and directors have set the losses in motion and cannot have their liability excused or diminished because the government agency in charge is overworked or understaffed.
Here, in the choice between having a wrongdoer or the taxpayer absorb any additional losses, public policy dictates that the entirely innocent taxpayers should not suffer the burden, particularly where it is apparent that they have already contributed so much to the bail-out of those institutions where no or little recovery is available. In some particular instances, however, imposing added liability created by the neglect or inaction of the government on those found to be wrongdoers may by unfair and onerous. Nevertheless, as a general proposition, it is appropriate to fasten liability on those who have given birth to the problem rather than on those who have inherited it and must now correct it.
On October 5, 1990, the Commissioner of the New Jersey Department of Banking declared the Mountain Ridge State Bank (the "Bank"), a banking institution chartered under the laws of the State of New Jersey, insolvent and closed it. Pursuant to 12 U.S.C. § 1821, the Federal Deposit Insurance Corporation (the "FDIC") was appointed as the liquidating receiver of the Bank with all the rights, obligations and powers provided by law. On November 9, 1992, the FDIC filed this lawsuit against the former directors and officers of the Bank,
asserting that defendants breached their fiduciary duties to the Bank and that they were negligent and grossly negligent in the discharge of their duties to the Bank. Plaintiff seeks compensatory damages, interest, costs of suit, attorneys' fees and other relief the court deems appropriate. By March 5, 1993, all of the defendants had filed answers to plaintiff's complaint.
Plaintiff now moves to strike all but two of the affirmative defenses asserted by the various defendants
pursuant to Federal Rule of Civil Procedure 12(f), arguing that these defenses are insufficient as a matter of law.
Rule 12(f) provides, in relevant part, that "upon motion made by a party . . . the court may order stricken from the pleading any insufficient defense." Fed. R. Civ. P. 12(f). However, motions to strike affirmative defenses are generally disfavored because they require the court to evaluate legal issues before the factual background of a case has been developed through discovery. See, e.g., Cipollone v. Liggett Group, Inc., 789 F.2d 181, 188 (3d Cir. 1986); United States v. 416.81 Acres of Land, 514 F.2d 627, 631 (7th Cir. 1975); Glenside West Corp. v. Exxon Corp., 761 F. Supp. 1100, 1115 (D.N.J. 1991). Thus, the United States Court of Appeals for the Third Circuit has stated that "a court should not grant a motion to strike a defense unless the insufficiency of the defense is 'clearly apparent.'" Cipollone, 789 F.2d at 188; see also Glenside, 761 F. Supp. at 1115 (noting that "a motion to strike will not be granted where the sufficiency of a defense depends on disputed issues of fact . . . [nor] is [it] meant to afford an opportunity to determine disputed and substantial questions of law").
Although motions to strike are not favored, courts recognize that a motion to strike can save time and litigation expense by eliminating the need for discovery with regard to legally insufficient defenses. See id. at 1115 (and cases cited therein). Plaintiff maintains that this is precisely the type of case where striking the insufficient defenses will prevent "a flood of inquiry . . . for which both the public and the defendants will pay dearly, in wasted litigation time and expense." Plt. Brief at 4. Defendants
assert that all of their defenses are legally sufficient and therefore should not be stricken. In order to resolve this motion, the court will first set out briefly the defenses at issue and then consider their legal sufficiency.
Plaintiff asserts, and defendants do not dispute, that the affirmative defenses at issue fall into the following categories: 1) contributory negligence; 2) estoppel; 3) waiver; 4) ratification; 5) unclean hands; 6) collateral estoppel; 7) statute of limitations and laches; 8) failure to mitigate damages; 9) lack of proximate cause; 10) conclusory statements or denials; 11) lack of consideration; and, 12) reliance upon defenses asserted by other defendants. Because the court finds that this categorization encompasses all of the relevant defenses asserted by the various defendants, the court will turn to the legal sufficiency of these defenses beginning first with all of the defenses relating to action or inaction by the FDIC.
A. Defenses Involving the FDIC's Actions
At the outset of this discussion, the court notes, as stated above, that Congress has assigned the FDIC two distinct roles. The FDIC's primary function arises out of its obligation to insure "the deposits of all banks and savings associations which are entitled to the benefits of insurance," 12 U.S.C. § 1811, and is primarily regulatory in nature. See id. at § 1821(a). However, the FDIC also serves a second function, which is to act as a receiver or conservator of failed financial institutions. Id. at § 1821(c). As plaintiff notes, courts have carefully maintained a wall between the FDIC's two functions, holding that the actions of the FDIC as a regulator cannot form the basis for claims asserted against the FDIC as receiver, and vice-versa. See, e.g., FDIC v. Cheng, 787 F. Supp. 625, 634 (N.D. Tex. 1991); FDIC v. Butcher, 660 F. Supp. 1274, 1280 (E.D. Tenn. 1987). With this framework in mind, the court turns now to the specific defenses asserted that are based on action or inaction by the FDIC.
1. Contributory Negligence
The first affirmative defense at issue asserts that the FDIC's own negligence contributed to any losses sustained by the Bank and its shareholders. In support of its motion to strike this defense, plaintiff argues that "any assertion that the FDIC was negligent prior to the Bank's insolvency is insufficient as a matter of law."
Plt. Brief at 4. Plaintiff relies on First State Bank v. United States, 599 F.2d 558 (3d Cir. 1979), cert. denied, 444 U.S. 1013, 62 L. Ed. 2d 642, 100 S. Ct. 662 (1980), in which the United States Court of Appeals for the Third Circuit held that the FDIC owed no "duty to warn the Bank's board of the derelictions of their president and employees." Id. at 566. Plaintiff also cites numerous cases from other circuits and districts, in each of which the court has adopted this "no duty" rule.
See Plt. Brief at 5-7.
Behind the almost universal acceptance of the "no duty" rule, see Resolution Trust Corp. v. Kerr, 804 F. Supp. 1091, 1099 (W.D. Ark. 1992) (noting that "the no duty rule has gained acceptance in the various federal courts"), is the fact that:
'Nothing could be more paradoxical or contrary to sound policy than to hold that it is the public which must bear the risk of errors of judgment made by its officials in attempting to save a failing institution -- a risk that would never have been created but for defendants' wrong-doing in the first instance.'
FDIC v. Baker, 739 F. Supp. 1401, 1407 (C.D. Cal. 1990) (quoting FSLIC v. Roy, No. 8-1227, 1988 WL 96570 (D. Md. June 12, 1988)). Considering the clear public policy at stake, courts have thus held that "no duty devolves onto the FDIC in favor of officers and directors of a failed banking institution when the FDIC's role is either regulator or receiver of that institution." Baker, 739 F. Supp. at 1407 (emphasis added). As a result, courts have held that if an affirmative defense rests on the notion that the FDIC owes such a duty, that defense is insufficient as a matter of law. See id.; Kerr, 804 F. Supp. at 1099.
In light of the allegations at issue in this case, this court is also persuaded that the "no duty" rule is sound as a matter of public policy. If these defendants breached their fiduciary duties to the Bank and were negligent or grossly negligent in the discharge of their duties as the FDIC maintains, these defendants should not be able to shift the costs of their actions to the FDIC and, ultimately, to the taxpayers. As such, the court concludes that the FDIC owed no duty to these defendants in its capacity as regulator or as receiver of the Bank. Thus, defendants' contributory negligence defense must be stricken.
Plaintiff argues that the "no duty" rule also renders insufficient as a matter of law defendants' failure to mitigate affirmative defense.
Defendants counter that because this issue "is one of first impression in this Circuit" and "district courts in other circuits who have addressed this issue are split on it," whether the mitigation defense can be maintained is an unclear question of law. Def. Brief at 9. Thus, defendants argue that plaintiff's motion to strike this defense should be denied. The court disagrees.
Although defendants appear to be correct in asserting that no court in this Circuit has considered this issue in a reported decision, the case law overwhelmingly supports plaintiff's argument that the mitigation defense cannot be maintained. See, e.g., Kerr, 804 F. Supp. at 1099 ("The court believes the public policy rationale of the no duty rule as expressed in Burdette is persuasive and that the affirmative defenses of contributory fault and mitigation of damages should by stricken.").
Moreover, the case relied on almost exclusively by defendants, FDIC v. Ashley, 749 F. Supp. 1065, 1069 (D. Kan. 1990), has been bluntly criticized for its holding that a mitigation of damages defense can be maintained against the FDIC. In RTC v. Scaletty, 810 F. Supp. 1505 (D. Kan. 1992), the court noted that the Ashley court held that a failure to mitigate defense was available for two reasons: 1) because the FDIC, as receiver, owed an obligation "to mitigate damages on behalf of the institution's owners and creditors"; and, 2) because the mitigation requirement "'is not actually a 'duty,' but a limitation on the amount of damages recoverable by the plaintiff.'" Id. at 1517. As the Scaletty court pointed out, the Ashley court's rationale is flawed in that it: 1) "goes against the weight of authority," id.; 2) does not address the alternative problem with the defense, sovereign immunity; 3) fails to consider 12 U.S.C. § 1821(d)(13)(D), which provides that no court shall have jurisdiction over "any claim relating to any act or omission of . . . the [FDIC] as receiver"; and, 4) "is contrary to public policy," Scaletty, 810 F. Supp. at 1518.
This court agrees with each criticism levelled at the Ashley decision by the Scaletty court. Thus, defendants' assertions to the contrary notwithstanding, the court is not persuaded that the question of whether a failure to mitigate defense can be maintained against the FDIC is a substantial, disputed question of law. Instead, the court is persuaded that the FDIC owes no duty of any kind to these defendants, as discussed supra. Thus, the court concludes that the FDIC owes no duty to these defendants to mitigate any damages arising out of defendants' alleged negligence and breach of fiduciary duties. Accordingly, the failure to mitigate defense will be stricken.
3. Estoppel, Waiver and Unclean Hands
Plaintiff asserts that "no affirmative defense based on estoppel can be asserted against the FDIC." Plt. Brief at 10 (relying on Office of Personnel Management v. Richmond, 496 U.S. 414, 110 S. Ct. 2465, 110 L. Ed. 2d 387 (1990)). Plaintiff further argues that "as in the case of estoppel, the defenses of waiver and unclean hands are unavailable and may not be asserted against the FDIC." Plt. Brief at 11 (relying on FDIC v. Isham, 782 F. Supp. 524, 532 (D. Colo. 1992), FDIC v. Arceneaux, 1990 WL 357532 (W.D. La. 1990) and FDIC v. O'Melveny & Myers, 969 F.2d 744 (9th Cir. 1992)).
Defendants assert the same syllogism with regard to these defenses as they asserted with regard to the failure to mitigate defense. First, defendants acknowledge that most courts have stricken these defenses when asserted against the FDIC. However, defendants cite two cases in which these defenses were not stricken, FDIC v. Harrison, 735 F.2d 408 (11th Cir. 1984) and FDIC v. Spain, 796 F. Supp. 241 (W.D. Tex. 1992). Defendants then argue that because courts are in disagreement about whether these defenses can be maintained against the FDIC and because the issue is one of first impression in this Circuit, the court should not resolve this "disputed and substantial question of law" on a motion to strike. Again, the court disagrees with defendants' contention.
The court notes first that the many cases relied upon by plaintiff do not hold that equitable defenses such as estoppel and waiver can never be asserted against the FDIC. See, e.g., O'Melveny, 969 F.2d at 752 (noting that "it does not necessarily follow that equitable defenses can never be asserted against FDIC acting as a receiver; we hold only that the bank's inequitable conduct is not imputed to FDIC"). However, the cases relied upon by plaintiff do hold that estoppel and waiver cannot be asserted against the FDIC by former officers or directors of a failed financial institution. See, e.g., Scaletty, 810 F. Supp. at 1518-19. Moreover, the cases relied on by defendants can be distinguished on this basis, as well as others, because they do not involve assertions of estoppel by such defendants.
In Harrison, the FDIC, acting as the receiver of a failed financial institution, sued guarantors of a debt owed to the institution by certain debtors. 735 F.2d at 409. In considering whether the FDIC could be equitably estopped from collecting this debt, the court stated that:
Activities undertaken by the government primarily for the commercial benefit of the government or an individual agency are subject to estoppel while actions involving the exercise of exclusively governmental or sovereign powers are not.
Id. at 411. The court then noted that "in its dealings with [the guarantors], the Corporation performed essentially the same function any other bank that may have acquired some of the assets of a failed bank." Id. at 412. Thus, the court found "no reason not to apply the traditional rules of equitable estoppel to the conduct of the FDIC."
This case is readily distinguishable from Harrison, which explicitly limited its holding to the situation in which the FDIC "acts in its corporate capacity to collect a debt acquired from an insolvent bank." Id. at 413. In this case, the FDIC is not acting to recover the Bank's outstanding loans. Rather, the FDIC is seeking to relieve the taxpayers of financial losses allegedly caused by the actions of former officers and directors of the Bank. As such, public policy clearly militates against the assertion of the equitable defenses of estoppel, waiver or unclean hands against the FDIC in this case. Accordingly, the court concludes that these defenses are insufficient as a matter of law and strikes them.
The court must also strike defendants' "ratification" defenses, which posit that the FDIC is estopped from asserting its claims against defendants because, in its regulatory capacity, the FDIC approved or ratified the defendants' actions.
Plaintiff correctly argues that to the extent that defendants' conduct may have been approved by the FDIC acting in its regulatory capacity, "it may not be interposed as an affirmative defense [in this action] . . ." Plt. Brief at 12. This is so for two reasons.
First, it is well-settled that claims involving the FDIC's actions as a regulator are not relevant in suits brought by the FDIC as receiver. See supra. Second, this defense is simply another form of an estoppel defense. As discussed supra, public policy precludes the assertion of "the affirmative defenses of contributory negligence, estoppel and mitigation of damages." FSLIC v. Burdette, 696 F. Supp. 1183 (E.D. Tenn. 1988). Because an estoppel defense cannot be asserted against the FDIC in this case, the ratification defense is insufficient as a matter of law and is stricken.
5. Collateral Estoppel
Finally with regard to defenses involving, at least peripherally, actions of the FDIC, two defendants Salvatore and Irish have asserted that the FDIC's suit is barred by collateral estoppel. Plaintiff argues that there is no basis for a collateral estoppel defense in light of the fact that "the FDIC has never been a party or in privity with a party in any litigation which has gone to final adjudication on the merits regarding any of the issues raised by this lawsuit." Plt. Brief at 11. Defendants offer no opposition to plaintiff's motion to strike this defense.
As the Third Circuit has recently stated:
Issue preclusion, formerly titled collateral estoppel, proscribes relitigation when the identical issue already has been fully litigated. Issue preclusion may be invoked when: (1) the identical issue was decided in a prior adjudication; (2) there was a final judgment on the merits; (3) the party against whom the bar is asserted was a party or in privity with a party to the prior adjudication; and (4) the party against whom the bar is asserted had a full and fair opportunity to litigate the issue in question.
Board of Trustees of Trucking Employees of N.J. Welfare Fund, Inc. v. Centra Inc., 983 F.2d 495, 505 (3d Cir. 1992). Although none of these requirements for a defense of collateral estoppel may be present in this case, as plaintiff asserts, such a conclusion would necessitate a review of factual matters outside of the pleadings and thus is not appropriately resolved on a motion to strike. Accordingly, the court declines to strike defendants' collateral estoppel defense.
B. Causation Defenses
The court turns now to the next set of affirmative defenses that plaintiff moves to strike. These defenses can be characterized generally as defenses involving issues of causation, and more specifically as either: 1) defenses asserting that the answering defendants did not cause plaintiff's losses (the "straight causation defense"); and 2) defenses asserting that plaintiff's losses were caused by other defendants, third parties, or supervening/intervening causes in general (the "other/supervening causation defense").
Plaintiff argues that all of the causation defenses, including the other/supervening causation defenses, are simply assertions by the defendants that their conduct was not the proximate cause of the Bank's losses. See Plt. Brief at 20. Because the FDIC must establish proximate cause as an element of its prima facie case, plaintiff asserts that defendants cannot assert lack of proximate cause as an affirmative defense.
Defendants concede that "an affirmative defense that no action or inaction by them caused the FDIC's alleged damages" cannot be maintained as "such assertions are already in issue because of the Complaint." Def. Brief at 5 n.5 (citing FDIC v. Renda, 692 F. Supp. 128, 133 (D. Kan. 1988), in which the court struck defenses asserting that the defendants were not the proximate cause of a financial institution's losses). Indeed, as the Kerr court stated:
In order to prevail on a negligence claim the RTC must first establish that the defendants were negligent and second that such negligence was a proximate cause of the losses sustained . . . Proximate cause is therefore an element of the claim and not an affirmative defense. While this appears to be a fine distinction, the court believes it is a distinction made necessary under the law.