                                        In the

      United States Court of Appeals
                      For the Seventh Circuit
                           ____________________  
No.  12-­‐‑3474  
ELLIOTT   D.   LEVIN,  as  Trustee  in  bankruptcy  for  Irwin  Finan-­‐‑
cial  Corporation,  
                                                 Plaintiff-­‐‑Appellant,  
                                           v.  

WILLIAM   I.   MILLER,   GREGORY   F.   EHLINGER,   and   THOMAS   D.  
WASHBURN,  
                                              Defendants-­‐‑Appellees,  
                               and  
FEDERAL  DEPOSIT  INSURANCE  CORPORATION,  
                                        Intervenor-­‐‑Appellee.  
                           ____________________  

          Appeal  from  the  United  States  District  Court  for  the  
           Southern  District  of  Indiana,  Indianapolis  Division.  
         No.  1:11-­‐‑cv-­‐‑1264-­‐‑SEB-­‐‑TAB  —  Sarah  Evans  Barker,  Judge.  
                           ____________________  

   ARGUED  SEPTEMBER  10,  2013  —  DECIDED  AUGUST  14,  2014  
                  ____________________  

  Before   WOOD,   Chief   Judge,   and   EASTERBROOK   and  
HAMILTON,  Circuit  Judges.  
    EASTERBROOK,  Circuit  Judge.  Irwin  Financial  Corporation,  
a  holding  company,  entered  bankruptcy  when  its  subsidiar-­‐‑
2                                                                   No.  12-­‐‑3474  

ies  failed.  Both  subsidiaries  were  banks  (Irwin  Union  Bank  &  
Trust  and  Irwin  Union  Bank,  FSB),  which  the  Federal  Depos-­‐‑
it  Insurance  Corp.  closed  and  took  over  in  2009.  The  banks’  
asset   portfolios   had   been   dominated   by   mortgage   loans,  
whose   value   plunged   in   2007   and   2008.   The   FDIC   is   in   the  
process   of   collecting   the   banks’   assets   and   paying   their  
debts.   Further   details   are   not   material   to   the   disposition   of  
this  appeal.  
      Elliott   Levin,   Irwin   Financial’s   trustee   in   bankruptcy,  
filed   this   suit   against   three   of   its   directors   and   officers.   For  
simplicity,  we  refer  to  Irwin  Financial  and  the  trustee  collec-­‐‑
tively  as  “Irwin,”  to  Irwin’s  two  subsidiaries  as  “the  Banks,”  
and   to   the   defendants   as   “the   Managers.”   The   FDIC   inter-­‐‑
vened   to   defend   its   own   interests,   because   whatever   Irwin  
collects  from  the  Managers  will  be  unavailable  to  satisfy  any  
claims   that   the   FDIC   has   against   them.   Both   the   FDIC   and  
the  Managers  contend  that  most  of  Irwin’s  claims  belong  to  
the   FDIC   under   12   U.S.C.   §1821(d)(2)(A)(i),   which   says   that  
when  taking  over  a  bank  the  FDIC  acquires  “all  rights,  titles,  
powers,  and  privileges  of  the  insured  depository  institution,  
and   of   any   stockholder,   member,   accountholder,   depositor,  
officer,  or  director  of  such  institution  with  respect  to  the  in-­‐‑
stitution   and   the   assets   of   the   institution”.   Irwin,   the   FDIC,  
and  the  Managers  all  understand  this  language  to  allocate  to  
the   FDIC   not   only   the   closed   banks’   rights   but   also   any  
claims   that   investors   might   assert   derivatively   on   behalf   of  
the  closed  banks.  Courts  of  appeals  (including  this  one)  rou-­‐‑
tinely  describe  §1821(d)(2)(A)(i)  the  same  way.  See,  e.g.,  Ada-­‐‑
to   v.   Kagan,   599   F.2d   1111,   1117   (2d   Cir.   1979);   Courtney   v.  
Halleran,  485  F.3d  942,  950  (7th  Cir.  2007);  Pareto  v.  FDIC,  139  
F.3d  696,  700  (9th  Cir.  1998).  
No.  12-­‐‑3474                                                                       3  

     Irwin  presented  four  types  of  claims  against  the  Manag-­‐‑
ers.   The   first   (counts   1,   2,   4,   and   5   of   the   complaint)   asserts  
that  the  Managers  violated  their  fiduciary  duties  to  Irwin  by  
not   implementing   additional   financial   controls   that   would  
have  protected  Irwin  from  the  Managers’  errors  in  their  roles  
as   directors   and   managers   of   the   Banks.   The   Managers   (as  
officers   of   the   Banks)   allowed   the   Banks   to   specialize   in  
kinds  of  mortgages  that  were  especially  hard-­‐‑hit  in  2007  and  
2008.   Irwin   contends   that   they   should   have   diversified   the  
Banks’   portfolios,   hedged   the   risk   using   other   instruments,  
or  both,  and  are  liable  to  Irwin  for  failing  to  implement  hold-­‐‑
ing-­‐‑company-­‐‑level  rules  that  would  have  compelled  them  to  
curtail  bank-­‐‑level  risks.  
   Count   3   alleges   that   the   Managers   allowed   Irwin   to   pay  
dividends   (or,   equivalently,   repurchase   stock)   in   amounts  
that  left  it  short  of  capital  when  the  financial  crunch  arrived.  
Irwin  maintains  that  it  would  not  have  distributed  money  to  
investors   had   the   Managers   furnished   better   information  
about  the  Banks’  portfolios,  for  then  Irwin  would  have  real-­‐‑
ized  the  benefit  of  being  better  capitalized.  
    Count   6   alleges   that   one   of   the   Managers   breached   his  
duty  of  care  by  hiring  unnecessary  (or  unnecessarily  expen-­‐‑
sive)   consultants,   squandering   Irwin’s   money.   Irwin’s   reply  
brief  abandons  this  claim;  we  do  not  mention  it  again.  
   Count  7  alleges  that  two  of  the  Managers  breached  their  
duties  of  care  and  loyalty  when  in  the  first  half  of  2009  they  
“capitulated”   to   the   FDIC   and   caused   Irwin   to   contribute  
millions   of   dollars   in   new   capital   to   the   Banks.   The   com-­‐‑
plaint   asserts   that   the   Managers   knew,   or   should   have  
known,  that  this  was  equivalent  to  throwing  money  away—
that  it  might  benefit  the  FDIC  (and  could  conceivably  benefit  
4                                                                 No.  12-­‐‑3474  

the   Managers   in   their   roles   at   the   Banks)   but   held   no   pro-­‐‑
spect  of  benefit  for  Irwin.  
    The  district  court  asked  Magistrate  Judge  Baker  for  anal-­‐‑
ysis.  He  recommended  that  the  first  cluster  of  counts  (1,  2,  4,  
and   5)   be   dismissed   because   under   §1821(d)(2)(A)(i)   the  
FDIC   rather   than   Irwin   owns   any   legal   claim   that   depends  
on  acts  the  Managers  took  in  their  roles  at  the  Banks.  He  rec-­‐‑
ommended   that   counts   3   and   7   continue   to   summary   judg-­‐‑
ment  or  trial.  The  district  judge,  however,  concluded  that  all  
claims   belong   to   the   FDIC,   and   she   dismissed   the   entire  
complaint.   Irwin   has   appealed.   The   Managers   defend   the  
district   court’s   decision;   the   FDIC   does   not   and   concedes  
that   counts   3   and   7   belong   to   Irwin.   (The   FDIC   nonetheless  
asks   us   to   affirm   across   the   board,   contending   that   Irwin’s  
position  on  these  counts  is  substantively  implausible.)  
     All  of  the  litigants  agree  that  the  distinction  between  di-­‐‑
rect  and  derivative  claims  depends  on  Indiana  law,  for  Irwin  
was  incorporated  there.  Indiana  treats  a  stockholder’s  claim  
as  derivative  if  the  corporation  itself  is  the  loser  and  the  in-­‐‑
vestor  is  worse  off  because  the  value  of  the  firm’s  stock  de-­‐‑
clines.  See  Barth  v.  Barth,  659  N.E.2d  559  (Ind.  1995);  Massey  
v.  Merrill  Lynch  &  Co.,  464  F.3d  642,  645  (7th  Cir.  2006)  (Indi-­‐‑
ana   law).   That’s   a   good   description   of   the   theory   behind  
counts  1,  2,  4,  and  5:  The  Banks  suffered  a  loss  when  the  val-­‐‑
ue   of   their   portfolios   cratered,   and   Irwin   suffered   a   deriva-­‐‑
tive  loss  when  the  value  of  its  stock  in  the  Banks  plummeted.  
At   oral   argument   counsel   for   Irwin   conceded   that   it   would  
not   have   suffered   any   injury   unless   the   Banks   had   done   so  
first.   The   theory   behind   these   counts—that   the   Managers  
owed  a  duty  to  Irwin  to  protect  it  from  their  own  behavior  at  
the  Banks—is  a  veneer  over  a  derivative  claim  based  on  the  
No.  12-­‐‑3474                                                                5  

harm  the  Managers’  choices  caused  to  the  Banks  and  trans-­‐‑
mitted  to  Irwin  through  a  decline  in  the  value  of  the  shares  it  
held.  The  FDIC,  not  Irwin,  therefore  owns  any  claim  against  
the  Managers  that  depends  on  the  choices  they  made  as  di-­‐‑
rectors   or   employees   of   the   Banks.   Any   recovery   by   Irwin  
would  be  double  counting.  See  Mid-­‐‑State  Fertilizer  Co.  v.  Ex-­‐‑
change   National   Bank,   877   F.2d   1333,   1335–36   (7th   Cir.   1989);  
Kagan  v.  Edison  Bros.  Stores,  Inc.,  907  F.2d  690  (7th  Cir.  1990).  
     Count   3,   by   contrast,   concerns   only   what   the   Managers  
did   at   Irwin—both   with   respect   to   supporting   the   financial  
distributions   and   with   respect   to   the   information   they   gave  
Irwin   about   the   Banks’   loan   portfolios.   If   count   3   is   dis-­‐‑
missed,   the   FDIC   cannot   gain;   it   owns   the   Banks   and   all   of  
their  assets,  but  the  Banks  cannot  collect  from  the  Managers  
for   any   shortcomings   in   the   services   that   they   rendered   to  
Irwin.  Section  1821(d)(2)(A)(i)  is  designed  to  allocate  claims  
between   the   FDIC   and   other   injured   parties;   it   is   not   de-­‐‑
signed   to   vaporize   claims   that   otherwise   exist   after   a   busi-­‐‑
ness  failure.  Yet  if  count  3  is  dismissed,  the  claim  will  disap-­‐‑
pear;  no  one  will  be  able  to  pursue  it.  It  would  not  be  sensi-­‐‑
ble  to  read  §1821(d)(2)(A)(i)  that  way.  
     The  potential  problem  with  count  3  is  not  ownership  but  
whether   Indiana   law   permits   recovery   on   a   theory   that   a  
holding  company  distributed  “too  much”  to  its  investors.  As  
a   first   approximation,   dividends   and   repurchases   are   a  
wash;   stockholders   gain   exactly   what   the   corporation   loses.  
These   transactions   leave   the   firm   with   less   capital,   but   this  
may  be  beneficial  if  it  induces  managers  to  work  harder  and  
smarter.   And   if   the   firm   later   lands   in   financial   trouble,  
stockholders   see   payouts   as   a   blessing—for   the   distribution  
means  that  the  money  was  not  lost  with  the  firm’s  financial  
6                                                              No.  12-­‐‑3474  

distress.  But  the  district  court  did  not  dismiss  count  3  on  the  
merits,   which   have   not   been   fully   briefed   on   appeal.   Nor  
have  the  parties  explored  how  Indiana’s  version  of  the  Busi-­‐‑
ness  Judgment  Rule  applies  to  the  Managers’  activities  with  
respect   to   information   and   distributions.   It   was   accordingly  
premature  to  dismiss  this  part  of  the  complaint.  
     The  district  court  thought  that  count  3  does  not  narrate  a  
“plausible”   claim,   as   the   Supreme   Court   used   that   word   in  
Ashcroft  v.  Iqbal,  556  U.S.  662  (2009),  and  Bell  Atlantic  Corp.  v.  
Twombly,  550  U.S.  544  (2007).  Yet  those  decisions  concern  the  
adequacy  of  the  notice  given  by  the  pleading,  not  the  claim’s  
legal  substance.  The  Court  held  that  Fed.  R.  Civ.  P.  8  is  not  
satisfied  by  a  skeletal  complaint  that  contains  conclusion  or  
surmise   and   requires   a   court   to   decide   whether   events   not  
pleaded   could   be   imagined   in   a   plaintiff’s   favor.   The   Court  
wrote   that   judges   may   bypass   implausible   allegations   and  
insist   that   complaints   contain   enough   detail   to   allow   courts  
to   separate   fantasy   from   claims   worth   litigating.   Iqbal   and  
Twombly   do   not   change   the   standards   for   judgment   on   the  
pleadings   (Rule   12(c))   or   summary   judgment   (Rule   56),   nor  
do   they   require   complaints   to   address   potential   defenses  
such   as   the   Business   Judgment   Rule.   The   Court   held   in  
Gomez  v.  Toledo,  446  U.S.  635  (1980),  that  complaints  need  not  
anticipate   affirmative   defenses;   neither   Iqbal   nor   Twombly  
suggests  otherwise.  See  Richards  v.  Mitcheff,  696  F.3d  635  (7th  
Cir.  2012).  So  although  count  3  may  not  have  much  prospect,  
it  could  not  be  dismissed  at  the  suit’s  outset.  
    Count   7   maintains   that   two   of   the   Managers   injured   Ir-­‐‑
win   by   causing   it   to   invest   more   money   in   the   Banks   even  
after   they   had   failed.   Fundamentally   it   alleges   that   they  
threw   good   money   after   bad.   Again   this   is   based   on   injury  
No.  12-­‐‑3474                                                                  7  

that   Irwin   sustained   in   its   own   right,   a   claim   that   the   FDIC  
could   not   pursue   as   the   Banks’   successor.   (Counsel   for   the  
FDIC  agreed  with  this  proposition  at  oral  argument.)  Irwin’s  
loss  does  not  depend  on  injury  to  the  Banks;  to  the  contrary,  
Irwin’s   investment   would   have   made   the   Banks   better   off.  
But  since  they  were  under  water  (so  the  complaint  alleges)  at  
the  time  of  the  investment,  Irwin  suffered  an  immediate  and  
irreparable   loss.   This   is   the   strongest   of   Irwin’s   claims   be-­‐‑
cause  it  potentially  entails  a  violation  of  the  duty  of  loyalty;  
Irwin   contends   that   the   two   Managers   sought   to   promote  
their  own  interests  (as  officers  of  the  Banks)  at  the  expense  of  
Irwin’s   interests.   Count   7   cannot   be   dismissed   under  
§1821(d)(2)(A)(i)  or  Rule  8.  
     At   oral   argument   the   court   asked   counsel   whether  
§1821(d)(2)(A)(i)   should   be   understood   not   simply   to   allo-­‐‑
cate  claims  between  the  FDIC  and  other  entities,  but  to  trans-­‐‑
fer  to  the  FDIC  all  claims  held  by  any  stockholder  of  a  failed  
bank—even  claims  that  like  counts  3  and  7  do  not  depend  on  
an   injury   to   the   failed   bank.   No   federal   court   has   read   the  
statute  that  way,  however,  and  counsel  for  all  of  the  litigants  
declined   to   adopt   that   understanding.   Section  
1821(d)(2)(A)(i)   transfers   to   the   FDIC   only   stockholders’  
claims   “with   respect   to   …   the   assets   of   the   institution”—in  
other   words,   those   that   investors   (but   for   §1821(d)(2)(A)(i))  
would  pursue  derivatively  on  behalf  of  the  failed  bank.  This  
is   why   we   have   read   §1821(d)(2)(A)(i)   as   allocating   claims  
between  the  FDIC  and  the  failed  bank’s  shareholders  rather  
than  transferring  to  the  FDIC  every  investor’s  claims  of  eve-­‐‑
ry  description.  Any  other  reading  of  §1821(d)(2)(A)(i)  would  
pose   the   question   whether   Irwin   and   similarly   situated  
stockholders  would  be  entitled  to  compensation  for  a  taking;  
8                                                                      No.  12-­‐‑3474  

our   reading   of   the   statute   (which   is   also   the   FDIC’s)   avoids  
the  need  to  tackle  that  question.  
     The   judgment   of   the   district   court   is   affirmed   with   re-­‐‑
spect   to   counts   1,   2,   4,   and   5.   It   is   vacated   with   respect   to  
counts  3  and  7.  The  case  is  remanded  for  further  proceedings  
consistent  with  this  opinion.  
No. 12-3474                                                     9

    HAMILTON, Circuit Judge. I join Judge Easterbrook’s opin-
ion for the court. His opinion accurately applies the differ-
ence between a shareholder’s direct and derivative claims,
which all parties agree is the decisive legal question. Counts
three and seven are correctly categorized as direct claims
and must be remanded, even though they do not have prom-
ising futures because of the Business Judgment Rule.
    I have come to that conclusion reluctantly, however.
Stepping back from the parties’ arguments, I believe this case
raises some broader policy questions that deserve considera-
tion by the FDIC and Congress, including why the di-
rect/derivative distinction should still matter, either under
the current version of the Financial Institutions Reform, Re-
covery, and Enforcement Act of 1989, see 12 U.S.C.
§ 1821(d)(2)(A), or perhaps other statutory amendments that
Congress may want to consider.
   The most interesting facts about this case are buried in
two footnotes in the briefs. They concern money that might
be available to pay the plaintiff in this case, the trustee of Ir-
win Financial Corporation, which is the holding company
that presided over this expensive debacle. The money could
come from Irwin Financial’s director and officer liability in-
surance policy.
    That insurance policy covered directors and officers of
Irwin Financial and all of its subsidiaries, including the de-
funct banks that were taken over by the FDIC. It is apparent-
ly a “wasting” policy, meaning that the legal costs of defense
are charged against the policy limits and thus reduce the
amount available to compensate the FDIC for its expendi-
tures in excess of $500 million to clean up the mess. See
FDIC Br. at 16 n.10; IFC Reply Br. at 19 n.17. And that mess,
10                                                           No. 12-3474

we need to remember, was left behind by the entire Irwin
Financial empire and its directors and officers.
    To the extent those insurance proceeds might be used to
pay Irwin Financial, the result is troubling. It is even more
troubling because two of the three directors and officers
whose actions are targeted in this case and who are covered
by the insurance policy held positions with both the holding
company (Irwin Financial) and its defunct banks. Under
those circumstances, allowing Irwin Financial any prospect
of recovery ahead of or on par with the FDIC turns the equi-
ties upside down. Yet that result follows from the parties’
and our adoption of the direct/derivative dichotomy in in-
terpreting 12 U.S.C. § 1821(d)(2)(A), which gives the FDIC
extensive rights with respect to failed banks. 1
    One possible solution to the problem I see would be a
broader reading of § 1821(d)(2)(A) than the parties have em-
braced. Section 1821(d)(2)(A) provides that when the FDIC
steps in as the conservator or receiver of a failed bank, it
shall succeed by operation of law to “all rights, titles, pow-
ers, and privileges of the insured depository institution, and
of any stockholder, member, accountholder, depositor, officer,
or director of such institution with respect to the institution and
the assets of the institution.”


1 I recognize that, as a practical matter, the trustee at this point repre-
sents the interests of Irwin Financial’s creditors rather than its share-
holders. I doubt that those creditors participated in Irwin Financial’s
profits or the financial debacle that required the FDIC to step in. Nothing
about the trustee’s claims, however, depends on Irwin Financial itself
having gone into bankruptcy. If Irwin Financial had managed to remain
solvent itself, it would be able to assert counts three and seven as direct
claims for the benefit of its own shareholders.
No. 12-3474                                                 11

    The parties, including the FDIC itself, and Judge Easter-
brook’s opinion interpret this language about the rights of a
stockholder to be limited to derivative claims a stockholder
might have. It is not obvious to me that the language must
be interpreted so narrowly, nor did the cases cited at page 2
of the opinion confront this issue or require that result. The
FDIC can already pursue what would be a derivative claim
because the claim really belongs to the failed depository in-
stitution itself. So what does the language referring to “the
rights … of any stockholder” add to the meaning and effect
of the statute? The doctrine that statutes should not be con-
strued to render language mere surplusage is not absolute,
but it weighs in favor of a broader reach that could include
direct claims. See, e.g., Dunn v. Commodity Futures Trading
Comm’n, 519 U.S. 465, 472 (1997). If “rights … of any stock-
holder” was meant to refer only to derivative claims, it’s a
broad and roundabout way of expressing that narrower
idea.
    The statutory language is not precise and could be inter-
preted, for sound policy reasons, more broadly to include a
stockholder’s direct claims that are based on harms resulting
from dealings with the assets of the failed institution, or at
least claims against other persons and entities who were part
of the holding company structure. Under that broader read-
ing, it would be possible for the FDIC to go after all the in-
surance proceeds and other available assets in a case like this
one, at least until the FDIC has been fully reimbursed for the
losses it incurred to protect depositors from the folly of the
banks and their parent company, plaintiff Irwin Financial.
   At the core of the financial crisis of 2008 were policies
that allowed bankers and other financiers to “privatize prof-
12                                                      No. 12-3474

its” but “socialize losses.” See, e.g., Joseph E. Stiglitz, Freefall:
America, Free Markets, and the Sinking of the World Economy
(2010). There are of course powerful reasons for the FDIC
and its counterparts for credit unions and other financial in-
stitutions to play their vital roles in socializing losses to pro-
tect depositors and stabilize the economy. Any student of the
Great Depression who remembers the “runs” on banks can
appreciate those roles. But this case at its core presents a
troubling effort. The holding company structure and the di-
rect/derivative dichotomy are being used in ways that could
allow those who ran the banks into the ground to take for
themselves some of the modest sums available to reimburse
the FDIC for a portion of the socialized losses they inflicted.
    If that result is not contrary to federal law, it should be. I
do not know whether the stakes on a national level are large
enough to motivate policymakers to act, but there are several
ways to accomplish that more just result. First, the FDIC
could choose to modify its interpretation of the ambiguous
§ 1821(d)(2)(A). That course would depend on having courts
accept that new interpretation. Even better, Congress could
amend the statute to clarify that it does not want to let those
responsible for these financial debacles push ahead of the
FDIC in collecting available assets. A statutory rule giving
the FDIC priority over such “direct” claims by stockholders
of failed banks against others within the holding company
structure would surely withstand any challenge by parties
like Irwin Financial under the Takings Clause of the Fifth
Amendment. And no doubt there are other ways that ex-
perts in this field could devise to protect the public interest.
   Counsel for Irwin Financial’s trustee pointed out in oral
argument that the FDIC is supported by insurance premi-
No. 12-3474                                                13

ums collected by covered banks rather than by direct appro-
priations by Congress. The FDIC asserts, however, that its
insurance is backed by the full faith and credit of the United
States government, meaning all taxpayers. In light of that
public interest and the banks’ ability to socialize the losses
they cause, I hope the FDIC and/or the Congress will consid-
er this issue.
