Federal Deposit Insurance Corporation v. Beere et al

Filing 35

DECISION AND ORDER Granting in Part and Denying in Part Motion to Dismiss 18 and Denying Without Prejudice Motion to Strike Affirmative Defenses 16 (cc: all counsel) ((cef), C. N. Clevert, Jr.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
FEDERAL DEPOSIT INSURANCE CORPORATION
as Receiver for First Banking Center,
Plaintiff,
v.

Case No. 14-C-0575

THOMAS BEERE, KEITH BLUMER,
DAVID BOILINI, FRANK CANNELLA,
BRANTLY CHAPPELL, JOHN ERNSTER,
ROBERT FAIT, DANIEL JACOBSON,
JAMES SCHERRER, JOHN SMITH,
RICHARD TORHORST, CHARLES WELLINGTON,
and ST. PAUL MERCURY INSURANCE COMPANY/
TRAVELERS INDEMNITY COMPANY,
Defendants.
DECISION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION
TO DISMISS (DOC. 18) AND DENYING WITHOUT PREJUDICE
MOTION TO STRIKE AFFIRMATIVE DEFENSES (DOC. 16)
The Federal Deposit Insurance Corporation (“FDIC-R”), as receiver for First Banking
Center (the “Bank”), sues twelve directors of the Bank (two of whom were also officers) (the
“Individual Defendants”) for negligence (count I) and violation of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989, 12 U.S.C. § 1821(k) (“FIRREA”). In
addition, the FDIC-R asserts a direct action claim (count III) against the directors’ and
officers’ liability policy insurer, St. Paul Mercury Insurance Company/Travelers Indemnity
Company (“Travelers”). The Bank failed, and the FDIC-R claims that the Individual
Defendants were negligent and grossly negligent in approving seven loans to three
borrowers between December 2006 and May 2008. According to the complaint, the loan
approvals violated the Bank’s loan policy and were contrary to prudent, safe, and sound
lending practices.

(Doc. 1, ¶ 2.)

Moreover, the complaint charges the Individual

Defendants’ negligence and gross negligence caused damages of at least $11.8 million.
(Doc. 1, ¶ 3.)
Travelers answered the complaint and offered affirmative defenses. The FDIC-R
has moved to strike several of them. (See Doc. 16.) Briefing and court consideration of
that motion to strike was stayed when the Individual Defendants moved to dismiss counts
I and II of the complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim (see Doc.
18). In their joint motion to stay the affirmative-defenses challenge, the FDIC-R and
Travelers acknowledged that issues in the motion to strike likely will be streamlined or
eliminated following resolution of the Individual Defendants’ motion to dismiss. (Doc. 20,
¶ 7.)
In an unusual briefing move regarding the Individual Defendants’ motion to dismiss,
codefendant Travelers waited three weeks then filed a “response” in which it did not
oppose the Individual Defendants’ motion to dismiss. Instead, it joined in the motion. That
unorthodox move resulted in two additional briefs, as the FDIC-R, which had already
responded in opposition to the Individual Defendants’ motion, otherwise would not have
had a chance to respond to Travelers’ arguments, and, predictably, Travelers then wanted
to reply to the FDIC-R’s additional brief.
The court permitted that additional briefing as well as a surreply by the FDIC-R to
an argument the Individual Defendants raised for the first time in their reply brief. In sum,
the court has six briefs (plus two additional filings regarding a recently issued case from

2

the Fourth Circuit), although there is only one motion to dismiss claims in the complaint,
concerning counts I and II.1
MOTION TO DISMISS COUNTS I AND II
A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint
to state a claim upon which relief may be granted. See Fed. R. Civ. P. 12(b)(6). Rule
12(b)(6) requires a plaintiff to clear two hurdles. EEOC v. Concentra Health Servs., Inc.,
496 F.3d 773, 776 (7th Cir. 2007). First, the complaint must describe the claim in sufficient
detail to give a defendant fair notice of the claim and the grounds on which it rests. Id.
Although specific facts are not necessary, “at some point the factual detail in a complaint
may be so sketchy that the complaint does not provide the type of notice of the claim to
which the defendant is entitled under [Fed. R. Civ. P.] 8.” Airborne Beepers & Video, Inc.
v. AT&T Mobility LLC, 499 F.3d 663, 667 (7th Cir. 2007). Second, the complaint must set
forth a claim that is plausible on its face. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570,
127 S. Ct. 1955, 1974 (2007); St. John’s United Church of Christ v. City of Chicago, 502
F.3d 616, 625 (7th Cir. 2007). The “allegations must plausibly suggest that the plaintiff has
a right to relief, raising that possibility above a ‘speculative level’; if they do not, the plaintiff
pleads itself out of court.” EEOC, 496 F.3d at 776 (citing Bell Atl. Corp., 550 U.S. at 55556, 569 n.14 (2007)). When considering a Rule 12(b)(6) motion, the court must construe
the complaint in the light most favorable to the plaintiff, accepting as true all well-pleaded
facts and drawing all possible inferences in the plaintiff’s favor. Tamayo v. Blagojevich,
526 F.3d 1074, 1081 (7th Cir. 2008).
1

A sim pler course would have been for the codefendant groups to confer before the Individual
Defendants filed their m otion to dism iss or for Travelers to join the m otion to dism iss the com plaint prom ptly
(or at least notify the court and the FDIC-R of its intent to do so), so that FDIC-R could have responded to all
of the argum ents at one tim e.

3

The Individual Defendants’ motion to dismiss primarily involves legal arguments.
Specific allegations of the complaint will be referenced below only as needed.
A.

Count I: Dismissed as to Directors, Continues as to Officers
1.

Claims Against Directors

The Individual Defendants contend that Wis. Stat. § 221.0618(1) protects them from
liability for the FDIC-R’s negligence claim. As to state-law matters, this court must apply
substantive state law as enacted by the state legislature and as interpreted or declared by
the state’s highest court. See Home Valu, Inc. v. Pep Boys—Manny, Moe and Jack of
Del., Inc., 213 F.3d 960, 963 (7th Cir. 2000); see also Erie R.R. Co. v. Thompkins, 304
U.S. 64, 78-79 (1938). If the Supreme Court of Wisconsin has not spoken on the issue
and the law is unclear, this court must predict how that court would decide the question
presented. Rodman Indus., Inc. v. G & S Mill, Inc., 145 F.3d 940, 942 (7th Cir. 1998). In
that instance, decisions of the state’s intermediate appellate courts are authoritative unless
there is a split among those courts or “there is a compelling reason to doubt that the courts
have got the law right.” Rekhi v. Wildwood Indus., Inc., 61 F.3d 1313, 1319 (7th Cir. 1995),
quoted in Home Valu, Inc., 213 F.3d at 963. Federal courts sitting in diversity should
hesitate to expand state law in the absence of any indication of intent by the state courts
or legislature. King v. Damiron Corp., 113 F.3d 93, 97 (7th Cir. 1997). Generally, when
faced with equally plausible interpretations of state law, the federal court should choose
the interpretation that restricts liability, rather than an expansive interpretation that creates
substantially more liability. Home Valu, Inc., 213 F.3d at 963.
Section 221.0618(1), titled “Limited liability of directors” provides that

4

a director is not liable to the bank, its shareholders, or any person asserting
rights on behalf of the bank or its shareholders, for damages, settlements,
fees, fines, penalties or other monetary liabilities arising from a breach of, or
failure to perform, any duty resulting solely from his or her status as a
director, unless the person asserting liability proves that the breach or failure
to perform constitutes any of the following:
(a)
A willful failure to deal fairly with the bank or its shareholders in
connection with a matter in which the director has a material conflict
of interest.
(b)
A violation of criminal law . . . .
(c)
A transaction from which the director derived an improper personal
profit.
(d)
Willful misconduct.
No cases are listed in the Wisconsin Statutes Annotated as discussing this provision, and
the parties indicate that no cases interpreting this provision exist. However, a nearly
identically worded and titled statute exists regarding corporations—the only difference
being the use of the word “corporation” instead of “bank.” See Wis. Stat. § 180.0828(1).
This court believes that the Supreme Court of Wisconsin would apply cases interpreting
§ 180.0828 to cases involving § 221.0618 as well.

The statutes are virtually

identical—simply applying to different entity forms, corporations versus banks. Regarding
the language at issue in this case, in particular, case law regarding § 180.0828 applies
equally to § 221.0618.
The FDIC-R does not contend in its briefs, nor does the complaint assert, that any
of the four exceptions (a) to (d) in § 221.0618(1) is met by the allegations in this case.
Instead, the FDIC-R argues that § 221.0618 does not apply at all to actions by the FDIC-R
for negligence. However, this court finds that § 221.0618 protects the Bank’s directors
against damages liability for negligence as alleged in count I.
The Individual Directors and Travelers argue that as a receiver, the FDIC-R
constitutes a “person asserting rights on behalf of the bank or its shareholders” for
5

damages arising from negligence, i.e., a breach of duty, by the Individual Directors while
performing as directors of the Bank. The FDIC-R responds that as receiver, it asserts
rights on behalf of depositors, creditors and a federal insurance fund as well as the Bank
and its shareholders, acting more like a trustee in bankruptcy. Therefore, it reasons that
§ 221.0618(1) is no bar to its claim of negligence.
The name of the plaintiff as set forth in the caption of the complaint reads: “Federal
Deposit Insurance Corporation as receiver for First Banking Center.” (Doc. 1 at 1.) As
explained by the Seventh Circuit, the Federal Deposit Insurance Corporation generally
operates as two entities: FDIC–Receiver (FDIC-R) and FDIC–Corporate (FDIC-C). FDIC
v. Ernst & Young LLP, 374 F.3d 579, 581 (7th Cir. 2004). The FDIC-C “acts as guardian
of the public fisc, disburses proceeds from the insurance fund, and having paid insurance
claims is subrogated to rights of the bank’s depositors against the failed institution.” Id.
FDIC-R prosecutes claims held by a failed bank (as opposed to its depositors). Id.; cf.
Atherton v. FDIC as Receiver for City Savings F.S.B., 519 U.S. 213, 225, 117 S. Ct. 666
(1997) (“[T]he FDIC is acting only as a receiver of a failed institution; it is not pursuing the
interest of the Federal Government as a bank insurer . . . .”). FDIC-R applies any
recoveries first to secured creditors, then to uninsured depositors, then to general creditors,
then to subordinated claims such as those of the shareholders. Ernst & Young, 374 F.3d
at 581.
Title 12 U.S.C. § 1821(d)(2)(A)(i) states that as a receiver the FDIC-R succeeds to
all rights of the insured depository institution and of any stockholder of the institution. The
Supreme Court has interpreted this language as meaning that the FDIC-R as receiver
“‘steps into the shoes’” of the failed bank, obtaining the bank’s rights that existed prior to
6

receivership. O’Melveny & Myers v. FDIC as Receiver for Am. Diversified Sav. Bank, 512
U.S. 79, 86, 114 S. Ct. 2048 (1994). Any defense good against the bank is good against
the receiver, too. Id.; accord Ernst & Young, 374 F.3d at 581 (stating that when the FDICR prosecutes claims held by the failed bank it “steps into the shoes of the failed bank and
is bound by the rules that the bank itself would encounter in litigation”).
In Data Key Partners v. Permira Advisers LLC, the Supreme Court of Wisconsin
concluded that the business judgment rule codified in § 180.0828 (the parallel provision
for non-bank corporations) is not merely an affirmative defense to be raised in pleadings
subsequent to the complaint. 2014 WI 86, ¶ 42, 356 Wis. 2d 665, ¶ 42, 849 N.W.2d 693,
¶ 42. Instead, the statute “is both a substantive law and a procedural device by which to
allocate a burden.” Id., ¶ 2; accord id., ¶¶ 33, 65. The court pointed to, among other
things, the statutory language that “a director is not liable.” Id., ¶ 35.
Because of § 221.0618(1) and Data Key, if the Bank held no cause of action for
negligence against its directors at the time the FDIC-R took over as receiver, no cause of
action exists for the FDIC-R, either. A negligence claim could not spring into being when
the FDIC-R took over the Bank. Instead, the FDIC-R stepped into the Bank’s shoes, and
if none of the four exceptions to § 221.0618(1) applied, the Bank held no negligence claim
against its directors.
Further, the FDIC-R is pursuing this particular negligence claim on behalf of the
Bank. Presumably, the FDIC-R believes the directors’ alleged breaches of duty caused
losses that harmed the Bank. The actions by the directors that are at issue occurred while
the Bank existed, and the losses affected the Bank’s assets before the FDIC-R stepped
in. The FDIC-R, as receiver, does assert rights “on behalf of” the Bank, notwithstanding
7

the derivative interests of creditors or depositors whom the Bank did not pay and who may
end up with payments from the FDIC-R.
At least one court has found, notwithstanding the Supreme Court’s language in
O’Melveny & Myers, a bank’s inequitable conduct of unclean hands would not be imputed
to the FDIC-R as receiver under California law. FDIC v. O’Melveny & Myers, 61 F.3d 17
(9th Cir. 1995) (deciding case on remand from the Supreme Court). But § 221.0618 is not
about inequitable conduct by a bank; it concerns whether a cause of action exists at all for
actions of directors that affect a bank.
In Resolution Trust Corp. v. Scott, a district court in Mississippi found that a state
immunity statute similar, though not identical, to Wisconsin’s, barred the negligence claim
against a director and officer of Unifirst Bank brought by the RTC as the bank’s receiver.
887 F. Supp. 937 (S.D. Miss. 1995).2 The exculpatory statute in Scott read that a “director
or officer of a bank or bank holding company shall not be held personally liable to the
corporation or its successor, or the shareholders thereof, for monetary damages unless the
director or officer acted in a grossly negligent manner” or worse. Id. at 940. The RTC was
treated as the successor to the bank in that case such that the director and officer were
protected from liability.
Here, as support for its position, the FDIC-R points to two other district court cases,
FDIC as Receiver of Integrity Bank v. Skow and FDIC as Receiver for Frontier Bank v.
Clementz. Both are distinguishable based on the immunity language at issue. In Skow,
Georgia law permitted a bank’s articles of incorporation to limit or eliminate personal liability

2

Pursuant to federal statute, the FDIC-R has replaced the Resolution Trust Corporation (“RTC”) as
receiver for failed banks. See Atherton, 519 U.S. at 219.

8

of directors “‘to the shareholders of the bank.’” No. 1:11-CV-0111-SCJ, 2012 WL 8503168,
*3 (N.D. Ga. Feb. 27, 2012). The articles of incorporation of the bank at issue exculpated
directors from personal liability to the bank and personal liability to bank shareholders. The
district court found that the plain language of the statute permitted exculpation only as
against shareholders, not as against the bank. Id. at *4. Because the FDIC-R as receiver
was not a shareholder, its claims for negligence, gross negligence, and breach of fiduciary
duty were not barred by the articles. Id. at *4. Skow is easily distinguishable, as that court
expressly relied on the statutory language barring only claims brought by shareholders, and
the FDIC-R was not a shareholder. Nevertheless, some language in the opinion suggests
that the court thought the FDIC-R represented more than just the institution, “serving as
an instrument of the banking industry when it becomes receiver for a failed bank.” Id. at
*5 (internal quotation mark omitted). This language is what the FDIC-R says supports its
argument here. But the referenced language in Skow was part of the discussion rejecting
an argument that the FDIC-R was essentially acting on behalf of shareholders. See 2012
WL 8503168, at *5. Yet other language in Skow supports application of § 221.0618(1) in
this case, as the Skow court noted that the FDIC-R as receiver stepped into the shoes of
the bank rather than the shareholders and that under Georgia law a receiver could sue
bank directors to procure a judgment for the benefit of the bank. Thus, had the exculpatory
statute included liability to the bank as well as to shareholders the decision may have been
different.3

3
After determ ining that the articles did not bar the FDIC-R’s negligence and breach of fiduciary duty
claim s, the Skow court found that Georgia’s separate statutory business judgm ent rule did. That statute was
not restricted to certain types of plaintiffs; it provided that a director who perform ed his or her duties in good
faith “‘shall have no liability by reason of being or having been a director or officer of the bank.’” Id. at *7.
However, dism issal was reversed on appeal following certification to the Suprem e Court of Georgia regarding
the standard for such a claim . FDIC as Receiver for Integrity Bank v. Skow, 769 F.3d 1306 (11th Cir. 2014).

9

In Clementz, the FDIC-R as receiver contended that former bank officers and
directors were negligent and grossly negligent by recommending, presenting for approval,
and approving eleven loans in violation of the bank’s loan policy and sound lending
practices. No. C13-737 MJP, 2013 WL 6513001, *1 (W.D. Wash. Dec. 12, 2013). The
directors argued that the bank’s articles of incorporation, which provided that no director
of the bank “shall be liable to the Corporation or its shareholders for monetary damages,”
barred the FDIC-R’s claims for negligence and gross negligence. Id. at *5. Washington
law permitted such a provision. Id. at *6.
The district court believed that the FDIC-R as a receiver “is not an exact stand-in for
the bank itself” and represented depositors, shareholders, creditors and the federal
insurance fund as well as the failed institution. Id. at *6. But Clementz barred liability for
directors from claims brought only by banks or shareholders. Wisconsin’s statute is
broader, extending beyond banks and shareholders to anyone “asserting rights on behalf
of the bank or its shareholders.” Here, this court believes the FDIC-R sues on behalf of
the bank. To the extent that Clementz suggests that the FDIC-R represents more than the
bank such that it escapes application of § 221.0618(1), this court disagrees.4
Next, the FDIC-R argues that § 221.0618(1) applies only to breaches of fiduciary
duties, not negligence. But the language of the statute is not so confined. The statute

4

Sim ilarly distinguishable is Progressive Casualty Insurance Company v. FDIC as Receiver of Vantus
Bank, in which the district court found that the FDIC-R did not act “on behalf of” the failed Bank for purposes
of an “insured vs. insured exclusion” in a directors and officers insurance policy because the contract
expressly referenced receivers in other provisions but not that one. 80 F. Supp. 3d 923, 946-48 (N.D. Iowa
2015) (“[W ]hen the Vantus Policy intended to address coverage issues relating to ‘receivers’ and other
successors to the Bank, it expressly identified such successors.”). The court found that the intent of the
insurance provision was to preclude collusive suits by the com pany and insured persons to recover for
m ism anagem ent, and the FDIC-R’s suit was not such a collusive action. Id. at 950-51. To the extent that the
Progressive Casualty court suggested that the Suprem e Court’s O’Melveny & Myers decision did not apply
to a case like the one at bar, this court disagrees.

10

does not say that only fiduciary duties are included. Rather, the statute (emphasis added)
says “breach of . . . any duty resulting solely from . . . status as a director.” Reasonably
construed, “breach of . . . any duty” includes breaches of duties that embrace a general
negligence claim. In Dixon v. ATI Ladish LLC, the Seventh Circuit indicated that the
parallel statute, § 180.0828, “covers ‘any duty’ that a director owes to the corporation or
its investors; it is as applicable to a ‘duty of candor’ as to the general duty of care.” 667
F.3d 891, 895 (7th Cir. 2012). This court finds § 221.0618 as applicable to a director’s
general duties that may give rise to negligence claims as to particular fiduciary duties.
The supplemental authority provided by the Individual Defendants, FDIC as
Receiver for Cooperative Bank v. Rippy, ___ F.3d __, No. 14-2078, 2015 WL 4910473 (4th
Cir. Aug. 18, 2015), supports this view. The Rippy court found that an exculpatory clause
in articles of incorporation, which stated more narrowly than § 221.0618(1) that directors
would not be liable for damages arising from “breach of any fiduciary duty as a director,”
protected directors from liability for ordinary negligence as well as breach of fiduciary
duties, though it did not protect against gross negligence. 2015 WL 4910473, at *6. Here,
the alleged misconduct of the Individual Defendants arose from their roles as
directors—any approval of the loans at issue occurred only because they were Bank
directors. Thus, § 221.0618(1) includes the FDIC-R’s negligence claim within its scope.
Next, the FDIC-R contends that § 221.0618(1) immunity should not be a basis for
dismissal of a complaint. Data Key decides this argument against the FDIC-R. As stated
above, the Supreme Court of Wisconsin concluded that the business judgment rule
codified in § 180.0828 (the parallel provision for non-bank corporations) “is both a
substantive law and a procedural device by which to allocate a burden.” 2014 WI 86, ¶ 2;
11

accord id., ¶¶ 33, 65. “As such, a party challenging the decision of a director must plead
facts sufficient to plausibly show that he or she is entitled to relief, i.e., facts that show the
director’s actions constitute” one of the statute’s exceptions. Id., ¶ 2; accord id., ¶ 65.
Thus, “notice pleading requires plaintiffs to plead facts sufficient to avoid the business
judgment rule, even when it is not raised on the face of the complaint.” Id., ¶ 43.
For these reasons, the negligence claim against the directors must be dismissed.
2.

Claims Against Officers

According to the complaint and the parties’ briefs, two of the Individual Defendants,
Brantly Chappell and John Smith, were officers as well directors of the Bank. (See Doc.
1, ¶¶ 7, 8.) The FDIC-R has sued them in both capacities. (See Doc. 1, ¶ 1.) Initially,
Chappell and Smith initially contended that although § 221.0618 applied only to directors,
a common-law business judgment rule nevertheless absolved them of liability. Following
the Supreme Court of Wisconsin’s decision in Data Key, the Individual Defendants
included in their reply a new argument that § 221.0618 applies to officers as well.5
Indeed, the Supreme Court of Wisconsin in Data Key wrote that “[t]he business
judgment rule, as codified in Wis. Stat. § 180.0828, applies by its terms to officers and
directors.” 2014 WI 86, ¶ 57. Although this court must abide by Supreme Court of
Wisconsin holdings regarding Wisconsin law, the language at issue was dicta because it
occurred in relation to Data Key’s claims against majority shareholders, not officers. As
more fully set forth, the decision reads:
D. Majority Shareholders
¶ 57 The business judgment rule, as codified in Wis. Stat. § 180.0828,
applies by its terms to officers and directors. There is no mention of
5

This is the argum ent regarding which the court perm itted the FDIC-R to file a surreply.

12

protection for majority shareholders. Therefore, we do not look to
§ 180.0828 in regard to plaintiffs’ claims against the Pauls in their role as
majority shareholders of Renaissance.
2014 WI 86, ¶ 57. Data Key did not involve any discussion or decision regarding
§ 180.0828's application to corporate officers. The statement by the court might even be
considered an overlooked error, because the statute by its terms applies only to directors,
not officers.
As for the argument that officers are protected by a common-law business judgment
rule, the Data Key court indicated several times that § 180.0828(1) codified Wisconsin’s
business judgment rule. 2014 WI 86, ¶¶ 32, 35, 57. A reasonable interpretation of that
statement is that the statute codified the full business judgment rule—nothing remains of
it, as its entire scope was codified. Why would the legislature codify only part of the
business judgment rule, leaving some other part in the common law? The Seventh Circuit
suggests this same point: “the business judgment rule is a common-law doctrine, and
there is no need to decide how Wisconsin’s courts would apply the common law when
there is a statute on the topic,” pointing to Wis. Stat. § 180.0828. Dixon, 667 F.3d at 895.
This court has reviewed several cases on Wisconsin’s business judgment rule and
has found no clear indication that the common law rule covered officers as well as
directors. In Steven v. Hale-Haas Corp., the Supreme Court of Wisconsin wrote that
unless evidence showed a corrupt bargain or action patently harmful to the corporation, the
court would
not substitute its judgment for that of the board of directors and assume to
appraise the wisdom of any corporate action. The business of a corporation
is committed to its officers and directors, and if their actions are consistent
with the exercise of honest discretion, the management of the corporation
cannot be assumed by the court.
13

249 Wis. 205, 221, 23 N.W.2d 620 (1946). Although the court discussed management by
both officers and directors, it referenced only directors when stating that the court would
not substitute its judgment for theirs. The Supreme Court of Wisconsin in Koenings v.
Joseph Schlitz Brewing Co. mentioned that the court of appeals thought corporate officers
were covered by the rule, but the business judgment rule was not appropriately presented
in the case in any event. 126 Wis. 2d 349, 359-60, 377 N.W.2d 593 (1985). In Einhorn
v. Culea, the Supreme Court of Wisconsin referenced only directors when describing the
business judgment rule as
a judicially created doctrine that limits judicial review of corporate decisionmaking when corporate directors make business decisions on an informed
basis, in good faith and in the honest belief that the action taken is in the
best interests of the company. The business judgment rule shields, to a
large extent, the substantive bases for a corporate decision from judicial
inquiry. The business judgment rule also ensures that management remains
in the hands of the board of directors and protects courts from becoming too
deeply implicated in internal corporate matters.
2000 WI 65, ¶ 19, 235 Wis. 2d 646, ¶ 19, 612 N.W.2d 78, ¶ 19 (footnotes omitted). The
Wisconsin Court of Appeals similarly referenced only directors in Reget v. Paige:
The business judgment rule is a judicially created doctrine that contributes
to judicial economy by limiting court involvement in business decisions where
courts have no expertise and contributes to encouraging qualified people to
serve as directors by ensuring that honest errors of judgment will not subject
them to personal liability. It generally works to immunize individual directors
from liability and protects the board’s actions from undue scrutiny by the
courts.
2001 WI App 73, ¶ 17, 242 Wis. 2d 278, ¶ 17, 626 N.W.2d 302, ¶ 17 (citation omitted).
Notably, the Supreme Court of Wisconsin has indicated that the business judgment
rule is also “reflected in part in Wis. Stat. § 180.0826,” which states that “[u]nless the
director or officer has knowledge that makes reliance unwarranted, a director or officer, in

14

discharging his or her duties to the corporation, may rely on information, opinions, reports
or statements . . . if prepared or presented by . . . [a]n officer or employee of the
corporation whom the director or officer believes in good faith to be reliable and competent
in the matters presented.” Casper v. Am. Int’l S. Ins. Co., 2011 WI 81, ¶ 101, 336 Wis. 2d
267, ¶ 101, 800 N.W.2d 880, ¶ 101 (quoting Wis. Stat. § 180.0826). For banks, Wis. Stat.
§ 221.0616 parallels the corporation-focused § 180.0826 and similarly refers to both
directors and officers. Likewise, Wis. Stat. § 221.0617 provides that in discharging duties
to a bank “a director or officer” may consider certain factors in addition to the effects on
shareholders.
Based on the Supreme Court of Wisconsin’s indications that the business judgment
rule has been codified in § 180.0826 and § 180.0828; the specific references to directors
and officers in §§ 180.0826, 221.0616, and 221.0617, versus the references to directors
alone in §§ 180.0828 and 221.0618; the lack of any clear statement by the Supreme Court
of Wisconsin that the common-law business judgment rule covers officers; and the
Seventh Circuit’s direction that when a rule is codified the common law rule need not be
applied, this court concludes that no common law business judgment rule immunizes the
officers against liability for negligence. Moreover, this court finds that as to § 221.0618, the
legislature intended to protect only directors, not officers. Cf. FDIC v. Brudnicki, No. 5:12cv-398-RS-GRJ, 2013 WL 2145720 (N.D. Fla. May 15, 2013). The Brudnicki court
observed that “[t]he Legislature evinced no concerns about finding qualified people to serve
as presidents and chief executive officers of corporations, which are substantially different
responsibilities than serving on a board of directors while not a corporate officer.” Id. at *3.

15

B.

Count II: Continues
Title 12 U.S.C. § 1821(k) provides that a director or officer of an insured depository

institution “may be held personally liable for monetary damages in a civil action” by the
FDIC-R acting as receiver “for gross negligence, including any similar conduct or conduct
that demonstrates a greater disregard of a duty of care (than gross negligence) including
intentional tortious conduct, as such terms are defined and determined under applicable
State law.” The Individual Defendants contend that the FDIC-R’s gross negligence claim
fails because Wisconsin has abolished any cause of action for gross negligence; thus, no
cause of action or definition exists to plug into the federal statute.
The concept of “gross negligence” was abolished by the Supreme Court of
Wisconsin in 1962. Bielski v. Schulze, 16 Wis. 2d 1, 114 N.W.2d 105 (1962), overruled
on other grounds by Wangen v. Ford Motor Co., 97 Wis. 2d 260, 294 N.W.2d 437 (1980);
accord Heritage Farms, Inc. v. Markel Ins. Co., 2009 WI 27, ¶ 39, 316 Wis. 2d 47, ¶ 39,
762 N.W.2d 652, ¶ 39. The Bielski court found that the gross-negligence standard did not
fit into the state’s comparative negligence system. The court concluded that “[o]nly by
abolishing the present concept of gross negligence and considering such conduct as
ordinary negligence and treating it in terms of degree on a comparative basis can an
equitable and fair result be reached in all cases.” 16 Wis. 2d at 17-18.
The Individual Defendants’ position that the lack of a cause of action for gross
negligence requires dismissal has support in Resolution Trust Corp. v. Gershman, 829 F.
Supp. 1095 (E.D. Mo. 1993). Missouri courts “‘do not recognize degrees of negligence and
therefore do not distinguish between negligence and gross negligence.’” Id. at 1101
(internal quotation marks omitted). The district court in Gershman found it could not import
16

a definition of gross negligence used in a licensing statute and refrained from selecting a
“willful and wanton” standard from another statute. Id. The court concluded:
FIRREA defers to state law definitions of gross negligence. After careful
consideration of the statutory language, the Court holds that where the
governing state law does not create a cause of action for gross negligence
or set forth an applicable definition, the RTC may not assert a gross
negligence claim. This holding is consistent with the Court’s ruling that
§ 1821(k) only preempts state law to the extent that state law exempts
directors and officers from liability for gross negligence or more culpable
behavior. The RTC’s claims must be based on other applicable law. In
accordance with this ruling, Plaintiff’s claims for gross negligence will be
dismissed.
Id.
However, Gershman predated the U.S. Supreme Court’s consideration of § 1821(k)
in Atherton. The Atherton Court held that under § 1821(k) “state law sets the standard of
conduct as long as the state standard (such as simple negligence) is stricter than that of
the federal statute. The federal statute nonetheless sets a ‘gross negligence’ floor, which
applies as a substitute for state standards that are more relaxed.” 519 U.S. at 216. The
floor provides “a guarantee that officers and directors must meet at least a gross
negligence standard.” Id. at 227.
The Individual Defendants’ argument, though linguistically interesting, cannot
succeed, as it would mean that a state could defeat the floor of the federal statute by
completely eliminating its cause of action or definition of gross negligence. Wisconsin
cannot be permitted to obliterate the minimum federal standard of conduct. If Wisconsin’s
standard is more relaxed by recognizing only an intentional tort claim, for instance, and not
a negligence or gross negligence claim, then, as indicated by the Supreme Court,
§ 1821(k) substitutes its gross-negligence floor. District courts in Illinois held that the RTC

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could sue defendants for gross negligence under § 1821(k) even though Illinois does not
recognize gross negligence as a separate tort. Resolution Trust Corp. v. Franz, 909 F.
Supp. 1128, 1139 (N.D. Ill. 1995); Resolution Trust Corp. v. Gravee, No. 94 C 4589, 1995
WL 75373, *4 (N.D. Ill. Feb. 22, 1995). This court agrees with Franz and Gravee and
rejects Gershman.
Section 1821(k) does not require that a state have an actual cause of action for
gross negligence, but rather just a definition of gross negligence. See Gravee, 1995 WL
75373, at *4. The statute provides that the FDIC-R as receiver may sue “for gross
negligence, including any similar conduct . . . as such terms are defined and determined
under applicable State law.” § 1821(k). And Wisconsin does have a definition of gross
negligence for this situation, found in Wis. JI–Civil 1006: “Gross negligence is conduct . . .
which shows either a willful intent to injure or reckless and wanton disregard of the rights,
safety, or property of another person.” The instruction was approved in 1978 (after Bielski)
and revised in 2002 and 2015. Wis. JI–Civil 1006 cmt. The comments state that although
gross negligence is no longer part of Wisconsin common law, the instruction
is retained, however, for whatever use may be made of it in the trial of cases
wherein foreign law on gross negligence is to be applied. It may also be of
utility in cases arising under certain Wisconsin statutes which impose civil
liability for conduct which is akin to or the equivalent of gross negligence.
Id. (citations omitted). Because the federal statute § 1821(k) sets a statutory floor of gross
negligence, per the comments this instruction should supply the definition.6

6
This court rejects the FDIC-R’s argum ent that the definition of gross negligence for present purposes
is “very great negligence” or “grave negligence” as used in a 1974 case about revocation of an engineer’s
license and in a footnote in a case from 1972. (See Doc. 21 at 10-11.) The court believes that the W isconsin
Jury Instruction definition would be used by W isconsin courts today in the present case. “Very great” or
“grave” negligence would be vague for a jury, and the W isconsin Jury Instruction is m ore recent and appears
to fit the bill for the present situation.

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Further, although the Supreme Court of Wisconsin abolished gross negligence as
a separate tort, Wisconsin caselaw retained the concept of that standard of conduct for
common-law punitive damages purposes. In Wangen, the court quoted with approval preBielski caselaw that likened the standard for punitive damages to gross negligence:
[I]n order that punitory damages may be assessed, something must be
shown over and above the mere breach of duty for which compensatory
damages can be given; that is, a showing of a bad intent deserving
punishment, or something in the nature of special ill will towards the person
injured, or a wanton, deliberate disregard of the particular duty then being
breached, or that which resembles gross, as distinguished from ordinary,
negligence.
97 Wis. 2d at 268 (quoting Meshane v. Second St. Co., 197 Wis. 382, 387, 222 N.W. 320
(1928)). The court clarified that the aspect of the doctrine of gross negligence that Bielski
eliminated was the effect that a finding of gross negligence meant a plaintiff could recover
one hundred percent of his compensatory damages, even if he had been guilty of some
contributory negligence. 97 Wis. 2d at 272. But the aspect of gross negligence that
correlated with a more egregious level of conduct than ordinary negligence still existed
regarding punitive damages:
Only where there is proof of malice or willful, wanton, reckless disregard of
plaintiff’s rights can punitive damages be considered. Although Bielski
eliminated the proof of aggravated conduct characterized as gross
negligence in determining liability for compensatory damages and the
amount thereof in negligence actions, Bielski has not been interpreted by this
court as eliminating such conduct as the basis for punitive damages. We do
not read Bielski as holding that “outrageous” conduct, which may also fit the
description of “gross negligence,” has no place in determining the existence
of liability for punitive damages . . . .
97 Wis. 2d at 275. The comments to instruction 1006 echo Wangen regarding the
similarity of gross negligence to conduct justifying common-law punitive damages. Thus,
for purposes of § 1821(k) the punitive damages standard applies to the “similar conduct”
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referred to by the statute that is comparable to gross negligence. Therefore, for the FDICR to prevail under § 1821(k) and Wisconsin law, it will have to prove ordinary negligence
plus the level of conduct defined as gross negligence in instruction 1006.
The Individual Defendants contend that even if the FDIC-R can pursue its § 1821(k)
claim, the complaint fails to set forth facts meeting the applicable standard. The court has
reviewed the complaint and finds that it sets forth sufficient facts charging the Individual
Defendants with reckless and wanton disregard of the Bank’s assets and safety. The
complaint identifies the challenged transactions and describes them with details. The
complaint asserts that notwithstanding the Bank’s move into aggressive commercial real
estate lending and development lending, the Individual Defendants failed to hire staff with
experience in high-risk loans or to appropriately train staff; loans were approved despite
inadequate creditworthiness of the borrowers and guarantors and without sufficient
collateral. (Doc. 1, ¶ 28.) Under the Bank’s loan policy, the Bank had a “house limit” for
loans to one borrower, and each of the seven loans mentioned in the complaint required
Board approval because the aggregate loans to each borrower exceeded the house limit.
Yet Chappell and Smith twice approved additional funding without obtaining Board
approval. (Doc. 1, ¶¶ 30, 31.) The Bank’s loan policy required that a global cash flow
analysis for commercial borrowers, that the debt-to-income ratio not exceed forty percent,
that the project be within southeastern Wisconsin, that a feasibility study be conducted for
development loans, and that the maximum loan-to-value ratios were between sixty-five and
eighty percent depending on the type of loan. (Doc. 1, ¶ 32.) Yet for the seven loans, the
Individual Defendants violated these loan policies by, among other things, failing to review
any financial information for the borrowers or using financial information for guarantors that
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was years old; failing to obtain a global cash flow analysis; approving loans with a
guarantor’s debt-to-income ratio of eighty percent; failing to ensure there was sufficient
collateral securing the loans; approving loans despite having information that the
guarantors were not viable sources of repayment because of their other illiquidity and other
liabilities; approving loans without the required feasibility studies; and approving loans with
loan-to-value ratios of 99, 111, 124, and 174 percent. (Doc. 1, ¶¶ 36, 38, 40, 43, 45, 49.)
One of the loans was to fund construction in Chicago, not southeastern Wisconsin. (Doc.
1, ¶ 48.) Moreover, certain credit requests presented to the Individual Defendants warned
of a construction housing market slow down, a housing market bubble, and that one
borrower was already experiencing slower sales than expected on other projects. (Doc.
1, ¶ 36, 43.) Just weeks after one of the loan increases, bank examiners rated one of the
loans substandard. (Doc. 1, ¶ 46.)
Assuming the truth of these allegations, the court finds that the Individual
Defendants did not make one or two business decisions that in hindsight were not
successful. Instead they frequently approved loans that violated the Bank’s loan policy
without adequate financial information showing the borrower’s or guarantor’s ability to
repay. The loan-to-value ratios, in particular, were not slightly outside of the range of the
loan policy, but greatly outside the range. Though the Individual Defendants argue that
regulatory guidance permits exceptions to the loan-to-value ratios, a reasonable inference
from the allegations in the complaint is that at the Bank such ratios were the rule rather
than the exception.

These allegations sufficiently allege recklessness and wanton

disregard for purposes of the FDIC-R’s gross-negligence claim.

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Lastly, the Individual Defendants argue that the FDIC-R cannot pursue a gross
negligence and a negligence claim.7 The statutory language and caselaw indicate that it
can. Section 1821(k) ends by saying that it does not impair or affect any right of the FDICR under other applicable law. Thus, any cause of action under § 1821(k) is in addition to
any other federal or state claims, such as for negligence. In Atherton, the Supreme Court
rejected an argument that by authorizing actions for gross negligence, § 1821(k) forbid
actions based on less seriously culpable conduct such as negligence. 519 U.S. at 228.
The Fourth Circuit recognized as much in Rippy: “[U]nder North Carolina law, a director
or an officer can be held liable for ordinary negligence. In line with Atherton and 12 U.S.C.
§ 1821(k), the FDIC-R may sue bank directors and officers for both ordinary negligence
and gross negligence.” 2015 WL 4910473, at *4. Moreover, even if gross negligence and
ordinary negligence are inconsistent under Wisconsin law, that is a matter for trial, not
pleading. A plaintiff may plead the claims in the alternative. See Wis. JI–Civil 1006 cmt.;
see also Fed. R. Civ. P. 8(d)(2), (3).
For these reasons, the motion to dismiss count II will be denied.
C.

Count III: Continues
The Individual Defendants’ motion, to which Travelers joined, challenged counts I

and II only. No motion challenges count III, notwithstanding that some of the later
replies/surreplies discuss the validity of count III against the insurance company.
Moreover, the court declines to address an issue that has not been properly raised in a
pending motion. Therefore, count III will continue, though the parties are encouraged to

7

Note that the negligence claim rem ains pending against only corporate officers Chappell and Sm ith.

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work out stipulations regarding the effect of this decision on the claims against
Travelers.
MOTION TO STRIKE AFFIRMATIVE DEFENSES
As noted by the FDIC-R and Travelers in their motion to stay (Doc. 20), the court’s
decision on dismissal impacts which affirmative defenses may be pursued. Hence, a new
motion to strike that eliminates any challenge to affirmative defenses that are now moot
or may be withdrawn is warranted.
CONCLUSION
For the reasons set forth above,
IT IS ORDERED that the motion to dismiss (Doc. 18) is granted as to the negligence
claim against the directors only, but is otherwise denied.
IT IS FURTHER ORDERED that the motion to strike affirmative defenses (Doc. 16)
is denied without prejudice.
IT IS FURTHER ORDERED that within fourteen days of this order Travelers must
identify which, if any, affirmative defenses it is withdrawing.
IT IS FURTHER ORDERED that within fourteen days of the filing of Travelers’
statement regarding or withdrawal of affirmative defenses, the FDIC-R may file a new
motion to strike affirmative defenses, if it so chooses.
Dated at Milwaukee, Wisconsin, this 25th day of September, 2015.
BY THE COURT
/s/ C.N. Clevert, Jr.
C.N. CLEVERT, JR.
U.S. DISTRICT JUDGE

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