The opinion of the court was delivered by: PLATT
The United States of America, a third-party defendant in Federal Deposit Insurance Corporation v. National Surety Corporation, et al., 76 C 494, and Corbin v. National Surety Corporation, et al., 76 C 515, moves pursuant to Rule 12 of the Federal Rules of Civil Procedure (FRCP) to dismiss the third-party complaints of the National Surety Corporation, Fireman's Fund Insurance Company, the Aetna Casualty and Surety Company, and the Insurance Company of North America ("Insurance Companies") on the grounds that this Court lacks subject matter jurisdiction over the claims and that the third-party complaints fail to state a claim upon which relief can be granted.
The Federal Deposit Insurance Corporation ("FDIC") moves pursuant to FRCP 12 to dismiss various counterclaims and affirmative defenses asserted against it in FDIC v. National Surety Corporation, et al., supra, FDIC v. Ernst & Ernst, 76 C 2339, and FDIC v. Continental Bank International, 77 C 293, by the Insurance Companies, Ernst & Ernst, and Continental Bank International ("CBI").
Ernst & Ernst moves pursuant to FRCP 13, 14 and 15 to amend its answer in various respects in Gold v. Ernst & Ernst, 75 C 684, and FDIC v. Ernst & Ernst, supra, and, by serving a third-party complaint, to bring in as third-party defendants in these two cases the United States and various directors, officers and/or other employees of Franklin National Bank ("FNB") and Franklin New York Corporation ("FNYC"). Ernst & Ernst also moves to amend its answers to third-party complaints served on it in FDIC v. National Surety Corporation, et al., supra, and Corbin v. National Surety Corporation, et al., supra, so as to add cross-claims against the United States and various directors, officers, and/or other employees of FNB and FNYC. In addition, certain individual defendants have joined Ernst & Ernst's motions and also seek to add claims against the United States.
On October 8, 1974, the Franklin National Bank was declared insolvent by the Comptroller of the Currency who appointed the FDIC as receiver of FNB. On the same day Judge Judd of this Court approved a purchase and assumption agreement whereby certain assets of FNB were transferred to the European-American Bank and Trust Company as purchasing (of certain assets) and assuming (of certain liabilities) bank. In re Franklin National Bank, 381 F. Supp. 1390 (E.D.N.Y. 1974). The FDIC as receiver sold to itself in its corporate capacity all the remaining assets of FNB including the rights of the FNB on various Bankers Blanket Bonds. Those bonds insured FNB and its parent holding company, FNYC, against loss through any dishonest or fraudulent act of employees of either corporation.
The FDIC has brought suit against the issuers of those bonds, the above-named Insurance Companies. Sol Neil Corbin as Trustee in Bankruptcy of FNYC also seeks recovery on those bonds. See Federal Deposit Insurance Corp. v. National Surety Corp., 425 F. Supp. 200 (E.D.N.Y. 1977).
The FDIC has also sued the auditor of FNB, i.e., Ernst & Ernst, in FDIC v. Ernst & Ernst, supra, based on a claim of purported negligence of Ernst & Ernst in its auditing of FNB. That firm is also being sued in a stockholder class action, Gold v. Ernst & Ernst, supra, on substantially the same grounds.
Finally, the FDIC is suing CBI, in FDIC v. Continental Bank International, supra, based on a claim of purported negligence of CBI in failing to notify FNB about the past employment record of an employee alleged to have subsequently caused FNB significant monetary losses.
The facts leading up to the collapse of FNB on October 8, 1974 are, to say the least, complex. Judge Judd in a related case, Huntington Towers v. Franklin National Bank, 75 C 972 (E.D.N.Y. July 1, 1976), aff'd in part, rev. in part, 559 F.2d 863 (2d Cir. 1977), summarized those facts as follows (at p. 6):
"The Comptroller's affidavit in support of his motion for summary judgment sets forth that as of December 31, 1973 Franklin was the twentieth largest bank in the United States, with $5 billion in resources, $3.7 billion of total deposits, and 103 branches in addition to its main office. The stock of its holding company, Franklin New York Corporation (FNYC), was publicly owned, and registered with the Securities & Exchange Commission. A regular examination of Franklin by the Comptroller, begun on November 14, 1973 and concluded on March 8, 1974, showed that Franklin's total resources had grown much faster than its capital; that its growth had been financed almost entirely by short-term borrowed funds representing about 50 percent of the bank's liabilities; and that it had loans which were subject to criticism, although not necessarily uncollectible, amounting to more than its equity capital of $170 million.
"During the week of May 6, 1974, the Comptroller's Office and the Federal Reserve System learned from Franklin that severe losses had occurred in its foreign exchange department, that announcement of these losses would cause a severe liquidity crisis, and that an immediate and massive loan from FRB (Federal Reserve Bank of New York) might be necessary. On May 12, 1974, FNYC Franklin's parent corporation, announced that the foreign exchange department of Franklin had sustained losses of $12 million and that additional losses might be as high as $25 million. Trading in securities of FNYC was promptly suspended. These announcements caused a large run-off of borrowings, in spite of the announcement that the Federal Reserve System would advance funds to Franklin as needed, within the limits of acceptable collateral. Within ten days (by May 22, 1974), the loans from FRB reached an amount of $1,125 billion.
"Between May and October, the Comptroller's Office endeavored to develop long-term solutions to Franklin's problems, including efforts to obtain help from other banks with its liquidity problems, to arrange a purchase of Franklin by some other bank, and to negotiate with FDIC to assist a purchase and assumption of Franklin's assets and liabilities by another commercial bank. A substantial impairment of the bank's equity capital was revealed by a special examination begun on August 14, 1974. By October 7, 1974, FRB informed the Comptroller that continuation of its credit assistance to Franklin (which amounted to $1.768 billion on October 2nd) would no longer be in the public interest. The Comptroller declared Franklin insolvent at 3:00 p.m. on October 8, 1974."
See generally, H. Rep. No. 94-1669 (Adequacy of the Office of the Comptroller of the Currency's Supervision of Franklin National Bank), 94 Cong., 2d Sess. (1976).
The Insurance Companies in their third-party complaints against the United States, essentially allege that the bank examinations and the other regulatory functions described above were conducted negligently, thus contributing to the losses at FNB. Substantially similar allegations are made by CBI in its Seventh Defense and by Ernst & Ernst in its proposed cross-claims and third-party complaints dealing with the United States.
In addition, some of the Insurance Companies suggest, in the board parameters of their third-party complaints
and in their memoranda supporting same, that the United States, via the FRB, the Comptroller, and FDIC, went beyond its normal regulatory role in the instant case and, from some point prior to May, 1974, participated to some extent in the actual operation of FNB.
Thus, for example, at page 29 of the memorandum of the National Surety Corporation and Fireman's Fund Insurance Company, these parties state as follows:
"Finally, Fireman's has pleaded, in paragraph 11, that employees of the OCC (Office of the Comptroller of the Currency) voluntarily undertook to issue orders and directives and make recommendations and suggestions with which they knew FNB was required to comply. This is support for Fireman's contention that the USA was under a duty to act with due care with respect to those orders, directives, recommendations and suggestions."
Also, in the affidavit of Mark Belnick submitted in opposition to the Government's motion to dismiss Aetna Casualty and Surety Company's third-party complaint against the United States, it is stated that (at p. 6):
"During the period from at least 1969 through 1974, the Government actively involved itself in FNB's affairs, undertook intensive regulation and supervision of FNB's operations, and established a constant federal presence at FNB. It did so not only through frequent examinations of the bank (including 'special' examinations of the bank's Foreign Exchange Department), but through regular communications with the officers and directors of FNB and FNYC. These communications concerned matters ranging from the bank's general condition to increases in the bank's capital to the opening of new bank branches and even to FNB's investment in its own office space. Moreover, the Government was not merely exchanging information with FNB -- it was giving advice, making recommendations, and at times urging or directing actions or procedures."
Further, the Insurance Companies argue that since discovery is not completed yet, they have not had a full opportunity to develop all the facts in support of their position. They argue that upon the completion of discovery that the facts may well show that the Government's involvement in the operation of FNB was so extensive that the Government replaced the officers and directors of FNB, and to an extent ran the bank itself.
As these are motions to dismiss and to amend pleadings, we only must decide whether the theories of recovery state claims upon which relief can be granted and so we will assume the truth of all the above allegations. However, it should be clearly understood that the decision below based on that assumption is without prejudice to motions for summary judgment under Rule 56 at the completion of discovery if no facts are developed that support this assumption.
We do note, however, that at the moment the parties are in some dispute as to whether the negligence of the Government arose from too much involvement in FNB or too little. The memorandum of Continental Bank International in opposition to the United States motion to dismiss the third-party complaints, for example, at page eight, states that the Government agencies "stood by for over four years and did virtually nothing to remedy the deficiencies in the face of successive examinations which showed that deficiencies were growing progressively more severe." This is in substantial contrast to the allegations suggested by the parties, as discussed above, that the United States took an active part in the operation of FNB.
As will be discussed below, however, the crucial question is whether the United States by its actions assumed a duty to FNB, its officers, and its directors. If the Government can show that it was in fact uninvolved in the affairs of FNB as indicated below, this would support a motion for summary judgment, but at the moment we are concerned with whether the third-party complaints, counterclaims and cross-claims in question state valid claims.
Based on the above allegations of misconduct by the Government, the Insurance Companies have filed third-party complaints against the United States and counterclaims and defenses against the FDIC alleging that, if they are liable on their bonds, the United States and the FDIC are liable to them. CBI has also asserted those allegations by way of a defense against FDIC. The United States and the FDIC have moved to dismiss these claims and defenses. Likewise, Ernst & Ernst and others seek leave to amend their answers to serve third-party complaints and cross-claims to state claims for contribution against the United States and the FDIC based on a purported liability arising from the alleged misconduct.
This Court now turns to a separate analysis of these various motions.
I -- The United States Motion to Dismiss.
The United States is immune from suit for reasons of sovereign immunity except as it consents to be sued. The Federal Tort Claims Act ("FTCA"), 28 U.S.C. § 2671 et seq. This waiver is specifically contained in 28 U.S.C. § 2674 which states in relevant part as follows:
"The United States shall be liable, respecting the provisions of this title relating to tort claims, in the same manner and to the same extent as a private individual under like circumstances, but shall not be liable for interest prior to judgment or for punitive damages."
The Government first argues that this waiver of sovereign immunity does not cover the case at bar because no "private individual" could be liable for bank examinations or other regulatory activities as this is an exclusively governmental function.
However, the Supreme Court in Indian Towing Company v. United States, 350 U.S. 61, 67-68, 100 L. Ed. 48, 76 S. Ct. 122 (1953), stated as follows:
"While the area of liability is circumscribed by certain provisions of the Federal Tort Claims Act, see 28 U.S.C. § 2680, 28 U.S.C.A. § 2680, all Government activity is inescapably 'uniquely governmental' in that it is performed by the Government.
"On the other hand, it is hard to think of any governmental activity on the 'operational level,' our present concern, which is 'uniquely governmental,' in the sense that its kind has not at one time or another been, or could not conceivably be, privately performed.
"There is nothing in the Tort Claims Act which shows that Congress intended to draw distinctions so finespun and capricious as to be almost incapable of being held in the mind for adequate formulation."
Thus, the Supreme Court rejected that argument, and instead rested its decision on whether the United States had a duty to the plaintiffs. Therefore, we too reject the distinction between governmental and non-governmental activities and turn to the question of duty.
Existence of a Duty on the Part of the United States
The Insurance Companies argue there are two possible sources of a duty here: one based on statutes and the other based on the actual actions of the United States in ...