United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 13, 2010 Decided October 22, 2010
No. 08-7150
MORTON A. BENDER AND GRACE M. BENDER,
APPELLEES
v.
CAROLYN D. JORDAN, ET AL.,
APPELLANTS
INDEPENDENCE FEDERAL SAVINGS BANK,
APPELLEE
Appeal from the United States District Court
for the District of Columbia
(No. 1:06-cv-00092-RMC)
Frederick D. Cooke Jr. argued the cause and filed the
briefs for appellants. Peter E. Strand entered an appearance.
Dale A. Cooter argued the cause for appellee
Independence Federal Savings Bank. With him on the brief
was Donna S. Mangold. Griffin V. Canada Jr. entered an
appearance.
2
Before: BROWN, Circuit Judge, and EDWARDS and
WILLIAMS, Senior Circuit Judges.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: This is a fee dispute
arising out of prolonged litigation between various parties
interested in Independence Federal Savings Bank (“IFSB” or
the “Bank”), a federal stock savings association regulated at
the time of the relevant events by the Office of Thrift
Supervision (“OTS”).1 One substantive phase, possibly the
last, began in 2006 when shareholders Morton and Grace
Bender filed a securities law suit against IFSB, five then
directors and its president and CEO. Those six individuals
executed agreements with IFSB under which the Bank
advanced funds for defense of the suit, on the condition that
each individual would repay the expenses if later determined
not to be entitled to indemnification under an OTS regulation,
12 C.F.R. § 545.121.
On the merits, the district court granted a preliminary
injunction in favor of the Benders, Bender v. Jordan, 439 F.
Supp. 2d 139 (D.D.C. 2006), who soon thereafter acquired
control of the Bank. With them in charge, the district court
dismissed their substantive claims as moot. Bender v. Jordan,
515 F. Supp. 2d 10 (D.D.C. 2007).
1
Under the recently enacted Dodd-Frank Wall Street Reform
and Consumer Protection Act, the Office of Thrift Supervision will
be eliminated and its authority over federal savings associations will
be transferred to the Office of the Comptroller of the Currency.
Pub. L. No. 111-203, §§ 311-13, 369, 124 Stat. 1376, 1520-23,
1557-65 (2010) (to be codified at 12 U.S.C. §§ 5412-13, 1463).
3
ISFB’s new board of directors then unanimously
approved a resolution stating that three of the original six
individual defendants—namely, two former directors and the
former president and CEO—were not entitled to
indemnification and demanding repayment of legal fees
advanced pursuant to their respective agreements. Joint
Appendix (“J.A.”) 130. These three individuals refused to
repay. IFSB filed a cross-claim against them for breach of
contract, and the district court granted summary judgment in
favor of IFSB. Bender v. Jordan, 570 F. Supp. 2d 37 (D.D.C.
2008). The district court also rejected the three cross-
defendants’ argument that the obligation should be split six
ways among the original six individuals, and ruled that each
of the three cross-defendants should be severally liable for
one-third of the entire amount advanced. It absolved the three
original defendants not named by IFSB as cross-defendants,
saying, “Because [the other three defendants] were not found
to be actively involved [in the securities law violations alleged
by the Benders] . . . , it was not unreasonable for the current
Board to decide that their ‘fair share’ of the legal fees and
expenses was $0.00.” Id. at 48.
The three cross-defendants (here called for simplicity’s
sake the “former directors”) appeal on the grounds that IFSB
failed to comply with the procedures set forth in 12 C.F.R.
§ 545.121 and that they therefore are not required to
reimburse IFSB under the terms of the agreements. They also
appear to make an obscure argument that the agreements
themselves obligate the IFSB to initiate procedures alluded to
in the regulation. Because their reading of 12 C.F.R.
§ 545.121 is mistaken (as is their reading of the contract, to
the extent that they rely on it at all), we affirm the judgment of
the district court. In their brief to this court the former
directors did not specifically challenge the district court’s
exclusion of the other three original defendants, and only did
so indirectly at oral argument. See Oral Arg. Recording at
4
38:18-40:18. The apportionment issue is therefore forfeited.
See Williams v. United States, 396 F.3d 412, 415 (D.C. Cir.
2005) (argument inadequately raised in opening brief is
forfeited).
* * *
Although the parties do not raise the issue, we must first
consider whether the district court properly exercised
jurisdiction. A case arises under federal law within the
meaning of 28 U.S.C. § 1331 “if ‘a well-pleaded complaint
establishes either that federal law creates the cause of action
or that the plaintiff’s right to relief necessarily depends on
resolution of a substantial question of federal law.’” Empire
Healthchoice Assurance, Inc. v. McVeigh, 547 U.S. 677, 690
(2006) (quoting Franchise Tax Bd. of Cal. v. Construction
Laborers Vacation Trust for Southern Cal., 463 U.S. 1, 27-28
(1983)). IFSB’s cause of action—breach of contract—
appears on its face to be one created by state law. But even
where that is true, the federal courts have jurisdiction when, as
here, it is apparent that the federal questions overwhelmingly
predominate.
For federal courts to have jurisdiction, the state law claim
must turn on an “actually disputed and substantial” issue of
federal law, Grable & Sons Metal Products, Inc. v. Darue
Engineering & Mfg., 545 U.S. 308, 314 (2005), and federal
jurisdiction must be “consistent with congressional judgment
about the sound division of labor between state and federal
courts governing the application of § 1331.” Id. at 313-14.
The Court has said that this depends on such factors as the
strength of the federal interest in a federal forum to resolve
questions of federal law and whether federal jurisdiction
would “materially affect” the “normal currents of litigation.”
Id. at 315, 319. Federal jurisdiction is favored in cases that
5
present “a nearly ‘pure issue of law’ . . . ‘that could be settled
once and for all and thereafter would govern numerous . . .
cases.’” Empire, 547 U.S. at 700 (quoting Richard H. Fallon,
Jr., Daniel J. Meltzer, & Daniel L. Shapiro, Hart &
Wechsler’s The Federal Courts and the Federal System 65
(2005 Supp.)). Conversely, federal jurisdiction is disfavored
for cases that are “fact-bound and situation-specific” or which
involve substantial questions of state as well as federal law.
Empire, 547 U.S. at 701.
As in Grable (but not in Empire), this case presents a
nearly pure issue of federal law, and none of the other relevant
factors weighs against federal jurisdiction. Although breach
of contract is a state law cause of action, the agreements
themselves are “creatures of federal law,” see Jackson Transit
Authority v. Local Division 1285, Amalgamated Transit
Union, 457 U.S. 15, 23 (1982), in the sense of being intended
to implement the scheme designed by 12 C.F.R. § 545.121.
The former directors and IFSB entered into the agreements
because federal law requires the execution of such contracts
before legal fees can be advanced to defendant officers and
directors. Id. § 545.121(e). And the parties’ legal duties turn
almost entirely on the proper interpretation of that regulation.
The federal interest in a federal forum for this case is
substantial. At stake is the interpretation of a federal
regulation that governs the conduct of a federal agency—the
Office of Thrift Supervision—and federally chartered savings
associations. By contrast, there is no discernable state interest
in a state forum.
The Court’s opinions in this area call on the federal courts
to make predictive judgments about, for example, whether
jurisdiction over such actions as the one in question will
“materially affect, or threaten to affect, the normal currents of
litigation,” Grable, 545 U.S. at 319, presumably by leading to
a wave of new filings in federal court. Creation of precedent
6
interpreting 12 C.F.R. § 545.121 is likely in fact to reduce the
frequency of disputes over contracts under 12 C.F.R.
§ 545.121(e). And in many instances (indeed, it may be the
case here, but we need not reach it), the federal courts would
have supplemental jurisdiction over 12 C.F.R. § 545.121(e)
breach of contract claims. Here we have turned first to federal
question jurisdiction primarily because idiosyncrasies of the
record pose special problems for supplemental jurisdiction. In
any case, we do not anticipate that this exercise of federal
jurisdiction will portend any more than “a microscopic effect
on the federal-state division of labor.” Grable, 545 U.S. at
315.
Our finding of jurisdiction under Empire and Grable
makes it unnecessary to consider alternative grounds. These
include federal question jurisdiction under the opinion in
Jackson Transit (for cases where Congress has intended that
“all rights and duties stemming from” a contract should be
governed by federal law, see Empire, 547 U.S. at 693) and
supplemental jurisdiction under 28 U.S.C. § 1367.
* * *
Thus we reach the merits, which depend on the federal
regulation and, to a much lesser extent, on the identically
worded agreements seeking to implement that regulation. We
start with the latter:
Pursuant to Regulations of the Office of Thrift
Supervision (the “OTS”) governing advancement of
expenses to directors and officers of a federal savings
association, 12 C.F.R. § 545.121(e), (the “Regulation”),
with respect to claims brought against a director or officer
arising from service as a director or officer of a federal
savings association, I hereby request that Independence
7
Federal Savings Bank (the “Bank”) pay reasonable
expenses and costs that have been or will be incurred in
the defense or settlement of the litigation styled as
Morton A. Bender, et al. v. Carolyn D. Jordan, et al.
Under the Regulation, I hereby agree that I will repay the
Bank any amounts so paid on my behalf by the Bank if it
is later determined that I am not entitled to
indemnification with respect to the litigation under 12
C.F.R. § 121 [sic], and I represent that I have sufficient
assets to repay my fair share of such amounts.
J.A. 109-11 (punctuation as in original). The parties agree
that the second reference to the regulation should be
understood to refer to 12 C.F.R. § 545.121 (as does the first,
accurately).
Although 12 C.F.R. § 545.121(f) authorizes covered
banks to enact bylaws governing indemnification of officers
and directors, IFSB did not do so. Thus the former directors’
claim of a violation by the Bank turns on the indemnification
provisions of 12 C.F.R. § 545.121(b) and (c):
(b) General. Subject to paragraphs (c) and (g) of this
section, a savings association shall indemnify any person
against whom an action is brought or threatened because
that person is or was a director, officer, or employee of
the association, for:
(1) Any amount for which that person becomes
liable under a judgment if [sic; presumably in] such
action; and
(2) Reasonable costs and expenses, including
reasonable attorney's fees, actually paid or incurred
by that person in defending or settling such action, or
in enforcing his or her rights under this section if he
8
or she attains a favorable judgment in such
enforcement action.
(c) Requirements. Indemnification shall be made to such
period [sic; presumably person] under paragraph (b) of
this section only if:
(1) Final judgment on the merits is in his or her
favor; or
(2) In case of:
(i) Settlement,
(ii) Final judgment against him or her, or
(iii) Final judgment in his or her favor, other
than on the merits, [¶]
if a majority of the disinterested directors of the
savings association determine that he or she was
acting in good faith within the scope of his or her
employment or authority as he or she could
reasonably have perceived it under the circumstances
and for a purpose he or she could reasonably have
believed under the circumstances was in the best
interests of the savings association or its members.
12 C.F.R. § 545.121 (b), (c). We have inserted a ¶ sign in
brackets before the “if” clause at the very end, to make clear
that, as all parties agree, that clause governs indemnification
under any of the subsections of § 545.121(c)(2).
In the useful nomenclature adopted by the court in Harris
v. Resolution Trust Corporation, 939 F.2d 926 (11th Cir.
1991), this regulation allows for two types of
indemnification—“mandatory indemnification” under 12
9
C.F.R. § 545.121(c)(1) for directors who receive final
judgment in their favor on the merits, and “permissive
indemnification” under 12 C.F.R. § 545.121(c)(2) for those
who do not. In the second case indemnification is proper only
if a majority of disinterested directors make certain prescribed
findings.
Because the former directors did not receive final
judgment in their favor on the merits, they are not entitled to
“mandatory indemnification.” They argue, however, that they
are not in breach of contract until a majority of disinterested
new directors has determined, in good faith, that each former
director was not “acting in good faith within the scope of his
or her employment or authority as he or she could reasonably
have perceived it under the circumstances and for a purpose
he or she could reasonably have believed under the
circumstances was in the best interest of the savings
association and its members.” 12 C.F.R. § 545.121(c)(2). In
essence, they claim that the regulation obliges a bank to
launch a process that might create a permissive entitlement.
Thus, the board would have to take whatever steps are
necessary to assure the presence of directors qualifying
thereunder as disinterested and to be sure that such directors
then determine whether the former directors were acting in
good faith and for purposes that they could reasonably believe
were in the best interest of the savings association. If these
disinterested persons found that these conditions were met,
then the Bank would be required to indemnify the former
directors.
The former directors’ interpretation of the regulation is
mistaken. 12 C.F.R. § 545.121(c) does not require a board of
directors to indemnify directors and officers in any
circumstances in which the officers or directors have not
received final judgment on the merits in their favor.
Permissive indemnification is discretionary. 12 C.F.R.
10
§ 545.121(c)(2) provides a standard that must be met for a
board of directors to grant permissive indemnification; it goes
on, in a passage not quoted, to require notice to the OTS 60
days before a bank provides indemnification under either
subsection of 12 C.F.R. § 545.121(c), and to bar
indemnification if the OTS states an objection within the
notice period. The policy manifested by 12 C.F.R.
§ 545.121(c)(2) is one of protecting the financial health of
savings associations by limiting the ability of boards to
indemnify undeserving officers and directors and by providing
for regulatory review. For us to find that the regulation
mandates that directors jump through the hoops required for
permissive indemnification would, inconsistently with that
purpose, impose a potentially costly burden on savings
associations (even if we were to disregard the attendant risks
of litigation). There is no requirement for a board of directors
to do anything at all under 12 C.F.R. § 545.121(c)(2) and
therefore no entitlement to indemnification for officers and
directors beyond 12 C.F.R. § 545.121(c)(1) unless and until
the disinterested directors have approved permissive
indemnification in accordance with 12 C.F.R. § 545.121(c)(2)
and the OTS has not objected during the 60-day notice period.
The former directors cite Resolution Trust Corporation v.
Nicholson, Civ. No. 3-88-163, 1991 U.S. Dist. LEXIS 21143
(E.D. Tenn. Sept. 5, 1991), in support of their interpretation of
12 C.F.R. § 545.121(c)(2). The Nicholson court stated in
dictum that a board of directors’ decision not to indemnify a
director under 12 C.F.R. § 545.121(c)(2) “is to be made in
good faith and based on the board’s fiduciary
responsibilities.” Nicholson, 1991 U.S. Dist. LEXIS 21143 at
*18 (citing OTS Opinion Letter, 1989 FHLBB LEXIS 458,
1989 WL 1114183 (October 6, 1989)). Because the court
determined that Nicholson’s claim was not ripe, it did not rule
on the exact scope of the board of directors’ duties. Id. at *19.
In contrast to Nicholson, we reach the merits of the argument.
11
We agree that insofar as the new directors are acting in their
official capacity, they are bound by their fiduciary duties to
IFSB. But 12 C.F.R. § 545.121(c)(2) imposes no additional
duty of good faith for board members to undertake the
procedures prerequisite to permissive indemnification. It
therefore creates no general entitlement to indemnification
under 12 C.F.R. § 545.121(c)(2) where the board of directors
does not consider the determinations necessary to create a
permissive entitlement.
In their opening brief the former directors hint, in the
most subtle way imaginable, at a claim that the agreements
themselves created a duty on the Bank’s part to launch the
procedures for finding a permissive entitlement. The
argument becomes explicit in the reply brief, but of course we
typically disregard arguments that pop up only at that stage,
when the appellee’s chance to respond has passed. Carducci
v. Regan, 714 F.2d 171, 177 (D.C. Cir. 1983).
In any event, the argument’s lack of merit is plain. To be
sure, the agreements call for the recipients of advances to
repay them “if it is later determined that I am not entitled to
indemnification” under the regulation. J.A. 109-11. The
board in fact made such a determination, adopting a resolution
to the effect that the former directors were not entitled to
indemnity. The board did not purport to address the
possibility of permissive indemnification. Presumably the
parties could have assigned the board a duty to address that
issue, a duty altogether outside 12 C.F.R. § 545.121, but it
used no language purporting to do so. Especially in
agreements declaring themselves to be “[p]ursuant” to OTS’s
regulations, where the former directors agreed to repay
“[u]nder” 12 C.F.R. § 545.121, it would take far clearer
language to impose any such burden on the board.
12
The former directors’ brief is replete with assertions that
the Bank’s new board directors are subject to a general duty of
good faith. No doubt. But that general interpretive gloss is no
basis for generating a whole new duty ex nihilo.
As the former directors have satisfied neither the
conditions for mandatory nor those for permissive entitlement,
and the board has made a determination embodying that fact,
the former directors are obligated under the agreements to
repay IFSB for the cost of their legal defense.
* * *
The judgment of the district court is therefore
Affirmed.