Opinion
95 Civ. 9281 (NRB).
June 26, 2003.
Gregory W. Herbert, Esq., Greenberg Traurig, P.A., Orlando, FL., Paul A. Batista, Esq., New York, New York, Counsel for Plaintiffs.
Alan L. Spear, Esq. John J. Wessling, Esq., Federal Deposit Insurance Corporation, Washington, D.C., Daniel J. Buzzetta, Esq., Thelan Reid Priest LLP, New York, New York, Counsel for Defendants.
OPINION AND ORDER
Plaintiff Golden Pacific Bancorp ("Bancorp"), for itself and derivatively on behalf of Golden Pacific National Bank ("the Bank"), filed this action against defendant Federal Deposit Insurance Corporation ("FDIC"). Bancorp, the holding company for the Bank, sued the FDIC charging mismanagement in the receivership of the Bank. In our decision filed on December 26, 2002, we granted summary judgment to the FDIC on all issues except two: whether the allocation of expenses incurred in a declaratory judgment action brought by the FDIC and the repurchase of certain loan assets by the FDIC amounted to either waste or unjust enrichment on the part of the FDIC. Golden Pacific Bancorp v. FDIC, 95 Civ. 9281 (NRB), 2002 U.S. Dist. LEXIS 24961, at *54 (S.D.N.Y. Dec. 26, 2002) ("Golden Pacific '02"). In the same decision, we granted the FDIC leave to renew its summary judgment motion as to those two issues. That renewed motion is the subject of this opinion. Also addressed is a motion submitted by Bancorp, after the FDIC had made its renewed summary judgment motion, to strike the declaration of the FDIC's expert witness Wayne S. Green. For the reasons stated herein, the FDIC's motion is granted, and Bancorp's motion to strike Green's declaration and accompanying expert report is denied.
This is the most recent in a series of decisions in this case. Earlier decisions are included in the record or reported at: Report and Rec. of Mag. Judge Henry Pitman dated July 31, 1997, Def. Memo. '02 Ex. 3; Golden Pacific Bancorp v. FDIC, 95 Civ. 9281 (AGS) (HBP), 1997 U.S. Dist. LEXIS 15537 (S.D.N.Y. Oct. 7, 1997); Golden Pacific Bancorp v. FDIC, 95 Civ. 9281 (NRB), 2000 U.S. Dist. LEXIS 8240 (S.D.N.Y. June 15, 2000) ("Golden Pacific '00"); Golden Pacific Bancorp v. FDIC, 273 F.3d 509 (2d Cir. 2001); Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961. Throughout this opinion, references to motion papers submitted in connection with the prior summary judgment motion will be designated with the characters "'02."
Because Bancorp only created a genuine issue of material fact as to the litigation expenses and loan repurchases by submitting a supplemental declaration in response to a motion by the FDIC to strike affidavits, the FDIC was not given an appropriate opportunity to respond to Bancorp's arguments, and we thus granted the FDIC leave to submit this renewed motion for summary judgment. Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961, at *36, *43.
I. Background
We have laid out the background of this case in detail in our December 26, 2003 opinion. Id. at *2-*11. The facts relevant to the remaining issues may be outlined briefly. In June of 1985, the Office of the Comptroller of the Currency ("OCC") declared the Bank insolvent, and appointed the FDIC as the Bank's receiver. The basis for the insolvency was essentially the Bank's issuance of high-interest securities, known as "yellow certificates" because of the color of the paper on which they were printed. Though the Bank's management claimed the yellow certificates were not liabilities of the Bank, the OCC concluded they were.
Once the OCC declared the Bank insolvent, the FDIC acted in two distinct capacities with respect to the Bank and its affairs. The FDIC acted as the Bank's receiver ("FDIC-R") and, in the FDIC's role as insurer of depository institutions, it bore the duty of making whole the Bank's insured depositors ("FDIC Corporate" or "FDIC-C"). In October of 1985, the FDIC brought a declaratory judgment action to determine the status of the yellow certificates. FDIC v. Holders of Yellow Certificates Nos. 1 Through 367, 85 Civ. 8164 (VLB). Bancorp charges that this lawsuit was partly, if not entirely, for the benefit of the FDIC-C, and that legal expenses of approximately $600,000 for this lawsuit were improperly charged to the receivership.
To fulfill its insurance obligations to depositors, the FDIC-C entered into a Deposit Insurance Transfer and Asset Purchase Agreement ("DITAPA") with Hong Kong Shanghai Bank ("HKSB") in which HKSB became the paying agent for Golden Pacific's deposits. As part of the transaction, the FDIC wired $115,697,512 to HKSB as an initial payment to cover the insured deposit liabilities. Also as part of the transaction, HKSB agreed to purchase $61,629,803 of the Bank's assets.
On two separate occasions, the FDIC repurchased from HKSB certain loans that HKSB had originally bought from the FDIC as part of the DITAPA transaction. Though one of these repurchases apparently fell within a 60-day window after HKSB's acquisition of the loans during which HKSB could require the FDIC to repurchase loans, the second repurchase fell outside this window. Bancorp argues that the FDIC's allowing HKSB to make this second repurchase constituted waste. Though the amount of loans involved in the second repurchase is unclear, there is evidence that the total value of the loans repurchased in both transactions was $7.3 million.
The facts concerning the two loan repurchases are based exclusively on a letter from Robert M. Cittadino, an FDIC manager, to Mr. N.P. Snaith at HKSB, in which Cittadino informs Snaith that the FDIC will not be making a third repurchase of loans, and summarizes the history of the loan repurchases between the FDIC and HKSB. Cittadino Letter, Chuang Supp. Decl. '02 Ex. 4.
The FDIC disputes the substantive claims of unjust enrichment and waste. However, the FDIC also argues that, even if the FDIC erred in its management of the receivership, Bancorp is not entitled to relief because at the conclusion of the receivership, creditors still had higher priority claims than shareholders of the Bank, such as Bancorp, to the remaining proceeds. According to the FDIC's expert report, the receivership still owed significant amounts of post-insolvency interest, or interest that began to accrue after the Bank went into bankruptcy. Report of Wayne S. Green, Def. Memo. '02 Ex. 19 ("Green Report"), at 14. Additionally, in October of 1993, the Internal Revenue Service ("IRS") entered into an agreement with the FDIC as receiver for the Bank in which income tax deficiencies stemming from tax years 19801988 were abated pursuant to 26 U.S.C. § 7507(a). Closing Agreement on Final Determination Covering Specific Matters dated October 7, 1993 ("Closing Agreement"), Def. Memo. '02 Ex. 27. The FDIC argues that these outstanding liabilities exceed the amounts that the FDIC would owe were it found to have committed waste and/or unjust enrichment, and thus that Bancorp lacks standing.
This interest was owed both on the principal amounts of loans extended by the FDIC-C to fulfill its insurance obligation to insured creditors, and on principal owed to non-FDIC creditors of the Bank. For a more detailed discussion of post-insolvency interest and the FDIC's entitlement to it, see Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961, at *6-*7, *11-*22.
That provision of the Internal Revenue Code states:
Whenever and after any bank or trust company, a substantial portion of the business of which consists of receiving deposits and making loans and discounts, has ceased to do business by reason of insolvency or bankruptcy, no tax shall be assessed or collected, or paid into the Treasury of the United States, on account of such bank or trust company, which shall diminish the assets thereof necessary for the full payment of all its depositors; and such tax shall be abated from such national banks as are found by the Comptroller of the Currency to be insolvent; and the Secretary, when the facts shall appear to him, is authorized to remit so much of the said tax against any such insolvent banks and trust companies organized under State law as shall be found to affect the claims of their depositors.26 U.S.C. § 7507(a).
II. Discussion
Again, we apply the familiar summary judgment standards outlined in Golden Pacific '00, 2000 U.S. Dist. LEXIS 8240, at *9-*10.
A. Renewed Summary Judgment Motion
We agree with the FDIC that it is entitled to summary judgment on Bancorp's remaining claims because Bancorp would not be entitled to any recovery and thus lacks standing to sue. That Bancorp would not be entitled to any recovery is clear. Even if the FDIC were found to have engaged in unjust enrichment and/or corporate waste, the most that Bancorp could recover would be $600,000 in legal expenses for the declaratory judgment action, and $7.3 million for the repurchase of the loans from HKSB, thus, $7.9 million. However, before Bancorp as a shareholder would be entitled to collect this money, some amount of it would be owed to the FDIC in the form of additional post-insolvency interest that was owed but never paid, and $11,730,753, plus interest, would still be owed to the IRS for the deficiencies it assessed against the receivership estate. Closing Agreement at 1. According to 26 U.S.C. § 7507, these deficiencies were only abated to the extent their collection would diminish the assets necessary for the full payment of depositors. 26 U.S.C. § 7507; Closing Agreement at 2. Thus, should the claims of the depositors be fully satisfied, the full amount of the deficiencies, plus interest, would become due to the IRS. Because these outstanding debts exceed the $7.9 million in possible damages for Bancorp, any recovery by Bancorp is precluded.
Of course, it is reasonable to assume that, even if the second repurchase of the HKSB loans was wrongful, the damages resulting from this act would not amount to $7.3 million, since 1) some amount of loans was repurchased in the first transaction, not the second, and 2) even if the FDIC was unable to recoup the entire repurchase price of these loans in their liquidation, it stands to reason that they recouped some portion of them.
The FDIC asserts that the full amount of unpaid interest calculated at 9%, $13,264,185, Green Report at 16 n. 18, would have to be paid before the IRS debt could begin to be paid off, and thus before Bancorp could hope to recover on any claim. The amount of money due from unpaid interest might not be this high, however, because, as we noted in our earlier opinion, the use of a market rate of interest, which would have been approximately 7.42%, would have been preferable to the use of the New York State statutory pre-judgment interest rate of 9%. Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961, at *23. However, given that the effective rate of post-insolvency interest to the FDIC was 4.3%, id., Deposition of Gail Verley, Def. Memo. '02 Ex. 18, at 26, it is clear that some amount of interest would have to be paid off before any money would be available for the IRS.
This case is thus directly analogous to Herring v. FDIC, 82 F.3d 282 (9th Cir. 1995), cert. denied, 519 U.S. 1027 (1996), a Ninth Circuit case in which shareholders of a bank in receivership contested alleged losses of $530,124. Id. at 284. The court observed that, though approximately $367,000 was available for distribution, the FDIC and other creditors had interest claims of approximately $1,500,000 against the receivership, so that, "even if the $530,124 were disallowed, the resulting $603,000 deficiency would still leave the shareholders nothing." Id. at 284-85. The court stated: "A party with no interest in the litigation generally has no standing. . . . The shareholders could not recover funds even if their fraud allegations were true; the shareholders thus lack standing to challenge that fraud." Id. at 285. See also Klare v. United States, 107 Ct. Cl. 310, 311-13 (Cl.Ct. 1946) (stating that shareholders of bank in receivership were not entitled to recovery of approximately $5,000,000 that they claimed was illegally spent on attorneys' fees and OCC employees' salaries because, before bank shareholders could be entitled to receive any funds from proceeds of receivership, assessment of $19,000,000 had to be repaid).
The claim of the IRS clearly has priority over the shareholders, who are only entitled to the proceeds remaining after all claims have been fully paid. 12 U.S.C. § 194. Thus, just like the plaintiffs in Herring, Bancorp has suffered no real injury due to any alleged mismanagement by the FDIC, and lacks standing to pursue its claims.
12 U.S.C. § 194 states:
From time to time, the comptroller shall make a ratable dividend of the money so paid over to him by such receiver on all such claims as may have been proved to his satisfaction or adjudicated in a court of competent jurisdiction, and, as the proceeds of the assets of such association are paid over to him, shall make further dividends on all claims previously proved or adjudicated; and the remainder of the proceeds, if any, shall be paid over to the shareholders of such association, or their legal representatives, in proportion to the stock by them respectively held.Id.
The impossibility of any recovery also means that, aside from the lack of standing, Bancorp could not make out a substantive unjust enrichment claim. To recover on a theory of unjust enrichment, "a plaintiff must prove that the defendant was enriched, that such enrichment was at plaintiff's expense, and that the circumstances were such that in equity and good conscience the defendant should return the money or property to the plaintiff." Dolmetta v. Uintah Nat'l Corp., 712 F.2d 15, 20 (2d Cir. 1983). Because the unpaid post-insolvency interest and the IRS deficiencies stand in the way of any recovery by Bancorp, any enrichment that accrued to the FDIC did not come at the expense of Bancorp.
Many of Bancorp's arguments in response have been rejected already, and all are without merit. Bancorp attempts to argue that the unpaid post-insolvency interest should not be the basis upon which to deny it standing based on three arguments it has asserted previously: (a) interest accrued unnecessarily due to the FDIC's use of a DITAPA transaction to satisfy its insurance obligation; (b) interest was calculated on funds extended by the FDIC-C to pay post-insolvency interest to the yellow certificate holders; and (c) the interest rate charged was excessive. As we held in our prior opinion, the use of a DITAPA transaction was well within the discretion allowed the FDIC by law to choose how it will run its insurance program, Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961, at *27-*29, and Bancorp has failed to offer any evidence suggesting that the interest paid on the yellow certificates was excessive or inappropriate, id. at *37-*38. We have already addressed, both in our previous opinion and in this one, Bancorp's argument concerning the FDIC's choice of interest rate. See Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961, at *23-*24; supra note 7.
To the extent Bancorp offers a new argument on this point, that argument strains credibility. Bancorp states in its opposition brief: "The FDIC charged interest on the principal and interest paid to the [yellow] certificate holders at the end of the lawsuit over their insurability, and yet the accrual of that interest was caused by the FDIC's refusal to recognize those accounts." Pl. Opp. Mem. at 20. It is misleading to say that the FDIC refused to recognize the claims of the yellow certificate holders. In fact, the FDIC brought the declaratory judgment action specifically to determine the legitimacy of their claims, at a time when the only parties who were advocating the position that their claims should not be recognized were certain Bank employees, including Joseph Chuang, who was the former chairman of the Bank and the former President, Chairman, and CEO of Bancorp. It is unseemly for Bancorp to argue that the FDIC should be faulted for the resolution of a dispute that its own CEO created.
The new arguments presented by Bancorp are also unconvincing. Bancorp claims the post-insolvency interest only mounted to such high levels because the receivership was kept open too long. Bancorp's contention appears to be that, given that so many of the Bank's assets had been liquidated by November of 1989, the receivership should have been terminated soon after this date, instead of remaining open in some form until November 1, 1995. Green Report at 16. However, this argument ignores the fact that, though the receivership may have stayed open, post-insolvency interest stopped accruing on the funds extended by the FDIC and other creditors of the Bank in January of 1990, a mere two months after Bancorp claims the bulk of the assets had been liquidated. Id. at 13, 14 n. 12. Thus, an artificially extended period of interest accrual is not the reason unpaid post-insolvency interest today prohibits Bancorp's recovery.
To support this assertion, Bancorp cites to a Statement of Condition that shows the Bank with assets of $23,618,669, liabilities of $8,758,150, and equity of $18,860,520, as of November 30, 1989. Statement of Condition, Joint Appendix filed in this case during Briefing for Second Circuit's December 7, 2001 Decision, at 1060. On June 21, 1985, the day the OCC shut down the Bank, it had assets of $166 million and liabilities of $172 million. Def. Rule 56.1 Statement of Undisputed Material Facts in Support of '02 Motion for Summary Judgment, at ¶ 20.
Finally, Bancorp argues that the IRS liability only accrued as a result of a "dispute the FDIC had with the IRS over the `solvency' of the bank after closing." Pl. Opp. Br. at 21. Bancorp further asserts that the $11 million in tax deficiencies that were the subject of the Closing Agreement "could only have come about if the bank was liquidated while `solvent,'" and that the FDIC in entering into the agreement "accepted liability for taxes as if [the Bank] were solvent." Id. at 22. Bancorp fails to support its argument. Indeed, the section of the Internal Revenue Code under which the Closing Agreement was executed is only applicable when a Bank is insolvent, That section applies when a bank "has ceased to do business by reason of insolvency or bankruptcy," or when a national bank is "found by the Comptroller of the Currency to be insolvent." 26 U.S.C. § 7507(a). Thus, the existence of the Closing Agreement does nothing to resuscitate Bancorp's argument that the FDIC illegally liquidated a solvent bank.
Thus, Bancorp's claims for unjust enrichment and corporate waste fail due to lack of standing, and we grant summary judgment to the FDIC on these issues.
Having found that Bancorp cannot establish any damages and therefore lacks standing, we need not reach the FDIC's arguments that Bancorp's claims of unjust enrichment and corporate waste fail on the merits.
B. Motion to Strike Declaration
Bancorp has moved to strike the declaration of Wayne S. Green, the FDIC's accounting expert. Green prepared an accounting report concerning the Golden Pacific Receivership, which the FDIC submitted in connection with its original motion for summary judgment. The Green Report summarizes the financial history of the receivership, and includes Green's conclusion that at the termination of the receivership, it still owed more than $13 million in post-insolvency interest to various creditors including the FDIC. Green Report at 4-5. Bancorp argues that the Green Report is flawed because, though the Bank was shut down in June of 1985, the accounting procedures employed in the report did not become the general liquidation accounting procedures of the FDIC until January of 1987, according to Bancorp, and Green did not begin working at the FDIC until August of 1989.
We note as an initial matter that the conclusions of the Green Report are essentially irrelevant to our holdings in both our current opinion and our previous opinion concerning the FDIC's motion for summary judgment. In concluding in our previous opinion that the interest the FDIC paid itself was appropriate, we used data from the Federal Reserve web site to calculate the average market rate of interest during the time the FDIC had extended its funds, and compared that average rate to the uncontroverted testimony of Gail Verley, an FDIC manager, concerning the effective rate of interest earned by the FDIC on its funds. Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961, at *23-*24; Federal Reserve Release: Selected Interest Rates, http://www.federalreserve.gov/releases/hl5/data/wf/tcmly.txt (Dec. 11, 2002); Deposition of Gail Verley, Def. Memo. '02 Ex. 18, at 26. Our conclusion in this opinion that Bancorp lacks standing to pursue its remaining claims does not depend on the Green Report's calculation of post-insolvency interest still outstanding as of the close of the receivership, since the IRS's claim for $11,730,753 plus interest due to tax deficiencies, evident from the Closing Agreement and undisputed in amount by Bancorp, more than outweighs any possible recovery by Bancorp. That said, we find that Bancorp's substantive attack on the Green Report is wholly without merit.
The Federal Rules of Civil Procedure require that affidavits in support of a motion for summary judgment "show affirmatively that the affiant is competent to testify to the matters stated therein." Fed.R.Civ.P. 56(e). Moreover, the Federal Rules of Evidence require that Green offer "technical, or other specialized knowledge [that] will assist the trier of fact to understand the evidence or to determine a fact in issue" and that Green be "qualified as an expert by knowledge, skill, experience, training, or education." Fed.R.Evid. 702. To meet the requirements of Fed.R.Evid. 702, Green's testimony and report must be "not only relevant, but reliable." Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579, 589 (1993). Based on the record before us, Green meets these tests.
Green is a Senior Financial Management Analyst and a Team Leader of the Forensic Accounting Unit in the FDIC's Division of Resolution and Receivership in Dallas, Texas, with 24 years of combined experience in banking and accounting, and thirteen years of specific liquidation accounting experience. Supplemental Decl. of Wayne S. Green dated April 10, 2003 ("Green Supp. Decl."), at ¶¶ 1, 10-11. While at the FDIC, he reviewed and analyzed dozens of receiverships. Id. at ¶ 11. In preparing his expert report, he considered documents and financial statements covering the entirety of the Golden Pacific receivership. Id. at ¶ 4. Thus, Green is clearly familiar with both liquidation accounting procedures and the Golden Pacific receivership, and this familiarity forms the basis for his report.
Bancorp has not identified any specific difference, let alone a meaningful difference, between the formulation of the accounting rules before and after January of 1987. Given that the manual itself is a collection of FDIC accounting procedures that in many instances had been in existence since the early 1980s, Green Supp. Decl. at ¶ 6, Bancorp bears the burden of identifying specific procedures that changed, and showing why those changes are significant. Bancorp has not met that burden. Nor has Bancorp raised, at this late date, after exhaustive discovery and briefing on three separate summary judgment motions, any lack of qualifications on the part of Green. Without any specificity as to the differences and, specifically, the shortcomings of the post-1987 procedures, Bancorp's argument is not persuasive with this court.
Bancorp's citation to Douglas v. Beneficial Finance Company, 334 F. Supp. 1166 (D. Alaska 1971) is inapposite specifically because Bancorp fails to identify any difference between the pre- and post-1987 accounting rules. We readDouglas, in which the court struck a document that "purport[ed] to be an `operating manual'" because it lacked foundation and because there was "nothing to indicate that the manual is current," id. at 1169, to stand for the proposition that irrelevant evidence lacking a foundation is excludable, and we have no quibble with that proposition. However, plaintiff has failed to make such a showing here — without demonstrating differences in the accounting procedures after January of 1987, Bancorp has failed to show that the Green Report is irrelevant or that it lacks foundation.
Bancorp apparently did not take Green's deposition or otherwise seek testimony concerning his expert qualifications or opinions. Def. Reply Memo. in Further Support of Summary Judgment at 5 n. 7. Bancorp asserts that it did not believe Green's testimony to be relevant, because Judge Schwartz early on in this case declared, according to Bancorp, that "the receiver's knowledge of the receivership's solvency was the proper issue, rather than the receiver's entitlement to post-insolvency interest." Pl. Reply Memo. to Strike Decl. at 9. Bancorp goes on to assert that "[i]f Judge Schwartz's ruling is the law of the case, the Green Report is irrelevant." Id. at 10. We agree with Bancorp insofar as we believe, as we notedsupra, that the Green Report is for all practical purposes irrelevant to the fundamental holdings in both our previous opinion and this one. However, in response to Bancorp's contention that we somehow changed the law of the case in this proceeding, we reiterate that when the mandate of a higher court is not involved, the law of the case doctrine is a discretionary one. Perillo v. Johnson, 205 F.3d 775, 780-81 (5th Cir. 2000);Golden Pacific '02, 2002 U.S. Dist. LEXIS 24961, at *22 n. 11. We also reiterate our view that our December 2002 ruling in this case did not represent a change in the law of the case, because, among other reasons, Judge Schwartz's ruling in October of 1997 was on a motion to dismiss, not on summary judgment, and because his holding only allowed the case to proceed on the assumption that the FDIC had liquidated a bank it knew to be solvent "in a deliberately wasteful and self-serving manner." Golden Pacific Bancorp v. FDIC, 95 Civ. 9281 (AGS) (HBP), 1997 U.S. Dist. LEXIS 15537, at *6 (S.D.N.Y. Oct. 7, 1997).
For completeness, we briefly address Bancorp's remaining arguments. Bancorp challenges Green's qualifications by citing supposed conflicts between his conclusions and those of Michael Hovan, a former field bank examiner for the FDIC. Bancorp claims that Hovan testified the FDIC could not legally liquidate a solvent bank, while Green stated the FDIC need not concern itself with solvency, and that FDIC policy prohibited post-insolvency interest, while Green "states otherwise." Pl. Reply Memo. to Strike Decl. at 6-7. Bancorp offers no citations for Green's purported conflicting statements, and we cannot find them in the record. In any event, the possibility of grist for cross-examination is not sufficient for a successful motion to strike.
Finally, Green's employment by the FDIC does not require us to strike his declaration. "[C]ourts routinely permit expert testimony by parties, employees, and others with financial and other plain interests in the outcome of the litigation," as long as the potential for assistance to the trier of fact is not outweighed by the "danger of unfair prejudice, confusion of the issues, or misleading the jury." Knowledge Based Techs. v. IBM, 96 Civ. 9461 (JSR), 1998 U.S. Dist. LEXIS 4602, at *2-*3 (S.D.N.Y. Apr. 8, 1998). These dangers do not present a significant concern here.
Based on his understanding of liquidation accounting procedures, Green is competent to testify and qualified as an expert, and we deny Bancorp's motion to strike the declarations.
CONCLUSION
Defendant's motion for summary judgment as to the issues remaining in the case is granted. Plaintiff's motion to strike the Green Declaration is denied. The Clerk of the Court is respectfully requested to close the case.