Grant Thornton, LLP v. Federal Deposit Insurance , 435 F. App'x 188 ( 2011 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-1306
GRANT THORNTON, LLP,
Plaintiff - Appellant,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of the
First National Bank of Keystone,
Defendant – Appellee,
and
OFFICE OF THE COMPTROLLER OF THE CURRENCY; GARY ELLIS,
Parties-in-Interest,
v.
UNITED BANK, INCORPORATED, formerly United National Bank;
KUTAK ROCK, LLP,
Movants.
No. 10-1379
GRANT THORNTON, LLP,
Plaintiff – Appellee,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of the
First National Bank of Keystone,
Defendant – Appellant,
and
OFFICE OF THE COMPTROLLER OF THE CURRENCY; GARY ELLIS,
Parties-in-Interest,
v.
UNITED BANK, INCORPORATED, formerly United National Bank;
KUTAK ROCK, LLP,
Movants.
Appeals from the United States District Court for the Southern
District of West Virginia, at Bluefield. David A. Faber, Senior
District Judge. (1:00-cv-00655-DAF; 1:03-cv-02129-DAF)
Argued: March 22, 2011 Decided: June 17, 2011
Before TRAXLER, Chief Judge, and MOTZ and AGEE, Circuit Judges.
Affirmed in part and reversed and remanded in part by
unpublished opinion. Judge Agee wrote the opinion, in which
Chief Judge Traxler and Judge Motz concurred.
ARGUED: Stanley Julius Parzen, MAYER BROWN, LLP, Chicago,
Illinois, for Appellant/Cross-Appellee. Jaclyn Chait Taner,
FEDERAL DEPOSIT INSURANCE CORPORATION, Arlington, Virginia, for
Appellee/Cross-Appellant. ON BRIEF: John H. Tinney, THE TINNEY
LAW FIRM PLLC, Charleston, West Virginia; Mark W. Ryan, Miriam
R. Nemetz, MAYER BROWN LLP, Washington, D.C., for
Appellant/Cross-Appellee. David Mullin, John M. Brown, Clint R.
Latham, MULLIN HOARD & BROWN, LLP, Amarillo, Texas; Colleen J.
Boles, Assistant General Counsel, Lawrence H. Richmond, Senior
Counsel, Minodora D. Vancea, FEDERAL DEPOSIT INSURANCE
CORPORATION, Arlington, Virginia, for Appellee/Cross-Appellant.
2
Unpublished opinions are not binding precedent in this circuit.
3
AGEE, Circuit Judge:
The Federal Deposit Insurance Corporation (“FDIC”), acting
as receiver for the First National Bank of Keystone (“Keystone”
or “the Bank”), sued Grant Thornton, LLP (“Grant Thornton”), a
national accounting firm, for professional malpractice.
Alleging that Grant Thornton negligently performed an audit of
Keystone, 1 the FDIC sought to recover damages from the accounting
firm after the FDIC closed Keystone as insolvent. After a
lengthy bench trial, the district court awarded judgment in the
FDIC’s favor in the initial amount of $25,080,777, which was
reduced by a settlement credit to $23,737,026.43.
On appeal, Grant Thornton does not challenge the district
court’s finding that it was negligent in the conduct of the
Keystone audit. Instead, Grant Thornton assigns error to the
district court’s finding that its negligence was the proximate
cause of certain of Keystone’s losses. Grant Thornton also
challenges the district court’s refusal to allow some defenses
and claims, which required imputing the actions of the Bank’s
management to the FDIC. Finally, Grant Thornton claims the
1
The FDIC’s claims were first asserted below as
counterclaims in Grant Thornton v. FDIC, No. 1:00-0655, and in a
complaint in intervention in Gariety v. Grant Thornton, LLP, No.
2:99-0992. The district court subsequently severed the FDIC’s
claims against Grant Thornton from the other claims in Gariety,
assigned a new case number (No. 1:03-2129), and consolidated
them for trial with the FDIC’s claims in No. 1:00-0655.
4
court erred in calculating a settlement credit based on the
FDIC’s earlier settlement of various claims against Kutak Rock,
LLP (“Kutak”), the Bank’s outside legal counsel. The FDIC has
filed a cross-appeal, challenging the district court’s denial of
an award of prejudgment interest.
As explained in more detail below, we affirm the judgment
of the district court as to all issues except the district
court’s calculation of the settlement credit. As to that issue,
we reverse and remand for further proceedings.
We underscore, however, that the results in this case are
driven by its unique facts, particularly the context of heavy
regulatory oversight, known to Grant Thornton, as the sole
reason for its engagement. Accordingly, it should be well
understood we do not announce any new rule of auditor liability
and none should be implied.
I.
A. Factual Background
In Ellis v. Grant Thornton LLP, 530 F.3d 280 (4th Cir.
2008), a prior appeal with different parties, we described
Keystone’s background and how it came to engage Grant Thornton:
Prior to 1992, Keystone was a small community
bank providing banking services to clients located
primarily in McDowell County, West Virginia. Before
its collapse, Keystone was a national banking
5
association within the Federal Reserve System, the
deposits of which were insured by the FDIC.
In 1992, Keystone began to engage in an
investment strategy that involved the securitization
of high risk mortgage loans. . . . Keystone would
acquire Federal Housing Authority or high loan to
value real estate mortgage loans from around the
United States, pool a group of these loans, and sell
interests in the pool through underwriters to
investors. The pooled loans were serviced by third-
party loan servicers, including companies like Advanta
and Compu-Link. Keystone retained residual interests
(residuals) in each loan securitization [but the
residuals] would receive payments only after all
expenses were paid and all investors in each
securitization pool were paid. Thus, Keystone stood to
profit from a securitization only after everyone else
was paid in full. The residuals were assigned a value
that was carried on the books of Keystone as an asset.
Over time, the residual valuations came to represent a
significant portion of Keystone's book value.
From 1993 until 1998, when the last loan
securitization was completed, the size and frequency
of these transactions expanded from about $33 million
to approximately $565 million for the last one in
September 1998. All told, Keystone acquired and
securitized over 120,000 loans with a total value in
excess of $2.6 billion.
[T]he securitization program proved highly
unprofitable. Due to the risky nature of many of the
underlying mortgage loans, the failure rate was
excessive. As a result, the residual interests
retained by Keystone proved highly speculative and, in
actuality, they did not perform well.
Keystone's valuation of the residuals was greater
than their market value. [Some members of Keystone’s
management] and others concealed the failure of the
securitizations by falsifying Keystone's books. Bogus
entries and documents hid the true financial condition
of Keystone from the bank's directors, shareholders,
depositors, and federal regulators.
6
Keystone's irregular bank records drew the
attention of the [Office of the Comptroller of the
Currency (“OCC”)], which began an investigation into
Keystone's banking activities. This investigation
revealed major errors in Keystone's accounting records
that financially jeopardized Keystone. In May 1998,
the OCC required Keystone to enter into an agreement
obligating Keystone to take specific steps to improve
its regulatory posture and financial condition. This
agreement required Keystone to, among other things,
retain a nationally recognized independent accounting
firm “to perform an audit of the Bank's mortgage
banking operations and determine the appropriateness
of the Bank's accounting for purchased loans and all
securitizations.” In August 1998, Keystone retained
Grant Thornton as its outside auditor.
Ellis, 530 F.3d at 283-84 (internal citation omitted). 2
B. Grant Thornton’s Audit of Keystone
Since Grant Thornton does not challenge the district
court’s finding that it was negligent in performing the Keystone
audit, it is not necessary to fully discuss all the negligent
acts found by the court. We simply note the record fully
supports the numerous factual findings by the district court
regarding Grant Thornton’s negligence.
In particular, the district court concluded two employees
of Grant Thornton with primary responsibility for Keystone’s
audit, Stan Quay and Susan Buenger, committed various violations
of the Generally Accepted Auditing Standards (“GAAS”). See also
2
The general factual background set forth in Ellis and
repeated herein tracks to a large degree the district court’s
findings of fact in this case.
7
Grant Thornton, LLP v. Office of the Comptroller of the
Currency, 514 F.3d 1328, 1340-41 (D.C. Cir. 2008) (Henderson,
J., concurring) (discussing facts of instant case and describing
Quay and Buenger’s conduct as “strikingly incompetent”).
A crucial error was Buenger’s failure to obtain written
confirmation of a purported oral representation from Advanta,
one of Keystone’s loan servicers, that a substantial number of
mortgages were properly documented on Keystone’s books of
account. Buenger testified that she had a telephone
conversation with Patricia Ramirez, who worked for Advanta, in
which Ramirez told Buenger that she had located a pool of
mortgages owned by Keystone worth approximately $236 million.
But an e-mail from Ramirez minutes later, as well as an earlier
written confirmation, showed that the loans were not owned by
Keystone, but by “Investor Number 406,” identified as “United
National Bank,” a separate banking entity. (J.A. at 1151.)
While the district court expressly concluded that the oral
statements Buenger attributed to Ramirez were not in fact made,
it held that even if they had been, Buenger had an obligation
under GAAS to obtain all “significant” confirmations of
financial data in writing. Since the $236 million mortgage
portfolio at issue constituted about one-fourth of the Bank’s
claimed assets, it was clearly significant. Yet Buenger did not
utilize the written statements from Advanta and instead chose to
8
rely on the alleged oral misrepresentation, despite the fact
that it conflicted with the written evidence and doing so was
contrary to GAAS accounting procedure. Similarly, “Quay violated
GAAS by failing to supervise or participate in the evaluation of
the Advanta confirmation responses.” (J.A. at 798.)
Because of this and other negligent acts, Buenger and Quay
failed to find numerous problems with the Bank’s financial
statements. Instead, Grant Thornton issued a clean audit
opinion on April 19, 1999, stating that the audit had been
conducted “in accordance with generally accepted auditing
standards” and that the Bank’s financial statements were “free
of material misstatement[s].” (J.A. at 1155.) In point of fact,
however, those financial statements overstated Keystone’s assets
by $515 million, making the Bank grossly insolvent. During an
annual examination of Keystone a few months later, in August
1999, the OCC discovered the discrepancies and closed the Bank
on September 1, 1999, appointing the FDIC as receiver.
Of particular importance, the district court concluded that
“[i]f Grant Thornton had exercised due professional care in
connection with its audit, the fraud would have been discovered”
and that “[i]f Grant Thornton had disclosed to Keystone’s board
or the OCC the fact that Keystone was carrying over $400 million
in loans on its books that were not owned by Keystone, the Bank
would have been closed by April 21, 1999.” (J.A. at 800.) The
9
court thus concluded that Grant Thornton’s negligence
proximately caused damages in the amount of Keystone’s net
operating expenses from April 21, 1999, two days after the audit
report was released, until September 1, 1999, when the Bank was
closed.
In the context of the analysis of each argument raised on
appeal, we discuss pertinent findings of fact that place each
issue in perspective. Grant Thornton and the FDIC have timely
filed their respective appeal and cross-appeal. We have
jurisdiction pursuant to 28 U.S.C. § 1291.
II. Proximate Causation
Grant Thornton makes three challenges to the district
court’s finding that its negligence proximately caused the
Bank’s post-audit operating losses. First, it argues that the
district court applied the incorrect legal standard. Second, it
contends that the district court’s finding of proximate cause
was clearly erroneous. Third, it argues that the district court
erred in refusing to consider that actions and knowledge of
Keystone’s management subsequent to Grant Thornton’s audit were
a superseding and intervening cause that cut off any of Grant
Thornton’s liability for post-audit damages.
We employ a “mixed standard of review” when judgment
results from a bench trial. Universal Furniture Int’l, Inc. v.
10
Collezione Europa USA, Inc., 618 F.3d 417, 427 (4th Cir. 2010)
(citation and quotation marks omitted). Specifically, we review
the district court’s legal rulings de novo. Id.; see also
Murray v. United States, 215 F.3d 460, 463 (4th Cir. 2000)
(legal conclusions regarding the correct standard of proof for
proximate cause are reviewed de novo). We review the district
court’s factual determinations for clear error. Universal
Furniture Int’l, Inc., 618 F.3d at 427. Under clear error
review, this Court must affirm factual findings if they are
“plausible in light of the [entire] record,” “even though
convinced that had it been sitting as the trier of fact, it
would have weighed the evidence differently.” Walton v.
Johnson, 440 F.3d 160, 173 (4th Cir. 2006).
A. Legal Standard for Proximate Cause
We find no merit in the contention that the district court
failed to apply the proper legal standard for proximate cause.
As the district court concluded and the parties agree, West
Virginia law governs the common law claims of the FDIC here.
See O’Melveny & Myers v. Fed. Deposit Ins. Corp., 512 U.S. 79,
89 (1994) (“[w]hat sort of tort liability to impose on lawyers
and accountants in general, and on lawyers and accountants who
provide services to federally insured financial institutions in
particular” did not warrant the “judicial creation of a federal
11
rule of decision . . . .”). State law thus governs the claims
here. See Resolution Trust Corp. v. Everhart, 37 F.3d 151, 154-
55 (4th Cir. 1994) (relying on O’Melveny to hold that whether a
federal receiver timely filed a claim against the former
directors and officers of a failed financial institution was an
issue controlled by state law).
West Virginia law defines a proximate cause of an injury as
one “which, in natural and continuous sequence, produces
foreseeable injury and without which the injury would not have
occurred.” Hudnall v. Mate Creek Trucking, Inc., 490 S.E.2d 56,
61 (W. Va. 1997). Thus, the test requires both (1) “foreseeable
injury”; and (2) but-for causation. Id.Grant Thornton contends that the district court relied
solely on its negligence as a but-for cause of the damages
awarded, but failed to consider whether the resulting injury to
the Bank was in fact foreseeable. The record plainly rebuts
this contention as the district court applied the Hudnall two-
part test, and addressed at length the issue of foreseeability
in a separate sub-heading under causation in its written opinion
of March 14, 2007. The district court did not err in its
application of the legal standard for proximate cause.
12
B. Finding of Proximate Cause
The district court found that it was foreseeable to a
“reasonably prudent auditor” that an auditor’s negligent failure
to discover a Bank’s true losses and actual insolvency could
result in a continuation of those losses. (J.A. at 839.)
Grant Thornton’s negligence in failing to discover the
fraud at Keystone allowed that fraud to continue, and
the losses the FDIC seeks to recover are the
foreseeable result of that ongoing fraudulent scheme.
As Grant Thornton’s expert conceded, it is certainly
foreseeable from the standpoint of a reasonably
prudent auditor that the failure to discover fraud
will result in the continuation of the fraud.
(J.A. at 840.)
Consequently, the district court found that the Bank’s
post-audit net operating loss (operating expenses offset by
operating income) for the period from April 21, 1999 (2 business
days after the release of the audit) until September 1, 1999
(when Keystone was involuntarily closed by the OCC) were
proximately caused by Grant Thornton’s negligence. Grant
Thornton contends, however, that the Bank’s losses were not
proximately caused by the audit, but were the result of the
Bank’s longstanding “unprofitable securitizations and the
imbalance between the Bank’s income and its interest
obligations.” (Opening Br. for Grant Thornton at 24.) Because
the specific facts of this case distinguish it from the typical
13
case in which an audit is undertaken, we agree with the district
court.
We find it particularly significant in this case that Grant
Thornton was hired to perform the audit, not in the ordinary
course, but at the insistence of federal regulators who were
closely watching Keystone. And Grant Thornton was well aware
that factor was the reason behind its engagement. As the
district court explained: “The unique position that Keystone
was in at the time period in question - - with federal
regulators carefully watching the Bank’s actions and waiting for
assurances from the outside auditor that the Bank’s financial
statements were accurate - - distinguish this case from any of
the other cases relied upon by the parties . . . .” (J.A. at
843.)
A number of factual findings by the district court support
its ultimate finding of proximate causation based on
foreseeability. For example, there was evidence that:
(1) OCC told Grant Thornton in December 1998 that
Keystone had overstated its assets by about $90
million in three earlier quarterly reports;
(2) by January 1999, both Buenger and Quay testified
that the OCC informed them there was a “distinct
possibility” that the bank would fail if the problems
and weaknesses were not satisfactorily addressed and
resolved, which Buenger interpreted as a “high
probability” of failure (J.A. at 993-99);
14
(3) Buenger admitted that, prior to the audit report
being issued, Grant Thornton had characterized the
audit as a “highest maximum risk” audit, its highest
risk category (J.A. at 998); this risk category
required certain additional steps and tests be
conducted, some of which Buenger and Quay simply
failed to perform; and
(4) both Buenger and Quay “testified that their ‘fraud
antenna’ were up as high as they could get.” (J.A. at
770.)
These facts, among others, made it reasonably foreseeable to any
prudent auditor that a failure to perform the audit with due
care could result in the continued operation of a Bank that was
in fact woefully insolvent and hemorrhaging losses.
Additionally, as pointed out by the district court, the
damages awarded were all natural and foreseeable losses as a
result of Keystone’s continued operations. Although Grant
Thornton challenges, for example, the payment of interest on
deposits received before the audit began, it is because of their
recurring nature in the ordinary course of commerce that such
expenses were particularly foreseeable. (See J.A. at 845 (“It
was highly foreseeable that Keystone would continue to pay
interest expense on deposits, dividends, legal fees, consulting
fees, salaries, and other routine operating expenses.”).)
Again, we see no clear error in that finding.
Grant Thornton argues that affirming the finding of
proximate cause in the case at bar “effectively makes the
auditor an insurer for a bank’s future financial performance if
15
it fails to recognize that the bank should close” and “would
impose arbitrary and potentially breathtaking liability on
auditors.” (Opening Br. for Grant Thornton at 19.) It also
argues that affirmance will expose “auditors and others who
serve federally-insured institutions to potentially limitless
liability that is unbounded by ordinary principles of proximate
causation and proportionate fault” and will “discourage prudent
service providers from future dealings with federally-insured
institutions—particularly those most in need of audit services.”
(Id. at 18.)
Again, we disagree based on the particular and unique facts
of this case, primarily the specific context in which this audit
occurred. Given this context, we conclude that the district
court did not clearly err in finding both that the damages from
the continued operation of the Bank would not have occurred but
for Grant Thornton’s negligence and that they were a foreseeable
result of Grant Thornton’s negligence. Cf. Hudnall, 490 S.E.2d
at 61.
Grant Thornton’s dire predictions of unlimited liability
for auditors of insolvent banks also ignores the temporal scope
of the district court’s damage determination here. (Cf. Opening
Br. for Grant Thornton at 27 (referring to “crushing” and
“breathtaking” liability).) Notably, the district court did not
conclude that continued operating expenses for an unlimited
16
period of time would have been foreseeable. Rather, the damages
period here was for a reasonable — and foreseeable — period. 3 In
particular, the district court concluded that, had the audit
been performed properly instead of negligently, federal
regulators would have closed the Bank two days after an accurate
audit report had issued, or by April 21, 1999. The court
limited the damages to those incurred during the period between
this date and September 1, 1999, when the Bank actually closed.
Cf. Thabault v. Chait, 541 F.3d 512, 519-20 (3d Cir. 2008)
(upholding jury verdict of almost $120 million as proximately
caused by auditors’ negligent failure to discover insolvency of
insurance company where the damages represented the net cost of
continuing operations from the date of the audit to the date of
liquidation, a period of more than nineteen months).
We thus conclude that the district court’s finding of
proximate cause was not in error as its determination was
supported by the evidence before it and consistent with West
Virginia law.
3
At oral argument, the FDIC acknowledged that Grant
Thornton’s liability would not have extended indefinitely, but
instead could have been naturally limited by any subsequent
audit required to be conducted by federal regulators at regular
intervals.
17
C. Intervening and Superseding Cause
Grant Thornton’s final challenge to the district court’s
finding of proximate cause is that the actions of the Bank’s
management, post audit, constituted a superseding and
intervening cause that extinguished Grant Thornton’s liability
for damages. Grant Thornton points to evidence that Keystone’s
executives were aware that the Bank was insolvent, but continued
to recklessly operate Keystone and to hide its true financial
condition. For example, Bank executives convinced the OCC
examiners to allow the Bank to send confirmation requests to
Advanta and Compu-Link, rather than the OCC sending those
directly. The Bank’s management reworded the confirmation
letters to its loan servicers so as to request information on
loans owned not just by Keystone but also by United National
Bank. Management then attempted to intercept the responses to
assure the artifice was not detected.
West Virginia’s Supreme Court of Appeals (“WVSCA”) has
explained the defense of an intervening cause as follows:
The function of an intervening cause is that of
severing the causal connection between the original
improper action and the damages. Our law recognizes
that an intervening cause, in order to relieve a
person charged with negligence in connection with an
injury, must be a negligent act, or omission, which
constitutes a new effective cause and operates
independently of any other act, making it and it only,
the proximate cause of the injury.
18
Sydenstricker v. Mohan, 618 S.E.2d 561, 568 (W. Va. 2005)
(internal citations, quotation marks and brackets omitted).
The district court’s order contains a section titled
“Intervening and Superseding Cause” in which it discusses the
actions and knowledge of Keystone’s management after the audit.
(J.A. at 849-873.) However, the district court analyzes the
issue in terms of imputation and did not directly address the
precise argument raised by Grant Thornton, which is that the
actions of management need not be imputed to the FDIC to be a
“superseding cause,” 4 but instead that the actions of a non-party
may give rise to such a cause. (Opening Br. for Grant Thornton
at 36 (citing Sydenstricker, 618 S.E.2d at 568 (the defense of
intervening cause can be established based on evidence that
shows “the negligence of another party or a nonparty”)).)
We agree with the district court’s implicit holding that
the continued effort of the Bank’s management post audit to
conceal Keystone’s insolvency was not an intervening and
superseding cause under West Virginia law. See Ross v. Commc’ns
Satellite Corp., 759 F.2d 355, 363 (4th Cir. 1985) (“An
appellate court has power to determine independently whether
summary judgment may be upheld on an alternative ground where
4
The question of whether the district court correctly held
that the actions of Keystone’s management could not be imputed
to the FDIC is addressed in detail infra at Section III.
19
the basis chosen by the district court proves erroneous.”),
overruled on other grounds by Price Waterhouse v. Hopkins, 490
U.S. 228 (1989).
Our review of the West Virginia caselaw reveals the WVSCA
would not find the post-audit acts of Keystone’s management a
superseding or intervening cause. For example, in Yourtee v.
Hubbard, 474 S.E.2d 613 (W. Va. 1996), the plaintiff’s decedent
was killed while riding as a passenger in a stolen car, and the
owner of the car was being sued because he had negligently left
the car unattended with the keys in the car. Id. at 615. The
WVSCA upheld the trial court’s finding that the theft of the car
by plaintiff’s decedent and his friends and their subsequent
acts (which included driving at high rates of speeds in excess
of ninety miles per hour, losing control of the vehicle, and
running it into a brick wall) constituted an intervening cause
that broke the chain of causation and relieved the car owner of
liability. Id. at 615, 620-21.
Similarly, in Harbaugh v. Coffinbarger, 543 S.E.2d 338,
345-47 (W. Va. 2000), a decedent’s decision to play Russian
roulette was an intervening cause rendering it the only
proximate cause of the injury even though defendant had
negligently supplied the loaded gun. Federal courts applying
West Virginia law have reached similar results. See, e.g.,
Ashworth v. Albers Med., Inc., 410 F. Supp. 2d 471, 479-81
20
(S.D.W. Va. 2005) (concluding that a drug manufacturer was not
liable for injuries caused by alleged criminal acts of third
parties who introduced counterfeit versions of the
manufacturer’s drug into the stream of commerce).
In the foregoing cases, the two acts of negligence are
unconnected and unrelated; the one could not be reasonably
foreseen to be the result of the other. These cases reflect a
superseding or intervening cause because the event in question
was significantly independent from the initial negligence such
that the separate acts of negligence had only a tangential
relation to each other. By contrast, in the case at bar, the
continued fraudulent conduct by the Bank’s management was not
unforeseeable nor did it “operate independently” of the
established fact of Grant Thornton’s negligent audit. Cf.
Sydenstricker, 618 S.E.2d at 568.
As noted in discussing proximate cause, we find it
particularly significant that Grant Thornton was hired by
Keystone — as a requirement of the Bank’s agreement with the OCC
— in order to evaluate the Bank’s financial condition and that
Grant Thornton knew regulators and management would rely on a
clean audit report to allow the Bank to continue to operate.
Thus, Bank’s management’s use of the defective audit report to
continue to engage in fraudulent conduct and to stave off
regulators was facilitated by Grant Thornton’s negligence.
21
Indeed, but for the negligent audit report, the management
conduct posited by Grant Thornton could not have happened. In
this sense, the post-audit actions by Bank’s management are not
a “new effective cause” and did not “operate[] independently” of
Grant Thornton’s negligence and thus do not constitute a
superseding cause of the Bank’s damages. See Sydenstricker, 618
S.E.2d at 568; see also Wehner v. Weinstein, 444 S.E.2d 27, 32-
33 (W. Va. 1994).
We thus find no error in the district court’s determination
that Grant Thornton’s liability for its negligence was not
absolved by a later intervening and superseding cause.
III. Imputation
Grant Thornton next contends that the district court erred
by prohibiting it from offering certain claims or defenses,
specifically (1) comparative/contributory negligence; (2) in
pari delicto; and (3) "similar doctrines." (Opening Br. for
Grant Thornton at 20.) Relying in large part on the decision of
the WVSCA in Cordial v. Ernst & Young, 483 S.E.2d 248 (W. Va.
1996), the district court held that Grant Thornton was barred
from asserting these or similar claims or defenses that involved
the imputation of the knowledge or actions of Keystone’s
management to the FDIC. Consequently, the court granted the
FDIC’s motion to dismiss the affirmative defenses asserted by
22
Grant Thornton, and dismissed related counts of Grant Thornton’s
third party complaint. We review de novo a district court’s
decision to strike a defendant’s affirmative defenses or dismiss
a defendant’s counterclaims. Cf. Murray v. United States, 215
F.3d 460, 463 (4th Cir. 2000) (conclusions of law are reviewed
de novo).
As an initial matter, we note that state law controls what
defenses are available against the FDIC when the agency is
acting as the receiver of a failed financial institution. See
supra at Section II.A (citing O’Melveny & Myers, 512 U.S. at 89;
and Resolution Trust Corp., 37 F.3d at 154-55). Accordingly,
the FDIC simply “‘steps into the shoes’ of the failed” financial
institution and is then subject to whatever defenses state law
provides. O’Melveny, 512 U.S. at 86-87 (citation omitted).
Accordingly, West Virginia law governs the issue of whether the
knowledge or conduct of the Bank’s management can be imputed to
the FDIC here.
Although the parties have not cited to any West Virginia
cases directly addressing whether the actions of a bank’s
management can be imputed to the FDIC as receiver, two WVSCA
decisions offer guidance in predicting how that court would rule
on this issue. Because those cases point to seemingly
conflicting conclusions, we examine them in some detail.
23
The first case, Wheeling Dollar Sav. & Trust Co. v.
Hoffman, 35 S.E.2d 84 (W. Va. 1945), involved an insurance
company and a loan association, both of which had been placed in
receivership. See id. at 86. The insurance-company receiver
sued the loan-association receiver. As a defense, the loan-
association receiver asserted fraud and the doctrine of unclean
hands, predicated on facts showing that (1) the insurance
company and loan association were run by the same secretary-
treasurer, id. at 87, and (2) “the whole system of accounts
between the[] corporations and the official reports made on
their behalf seem[ed] to be permeated with deliberate fraud.”
Id. at 88.
Because the two company’s accounts were “created and
preserved by the common manager,” the WVSCA held that the whole
system of fraudulent accounts was “chargeable to the officers
and directors of each [company], either through actual knowledge
or the gross ignorance or neglect of their official duties, and,
hence, to the corporations themselves.” Id. The WVSCA further
held that the knowledge and/or negligence of the corporations
was chargeable to their receivers, as “[t]he rights of the
respective receivers rise no higher than those of the
corporations which they represent.” Id. Accordingly, the WVSCA
applied the doctrine of unclean hands and based on the “high
probability of fraud in the whole subject of th[e] litigation
24
. . . refuse[d] [to] consider[] . . . the plaintiff’s bill.”
Id. at 89.
Wheeling Dollar thus favors Grant Thornton’s position in
the present case. It is not, however, the WVSCA’s most recent
holding regarding the defenses available against a government
entity serving as the receiver of a failed financial
institution.
In Cordial v. Ernst & Young, 483 S.E.2d 248 (W. Va. 1996),
the accounting firm Ernst & Young was hired by both Blue Cross
and Blue Shield (“BCBS”) and the West Virginia Commissioner of
Insurance (“the Commissioner”) to perform external audits of
BCBS’s accounts. See id. at 251-52. The Commissioner later
placed BCBS into receivership, see id. at 255, and filed suit
against Ernst & Young alleging various causes of action
including negligence, breach of fiduciary duty, breach of
contract, and fraud. Id.Citing Wheeling Dollar, Ernst & Young argued that the
Commissioner acting as receiver could “assert only those claims
that [BCBS] could itself have brought.” Id. at 256 & 257 n.9.
For several reasons, the WVSCA disagreed. First, the court
cited a prior case in which it recognized the Commissioner
acting as “‘[r]eceiver is a government official charged with
authority to protect not only the shareholders of the
corporation, but also policyholders, creditors and the public.’”
25
Id. at 257 (quoting Clark v. Milam, 452 S.E. 2d 714, 720 (W. Va.
1994)). In other words, “[r]ather than being deemed to solely
represent the interests of the corporation, the Insurance
Commissioner as [r]eceiver represents a broad array of
interests, including those of the public.” Id. (quotation and
emphasis omitted).
Second, the WVSCA relied on the reasoning of the United
States District Court for the Northern District of Illinois in a
federal case involving a suit brought by a financial institution
receiver “against accountants for an improper audit.” Id.(citing Resolution Trust Corp. v. KPMG Peat Marwick, 845 F.
Supp. 621 (N.D. Ill. 1994)). The WVSCA agreed with the Illinois
district court that “‘[p]ublic policy concerns mandate a finding
that the duty of FDIC to collect on assets of a failed
institution runs to the public and not to the former officers
and directors of the failed institution,’” and that “‘it is the
public which is the intended beneficiary of FSLIC, just as it is
the public which is the beneficiary of the common law duty
imposed upon officers and directors to manage properly the
institutions entrusted to their case.’” Id. (quoting KPMG Peat
Marwick, 845 F. Supp. at 623) (additional citations omitted).
Third, the WVSCA cited West Virginia’s “comprehensive
scheme of insurance regulation” as evidence of a “broad public
interest in the sound administration of insurance firms.” Id.26
The Commissioner, as receiver, thus “carr[ies] out a duty that
runs to the public in pursuing the claims of policyholders,
creditors, shareholders or the public.” Id. (internal quotation
marks omitted). Accordingly, the Commissioner “acts as the
representative of interested parties, such as the defunct
insurer, its policyholders, creditors, shareholders, and other
affected members of the public” and “has standing . . . to bring
an action . . . to vindicate the rights of such interested
parties.” Id.Critically, at the end of this discussion, the WVSCA
inserted a footnote addressing Ernst & Young’s claim under
Wheeling Dollar that “[t]he rights of the respective receivers
rise no higher than those of the corporations which they
represent.” Id. at 257 n.9 (quotation marks omitted). This
contention formed part of Ernst & Young’s greater argument that
because BCBS’s “managers indisputably knew what its financial
condition was, . . . they could not bring a valid claim against
E&Y for failure to disclose such.” Id.The Cordial Court rejected this proposition on two grounds.
First, the court explained “that Wheeling Dollar was decided
prior to the adoption” of West Virginia’s comprehensive
insurance regulatory scheme. Id. “Consequently, [the case was
not] relevant to the issues at bar.” Id. “Moreover,” the court
explained, “since [the] Commissioner, acting as receiver, is
27
vindicating the rights of the public, including the Blue Cross
creditors, policyholders, providers, members, and subscribers,
[there was] no merit in this contention.” Id. (emphasis added).
Footnote 9 of the Cordial opinion thus indicates that the
WVSCA would not limit the Commissioner, as receiver, only to the
rights of the represented corporation because he also serves to
“vindicat[e] the rights of the public.” Id. It also suggests
that Wheeling Dollar is no longer good law, at least in the
context of government receiverships. Furthermore, in
formulating the controlling public policy involved, the WVSCA
heavily relied on — and favorably referred to — KPMG Peat
Marwick, which applied similar logic to the FDIC in a suit
against auditors. We see no principled difference between the
Commissioner’s role as receiver in Cordial and that of the FDIC
in the case at bar. We therefore find no error in the district
court’s decision not to allow Grant Thornton’s affirmative
defenses of in pari delicto, comparative negligence, or other
defenses or claims that relied on imputation of the Bank’s
management to the FDIC.
IV. Settlement Credit
Based on the FDIC’s settlement of its claims against Kutak,
the district court awarded a percentage of the settlement amount
as a settlement credit to Grant Thornton. On appeal, Grant
28
Thornton posits two challenges to the calculation of the
credit. First, Grant Thornton contends it was entitled to a $22
million setoff based on a computation in the Kutak proceeding.
In the alternative, Grant Thornton argues that the district
court improperly calculated the settlement credit by basing it
only on amounts actually received by the FDIC, and instead
should have based the credit on the face value of the Kutak
settlement. We address each argument in turn after some
additional factual background.
Before trial, Grant Thornton sought leave to file a
contribution claim against the Bank’s outside counsel, Kutak.
The district court held that the FDIC’s settlement with Kutak
over Kutak’s liability in Keystone’s failure extinguished Grant
Thornton’s contribution claim. However, the court noted that
Grant Thornton might be entitled to a settlement credit to be
resolved in a later proceeding. After trial, the district court
delayed entry of judgment against Grant Thornton and held a
hearing to determine the amount of any settlement credit.
As described by the district court, the Kutak settlement
agreement provided that Kutak’s primary insurer, Executive Risk
Indemnity, Inc., would immediately pay the FDIC the remaining
policy limits of $8 million. Kutak also signed a $4 million
promissory note bearing 3% interest, to be paid in installments.
The settlement agreement further provided that Kutak and the
29
FDIC would cooperate in pursuing a $10 million claim on Kutak’s
excess insurance policy with Reliance Insurance Company, which
was in receivership. If the FDIC received less than $8 million
from Reliance, then Kutak would make up a portion of the
shortfall according to a formula set forth in a second
promissory note. The maximum amount that Kutak would be
required to pay under this second promissory note was
$2,750,000.
Before the district court, Grant Thornton argued it was
entitled to a credit of $22 million, the full face amount of the
Kutak settlement agreement ($8 million plus $4 million plus $10
million) because: (1) Kutak was jointly responsible for the
operating losses for which Grant Thornton had been held liable
and (2) the settlement agreement did not allocate the proceeds
among joint and alleged non-joint claims. The FDIC took the
initial position that Grant Thornton was due no settlement
credit because the FDIC had planned to sue Kutak only for
damages associated with Keystone’s securitizations, a matter for
which Grant Thornton was not liable. The FDIC later admitted
that there was some overlap between the damages against Kutak
and against Grant Thornton, but argued that, if a settlement
credit was due, the amount should be based on the amount
actually recovered from Kutak, rather than the full face value
of the agreed settlement amount.
30
The district court ruled that: (1) Kutak was responsible
for $292,899,625 in damages to the FDIC, including the
$25,080,777 of post-audit net operating losses for which it was
jointly liable with Grant Thornton; and (2) in determining the
credit due Grant Thornton, the FDIC/Kutak settlement should be
allocated proportionally by dividing the $292,899,685 amount by
the $25,080,777 figure, yielding a 8.563% settlement credit
ratio. Put differently, the district court ruled that the
overlapping damages — the indivisible loss — accounted for only
8.563% of the total damages caused by Kutak.
Using this formula, the district court then calculated the
settlement credit based upon the funds actually received by the
FDIC from Kutak. These funds included what the FDIC was
“guaranteed” to receive from the primary insurer and Kutak’s
promissory notes (a total calculated at $15,692,521), rather
than the higher stipulated settlement amount of $22 million.
The settlement credit was thus determined to be $1,343,750.57
(8.563% of $15,692,521). The district court also held that
Grant Thornton should receive an additional credit equal to
8.563% of any additional future payments made by Kutak to the
FDIC under the settlement agreement.
31
A.
Grant Thornton first contends that West Virginia law
requires a setoff equal to the full face amount in the
settlement agreement between FDIC and Kutak, $22 million. The
accounting firm argues that West Virginia law and Section 4 of
the Uniform Contribution Among Tortfeasors Act (“UCATA”), which
Grant Thornton contends has been adopted by court decision in
West Virginia, require it. 5 Further, Grant Thornton makes
several policy arguments as to why West Virginia’s rules
governing partial settlements in multi-party cases “can be
meaningfully applied only if the allocation is included in the
settlement agreement.” (Opening Br. for Grant Thornton at 47.)
Lastly, Grant Thornton argues that hearings on “allocation” of
damages, such as occurred here, encourage protracted legal
5
Section 4 of UCATA provides:
When a release or a covenant not to sue or not to
enforce judgment is given in good faith to one of two
or more persons liable in tort for the same injury .
. . [i]t does not discharge any of the other
tortfeasors from liability for the injury . . . .; but
it reduces the claim against the others to the extent
of any amount stipulated by the release or the
covenant, or in the amount of the consideration paid
for it, whichever is the greater.
Bd. of Educ. of McDowell Cnty. v. Zando, Martin & Milstead,
Inc., 390 S.E.2d 796, 803 n.6 (W. Va. 1990) (“Zando”) (quoting
12 U.L.A. at 98 (1975)) (emphasis added). As described by the
WVSCA in Zando, this results in a “pro tanto, or dollar-for-
dollar, credit for partial settlements against any verdict
ultimately rendered for the plaintiff.” Id. at 805.
32
proceedings and are inherently unfair, since the settling party
is not involved in the proceedings and the non-settling party is
not in as good a position to contest the plaintiff’s claims
against the settling party. Grant Thornton thus argues that
where a settlement (like that between the FDIC and Kutak) covers
both joint and non-joint liabilities and does not allocate among
joint and non-joint claims, “the nonsettling party is entitled
to a credit equaling the entire settlement amount.” (Opening
Br. for Grant Thornton at 49 (quoting Cohen v. Arthur Andersen
LLP, 106 S.W.3d 304, 310 (Tex. Ct. App. 2003)).)
We agree with the district court that the determination of
setoff is a complex question and that Grant Thornton’s simple
solution of deducting the $22 million face settlement amount
from the verdict against it, while “appealing for its simplicity
of application,” is “simple, neat, and wrong.” (J.A. at 958.)
Under West Virginia law, the threshold question of whether
or not Grant Thornton is entitled to any settlement credit is
based on whether the loss is a single, indivisible loss. See
Biro v. Fairmont Gen. Hosp., Inc., 400 S.E.2d 893, 896 (W. Va.
1990) (“In order to permit a verdict reduction reflecting a
prior settlement, Zando held that there must be a ‘single
indivisible loss arising from the actions of multiple parties
who have contributed to the loss.’”) (citation omitted). Where
there is an indivisible injury, then a setoff is appropriate.
33
See id. at 896. But if there are divisible injuries causing
loss, then no setoff will be allowed. Cf. id. at 897(concluding that an injury from negligently performed surgery
was divisible from injuries from a fall in the hospital while
recovering from that surgery and thus no offset was warranted).
But in the case at bar we have a partial overlap of the
damages contemplated in the FDIC’s settlement agreement with
Kutak and the damages found to have been caused by Grant
Thornton. That is, the total damages sought against Kutak by
the FDIC included the full $25 million of the Bank’s post-audit
net operating loss for which Grant Thornton was also found
responsible. Thus, that overlapping portion of the damages
related to the operating loss is indivisible, and a setoff is
appropriate. Zando, 390 S.E.2d at 809 (“a single indivisible
loss arising from the actions of multiple parties” entitles the
nonsettling defendant to a reduction).
We agree with the district court, however, that “the FDIC’s
claims against Kutak for the $25 million in damages for which
Grant Thornton has been found liable are divisible” from the
FDIC’s claim for damages against Kutak for the remaining losses
to the Bank because “one person [Kutak] caused all of the
damages and another person [Grant Thornton] caused only part of
the damages.” (J.A. at 955.) See Restatement (Third) of Torts
§ 26 cmt. f (2000) (“[d]ivisible damages can occur . . . when
34
one person caused all of the damages and another person caused
only part of the damages.”). Simply giving Grant Thornton a
credit equal to the $22 million FDIC settlement with Kutak
requires an assumption that the entire amount of the Kutak
settlement was meant to pay for net operating expenses after
April 21, 1999, an assumption not supported by the record or
logic. Indeed, as found by the district court, Kutak’s
involvement was for a much longer period of time than Grant
Thornton and resulted in damages not attributable to Grant
Thornton at all (such as damages incurred as a result of the
failed securitization programs). While the FDIC and Kutak did
not allocate specific damages in the settlement agreement, to
give Grant Thornton the full $22 million credit would not be in
accord with the principles set out by the WVSCA in Zando,
governing verdict credits for nonsettling defendants. 6
6
In making the allocation determination, the district court
emphasized that it was attempting to adhere to the principle
expressed in Zando that “a plaintiff is entitled to one, but
only one, complete satisfaction for his injury.” 390 S.E.2d at
803. The court also discussed favorably the Supreme Court of
Virginia’s decision in Tazewell Oil Co., Inc. v. United Va.
Bank, 413 S.E.2d 611 (Va. 1992), in which a plaintiff sued three
banks for various acts of creditor misconduct resulting in
various harms to the plaintiff. Id. at 617. After settling
with two banks, plaintiff obtained a jury verdict against the
third bank, and the trial court allowed a credit against the
verdict for the full amount of the settlements. Id. The Supreme
Court of Virginia reversed, remanding for an allocation among
the multiple injuries and instructing that “the court must look
at the injury or damage covered by the release and, if more than
(Continued)
35
In short, we find no error in the district court’s approach
in allocating the damages between Kutak and Grant Thornton or in
its conclusion that only a portion of those damages overlapped
and were indivisible. Accordingly, we affirm the district
court’s decision that Grant Thornton is not entitled to a full
$22 million reduction, but only to a portion of that amount. As
to the amount of damages attributed by the district court to
Kutak, (i.e., its arrival at the $292 million figure and the
resulting 8.563% calculation), those findings are reviewed only
for clear error. We cannot say based on the record before this
Court that these findings were “clearly erroneous.”
B.
Grant Thornton alternatively contends that the district
court separately erred in basing the settlement credit on the
amounts actually recovered by the FDIC, rather than on the
stipulated amount in the settlement agreement. Put differently,
Grant Thornton argues that even if the 8.563% credit ratio is
correct, the amount of the credit should have been 8.563% of $22
million (the full amount of the stipulated agreement), rather
than 8.563% of $15,692,521 (the amount the district court
a single injury, allocate, if possible, the appropriate amount
of compensation for each injury.” Id. at 622.
36
described as money the FDIC had received to date “plus
additional guaranteed recovery” (J.A. at 971)).
Neither party has pointed to a case from West Virginia
where the agreed settlement amount and the amount actually paid
or recovered from that settlement differed, and it does not
appear that the issue has been directly addressed by any West
Virginia published decision. In Hardin v. New York Central
Railroad Co, 116 S.E.2d 697 (W. Va. 1960), the WVSCA stated the
rule as: “[I]f one joint tort-feasor makes a settlement with
the plaintiff the amount of the settlement, if presented
properly during the trial or after the trial, should be deducted
either by the jury or by a court.” Id. at 701 (emphasis added).
This language supports Grant Thornton’s position that it is the
amount of the agreed settlement that governs. However, there is
somewhat contradictory language in Tennant v. Craig, 195 S.E.2d
727 (W. Va. 1973), which instructs that “[w]here a payment is
made, and release obtained, by one joint tort-feasor, other
joint tort-feasors shall be given credit for the amount of such
payment in the satisfaction of the wrong.” Id. at 730 (emphasis
added); see also Savage v. Booth, 468 S.E.2d 318, 323 (W. Va.
1996) (citing Zando for the proposition that the non-settling
joint tortfeasor is “entitled to receive credit for the
settlement amount paid”).
37
Because there was no discrepancy between the face value of
the settlement and the amount of the settlement payment in
Zando, Tennant, or Hardin, we are left as a federal court
seeking to apply state law to forecast how the WVSCA would
determine the issue. See Ellis, 530 F.3d at 287 (in case
governed by state law, if the state’s highest court “has spoken
neither directly nor indirectly on the particular issue before
us, we are called upon to predict how that court would rule if
presented with the issue”) (citation omitted).
We conclude that the best indication of how the WVSCA would
resolve this issue is set forth in Zando by virtue of the
approval of both UCATA Section 4 and citation to Tommy’s Elbow
Room, Inc. v. Kavorkian, 754 P.2d 243 (Alaska 1988). See Zando,
390 S.E.2d at 805 (West Virginia’s “practice with regard to
verdict reduction basically comports with Section 4 of the
UCATA”).
Based on the WVSCA’s statement that its practice “basically
comports” with UCATA Section 4, id., we predict that court would
adopt the language of the uniform act, including that the
settlement credit to the nonsettling defendant is the amount
“stipulated by the release or the covenant, or . . . the amount
of the consideration paid for it, whichever is the greater.”
Cf. 12 U.LA. at 98 (1975), quoted in Zando, 390 S.E.2d at 803.
This conclusion is bolstered by the WVSCA’s statement in Zando
38
after discussing UCATA Section 4 “to have the verdict reduced by
the amount of any good faith settlements previously made with
the plaintiff by other jointly liable parties.” Id. at 806.
The plain language of UCATA Section 4 directs that the
settlement credit should be based on the amount stipulated by
the release with the settling defendant, if that is greater than
the amount paid. Applying that provision here, the setoff
should have been calculated based on the face amount of the
settlement, $22 million.
Similarly, Tommy’s Elbow Room interpreted the same
language, which had been adopted by statute in Alaska. 754 P.2d
at 244-45 (citing Alaska Stat. § 09.16.040(1)). Indeed, the
issue in Tommy’s Elbow Room was whether a nonsettling
defendant’s liability should be reduced by the face amount
stipulated in the settlement agreement or by the amount paid.
Id. The Alaska Supreme Court concluded that the proper amount
for the setoff was the (likely) higher settlement amount, rather
than the amount actually recovered in settlement. Id. at 246-
47.
The district court here noted that other jurisdictions had
criticized that rule, as adopted in Tommy’s Elbow Room, and
concluded that the WVSCA would not follow it, either. However,
we find Zando’s favorable reference both to Tommy’s Elbow Room
and to UCATA § 4 to be the better indicators of how the WVSCA
39
would rule. Accordingly, we predict that the WVSCA would apply
the plain language of UCATA Section 4, just as the Tommy’s Elbow
Room court did, and would base the setoff amount here on the
face value of the settlement. 7 Thus, the proper settlement
credit here should be 8.563% of $22 million, or $1,883,860.
Thus, the final judgment against Grant Thornton, adjusted for
the proper settlement credit, should have been $23,196,917
($25,087,777 minus $1,883,860), not $23,737,026.43.
V. Prejudgment Interest
The district court denied the FDIC’s request for an award
of prejudgment interest on the judgment amount owed by Grant
Thornton. It first examined the federal statute, 12 U.S.C.
§ 1821(l), which authorizes the award of interest in a bank
receivership proceeding:
In any proceeding related to any claim against an
insured depository institution’s director, officer,
employee, agent, attorney, accountant, appraiser, or
7
We understand the criticism of this rule, which may make
it more difficult for a plaintiff to obtain a complete
satisfaction. However, the same competing policy issues would
have been evident to the WVSCA when it discussed UCATA § 4 in
Zando. We further note, as did the Tommy’s Elbow Room court,
that any time a plaintiff settles a claim, the plaintiff assumes
the risk that some amount of the settlement will not be
recoverable. 754 P.2d at 245. The fact that it ultimately is
not recoverable and that the non-recovery works to the detriment
of the plaintiff, is the result of the plaintiff’s own bargain
in agreeing to the settlement amount and its terms of payment.
40
any other party employed by or providing services to
an insured depository institution, recoverable damages
determined to result from the improvident or otherwise
improper use or investment of any insured depository
institution’s assets shall include principal losses
and appropriate interest.
12 U.S.C. § 1821(l) (emphasis added). 8 The district court
concluded that the award of prejudgment interest was not
appropriate because, under applicable West Virginia law, W. Va.
Code § 56-6-31, “the court does not believe that the damages the
FDIC seeks to recover are ‘special or liquidated damages’”
warranting prejudgment interest. (J.A. at 886.) The FDIC
contends in its cross-appeal that this determination was error. 9
The FDIC essentially argues that the statutory language
“recoverable damages . . . shall include principal losses and
appropriate interest” means that prejudgment interest must be
awarded in all cases; it is never discretionary. Conversely,
Grant Thornton argues that the district court correctly
8
The district court did not address the question under
§ 1821(l) of whether the damages at issue here resulted from an
“improvident or otherwise improper use of . . . [Keystone’s]
assets.” Instead, the court assumed, without deciding, that
this condition was satisfied. In light of our conclusion that
the district court properly concluded that prejudgment interest
was inappropriate in the case at bar, we too assume, without
deciding, the damages satisfy this condition.
9
The parties appear to agree that the district court’s
decision as to whether to award prejudgment interest is reviewed
for abuse of discretion. (See Principal Br. for FDIC at 64;
Response/Reply Br. for Grant Thornton at 48-49 (citing Moore
Bros. Co. v. Brown & Root, Inc., 207 F.3d 717, 727 (4th Cir.
2000)).)
41
interpreted § 1821(l) to mean that “if prejudgment interest is
available under West Virginia law in a case of this nature, the
court may award prejudgment interest.” (Cf. J.A. at 884.)
There is a dearth of case law applying this statute, and
none of the cases that reference the provision expressly address
the arguments raised by the parties here. See, e.g., Fed.
Deposit Ins. Corp. v. Mijalis, 15 F.3d 1314, 1326-27 (5th Cir.
1994) (in case where the parties disputed only the rate of
interest, court seemingly interpreted “appropriate interest” as
meaning the “appropriate rate of interest,” but declined to
address the propriety of the interest awarded because defendants
did not properly preserve the issue); Fed. Deposit Ins. Corp. v.
UMIC, Inc., 136 F.3d 1375, 1385 (10th Cir. 1998) (prejudgment
interest could not be awarded under this section because the
conduct upon which the judgment was based occurred before the
enactment of Section 1821(l)). Likewise, we have not found any
cases specifically discussing whether similarly-worded
provisions require the award of prejudgment interest in all
cases or simply allow it in appropriate cases. See, e.g., 12
U.S.C. § 1787(i) (“recoverable damages . . . shall include
principal losses and appropriate interest”); 12 U.S.C. § 4617(h)
(same); 12 U.S.C. § 5390(g) (same).
In construing the statute, we must give the words therein
their ordinary meaning. United States v. Abdelshafi, 592 F.3d
42602, 607 (4th Cir. 2010) (statutory interpretation requires that
the court “strive to implement congressional intent by examining
the plain language of the statute” and to give a statute its
“plain meaning,” which in turn is “determined by reference to
its words’ . . . ‘ordinary, contemporary, [and] common
meaning’”) (citations omitted).
As an initial matter, we note that nothing in § 1821(l)
refers to prejudgment interest, but simply to “appropriate
interest.” The FDIC argues that to interpret “interest” as
referring only to post-judgment interest would render the
language superfluous, since there is already a statute providing
for the award of post-judgment interest to all successful
plaintiffs in civil cases, 28 U.S.C. § 1961(a)). On this basis,
we conclude that the reference to “appropriate interest” in
§ 1821(l) may include both postjudgment and prejudgment
interest. See Comeau v. Rupp, 810 F. Supp. 1172, 1180-81 (D.
Kan. 1992).
However, the mere fact that “appropriate interest” could
include both prejudgment and post-judgment interest, does not
lead to the conclusion that the statute mandates prejudgment
interest must always be awarded. See id. at 1180(“Notwithstanding the authority to award prejudgment interest
under [the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183,
43
(“FIRREA”)],” the court will still have to decide “the
appropriateness of such an award.”).
Unsurprisingly, the parties offer competing interpretations
for this dilemma, but both essentially add language to the
statute in doing so. The FDIC’s interpretation of “appropriate
interest” is “an appropriate rate of interest” or “an
appropriate amount of interest.” Grant Thornton’s
interpretation is that “appropriate interest” means “interest,
if appropriate” or “interest, in an appropriate case” or
“interest, if otherwise appropriate.” We conclude that Grant
Thornton has the better argument and its interpretation is the
most harmonious with a natural reading of the statute. See 62
Cases, More or Less, Each Containing Six Jars of Jam v. United
States, 340 U.S. 593, 596 (1951) (“[O]ur problem is to construe
what Congress has written. After all, Congress expresses its
purpose by words. It is for us to ascertain—neither to add nor
to subtract, neither to delete nor to distort.”).
First, the common dictionary definition of “appropriate”
more easily comports with Grant Thornton’s interpretation. Most
often, “appropriate” means “specially suitable: fit, [or]
proper.” Webster’s Third New Int’l Dictionary 106 (1961). We
could easily substitute those definitional words for
“appropriate” and the statute would continue to mean what Grant
Thornton and the district court interpreted it to mean. That
44
is, “damages shall include ‘specially suitable’ interest” or
“‘fitting’ interest” or “‘proper’ interest.” By contrast, to
interpret “appropriate” as specifically referring only to the
rate or amount of interest would require additional words with a
different substantive meaning being written into the statute.
Second, the FDIC hinges its argument primarily on the fact
that the statute contains the word “shall,” a mandatory and not
permissive term. (See Principal Br. for FDIC at 62 (citing
United States v. Monsanto, 491 U.S. 600, 607 (1989)).) But
while Congress used the language “shall,” it also included the
word “appropriate” for a purpose. Nothing in the statute
suggests that “appropriate” refers to a rate or amount of
interest. Indeed, other statutes providing that interest shall
be an element of damages do not include the limitation
“appropriate.” See, e.g., 28 U.S.C. § 1961(a) (stating that
postjudgment interest “shall be allowed on money judgment in a
civil case recovered in a district court” and specifying in
detail how interest is to be calculated); 7 U.S.C. § 2564 (in
infringement of plant variety protection, the court “shall award
damages adequate to compensate for the infringement but in no
event less than a reasonable royalty for the use made of the
variety by the infringer, together with interest and costs as
fixed by the court”).
45
Notably, moreover, a statutory review makes clear that
Congress knows how to specify rates of interest or to refer to
certain factors in setting interest when it chooses to do so.
See, e.g., 42 U.S.C. § 9607(a)(4) (setting forth damages in
CERCLA cases and explaining what damages the interest applies
to, the dates of accrual and referring to specific rates of
interest); 15 U.S.C. § 15 (in antitrust actions, instructing
“[t]he court may award . . . simple interest on actual damages,”
describing prejudgment interest period, and allowing such an
award “if the court finds that the award of such interest for
such period is just in the circumstances”). In those statutes,
Congress did not simply say that an “appropriate” rate should be
used, but instead gave specific particulars about the rate, the
time period for interest, and/or or how to calculate it. In
contrast, no such directions appear in § 1821(l).
For these reasons, we find the word “appropriate” is best
read as a limitation as to when prejudgment interest should be
provided, not as a reference to any particular “rate” or amount
of interest nor that its award is mandated in all cases. Thus,
we conclude that the award of prejudgment interest under §
1821(l) is discretionary, i.e., that it need only be awarded if
appropriate.
The FDIC next contends that, even if we adopt Grant
Thornton’s interpretation of the statute, the district court
46
nonetheless abused its discretion in denying interest because it
looked solely to West Virginia law to determine whether interest
was appropriate in this case. For support, the FDIC cites to
United States v. Dollar Rent A Car Systems, Inc., 712 F.2d 938(4th Cir. 1983) (“Dollar”).
The FDIC’s reliance on Dollar is misplaced. In Dollar,
this Court concluded that the district court abused its
discretion when it awarded prejudgment interest and considered
itself bound by the lower rate established by state law. Id. at
941. This was an abuse of discretion because federal law, not
state law, governed that case and federal law in fact granted
discretion to award a higher rate. Id. Dollar does not stand
for the general proposition, as cited by the FDIC, that a
district court abuses its discretion when it analyzes whether
interest is warranted under state law.
The district court’s analysis here suggests that it
interpreted the language as meaning that it would award interest
if appropriate under West Virginia law. Although the court’s
opinion does not explicitly state that it was constrained by
West Virginia law, it analyzed the issue under West Virginia law
and concluded as follows:
Even assuming that the FDIC is entitled to
prejudgment interest under FIRREA, the court does not
believe that the damages the FDIC seeks to recover are
“special or liquidated damages” within the meaning of
W. Va. Code § 56-6-31. Accordingly, the FDIC’s
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request for an award of prejudgment interest is
denied.
(J.A. at 886; see also id. at 885-86 (concluding that the
damages here were neither special nor liquidated damages).)
The district court’s reference to state law here was not an
abuse of discretion. Particularly in view of our earlier
discussion of O’Melveny & Myers, where the Supreme Court held
the FDIC in FIRREA cases was to “work out its claims under state
law,” 512 U.S. at 87, the district court correctly looked to the
applicable state law in order to determine whether prejudgment
interest was “appropriate” in this case. See United States v.
Am. Mfrs. Mut. Cas. Co., 901 F.2d 370, 372-73 (4th Cir. 1990)
(in the absence of “explicit standards for the allowance of pre-
judgment interest,” federal statutes are “treated as
incorporating the applicable state law on [the] issue”);
Quesinberry v. Life Ins. Co. of N. Am., 987 F.2d 1017, 1030 (4th
Cir. 1993) (“absent a statutory mandate the award of pre-
judgment interest is discretionary with the trial court”).
Moreover, we find no abuse of discretion in the district
court’s determination that prejudgment interest here was not
warranted. Although the court ultimately arrived at a damages
award, until it did so, it was impossible for Grant Thornton to
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know how much it owed. 10 See Lockard v. City of Salem, 43 S.E.2d
239, 243 (W. Va. 1947) (“interest is denied when the demand is
unliquidated for the reason that the person liable does not know
what sum he owed and therefore cannot be in default for not
paying.”) (citation and quotation marks omitted); Bond v. City
of Huntington, 276 S.E.2d 539, 550 (W. Va. 1981) (prejudgment
interest applies where case involves “only pecuniary losses that
are subject to reasonable calculation that exist at the time of
the trial”).
Similarly, under federal law, courts may deny prejudgment
interest where “a legitimate controversy existed” regarding the
amounts ultimately deemed to be owed. Moore Bros., 207 F.3d at
727. Instead, the court must “weigh the equities in a
particular case to determine whether an award of prejudgment
interest is appropriate.” Id.
In short, we find no error in the district court’s denial
of prejudgment interest.
10
In addition to numerous disagreements at trial regarding
a proper measure of damages, here a special separate hearing was
held after the trial to determine the Kutak setoff amount, if
any. Until that hearing was held and the district court issued
its ruling, Grant Thornton could not know what amount it owed.
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VI. Conclusion
For the foregoing reasons, we affirm the district court’s
judgment in all respects except the amount of the settlement
credit. As to that issue, we reverse and remand for further
proceedings consistent with this opinion.
AFFIRMED IN PART AND
REVERSED AND REMANDED IN PART
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