American Cas. Co. v. Community Sav. & Loan, Inc.

• Citation: 635 F. Supp. 539
• Decision Date: 15 April 1986
• Docket Number: Civ. A. No. R-85-4615.
• Court: U.S. District Court — District of Maryland
• Parties: AMERICAN CASUALTY COMPANY OF READING, PA., Plaintiff, v. COMMUNITY SAVINGS & LOAN, INC., et al., Defendants.

635 F. Supp. 539

AMERICAN CASUALTY COMPANY OF READING, PA., Plaintiff, v. COMMUNITY SAVINGS & LOAN, INC., et al., Defendants.

Civ. A. No. R-85-4615.

United States District Court, D. Maryland.

April 15, 1986.

William A. Hylton, Jr., Hylton & Gonzales, Baltimore, Md., and Michael P. Tone, Peterson, Ross, Schloerb & Seidel, Chicago, Ill., for plaintiff.

John B. Isbister, J. Hardin Marion, Tydings & Rosenberg, Baltimore, Md., for defendant Community Sav. & Loan, Inc. and State of Md. Deposit Ins. Fund.

Mark H. Tuohey, III, Kirby, Gillick, Schwartz and Tuohey, P.C., Washington, D.C., for defendant Clayton C. McQuiston.

M. Albert Figinski, Melnicove, Kaufman, Weiner & Smouse, P.A., Baltimore, Md., for defendants Clayton C. McQuiston, Joseph Cunningham and James B. Decrin.

John R. Fornaciari, Steele, Simmons & Fornaciari, Washington, D.C., William W. Cahill, Jr., Weinberg & Green, Baltimore, Md., for defendant Tom J. Billman.

James H. Hulme, Howard B. Possick, Arent, Fox, Kintner, Plotkin & Kahn, Washington, D.C., for defendant John D. Faulkner, Jr.

William J. Murphy, Baltimore, Md., for defendants Michael C. Shomper, Elaine A. Dudash and Priscilla A. Fink.

Warren S. Oliveri, Jr., J. Jonathan Schraub, Golden, Freda & Schraub, P.C., Washington, D.C., for defendant Thomas H. Fellows.

Robert P. Trout, Gloria B. Solomon, Dunnells, Duvall, Bennett & Porter, Washington, D.C., for defendant James B. Deerin, Jr.

Vincent E. Ferretti, Jr., Tietz & Ferretti, Rockville, Md., Paul L. Friedman, White & Case, Washington, D.C., for defendant Leonard Meltz, Jr.

James A. Rothschild, Baltimore, Md., for defendant Robert N. Kemp, Jr.

J. Philip Kessel, Washington, D.C., for defendant Jane Goodwin David.

MEMORANDUM AND ORDER

RAMSEY, District Judge.

Plaintiff American Casualty Company of Reading, Pennsylvania (hereinafter "American Casualty") has brought this action seeking reformation or, in the alternative, rescission of an insurance policy. The subject policy is a directors' and officers' liability policy issued to Community Savings & Loan, Inc. (hereinafter "Community") and its directors and officers. Named as defendants in this action are Community, The Maryland Deposit Insurance Fund (hereinafter "MDIF"), various former and/or current directors and officers of Community, and Richard Kurrus, who is named as a representative of a potential class of people who may have claims against Community's directors and officers. Presently before the Court are defendants' motions to dismiss.¹ Plaintiff has opposed. The issues are thoroughly briefed and the Court now rules pursuant to Local Rule 6 (D.Md.1985) without need for a hearing.

The first issue presented is whether MDIF is an arm or alter ego of the state of Maryland. If MDIF is an arm or alter ego of the state, then the Eleventh Amendment would bar suit against MDIF in federal court. See Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 100, 104 S.Ct. 900, 908, 79 L.Ed.2d 67 (1984). Furthermore, MDIF would not be subject to the Court's diversity jurisdiction. See Moor v. County of Alameda, 411 U.S. 693, 717-18, 93 S.Ct. 1785, 1799-1800, 36 L.Ed.2d 596 (1973), State Highway Commission of Wyoming v. Utah Construction Co., 278 U.S. 194, 199, 49 S.Ct. 104, 106, 73 L.Ed. 262 (1929). Should the Court find that MDIF is an arm or alter ego of the state and therefore not subject to suit in federal court, the Court must next determine whether MDIF is a necessary party to this litigation. If MDIF is found to be a necessary party, the Court must finally determine whether the action may proceed "in equity and good conscience" or whether the action must be dismissed.

In determining whether MDIF is an arm or alter ego of the state, the Court must examine MDIF's relationship with the state of Maryland. MDIF was created as a part of the Department of Licensing and Regulation. Md.Fin.Inst.Code Ann. § 10-102 (Supp.1985). That department is "a principal department of the state government." Md.Ann.Code art. 41, § 221(a) (1982). MDIF is subject to virtually complete government control. MDIF's Director is appointed by the Governor, Md.Fin.Inst. Code Ann. § 10-103(a) (Supp.1985); he serves at the pleasure of the Secretary of Licensing and Regulation, Id. § 10-105; the Director and his staff are paid from state funds, Id. § 10-104(a); and the majority of the members of MDIF's Board of Directors are appointed directly by the Governor, Id. § 10-103(d)(2)(ii). The Director's hiring authority is governed by state budgetary constraints. Id. § 10-104(a).

MDIF is "exempt from all special and ordinary taxes" imposed by the state. Section 7, ch. 6, Acts 1985, 1st Sp.Sess. MDIF's Director is granted qualified immunity. Id. Section 9, ch. 6. Any net earnings of MDIF are to be "accumulated for the benefit of the state." Md.Fin.Inst.Code Ann. § 10-112(c) (Supp.1985). And it is the statutory policy of the state to appropriate funds to MDIF "to the extent necessary to protect holders of savings accounts in member associations." Id. § 10-116.

The issue of whether MDIF is an agency of the state of Maryland is not one of first impression in this District. Judge Miller, of this Court, in a related case, Community Savings & Loan, Inc. v. Citibank N.A. Civil No. M-85-4005 (D.Md. October 10, 1985) held that MDIF is an agency of the state of Maryland (Transcript of Opinion at 4). In Foremost Guaranty Corp. v. EPIC Mortgage, Inc., C.A. 85-1298-A (E.D.Va. March 24, 1986), another case involving Community, Judge Hilton of the United States District Court for the Eastern District of Virginia held:

MDIF is an arm of the State of Maryland, it is a state agency, and ... they are the real party in interest as far as Community Savings and Loan is concerned. And therefore, there is not diversity in this case and the motion to dismiss will be granted.

Transcript of Opinion at 16, 17. This Court is in complete agreement with Judge Miller's and Judge Hilton's decisions and so finds. As an agency of the state of Maryland, MDIF is not subject to this Court's diversity jurisdiction. See Moor v. County of Alameda, 411 U.S. at 717, 718, 93 S.Ct. at 1799, 1800, State Highway Commission of Wyoming v. Utah Construction Co., 278 U.S. at 199, 49 S.Ct. at 106. Furthermore, the Eleventh Amendment bars suits brought in federal courts against a state or its agencies.² See Pennhurst State School & Hospital v. Halderman, 465 U.S. at 100, 104 S.Ct. at 908; Highfield Water Co. v. Public Service Commission, 488 F.Supp. 1176, 1178 (D.Md.1980). Accordingly, the suit brought against MDIF must be dismissed.

The next issues are whether MDIF is a necessary party to this litigation and, if so, whether this Court may proceed with the litigation without it. American Casualty brought this action against Community and its directors and officers seeking the reformation or, in the alternative, the rescission of the directors' and officers' liability insurance policy which it issued to Community. MDIF was originally sued as conservator of Community, after it was appointed conservator by order of the Circuit Court for Montgomery County, Maryland. As conservator, MDIF "exercised the powers, rights, and privileges of the officers, directors, and members of Community savings and loan association." Md.Fin. Inst.Code Ann. § 9-702(b)(1) (Supp.1985). MDIF also had full authority to transact Community's business, conduct its operations, manage its assets and enforce its substantive rights. Id., § 9-702(b) (Supp. 1985). On April 8, 1986, the Judge presiding over Community's conservatorship converted the conservatorship into a full receivership thereby giving total control of Community's assets to MDIF. See id., §§ 9-708, 9-709 (Supp.1985). It is MDIF, therefore, as receiver of Community which is controlling the instant litigation. Accordingly, MDIF is a necessary party to the litigation.

Furthermore, the insurance policy which American Casualty seeks to limit or rescind is an asset of Community. The policy insures Community for any loss resulting from the wrongful acts of its directors or officers. If American Casualty prevails, and the policy is either limited or rescinded, the receiver's ability to meet its liabilities to depositors will be disminished. This in turn will directly impact MDIF, as insurer of Community's deposits, and ultimately the funds of the State. Accordingly, the financial stake which MDIF has in the outcome of the case makes it a necessary party to the litigation.

The importance of MDIF as a party in cases involving Community Savings & Loan has been recognized by this District. In remanding Community Savings & Loan, Inc. v. CitiBank, N.A., supra, to state court, Judge Miller held:

In my judgment ... MDIF ... is the real party in interest in this case. It is controlling the litigation. It may ultimately be required to pay money to the depositors. And the outcome of this particular lawsuit may have some substantial bearing on whether or not it has to pay out money. It is admittedly a contingent liability but it is certainly not a totally illusory possibility. Therefore, I think not only control but other facts indicate that MDIF has a substantial stake in the outcome of this litigation.

Transcript of Opinion at 3.

It is readily apparent that MDIF is a necessary and integral part of this litigation. It would be impossible for the Court to fashion the relief requested by American Casualty without affecting MDIF's interests. Because MDIF can not be made a party to this suit, the case must be DISMISSED as to all parties.

In dismissing the claim brought in federal court, the Court recognizes that the plaintiff has ready access to the state courts as to the very issue posed by this litigation since before American Casualty filed its amended complaint with this Court, MDIF filed an action in state court seeking a declaration that the policy issued by American Casualty is in full force and effect. See State of Maryland Deposit...