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.
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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
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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
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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
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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.
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