                            In the
 United States Court of Appeals
              For the Seventh Circuit
                         ____________

No. 03-2619
FEDERAL DEPOSIT INSURANCE CORPORATION,
                                              Plaintiff-Appellant,
                                v.

ERNST & YOUNG     LLP,

                                             Defendant-Appellee.


                         ____________
         Appeal from the United States District Court for
        the Northern District of Illinois, Eastern Division.
         No. 02 C 7914—Robert W. Gettleman, Judge.
                         ____________
    ARGUED NOVEMBER 4, 2003—DECIDED JULY 8, 2004
                  ____________



 Before EASTERBROOK, ROVNER, and EVANS, Circuit
Judges.
  EASTERBROOK, Circuit Judge. For almost a decade
Superior Bank FSB participated in the sub-prime lending
market, making loans to home and auto buyers with poor
credit records. It then sold to public investors interests in
pools of these loans; the process is known as securitization.
Investors were promised a fixed rate of interest lower than
the one the borrowers had agreed to pay Superior. Securiti-
zation creates diversification; a pool of loans is safer than
2                                                No. 03-2619

any one loan (and fractional interests in many pools are
safer than one pool), unless defaults are perfectly (and
positively) correlated. Superior held a residual interest
in these pools to the extent that the total return exceeded
the fixed rate promised to the investors. Two things could
drain value from this retained interest: an unexpectedly
high default rate, or an unexpectedly high prepayment rate
(for if the borrowers prepaid, then Superior would not
receive the high contractual interest rate). At one point
Superior reported that its retained interest in securitized
loans was worth about $1 billion. When interest rates fell
during the late 1990s, however, borrowers began to prepay
and refinance their loans more frequently. In January 2001
Ernst & Young, Superior’s auditors, concluded that Supe-
rior’s accounts must be restated to reduce the value of the
retained interests by $270 million; a write-down of a further
$150 million soon followed.
  Disappearance of $420 million that had been booked as
investors’ equity left Superior insolvent, and the Federal
Deposit Insurance Corporation assumed control in July
2001. The FDIC appointed a conservator to wind down
Superior’s business; as manager of the Savings Association
Insurance Fund, the FDIC supplied credit to facilitate this
process and assure that all insured depositors would be
paid in full. The FDIC says that the net loss to the insur-
ance fund exceeds $500 million. Superior’s equity owners
have promised to pay $460 million over time. Believing that
the accountants also bear responsibility for the bank’s
failure—that generally accepted accounting principles re-
quired the residual interests to be discounted in light of the
possibility of prepayments and other events that could
intervene before the outside investors had been paid off—
the FDIC has sued Ernst & Young for hefty compensatory
and punitive damages. Illinois law, which the FDIC agrees
controls, permits third parties such as investors to sue ac-
countants for fraud (which the FDIC alleges). 225 ILCS
No. 03-2619                                                 3

450/30.1(1). It allows third parties to recover for ordinary
negligence (which the FDIC also alleges) if the accountant
knew that “a primary intent of the client was for the
professional services to benefit . . . the particular person
bringing the action”. 225 ILCS 450/30.1(2). If the FDIC
prevails, 25% will go to the equity investors (effectively re-
ducing the net proceeds of that settlement) and the rest will
be applied to the benefit of Superior’s other creditors,
principally the insurance fund.
  By referring to “the FDIC” as the plaintiff, we have sim-
plified unduly—for that agency acts in multiple capacities,
and the difference affects this litigation. For many purposes
it is helpful to treat the FDIC as two entities: FDIC-Re-
ceiver and FDIC-Corporate. (The FDIC has a third capacity
as bank overseer and regulator.) FDIC-Receiver acquires
the assets and legal interests of the failed bank and pro-
ceeds much as a trustee in bankruptcy; FDIC-Corporate
acts as guardian of the public fisc, disburses proceeds from
the insurance fund, and having paid insurance claims is
subrogated to rights of the bank’s depositors against the
failed institution. See 12 U.S.C. §1821(g). FDIC-Corporate
also holds the right to prosecute claims against the failed
bank’s officers and owners. 12 U.S.C. §1821(k). As we have
recounted, FDIC-Corporate has secured a substantial
settlement from Superior Bank’s managers and equity
investors. Other claims held by the failed bank (as opposed
to its depositors) come within the control of FDIC-Receiver.
Accounting misconduct, like legal malpractice, may entitle
the client (and FDIC-Receiver as its proxy) to recover
damages. But FDIC-Receiver has neither sued Ernst &
Young nor assigned that right to FDIC-Corporate. See 12
U.S.C. §1823(d) (permitting FDIC-Receiver to sell or assign
choses in action to FDIC-Corporate). Instead FDIC-Corpo-
rate has sued without benefit of an assignment. The FDIC
believes that this maneuver allows it to avoid two terms of
the contract by which Superior Bank engaged Ernst &
4                                               No. 03-2619

Young. Superior Bank promised to arbitrate any disputes
with the accounting firm, and it also waived any claim to
punitive damages. FDIC-Receiver steps into the shoes of the
failed bank and is bound by the rules that the bank itself
would encounter in litigation. See O’Melveny & Myers v.
FDIC, 512 U.S. 79 (1994). But FDIC-Corporate did not
assume Superior Bank’s contracts and can litigate free of
Superior’s promises. See EEOC v. Waffle House, Inc., 534
U.S. 279 (2002) (federal agency not bound by arbitration
clause when it litigates in its own name, even though
persons who agreed to arbitrate would be the principal
beneficiaries of a favorable judgment).
  Ernst & Young argued that the FDIC sued in the wrong
capacity—and that if the agency’s capacity were changed to
reflect that FDIC-Receiver is the proper adversary, then the
suit must be dismissed in favor of arbitration. The district
court did not directly resolve these contentions. Instead it
dismissed the suit for lack of standing. 256 F. Supp. 2d 798,
reconsideration denied, 216 F.R.D. 422 (2003). As the judge
saw matters, suit by FDIC-Corporate would frustrate the
operation of 12 U.S.C. §1821(d)(11)(A), which establishes
preferences among creditors in the failed bank. FDIC-
Receiver must apply any recoveries first to secured credi-
tors, then to pay off any uninsured depositors, next to
general creditors, and finally to subordinated claims
(including those of the shareholders). But FDIC-Corporate
could satisfy its own claims as insurer first before turning
over any excess to FDIC-Receiver for distribution under the
statutory priority.
  What this has to do with “standing” is unfathomable. A
person whose injury can be redressed by a favorable judg-
ment has standing to litigate. See Lujan v. Defenders of
Wildlife, 504 U.S. 555, 559-62 (1992). FDIC-Corporate
suffered an injury when it disbursed money from the in-
surance fund; it asserts that Ernst & Young caused (part of)
this loss; and the loss can be redressed (and the fund
No. 03-2619                                                 5

replenished) by a judgment for money damages against
Ernst & Young. Nothing more is required for standing.
At all events, FDIC-Corporate has promised to distribute
proceeds of the litigation just as if they had come to FDIC-
Receiver. The district court was skeptical about this prom-
ise but did not explain why the FDIC should be thought
untrustworthy (one branch of government should not
assume that another is deceitful), let alone why such an
undertaking could not be enforced if the FDIC reneged.
Promises by the Executive Branch to pay money other than
as statutes require do not estop the United States, because
the Constitution gives Congress the power to control
distributions from the Treasury. See Office of Personnel
Management v. Richmond, 496 U.S. 414 (1990). But a
promise to abide by a federal statute poses no such difficul-
ties. Section 1821(d)(11)(A) does not block this litigation.
   But why should FDIC-Corporate be allowed to pursue a
claim that §1821 seemingly allocates to FDIC-Receiver? The
FDIC’s principal response is: “What’s to prevent it?” No
statute says that FDIC-Corporate is forbidden to sue third
parties such as lawyers and accountants. As FDIC-Corpo-
rate sees things, §1821(g) authorizes it to sue the failed
institution as subrogee of the depositors, and §1821(k)
authorizes it to sue the managers and investors; everything
else is optional. If state law would allow an insurer (say) to
sue the firm’s accountant, then off we go. That no decision
of any federal appellate court—or for that matter any
Illinois court—vindicates its claim just means (FDIC-
Corporate insists) that this is the first suit; it does not
mean that FDIC-Corporate should lose. O’Melveny & Myers
holds that state law governs litigation in the wake of bank
failures; and as Illinois permits third parties to recover
from accountants on account of injuries caused by fraud,
whether or not the accountant knew that its client intended
to benefit this third party, FDIC-Corporate believes that it
is entitled to proceed. (The claim of fraud makes it unneces-
6                                              No. 03-2619

sary to determine what 225 ILCS 450/30.1(2) means in
conditioning negligence actions against accountants on
proof that “a primary intent of the client was for the
professional services to benefit . . . the particular person
bringing the action”. 225 ILCS 450/30.1(2). See Freeman,
Freeman & Salzman, P.C. v. Lipper, 2004 Ill. App. LEXIS
743 (1st Dist. June 23, 2004). On the extent to which
Illinois is an Ultramares jurisdiction, see Builders Bank v.
Barry Finkel & Associates, 339 Ill. App. 3d 1, 7-8, 790 N.E.
2d 30 (1st Dist. 2003), discussing Ultramares Corp. v.
Touche, 255 N.Y. 170, 174 N.E. 441 (1931) (Cardozo, J.).)
FDIC-Corporate points out that FDIC v. Ernst & Young,
967 F.2d 166, 171-72 (5th Cir. 1992), says in dictum that
FDIC-Corporate “might be able to make this claim”. It
wants us to turn “might be able” into “is entitled”.
  O’Melveny & Myers held that claims by FDIC-Receiver
depend on state law unless a federal statute provides oth-
erwise. In O’Melveny & Myers FDIC-Receiver contended
that it should be allowed to proceed under federal common
law—if only the kind that incorporates most state law, see
United States v. Kimbell Foods, Inc., 440 U.S. 715 (1979)—
because nothing in §1821 forbids that approach, and be-
cause bending some state-law rules would increase recover-
ies for the benefit of the insurance fund. That’s the same
line of argument that FDIC-Corporate makes to us: “let
us proceed because nothing in §1821 explicitly forbids that
step, and because if we win the insurance fund will be bet-
ter off.” But the reason FDIC-Corporate proposes this is to
escape rules of state contract law that bind FDIC-Receiver.
In other words, FDIC-Corporate in this suit (just like FDIC-
Receiver in O’Melveny & Myers) wants to take advantage of
state law’s beneficial aspects while avoiding those it does
not like—particularly rules enforcing waivers of punitive
damages and agreements to arbitrate (which under the
Federal Arbitration Act, 9 U.S.C. §2, must be enforced to
the same extent as any other contractual promise).
No. 03-2619                                                 7

O’Melveny & Myers observed that §1821 does override some
state-law doctrines, but that efforts to evade additional ones
through clever litigation tactics thus are not simply unpro-
vided-for situations; permitting the maneuver would
contradict the statutory resolution that federal law governs
a few matters and state law the rest. 512 U.S. at 86-87. The
Court added that even if §1821 were removed from the
picture, it would be inappropriate to allow the FDIC to
evade state law; “there is no federal policy that the [insur-
ance] fund should always win.” Id. at 88. Much of O’Melveny
& Myers, including this passage, is addressed as pointedly
to FDIC-Corporate as to FDIC-Receiver. Only by insisting
that FDIC-Receiver pursue the failed bank’s claims against
third parties such as accountants and law firms can we
ensure that all aspects of state law govern.
  Still, we must consider the possibility that §1821(g)(1)
authorizes this litigation indirectly. Following payment to
a depositor from the insurance fund, FDIC-Corporate “shall
be subrogated to all rights of the depositor against such
institution or branch to the extent of such payment
or assumption.” Ernst & Young is not the “institution or
branch” of which this statute speaks. Perhaps, however, an
action against the failed bank could do service for an action
against third parties. People who cannot sue directly often
may sue derivatively: for example, a corporate shareholder
unable to sue the firm’s lawyers or accountants may be able
to sue on behalf of the firm itself, if the board of directors
unreasonably refuses or is financially aligned with the
potential defendant. See Kamen v. Kemper Financial
Services, Inc., 500 U.S. 90 (1991); Mid-State Fertilizer Co.
v. Exchange National Bank, 877 F.2d 1333 (7th Cir. 1989);
American Law Institute, Principles of Corporate
Governance: Analysis and Recommendations Part 7 Ch. 1
(1994). As the collective representative of depositors (who
after insolvency are equivalent to equity owners), FDIC-
Corporate could demand that the failed bank pursue a
8                                                No. 03-2619

claim against responsible third parties and take over if a
conflict of interest prevented the bank from acting to pro-
tect its investors. See Adato v. Kagan, 599 F.2d 1111, 1117
(2d Cir. 1979); Brandenburg v. Seidel, 859 F.2d 1179, 1191
(4th Cir. 1988). But here the analogy to derivative litigation
breaks down, because the manager of the failed bank’s
estate is FDIC-Receiver, which has no conflict. Illinois
would not let FDIC-Corporate bypass “the management” (=
FDIC-Receiver) just to avoid the terms of the bank’s en-
gagement letter with Ernst & Young. So the statutory
subrogation route offers no prospect to FDIC-Corporate
even when used as the fulcrum of a derivative claim.
Everything points to FDIC-Receiver as the right entity to
pursue any claim against Superior Bank’s accountants.
  Footnotes to the parties’ briefs debate whether FDIC-
Receiver can escape the arbitration clause and waiver of
punitive damages by repudiating these provisions on the
authority of 12 U.S.C. §1821(e). The district judge thought
not, concluding that this subsection allows the repudiation
of contracts as a whole but not unwelcome clauses in con-
tracts. Otherwise FDIC-Receiver could walk away from the
obligation to pay for goods and services that the bank had
received before its failure. Or maybe the FDIC could claim
a right to repudiate words (such as “not”) or to repudiate
the decimal point out of a figure (turning a borrower’s
promise to pay “10.9% interest” into “109% interest”). Cf.
Risser v. Thompson, 930 F.2d 549 (7th Cir. 1991) (discuss-
ing the power of Wisconsin’s governor to veto words out of
sentences and letters out of words—subject to override,
which the FDIC does not propose to afford Ernst & Young).
Cherry picking is not allowed by the rejection power in
bankruptcy, see In re Crippin, 877 F.2d 594 (7th Cir. 1989);
why should it be permitted under §1821(e)? When denying
reconsideration the judge recognized that, because FDIC-
Receiver is not a party, the statement is dictum and that
the subject remains open should FDIC-Receiver launch a
No. 03-2619                                                 9

suit of its own. Likewise we avoid definitive resolution,
though it is hard to escape the logic of the district judge’s
position. If the FDIC really thought that FDIC-Receiver
could ignore these promises, then why did FDIC-Corporate
pursue this litigation? It makes sense only if FDIC-Receiver
is bound (because per O’Melveny & Myers it steps into the
failed bank’s shoes). The FDIC has not identified any
appellate decision holding that §1821(e) may be used to
excise words, sentences, or paragraphs from contracts. Still,
until FDIC-Receiver has sued, and the subject has been
fully briefed, it would be premature to resolve this question.
We can say, however, that the district court has ample
authority to award attorneys’ fees against parties that
make unjustified efforts to escape commitments to arbi-
trate, and that the validity of the waiver of punitive
damages would be a subject for the arbitrator rather than
the court. See, e.g., PacifiCare Health Systems, Inc. v. Book,
538 U.S. 401 (2003).
  The judgment is modified to reflect a decision against
FDIC-Corporate on the merits (rather than for lack of
standing), and as so modified is affirmed.

A true Copy:
       Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit




                    USCA-02-C-0072—7-8-04
