This section contains the nature of the case and procedural background.

American Diversified Savings Bank (P) was acquired by Ranbir Sahni and Lester Day. ADSB's principal activity was the purchase, development, and sale of real estate through limited partnerships sponsored by ADSB and its subsidiaries. These activities were funded by ADSB's insured deposits, which totaled $958 million. ADSB's deposits were insured by the FDIC (P). ADSB retained D to assist with two real estate syndications by creating private placement memorandums. These were 300-page documents designed to induce outside investors to become limited partners in the two real estate deals. ADSB's financial condition was, in fact, far from sound. Sahni, Day had intentionally and fraudulently overvalued ADSB's assets, engaged in the sham sale of assets in order to create inflated 'profits,' and generally 'cooked the books.' Touche the corporation's auditor and Arthur Young & Company who replaced them began to express concerns about ADSB's financial condition. ADSB engaged a third accounting firm, Coopers & Lybrand. Five months before the private placement offerings were sold Touche had notified ADSB, Rogers & Wells (then ADSB's attorneys), and federal regulators that they believed ADSB's net worth was less than zero. D never communicated with Arthur Young, Touche Ross, Rogers & Wells, or ADSB's federal or state regulators. Arthur Young was not aware that D had included its March 31, 1985, audited financial statement, by then almost six months out of date, in the Gateway Center paperwork. The offerings closed on December 31, 1985. On February 14, 1986, FDIC (P) stepped in as conservator for ADSB. P filed a lawsuit alleging breach of fiduciary duty against Sahni and Day and RICO violations against Sahni. P began receiving complaints from investors that they had been misled by the offerings and demanded a return of their investments. P offered to have the partnerships rescind the investments. In accepting the rescission offer, each investor assigned to P 'all actions, causes of action, claims, or suits of any kind or nature whatsoever against any person or entity arising from offerings. P then sued D for professional negligence, negligent misrepresentation, and breach of fiduciary duty. D argued it owed no duty to ADSB or its affiliates to ferret out ADSB's own fraud; (2) the conduct of ADSB's wrongdoing officers must be imputed to ADSB, and that P, as receiver, stood in the shoes of ADSB; (3) and that therefore, as an ordinary assignee, P was barred from pursuing any claims against D. The court granted D's motion for summary judgment. P appealed. The Court of Appeals reversed and remanded holding that (1) federal law, not state law, governed the application of defenses against P; and (2) under a federal rule of decision, P, as receiver, was not estopped from litigating its claims against the law firm because of the allegedly unclean hands of the S & L's insiders. D appealed.

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