O'Melveny & Myers v. Federal Deposit Insurance Corporation

American Diversified Savings Bank (ADSB) was a California-chartered and federally insured savings and loan bank. In 1983, ADSB was acquired by Ranbir Sahni and Lester Day. Sahni served as chairman and CEO of ADSB, and Day served as president. Sahni and Day knowingly engaged in misconduct by acting against ADSB’s interest. Sahni and Day led ADSB to engage in many risky real estate transactions, and the two fraudulently overhauled ADSB’s assets, engaged in sham sales of assets to create inflated profits, and generally cooked the books to disguise ADSB’s declining net worth. In 1985, California law firm O’Melveny & Myers (the firm) (plaintiff) had represented ADSB in connection with two real estate syndications. The firm did not contact any accounting firms that had worked for ADSB or any regulatory authorities to inquire about ADSB’s financial status. The real estate syndications closed, and two months later, federal regulators concluded ADSB was insolvent. The Federal Deposit Insurance Corporation (FDIC) (defendant) stepped in as receiver for ADSB. FDIC sued the firm in federal district court, alleging professional negligence and breach of fiduciary duty under California law. The firm moved for summary judgment, arguing that Sahni and Day’s knowledge of their misconduct must be imputed to ADSB, and hence the FDIC because the FDIC assumed ADSB’s position as the receiver. The district court granted summary judgment for the firm. The FDIC appealed, arguing that federal common law, not California law, determines whether knowledge by officers so acting will be imputed to the FDIC when it sues as a receiver. The court of appeals reversed. The firm filed a petition for a writ of certiorari, which was granted.