Bauer V. Sweeny

Washington and Lee Law Review, Winter 1993 | Go to article overview

Bauer V. Sweeny


It is well settled that causes of action against directors, officers, and employees for mismanagement of a bank belong to the bank rather than the bank's shareholders.(232) Should the bank refuse to institute these causes of action, one or more of the shareholders may bring a derivative action.(233) When a bank fails, however, the causes of action against the bank's management vest with the bank's receiver and may be conveyed or sold as any other asset. It is when a bank's causes of action are sold that the propriety of a shareholder derivative suit comes into question.(234)

In Federal Deposit Insurance Corp. v. American Bank Trust Shares, Inc.,(435)the United States Court of Appeals for the Fourth Circuit considered a case where the Federal Deposit Insurance Corporation (FDIC), in its corporate capacity, purchased from the FDIC, as receiver, causes of action against officers and directors of the bank. The American Bank court affirmed that this purchase for value precluded a shareholder derivative action while the FDIC was pursuing the same claims and held that the FDIC had the sole right to pursue them. By contrast, the Fourth Circuit held in Womble v. Dixon(236) that where the Federal Savings and Loan Insurance Corporation (FSLIC), as receiver, transferred the rights to the causes of action of a failed savings and loan to the FSLIC in its corporate capacity, shareholders could maintain a derivative action when the FSLIC neglected to assert certain of those causes of action. The distinguishing and controlling factor in these cases was the FSLIC's failure to bring its claims in Womble and the FDIC's active pursuit of its claims in American Bank. The opinions in Womble and American Bank, there fore, avoided a discussion specifically concerning the impact of the sale or conveyance of a bank's causes of action on the ability of shareholders to bring a derivative action. Consequently, the Fourth Circuit had not determined the importance of this issue when it reviewed the case of Bauer v. Sweeny(237).

In Bauer, the plaintiffs were shareholders of Seabank Federal Savings Bank (Seabank). In December of 1989, the Office of Thrift Supervision closed Seabank and appointed the Resolution Trust Company as receiver of the bank (RTC-Receiver). RTC-Receiver then sold all of Seabank's claims against its officers to the Resolution Trust Company in its corporate capacity (RTC-Corporate). Because RTC-Corporate apparently had not pursued any of these potential claims, the plaintiffs attempted to bring a derivative action against the various officers and directors of Seabank.

The United States District Court for the District of South Carolina, on the authority of American Bank, dismissed the plaintiffs' action for failure to state a claim. The court found that RTC-Corporate purchased, and exclusively owned, the claims the plaintiffs sought to bring in their derivative action. The court held, therefore, that the shareholders lacked standing to pursue their derivative claims because the sole right to institute the claims belonged to RTC-Corporate. Plaintiffs appealed to the Fourth Circuit where the decision of the district court was affirmed.

In affirming the district court's decision, the Fourth Circuit echoed the lower court's reliance on American Bank. However, in so relying on American Bank, both the Bauer court and the district court were forced to confront the seemingly contradictory language of he district court in Womble, affirmed by the Fourth Circuit, which stated that " a! derivative action is not precluded simply because a bank, or a savings and loan association is placed in receivership."(238) The district court held that this language applies only to situations where a bank still owns the causes of action the shareholders seek to assert in a derivative action. Thus, the district court, and the Fourth Circuit on appeal, read Womble as presenting a situation where the FSLIC-Receiver transferred, but did not sell for value, the savings and loan's causes of action to FSLIC-Corporate. …

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