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America West Bank Members v. State

United States District Court, D. Utah

February 5, 2018

THE STATE OF UTAH, acting through the UTAH DEPARTMENT OF FINANCIAL INSTITUTIONS, and G. EDWARD LEARY, an individual, Defendants.


          Clark Waddoups United States District Judge


         Plaintiff America West Bank Members, L.C. (AWBM) filed this action against the State of Utah, Utah Department of Financial Institutions (UDIF), and UDIF Commissioner G. Edward Leary (collectively, Defendants) challenging the UDIF's seizure of a bank wholly owned by AWBM. (See generally Am. Compl., ECF No. 2-1.) Defendants have moved the court to dismiss all of AWBM's claims on several grounds, including statutes of limitation, qualified immunity, and failure to state a claim. (See Mot. to Dismiss, ECF No. 10.) AWBM opposed the motion, (see Opp'n, ECF No. 16), and Defendants replied in support, (see Reply, ECF No. 21).

         On January 25, 2017, the court held a hearing on the motion and allowed supplemental briefing as the parties' deemed necessary. (See ECF No. 25.) Shortly thereafter, the court requested supplemental briefing addressing the effect of White v. Pauly, 137 S.Ct. 548 (2017) (per curiam), and Garcia v. Escalante, 678 F. App'x 649 (10th Cir. 2017) (unpublished), on the court's analysis of Commissioner Leary's qualified immunity defense. (ECF No. 26.) The parties submitted supplemental briefing on qualified immunity, and the court took the motion under advisement. (See ECF Nos. 25-28.)

         Upon consideration of the original and supplemental briefing, the parties' oral arguments, the case record, and relevant legal authorities, the court GRANTS IN PART and DENIES IN PART Defendants' Motion to Dismiss, (ECF No. 10). As further detailed in the analysis that follows, the court finds that AWBM's federal and state constitutional claims are timely and relate back to AWBM's prior state court action, but that its contract claims are untimely and must be dismissed. In addition, the court concludes that Commissioner Leary is not entitled to qualified immunity at this stage in the proceedings. Finally, the court allows AWBM to amend its complaint to clarify whether it is asserting a physical taking or regulatory taking, or both.

         In sum, the court DISMISSES the First and Second Claims for Relief (i.e., the contract claims), but allows the remaining claims to proceed at this time.


         AWBM previously sued these Defendants[1] in state court for the bank seizure at issue. (Am. Compl. ¶ 6.) On April 30, 2012, the state district court dismissed the case in its entirety for lack of sufficient factual allegations under Utah Rule of Civil Procedure 12(b)(6). (See Id. at ¶ 7; Am. W. Bank Members, L.C. v. State, 2014 UT 49, ¶ 1, 342 P.3d 224, 227.) The Utah Supreme Court affirmed the district court's dismissal of AWBM's claims on the same grounds, with an important clarification. See Am. W. Bank, 2014 UT 49, ¶¶ 1, 36. The district court appeared to have dismissed AWBM's due process claims with prejudice, which the Utah Supreme Court found constituted error. Id. at ¶¶ 4 n.4, 8, 37, 44. The Utah Supreme Court directed the district court to dismiss the due process claims without prejudice. Id. at ¶¶ 37, 44.

         In its decision, the Utah Supreme Court briefly recounted the background behind the bank's seizure in 2009 and the subsequent proceedings, which this court repeats for convenience and then supplements with further factual background:

America West Bank (Bank) is wholly owned by its members, AWBM. On May 1, 2009, UDFI filed a petition in district court for an order approving the seizure of the Bank. That same day, the district court granted the petition without the presence or participation of AWBM. UDFI then appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of the Bank. The FDIC announced publicly it had been appointed receiver of the Bank and immediately began winding down the affairs of the Bank and liquidating its assets.
On June 28, 2011, AWBM filed a complaint in district court against the State of Utah; UDFI; the commissioner of UDFI, Mr. G. Edward Leary . . . . AWBM also filed a notice of claim against Mr. Leary, as required by the Utah Governmental Immunity Act (Immunity Act). AWBM alleged various claims, including common law tort, breach of contract, breach of the covenant of good faith and fair dealing, constitutional takings, and due process violations. Liquidation of the Bank's assets was ongoing when AWBM filed its complaint. The State filed a motion to dismiss the complaint based on rules 12(b)(1) and 12(b)(6) of the Utah Rules of Civil Procedure.

Id. at ¶¶ 2-3 (footnote omitted).

         As noted, the district court dismissed AWBM's case in April 2012, and the Utah Supreme Court affirmed the dismissal on grounds that AWBM had not alleged sufficient factual allegations in the complaint, clarifying that all claims should be dismissed without prejudice. Id. at ¶¶ 36, 44. On December 3, 2014, the Utah Supreme Court remitted its decision to the district court. (Am. Compl. ¶ 9; Mot. Ex. 8, p. 3, ECF No. 10-8 (Dist. Ct. Dkt.).)

         On December 1, 2015, AWBM refiled its action against Defendants in the state district court. (See ECF No. 4.) AWBM amended its complaint in March 2016 to include due process claims under 42 U.S.C. § 1983 and served it on the Defendants at that time. (See id.; Opp'n at 8; Notice of Removal ¶¶ 2-3, ECF No. 2.) Defendants removed the action to this court in April 2016, invoking this court's original jurisdiction over the federal due process claim. (See Notice of Removal, ECF No. 2.)

         The Amended Complaint alleges causes of action for breach of contract and the covenant of good faith and fair dealing; violation of procedural and substantive due process under the Fourteenth Amendment and the Utah Constitution; and violation of the Takings Clause of the Utah Constitution. (Am. Compl. at pp. 17-33.) The Amended Complaint greatly expands on the general allegations in the first state court action. (Compare Am. Compl., ECF No. 2-1 with ECF No. 10-7.) The court highlights some of the allegations in the Amended Complaint that guide its analysis, accepting, as it must at this stage, all well-pleaded factual allegations as true and viewing them in the light most favorable to AWBM. See Sanchez v. United States Dep't of Energy, 870 F.3d 1185, 1199 (10th Cir. 2017) (“We accept as true all well-pleaded factual allegations in the complaint and view them in the light most favorable to [the plaintiff].”).

         In 2000, the UDFI chartered America West Bank (the Bank), which was wholly owned by AWBM. (Am. Compl. ¶¶ 11, 16.) The Bank had early success and positive regulatory reviews. (Id. at ¶¶ 17-19.) In 2007, the Bank was poised to implement an “innovative” and “revolutionary . . . member banking concept” that would give the Bank “the ability to distribute earnings to member owners . . . while avoiding the corporate level tax of a Bank” and “provide member banking benefits similar to those used by credit unions to build member loyalty.” (Id. at ¶¶ 20-24.) In late 2007, the Federal Reserve approved the Bank's implementation of this concept, which the Bank expected would “raise significant additional capital in the short term and lead to the competitive advantage of the Bank over the long-term.” (Id. at ¶¶ 22, 25-26.)

         In 2008, however, the regulatory atmosphere changed. (See Id. at ¶ 27.) The FDIC and UDFI became more “aggressive and hostile” and took “unreasonable positions not previously taken in evaluating the Bank, ” with officials indicating that the change was “political.” (Id. at ¶¶ 29-30.) A former FDIC examiner, Brent Savage, apparently told a Bank member that the FDIC had changed its mind about the innovative member banking concept and had directed that the Bank be shut down. (See Id. at ¶¶ 31, 46-49.)

         During 2008 and 2009, the Bank attempted to defend its position by showing the “willingness of owners to contribute additional capital, a very engaged board, the Bank's profitability, and willingness to respond to recommendations from regulators.” (Id. at ¶¶ 32-34.) But although the Bank's performance had improved in 2007, as noted in the FDIC's Material Loss Review, and the Bank was well-rated in peer reports, the Bank's regulatory ratings declined in 2008 and 2009 owing to the new examination process by the UDFI and FDIC. (Id. at ¶¶ 26-28.) During this time, regulators changed their analysis of the Bank and its assets from an “ongoing concern” to an immediate liquidation with accompanying mark downs. (Id. at ¶¶ 39-40, 43.) The Bank disputed this methodology and the regulators' characterizations of the Bank's capital, assets, and liquidity, and signed a call report following these examinations “under protest.” (Id. at ¶¶ 44-45, 78.) Regulators encouraged the Bank to continue to raise capital, resulting in significant capital infusions during 2008. (Id. at ¶¶ 55-62.) But the Bank was unable to secure Troubled Asset Relief Program (TARP) funds in 2008 due to its low rating by regulators. (Id. at ¶¶ 64-66.) In September 2008, the FDIC sent the Bank a Cease and Desist Order, and in January 2009 the Bank entered into an agreement with the Federal Reserve Bank of San Francisco. (See Mot. Exs. 4 & 5, ECF Nos. 10-4 & 10-5.)

         On May 1, 2009, UDFI Commissioner Leary[2] filed an ex parte verified petition for an order granting possession of the Bank on the basis that the Bank did not meet minimum capital requirements. (Am. Compl. ¶¶ 67, 97.) The district court granted the petition and appointed the FDIC as receiver of the Bank that day. (Id. at ¶¶ 106, 108.) No representative from the Bank was notified of or present at the hearing. (Id. at ¶ 106.) The FDIC immediately and publicly announced the seizure of the Bank, and began liquidating the Bank's assets. (Id. at ¶ 109.) Commissioner Leary and an attorney for the state told a representative of the Bank not to resist the FDIC's actions because the FDIC could “make it much worse” for the Bank. (Id. at 112.) The case in which the petition was filed remains under seal. (Id. at ¶ 98.)

         AWBM contends that Commissioner Leary knew or should have known that the Bank met minimum capital requirements and that the statutory bases for the seizure were not fulfilled. (See Id. at ¶¶ 76-77, 81.) The UDFI had a report indicating that the Bank did not meet minimum capital requirements, but AWBM asserts that Commissioner Leary should have known the report was based on a methodology to which the Bank protested. (See Id. at ¶¶ 78-79.) AWBM asserts that this methodology was incorrect and would have shown most, if not all, other financial institutions as failing to meet minimum capital requirements as well. (Id. at ¶¶ 80-81.) AWBM contends that Commissioner Leary facilitated the FDIC's attempt to create a basis to seize the Bank and that the incorrect methodology was not imposed to protect the public, but rather to manufacture a justification for the Bank's seizure. (Id. at ¶¶ 82, 91, 96, 99.) Indeed, AWBM alleges that when the district court asked Commissioner Leary how much capital infusion would be required to meet the minimum capital requirements, Commissioner Leary told the judge that he did not know. (Id. at ¶ 100.) But AWBM contends Commissioner Leary should have known how much capital was needed based on his own reports and should have known the Bank could raise capital quickly if allowed to do so. (See Id. at ¶¶ 101-04.)

         An officer at Cache Valley Bank, which had a role in administering the liquidated assets on behalf of the FDIC, told a Bank representative that the assets seized were valuable and that the FDIC did not lose money on the liquidation. (See Id. at ¶¶ 115-16.) Subsequent transactions apparently showed the assets resold for a “healthy profit” and realized at least as much value as projected by the Bank. (Id. at ¶¶ 117-19.)


         To survive dismissal under Federal Rule of Civil Procedure 12(b)(6), [3] “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The court must “accept the well-pled factual allegations in the complaint as true, resolve all reasonable inferences in the plaintiff's favor, and ask whether it is plausible that the plaintiff is entitled to relief.” Diversey v. Schmidly, 738 F.3d 1196, 1199 (10th Cir. 2013) (internal quotation marks and citations omitted). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). The “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555. “Even so, ‘[g]ranting [a] motion to dismiss is a harsh remedy which must be cautiously studied, not only to effectuate the spirit of the liberal rules of pleading but also to protect the interests of justice.'” Dias v. City & Cty. of Denver, 567 F.3d 1169, 1178 (10th Cir. 2009) (alterations in original) (quoting Duran v. Carris, 238 F.3d 1268, 1270 (10th Cir. 2001)). “Thus, ‘a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.'” Id. (quoting Twombly, 550 U.S. at 556).

         In addition, where a motion to dismiss is based on an affirmative defense raised in an answer, such as qualified immunity, it “is more accurately described as a motion for judgment on the pleadings under Federal Rule of Civil Procedure 12(c) rather than a motion for failure to state a claim under Rule 12(b)(6).” Brown v. Montoya, 662 F.3d 1152, 1160 n.4 (10th Cir. 2011). The standards under both rules are the same. Id.

         Finally, in evaluating the sufficiency and plausibility of the pleadings, the court may consider documents incorporated by reference and other matters of which the court may take judicial notice, including court dockets. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); Mayfield v. Bethards, 826 F.3d 1252, 1256 (10th Cir. 2016) (noting that, on a motion to dismiss, the court “is limited to the Complaint and any documents it incorporates”); Kerber v. Qwest Grp. Life Ins. Plan, 647 F.3d 950, 959 (10th Cir. 2011) (noting that exhibits and documents incorporated into complaint may be considered, as long as the parties do not dispute their veracity).


         I. Statutes of Limitations

         A. Section 1983 claim

         The parties do not dispute that Utah's four-year residual statute of limitations applies to AWBM's § 1983 claim. See Brock v. Herbert, 435 F. App'x 759, 762 (10th Cir. 2011) (unpublished)[4] (holding district court correctly applied the four year statute of limitations to § 1983 claims) (citing Fratus v. DeLand, 49 F.3d 673, 675 (10th Cir. 1995)). Because the Bank seizure occurred on May 1, 2009, the period for AWBM to bring a § 1983 claim lapsed on May 1, 2013, while its first action was on appeal. The Utah Supreme Court's remittitur, issued on December 3, 2014, affirmed the dismissal of all claims without prejudice. Then, on December 1, 2015, AWBM filed this case.

         Because the second filing occurred within one year of the dismissal of its prior case not on the merits, and because the § 1983 statute of limitations ran while the first action was pending, the § 1983 claim appears to be timely under the Utah savings statute.

         State law governs the appropriate limitations periods and accompanying tolling issues. Fratus, 49 F.3d at 675. Utah Code Ann. § 78B-2-111(1) states:

If any action is timely filed and the judgment for the plaintiff is reversed, or if the plaintiff fails in the action or upon a cause of action otherwise than upon the merits, and the time limited either by law or contract for commencing the action has expired, the plaintiff . . . may commence a new action within one year after the reversal or failure.

         This savings provision provides a limited exception to the usual statutes of limitations: “If a party files its action before the expiration of the statute of limitations, but the action is dismissed for any reason other ‘than upon the merits' after the expiration of the applicable limitations period, the party may refile its claim as a ‘new action' within one year of the previous dismissal.” Norton v. Hess, 2016 UT App 108, ¶ 9, 374 P.3d 49, 52. AWBM's first action was dismissed without prejudice for failure to state sufficient allegations supporting the claims, not on the merits. The statute of limitations for the § 1983 claim expired while the first action was on appeal. AWBM initiated its current action within a year of the Utah Supreme Court's remittitur. Thus, the § 1983 claim is timely under the Utah savings statute.

         Defendants do not challenge this reasoning, but instead argue that because AWBM did not plead a § 1983 claim in its prior action, it cannot plead the claim now. AWBM included the parallel state cause of action for violation of due process in the first action, however, so it argues that the § 1983 claim relates back to the prior complaint under Rule 15(c) of the Federal and Utah Rules of Civil Procedure. Defendants respond by arguing that the relation back ...

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