ATHERTON v. FEDERAL DEPOSIT INSURANCE CORPORATION, AS RECEIVER FOR CITY SAVINGS, F. S. B.
City Federal Savings Bank (City Federal) lost a significant amount of its clients' money because of negligent investing by employee John Atherton. The client, Resolution Trust Corporation (RTC), sued Atherton under state law for "gross negligence," "simple negligence," and "breach of fiduciary duty." A three-judge District Court held that Atherton could only be sued for gross negligence, because the more lenient "gross negligence" standard for negligent conduct set by federal statutory law annulled stricter standards set by state law. The U.S. Appeals Court for the Third Circuit reversed the decision, and held that federal statutes only ensured a minimum standard of "gross negligence." The stricter state standards still applied.
On appeal to the Supreme Court, the Federal Deposit Insurance Corporation (FDIC), petitioning on behalf of RTC, argued that federal common law should set a uniform standard of negligent conduct for all employees at federally chartered banks. According to FDIC, allowing state statutes to regulate federally chartered banks would contradict the federal charter system's purpose of upholding federal common law. The Supreme Court was asked to decide which law applied to Atherton: state law, federal common law, or federal statutory law.
1) Can states apply standards of negligence that are stricter (more inclusive) than the federal standard of "gross negligence" for employees of federally- chartered banks?
2) Is there a federal common law governing negligence by employees of federally-chartered banks?
Legal provision: 12 U.S.C. 1821
Yes and no. The unanimous Court concluded that "state law sets the standard of conduct as long as the state standard is stricter than that of the federal statute." The opinion by Justice Stephen Breyer held that the federal "gross negligence" statute was only intended to set a "floor" or minimum standard for state laws governing negligent conduct. The Court also ruled that "[t]here is no federal common law that would create a general standard of care applicable to this case."
Argument of Ronald W. Stevens
Chief Justice Rehnquist: We'll hear argument now in Number 95-928, John W. Atherton, Jr. v. Federal Deposit Insurance Corporation.
Mr. Stevens: Mr. Chief Justice and may it please the Court:
At issue in this case is whether the FDIC, in its capacity as Receiver of a federally chartered savings association, has a Federal common law claim based on simple negligence against the former directors and officers of that association for breach of their fiduciary duty of care, which is the proposition for which the Government contends, or whether the FDIC's sole Federal claim is the statutory claim for gross negligence under 12 U.S.C. section 1821(k), which is the proposition for which we contend.
That latter provision was adopted as part of the Financial Institution Reform, Recovery, and Enforcement Act of 1989, otherwise known as FIRREA.
Although a divided panel of the Third Circuit found that 1821(k) does not even apply to federally chartered depository institutions, the Government has conceded in this Court that it does.
Where petitioner and the Government part company is on the question of whether the FDIC has a preexisting Federal common law claim for simple negligence and, if it does, whether that claim was displaced by section 1821(k).
Unknown Speaker: Mr. Stevens, I think, if I remember correctly, the Third Circuit Court of Appeals assumed there was a Federal common law standard here, and left it open on remand to the district court to determine the scope of the standard, is that right?
Mr. Stevens: Yes, Justice O'Connor, they did... they--
Unknown Speaker: Did the petitioners here concede in the court of appeals that a Federal common law standard applied?
Mr. Stevens: --No, we did not.
We argued to the Third Circuit, which argument occurred subsequent to this Court's decision in O'Melveny and Myers, that under that decision there was no general Federal common law right of action that accrued prior to the enactment of FIRREA.
Unknown Speaker: And do you think that the question whether there exists a Federal common law rule was preserved--
Mr. Stevens: Yes, I do.
Unknown Speaker: --here?
Mr. Stevens: Yes.
Unknown Speaker: It wasn't... it wasn't set out that clearly in your original cert petition.
Mr. Stevens: Well, in the... the second of the two questions presented in the cert petition is as follows, quote, Whether the court of appeals erred in concluding that section 1821(k)... and I'm leaving out some descriptive language of that now... has no application whatsoever to RTC actions against officers and directors of failed federally chartered FDIC insured institutions, and that the liability of officers and directors of such institutions is instead governed exclusively by Federal common law.
The second of the reasons for granting the writ which was set forth at page 8 of the petition is, quote, the court of appeals' conclusion that Federal common law instead of section 1821(k) supplies the applicable law in this case violates this Court's longstanding rules respecting the creation and application of such judgemade law, and finally, section 2 of the petition is expressly entitled, quote, the Third Circuit's decision is in direct conflict with this Court's prior rulings respecting the application of Federal common law, and particularly its recent decision in O'Melveny and Myers v. FDIC.
Unknown Speaker: And what State law do you say applies in this case?
Mr. Stevens: It's our contention that the State law that would apply in cases such as this would be the law of the place of the location of the principal place of business of the association.
Unknown Speaker: Which is?
Mr. Stevens: New Jersey.
In this case, however, the FDIC has waived its State law claim.
Unknown Speaker: But that was in response to the district court's ruling, wasn't it?
Mr. Stevens: No, Your Honor.
That was a unilateral voluntary action taken by the FDIC and articulated in its brief to the district court below when the matter was being briefed in connection with the motion to dismiss.
It was not an action taken subsequent to the district court's order.
It was a voluntary, unilateral decision by the FDIC.
Unknown Speaker: But do I understand correctly that the district court's opinion said that 1821(k) was the exclusive law applicable to a Federal, federally chartered institution?
Mr. Stevens: That's correct.
Unknown Speaker: And you are not defending that position.
Mr. Stevens: No, Your Honor, we are not.
It is our--
Unknown Speaker: So no one is supporting the district court, who said that 1821(k) is just it, there's nothing else?
Mr. Stevens: --Well, let me be clear.
It's our position that the only Federal law claim that the FDIC has postreceivership is a claim for gross negligence under section 1821(k).
It is our position, however, that that's not the only claim that's available to the Government.
The Government would also have a claim under State law for simple negligence if the State law in question provided such a claim.
Unknown Speaker: Yes, so to that extent you agree that the district court was wrong.
Mr. Stevens: Yes, Your Honor.
Unknown Speaker: May I ask--
--I don't think the briefs tell us what the rule is in New Jersey.
Mr. Stevens: Well, to be candid, Your Honor, I think that's why the FDIC waived its State law claim.
It's our position that the standard in New Jersey is gross negligence.
Unknown Speaker: So it really doesn't matter, then, if there's a--
Mr. Stevens: I don't think it does.
I'm sure the FDIC will argue that it's in fact simple negligence, but at this point it's an academic issue because they've waived the claim.
Unknown Speaker: --Well, it might not be.
They've waived that legal basis for the claim, but I would think there's a question whether the basically alleging the same, you know, misconduct by the defendants in the case.
Whether it's too late for them to say an alternative legal base for the claim would be State law even though we haven't argued it up to now, I'm not sure what the answer to that is is all I'm saying.
That's why I was curious about whether there is a difference, but the answer to that is, you would disagree with your opponents, probably.
Mr. Stevens: Correct.
Unknown Speaker: Okay.
Mr. Stevens: We would take the position there's no difference.
Unknown Speaker: Do you--
--If the State law issue... the State law standard were, let's say, intentional negligence, you would still concede that there was a gross negligence claim under (k), is that right?
Mr. Stevens: Yes, Your Honor.
Unknown Speaker: Yes.
Mr. Stevens: Absolutely.
Unknown Speaker: Do you say that Federal law governs--
Mr. Stevens: Well, it--
Unknown Speaker: --federally chartered--
Mr. Stevens: --Institutions?
Unknown Speaker: --savings and loans?
Mr. Stevens: No, and the reason for that is that this Court has made it clear that for Federal common law to apply, two tests have to be met.
Unknown Speaker: Well now, wait a minute.
That's a separate question.
You could say yes, Federal law applies, but the Federal law in turn refers to State law.
Mr. Stevens: Well, that would be predicated upon a finding that the criteria for the application of Federal law, Federal common law is present, but that there is no conflict, and that there's no conflict between the application of State law and Federal law as in Kimbell Foods, where this Court held that the issue there was governed by Federal law, but that there was no reason not to use State law as the rule of Federal decision.
But before you can get to that point, you have to decide that there's a uniquely Federal interest present.
And it's our position that in this case no such uniquely Federal interest is present because this Court has defined such interest principally to involve the rights and duties of the United States and, as this Court said in O'Melveny, the FDIC is not the United States, and even if it were it, would be begging the issue because the FDIC is asserting claims in this case in its capacity as a receiver for the institution, standing in the shoes of the institution.
In fact, the FDIC's position would not only require the application of Federal common law to cases where it's bringing the claims, it would require the application of Federal common law if the institution when solvent was bringing claims like this against its directors and officers or if a shareholder of a solvent institution was bringing a derivative action where the FDIC itself wouldn't be a party, where no United States entity would be a party, where no United States funds would be directly involved, and where not even the insurance fund would be directly involved.
Unknown Speaker: The only thing to be said on the other side, however, is what... it's... other corporations that are established under Delaware law, New Jersey law, or whatever, they have a clear law to apply when there is a suit by shareholders as far as internal management is concerned.
You know what the law is.
Is it likely that Congress set up this Federal corporation without any internal procedures governed by Federal law?
Mr. Stevens: It's not only likely, it's what they did.
They have adopted a statute, HOLA, the Homeowners Loan Act, back in 1933 which has all kinds of statutory provisions in it that talk about what banks and... I'm sorry, what S&L's have to do, how they conduct their operations and so forth, but there's nothing in that statute that talks about a standard of care for officers and directors.
Unknown Speaker: When was that adopted?
Mr. Stevens: 1933, and it... and we have had 63 years when Congress--
Unknown Speaker: It was before Erie, wasn't it?
Mr. Stevens: --It was before Erie, but Congress has had every opportunity to amend the statute numerous times after Erie and it hasn't done so, and--
Unknown Speaker: So I guess what Congress was thinking at the time was that there is up in the sky there a common law concerning directors' liability.
Mr. Stevens: --Well, it might have thought that there was a State common law, but it would have been hard to think that there was a Federal common law.
Unknown Speaker: No, it didn't.
No, it didn't.
There was no such thing as State common law and Federal common law before Erie.
Mr. Stevens: I agree, but--
Unknown Speaker: We made that up after Erie.
Mr. Stevens: --Correct, Your Honor, but in this Court's decision in Herrmann v. Edwards and Whittemore v. Amoskeag Bank, the Court made it clear that the mere fact that there was an assertion by shareholders of a national bank against its directors and officers for mismanagement was not sufficient to give rise to a Federal cause of action where the assertion was made under common law.
Now, I think the Court was saying in that case, this is a case for the application... in those two cases, those are cases for the application of State law, not Federal law.
Unknown Speaker: What you're saying is, we... in light of what happened after Erie we should treat corporate law the same way we treat contract law.
Although we thought there was a Federal law, having discovered there is not, it goes back to being governed by State law.
Mr. Stevens: Well, assuming for the sake of argument that there was a Federal common law pre-Erie in this area, yes, Erie demolishes it.
Unknown Speaker: But Mr. Stevens, one problem is that there is no entity, no State that has chartered the Federal institution, so let's assume for the minute that we don't have any 1821(k), and the question is simply, what law governs the internal operations of a federally chartered institution?
How do you answer that?
It wouldn't be the law of incorporation.
Mr. Stevens: No, it would be State law where the principal place of business was located, and I would point Your Honor to the recent regulation promulgated by the Office of the Comptroller of the Currency, which regulates all nationally chartered banks.
They recently adopted a regulation which is cited in our--
Unknown Speaker: You cited that in your brief.
Mr. Stevens: --Yes.
Unknown Speaker: But you have to get to the principal place of business by some Federal law, and you at least have a Federal choice of law rule, right?
Mr. Stevens: I don't think you do.
I think that--
Unknown Speaker: Well then, where did the identification of the principal place of business come from?
Mr. Stevens: --I--
Unknown Speaker: Not the sky.
Mr. Stevens: --No.
I think you do it by reference to State law.
For example, in 1821(k)--
Unknown Speaker: But under State law the State of incorporation would govern internal operations.
Mr. Stevens: --I understand that, but in 1821(k) Congress itself said, define gross negligence under applicable State law.
Congress itself indicated it had no interest in having some Federal uniform standard apply here.
And by the same token, it seems to me that the fact that the institution happens to have gotten its charter from the Federal Government is not sufficient to predicate the creation of an entire body of Federal common law, which would--
Unknown Speaker: That may be, but I think you still have to overcome Justice Ginsburg's assertion that if there is no Federal substantive law there is also no Federal choice of law, so you really can't say for sure that the law which governs is the law of principal place of business.
It depends on what the State law of the forum is, doesn't it?
Mr. Stevens: --Correct.
Unknown Speaker: So you really don't know what law governs.
Mr. Stevens: It's... it's my... I--
Unknown Speaker: In most forums it would probably be the State of the--
Mr. Stevens: --I can't say definitively, but that's not the issue that's in front of the Court, and it could be resolved below.
Unknown Speaker: --In a way it is, because we hate to have these corporations floating out there with no accepted law governing their internal operations.
And you've already said that under State law it would not be the principal place of business, it would be the place of incorporation that determines the internal operations.
Mr. Stevens: Well, if it's necessary to establish a uniform Federal rule that says it's the principal place of business, I suppose the Court could do that, although it strikes me that that's antithetical to the--
Unknown Speaker: You have identified the principal place of business as the State law that would control.
I asked you how you get there, how you get that pointing rule.
You have to get it from some place.
Mr. Stevens: --Well, I guess I get it from the fact that the rule in most States is that, that that's the rule in the Model Business Code, that that's the rule that--
Unknown Speaker: But I thought the rule--
Mr. Stevens: --the OCC has indicated--
Unknown Speaker: --No, but--
--I thought the rule in most States is the State of incorporation.
Mr. Stevens: --It is, but that rule wouldn't be applicable here.
Unknown Speaker: No, but you're--
--So then you're not... then you're not getting the pointing rule from State law, because State law would say, we look to the State of incorporation to determine matters of internal operations.
Mr. Stevens: That's correct, but I think you have to keep in mind that historically the reason they looked to the State law of incorporation was because that was where the principal place of business was.
Now, it's true that over time that's changed, and as Delaware passed laws that made it more receptive to corporations, more and more corporations incorporated there even though their principal places of business were elsewhere, but the concept here to my way of thinking is that the Federal Government, the only Federal banking agencies that's indicated any thoughts on this has said the principal place of business is fine.
Unknown Speaker: No, but you--
--Mr. Stevens, maybe we have here what is... what conflict-of-laws mavens call "renvoi".
That is to say that the State law would look to the place of... to the State of incorporation, the state of incorporation here being the Federal Government, the Federal Government having no rule on the question refers it back to State law, and maybe that's how you get where you want to be.
Mr. Stevens: I think that's right, Your Honor.
Unknown Speaker: Yes, but even on Justice Scalia's analysis, you've still got to have a basis for looking to some State law somewhere, and it seems to me that your answer to Justice Ginsburg boils down to this, that in addition to the O'Melveny standard, there's another source of Federal common law here, and the source is something like necessity.
If there's got to be a basis for court dealing with a federally chartered institution, to say what law applies, there is of necessity a Federal common law to the extent of deriving a pointing rule, and you're saying, I think, the necessity here is that Federal laws say that you look to the State of principal place of business.
Mr. Stevens: I would... I would agree with that as well, Your Honor.
Unknown Speaker: --Okay.
Well, do we have to determine in this case before us which State law is applicable--
Mr. Stevens: No, you don't.
Unknown Speaker: --in order to answer the questions before us?
Mr. Stevens: No, you do not, Justice O'Connor.
Unknown Speaker: What about applying the gross negligence standard in accordance with State law and so forth?
Would you look to the State of incorporation or the place of business of the State?
Mr. Stevens: Well, I think you'd look to State conflicts laws.
I mean, Congress has made it clear you're supposed to determine that issue according to applicable State law.
However you would go about doing that is... Congress didn't--
Unknown Speaker: But on your view of the case, that's what has to be done in this case.
Mr. Stevens: --Yes.
Unknown Speaker: It's the gross negligence standard specified in 1821(k) in conformity with State law.
Mr. Stevens: Right, in my--
Unknown Speaker: And what State law are we talking about in this--
Mr. Stevens: --New Jersey in my--
Unknown Speaker: --Everybody agrees to that.
Mr. Stevens: --New Jersey--
Unknown Speaker: And is that because that's the principal place of business?
Mr. Stevens: --Yes.
Unknown Speaker: And I take it that if the State of New Jersey allowed an action for simple negligence, that would be permissible under the Reserve Clause?
Mr. Stevens: Absolutely, Your Honor.
Unknown Speaker: So they have to allow at least gross negligence, but if they have a more proplaintiff standard of liability than that, that, too, is incorporated.
Mr. Stevens: That's correct, which I think is entirely consistent with the policy behind FIRREA and the legislative history of the act.
Unknown Speaker: Could all this be solved by regulation?
I mean, suppose the Federal Government is very upset that there is no clear... clear rule as to which law governs the internal affairs on this particular issue, could a regulation be issued which would set forth--
Mr. Stevens: Well, this Court, in de la questa, said that the Federal Home Loan Bank Board, which has been succeeded by the OTS, has plenary authority over federally chartered thrifts.
Unknown Speaker: --Mm-hmm.
Mr. Stevens: I think that the OTS would have authority to promulgate regulations, all kinds of regulations related to the internal operations by saying you can only make loans that have this loan-to-value ratio, or you have to have this kind of collateral.
They could establish standards of conduct for virtually every aspect of the operations of the institution.
I don't believe that they could articulate a standard that would create a Federal common law standard of liability for application in Federal court actions, civil court actions, and the reason for that is that Congress in section 1818(b)(6)(a), which was part of FIRREA, has provided an administrative remedy for all the Federal banking agencies to pursue claims against Federal and State-chartered institution thrifts and directors, and to recover losses from those individuals incurred as a result of their misconduct.
But in that statutory provision Congress has said that such recoveries can only be had where there is a showing of either unjust enrichment or reckless disregard.
Congress imposed that statutory standard, and I don't believe that any of the Federal banking agencies has the authority to adopt a less stringent standard than that in the face of Congress having spoken.
I think that's what a number of prior decisions of this Court indicate.
Unknown Speaker: Well, this is only after takeover, though, isn't it?
Mr. Stevens: No.
Unknown Speaker: No?
Mr. Stevens: That administrative remedy is available to the agencies when the institution is solvent at any time.
Unknown Speaker: What about the savings clause in this Federal statute, 18--
Mr. Stevens: 21(k)?
Unknown Speaker: --21(k)?
Mr. Stevens: The savings clause in this statute doesn't help the Government here for several reasons.
What the savings clause says is that nothing in this paragraph shall impair or affect any right of the FDIC under other applicable law.
Other applicable law can't be read in a way that renders the first sentence of 1821(k) inoperative.
Unknown Speaker: Well, it isn't inoperative if you look at it from the point of view that at least faced with State law that says you need intentional misconduct, that the Federal law says no gross negligence will suffice, so of course it isn't inoperable.
Mr. Stevens: It isn't... it doesn't render the language inoperable with respect to State-chartered institutions.
It does with respect to federally chartered institutions if you assume the existence of a Federal common law simple negligence claim.
Unknown Speaker: Yes, but it doesn't if what you just said is the case.
That is, if Federal common law is, look to the State where the principal place of business exists, then it means just what Justice O'Connor said, and what we would do if the principal place of business is New Jersey, and if New Jersey has a statute of simple negligence, this statute would retain that cause of action.
Mr. Stevens: Absolutely correct.
I... we do not contend that the savings clause precludes the Government from asserting a claim for simple negligence under applicable State law.
That is not our contention.
Unknown Speaker: And also that would be true if, as you've just said, the Federal law is that we look to the law of the State where the principal place of business of the federally incorporated bank exists.
Mr. Stevens: No, I wouldn't agree with that for this--
Unknown Speaker: Why not?
Mr. Stevens: --For this reason.
In City of Milwaukee, one of the arguments that was made there was that there was a statutory section that dealt with citizen suits, and there was a provision in that section that said that any person was preserved the right to assert any remedy under State or common law, and that respondent in that case argued... petitioner in that case argued that that savings clause preserved Federal common law.
The Court rejected that argument and said at most... at most, that language only provided that that section dealing with citizen rights didn't have the effect of impacting a claim under common law, but that didn't mean that the comprehensive nature of the act as a whole didn't displace Federal common law, number 1, and number 2, it made the comment that the term common law as used in that savings clause was highly unlikely to have meant the specific narrowly construed Federal common law as opposed to the more generic State common law.
In this statutory provision, the savings clause doesn't even use the phrase, common law, and in our brief we point to a number of statutory provisions where when Congress wanted to save Federal common law it did so expressly.
Here, the only phrase used is other applicable law, and we think that means Federal statutory law, State statutory law, State common law, which is the routine common law, but not the narrow, specific, rarely invoked Federal common law.
Unknown Speaker: Mr. Stevens, I thought your position was that there was in effect nothing to save, because there never was any governing Federal common law.
Mr. Stevens: That is our position.
Unknown Speaker: Which is quite different from... your answer to Justice Breyer seemed to imply there was Federal common law but there is no longer by virtue of the first sentence of 1821(k).
Mr. Stevens: I didn't mean to say that, Your Honor.
Our position is there never was a Federal common law claim.
There isn't now.
Our alternative argument is, should the court determine that there was a preexisting Federal common law claim for simple negligence that existed prior to the adoption of FIRREA, then Congress' reference to gross negligence standard in that statutory provision displaces that preexisting Federal common law, and that preexisting Federal common law is not preserved by the savings clause, so it's an alternative argument.
Unknown Speaker: But your position is that there is no substantive Federal common law, no common law governing the substantive standard of liability.
It is consistent with your argument that there might be a Federal pointer law telling you where you look, what State you look to.
Mr. Stevens: Yes.
Unknown Speaker: And that's what Justice Breyer's question was assuming, and I would have supposed that the Milwaukee case did not deal with that.
Mr. Stevens: I think that's--
Unknown Speaker: --because the Milwaukee case was dealing with substantive law.
Mr. Stevens: --That's correct, Your Honor.
Unknown Speaker: So I would... then would you change your answer to--
Mr. Stevens: Yes.
If that's where your question was coming from, Your Honor, then I misunderstood the question, and I would agree with Justice Souter.
Unknown Speaker: --Does the State of New Jersey under your view of the case have certain obligations that it imposes on directors by which we measure whether or not there has been gross negligence?
That is to say, you must have three appraisals before you lend on real property in excess of $3 million, or something like that?
Does the State of New Jersey have specific duties that are imposed on directors that are applicable to this corporation?
Mr. Stevens: --I don't believe so.
There are State banking provisions under the law of New Jersey, but I don't know that... I don't think that they... they would be preempted by Federal regulations on the same subject matter.
They do have general statutory provisions that establish a duty of care for officers and directors of banking corporations, which would be applicable.
Mr. Chief Justice, I'd like to reserve the remainder of my time for rebuttal, if I may.
Unknown Speaker: Well, I have one last question.
I'd asked you before if you... if petitioners had conceded below that Federal common law governed.
Now, Judge Becker's opinion says both parties conceded that.
Mr. Stevens: Your Honor--
Unknown Speaker: So was that an error?
Mr. Stevens: --Yes.
We are... we did argue at the district court level that Federal law governed.
We did make that argument, and we have reversed our position since then, but we reversed it at the Third Circuit level in light of this Court's decision in O'Melveny and Myers, not because the law fundamentally changed with that decision, to be honest, but because that decision focused attention on the fact... on the importance of the proposition that there is no general Federal common law, and we argued to the Third Circuit that the Government's position was wrong because it had no general Federal common law claim.
The Third Circuit was in error.
What we did concede is that the only thing at issue in that case, because they had waived their State law claim, was, what was the nature of their Federal law claim?
Unknown Speaker: Mr. Stevens, I don't follow how you suddenly saw a light from O'Melveny which involved a State chartered institution, so this question of what law governs the internal operations of a federally chartered institution wasn't touched by O'Melveny.
Mr. Stevens: Well, Your Honor, it's true that that case involved a State-chartered institution, but the proposition that there is no general Federal common law, the--
Unknown Speaker: To govern a State-chartered institution that has internal operations controlled by the State of incorporation.
Mr. Stevens: --Well, as I said, it's true that the facts of that case involved a State-chartered institution, but the propositions articulated by the Court at the beginning of that opinion I don't believe are limited by the fact that the institution in that case was State-chartered.
I don't think the fact that you have to have unique Federal interests present and a conflict, a significant conflict between the application of State law and some identifiable Federal purpose is unique to State-chartered institutions.
I think that standard applies for the creation of Federal common law no matter what the facts of the case are.
Unknown Speaker: Thank you, Mr. Stevens.
You've reserved the time remaining.
Mr. Bress, we'll hear from you.
Mr. Stevens: Thank you, Mr. Chief Justice.
Argument of Richard P. Bress
Mr. Bress: Mr. Chief Justice and may it please the Court:
Section 1821(k) is a plainly worded provision, and in our view it means precisely what it says.
It provides that the FDIC as receiver may hold officers and directors of failed financial institutions liable for their gross negligence or worse misconduct while preserving the FDIC's preexisting right to assert against those officers and directors whatever claims the institution could have asserted on its own behalf.
Now, petitioner's argument to the contrary is based on a supposed negative implication.
Unknown Speaker: They haven't argued to the contrary.
They would agree with everything you've said so far.
The only issue is, they don't think there are any rights that it had under--
Mr. Bress: --Your Honor, that is certainly their primary argument.
Their secondary argument, however, is that even if there was Federal common law it's been supplanted by the statute.
Unknown Speaker: --Is that what you're going to address now, or the primary?
Mr. Bress: Well, the arguments have sort of switched place in terms of what's primary and what's not from the briefing schedule.
If you'd like, Your Honor, I can address the underlying law at this point.
I'd just like to note before I do it that either Federal common law exists, in which case the statute preserves the FDIC's right to assert it, or Federal law, common law doesn't exist, in which case we're all agreed that State law governs and that the FDIC can assert the institution's State law claims.
Unknown Speaker: I think that's generally agreed.
Mr. Bress: All right, and I'd like to note one extra thing at this point which is, to the degree that there's an argument here that the FDIC has waived its State law claims, there has been no waiver here.
In fact, the third amended complaint that's been filed simply alleges counts for negligence, gross negligence, and breach of fiduciary duty.
Unknown Speaker: Well, do you agree we don't have to decide what the applicable State law is here?
Mr. Bress: Oh, I agree, Your Honor, primarily because we don't believe that there is applicable State law here.
I'd like to address that, if I may.
Unknown Speaker: May I... I think this is what you're going to address, but you contend there is a Federal common law that is applicable.
Mr. Bress: Yes, Your Honor.
Unknown Speaker: And is the Federal common law rule one that is the same in all States in the country?
Mr. Bress: Yes.
Unknown Speaker: And why, then, is the Federal statutory gross negligence law... rule somewhat different in different States?
Mr. Bress: Your Honor, that can be explained by what the state of the law was at the time that Congress acted, and what Congress' purposes here were.
This was emergency legislation, and Congress had a very simple purpose, which was to preempt State insulating statutes that could insulate officers and directors of financial institutions from liability to the FDIC.
Now, at that time, while the majority of courts were applying the uniform ordinary care standard of Federal common law to officers and directors of federally chartered associations, some courts were applying State law to officers and directors of federally chartered associations.
Congress didn't try to sort out which was the right answer.
Congress just wanted to make sure, whatever a court might otherwise apply, the FDIC would always have a suit for gross negligence, so if a court would apply the State's law to a federally chartered association, Congress was telling them, well, apply that State's gross negligence standard.
However, if a court were to apply Federal common law the question really would never come up, because under Federal common law the standard is, and has for a long time, been a standard of ordinary care.
Unknown Speaker: That's by no means the only reading of that statute, certainly.
I mean, to... your interpretation is certainly not the only one that comes from the language.
Mr. Bress: No, Your Honor, but we believe it's the one that makes the most sense out of the language in the following sense.
The savings clause preserves the FDIC's rights under other applicable law.
Now, at the time, Congress is presumed to enact laws with knowledge of what the surrounding law is, and at that time the vast majority of courts were applying Federal common law to suits against officers and directors of federally chartered associations, so to take their interpretation of the statute you have to believe that Congress missed that entirely and believed that State law was applicable.
Unknown Speaker: You're saying there's no reference to State law, that that provision does not refer to State law at all?
Mr. Bress: Oh, no, no, no.
No, that's not what I'm saying, Your Honor.
What I'm saying is that with regard to federally chartered associations the reference to other applicable law--
Unknown Speaker: But--
Mr. Bress: --in terms of civil suits would be Federal common law.
Unknown Speaker: --Right.
Ordinarily, when Congress legislates in a particular field, it is substituting a statute for what might have been Federal common law before.
Mr. Bress: That's correct, Your Honor.
Unknown Speaker: That's the City of Milwaukee.
Mr. Bress: Your Honor, when the statute speaks to the matter at issue this Court has said that that's what... but in order to determine what the statute says when it speaks we've got to look at the words of the statute, and what this statute says is, the FDIC can always sue for gross negligence, but the FDIC can also assert whatever it could have asserted otherwise under other applicable law.
Unknown Speaker: Well, but when you say other applicable law, do you think that... you say that meant they meant to preserve Federal common law, too?
Mr. Bress: Yes, Your Honor.
In fact, it would have been odd had they not, because as I've said, with regard to Federal associations that was the primary law that was applicable.
Unknown Speaker: Yes, but no... there were no decisions from this Court on point.
Mr. Bress: No, but there were decisions from courts of appeals in district courts, and Congress is presumed to know those.
Unknown Speaker: So Congress is supposed to sort out the various Federal rules and the State rules?
Mr. Bress: Your Honor, we're not contending that Congress sorted out and decided what was correct and what was incorrect.
All we're saying is that Congress would have been aware that the vast majority of courts were applying Federal common law.
Congress didn't try to sort it out.
Congress just said whatever the courts are applying, you've got a gross negligence standard.
Unknown Speaker: But some weren't, and to say in the statute that nothing in this paragraph shall affect any right of the FDIC under other applicable law reads to me as though they are also saving State law where it applies.
Mr. Bress: Oh, there's no doubt about that.
Unknown Speaker: And quite possibly the Federal common law directs us to State common law for the standard.
Mr. Bress: All right.
I'd like to address that, Your Honor.
Let me just preface it with a notion, though, that the statute doesn't purport to affect what the rights of the institution would have against its own officers and directors, so if you adopt the position that Federal common law is supplanted with respect to FDIC suits, you do have a situation where the institution before it fails could sue under Federal common law for ordinary care, but if the officer-directors perform so poorly the institution goes under, the FDIC is limited to the gross negligence standard.
That's a bit odd.
But now let me address what the underlying law is.
Unknown Speaker: But Mr. Bress, that depends on assuming that there is Federal common law that would govern the internal operation, something that this Court has never decided.
Mr. Bress: That's right, Your Honor, and let me now address that.
This Court has long understood that a corporation is a creature of law, and that its internal affairs are governed by the laws of the chartering authority, that the chartering authority and no other sovereign is the sovereign that has the predominant interest in those internal affairs.
Now, that's not just as a conflict of laws principle.
The Court has applied that in the context where you've got Federal preemption in dormant Commerce Clause challenges.
It's a principle of sovereignty at its fundamental base.
Unknown Speaker: Of sovereignty?
Mr. Bress: --Yes, Your Honor.
Unknown Speaker: You think it would be unconstitutional for a State, for example, to impose upon directors for certain activities a liability higher... to that State's citizens a liability higher than what the corporate State of incorporation would provide?
Mr. Bress: Your Honor, it flows from principles of sovereignty.
It does not make it unconstitutional, but it certainly does flow from principles of sovereignty.
This Court has stated that in Burks, in Kamen, in Cohens.
With regard to State institutions the Court has said, because it's created by the State, all of the rights and responsibilities flow from that State's laws, and it has also made clear the flip side, that when an institution... the Court has made clear that when an institution is chartered by the Federal Government it's from the Federal Government and from that charter that the rights and responsibilities flow.
Unknown Speaker: In contracts--
--Well, that may be, but it--
Mr. Bress: What's that?
Unknown Speaker: --In contracts, too.
Mr. Bress: And in contracts as well.
Unknown Speaker: No.
I mean, I said that somewhat facetiously, because I just wondered under the principles of Erie what good reason there is to have a special Federal law that's substantive in relation to banks that are chartered federally that wouldn't also apply to contracts, torts, and a whole bunch of things, and indeed, what is the implication of that for Erie?
Are we recreating Federal common law in a new area across the board?
That's, I guess, the question you've been asked by others.
Mr. Bress: Not at all, Your Honor, in this sense.
I mean, Erie, the primary purpose of Erie and the primary insight of Erie is that law has to flow from an identifiable sovereign.
There's no transcendental common law floating out there.
But after Erie, it was not the case that all common law was State.
Most common law was, but in areas of unique or essential Federal interest the law is Federal.
Now, with regard to contracts, we're not saying that a bank's contracts with third parties are governed by Federal law.
Unknown Speaker: But that's exactly my question, to be less elliptical, is what is the practical Federal interest here that requires a Federal common law that could not be served as well by a Federal common law pointer rule that said, simply apply the law of the State, a principal place of business, or the Model Business Code?
In other words, the things that were cited.
Mr. Bress: Your Honor, it's certainly true that in many areas this Court as a pointer rule will look to a State's law really as a convenient point of reference, and we think that that's a propriate in many instances.
It is not appropriate, however, where analogous Federal law provides you with some idea of what Congress thought about the matter, and in this case, by providing under section 1818(i) and section 1818(e) that the Federal regulators can enforce breaches of fiduciary duties which at the time the statute was created clearly included the duty of ordinary care, Congress is telling us that for Federal purposes enforcement of the duty of ordinary care is an important interest.
Unknown Speaker: But your argument goes well beyond that.
It goes to the entire internal management of the corporation if the theory you're putting before us is correct, and I would go further than Justice Breyer.
It seems to me that there's a lot more chance of some certainty in the law if we refer to State law than if we try to apply some nebulous Federal common law of internal operations of the corporation.
It will take us, you know, 100 years to develop a Federal law of internal management of corporations.
We've never done it.
Mr. Bress: Well, Your Honor, if we were talking about inventing all of corporate law for financial institutions I would be constrained to agree with you.
We're not talking about that.
All we're talking about is an area where Congress has itself said that the duty of ordinary care will be enforced.
Now, matters as demand on the corporation, futility of demand, that sort of thing, sure, a pointer rule would be appropriate, but where Congress has said the duty of ordinary care should be enforced, it would be appropriate to enforce that duty of ordinary care rather than, for instance... let me give you an example.
If a State were to completely remove all duty of care from its officers and directors, should that then mean that the Federal institution would have no claim whatever and no ability to enforce fiduciary duties of its own officers-directors, and similarly--
Unknown Speaker: Are you talking about preinsolvency, or postinsolvency?
Mr. Bress: --I'm talking about preinsolvency, and similarly, if a State were to enact strict liability as the standard, should that mean that the Federal chartering authority should have no ability to make sure that their institutions could attract officers and directors--
Unknown Speaker: But it's one thing to say the Federal chartering authority has no right to do that, but it's another thing to say that the Federal courts should step in on their own and develop a body of law.
Mr. Bress: --Well, Your Honor, I'm glad you've mentioned that.
The OTS, Office of Thrift Supervision, enforces section 1818(i) and section 1818(e), and in the context of agency adjudication has interpreted those sections to refer, when they refer to breach of fiduciary duties, to the duty of ordinary care, and further than that, and in terms of looking for certainty in the law, the OTS has set out the sorts of duties that are expected of an ordinarily prudent director in those circumstances.
Unknown Speaker: Mr. Bress, those duties govern the relationship between the regulator and the bank, is that correct?
Mr. Bress: Those duties are--
Unknown Speaker: Does OTS purport to be governing the relationship between the bank and its shareholders?
Mr. Bress: --The OTS has spoken in agency adjudication and said that the duties that are enforced should be the duties that the Federal regulator enforces as a matter of Federal law and should not depend on the courts of State law.
Unknown Speaker: All right.
Mr. Bress: It said that in agency adjudication.
Unknown Speaker: Well, it says it shouldn't depend on the quirks of State law, and yet under O'Melveny don't we have to see whether there is a conflict between the Federal interest and the State law, and it has been virtually conceded here that the law of every State on this point is ordinary negligence.
Why, then, do we have an occasion to look to this issue?
Mr. Bress: Okay.
Your Honor, I'd like to address that in two parts, if I may.
First of all, the conflict and the degree of conflict that is necessary really depends on what you're doing with regard to State law.
In O'Melveny and many other of these courts' cases what you're dealing with is... and in Boyle as well... you're displacing State law that would, in fact, otherwise apply in an area where the State has an interest.
Here what you're talking about is--
Unknown Speaker: And you're displacing that law presumably in favor of a standard substantively which is different from the State law.
Mr. Bress: --That's right.
That's right, Your Honor.
Unknown Speaker: That's not the case here.
Mr. Bress: Well, let me... I will address that, Your Honor.
Unknown Speaker: Mr. Bress, I think you ought to clarify one thing.
It isn't the State law generally that ordinary negligence is the standard, is it?
Mr. Bress: --I--
Unknown Speaker: I thought... if that were the case there would never have been any need for this statute.
Mr. Bress: --Your Honor, most States as a matter of common law and a matter of statutory law, they don't speak in terms of ordinary negligence.
What they speak of in terms of is ordinary care is the standard, and they apply that with the business judgment rule, so that you've got to demonstrate ordinary care to even get within the business judgment rule, and if you've exercised ordinary care... and we agree with this.
If you've exercised ordinary care you will not be held liable for honest mistakes of judgment.
Unknown Speaker: But--
--Maybe I'm confused.
I thought that the whole reason for 1812 had nothing to do with federally chartered institutions.
It had to do with States that were insulating officers and directors from any liability--
Mr. Bress: --Okay--
Unknown Speaker: --so Congress wanted to say at least gross negligence.
Mr. Bress: --Your Honor, there are several States, and there was a trend during the late 1980's of States that were, as a matter of statutory law, restricting liability of officers and directors to gross negligence or worse.
Many... several of them were restricting it to intentional or wanton misconduct.
Unknown Speaker: Yes, I think where we got confused is that the State common law was ordinary negligence, but the State insulating statutes supplanted common law and that's why we got--
Mr. Bress: That's correct, Your Honor, and in terms of negligence and ordinary negligence this... it's somewhat helpful, I think, even now to look back at the... at this Court's formulation in Briggs where it said what you're really talking about is ordinary care is the standard, and in some circumstances perhaps slight care is required.
For example, it isn't a transaction that really has much impact on the bank.
In some instances, however, you've got a bet... your company transaction and great care is required, and you look to whether the director has satisfied the care required under the circumstances.
Unknown Speaker: --May I--
Mr. Bress: But if I might continue as to why we use a Federal standard--
Unknown Speaker: --May I interrupt with one question?
Your argument based on 1818(i) and (e) and the regulatory power, are those regulatory powers of the OTS applicable to State-chartered institutions as well as Federal?
Mr. Bress: --They are, Your Honor, and in those instances you do have--
Unknown Speaker: Well--
Mr. Bress: --Well, in those instances you have two separate standards that are going to apply to the officers and directors, because you have two separate sovereigns that have an interest.
However, as petitioner has effectively conceded here, I think, while we can point as a pointer rule to the State where the main office is, that doesn't necessarily mean that that State has a substantial interest in the internal workings of a federally chartered institution.
We're just pointing to it as a matter of convenience, Your Honor, and in that circumstance--
Unknown Speaker: --Yes, but if you're right that those sections dictate ordinary care across the board, Congress didn't have to enact this statute.
Mr. Bress: --No, Your Honor, and I think Congress did, because there's no question that ordinary care is the standard for purposes of Federal regulatory enforcement as a Federal standard, because the statute was enacted to protect the Federal interest in the safety and soundness of all banks.
However, Congress recognizes that States are the ones that dictate the civil standards of liability for their own institutions, the rights of the institution and the shareholders vis-a-vis the directors.
You have two different standards for States because you've got two different sovereigns.
Here, you've one sovereign with an interest in it, and under HOLA, as this Court recognized in de la questa, the Homeowners Loan Act, Congress evinced a desire to have uniformity in the regulation of savings and loans.
This isn't just the courts invoking the interest of uniformity, this is Congress saying that uniformity is important.
Unknown Speaker: But then in--
--Mr. Bress, what are the problems about the uniformity?
You are saying Federal common law, and we look to an administrative agency, OTS, to get that Federal common law, and that... that's rather odd.
There is no Delaware corporation statute for the Federal, so we have to get the law from some place, and you say, well, the Federal common law should be what the OTS has pronounced.
Mr. Bress: If I... if that's how I came across, Your Honor, I'm sorry.
I would... and that's further that I wanted to go.
What I'm saying is that the statute itself includes a duty of ordinary care in it.
The OTS, in enforcing that duty of ordinary care, will, as the expert body, flesh it out somewhat, give an idea of what that entails for officers and directors of federally chartered institutions, and that's going to give you a better idea... I mean, perhaps Delaware does have a--
Unknown Speaker: But that's not common law, then.
You're saying there's a statutory preemption.
Mr. Bress: --No, Your Honor.
Unknown Speaker: If you're saying its right in the statute and that's all that OTS is doing, then aren't you saying there's a preemption?
Mr. Bress: Well, not quite, Your Honor.
What we're really saying is this is--
Unknown Speaker: Well, how close do you--
Mr. Bress: --All right... well, fairly close, Your Honor.
What we're coming at is really in Kamen what this Court said is if there is an analogous Federal provision that gives you an idea of what Congress would have done in this area, you look to that.
This Court did that in Musick and Peeler, the same sort of a thing, where under 10(b)(5) the Court said that you would use the contribution from the '34 act.
Unknown Speaker: --Well, that would be a much stronger argument, I would suppose, if this statute had never been passed.
Because if (k) had never been... if subsection (k) had rever been enacted, then if I follow your argument I would say, well, there's an area which is analogous to something covered by the statute that OTS is administering, but that statute doesn't cover it literally, and therefore I could say, well, there's a place where there seems to be a conflict between perceived Federal interest and State common law, and therefore we better develop some Federal common law for... to govern that.
But this statute has been passed which in effect is saying that in the area of possibly perceived conflict the threshold of gross negligence is good enough, so there doesn't seem to be any occasion to develop a common law to supplement that.
Mr. Bress: Your Honor, I think what the statute's telling you, and I think that what's actually the case here, is that there is a Federal interest, for instance, with regard to all banks whether they're State or Federal, that's clear, and in 1821(k) that interest was the Federal interest as in Shaw, and what Congress did is said... the first draft, in fact, of the Senate bill would have allowed the FDIC to proceed as receiver under any common law action, including ordinary negligence.
There were objections to that that were federalism-based.
The federalism-based objection said, look, what you're talking about are, you're including corporations that we've chartered, and as to which we dictate the internal affairs, and some States might legitimately believe that gross negligence rather than ordinary negligence is the right standard.
So Congress compromised.
They said the FDIC will always be able to sue for gross negligence even though, if a State has chosen a lower threshold or a higher threshold--
Unknown Speaker: But that suggests neither uniformity, nor does it suggest, as I thought you said earlier, that 1821(k) adopts some sort of standard of ordinary negligence.
Mr. Bress: --No, Your Honor, I... I'm sorry if that point has become confused.
Unknown Speaker: I'm not sure I correctly understood you.
Mr. Bress: We don't say that 1821(k) as a standard of ordinary negligence.
What we're pointing to for that is--
Unknown Speaker: It has... to the extent it has a standard, its standard is gross negligence.
Mr. Bress: --Your Honor, there's no question about that, and that's not where our argument's going.
1818(i) and 1818(e) are provisions where the Federal regulator can enforce breaches of fiduciary duties.
At the time those provisions were enacted, it was very clear--
Unknown Speaker: Preinsolvency.
Mr. Bress: --that breach of fiduciary duties included... preinsolvency that breach of fiduciary duties included the breach of the duty of ordinary care.
All we're saying here is, you've got a circumstance where you're either going to use a State law pointer rule, or you're going to adopt a uniform Federal standard.
Because Congress has said that the uniform Federal standard should be enforced as ordinary care, it's more appropriate to use that Federal standard that Congress has already told us is the standard that should apply--
Unknown Speaker: I think your argument's just extremely opaque on that point.
Are we getting into a position where we're like the King of France?
We march up the hill and then march down again?
If Federal law points to State law, then what difference does it make?
Mr. Bress: --We're not saying that Federal law points to State law, Your Honor.
What we're saying is that Federal law is the law that's applicable.
It's been suggested that we could point to State law.
We're disagreeing with that.
We're saying, no, there's a Federal standard that Congress has already said these officers and directors should live up to.
Unknown Speaker: At a different stage of the proceeding, preinsolvency.
Mr. Bress: Well, but again, all the FDIC's taking here are the rights that the institution had preinsolvency.
Unknown Speaker: Well then, we are just... if you're saying 1821(k) addresses this, we're talking about gross negligence, not simple negligence.
Mr. Bress: Your Honor, 1821(k) says that if the other applicable law doesn't give you a gross negligence standard, you can still sue for gross negligence.
What we're saying is that with regard to federally chartered institutions their rights vis-a-vis their own directors and officers are governed by Federal law because they operate under a Federal charter, and in determining what those rights are and what the duties are, we can either look for the State pointer... and by the way, the pointer is not always going to look to States with a well developed corporate law.
According to petitioner, the pointer might point to any State where you've got the main office, but you can either use a State pointer, or you could look to what the--
Unknown Speaker: Mr. Bress--
Mr. Bress: --Federal Government has said ought to be enforced as the duty, and we're just saying, given the interest in uniformity demonstrated in the Homeowners Loan Act that savings and loans should be subject to uniform standards, one should look to what Congress has said and apply a uniform standard, otherwise--
Unknown Speaker: --What Congress has said where, in (i)?
Mr. Bress: --In section 1818(i)(b)(2) Congress has said that officers and directors can be subject to civil money penalties for breach of fiduciary duties that cause or are likely to cause more than minimum damage to the institution.
Now, I grant that that section doesn't say what breach of fiduciary duties means, but this Court has long looked, and the latest case is DeSaterfield v. Mans and CCNV v. Reid... has long said that when the Congress uses a common law term, we look to what that term... whether that term had an established meaning.
The term did have an established meaning, and that included the duty of ordinary care, and if you rule against us, Your Honor, what will occur is that officers and directors of Federal institutions will have different and varying duties of care.
It will have a duty of care for the Federal regulators and a different one--
Unknown Speaker: Well, they do under the gross negligence standard anyway.
You've agreed they do under the gross negligence standard, because that refers to State law in any event.
Mr. Bress: --Officers and directors of federally chartered associations--
Unknown Speaker: Oh.
Mr. Bress: --That's all I'm talking about, is officers and directors of Federals.
Unknown Speaker: --Am I correct that... you're familiar with the Seventh Circuit case where Judge Easterbrook took part of your position and Judge--
Mr. Bress: That's right.
Unknown Speaker: --Posner took another part.
You wouldn't agree with either one of those opinions, would you?
Mr. Bress: That's right, Your Honor.
Unknown Speaker: Yes.
Mr. Bress: We think that Judge Easterbrook correctly recognized that--
Unknown Speaker: He went the first step.
Mr. Bress: --throughout the chartering authority--
Unknown Speaker: Yes.
Mr. Bress: --but he was incorrect in believing that it was displaced when you've got an express savings clause.
Unknown Speaker: Then you are taking the position, Mr. Bress, that the first sentence has no application to a federally chartered institution because you will have under the Federal common law this ordinary negligence standard.
Mr. Bress: Your Honor, our position is that it really has no practical application.
I mean, when Congress passed the statute, though, it wasn't acting imprudently, because at that time some courts were applying State law to Federal institutions, so Congress--
Unknown Speaker: You were saying that Congress said we don't know what it is, but whatever it is, we're not leaving... we're leaving it alone.
Mr. Bress: --Whenever the law is out there, we're leaving it alone.
If they were going to apply State law to you, and that State law would not give you a cause of action for gross negligence, you've got it.
Unknown Speaker: But you are saying, if your reading is correct that there is an ordinary negligence, Federal common law standard, then there would be no occasion ever to resort to the gross negligence part--
Mr. Bress: There would be no... there would... no--
Unknown Speaker: --for any federally chartered institution.
Mr. Bress: --By virtue of this Court's decision, if the Court were to rule that way, there would be no need to resort to the first sentence.
However, I am at pains to emphasize that at the time Congress passed the statute, that sentence would have had meaning even with regard to Federal associations because some courts were applying State law, and if Congress hadn't included Federal associations within the first sentence, then as to those courts that were applying State law to Federal charters, you wouldn't have a standard of... a cause of action of gross negligence available.
So a subsequent event, this Court's decision unifying the law and saying that there is a Federal common law standard, and I don't believe the Court has to go on and say what it is, but if it does, it's ordinary care--
Unknown Speaker: Well--
Mr. Bress: --a subsequent decision of that sort would render the first sentence of no practical effect with regard to Federal charters, that's true.
Unknown Speaker: --It's that last part.
I want to be... assume I'm with you.
Assume for the sake of argument that 1821(k) leaves Federal common law where it found it, all right.
Now, where did it find it, and what you're saying is, it found it (a) a rule of law that points you to the principle place of business, no.
You say no, correct?
It doesn't point you to the law of the principal place of business.
Rather, it creates its own standards.
So I say, what leads you to think that?
And now you're only reply to that is to source... is to cite primarily is 1818(e) and (i), and 1818(e) and (i), from my finding it here, are these infinitely long page-full procedural requirements that go on endlessly that I can't find anything that seems to be relevant, except for one sentence that refers to gross or continuing disregard, or something like that.
Mr. Bress: All right, Your Honor, let me address that.
We're not saying that Congress acted in recognition of the standard under 1818(i) or 1818(e) at the point when it enacted 1821(k).
What we're saying is that when it enacted 1821(k), Justice Breyer, the courts, the majority, vast majority of courts at that time were already applying a uniform ordinary care standard.
Unknown Speaker: We, this Court had not.
This Court had not.
Mr. Bress: This Court had not, but Congress doesn't... it doesn't just enact laws in recognition of what this Court's decisions are.
Congress is presumed to know at least where there is a majority--
Unknown Speaker: Well, but you just told us the opposite.
You just told us that the reason the... in response to Justice Ginsburg that the reason the first sentence makes sense even as applied to Federal institutions is that Congress didn't know what the law was.
Mr. Bress: --No--
Unknown Speaker: It might be applying State law, they might be applying Federal law.
That's what you told Justice Ginsburg.
Mr. Bress: --Your Honor--
Unknown Speaker: Now in response to this question you say Congress must have assumed that they... you know, since the vast majority of lower courts were applying Federal law, that this was a Federal law at issue.
Mr. Bress: --Your Honor, there's no contradiction whatever.
Unknown Speaker: Okay, well--
Mr. Bress: What we're saying is that Congress had no view as to what the correct answer was.
The vast majority of courts were applying Federal law, but some courts clearly were applying State law as well.
Congress had no reason, no desire to sort that out.
This was emergency legislation.
Congress said, whatever the courts are applying, they... you can continue to have that, but you're going to have gross negligence as a minimum, as a floor.
Unknown Speaker: --Then how do you get a congressional policy for uniformity?
You've just said Congress took no position as to what was the correct law.
Mr. Bress: That's right, Your Honor.
Unknown Speaker: If that's correct, how do you conclude in answer to Justice Breyer's question and other questions that somehow there is a congressional indication somewhere, (e), (i), or anyway, that there is a need for a uniform standard?
Mr. Bress: Your Honor, if that's gotten lost, I'm sorry.
The uniformity comes from HOLA itself, the Homeowners Loan Act.
As this Court interpreted the Homeowners Loan Act--
Unknown Speaker: Well, that's Congress.
Mr. Bress: --What's that?
Unknown Speaker: Oh, you're--
Mr. Bress: Right.
No, what I'm saying is, as this Court has interpreted the Homeowners Loan Act in de la questa, Congress intended at the time that statute was enacted to have uniform regulation of savings and loans.
Now, at the time FIRREA was enacted Congress wasn't interested in changing the workings of the internal affairs of banks themselves.
All it was saying was, when the FDIC comes in as receiver, in order to protect the insurance fund the FDIC is always going to be able to sue for gross negligence.
Now, it's still going to step into the shoes of the institution, but--
Unknown Speaker: --You've answered the question, Mr. Bress.
Mr. Stevens, you have 2 minutes remaining.
Rebuttal of Ronald W. Stevens
Mr. Stevens: Thank you, Mr. Chief Justice.
The FDIC is saying, as a matter of policy we have to have uniformity.
That's its argument in this Court.
In FDIC v. Thall, a decision which came down in August of 1996 of this year from the Eleventh Circuit, the FDIC argued and prevailed exactly the opposite proposition, that State law should apply to federally chartered institutions.
They took the position in that case that the application of the internal affairs doctrine to federally chartered institutions was, and I quote from their brief, which is cited at--
Unknown Speaker: Of course, they're entitled to change their position.
You've changed your position too, but--
Mr. Stevens: --We changed our position on the basis of a change in the law.
Theirs is a policy argument.
Unknown Speaker: Well, but basically you do... you agree with Judge Posner's analysis, as I understand it.
Mr. Stevens: No.
He uses an internal affairs... the internal affairs--
Unknown Speaker: No, he rejected that.
Mr. Stevens: --doctrine.
Unknown Speaker: Well, that--
Mr. Stevens: Well, that's... he still used it, but he's... I believe... to the extent that he indicated it's not applicable, I agree with him.
The second point is that... that the OTS standard that they're talking about has nothing to do with simple negligence.
The... the... well, the... first of all, 1818(i) is a civil money penalty provision.
It's a provision for imposing a penalty, but the provision that deals with conduct precisely analogous to that at issue here is not a civil money penalty section.
It's not a fining section.
It's 1818(b)(6)(a), which is the section which gives the agencies to recover losses incurred by the institutions, Federal or State chartered, caused by directors and officers, and the standard for recovery there is not simple negligence.
Congress set the standard at unjust enrichment or reckless disregard.
Unknown Speaker: --And what section are you referring to?
Mr. Stevens: 1818(b)(6)(a).
Chief Justice Rehnquist: Thank you, Mr. Stevens.
The case is submitted.