Resolution Trust Corp. v. Acton

1 IN THE UNITED STATES COURT OF APPEALS 2 FOR THE FIFTH CIRCUIT 3 _______________ 4 No. 94-10375 5 _______________ 6 RESOLUTION TRUST CORPORATION, 7 in its corporate capacity, 8 Plaintiff-Appellant, 9 VERSUS 10 CHARLES D. ACTON, 11 DAVID CLAYTON, 12 WILLIAM F. COURTNEY, 13 RICHARD L. DAVIDSON and 14 JOHN R. RITTENBERRY, 15 Defendants-Appellees. 16 _________________________ 17 Appeal from the United States District Court 18 for the Northern District of Texas 19 _________________________ 20 (April 4, 1995) 21 Before SMITH and BARKSDALE, Circuit Judges, and BUCHMEYER, District 22 Judge.* 23 JERRY E. SMITH, Circuit Judge: 24 Plaintiff, the Resolution Trust Corporation ("RTC"), appeals 25 a summary judgment in favor of defendants, Charles D. Acton, David 26 Clayton, William F. Courtney, Richard L. Davidson, and John R. 27 Rittenberry. Finding no error, we affirm. * District Judge of the Northern District of Texas, sitting by designa- tion. 28 I. 29 A. 30 Defendants are the former directors of HeritageBanc Savings 31 Association ("HeritageBanc"), a state-chartered, federally-insured 32 savings and loan association based in Duncanville, Texas. In April 33 1989, HeritageBanc was placed into conservatorship. On August 9, 34 1989, the RTC succeeded the Federal Savings and Loan Insurance 35 Corporation as HeritageBanc's conservator. The bank was placed 36 into receivership in April 1990 by the Office of Thrift Supervi- 37 sion. The RTC was appointed the receiver and became the bank's 38 successor in interest. The RTC, in its corporate capacity, 39 purchased several of the bank's assets, including the claims at 40 issue in this case. 41 The claims surround the operation of the bank from 1983 to 42 1988 ("the relevant time period"). On April 1, 1992, the RTC 43 brought this case against five of HeritageBanc's directors, 44 asserting state claims for breach of fiduciary duty, negligence, 45 and gross negligence. 46 Acton was the president and chairman of the board of 47 HeritageBanc from 1962 until the conservatorship. Rittenberry was 48 an executive vice-president and director. The three other 49 defendants served as outside directors for at least twelve years, 50 including the relevant time period. 51 Acton's wife, two daughters, and father-in-law were officers 52 of HeritageBanc and Oak Tree Land Development Company, Inc. ("Oak 53 Tree"), a subsidiary of HeritageBanc. Acton's two sons-in-law, 2 54 Patrick McElroy and Edward Cummings, were active in the operations 55 of the bank. Cummings also allegedly ran Oak Tree and was the 56 highest paid individual associated with HeritageBanc. 57 The RTC's claims focus on the defendants' alleged failure 58 adequately to oversee the actions of Acton and the members of his 59 family. Specifically, the RTC alleges that the defendants bear 60 responsibility for the approval of a series of real estate loans 61 that went sour. 62 Oak Tree was formed in January 1984 as a wholly-owned 63 subsidiary of HeritageBanc. The RTC alleges that Cummings remained 64 a de facto officer of Oak Tree after the acquisition. The RTC also 65 asserts that, at the time of the acquisition, HeritageBanc shifted 66 a large amount of its resources from home lending to the riskier 67 commercial real estate market. 68 In April 1984, the Texas Savings and Loan Department required 69 HeritageBanc to reduce its investment in Oak Tree to below a 10% 70 cap within 18 to 24 months. The RTC alleges that HeritageBanc 71 circumvented this requirement through a series of transactions that 72 form the basis of the RTC's allegations. 73 Block A Transaction 74 Cummings and HeritageBanc owned tracts of land in a 75 subdivision called Hollywood Park. HeritageBanc sold one tract to 76 Cummings at $0.64 per square foot and financed the transaction with 77 a loan. The Duncanville Planning Commission revised the relevant 78 plat and combined Cummings's new tract with other land he owned and 3 79 called the new land Block A. Four months after the initial sale, 80 HeritageBanc bought Block A from Cummings for $6.50 per square 81 foot. 82 Whittern/Turner Loans 83 In 1985, HeritageBanc provided all of the financing for Ollie 84 Whittern to buy two tracts of land, owned by HeritageBanc and the 85 other by Cummings. The RTC alleges that Cummings was intimately 86 involved with the discussions leading up to the deal and signed the 87 contracts of sale for both tracts on behalf of himself and Oak 88 Tree. The RTC alleges that the transaction provided a sizeable 89 profit to Cummings. 90 Danny Smith Construction Loans 91 The RTC alleges that a series of loans were made to an officer 92 and employee of Oak Tree named Danny Smith, who personally owned a 93 company called Danny Smith Construction. In 1985, the bank 94 allegedly loaned him $2.8 million for the purchase and development 95 of land owned by Oak Tree. Smith was earning $86,000 a year at the 96 time, and the company was worth approximately $49,000. The bank 97 supposedly represented to Smith that he would not be personally 98 liable in the event of a default. The company became insolvent by 99 1986, but the company was subsequently loaned $374,000. Later 100 loans of $160,000 and $611,576 were also made to Smith. 4 101 Berkeley Development Loans 102 The RTC alleges that a transaction almost identical to the 103 Danny Smith loans took place involving Chris Escobedo, an Oak Tree 104 employee, and his company, Berkeley Development. An initial loan 105 of $4,250,000 was made to purchase and develop Oak Tree land. 106 Again, Escobedo apparently was told that he would not face personal 107 liability. At the time of the loan, Escobedo had an income of 108 $41,960, and Berkeley Development was a company formed solely for 109 this transaction. Later, another $1,500,000 was loaned to Berkeley 110 Development, though it was insolvent. 111 Whittern/Turner, Danny Smith Construction, and Berkeley 112 Development defaulted on the loans. The loss is estimated at 113 $7,000,000. There does not appear to be an allegation that any of 114 the defendants personally profited from the transactions. 115 B. 116 The RTC commenced its suit on April 1, 1992. The RTC filed a 117 motion to strike certain affirmative defenses, including those 118 based upon the statute of limitations. The RTC argued, at that 119 time, that the adverse domination doctrine had tolled any statute 120 of limitations. The court converted the motion to one for partial 121 summary judgment. 122 On July 9, 1993, the district court granted the RTC's motion 123 and dismissed the affirmative defenses based upon the statute of 124 limitations. By January 4, 1994, all five of the defendants had 125 filed motions for reconsideration of the dismissal of the 5 126 limitations defenses in light of FDIC v. Dawson, 4 F.3d 1303 (5th 127 Cir. 1993). The district court reconsidered and reversed its 128 earlier ruling on the defense. RTC v. Acton, 844 F. Supp. 307 129 (N.D. Tex. 1994). 130 Because of the court's refusal to toll the statute of 131 limitations in this case, all claims before April 5, 1987, were 132 time barred. The RTC claims that all of the original loan 133 transactions in this case originated before that date. 134 The RTC filed a report on the impact of the rulings at the 135 direction of the court on February 2, 1994. Clayton and Davidson 136 also filed a statement with the court on that day. The RTC then 137 filed a response. The RTC argued that the limitations ruling made 138 it impossible for it to pursue the post-April 5, 1987, claims, as 139 those transactions are "interrelated" with the pre-April 5, 1987, 140 transactions. As a result, the RTC sought a final judgment on all 141 the claims so that it could pursue this appeal. Defendants 142 maintain that the RTC had $700,000 in claims that emanated from 143 loans made after April 5, 1987, which it now has forfeited. Final 144 judgment was entered dismissing the RTC's claims on the merits on 145 March 15, 1994. 146 II. 147 On appeal, the defendants raise a number of preliminary issues 148 that are meritless. According to the RTC, the only issue for this 149 appeal is whether gross negligence is enough to establish adverse 150 domination. Courtney alleges that the RTC has failed to challenge 6 151 a finding of fact, conclusion of law, or ruling of the district 152 court. The district court obviously concluded, as a legal matter, 153 that the RTC had not established adverse domination. As a result, 154 all of the RTC's claims that were dated prior to April 5, 1987, 155 were dismissed. Courtney's claim is absurd. 156 Clayton and Davidson ask this court to determine whether the 157 RTC has waived the right to pursue claims dated after April 5, 158 1987. The RTC may or may not have foregone the pursuit of possible 159 post-April 5, 1987, claims in order to pursue this appeal, but this 160 issue is not properly before us now. 161 Defendants aver that the RTC failed adequately to plead 162 adverse domination and cannot raise the defense. There is no 163 mention of this argument by the district court. It appears that 164 the defendants are the ones who are now raising the argument for 165 the first time on appeal. In any event, this court has held that 166 a party need not plead adverse domination in its original or 167 amended complaint. See Dawson, 4 F.3d at 1308. Defendants had 168 ample opportunity to present affidavit evidence and brief the issue 169 for the district court. See id. 170 III. 171 We now review the summary judgment on the limitations issue. 172 The RTC's claims are founded on Texas state law. To be validly 173 pursued by the RTC, state law claims must be viable under the 174 applicable state statute of limitations at the time federal 175 regulators take over. Randolph v. RTC, 995 F.2d 611, 619 (5th Cir. 7 176 1993). In addition, the RTC must comply with the applicable 177 federal limitations period when bringing suit. See Dawson, 4 F.3d 178 at 1307; 12 U.S.C. § 1821(d)(14). 179 The Texas statute of limitations for negligence and breach of 180 fiduciary duty is two years. TEX. CIV. PRAC. & REM. CODE ANN. 181 § 16.003(a). The same period applies to allegations of gross 182 negligence. See American Centennial Ins. Co. v. Canal Ins. Co., 183 810 S.W.2d 246, 255 (Tex. App.))Houston [1st Dist.] 1991), aff'd in 184 part, rev'd in part on other grounds, 843 S.W.2d 480 (Tex. 1992). 185 The applicable state limitations period for all of the state claims 186 in this case is two years. The conservatorship of HeritageBanc 187 began on April 5, 1989. The RTC therefore is time-barred from 188 pursuing claims arising from conduct that occurred prior to April 189 5, 1987, unless limitations is tolled. 190 This court in Dawson, 4 F.3d at 1310, held that in order for 191 the government to obtain a tolling of limitations under the 192 doctrine of adverse domination, it must prove two things. First, 193 it must show that a majority of the bank's board was composed of 194 alleged wrongdoers "during the period the [RTC] seeks to toll the 195 statute." Id. Whether there exists a genuine issue of fact on 196 this element is not in dispute on this appeal. Second, the RTC 197 must show that those directors were "more than negligent for the 198 desired tolling period." Id. at 1313. 199 The district court found that limitations had not been tolled, 200 because the RTC failed to allege that the directors had been more 201 than negligent. Acton, 844 F. Supp. at 317. The court noted that 8 202 the Dawson panel had refused to state exactly what level of 203 culpability above simple negligence would be sufficient to toll the 204 statute. The RTC argued that allegations of "gross negligence" 205 were enough. The district court, however, found as a matter of law 206 "that gross negligence is a degree of negligence for statute of 207 limitations purposes." Id. As a result, the court decided that 208 summary judgment was proper for defendants on the limitations 209 issue. 210 IV. 211 The district court's dismissal of the RTC's claims was based 212 solely upon the resolution of a pure question of law. We now 213 decide whether meeting the gross negligence standard is sufficient 214 to trigger the doctrine of adverse domination under Texas law. 215 While the Dawson court specifically did not decide this issue, we 216 are guided by Dawson. 217 The level of culpability required to trigger adverse 218 domination is a Texas state law question, though "Texas case law 219 provides little guidance to this court on this issue." Dawson, 4 220 F.3d at 1311. It is plain that no court in Texas has invoked the 221 adverse domination doctrine based upon the "mere negligence" of a 222 majority of the directors. Id. 223 The court in Dawson held that the doctrine of adverse 224 domination is "very narrow." Id. at 1312. According to the court: 225 If adverse domination theory is not to overthrow the 226 statute of limitations completely in the corporate 227 context, it must be limited to those cases in which the 228 culpable directors have been active participants in 9 229 wrongdoing or fraud, rather than simply negligent. 230 Id. We are given two pieces of relevant information. First, the 231 relevant conduct must be more than "simply negligent," and second, 232 it must amount to active participation in wrongdoing or fraud. 233 In Burk Royalty v. Walls, 616 S.W.2d 911 (Tex. 1981), the 234 court recounted the history of "gross negligence" in Texas. It 235 defined the standard as 236 that entire want of care which would raise the belief 237 that the act or omission complained of was the result of 238 a conscious indifference to the right or welfare of the 239 person or persons to be affected by it. 240 Id. at 920. In 1987, the Texas Legislature modified the common law 241 definition: 242 "Gross negligence" means more than momentary 243 thoughtlessness, inadvertence or error of judgment. It 244 means such an entire want of care as to establish that 245 the act or omission was the result of actual conscious 246 indifference to the rights, safety, or welfare of the 247 person affected. 248 TEX. CIV. PRAC. & REM. CODE ANN. § 41.001(5). According to the Texas 249 Supreme Court, this statutory definition, as compared to the common 250 law definition, "emphasizes that the evidence must 'establish' the 251 defendant's actual conscious indifference, rather than raise the 252 mere belief that conscious indifference might be attributable to a 253 hypothetical reasonable defendant." Transportation Ins. Co. v. 254 Moriel, 879 S.W.2d 10, 20 (Tex. 1994) (emphasis added). This 255 definition of gross negligence plainly contains a subjective 256 component. 257 There is no doubt that gross negligence and simple negligence 258 are separate standards at some level of analysis. Moreover, it is 10 259 more difficult for a party to establish gross negligence than to 260 show simple negligence because of the subjective component of gross 261 negligence. See Wal-Mart Stores, Inc. v. Alexander, 868 S.W.2d 262 322, 326 (Tex. 1993). The Texas Supreme Court, however, has stated 263 that "[n]o exact line can be drawn between negligence and gross 264 negligence." Williams v. Steves Indus., 699 S.W.2d 570, 573 (Tex. 265 1985). 266 Thus, while gross negligence certainly is "more" than simple 267 negligence under Texas law, the question is whether it is 268 sufficiently "more" to encompass the requirement that the directors 269 have been active participants in wrongdoing or fraud. We conclude 270 that it is not. 271 While there is a difference between negligence and gross 272 negligence, it is only a difference of degree and not kind. See 273 Trevino v. Lightning Laydown, Inc., 782 S.W.2d 946, 949 (Tex. 274 App.))Austin, 1990, writ denied). Gross negligence has a 275 subjective component but not an element of intent. Wal-Mart 276 Stores, 868 S.W.2d at 325. The plaintiff must show "actual 277 conscious indifference" rather than purposeful conduct. Id. at 278 325-26; Moriel, 879 S.W.2d at 20. Gross negligence in Texas is 279 akin to criminal recklessness. Moriel, 879 S.W.2d at 20 n.10. 280 Dawson requires intentional conduct. The words "active 281 participants in wrongdoing or fraud" are more consistent with 282 intentional conduct than with negligent conduct. The fact that the 283 Dawson court required not only fraudulent conduct or wrongdoing but 11 284 also "active participation" therein is significant.1 285 Furthermore, the Dawson court was very critical of the way 286 that the doctrine of adverse domination had been "liberally- 287 applied" in other federal courts: 288 Federal district courts have liberally applied the 289 doctrine in favor of government-appointed receivers when 290 they sue the directors of a failed bank, regardless of 291 the nature of the claims. The court in Hecht [RTC v. 292 Hecht, 818 F. Supp. 894, 896, 898 (D. Md. 1992)] applied 293 the doctrine in a case in which the RTC alleged breach of 294 fiduciary duty, negligence, gross negligence, and breach 295 of contract, but did not allege any form of self-dealing 296 or fraudulent conduct. 297 Dawson, 4 F.3d at 1312 (emphasis added). Our court in Dawson 298 rejected this liberal application. Therefore, the implication is 299 that some sort of self-dealing or fraudulent conduct is required 300 and that the level of culpability associated with that conduct is 301 distinct from gross negligence. The self-dealing or fraudulent 302 conduct must be more than negligent or grossly negligent to 303 constitute an active participation in wrongdoing or fraud. 304 This court's most recent relevant, though not controlling, 305 pronouncement came in RTC v. Seale, 13 F.3d 850 (5th Cir. 1994). 306 In that case, the RTC pled adverse domination and argued gross 307 negligence. The court, however, rejected the argument because the 1 For example, in Texas fraudulent conduct does not necessarily involve an element of intent: The essential elements of fraud do not include knowledge of falsity or an intent to deceive except in certain circumstances. Thus, a person who negligently makes a misrepresentation may be liable for fraud, that is assuming other elements to be present, fraud may be found where a person with a duty to know facts that are susceptible of being known makes a false statement with respect to those facts. Donald P. Duffala, FRAUD AND DECEIT, 41 TEX. JUR. 3D 254 (citations omitted). 12 308 RTC's proof was no more than conclusory assertions. The court did 309 not state whether gross negligence would suffice, but we did say 310 that the "RTC has not created any fact issues of regulatory 311 violations or fraud, concealment or other illegal activity 312 amounting to more than negligence." Id. at 854-55. 313 One possible implication from this language is that some sort 314 of intentional conduct, rather than some degree of negligence, is 315 required. Of course, the court also may have understood gross 316 negligence to constitute enough culpability for the doctrine of 317 adverse domination and simply may have felt that the RTC had not 318 created an issue of fact under that standard. Either way, the 319 Seale court's pronouncement does not constitute a holding that 320 binds us on this issue. 321 Because we conclude that the difference between gross 322 negligence and negligence in Texas is more one of degree rather 323 than kind, and in light of the plain desire of the Dawson court to 324 limit the doctrine of adverse domination to "active participants in 325 wrongdoing or fraud," we reason that an allegation of gross 326 negligence is not enough to toll limitations in this case under the 327 doctrine of adverse domination. The district court, therefore, was 328 correct to dismiss the RTC's claims as time barred under the state 329 statute of limitations. 330 AFFIRMED. 13