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IN RE FRANKLIN NATL. BANK SECS. LITIG.

August 17, 1979

IN RE: FRANKLIN NATIONAL BANK SECURITIES LITIGATION


The opinion of the court was delivered by: WEINSTEIN

Memorandum WEINSTEIN, D.J.:

The United States moves for summary judgment against all the third party claims which allege that the regulation of Franklin National Bank (FNB) by the Office for the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Bank (FRB) and the Federal Reserve Bank of New York (FRBNY) makes the United States liable for some of the losses arising from the decline and ultimate demise of FNB. Despite the cogent arguments in favor of this motion, pragmatic considerations, arising from the complex posture of this multidistrict litigation, demand that the motion be denied at this time, with leave to renew should pre-trial conditions change.

I. Posture of this Litigation

 The numerous claims for relief now before us seek to fix responsibility for the financial collapse of FNB. See generally In re Franklin National Bank Securities Litigation, MDL 196 (E.D.N.Y. August 3, 1979); In re Franklin National Bank Securities Litigation, 445 F. Supp. 723 (E.D.N.Y. 1978); In re Franklin Nat'1. Bank Securities Litigation, 73 F.R.D. 25 (E.D.N.Y. 1976). Both the FDIC, in its corporate capacity as receiver of FNB, and the Trustee in Bankruptcy of Franklin New York Corporation (FNYC), the parent holding company of FNB, have filed suit seeking recovery on the various Bankers Blandet Bonds that insured both FNB and FNYC against any loss through dishonest or fraudulent acts by employees of either corporation. See Federal Deposit Insurance Corp. v. National Surety Corp., 425 F. Supp. 200 (E.D.N.Y. 1977). The FDIC and the Trustee have also sued directly various officers and directors of FNB and FNYC. Finally, both the FDIC and the Trustee have filed complaints against Ernst & Ernst, the auditors of FNB and FNYC, alleging negligence in the audits. Overlapping claims have been made by a class of securities holders of FNYC. See In re Franklin National Bank, 381 F. Supp. 1390, (E.D.N.Y. 1974), aff'd.in part, rev'd.in part, rem'd., 574 F.2d 662 (2d Cir. 1978), clarified, No. 76-7616 (2d Cir. May 24, 1979). The FDIC alone has sued Continental Bank Internatioal (CBI) alleging that when FNB was considering hiring Peter Shaddick, a former employee of CBI, and allegedly a prominent figure in the subsequent dishonesty at FNB, CBI misrepresented Shaddick's record and character.

 Extensive criminal charges have been brought against directors and officers of FNB and FNYC. Some have resulted in guilty pleas, some in jury verdicts of guilty, now on appeal, and some have not yet been tried. Almost all of the criminal defendants have pleaded the Fifth Amendment in this civil litigation, thus substantially inhibiting discovery. Nevertheless, pretrial practice has been vigorous, with some 100,000 pages of depositions, millions of documents and scores of motions, requiring many thousands of pages of briefs and supporting exhibits.

 The issues now before us concern the third party claims filed by the primary defendants -- the bonding Companies, Ernst & Ernst, CBI and several of the officers and directors -- against the United States under the Federal Tort Claims Act, 28 U.S.C. § 2671, et seq., alleging, under a variety of legal and factual theories, that the regulatory supervision of FNB by the OCC, FDIC, FRB and FRBNY makes the United States liable for some of the losses suffered by FNB. These third party plaintiffs seek indemnification or contribution for any sum adjudged against them in the primary actions.

 While each of the governmental agencies is independent, they, quite properly, cooperated closely in the period before and after bankruptcy and receivership in carrying out banking and other fiscal policies of the country. The relationship among officials has been close on both an informal and formal basis. For example, the Comptroller of the Currency, charged with, among other things, bank examinations, is one of the triumvirate running the FDIC which insured deposits and now acts as receiver of FNB's assets, being itself the defunct bank's largest creditor.

 II. Possible Bases for a Cause of Action

 The Federal Tort Claims Act partially waives the sovereign immunity of the United States, permitting suit

 ...for injury or loss of property... caused by the negligent or wrongful act or omission of any employee of the government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.

 28 U.S.C. § 1346(b). This provision has never been interpreted to create any new causes of action (claims for relief) against the United States, but rather to confer only a procedural remedy. See, e.g., Dalehite v. United States, 346 U.S. 15, 73 S. Ct. 956, 97 L. Ed. 947 (1953); Certain Underwriters at Lloyds, 511 F.2d 159 5th Cir. 1975); Kaufman v. Evans, No. 127-71 (D.N.J. July 21, 1977). State law defines the possible causes of action. See, e.g., First State Bank of Hudson County v. The United States of America, D.C. Civ. No. 76-1084 (3rd Cir. May 30, 1979); Harmsen v. Smith, 586 F.2d 156 (9th Cir. 1978); Birnbaum v. U.S., 436 F. Supp. 967, 976 ff (E.D.N.Y. 1977), aff'd, 588 F.2d 319 (2d Cir. 1978). But cf. Davis, Administrative Law, § 25.08-2 at 566 (Supp. 1976) (arguing that the Supreme Court has occasionally neglected this statutory requirement).

 The third party plaintiffs, arguing under the basic New York principles of contribution and indemnity, N.Y.C.P.L.R. § 1401; See, e.g., Bay Ridge Air Rights Inc. v. State, 44 N.Y.2d 49, 404 N.Y.S.2d 73, 375 N.E.2d 29 (1978); Klinger v. Dudley, 41 N.Y.2d 362, 393 N.Y.S.2d 323, 361 N.E.2d 974 (1977); North Colonie Central School Dist. v. McFarland Const. Co., Inc., 60 A.D.2d 685, 399 N.Y.S.2d 933 (1977), contend that an action for contribution or indemnity is possible here because the regulatory agencies named as third party defendants owed an actionable duty to FNB and its shareholders. Cf. First State Bank of Hudson County v. The United States of America, D.C.Civ. No. 76-1084 (3rd Cir. May 30, 1979); Harmsen v. Smith, 586 F.2d 156 (9th Cir. 1978); Social Security Admin. Baltimore F.C.U. v. United States, 138 F. Supp. 639 (D.Md. 1956) (identical claims raised under law of New Jersey, California and Maryland). See also United States v. Yellow Cab Co., 340 U.S. 543, 71 S. Ct. 399, 95 L. Ed. 523 (1951). Two primary theories are offered to justify finding such a duty: (i) a duty should be implied from the statutory obligations imposed upon these regulatory agencies, See, e.g., Runkel v. City of New York, 282 A.D. 173, 123 NYS 2d 485 (1953), and (ii) a duty should be found to have been spontaneously generated by any or all of the specific actions taken by those agencies in their supervision of FNB -- essentially a theory of assumption of duty. See, e.g., Glanzer v. Shepard, 233 NY 236, 135 N E 275 (1922); Zibbon v. Town of Cheetowaga, 51 A.D. 2d 488, 382 NYS 2d 152 (4th Dept.), appeal Dismissed, 39 NY 2d 1056, 387 NYS 2d 428, 355 N E 2d 388 (1976); Paul v. Staten Island Edison Corporation, 2 A.D. 2d 311, 155 NYS 2d 427 (2d Dept. 1956). Neither contention is convincing.

 A. Implying a Duty from the Bank Regulation Statutes

 The third party plaintiffs first argue that the broad statutory schemes governing these bank regulatory agencies, See, e.g., Federal Reserve Act, 12 U.S.C. § 221 et seq.; Federal Deposit Insurance Act, 12 U.S.C. § 1811 et seq.; National Bank Act, 12 U.S.C. § 21 et seq., should provide a basis for implying a duty of care, running from those agencies to the banks and their shareholders, and that the failure of those agencies either to detect the weakness or alleged dishonesty at FNB, or to take appropriate regulatory action to remedy those problems, should be held a breach of that duty, and thus a basis for liability.

 Similar claims have been raised in the Litigations concerning other bank failures. So far no court has held that any of the statutory provisions governing the OCC, the FRB or the FDIC create any actionable duty running to the regulated institutions. See, e.g., First National Bank of Hudson County v. The United States of America, No. 76-1084 (3rd Cir. May 30, 1979); Harmsen v. Smith, 586 F.2d 156 (9th Cir. 1978), affirming, No. Civ. 73-460-E (S.D. Cal. July 28, 1975); Kaufman v. Evans, No. 127-71 (D.N.J. July 21, 1977). Cf. Social Security Administration Baltimore Federal Credit Union v. United States, 138 F. Supp. 639 (D. Md. 1958) (same conclusion regarding the regulatory provisions of the Federal Credit Union Act, 12 U.S.C. § 1751 et seq.).

 The provisions most frequently analyzed in these earlier cases has been that requiring the OCC to conduct examinations of every national bank. 12 U.S.C. § 481. The courts have uniformly concluded that the Comptroller's primary duty is to supervise the banking system for the protection of the public and the national economy as a whole -- and not for the protection of an individual banking institution. The purpose of national banking examinations under section 481 is to collect the information necessary to perform this broader regulatory function. See, e.g., Harmsen v. Smith, 586 F.2d 156, 157 (9th Cir. 1978); Kaufman v. Evans, No. 127-71, 5-6 (D.N.J. July 21, 1977). see also Senate Doc. No. 123, Pt. 2 at page 901, 82nd Cong. 2d Sess. (1952) (statement of Comptroller of the Treasury before the Joint Committee of the Economic Report) ("the chief duty of the national bank examiner is to ascertain that the statutory requirements and restrictions enacted by Congress and administrative regulations adopted thereunder are being complied with and that the lending and investment policies of the bank, and its operating procedures, are such as to minimize the dangers to the banking system"). The examinations are not conducted as a service to the banks: "Although bank examinations may reveal irregularities and even fraud, which discoveries may redound to the benefit of innocent persons, including stockholders, that result is merely an incidental benefit to the examined banks...." Harmsen v. Smith, 586 F.2d 156, 157 (9th Cir. 1978). Cf. Social Security Administration Baltimore Federal Credit Union v. United States, 138 F. Supp. 639, 645 (D.Md. 1956) ("The detection of fraud is not a primary function of the examinations."). This analysis has led every court addressing the issue to conclude that the Comptroller's mandate to conduct national bank examinations does not create an actionable duty running to the examined bank; the Comptroller's failure to detect weakness or dishonesty at an examined bank gives rise to no cause of action against the United States under the Federal Tort Calims Act. See, e.g., Harmsen v. Smith, 586 F.2d 156 (9th Cir. 1978); In re Franklin National Bank Securities Litigation, 445 F. Supp. 723 (E.D.N.Y. 1978); Kaufman v. Evans, No. 127-71 (D.N.J. July 21, 1977).

 Plaintiffs have fared no better in attempting to imply a duty from the statutory provision granting the FDIC power to examine insured banks. 12 U.S.C.§ 1820(b). Again, courts have held that the primary purpose of the examination is not to protect the individual banking institutions. In the case of FDIC examinations, the fundamental purpose is to safeguard the insurance fund: "The purpose of the bank examinations by the FDIC under 12 U.S.C. § 1820(b) is to prevent losses that would result in claims against the insurance fund.... If bank examinations by the FDIC reveal any irregularities or fraud, such examinations, though they may inure incidentally to the benefit of a bank, are intended primarily for the protection of the insurance fund." Frist State Bank of Hudson County v. United States of America, D.C. Civ. No. 76-1084,5,6 (3rd Cir, May 30, 1979). see also S. Rep. No. 1821, 86th Cong., 2d Sess. (1960) Reprinted in [1960] U.S. Code Cong. & Ad. News 3234, 3236 (discussing amendments to the Federal Deposit Insurance Act) (the FDIC's "supervisory responsibilities relate to specific types of actions which have a direct bearing upon its role as insurer"). This interpretation of the purpose of FDIC bank examinations has convinced courts that the statutory provision authorizing those examinations creates no duty to the examined bank, or to its shareholders or depositors, the failure of the FDIC to discover fraud or weakness, or even to disclose such adverse ...


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