542 F.2d 496 (9th Cir. 1976), 74-3262, Harmsen v. Smith

Docket Nº:74-3262, 74-2962.
Citation:542 F.2d 496
Party Name:Fred H. HARMSEN et al., Plaintiffs and Appellees, v. C. Arnholt SMITH et al., Defendants and Appellants. FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver of United States National Bank, Plaintiff in Intervention and Appellant, v. C. Arnholt SMITH et al., Defendants and Appellees.
Case Date:August 10, 1976
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 496

542 F.2d 496 (9th Cir. 1976)

Fred H. HARMSEN et al., Plaintiffs and Appellees,

v.

C. Arnholt SMITH et al., Defendants and Appellants.

FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver of United

States National Bank, Plaintiff in Intervention

and Appellant,

v.

C. Arnholt SMITH et al., Defendants and Appellees.

Nos. 74-3262, 74-2962.

United States Court of Appeals, Ninth Circuit

August 10, 1976

Rehearing and Rehearing En Banc Denied Oct. 13, 1976.

Page 497

Stanley H. Williams (argued), of Agnew, Miller & Carlson, Los Angeles, Cal., for defendants and appellees in No. 74-2962 and for defendants and appellants in No. 74-3262.

Charles A. Legge (argued), of Bronson, Bronson & McKinnon, San Francisco, Cal., for appellant in No. 74-2962.

Page 498

Joseph W. Cotchett (argued), of Cotchett, Hutchinson & Dyer, San Mateo, Cal., and Roger A. Parkinson (argued), of Long & Levit, Los Angeles, Cal., for defendants and appellants in No. 74-3262.

Before HUFSTEDLER and SNEED, Circuit Judges, and THOMPSON, [*] District Judge.

SNEED, Circuit Judge:

This case arises out of the insolvency of the United States National Bank of San Diego (USNB), a national banking association. To understand the posture of the case on appeal it is necessary to commence with October 18, 1973, the date the Comptroller of Currency declared the USNB insolvent. On that same day the Comptroller appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Several days thereafter two separate groups of minority shareholders brought class actions against the directors of USNB alleging violations of the federal securities laws and the National Banking Act, as well as pendent state law claims of fraud and breach of fiduciary duty. In due course the two groups filed a second amended and consolidated complaint which is the complaint to which this opinion is directed.

Shortly after the initiation of these proceedings by the minority shareholders, the FDIC moved to intervene therein and to displace the shareholder-plaintiffs. The district court determined that the FDIC was a proper intervening party plaintiff but that the FDIC could not preclude the minority shareholders from proceeding as party plaintiffs in this action. In addition, the district court certified this question:

That the question of the shareholder-plaintiffs' right to maintain an individual and representative action in their own right under Section 93 of the National Banking Act after a bank has failed involves a controlling question of law upon which there is substantial ground for difference of opinion, the decision of which will materially advance the ultimate termination of this litigation. The claimed right of the FDIC to assert such causes of action to the exclusion of shareholder-plaintiffs therefore involves a question certifiable under 28 U.S.C. § 1292(b).

The FDIC thus appeals from the district court's refusal to displace the minority shareholders.

Thereafter, the directors of the USNB for their part moved to dismiss the complaint. The district court granted the motion with respect to alleged violations of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 CFR 240.10b-5) thereunder on the ground that the asserted fraud did not take place in connection with the purchase or sale of any security. No appeal has been taken from this ruling.

The district court, however, denied the motion with respect to allegations of violations of the National Banking Act and the pendent state law claims. It also certified the following question:

The question of the shareholder-plaintiffs' right to maintain an individual and representative action in their own right under § 93 of the National Banking Act and under state law for a breach of fiduciary duty and fraud where the only damages claimed are the diminution of the value of their shares after the bank failed involves a controlling question of law upon which there is a substantial ground for difference of opinion, the decision of which will materially advance the ultimate termination of this litigation. The claimed right of the shareholder-plaintiffs to assert such causes of action therefore involves a question certifiable under 28 U.S.C. § 1292(b).

The defendant directors appeal the district court's denial of their motion to dismiss.

We hold that the district court properly refused to permit the FDIC to displace the minority shareholders as plaintiffs and that Section 93 of the National Banking Act

Page 499

enables the minority shareholders as plaintiffs to maintain an individual action in their own right after a bank has failed. We also hold that the district court properly declined to dismiss in its entirety the complaint of minority shareholders with respect to its allegations of violations of the National Banking Act. However, we do hold that certain portions of the complaint, as hereinafter described, alleging violations of the National Banking Act should have been dismissed. Finally, we respond to the second certified question by holding that minority shareholders may, under Section 93 of the National Banking Act, maintain in their own right a cause of action for damages after their bank has failed where the only damages claimed are the diminution of the value of their shares.

Before turning to the exposition of our reasons for these holdings we call attention to the fact that on June 27, 1975, the district court certified this action by the minority shareholders as a class action in which the class consists of "all persons and entities, excluding the defendant-shareholders, who were beneficial owners of United States National Bank common stock on October 18, 1973." The district court reserved the right to limit the class "by excluding any persons whose claims do not qualify for class treatment." There has been no certification under 28 U.S.C. § 1292(b) of a question directed to the propriety of this action by the district court on June 27, 1975, unless the phrase "individual and representative action" in the two certified questions set out above is construed to include such a question. Because the June 27, 1975 class certification followed the formulation of the two certified questions before us, we prefer to assume for the purposes of this appeal that the propriety of class certification is not before us. Hereinafter we shall point out, however, that the district judge may desire to alter in the light of this opinion, his class certification of June 27, 1975.

Our reasons for these holdings may be conveniently divided into two parts, viz. (1) those supporting the conclusion that Section 93 of the National Banking Act permits a shareholder to bring a direct action against the directors of a national bank subject to FDIC receivership, and (2) those that provide the basis for concluding that the complaint, in part, alleges such an action. To these reasons, so divided, we now turn.

I

Section 93 of the National Banking Act.

Section 93 of the National Banking Act comes to us from Section 50 of the National Bank Act of 1863 (12 Stat. 679) and Section 53 of the National Bank Act of 1864 (13 Stat. 116). See 12 U.S.C. § 38. Its present form reads as follows:

If the directors of any national banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate any of the provisions of this chapter, all the rights, privileges, and franchises of the association shall be thereby forfeited. Such violation shall, however, be determined and adjudged by a proper district or Territorial court of the United States in a suit brought for that purpose by the Comptroller of the Currency, in his own name, before the association shall be declared dissolved. And in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its...

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