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Goldstein v. Federal Deposit Insurance Corporation

United States District Court, Fourth Circuit

January 8, 2014

CHARLES R. GOLDSTEIN, Chapter 7 Trustee for K Capital Corporation, Plaintiff,



For the second time, this Court is faced with a motion to dismiss brought by the Federal Deposit Insurance Corporation ("FDIC"), defendant, as receiver for K Bank, in connection with litigation initiated by Charles R. Goldstein (the "Trustee"), plaintiff, the Chapter 7 Trustee for K Capital Corporation ("K Capital").[1] K Bank went into receivership on November 7, 2010. The next day, November 8, 2010, K Capital, a "bank holding company" that wholly owned K Bank, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. See Complaint (ECF 1) ¶¶ 1, 6; see also In re K Capital Corp., Case No. 10-35540 (Bankr. D. Md.).[2] Thereafter, the Trustee filed this suit against the FDIC, as receiver for K Bank, seeking damages of at least $20 million and other relief stemming from an alleged improper "scheme" of coordinated lending by K Capital and K Bank. See, e.g., Complaint ¶¶ 6-10, Counts One and Two.[3]

The scheme purportedly enabled K Bank to exceed its lending limitations, by permitting K Bank to extend financing to borrowers at extraordinarily high aggregate loan-to-value ratios of between 95% and over 100%-ratios that K Bank could not have achieved on its own under its charter and within "standard underwriting policies" and "regulatory constraints" applicable to K Bank as a "regulated banking institution." Complaint ¶¶ 7-9. According to the Trustee, K Bank and K Capital agreed to share the recoveries from the loans.

As discussed, infra, the FDIC moved to dismiss the five-count Complaint on September 30, 2011, pursuant to Fed.R.Civ.P. 12(b)(6). See ECF 9 (Motion to Dismiss). In a Memorandum Opinion and accompanying Order of May 16, 2012, I dismissed two counts but denied the FDIC's motion as to the remaining three counts. See ECF 18, 19; see also Goldstein v. F.D.I.C., 2012 WL 1819284 (D. Md. May 16, 2012). Thereafter, the parties engaged in extensive and contentious discovery, involving production by the FDIC of hundreds of thousands of documents.

The FDIC has now filed a second Motion to Dismiss, pursuant to Rules 12(b)(1), 12(c), 12(h)(2)(B), and 12(h)(3) of the Federal Rules of Civil Procedure. See ECF 131 at 1. The Motion is based on a formal determination made in June 2013 by the FDIC, the "No Value Determination, " which concluded that the K Bank receivership has no assets from which to satisfy any claims of general unsecured creditors. See ECF 131-1 ¶ 1. According to the FDIC, due to that determination, dismissal of the Trustee's Complaint is warranted pursuant to the prudential mootness doctrine and because, absent any actual case or controversy, the Court lacks subject matter jurisdiction. In addition, it contends that the equitable claim for an accounting is barred by 12 U.S.C. § 1821(j) and is otherwise moot. The Trustee opposes the FDIC's Motion, arguing, inter alia, that because it has asserted claims for "administrative expenses" and "deposit liabilities" that take priority over claims of general unsecured creditors, its claims survive the No Value Determination. See ECF 136 ¶¶ 42-50.

The Motion has been fully briefed, and no hearing is necessary to resolve it. See Local Rule 105.6.[4] For the reasons that follow, I will grant the Motion.

Factual Background[5]

Under the alleged lending "scheme, " K Bank would typically lend a borrower between 80% and 90% of the value of real estate used as collateral to secure the loan, and would obtain a first-priority lien on the real estate collateral. Complaint ¶ 13. Simultaneously, K Capital would extend a further loan to the borrower in an amount between 5% and 15% of the value of the collateral, and would receive a second-priority lien on the collateral. Id. ¶ 14. K Bank then serviced both loans "on a single loan system." Opp. ¶ 9; see Complaint ¶ 16.

The "scheme was fraught with risk" because the borrowers' collateral was so highly leveraged. Complaint ¶ 9. According to the Trustee, the risk fell "disproportionately on K Capital" because, if a borrower defaulted (and the Trustee alleges that the "majority" of the borrowers defaulted), K Capital's junior lien position meant that K Capital would recover nothing unless and until K Bank was repaid in full. Id. ¶ 9; see id. ¶¶ 10-23. Moreover, the financing extended by K Capital "was not made with economic terms commensurate with the risk." Id. ¶ 18. The Trustee contends that the scheme was made possible because although K Capital and K Bank were "nominally independent" of each other, they were "consolidated on an accounting and tax basis, " id. ¶ 8, and the "boards of K Capital and K Bank were populated by the same individuals who made decisions for both entities, despite conflicting interests." Id. ¶ 18. "On information and belief, " the Trustee contends that, at the time the loans were made, K Bank and K Capital agreed to "share the proceeds of payments" from each pair of loans or from collateral pari passu, i.e., in proportion to each entity's contribution to the total amount loaned to the borrower, at the time any proceeds were received. Id. ¶ 19. But, when the borrowers defaulted, "K Capital and its creditors were forced to absorb the loss of loans that primarily were issued for the benefit of K Bank." Opp. ¶ 10.

The Maryland Office of the Commissioner of Financial Regulation closed K Bank on November 7, 2010, and the FDIC was appointed as K Bank's receiver. The FDIC and Manufacturers and Traders Trust Company, Buffalo, New York ("M&T Bank"), entered into a Purchase and Assumption Agreement (the "P&A Agreement"), by which M&T Bank acquired most of the assets of K Bank, including the joint loans. Opp. ¶ 11.[6] According to the Trustee, the joint loans were acquired at "Book Value, '" which was defined in the P&A Agreement "as the dollar amount of the Accounting Records of the Failed Bank at Bank Closing." Id. The Trustee complains that the "FDIC has not provided any consideration or distribution to the K Capital Estate for its share of the Joint Loans sold to M&T Bank." Id. ¶ 12.

In February 2011, the Trustee filed a claim in the K Bank receivership with respect to approximately 90 improper "joint loans" with various borrowers. The claim was later supplemented. In April 2011, the FDIC-Receiver disallowed the claim. FDIC Mem. ¶ 7. This suit followed in June 2011, pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, 103 Stat. 189 (1989) (codified in Title 12 of the United States Code).

Based on these allegations, the Trustee, in the exercise of his duty to administer the estate of K Capital for the benefit of its creditors, see Complaint ¶ 5, asserted five claims against the FDIC in its capacity as receiver for K Bank: unjust enrichment (Count One); promissory estoppel (Count Two); declaratory judgment (Count Three); constructive trust (Count Four); and accounting (Count Five). All of the counts are founded on Maryland common law, and are premised on the proposition that each pair of loans issued by the two entities as part of the alleged "scheme" should be treated as a de facto "joint loan, " Complaint ¶ 11, and that the K Capital bankruptcy estate is entitled to recover from any proceeds of the subject loans received by the FDIC or K Bank in proportion to the amount of funding provided by K Capital for each "joint loan."[7]

As noted, the FDIC filed an earlier motion to dismiss on September 30, 2011. See ECF 9. Relying on Rule 12(b)(6), the FDIC argued, inter alia, that the Trustee's claims were barred by the D'Oench, Duhme doctrine[8] and its statutory counterparts, 12 U.S.C. §§ 1821(d)(9)(A) and 1823(e); that his claims were barred by FIRREA's "anti-injunction" provision, 12 U.S.C. § 1821(j), and by the equitable doctrines of unclean hands and pari delicto; and that his claims were facially implausible. See ECF 18 at 5, 14, 27, 32-33. In a Memorandum Opinion of May 16, 2012 (ECF 18), I dismissed the Trustee's claims for declaratory judgment (Count Three) and a constructive trust (Count Four), on the ground that they are barred by 12 U.S.C. § 1821(j). But, I otherwise denied the FDIC's motion. See id. at 33; accord ECF 19 (Order of May 16, 2012).


A. Standard of Review

1. Fed.R.Civ.P. 12(c)

The FDIC has moved for judgment on the pleadings, pursuant to Fed.R.Civ.P. 12(c). Under Rule 12(h)(2)(B), a defendant may assert "failure to state a claim upon which relief can be granted" in a Rule 12(c) motion. And, a Rule 12(c) motion "for judgment on the pleadings" may be filed "[a]fter the pleadings are closed, " so long as it is "early enough not to delay trial."

Courts apply "the same standard for Rule 12(c) motions as for motions made pursuant to Rule 12(b)(6), " alleging failure to state a claim. Burbach Broadcasting Co. of Del. v. Elkins Radio Corp., 278 F.3d 401, 406 (4th Cir. 2002); see Occupy Columbia v. Haley, ___ F.3d ___, 2013 WL 6570949, at *4 (4th Cir. Dec. 16, 2013). Both Bell Atl Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), make clear that, in order to survive a motion under Rule 12(b)(6) (and thus Rule 12(c)), a complaint must contain facts sufficient to "state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570; see Iqbal, 556 U.S. at 684 ("Our decision in Twombly expounded the pleading standard for all civil actions'...."); see also Simmons v. United Mortg. & Loan Inv., 634 F.3d 754, 768 (4th Cir. 2011); Andrew v. Clark, 561 F.3d 261, 266 (4th Cir. 2009); Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008). Thus, the defendant's motion will be granted if the "well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct." Iqbal, 556 U.S. at 679 (citation omitted).

Whether a complaint states a claim for relief is assessed by reference to the pleading requirements of Rule 8(a) of the Federal Rules of Civil Procedure. Under Rule 8(a)(2), a complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." The purpose of the Rule is to provide the defendant with "fair notice" of the claim and the "grounds" for entitlement to relief. Twombly, 550 U.S. at 555-56 n.3 (citation omitted). Although a plaintiff need not include "detailed factual allegations, " the rule demands more than bald and conclusory accusations or mere speculation. Twombly, 550 U.S. at 555; see Painter's Mill Grille, LLC v. Brown, 716 F.3d 342, 350 (4th Cir. 2013). To meet the minimal requirements of Rule 8(a)(2), the complaint must set forth "enough factual matter (taken as true) to suggest" a cognizable cause of action, "even if... [the] actual proof of those facts is improbable and... recovery is very remote and unlikely." Twombly, 550 U.S. at 556. A complaint that provides no more than "labels and conclusions, " or "a formulaic recitation of the elements of a cause of action, " is insufficient. Id. at 555.

In reviewing a Rule 12(c) motion, like one under Rule 12(b)(6), a court "must accept as true all of the factual allegations contained in the complaint, '" and must "draw all reasonable inferences [from those facts] in favor of the plaintiff.'" E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011) (citations omitted). However, the court is not required to accept legal conclusions drawn from the facts. See Papasan v. Allain, 478 U.S. 265, 286 (1986); Monroe v. City of Charlottesville, 579 F.3d 380, 385-86 (4th Cir. 2009), cert. denied, ___ U.S. ___ , 130 S.Ct. 1740 (2010).

"A court decides whether [the pleading] standard is met by separating the legal conclusions from the factual allegations, assuming the truth of only the factual allegations, and then determining whether those allegations allow the court to reasonably infer" that the plaintiff is entitled to the legal remedy sought. A Society Without A Name v. Virginia, 655 F.3d 342, 346 (4th Cir. 2011), cert. denied, ___ U.S. ___ , 132 S.Ct. 1960 (2012). "Dismissal under Rule 12(b)(6)'"-or judgment for the defendant under Rule 12(c)-"is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.'" Hartmann v. Calif. Dept. of Corr. & Rehab., 707 F.3d 1114, 1122 (9th Cir. 2013) (citation omitted). See Commonwealth Prop. Advocates, LLC v. Mortg. Elec. Reg. Sys., Inc., 680 F.3d 1194, 1201-02 (10th Cir. 2011) ("When reviewing a 12(b)(6) dismissal, we must determine whether the complaint sufficiently alleges facts supporting all the elements necessary to establish an entitlement to relief under the legal theory proposed.' Dismissal is appropriate if the law simply affords no relief.") (internal citation omitted).

Generally, in ruling on such a motion, a court "may not consider any documents that are outside of the complaint, or not expressly incorporated therein...." Clatterbuck v. City of Charlottesville, 708 F.3d 549, 557 (4th Cir. 2013). In considering a challenge to the adequacy of plaintiff's pleading, however, the court may properly consider documents "attached or incorporated into the complaint, " as well as documents attached to the defendant's motion, "so long as they are integral to the complaint and authentic." Phillips v. Pitt County Memorial Hosp., 572 F.3d 176, 180 (4th Cir. 2009); see also E.I. du Pont de Nemours & Co., 637 F.3d at 448. To be "integral, " a document must be one "that by its very existence, and not the mere information it contains, give rise to the legal rights asserted.'" Chesapeake Bay Foundation, Inc. v. Severstal Sparrows Point, LLC, 794 F.Supp.2d 602, 611 (D. Md. 2011) (citation omitted; emphasis in original). And, as discussed, infra, the Court may take judicial notice, where appropriate.

2. Fed.R.Civ.P. 12(b)(1)

Fed. R. Civ. P. 12(b)(1) governs motions to dismiss for lack of subject matter jurisdiction. See Khoury v. Meserve, 628 F.Supp.2d 600, 606 (D. Md. 2003), aff'd, 85 F.Appx. 960 (4th Cir. 2004). "It is well established that before a federal court can decide the merits of a claim, the claim must invoke the jurisdiction of the court." Miller v. Brown, 462 F.3d 312, 316 (4th Cir. 2006). Moreover, "[c]ourts have an independent obligation to determine whether subject-matter jurisdiction exists, even when no party challenges it." Hertz Corp. v. Friend, 559 U.S. 77, 94 (2010). Pursuant to Rule 12(h)(3), "[i]f the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action."

Once subject matter jurisdiction is challenged, the plaintiff bears the burden of proving that the court has subject matter jurisdiction. See Evans v. B.F. Perkins Co., a Div. of Standex Int'l Corp., 166 F.3d 642, 647 (4th Cir. 1999); see also Ferdinand-Davenport v. Children's Guild, 742 F.Supp.2d 772, 777 (D. Md. 2010); Khoury, 268 F.Supp.2d at 606. In ruling on a motion under Rule 12(b)(1), the court "should regard the pleadings as mere evidence on the issue, and may consider evidence outside the pleadings without converting the proceeding to one for summary judgment.'" Ferdinand-Davenport, 742 F.Supp.2d at 777 (quoting Evans, 166 F.3d at 647); see also Richmond, Fredericksburg & Potomac R.R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991), cert. denied, 503 U.S. 984 (1992). A court should grant a Rule 12(b)(1) motion "only if the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law." Evans, 166 F.3d at 647.

B. FIRREA and Distribution Priority

In response to the savings and loan crisis of the 1980s, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (as noted, "FIRREA, " codified in Title 12 of the United States Code). See Sharpe v. FDIC, 126 F.3d 1147, 1154 (9th Cir. 1997). FIRREA creates a framework for addressing claims against a failed financial institution, and permits the FDIC "to act as receiver or conservator of a failed institution for the protection of depositors and creditors." Id. (internal quotations and citations omitted).

In 1993, Congress adopted the National Depositor Preference Amendment to the Federal Deposit Insurance Act. Pub. L. 103-66, § 3001(a), 107 Stat. 312, 336-37; see MBIA Ins. Corp. v. F.D.I.C., 708 F.3d 234, 236 (D.C. Cir. 2013). It establishes the order of priority for payment of claims proven against a receivership estate, codified at 12 U.S.C. § 1821(d)(11)(A). The provision states, in relevant part:

[A]mounts realized from the liquidation or other resolution of any insured depository institution by any receiver appointed for such institution shall be distributed to pay claims (other than secured claims to the extent of any such security) in the following order of priority:
(i) Administrative expenses of the receiver.
(ii) Any deposit liability of the institution.
(iii) Any other general or senior liability of the institution (which is not a liability described in clause (iv) or (v)).
(iv) Any obligation subordinated to depositors or general creditors (which is not an obligation described in clause (v)).
(v) Any obligation to shareholders or members arising as a result of their status as shareholders or members (including any depository institution holding company or any shareholder or creditor of such company).

Notably, no payments may be made to a lower-priority class until all claims of a higher-priority class have been satisfied. See id. ; MBIA Ins. Corp. v. FDIC, 816 F.Supp.2d 81, 91-92 (D.D.C. 2011) ("The statute sets forth the priority in which claims are paid: administrative expenses of the receiver' must be fully satisfied before outstanding deposit liabilities, which must be satisfied before general liabilities."), aff'd, 708 F.3d 234 (D.C. Cir. 2013); see also Placida Prof'l Center, LLC v. FDIC, 2013 WL 978271, at *10 (11th Cir. Mar. 13, 2013); Battista v. FDIC, 195 F.3d 1113, 1118 (9th Cir. 1999). Where the FDIC acts as receiver for a failed institution, its liability is limited to the amount that a claimant would have received if the failed bank's assets were liquidated. 12 U.S.C. § 1821(i)(2). Put another way, if no receivership assets are available to satisfy the claims of creditors, the creditors cannot recover from the FDIC as receiver. First Indiana Fed. Sav. Bank ...

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