F.D.I.C. v. Shrader & York

United States Court of Appeals,

Fifth Circuit.

No. 91-6315.

FEDERAL DEPOSIT INSURANCE CORPORATION, etc., Plaintiff-Appellant,

v.

SHRADER & YORK, etc., et al., Defendants-Appellees.

May 20, 1993.

Appeal from the United States District Court for the Southern District of Texas.

Before DAVIS and JONES, Circuit Judges, and PARKER1, District Judge.

W. EUGENE DAVIS, Circuit Judge:

The Federal Deposit Insurance Corporation (FDIC) appeals the summary judgment dismissal

of its legal malpractice action against the law firm of Shrader & York, its individual partners, and

successor organizations (Shrader & York). We affirm.

I.

A.

The FDIC brought this legal malpractice action against Shrader & York in May of 1991. It

alleges that Shrader & York negligently contributed to the failure of two of the law firm's clients, City

Savings & Loan Association (City), and Lamar Savings Association (Lamar). Specifically, the FDIC

points to work Shrader & York did on the following five transactions: (1) City's acquisition of Realty

Development Corporation (RDC) in 1983; (2) Lamar's merger with Brazos Savings Association

(Brazos) in 1983; (3) the 1984 sale by a Lamar subsidiary of property known as 8214 Westchester;

(4) Lamar's acquisition of CTC (USA) Corporation (CTC) in 1985; and (5) Lamar's 1985 purchase

of Stone Oak Corporation (Stone Oak).

The district court granted summary judgment in favor of the defendants, relying on the

following grounds: (1) the Texas two year statute of limitations for legal malpractice claims expired

before the FDIC acquired City and Lamar; (2) the FDIC lacked standing to sue Shrader & York for

1
Chief Judge of the Eastern District of Texas, sitting by designation.
legal malpractice; (3) the individually named defendants were not partners in the law firm at the time

of the alleged acts of malpractice; and (4) the law firm's alleged acts of malpractice could not have

proximately caused the losses alleged by the FDIC, 777 F.Supp. 533. This appeal followed.

B.

Stanley E. Adams, Jr. (Adams) and his wife, Christie Bell, purchased Lamar in 1969. In 1979

Adams formed Lamar Financial Corporation (LFC) as Lamar's holding company. In 1983 LFC

purchased City. Adams served as chairman of the board of directors and chief executive officer of

Lamar from January of 1980 through December of 1985; as a director of LFC during the same time

period, and as chairman of the board of directors of LFC from January of 1983 through December

of 1985. Adams served as City's vice president from January of 1983 until May of 1986, and as a

director of City from December of 1985 to April of 1986. From December of 1985 until October of

1986, Adams owned 100% of City's stock. In February of 1992, Adams pled guilty to conspiracy

to defraud the United States, and false entries in savings association records, in violation of 18 U.S.C.

§§ 371, 657, 1006, and 1001.

On May 18, 1988, the Federal Home Loan Bank Board (FHLBB) determined that City and

Lamar were insolvent, and appointed the Federal Savings and Loan Insurance Corporation (FSLIC)

as their receiver. The FSLIC-Receiver sold to the FSLIC, in its corporate capacity, City and Lamar's

claims against professionals providing services to these thrifts. The FDIC acquired these causes of

action by operation of § 401 of the Financial Institutions, Reform, Recovery and Enforcement Act

of 1989 (FIRREA).

The FDIC alleges that Shrader & York contributed to the collapse of City and Lamar by doing

faulty legal work in the five transactions at issue. With respect to all five transactions the FDIC

alleges that Shrader & York failed to give City and Lamar competent legal advice to the point that

some transactions violated federal laws. The FDIC contends that Shrader & York allowed Adams

to deceive the Lamar and City directors. According to the FDIC's theory of the case, if Shrader &

York had alerted the City and Lamar boards of the illegal nature of the five transactions, the boards

would have blocked the transactions, thereby averting huge losses. The FDIC describes the five
transactions as follows:

1. City's acquisition of RDC: In 1983 City paid $30 million for RDC, a troubled asset. RDC's

principals then purchased $10 million of LFC preferred stock. Thus LFC used the RDC acquisition

to funnel $10 million of City's cash to LFC, allowing LFC to repay the loan LFC secured to purchase

City. The FDIC contends that this violated federal regulations prohibiting a holding company's

subsidiary thrift from investing its funds in an affiliate's obligation. The FDIC further contends that

Shrader & York knew that the transaction was unlawful, but failed to inform any disinterested officer

or director of City. According to the FDIC, City's losses from the RDC acquisition exceeded $5

million.

2. Lamar's acquisition of Brazos: In July of 1982 Lamar agreed to acquire Brazos. The

acquisition agreement provided that compensation to Brazos officers and directors would increase

only in the ordinary course of business, and that Lamar and Brazos would bear their own merger

expenses. In July of 1983 Shrader & York certified that the merger complied with the acquisition

agreement and applicable laws. The FDIC claims that Shrader & York failed to repo rt numerous

violations of the merger agreement. For example, the FDIC alleges that Brazos paid $155 thousand

of Lamar's merger-related expenses. More significantly, the FDIC alleges that officers and directors

of Lamar and Brazos wasted nearly $8 million in Brazos assets through conduct such as (1) paying

nearly $1 million in bonuses to senior officers of Lamar and Brazos; (2) giving 71 automobiles to

officers, directors and employees of Lamar, City, and Brazos; (3) giving Rolex watches to Brazos

directors; (4) constructing a greenhouse at Adams's house and an airstrip at Adams's ranch; and (5)

buying a $72 thousand diamond ring for Adams's wife.

3. Lamar's sale of 8214 Westchester: Lamar loaned $10.5 million to Drew Mortgage

Company, an entity owned by Lamar and City, for development and construction of 8214

Westchester, Lamar's Dallas headquarters. The FDIC alleges that in 1984 Shrader and York formed

a limited partnership, 8214 Westchester Ltd., to purchase the property. The limited partnership

borrowed $15 million in purchase financing fro m Mainland Savings (Mainland). Mainland

participated $8.8 million of the loan back to Lamar. Later, Lamar purchased the remaining $6.2
million of the loan. The FDIC claims that the sale was a scheme to avoid classifying the loan as a

non-performing depreciable asset, for 1984. It also alleges that Lamar lost $4 million on this

transaction.

4. Lamar's acquisition of CTC: In 1985 Lamar made a direct investment in CTC, a software

development corporation. The FDIC alleges that Lamar's regulatory capital was below the minimum

level necessary to make direct investments unsupervised by federal regulators. The FDIC further

alleges that Shrader & York prepared the documentation for the investment, but failed to advise

Lamar's board of directors of the need to obtain regulatory approval for the investment. The FDIC

alleges that Lamar lost over $1 million on the transaction.

5. Lamar's purchase of Stone Oak: In 1985 Lamar and LFC acquired Stone Oak, a real estate

development corporation, for $84.2 million. Again, the FDIC alleges that Lamar had insufficient

regulatory capital to make unsupervised direct investments. It alleges that Shrader & York failed to

advise Lamar's board of the need to obtain prior approval of the investment. The FDIC alleges that

Lamar lost $25 million on the investment.

II.

Because the FDIC's standing to sue is a threshold inquiry, we deal with it first. The district

court concluded that the FDIC's st anding to sue Shrader & York was based on Lamar and City's

shareholders' right to sue. Because the shareholders lacked standing, the district court concluded that

the FDIC also lacked standing.

The FSLIC-Receiver, as successor to Lamar and City, acquired all of the two thrifts' assets,

including their claims against Shrader & York. 12 C.F.R. §§ 548.2(f), 549.3 (FSLIC regulations in

effect at the time the FSLIC was appointed receiver of City & Lamar). The FSLIC-Receiver then

assigned these to the FSLIC-Corporate. See 12 U.S.C. § 1729(f)(2)(A) (1989). By operation of

FIRREA, the FSLIC was abolished and the FDIC succeeded to all of the FSLIC's assets. 12 U.S.C.

§ 1821a(a)(1). The FDIC therefore has standing to sue Shrader & York.2

III.

2
We discuss the FDIC's standing in further detail in section III of this opinion.
 The district court concluded that City and Lamar's legal malpractice claims against Shrader

& York were time barred before the FSLIC acquired them on May 18, 1988. FIRREA's statute of

limitations, 12 U.S.C. § 1821(d)(14) does not revive stale state law claims acquired by the FSLIC or

FDIC. F.D.I.C. v. Belli, 981 F.2d 838, 842 (5th Cir.1993); see also Federal Deposit Ins. Corp. v.

Hinkson, 848 F.2d 432, 434 (3rd Cir.1988). The FSLIC acquired City and Lamar's legal malpractice

claims against Shrader & York in May of 1988. Thus if City and Lamar's claims against Shrader &

York expired before May of 1988, Shrader & York's statute of limitations defense is meritorious.

The Texas limitation period for legal malpractice claims is two years. Tex.Civ.Prac. &

Rem.Code Ann. § 16.003 (Vernon 1986); Willis v. Maverick, 760 S.W.2d 642, 644 (Tex.1988).

The parties do not dispute that the occurrences giving rise to the legal malpractice claims against

Shrader & York took place well before May of 1986. So the claims all expired before May of 1988

unless one of the equitable doctrines urged upon us by the FDIC operates to extend the limitation

period.

The FDIC argues that two equitable doctrines should extend the limitation period. First, it

argues, Texas's discovery rule kept the statute of limitations from running before May of 1988.

Second, it argues, the doctrine of adverse domination tolled the running of the statute of limitations.

Summary judgment is appropriate if, after discovery, there is no genuine dispute over any

material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986),

Anderson v. Liberty Lobby, 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); see also

Fed.R.Civ.P. 56. Material facts are those that will affect the outcome of the lawsuit. Anderson, 477

U.S. at 247, 106 S.Ct. at 2510. A genuine dispute requires more than metaphysical doubt; there

must be an issue for trial. Matsushita, 475 U.S. at 586, 106 S.Ct. at 1355-56. Once the m oving

party for summary judgment shows the absence of a material factual dispute, the burden shifts to the

non-moving party to designate specific facts establishing an issue for trial. Celotex, 477 U.S. at 323,

106 S.Ct. at 2552-53.

In Texas, the party seeking to benefit from the discovery rule "bear[s] the burden of proving
and securing favorable findings thereon." Woods v. William M. Mercer, Inc., 769 S.W.2d 515, 518

(Tex.1988). A Texas rule of summary judgment procedure requires the moving party to negate the

discovery rule by proving as a matter of law that no issue of material fact exists concerning when the

plaintiff discovered or should have discovered its cause of action. Woods, 769 S.W.2d at 518 n. 2.

However federal courts follow the federal rule of summary judgment procedure. Impossible

Electronic Techniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d 1026, 1036 n. 10 (5th

Cir.1982); Schultz v. Newsweek, Inc., 668 F.2d 911, 917 (6th Cir.1982). "[W]here the nonmoving

party will bear the burden of proof at trial on a dispositive issue," the nonmoving party must go

"beyond the pleadings" and produce summary judgment evidence designating " "specific facts

showing that there is a genuine issue for trial.' " Celotex, 477 U.S. at 324, 106 S.Ct. at 2553 (quoting

Fed.R.Civ.Pro. 56(e)). So the FDIC bore the burden of producing some summary judgment evidence

in support of its discovery rule argument. See McLaren v. Imperial Cas. and Indem. Co., 767

F.Supp. 1364, 1378 (N.D.Tex.1991), aff'd in part without op., 961 F.2d 213 (5th Cir.1992).

A.

In its first response to Shrader & York's limitations defense, the FDIC asserts that Texas's

discovery rule kept the statute of limitations from expiring before May of 1988. Under Texas's

discovery rule, the statute of limitations for legal malpractice actions does not begin to run until "the

claimant discovers or should have discovered through the exercise of reasonable care and diligence

the facts establishing the elements of his cause of action." Willis, 760 S.W.2d at 646. In Willis, the

Texas Supreme Court noted that clients often lack the expertise to recognize a lawyer's negligence,

and that "[f]acts which might ordinarily require investigation likely may not excite suspicion where

a fiduciary relationship is involved." Willis, 760 S.W.2d at 645-46.

In Texas, a legal malpractice claim, which is based on negligence, requires proof of four legal

malpractice elements: (1) the existence of a duty on the part of one party to another; (2) breach of

that duty; and (3) injury (4) proximately caused by the breach. Lucas v. Texas Industries, Inc., 696

S.W.2d 372, 376 (Tex.1984). Proximate cause includes foreseeability and cause in fact. McClure

v. Allied Stores of Texas, Inc., 608 S.W.2d 901, 903 (Tex.1980). After reviewing the record, we
conclude that the district court correctly determined that Texas's discovery rule did not keep the

statute of limitations from expiring before May of 1988.

1.

Texas's discovery rule does not operate to extend the time limitation on the RDC acquisition,

the 8214 Westchester transaction, the CTC acquisition, or the Stone Oak acquisition past May of

1988. The summary judgment record demonstrates that Adams was intimately familiar with these

four transactions and knew the facts that the FDIC contends Shrader & York should have cautioned

City and Lamar about. We conclude that Adams's knowledge should be imputed to City and Lamar.

The FDIC vigorously challenges both conclusions, particularly the second.

The FDIC co ntends that the district court erroneously presumed that because Adams had

knowledge of Shrader & York's activities he knew of Shrader & York's malpractice. The FDIC's

argument assumes that Texas's discovery rule requires actual knowledge. In fact, the limitations

period on a legal malpractice claim begins to run when "the claimant discovers or should have

discovered through the exercise of reasonable care and diligence the facts establishing the elements

of his cause of action." Willis, 760 S.W.2d at 646.

As the majority owner of LFC, the chairman of LFC's board of directors from January of 1983

through December of 1985, chairman of the board of directors, chief executive officer and a director

of Lamar from January of 1980 t hrough December of 1985, and sole shareholder of City from

October of 1984 to December of 1985, Adams was intimately involved with the transactions at issue.

In a related action, Lamar Financial Corporation v. Adams, No. Civ. A. A-88-CA-183 (W.D.Tex.),

the FDIC's second amended complaint pled that Adams and his family were the majority shareholders

of LFC during the periods relevant to this suit. It further alleges that "Adams was in control of the

affairs of LFC, Lamar and City."

In Lamar Financial Corporation v. Adams, the FDIC accused Adams of "deliberately ...

entering into unsafe and unsound transactions" that "generated no new cash to Lamar," but

"dramatically increased [Lamar's] exposure to risk," and caused Lamar to sustain losses. Moreover,

the FDIC pled that Adams and others "carried out a scheme" to "disguis[e] and hid[e], from
regulatory authorities, depositors, creditors and others, the negative impact of these risky loans and

investments upon [Lamar's] regulatory worth." According to the FDIC's second amended complaint,

one of Adams's schemes was to sell real estate securing delinquent loans and real estate acquired

through foreclosure to third party "strawmen" to boost Lamar's regulatory net worth. This pattern

matches the FDIC's description of the 8214 Westchester transaction. The second amended complaint

further contended that Adams was involved in City's acquisition of RDC, "caus[ing]" City to purchase

RDC and then "fund RDC through capital contributions in excess of $85 million."

The FDIC claims, in one breath, that Adams engaged in elaborate schemes to circumvent

banking regulations. It cannot claim in the next breath that Adams was not aware that Shrader &

York negligently facilitated those schemes. Thus the summary judgment evidence establishes that

Adams should have discovered, through the exercise of reasonable care and diligence, the losses

caused by the schemes and the other facts establishing City and Lamar's legal malpractice claims

against Shrader & York. We also conclude, as a matter of law, that Adams's knowledge should be

imputed to City and Lamar. This is consistent with the generally accepted rule that a bank officer or

director's knowledge is imputed to the bank. F.D.I.C. v. Ernst & Young, 967 F.2d 166, 170 (5th

Cir.1992).

Texas has applied imputation principles to determine when the statute of limitations began to

run on a corporation's cause of action. Alice Roofing & Sheet Metal Works, Inc. v. Halleman, 775

S.W.2d 869 (Tex.App.1989) (Alice Roofing). In Alice Roofing, a corporation took out a loan and

repaid it with corporate funds. However, the sole shareholder of the corporation used the proceeds

of the loan for noncorporate purposes, thus making himself liable to the corporation. Alice Roofing,

775 S.W.2d at 869-70. The sole shareholder then sold the corporation to two other individuals,

allegedly concealing documents evidencing his debt to the corporation. Alice Roofing, 775 S.W.2d

at 870. When the new owners learned of the debt the corporation sued the former shareholder. Alice

Roofing, 775 S.W.2d at 870. The court of appeals held that the statute of limitations on the

corporation's cause of action began to run when the corporation took out the loan, not when the new

owners learned of the debt. Alice Roofing, 775 S.W.2d at 870. It said: "When the 1973 transaction
took place, the corporation had full knowledge of the transaction because it was acting through [the

former sole shareholder], its agent." Alice Roofing, 775 S.W.2d at 870.

The FDIC strenuously urges that several exceptions preclude us from applying this general

rule of imputation. The FDIC first argues that we should consider its special status as successor to

the FSLIC as receiver of City and Lamar and not hold it to the general rule of imputation. Next, the

FDIC contends that Adams's knowledge cannot be imputed to City or Lamar because he acted

adversely to their interests. Relatedly, the FDIC maintains that Adams was not disinterested. Finally,

the FDIC agues that we should not apply the general rule of imputation in favor of Shrader & York

because it is not an "innocent party" and had a duty to protect the thrifts from Adams's misconduct.

We will consider each argument in turn.

The FDIC argues first that, as statutory representative of the insolvent institutions' creditors,

it is not an ordinary assignee. Therefore, it argues, even if imputation might have been appropriate

against City and Lamar, it is not appropriate against the FDIC. We rejected this argument in Ernst

& Young, 967 F.2d at 169, 170, which involved an FDIC professional malpractice suit against a failed

S & L's former outside auditor. At issue was whether the knowledge of the failed S & L's former

dominating director could be imputed to the FDIC. We acknowledged that D'Oench, Duhme & Co.,

Inc. v. FDIC, 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956 (1942), and its progeny give specific rights

to the FDIC when it seeks to recover on defaulted loans from borrowers of failed banks. However

we held that "the FDIC is not entitled to special protection when it brings a tort claim against a third

party on behalf of a defunct financial entity." Ernst & Young, 967 F.2d at 170. In reaching this

conclusion, we relied on FDIC v. Cherry, Bekaert & Holland, 742 F.Supp. 612, 615 (M.D.Fla.1990)

(Cherry), which found "no reason" to treat the FDIC "differently than any other assignee" when it

prosecutes a professional liability suit. Because the FDIC could only recover " "those damages

potentially available to [its] assignor,' " we held that the bank officer's knowledge, which would have

been imputed to the bank, was i mputable to the FDIC. Ernst & Young, 967 F.2d at 169, 170

(quoting State Fidelity Mortgage Co. v. Varner, 740 S.W.2d 477, 480 (Tex.App.1987)).

The FDIC attempts to distinguish Ernst & Young, arguing that, in this case, it is suing on
behalf of depositors and other creditors, not just on behalf of the failed institutions. Ernst & Young

is indistinguishable. There, as here, the FSLIC was appointed receiver of a failed institution and

transferred the institution's claims against professionals to the FSLIC-Corporate. In both cases, the

FDIC acquired the claims pursuant to FIRREA. See F.D.I.C. v. Ernst & Young, 1991 WL 197111

(N.D.Tex.). The FDIC cites 12 U.S.C. § 1821(d)(2)(A)(i), and 12 C.F.R. §§ 549.3(a), 549.2(f) for

the proposition that it may assert claims on behalf of both the insolvent institution and its creditors.

The FDIC brought the same argument and the same authority to the attention of this Court in Ernst

& Young. We rejected the FDIC's argument and concluded with respect to its malpractice suit against

the failed bank's accountants that "the FDIC does not cite any statutory authority affording it special

protection.' " Ernst & Young, 967 F.2d at 169, 170 (quoting Cherry, 742 F.Supp. at 614, 615).

Moreover, in this case, the FDIC has not pled or offered summary judgment evidence that City and

Lamar's depositors and other creditors were clients of Shrader & York, and thus able to sue Shrader

& York for professional malpractice. See Thomas v. Pryor, 847 S.W.2d 303, 304 (Tex.App.1992)

("Under Texas law, an attorney can be held liable for professional malpractice only to a person with

whom the attorney has privity, meaning to a client."); First Mun. Leasing v. Blankenship, Potts, 648

S.W.2d 410 (Tex.App.1983). So the FDIC fails to explain how it improves its position by standing

in the shoes of depositors and other creditors. Ernst & Young therefore controls this issue, and we

hold that imputation is appropriate in this case. If City and Lamar knew what Adams knew, before

May of 1986, the FSLIC acquired only stale claims against Shrader & York when it was appointed

receiver of City and Lamar.

We now turn to the FDIC's argument that Adams acted adversely to City and Lamar. As the

FDIC contends, courts will generally not impute a bank officer or director's knowledge to the bank

if the officer or director acts with an interest adverse to the bank. F.D.I.C. v. Lott, 460 F.2d 82, 88

(5th Cir.1972). The Restatement (2d) of Agency formulates the adverse interest exception as

follows: "A principal is not affected by the knowledge of an agent in a transaction in which the agent

secretly is acting adversely to the principal and entirely for his own or another's purposes...."

Restatement (2d) of Agency § 282(1) (1957), cited with approval in Forest Park Lanes, Ltd. v. Keith,
441 S.W.2d 920, 931 (Tex.Civ.App.1969). According to this formulation, an agent's knowledge falls

within this exception only if the agent acts "entirely for his own or another's purposes." In other

words, "knowledge is imputed in a case of "joint' interests even though the agent's primary interest

is inimical to that of the principal." 3 Fletcher Cyclopedia Corporations § 822 at 126 (perm. ed.).

The paradigm case for applying this exception is where a bank's officer, on behalf of his bank, gives

a corporation in which he has an interest a concession to which it is not entitled, such as a

below-market price or rate of interest. 3 Fletcher Cyclopedia Corporations § 823 at 127.

Our understanding of this exception is further guided by three cases. The first, Goldstein v.

Union Nat. Bank, 109 Tex. 555, 213 S.W. 584, 590-91 (1919), was cited to us by the FDIC.

According to Goldstein, we should ask whether, under all the circumstances of the particular case,

the agent's interests are so incompatible with the interests of his principal as practically to
destroy the agency or to render it reasonably probable that an ordinary person, in the agent's
position, under such circumstances, will neither act in behalf of his principal upon his so
acquired knowledge, nor disclose that knowledge t o his principal, but, because of such
incompatibility in interests, will withhold knowledge from the principal.

Goldstein, 213 S.W. at 590-91. It is "inaccurate" and goes "too far" to say that the exception

involving adverse interest applies if "the individual interests of an agent are to any extent adverse to

that of his principal." Goldstein, 213 S.W. at 590.

Second, we look to our recent decision in Ernst & Young, 967 F.2d at 168-71. In that case

the FDIC, as receiver of a failed savings and loan, sued the S & L's outside auditor for professional

malpractice. Ernst & Young, 967 F.2d at 168. The S & L's sole shareholder, who was also its

chairman of the board and chief executive officer had brought losses to the S & L through fraudulent

and illegal activities. Ernst & Young, 967 F.2d at 168. Those activities included pursuing "complex

commercial ventures that were often based on unsafe and unsound underwriting practices," entering

into transactions that generated "paper profits, making [the S & L] appear solvent," making false

entries in the S & L's books "with intent to deceive [the S & L's] board and government regulators,"

conspiring to misapply the S & L's funds, and "numerous violations of Bank Board regulations."

Ernst & Young, 967 F.2d at 168.

In Ernst & Young, we explained that facts acquired by the officer committing fraud against
the corporation are not imputed to the corporation. We applied an explanation of "fraud against the

corporation" given in Cenco Inc. v. Seidman & Seidman, 686 F.2d 449 (7th Cir.), cert. denied, 459

U.S. 880, 103 S.Ct. 177, 74 L.Ed.2d 145 (1982). We explained that "fraud against the corporation

usually hurts just the corporation; the stockholders are the principal if not only victims...." Ernst &

Young, 967 F.2d at 171. On the other hand, we explained, "fraud for the benefit of the corporation"

primarily benefits the corporation's stockholders and injures "outsiders to the corporation." Ernst &

Young, 967 F.2d at 171. Applying this explanation, we held that the officer's knowledge should be

imputed to the S & L: the officer "acted on the corporation's behalf because by serving [the S & L],

he served himself, [the S & L's] sole owner. As the sole owner, [the officer's] fraudulent activities

on [the S & L's] behalf benefitted himself and injured ... depositors and creditors." Ernst & Young,

967 F.2d at 171.

In Cenco, insiders of a corporation were "deeply involved" in a "massive fraud" that consisted

mainly of "inflating inventories in the Medical/Health Division far above their actual value." Cenco,

686 F.2d at 451. This fraud increased Cenco's apparent worth, as well as the market price of its

stock. Cenco, 686 F.2d at 451. Thus, Cenco was able to "buy up other companies on the cheap" as

well as "borrow money at lower rates than if its inventories had been honestly stated." Cenco, 686

F.2d at 451. In the litigation that followed discovery of the fraud, the company asserted a cross claim

against its independent auditor for failing to prevent the fraud. Cenco, 686 F.2d at 451. The Seventh

Circuit said that the fraud was on behalf of the corporation: "those involved in the fraud were not

stealing from the company, as in the usual corporate fraud case, but were instead aggrandizing the

company (and themselves) at the expense of outsiders...." Cenco, 686 F.2d at 451, 456.

At trial, to successfully establish that Adam's knowledge of the fraudulent activity was not

imputed to the corporation under the discovery rule, the FDIC would have to prove that Adams acted

adversely to or committed fraud against City and/or Lamar. Therefore, to avoid summary judgment

dismissal, it bore the burden of producing some summary judgment evidence in support of this

argument.

The summary judgment evidence indicates that Adams misappropriated funds in connection
with the Brazos merger.3 However the FDIC did not offer summary judgment evidence that Adams

embezzled, looted, or otherwise personally profited at the expense of City or Lamar in connection

with the other four transactions. The five transactions at issue are independent. So Adams's possible

adverse interest in one transaction does not spill over into other transactions for purposes of the

imputation rule.

The FDIC urges us to infer t hat Adams breached his fiduciary duty to the institutions'

depositors and creditors. Creditors were injured when Adams's frauds were uncovered. However,

Cenco and Ernst & Young teach that fraud on behalf of a corporation, as opposed to fraud against

the corporation, almost always injures a corporation's creditors. Ernst & Young, 967 F.2d at 171,

Cenco, 686 F.2d at 456.

The FDIC also argues from the summary judgment evidence that Adams fraudulently inflated

Lamar's regulatory net worth, and that he concocted sham transactions to deceive federal regulators

so that he could retain his control over the institutions. However, the summary judgment evidence

indicates that any fraudulently inflated profits went on the books of Lamar and City, not into Adams's

personal account. Adams's desire to maintain control over City and Lamar, by itself, does not bring

Adams's conduct within the adverse interest exception, under any of the formulations we have

discussed.

An examination of the individual transactions reveals the inadequacy of the FDIC's summary

judgment evidence on this issue. Concerning the RDC transaction, the FDIC alleges that City paid

too much for a worthless asset in order to bypass regulations forbidding City from "upstreaming"

capital to LFC. The FDIC's complaint can be broken down into two elements: that City paid too

much for RDC, and t hat City gave $10 million to its sole shareholder, LFC.4 The FDIC does not

present evidence raising a fact question of whether Adams personally profited from City getting a bad

3
Because the Brazos merger was unusual in this respect, we discuss it in the next section of
this opinion.
4
The number is closer to $8.5 million. The FDIC's second amended complaint in Lamar
Financial Corporation v. Adams claimed that, by the Fall of 1983, LFC had repurchased the
stock held by RDC's principals for approximately $1.5 million.
deal on RDC. The FDIC's pleadings suggest that Adams, as majority owner of LFC, might have

personally benefitted from City's capital contribution to LFC. However the upstreaming violation did

not change the value of LFC's total assets. So the value of Adams's LFC stock presumably did not

increase either. If the upstreaming violation rendered City undercapitalized, it may have given Adams

an advantage over City's creditors. But the FDIC has not produced summary judgment evidence that

the transaction left City undercapitalized. Moreover, as we have explained, an advantage over

creditors does not come within the adverse interest exception. Ernst & Young, 967 F.2d at 171.

Ernst & Young is made more applicable to this transaction by the fact that Adams acquired 100% of

City's stock in December of 1985. After October of 1986, Adams was no longer City's sole

shareholder. However, we cannot say that City, at that point, ceased to know what it already knew.

Alice Roofing, 775 S.W.2d at 870.

Concerning the 8214 Westchester transaction, the FDIC alleges that Lamar lost $4.5 million

trying to hide a bad loan from federal regulators through a series of sham transactions. This attempt

to make it appear that Lamar had a positive net worth resembles the frauds in Ernst & Young and

Cenco. Ernst & Young, 967 F.2d at 171; Cenco, 686 F.2d at 451. Again the FDIC fails to offer

evidence that Adams personally profited from this transaction at Lamar's expense. The inflated net

worth went on to Lamar's books, not into Adams's personal account.

The FDIC also fails to meet its burden with respect to Lamar's direct investments into CTC

and Stone Oak. The FDIC alleges that Lamar directly invested in CTC and Stone Oak when its

capital was too low to lawfully do so. If these ventures had succeeded, Lamar, not Adams, would

have reaped the profits. Although hindsight reveals that Lamar paid too much for its investments,

the summary judgment evidence does not allow an inference that Adams personally profited from

Lamar's unwise investments.

Moreover, the record shows that federal regulatory officials made Lamar's board aware of the

regulatory violations. In June of 1985, LFC received a letter from the FHLBB expressing "concern

with [Lamar's] financial condition." The letter explained that Lamar had a current negative net worth

and was losing "approximately $1,000,000" per month. The FHLBB explained that it would request
a supervisory agreement if LFC did not infuse Lamar with new capital or take other steps to correct

the problem.

In November of 1985 Lamar received another letter from the FHLBB. That letter explained

that Lamar had "failed to meet its net worth requirements." In the letter, the FHLBB made clear that

it considered unauthorized direct investments during the quarter following June 30, 1985 a "direct

violation of the Insurance Regulations." It further explained that Lamar's "failure to maintain an

adequate level of net worth" was "exacerbated by investment in acquisition, development, and

construction loans and real estate that is substantially higher than the national average for such

investments." The FHLBB prohibited direct investments made without prior written approval of the

Supervisory Agent. These letters bolster our conclusion that Lamar should have discovered the facts

establishing any possible malpractice claims against Shrader and York arising out of the CTC and

Stone Oak investments.

We next consider the FDIC's argument that Shrader & York is not entitled to the benefit of

the general rule of imputation because it is not an innocent party and had a duty to protect City and

Lamar from Adams's misconduct. Application of such an exception would require a showing that

Shrader & York colluded with Adams to defraud City and Lamar. See, e.g., Crisp v. Southwest

Bancshares Leasing Co., 586 S.W.2d 610, 615 (Tex.Civ.App.1979) ("The [imputation] rule is for

the protection of innocent third parties and does not protect those who collude with the agent to

defraud the principal.") (emphasis added). The FDIC has not alleged or produced summary

judgment evidence that Shrader & York colluded with Adams, or that it did so to defraud City and

Lamar. It has only alleged that Shrader & York performed its duties negligently. This argument

therefore has no merit.

2.

We also affirm the district court's ruling as to the malpractice claims arising out of the Brazos

merger. The FDIC claims that Adams used the Brazos merger to waste millions of dollars of Lamar

assets. So Adams's knowledge with respect to this transaction might not be imputable to Lamar.

Still, the reco rd reveals that Lamar's Board of Directors had a considerable amount of concrete
information about the Brazos merger that should have put it on notice of potential legal malpractice

claims arising out of Shrader & York's work on that merger. In November of 1983 Lamar's board

received a letter from Peat Marwick, the accounting firm that represented Brazos in the merger. The

letter pointed out that "[G]eneral and administrative expenses for the [April 1, 1983-June 30, 1983]

period were appro ximately $9.2 million (unaudited), as compared to approximately $1.2 million

(unaudited) for the prior three-month period." Commenting on the unusual nature of the expenses,

the letter noted that some of the "$9.2 million was expended on automobiles for the benefit of certain

directors, officers, or employees of Lamar and Brazos." The letter drew attention to fact that the

merger agreement between Lamar and Brazos forbade salary increases outside the ordinary course

of business. Peat Marwick considered this activity so serious that its earlier report of July 5, 1983

could "no longer be relied on."

The FDIC argues that a subsequent investigation of the expenses, conducted by the outside

law firm of McKenna, Connor & Cuneo, did not accuse Shrader and York of any wrongdoing. The

scope of the investigation included "the records" of Lamar and Brazos relating to the acquisition of

Brazos by Lamar, and the "related public disclosures and filings with the Bank Board." The outside

law firm was to "prepare a report of its investigation and recommendations to correct improper

actions to the board of directors." Even though the investigation's scope was potentially expansive,

the investigation focused mainly on the actions of Lamar and Brazos insiders. We still conclude that

a reasonable person, armed with this information, exercising reasonable care and diligence, would

have discovered facts establishing Lamar's causes of action against Shrader and York.

B.

The FDIC argues that Adams adversely dominated City and Lamar, and that, therefore, City

and Lamar's causes of action against Shrader and York did not begin to run until Adams lost his grip

on City and Lamar. Because the FDIC is suing the corporations' outside counsel, and not their

officers or directors, the district court declined to apply the adverse domination doctrine.

This very narrow doctrine has been applied to suits by a corporation against the officers or

directors of that company. In appropriate cases, it tolls the statute of limitations for claims against
wrongdoing officers and directors of a co rporation until they relinquish control of the institution.

F.D.I.C. v. Howse, 736 F.Supp. 1437, 1442 (S.D.Tex.1990). The doctrine's primary policy rationale

is that a wrongdoing corporate officer or director will seek to hide his or her wrongful conduct from

the corporation. Howse, 736 F.Supp. at 1442.

The FDIC contends that the adverse domination doctrine is not limited to suits against a

corporation's officers and directors. In the FDIC's view, the policy rationale for the doctrine applies

in this case because Adams prevented City and Lamar from suing Shrader & York in order to avoid

exposure of his own wrongdoing.

The FDIC has not produced any cases from Texas or this Court that extend the adverse

domination doctrine beyond corporate officers and directors. Moreover, the FDIC does not allege

that Shrader and York committed intentional torts, or conspired with Adams to defraud City or

Lamar. Thus we agree with the district court that, in t his particular case, Texas's discovery rule

adequately addresses the FDIC's policy concern.

IV.

For the reasons stated above, we AFFIRM the district court's order.

AFFIRMED.