O'Melveny & Myers v. Federal Deposit Insurance
512 U.S. 79, 129 L. Ed. 2d 67, 1994 U.S. LEXIS 4446 (1994)
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Rule of Law:
In tort suits initiated by the Federal Deposit Insurance Corporation (FDIC) as a receiver for a failed financial institution, state law, not federal common law, governs defenses that are based on the imputation of knowledge from corporate officers to the institution.
Facts:
- In 1983, Ranbir Sahni and Lester Day acquired American Diversified Savings Bank (ADSB), a California-chartered and federally insured savings and loan.
- As chairman/CEO and president, Sahni and Day engaged in risky real estate transactions and fraudulently manipulated ADSB's financial records to conceal its growing insolvency.
- In September 1985, ADSB hired the law firm O'Melveny & Myers to provide legal services for two real estate syndications.
- At the time O'Melveny & Myers was retained, ADSB was secretly under investigation by state and federal regulators for its unsound business practices.
- While performing its work, O'Melveny & Myers did not contact ADSB's previous accounting firms or regulatory authorities to inquire about the bank's financial stability.
- The real estate offerings closed on December 31, 1985.
- On February 14, 1986, federal regulators officially determined that ADSB was insolvent.
- Following the discovery of the fraud, investors in the two syndications demanded refunds from the receiver, claiming they were deceived.
Procedural Posture:
- The FDIC, as receiver for ADSB, sued O'Melveny & Myers in the United States District Court for the Central District of California for professional negligence and breach of fiduciary duty.
- O'Melveny & Myers moved for summary judgment, which the District Court granted.
- The FDIC appealed the District Court's decision to the United States Court of Appeals for the Ninth Circuit.
- The Ninth Circuit reversed the District Court's grant of summary judgment.
- O'Melveny & Myers (petitioner) petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does federal common law, rather than state law, determine whether the fraudulent conduct of corporate officers can be imputed to a failed financial institution to bar a tort claim brought by the FDIC as the institution's receiver?
Opinions:
Majority - Justice Scalia
No, state law, not federal common law, governs the imputation of knowledge from a corporation's officers to the corporation itself, even when the FDIC is suing as a receiver. When the FDIC acts as a receiver, it 'steps into the shoes' of the failed institution, acquiring the rights the institution possessed and becoming subject to any defenses that would have been valid against the institution. There is no general federal common law, and federal courts are not to create special federal rules unless there is a significant conflict between a specific federal policy and the application of state law. General federal interests, such as ensuring uniformity in litigation or maximizing the recovery for the federal deposit insurance fund, are insufficient to justify displacing state law. Furthermore, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) specifies certain areas where federal law applies, implying that matters left unaddressed, such as imputation, remain governed by state law.
Concurring - Justice Stevens
Yes, I agree that state law must govern this dispute. Federal courts are courts of limited jurisdiction and do not possess the broad lawmaking powers of state courts. Because the FDIC's tort claim is created by state law, the defenses available against that claim must also be governed by state law. The duty of a federal court in such a case is not to fashion a new uniform rule but to interpret and apply the relevant state law as best it can, even if the specific issue has not been definitively settled by the state's courts.
Analysis:
This decision significantly reinforces the principle of Erie R. Co. v. Tompkins, clarifying that federal agencies acting as receivers are generally subject to state law defenses when pursuing state law claims. The ruling curtails the ability of federal courts to create federal common law, limiting it to situations where a specific and significant federal interest is threatened by state law. By rejecting the 'more money for the government' and 'uniformity' arguments, the Court placed the FDIC on the same footing as a private litigant in this context. Consequently, professionals like lawyers and accountants facing malpractice claims from the FDIC will have their liability determined by the diverse laws of the various states, rather than a uniform federal standard.
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