F.D.I.C. v. Henderson

United States Court of Appeals,

Fifth Circuit.

No. 94-40467.

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellant,

v.

John HENDERSON, Jr., Defendant-Appellee.

Aug. 21, 1995.

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

Before GARWOOD, JOLLY and BARKSDALE, Circuit Judges.

GARWOOD, Circuit Judge:

Acting in its corporate capacity as manager of the Federal

Savings and Loan Insurance Corporation (the FSLIC) Resolution Fund,

plaintiff-appellant the Federal Deposit Insurance Corporation (the

FDIC) appeals from the take-nothing judgment entered against it.

As we agree with the district court's determination, based on a

jury finding, that all the FDIC's claims are time-barred under

Texas law, we affirm.

Facts and Proceedings Below

This action arises out of the failure, in 1988, of two

state-chartered, federally insured financial institutions, Home

Savings and Loan Association (Home) of Lufkin, Texas, and its

affiliate Southland Savings Association (Southland) of Longview,

Texas. Defendant John Henderson (Henderson) was at all relevant

times president, chief executive officer, and chairman of the board

1
of both institutions.1 On August 16, 1991, the FDIC sued

Henderson, complaining that, as an officer and director of

Southland and Home, he had breached legal duties owed to the two

institutions by engaging in unsafe and unsound lending practices

with respect to eight large, high-risk, commercial real estate and

construction loans made in 1984 and 1985.2 The FDIC asserted that

these highly speculative ventures cost Home and Southland $34.16

million ($29.05 million to Home, $5.11 million to Southland). The

FDIC further alleged that these damages were the result of

1
The Federal Home Bank Board (FHLBB) declared Southland
insolvent and appointed the FSLIC receiver on August 18, 1988.
The FHLBB did the same to Home on December 22, 1988. After
becoming sole receiver of Southland and Home, the FSLIC, acting
as receiver, sold certain of the institutions' assets to the
FSLIC in its corporate capacity. Among the assets purchased by
the FSLIC in its corporate capacity were the rights and claims
asserted against Henderson in this case. Upon the enactment of
the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (FIRREA), Pub.L. 101-73, 103 Stat. 183 (1989), the FSLIC
was abolished and its assets vested in the FDIC. 12 U.S.C. §
1821a(1) & (2). The FDIC is thus the real party in interest; it
sues pursuant to its authority under FIRREA. Id. § 1821(k). See
FDIC v. Shrader & York, 991 F.2d 216, 219-20 (5th Cir.1993),
cert. denied, --- U.S. ----, 114 S.Ct. 2704, 129 L.Ed.2d 832
(1994).
2
These loans, which totaled over $82 million, are as
follows, with claimed damages caused by default in parentheses:
$20 million by Home to Secame Associates ($9.64 million); $17
million by Home and Southland to Phil Mockford ($6.88 million);
$11.2 million by Home and Southland to S.R. Woerner, C.J.
Woerner, and R.L. Woerner ($1.15 million); $8.6 million by Home
and Southland to Jay A. Rosenbaum ($6.44 million); $10.4 million
by Home to Westminster Glen Joint Venture ($3.65 million); $3.37
million by Home to Park Place, Ltd. ($700,000); $7.5 million by
Home and Southland to Vista Crossings, Ltd. ($2.24 million); and
$4.3 million by Home to Corpus Christi Crosstown, also known as
Padre Island Joint Venture ($3.46 million). Some of these
individual amounts were broken down into a series of two or three
smaller loans. Of the $82 million in loans made by Home and
Southland, Southland contributed roughly $5.5 million.

2
Henderson's ordinary negligence, gross negligence, breach of

fiduciary duty, and breach of contract. The FDIC brought no claim

of fraud or other intentional wrongdoing.

Henderson filed a motion for summary judgment on August 18,

1993, arguing in part that all the FDIC's claims were time-barred

under Texas's two-year statute of limitations for tort actions.

Tex.Civ.Prac. & Rem.Code Ann. § 16.003 (1986). Henderson argued

that this limitations period also applied to the FDIC's breach of

contract claim, which was wholly grounded on his alleged violation

of the oath of office (by which he swore to execute his duties

diligently and in compliance with federal law). Finally, Henderson

argued that the limitations period was not tolled by the state

common law doctrine of adverse domination, as the FDIC had alleged

in its second amended complaint.

The district court granted in part Henderson's motion on March

10, 1994, dismissing as time-barred the FDIC's claim of ordinary

negligence, but concluding that there remained a genuine issue of

material fact concerning whether the limitations period on the

remaining claims was tolled by adverse domination.3 The case thus

went to trial on March 13, 1994, on the issues of liability and

adverse domination only. In response to interrogatories, the jury

3
Citing FDIC v. Dawson, 4 F.3d 1303, 1307 (5th Cir.1993)
(holding that such claims "sound in tort"), cert. denied, ---
U.S. ----, 114 S.Ct. 2673, 129 L.Ed.2d 809 (1994), the district
court concluded that the FDIC's breach of contract claim sounded
in tort and was therefore also governed by Texas's two-year
statute of limitations. The breach of contract claim, as such,
was never submitted to the jury, and there is no issue on appeal
regarding it.

3
found that Henderson had been grossly negligent and had breached

his fiduciary duties to Home and Southland, thereby causing them to

incur $7 million in damages ($5 million to Home, $2 million to

Southland). The jury also found, however, that a majority of the

Home and Southland boards of directors had not adversely dominated

the institutions. Based on this finding, the district court held

all the claims time-barred and entered a take-nothing judgment

against the FDIC on March 31, 1994.4 Thereafter, on April 11,

1994, the FDIC filed a motion for a new trial or to alter or amend

the judgment, which the district court denied on April 18, 1994.

On May 17, 1994, the FDIC filed this timely appeal.

Discussion

Although FIRREA provides a federal statute of limitations for

actions brought by the FDIC as receiver of a failed, federally

insured lending institution, that period begins to run only if the

claims acquired were still good under the applicable state statute

of limitations on the date the FDIC (or the FSLIC) was appointed

receiver. Dawson, 4 F.3d at 1307. In other words, if the claims

acquired by the FDIC were time-barred under state law prior to the

date of receivership, FIRREA will not revive them. See Davidson v.

FDIC, 44 F.3d 246, 248 (5th Cir.1995). The FSLIC, the FDIC's

predecessor, was appointed Southland's receiver on August 18, 1988,

4
In so doing, the district court did not, as the FDIC
suggests, somehow set aside the jury verdict. The judgment in
this case was based entirely on the jury's express determination
that a majority of the Home and Southland boards did not
adversely dominate the institutions.

4
and Home's on December 22, 1988.5 See supra note 1. We must

decide whether, on these two dates, the claims acquired by the

FSLIC were barred under Texas law.

It is undisputed that the unsound banking practices involved

in this suit ended no later than some time in 1985 and that, as a

result, the claims against Henderson accrued at that time. Dawson,

4 F.3d at 1308.6 It is also undisputed that the applicable state

statute of limitations is two years and that the FSLIC became

receiver more than two years after the claims' accrual. See

Tex.Civ.Prac. & Rem.Code Ann. § 16.003(a) (Vernon 1986).

Therefore, unless the statute of limitations was tolled, the FDIC's

claims were time-barred under Texas law when the FSLIC was

appointed receiver, and they cannot be revived by FIRREA. See

Davidson, 44 F.3d at 248. The FDIC maintains that, even if the

claims were time-barred under state law, a new federal law has

since resuscitated them. In the alternative, the FDIC asserts that

the claims were not time-barred under Texas law because the

two-year statute of limitations was tolled by adverse domination.

5
FIRREA's statute of limitations for tort claims acquired by
the FDIC as receiver is either three years or the applicable
state law period, whichever is longer. See 12 U.S.C. §
1821(d)(14). The federal limitations period begins the date the
FDIC (or its predecessor, the FSLIC) is appointed receiver or the
date the cause of action accrues, whichever is later. Id. The
FDIC brought this action on August 16, 1991, two days short of
three years from the date the FSLIC was appointed receiver of
Southland.
6
The claims in this case accrued when the loans were
approved. RTC v. Seale, 13 F.3d 850, 852 (5th Cir.1994).
Although not all the precise approval dates are in the record, it
is undisputed that all eight transactions were approved sometime
in 1984 or 1985.

5
Specifically, the FDIC complains that the district court erred in

refusing its proposed instruction on a competing theory of adverse

domination, the so-called complete domination theory, which, the

FDIC contends, was supported by the evidence in this case. We

consider these contentions in turn.

I. Riegle-Neal Act

On September 29, 1994, four months after the FDIC filed its

notice of appeal in this case, President Clinton signed into law

the Riegle-Neal Interstate Banking and Branching Efficiency Act of

1994, Pub.L. No. 103-328, § 201, 108 Stat. 2368 (1994) (the Act).

Section 201(a) of the Act amends section 11(d)(14) of FIRREA, 12

U.S.C. § 1821(d)(14), by providing the following new subsection:

"(C) Revival of expired State causes of action.—

(i) In general.—In the case of any tort claim described
in clause (ii) for which the statute of limitation
applicable under State law with respect to such claim has
expired not more than 5 years before the appointment of
the Corporation as conservator or receiver, the
Corporation may bring an action as conservator or
receiver on such claim without regard to the expiration
of the statute of limitation applicable under State law.

(ii) Claims described.—A tort claim referred to in clause
(i) is a claim arising from fraud, intentional misconduct
resulting in unjust enrichment, or intentional misconduct
resulting in substantial loss to the institution." 12
U.S.C. § 1821(d)(14)(C).

The FDIC argues that this Act revives any claims that were barred

when acquired by the FSLIC. Henderson counters that the statute,

by its terms, is inapplicable to these claims. Thus, although all

the FDIC's claims sound in tort and although none became

time-barred under Texas law more than five years before the FSLIC's

appointment as receiver, we must still decide whether these tort

6
claims are the type described by the Act—whether, in other words,

they are claims "arising from" fraud or intentional misconduct

("resulting in unjust enrichment" or "substantial loss to the

institution"). Id.

The FDIC neither brought nor tried this case on a theory of

fraud or any other intentional wrongdoing. Not in its original,

first amended, or second amended complaint, nor in the pre-trial

order, did the FDIC ever assert theories of fraud or other

intentional misconduct, nor did it request jury instructions or

obtain a jury finding on any such theory. Indeed, in opposition to

the possible admission of evidence of Henderson's honest character

(or any other character evidence intended to show that he "was not

a crook"), the FDIC expressly disclaimed that it had brought a

claim of fraud. Even if we were to agree with the FDIC that the

"arising under" language of section 201 indicates that its

applicability does not strictly depend on "the form of the FDIC's

complaint," we still cannot say that Henderson did in fact engage

in intentional wrong-doing, because the jury made no findings to

that effect. Regarding liability, the jury was instructed only on

the theories of gross negligence and breach of fiduciary duty.

Under either theory, the jury could obviously have found liability

for acts that were neither intentional nor fraudulent.

Nevertheless, the FDIC relies heavily on evidence that

Henderson used the associations to fund his enjoyment of "luxury

7
automobiles and aircraft."7 Although some such evidence was

admitted at trial, the FDIC has never asserted to what extent, if

any, these alleged acts damaged Home or Southland. Nor did the

FDIC ever pray—in the pleadings, pre-trial order, or otherwise—for

any relief from this alleged misconduct. At all times, the FDIC

has focused exclusively on Henderson's acts and omissions relating

only to eight specific loan transactions. Indeed, at trial, an

FDIC witness was asked to testify concerning "the damages that the

FDIC has claimed in this case." As both counsel and the witness

made explicit, these damages were exclusively losses suffered as a

result of the "eight targeted loan transactions ... that we are

here today on." We also note that during closing argument, counsel

for the FDIC asked the jury to consider in its deliberations an

exhibit that listed the eight loans at issue and the damages, to

the penny, suffered as a result of their default. This exhibit

reflects no other damages. Finally, the jury interrogatories on

liability asked merely if Henderson had been grossly negligent or

had breached his fiduciary duty "with regard to any of the

transactions at issue in this case"; the only transactions

referred to in the jury instructions are the eight loans. We thus

reject any after-the-fact suggestion by the FDIC that it ever

sought recovery for, or asked the jury to make findings on, these

alleged acts of intentional misconduct.

In short, there is nothing about the jury's verdict which

7
The first mention of such acts appears in the FDIC's second
amended complaint.

8
could be said to establish that Henderson acted intentionally.8 It

is simply not enough for the FDIC to hypothesize that the jury

could have found that Henderson so acted. The FDIC failed to seek

such a finding, and we reject its suggestion at oral argument that

this failure is justified by the post-trial passage of section 201.

Whatever retroactive effect the Act has, it has it for both sides.

Accordingly, we hold that by its terms section 201 does not apply

to the claims brought by the FDIC in this case. Accordingly, we

need not consider Henderson's alternative contentions: that

section 201 of the Act violates the Tenth Amendment and that it

does not apply retroactively to suits filed before the statute's

enactment.

II. Adverse Domination

We turn now to the FDIC's alternative contention—that the

district court erred in refusing its proposed instruction on a

competing theory of adverse domination. We review with deference

a trial court's refusal to give a proposed instruction. Treadaway

v. Societe Anonyme Louis-Dreyfus, 894 F.2d 161, 167 (5th Cir.1990).

As a threshold matter, the complaining party must show that its

proposed instruction correctly states the law. Id. If it does, we

must then determine whether the charge as given was accurate or

misleading. A judgment will be reversed only when the charge as a

whole leaves us with a "substantial and ineradicable doubt whether

8
The quantum of damages actually awarded in this case ($7
million out of over $34 million sought) also undercuts the FDIC's
suggestion that the jury's verdict on liability implies that it
found Henderson's acts especially culpable or that it awarded
damages not specifically sought.

9
the jury has been properly guided in its deliberations." FDIC v.

Mijalis, 15 F.3d 1314, 1318 (5th Cir.1994) (citations and quotation

marks omitted). If we are convinced, after reviewing the record as

a whole, that the district court's failure to include the

instruction did not affect the outcome of the case, then the

judgment will not be reversed. Id.

The proposed instruction in this case concerns the FDIC's

asserted state law rule of adverse domination. Adverse domination

is a common law doctrine used to toll limitations on a corporate

action while the corporation is controlled by those culpably

involved in the wrongful conduct on which the action is based.9

See RTC v. Fleischer, 826 F.Supp. 1273, 1276 (D.Kan.1993); see

generally J. Wilkie, Jr., FDIC v. Dawson: The Fifth Circuit Reins

in Bank Regulators' Enforcement Rights Under FIRREA, 69 Tul.L.Rev.

288, 290-92 (1994). It is often said that the doctrine "rests on

the theory that if the wrongdoers controlled the corporation ...,

there would consequently be no one to sue them." 3A Stephen M.

Flanagan & Charles R.P. Keating, Fletcher Cyclopedia of the Law of

Private Corporations § 1306.20 (Supp.1994) [hereinafter Fletcher ].

We have emphasized that one rationale for the doctrine is "that a

wrongdoing corporate officer or director will seek to hide his or

her wrongful conduct from the corporation." Shrader & York, 991

F.2d at 227; see Dawson, 4 F.3d at 1310, 1312-13.

Relying on the only Texas case to address this issue, Allen v.

9
In Dawson, we held that state tolling principles control
federal courts' application of state statutes of limitation. 4
F.3d at 1308-09.

10
Wilkerson, 396 S.W.2d 493 (Tex.Civ.App.—Austin 1965, writ ref'd

n.r.e.), this Court in Dawson determined that adverse domination

has been recognized in Texas as an equitable tolling doctrine that

suspends the running of limitations while the corporation continues

under the domination of the wrongdoers, who are the adversaries of

the action. 4 F.3d at 1309-10. Observing that the doctrine is

"very narrow," id. at 1312, we determined that Texas follows the

"majority test," one of two general versions of the adverse

domination doctrine. Id. at 1310. Under the majority test, if a

majority of the board of directors are culpably involved in the

alleged wrongdoing, then we assume that the corporation was

adversely dominated and was thus unable to pursue a direct action

against the wrongdoing directors.10 In other words, although the

law usually presumes that directors will exercise their fiduciary

duties and sue on behalf of the corporation when it is wronged,

that presumption is reversed when a majority of the board is

10
We note that a Texas corporation may sue a culpable
officer or director if a majority of the board of directors
"present at a meeting in which a quorum is present" agrees to
bring suit (unless a greater number is required by the articles
of incorporation or bylaws). Tex.Bus.Corp.Act Ann. art. 2.34
(West Supp.1995). A quorum represents a majority of the total
directors unless the articles of incorporation or bylaws provide
otherwise. In no event, however, may a quorum be less than
one-third of the total number of directors. Id. Texas-chartered
banks, moreover, must at all times have at least five directors.
Tex.Rev.Civ.Stat.Ann. art. 342-404 (West 1973 & Supp.1995).
Finally, we note that an officer of the corporation may be
authorized to sue on behalf of the corporation if the bylaws or
the directors grant him such authority. Id. art. 2.42(B);
Valley v. International Properties, Inc. v. Brownsville Savings
and Loan Association, 581 S.W.2d 222, 227 (Tex.Civ.App.—Corpus
Christi 1979, no writ) (an officer has no authority "to conduct
litigation for the corporation" absent a grant of such authority
by the bylaws or a directors' resolution).

11
culpably involved in the alleged wrongdoing. Dawson, 4 F.3d 1309-

11. The statute of limitations is thereby tolled until a majority

of the directors is disinterested and informed of the wrongdoing.

Id.

Although it is not necessary to sue a majority of the board to

obtain a finding of adverse domination, the plaintiff still bears

the burden of proving the culpability of a majority of the board

members during the relevant time period. Dawson, 4 F.3d at 1311

(holding that the majority rule does not shift onto the defendant

"the burden of proving that a majority of the board was not

culpable"). In so doing, the FDIC must establish that the culpable

directors are guilty of more than mere negligence or even gross

negligence; it must show that they have actively participated in

fraud or other intentional wrongdoing with regard to the claims at

issue. RTC v. Acton, 49 F.3d 1086, 1091 (5th Cir.1995). Proof

that a majority of the board is actively and purposefully engaged

in the wrongdoing reverses the presumption that informed directors

will induce the corporation to sue culpable ones and thereby

establishes that the institutions are dominated by directors

adverse to the claims in question. Cf. Gaubert v. United States,

885 F.2d 1284, 1291 (5th Cir.1989) (noting the presumption in Texas

that the directors will exercise good business judgment in their

management of the corporation); Fletcher § 990 (noting the

presumption that directors will properly run the corporation).11

11
The law in Texas on derivative actions reflects the
presumption that directors will, when appropriate, sue on behalf
of the corporation. Tex.Bus.Corp.Act.Ann. art. 5.14 (West 1980).

12
This is the majority version of adverse domination.

There is, however, a competing rule, the so-called complete

domination theory, and it is on this theory that the FDIC sought an

instruction below. Unlike the majority test, the rule of complete

domination may not necessarily depend on whether a majority of the

board of directors is culpable or disinterested; application may

depend instead on the degree of control the culpable individual or

individuals have over the entire board. However, this rule is

considered harder to satisfy than the majority version because it

relies on no presumption of domination. It demands that the

plaintiff prove "full, complete and exclusive control in the

directors or officers charged," Dawson, 4 F.3d at 1309, and this at

least means "that once the facts giving rise to possible liability

are known, the plaintiff must effectively negate the possibility

that an informed stockholder or director could have induced the

corporation to sue." Int'l Rys. of Cent. Am. v. United Fruit Co.,

373 F.2d 408, 414 (2d Cir.), cert. denied, 387 U.S. 921, 87 S.Ct.

Before suing one or more directors derivatively on behalf of the
corporation, a shareholder must allege in the pleadings that a
demand for suit was made on the board or that such a demand was
futile. See Dodson v. Kung, 717 S.W.2d 385, 390
(Tex.App.—Houston [14th Dist.] 1986, writ. ref'd n.r.e.). The
court will not simply presume that a demand would be futile where
the defendants are on, or even in control of, the board; the
plaintiff must allege specific facts "indicating the futility of
the demand" and prove those facts at trial. Zauber v. Murray
Savings Ass'n, 591 S.W.2d 932, 936-39 (Tex.Civ.App.—Dallas 1979,
writ ref'd n.r.e.); accord Aronson v. Lewis, 473 A.2d 805
(Del.1984); see also Fletcher § 1040. As the court stated in
Zauber, "Only when it can be shown that something beyond unsound
business judgment has been exercised by the board of directors,
resulting in a wrongful refusal to act, will a shareholder be
allowed to institute the suit on behalf of the corporation." 591
S.W.2d at 936 (emphasis added).

13
2031, 18 L.Ed.2d 975 (1967); see also Dawson, 4 F.3d at 1309-10.

Whether the plaintiff can prove the effective impossibility of suit

is the key in the complete domination theory.12 Mosesian v. Peat,

Marwick, Mitchell & Co., 727 F.2d 873, 879 (9th Cir.), cert.

denied, 469 U.S. 932, 105 S.Ct. 329, 83 L.Ed.2d 265 (1984).

In this case, the district court gave the jury the following

instruction on adverse domination:

"In order to prevail on any of its claims against
[Henderson], the FDIC must prove that a certain legal doctrine
called "adverse domination' applies in this case. The term
"adverse domination' refers to a situation where a majority of
the board of directors that control a savings and loan, work
together to operate the institution in an improper manner.

As long as the savings and loan is under the control of
these wrongdoing directors, there is little possibility that
anyone could bring suit against the directors in the name of
the savings and loan. In such a situation, the savings and
loan is said to be adversely dominated by its board of
directors.

....

In order for you to find that the board of directors of
[Southland] and [Home] adversely dominated the two financial
institutions, you must find that, in conducting business for
the savings and loans, a majority of the directors (1) were
grossly negligent, (2) breached their fiduciary duties of due
care, loyalty, or allegiance, or (3) intentionally or
willfully engaged in wrongful conduct. It is not enough to
conclude that the directors were merely negligent."13

12
This conception of adverse domination is also sometimes
termed the "single disinterested director" theory, under which
the plaintiff must establish that there is "no one with knowledge
of facts giving rise to possible liability who could or would
have induced the corporation to bring an action." Hecht, 635
A.2d at 403; see also Bryan, 902 F.2d at 1523.
13
At the time the district court instructed the jury on the
level of culpability required of the wrongdoing directors, we had
not yet decided Acton. In Acton, we determined that, before the
majority test theory of adverse domination will apply, the
plaintiff must prove that the directors actively engaged in

14
This charge was clearly modeled on our decision in Dawson, where we

stated that Texas law was in accord with the majority version of

adverse domination. The district court's charge tracks Dawson by

turning the applicability of adverse domination on the culpability

vel non of a majority of the corporation's board of directors.

After this charge, and in response to interrogatories, the

jury found that a majority of the directors of Home and Southland

had not adversely dominated the institutions during the relevant

period.14 The FDIC, however, does not dispute the accuracy of the

district court's given instruction on adverse domination or the

jury's findings in response to it. Instead, the FDIC maintains

that the charge was incomplete because it did not allow the jury to

consider, in the alternative, the following instruction proposed by

the FDIC:

"The adverse domination doctrine may also apply if a defendant
exercised full, complete, and exclusive control of the
financial institution so as to prevent it from pursuing its

intentional wrongdoing; gross negligence, in other words, does
not rise to the level of culpability required to raise the
presumption of domination under the majority test. 49 F.3d at
1091.
14
The jury was required to answer the following two
questions:

"Do you find, from a preponderance of the evidence,
that a majority of the board of directors adversely
dominated [Home] from 1984 to December 26, 1986?"

"Do you find, from a preponderance of the evidence,
that a majority of the board of directors adversely
dominated [Southland] from 1984 to August 18, 1986?"

The December 26, 1986, and August 18, 1986, dates represent
two years exactly from the date of the FSLIC's appointment
as receiver of Home and Southland, respectively.

15
 legal rights against the defendant. FDIC v. Dawson, 4 F.3d
1303 (5th Cir.1993); see also RTC v. Seale, [13 F.3d 850 (5th
Cir.1994) ]. If [Henderson] adversely dominated Southland or
Home so as to exercise full, complete, and exclusive control
over the associations up until at least two years before the
respective association failed, the FDIC's lawsuit was timely."
(citations omitted).

This proposal purports to state the complete domination theory of

adverse domination.15

We begin by noting that the FDIC has not cited, nor can we

find, any Texas decision in which the court has tolled limitations

because of a single director's complete domination of the wronged

corporation. Indeed, in Dawson, after reviewing the only Texas

case ever to consider adverse domination, we determined that Texas

followed the majority rule, suggesting that it did not follow this

competing theory. 4 F.3d at 1310; accord FDIC v. Howse, 736

F.Supp. 1437, 1441 (S.D.Tex.1990). Moreover, a recent,

well-reasoned district court opinion, RTC v. Bright, 872 F.Supp.

1551, 1562 (N.D.Tex.1995), determined on summary judgment that

Texas law required the plaintiff to prove the culpability of a

board majority, rejecting the RTC's attempt to establish adverse

domination by showing actual control of the three defendants, who,

15
On the basis of this instruction, the FDIC apparently
proposed the following jury interrogatory:

"Did [Henderson] exercise such full, complete, and
exclusive control of Southland so as to prevent it from
pursuing its legal rights against [Henderson] through
at least August 18, 1986?"

The FDIC makes no mention of this interrogatory in its brief
nor anywhere indicates how it may affect the legitimacy of
its proposed instruction. We therefore confine our analysis
to the text of the instruction as cited and relied on by the
parties.

16
although together a numerical minority of the board, collectively

controlled 96% of the bank's stock.

Nor do we find persuasive support for a theory of complete

domination in Allen, the decision of the Texas court of appeals

interpreted in Bright and Dawson. There, the defendant was the

single culpable director and only one of four board members, but

controlled 80% of the corporation's capital stock and was alone

considered the owner of the bank by its bookkeeper. Allen, 396

S.W.2d at 496, 499. The court stated that running of the statute

of limitations on a corporate claim against a director concerning

his corporate actions required that a majority of the board have

notice (in the sense of knowledge of facts sufficient to put one

under a duty to inquire) of, and be disinterested in, the

challenged transactions. Id. at 500. Although there is broadly

worded language in Allen that might be read to support a theory of

complete domination, that language is dicta because the court

clearly did not consider evidence of Allen's complete control of

the corporation adequate to warrant tolling the limitations period.

See Bright, 872 F.Supp. at 1565. We therefore cannot say that

Texas has adopted the theory here advanced by the FDIC.

Even assuming that Texas would follow a complete domination

theory of adverse domination in addition to the majority test, we

believe that the FDIC's proposed instruction represents an

inadequate and incomplete statement of the rule as we understand

it. It is inadequate partly because it is too abstract, and such

instructions are disfavored. See Turlington v. Phillips Petroleum

17
Corp., 795 F.2d 434, 443 (5th Cir.1986); 9A Charles A. Wright and

Arthur R. Miller, Federal Practice and Procedure § 2556 (1995)

("[A]bstract charges typically are not favored by the federal

courts.... [T]he courts have shown a distinct preference,

particularly in complex cases, for instructions that relate the law

to the evidence presented by the parties.").

At the very least, the proposed instruction is misleading

because it fails to instruct the jury that it must find, and that

the FDIC must prove, that Henderson not only exercised full and

complete control over the directors, but also that but for this

control the directors would have pursued a direct action against

him on the transactions at issue.16 Total control alone—essentially

the only required finding under the critical portion of the FDIC's

proposed instruction—does not "negate the possibility that an

informed stockholder or director could [or would] have induced the

corporation to sue." Int'l Rys. of Cent. Am., 373 F.2d at 414;

see Dawson, 4 F.3d at 1309-10. It is presumed that board members

will adhere to their fiduciary duties. See Dawson, 4 F.3d at 1311.

16
A parsing of the instruction's language exposes additional
defects. The critical portion of the instruction is its second
sentence, in which the FDIC posed the following test: "If
[Henderson] adversely dominated the institution so as to exercise
full, complete, or exclusive control over the associations up
until at least two years before the respective associations
failed, the FDIC's lawsuit is timely." This instruction is
somewhat confusing, almost tautological, as it essentially states
that, if Henderson adversely dominated the institutions during
this time, the claims are timely. The issue for the jury,
however, is not the legal conclusion that the claims are or are
not timely, but the factual issue whether domination occurred;
the instruction should therefore have focused on the factual
findings that predicate a conclusion of adverse domination—an
issue we discuss in more detail below.

18
In the absence of a majority of sufficiently culpable directors,

this presumption cannot be overcome without a finding, which the

FDIC's proposed instruction failed to require, that clearly ties

Henderson's control of the boards specifically to the directors'

effective inability to bring suit on the particular transactions at

issue—without a finding in other words that the directors would

have brought an action but for the defendant's complete exercise of

control over them.17

The FDIC argues, however, that either of two theories supports

the adoption of a complete domination rule of adverse domination,

pointing to two situations in which a director with complete

control could use his authority to negate the possibility of suit.

The first is the concealment of the wrongdoing from the other

directors. Significantly absent, however, from the FDIC's

pleadings are allegations that Henderson used his authority to

conceal from the board the facts concerning his wrongdoing on the

17
The FDIC's general and overly abstract conception of
complete domination is implicit in its pleadings on this issue,
in which it alleged that Henderson, as the chief officer and
director of Home and Southland and as the major stockholder of
Home, "picked other members of the boards of directors and hired
employees[,] supervised virtually every aspect of the business
affairs of both [Southland and Home], including their day-to-day
activities[, and] supervised commercial loan approval." Although
a jury could find, if these allegations were proved, that
Henderson's authority at Home and Southland was full and
complete, it does not follow that he used this authority to
negate the possibility of a corporate action against him. In
other words, the fact of a director's complete control as a
general matter is not so critical as how he actually exercised it
in respect to barring possible recovery on the particular claims
at issue.

19
eight loans at issue18—even though, at oral argument, the FDIC

asserted that the adverse domination in this case mainly resulted

from Henderson's control over the facts concerning his wrongdoing

and his consequent ability to conceal them. Although we recognize

that the risk of concealment is a principal rationale behind the

general theory of adverse domination, see Shrader & York, 991 F.2d

at 227, Texas law already adequately prevents a dominant director

from benefiting from such deliberate acts under the tolling

doctrine of fraudulent concealment. Texas courts have recognized

fraudulent concealment as an affirmative defense to limitations

that the plaintiff must plead and prove. Matter of Placid Oil Co.,

932 F.2d 394, 399 (5th Cir.1991); Weaver v. Witt, 561 S.W.2d 792,

793 (Tex.1977) (per curiam). See also J.C. Kinley Co. v. Haynie

Wire Line Serv., Inc., 705 S.W.2d 193, 198 (Tex.App.—Houston [1st

Dist.] 1985, writ ref'd n.r.e.).

The FDIC essentially asks this Court to rule that Texas would

be willing to presume from the director's mere control the fact of

intentional concealment; as Texas law makes plain, however, such

must be pleaded and proved to the satisfaction of the jury. Even

assuming that Texas would supplement its already existent

protections against fraudulent concealment, we believe that the

18
Indeed, the evidence at trial strongly undercuts the
assertion that Henderson deliberately concealed such information.
At various times during the relevant period, the directors at
both Southland and Home received and considered numerous
indications from bank examiners that the institutions were
engaging in high-risk loans in violation of federal regulations,
such as loans-to-one-borrower lending limits and loan
underwriting controls.

20
jury would still have to find that the defendant in fact used his

complete authority to actually conceal his wrongdoing from the rest

of the board. In this case, however, neither the proposed

instruction nor the pleadings make any mention of concealment.

See, e.g., Bright, 872 F.Supp. at 1568-70 (RTC's pleadings alleged

that the Texas statute of limitations was tolled by adverse

domination, the discovery rule, and fraudulent concealment). Even

if the state were to adopt some theory of complete domination, we

cannot agree that the proposed instruction would properly state the

law.

According to the FDIC, complete domination might also occur

when the directors knew of the culpable director's wrongdoing but,

because of his exercise of control over them, would not bring

suit.19 Once again, however, if this were the FDIC's theory in this

case, its proposed instruction was deficient for failing to include

a requirement that there be found a factual, causal connection

between Henderson's alleged control and the boards' failure to

bring suit. That Henderson generally had full control of the

associations and that the boards failed to bring an action against

him do not, standing alone, show adverse domination; the jury must

19
The complete domination theory of adverse domination
presumes a board with more than one director. If there is only
one director and that director is culpably involved in the
alleged wrong, then the majority test would apply, and domination
of the corporation would be presumed so long as that director
maintained sole control. Here, Henderson was alleged to be the
only director of Southland for a short period of time until 1985.
The FDIC, however, did not seek a separate jury finding on
adverse domination during this period—presumably because the
tolling of this entire period would still be inadequate to make
the claims timely.

21
link these two facts—here with the theory that the director

exercised his control to actually cause informed directors not to

bring suit against him.20 Moreover, it cannot be enough for the

plaintiff simply to allege that the defendant has, in the past,

threatened individual board members or prevented them from somehow

acting. Nor can it be adequate simply to show that the culpable

director had the ability to control the board because, for example,

of his power to fire or remove informed directors;21 otherwise,

limitations would never run against a corporation where the

culpable director or officer is also the majority shareholder. The

general subservience or acquiescence of the non-culpable directors

to the culpable director cannot alone rebut the presumption that

the non-culpable directors will put the interests of the

corporation above their own; that is, that they will exercise

independent judgment. At the very least, therefore, the plaintiff

would have to show, and the jury find, that the culpable director

actually caused a board majority to abdicate their responsibility

20
In this case, there was simply no evidence to support
anything but the mere possibility that Henderson could have
exercised such control. There is, for instance, no evidence that
any directors considered suing on these transactions but did not
because Henderson threatened to remove or fire them (or because
the directors feared that).
21
For instance, in this case, the FDIC presented some
evidence at trial that Henderson threatened to fire an employee
and director of Southland, Dennis Newsom, who had questioned his
instructions to make wire transfers from Southland to Home.
Another Southland board member and employee, Kathy Fleming,
testified that she felt it would be "out of place" for her to
question Henderson in front of the board.

22
to sue on the particular transactions in question.22

Finding no reversible error in the district court's refusal to

include the FDIC's proposed instruction in its charge to the jury,

we hold that the district court was correct to enter a take-nothing

judgment on the jury's verdict against the FDIC.

Conclusion

The judgment of the district court is

AFFIRMED.

22
When non-culpable directors know of wrongdoing but will
not bring suit against the responsible director or officer, those
directors may have breached fiduciary duties they owe to the
institution. We cannot, however, simply presume from the
culpable director's general full control that informed,
non-culpable directors will not do their duty and sue. To take
advantage of that presumption, the defendant must at least follow
the majority test and adequately prove the culpability of the
board majority. Our reluctance to read the complete domination
theory expansively is informed by Dawson: "[I]t could almost
always be said that when one or two directors actively injure the
corporation, or profit at the corporation's expense, the
remaining directors are at least negligent for failing to
exercise "every precaution or investigation.' If adverse
domination theory is not to overthrow the statute of limitations
completely in the corporate context, it must be limited...." 4
F.3d at 1312.

23