Brill v. Northern California Sav. & Loan Ass'n

• Decision Date: 07 December 1982
• Docket Number: No. C-82-3137 RFP.,C-82-3137 RFP.
• Citation: 555 F. Supp. 566
• Parties: Alan BRILL, Harold Brill, and Helen Brill, Plaintiffs, v. NORTHERN CALIFORNIA SAVINGS AND LOAN ASSOCIATION, et al., Defendants.
• Court: U.S. District Court — Northern District of California

555 F. Supp. 566

Alan BRILL, Harold Brill, and Helen Brill, Plaintiffs, v. NORTHERN CALIFORNIA SAVINGS AND LOAN ASSOCIATION, et al., Defendants.

No. C-82-3137 RFP.

United States District Court, N.D. California.

December 7, 1982.

James J. Rowan, Howell & Hallgrimson, San Jose, Cal., for plaintiffs.

David M. Ivester, Washburn & Kemp, San Francisco, Cal., for defendant Great Western Sav.

Allen L. Martini, Ropers, Majeski, Kohn, Bently, Wagner & Kane, San Jose, Cal., for defendant Thunderbird Realty.

J. Stoffel, San Diego, Cal., for defendant Dave Garber.

Daniel Hanley, San Jose, Cal., for defendants.

MEMORANDUM

PECKHAM, Chief Judge.

Plaintiffs seek recovery from their lender and an associated party for the flood destruction of property owned by plaintiffs. Defendants move to dismiss pursuant to F.R.C.P. 12(b)(6).

STATEMENT OF FACTS

Plaintiffs Alan Brill, Harold Brill, and Helen Brill ("the Brills") purchased a residence at 117 Beth Drive, Felton, California, in December, 1979, at a price of $109,000. Defendant Northern California Savings provided first deed of trust financing in the amount of $60,500. The sellers, Richard and Evelyn Jones, took back a note for $20,000 secured by second deed of trust. The balance of the purchase price was paid in cash.

In January, 1982, flooding occurred that severely damaged the property and rendered the residence uninhabitable. Plaintiffs estimate the damage at $80,000. They had no flood insurance.

Prior to the flood, the Brills had rented out a portion of the property. After the flood, the rental income was interrupted, and the Brills were unable to make payments on the two outstanding notes. The sellers' assignee has filed a Notice of Default and is threatening foreclosure. The complaint states that Northern California Savings has also threatened to foreclose.

Plaintiffs filed this action in June, 1982, seeking damages, injunctive and declaratory relief. The complaint named Northern California Savings, which has been succeeded through acquisition by Great Western Savings and Loan Association ("Great Western")¹ and Palo Alto Financial Corporation, trustee under the first trust deed, which has been succeeded by California Reconveyance Company.²

LEGAL CLAIMS

Plaintiffs premise jurisdiction on 28 U.S.C. § 1331 and 42 U.S.C. §§ 4001 et seq., the National Flood Insurance Program ("NFIP"), which plaintiffs claim gives them a right to relief. Plaintiffs have also pleaded a state law claim of negligent misrepresentation against Great Western. Plaintiffs base their claim on two sections of the NFIP, 42 U.S.C. § 4012a(b) and 42 U.S.C. § 4104a. Section 4012a(b) directs federal agencies that oversee banks, savings and loan associations, and similar institutions to promulgate regulations prohibiting federally insured and regulated lenders from making loans on property located in flood hazard zones, unless such property is insured against flood damage to at least the principal balance of the loan for the term of the loan.³ Section 4104a instructs the same agencies to require the lenders under their supervision to provide notification to prospective borrowers if property on which they are borrowing is located in a flood hazard zone.⁴

Plaintiffs argue that section 4012a(b) gives rise to a private right of action for damages that result from a lender's failure to require its borrowers to obtain flood insurance when they purchase property in a flood zone. They argue that section 4104a creates a private right of action for resulting damages against a lender who fails to notify purchasers that property they propose to buy is located in a flood zone. Plaintiffs negligent misrepresentation claim against Great Western is based on the allegation that the lender represented without reasonable grounds for so believing that the NFIP's flood insurance requirement did not apply to this case.

Great Western has moved to dismiss the action under Rule 12(b)(6), either for failure to state a claim upon which relief can be granted or for lack of subject matter jurisdiction in that no substantial federal question is presented. Great Western's failure to require the purchase of flood insurance on the property and its failure to notify the Brills that the property was in a flood zone must be assumed for purposes of this motion. The sole issue before the court on this motion is whether the NFIP sections relied on by the Brills create an implied private right of action.

DISCUSSION

Several courts have addressed the issue of whether the NFIP creates any implied private right of action, and the results have not been uniform. Plaintiffs have provided the court with two district court opinions, Adlesperger v. Eureka Federal Savings & Loan Ass'n, Civ. 79-1360 (D.Kan. Feb. 4, 1981) (hereinafter cited as Adlesperger); Hofbauer v. Northwestern National Bank of Rochester, 547 F.Supp. 940 (D.Minn.1981) (hereinafter cited as Hofbauer), holding that sections 4012a(b) and 4104a do create an implied private right of action. Great Western cites several cases that reached the opposite conclusion. Till v. Unifirst Federal Savings & Loan Ass'n, 653 F.2d 152 (5th Cir.1981) (hereinafter cited as Till); Arvai v. First Federal Savings & Loan Ass'n, 539 F.Supp. 921 (D.S.C.1982); R.B.J. Apartments v. Gate City Savings & Loan Ass'n, 315 N.W.2d 284 (N.D.1982); Pippin v. Burkhalter, 276 S.C. 438, 279 S.E.2d 603 (1981).

All of the decided cases and the parties here agree that the framework for analyzing whether a private right of action should be implied was established by the Supreme Court in Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975). The Court listed four relevant factors:

First, is the plaintiff "one of the class for whose especial benefit the statute was enacted,"—that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?

Id. at 78, 95 S.Ct. at 2088 (citations omitted).

Great Western correctly points out that in cases since Cort, the Supreme Court has become more restrictive toward the implication of private rights of action. The listing of factors in Cort seemed to indicate that a strong showing of consistency with the underlying purposes of the legislation might compensate for a weaker showing of legislative intent. Under the later cases, it is clear that the issue is one of statutory construction: "The central inquiry remains whether Congress intended to create, either expressly or by implication, a private cause of action. Touche Ross & Co. v. Redington, 442 U.S. 560, 575, 99 S.Ct. 2479, 2489, 61 L.Ed.2d 82 (1979). "The factors specified in Cort remain the `criteria through which this intent could be discerned' citation omitted." California v. Sierra Club, 451 U.S. 287, 293, 101 S.Ct. 1775, 1779, 68 L.Ed.2d 101 (1981). The Court has stated, moreover, that the third and fourth Cort factors (consistency with legislative purpose and traditional state concern) "are only of relevance, if the first two factors statute enacted for plaintiffs' especial benefit and indications of legislative intent give indication of congressional intent to create the remedy. citation omitted" Id. at 298, 101 S.Ct. at 1781.

A. Especial Benefit

The first Cort factor is whether the plaintiff is one of the class for whose especial benefit the statute was enacted (the Court supplied the emphasis in Cort). To determine whether the Brills fall into such a class with respect to sections 4012a(b) and 4104a, it is helpful to step back for an overview of the purposes and policies of the legislation.

The NFIP was enacted in 1968 to create a nationwide program of flood insurance for property owners in flood areas and to encourage sound local land use policies to minimize flood damage. The 1968 Act operated on a voluntary basis insofar as local communities' participation in the program was concerned. The 1973 amendments made participation virtually mandatory by cutting off (as of 6/1/75) federal assistance to any non-participating community for any flood-zone construction purposes. Administration of the NFIP was placed under HUD.

The 1968 and 1973 congressional findings and declaration of purpose reveal the concerns of Congress about flood zone losses and the dual solution of pooling the risk to existing flood zone development while discouraging further flood zone construction.⁵

While home purchasers obviously benefit from this program, Congress appears to have been moved at least as much by the impact of mounting flood relief costs on the federal treasury. See Till, supra, 653 F.2d at 158-59; H.R.Rep. No. 1585, 90th Cong., 2d Sess., reprinted in 1968 U.S.Code Cong. & Ad.News 2873, 2966-67; S.Rep. No. 93-583, 93d Cong., 1st Sess., reprinted in 1973 U.S.Code Cong. & Ad.News 3217, 3218-20, 3223. Section 4012a(b) mandates only enough insurance to cover the principal balance of loans by federally regulated and insured lenders. If intended to especially benefit flood zone property purchasers, NFIP is a rather oddly underinclusive statute; it ignores not only the customers of non-federally insured and regulated lenders but even the equity interest of the customers of federal lenders.

The Brills make a misconceived argument with respect to application of especial benefit in this case. They urge that one need not be the sole beneficiary to be within the class for whose especial benefit the statute was enacted. But the defendants do not dispute this. Rather, the argument is over how the Supreme Court has developed the meaning of "especial benefit."

Plaintiffs ...