O'Melveny & Myers v. Federal Deposit Insurance

Background

A California savings and loan, American Diversified Savings Bank, was run by two men who owned nearly all of its stock and engaged in risky deals while hiding losses. In late 1985 the Los Angeles law firm O’Melveny & Myers represented the bank in two real estate syndications and did not contact the bank’s accountants or regulators. Federal regulators declared the bank insolvent in February 1986. The FSLIC and later the FDIC stepped in as receiver, refunded investors, and sued the law firm in 1989 for professional negligence and breach of fiduciary duty. The district court entered judgment for the firm, the Ninth Circuit reversed, and the Supreme Court took the case to decide which law applies.

Reasoning

The Court asked whether federal judge-made law should replace California rules about when a corporation is charged with its officers’ knowledge. It explained that general federal common law is limited and that state law controls unless a clear federal policy requires displacement. The Court found no specific federal interest—nor a statutory command—that justified making a broad federal rule here. It noted that FIRREA creates some special federal rules but does not authorize a general federal common-law exception. The Court therefore held California law governs the imputation question and sent the case back for the Ninth Circuit to apply state law.

Real world impact

Lower courts must apply state law to decide whether a failed bank’s officers’ knowledge can be used against the bank in FDIC receiver suits, except where Congress has clearly provided otherwise. That means case outcomes may vary by state and many similar suits will return to state-law analysis on remand.

Dissents or concurrances

Justice Stevens, joined by three Justices, concurred to stress that state courts might craft protective rules for creditors but federal courts are limited and must predict how state law would develop.