to remove the

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protections of the business judgment rule, then truly the doctrine amounts to a legal nullity.

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Under a proper understanding of the Washington business judgment rule, the Receiver’s

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allegations fail to rebut the substantive protections of the doctrine that apply at the outset,

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warranting dismissal of Counts I and II.

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B.

The Breach of Fiduciary Duty Claim Is Duplicative of the Negligence Claims.

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The Receiver does not dispute the wholly duplicative nature of Count III, the breach of

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fiduciary duty claim. It merely asserts that it would be “premature” to dismiss the claim at this

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stage. Opp. 26-28. But that is exactly what courts have done in identical situations where one

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claim is based “on the same facts” as another claim. Hua v. Boeing Corp., 2009 WL 1044587, at

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*5 (W.D. Wash. Apr. 17, 2009); Jacobson v. Wash. State Univ., 2007 WL 26765, at *11 (E.D.

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Wash. Jan. 3, 2007). The Receiver’s assertion that these cases “relied on state procedural law for

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dismissal,” Opp. 27, is mystifying, given that the same pleading standards applied in those

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federal cases as here. But even crediting the Receiver’s argument, Count III should be

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dismissed, for as here, Washington state law applied in those cases. Indeed, the basis for
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dismissal is even stronger here, where the claims not only are based “on the same facts” but are

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legally identical. As the Receiver does not dispute, the only fiduciary duty at issue is the duty of

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care, which is completely encompassed by negligence claims. See Mot. 11-12.

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The Receiver’s other arguments are equally unavailing. It claims that other cases cited

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by Mr. Killinger “involved dismissal of claims on the ground that the claims were not viable as

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pled,” but that contention is squarely contradicted by the language of those decisions. See, e.g.,

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Swartz v. KPMG LLP, 476 F.3d 756, 766 (9th Cir. 2007) (per curiam) (holding that a claim that

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was “merely duplicative” was “properly dismissed”). It claims that there is “no danger of

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prejudice to Defendants” in allowing the claim to proceed; yet in RTC v. Hess, 820 F. Supp.

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1359 (D. Utah 1993)—a decision cited by Mr. Killinger and unaddressed by the Receiver—the

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court dismissed a breach of fiduciary claim that was duplicative of a negligence claim because

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“[a]llowing RTC to continue with both claims would unduly prejudice defendants.” Id. at 1366.

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It claims that the Western District of Washington has “frequently cautioned against prematurely

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dismissing similar claims” but overlooks that the claims here are not just “similar” but legally

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and factually identical. Finally, it asserts that this Court in Grassmueck v. Barnett, 281 F. Supp.

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2d 1227 (W.D. Wash. 2003), refused to dismiss a supposedly duplicative claim. Grassmueck,

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however, did not address whether certain claims were duplicative or whether dismissal was an

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appropriate remedy; the only question before the Court was whether the complaint pleaded facts

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regarding bad faith and intentional conduct sufficient to preclude applicability of director

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protection provisions in a company’s corporate charter. Id. 1231-33. That question is not before

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the Court, which should adhere to well-established principles and dismiss Count III.

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C.

The Remedial Claims Should Be Dismissed Since the Substantive Claims Fail.

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The Receiver does not dispute that if Counts I-III against Mr. Killinger are dismissed,

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Counts IV and VI must be dismissed as well. Opp. 28-29. Because Counts I-III fail, Counts IV

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and VI should be dismissed.

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III.

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CONCLUSION
For the reasons herein and in Mr. Killinger’s opening brief, the Complaint should be

dismissed.
Killinger Reply ISO Motion to Dismiss
Case No. 2:11-cv-00459-MJP

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725 Twelfth St. NW, Washington, DC 20005
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Respectfully submitted,

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BARRY M. KAPLAN (WSBA
#8661)
WILSON SONSINI GOODRICH &
ROSATI
701 Fifth Avenue
Suite 5100
Seattle, WA 98104-7036
Tel: [phone]
Fax: [phone]

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/s Tobin J. Romero
.
BRENDAN V. SULLIVAN, JR. (pro hac vice)
DAVID D. AUFHAUSER (pro hac vice)
TOBIN J. ROMERO (pro hac vice)
BETH A. STEWART (pro hac vice)
GEORGE W. HICKS, JR. (pro hac vice)
STEVEN M. CADY (pro hac vice)
WILLIAMS & CONNOLLY LLP
725 Twelfth St., N.W.
Washington, DC 20005
Tel: [phone]
Fax: [phone]

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SEPTEMBER 15, 2011

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CERTIFICATE OF SERVICE

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I hereby certify that on September 15, 2011, I electronically filed the foregoing with the
Clerk of the Court using the CM/ECF system, which will send notification of such filing to all

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participants in this case who are registered CM/ECF users. I further certify that all participants

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to this case are registered with the CM/ECF system, and therefore no participant need be served

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by conventional methods.

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/s Tobin J. Romero
.
TOBIN J. ROMERO (pro hac vice)
WILLIAMS & CONNOLLY LLP
725 Twelfth St., N.W.
Washington, DC 20005
Tel: [phone]
Fax: [phone]

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Case No. 2:11-cv-00459-MJP

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