Charter Oak Federal Sav. Bank v. State of Ohio

• Decision Date: 18 May 1987
• Docket Number: Civ. No. C-1-86-0715.
• Citation: 666 F. Supp. 1040
• Parties: CHARTER OAK FEDERAL SAVINGS BANK, Plaintiff, v. STATE OF OHIO, et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

666 F. Supp. 1040

CHARTER OAK FEDERAL SAVINGS BANK, Plaintiff, v. STATE OF OHIO, et al., Defendants.

Civ. No. C-1-86-0715.

United States District Court, S.D. Ohio, W.D.

May 18, 1987.

Gene Mesh, Cincinnati, Ohio, for plaintiff.

Kathleen McManus, Philip Brown, Columbus, Ohio, Roger Makley, Dayton, Ohio, David Bodiker, Columbus, Ohio, for defendants.

ORDER

CARL B. RUBIN, Chief Judge.

This matter is before the Court on the State of Ohio's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) (doc. 14), as well as on requests for dismissal from the eighteen remaining state defendants in this action. Plaintiff filed a motion in opposition to dismissal (doc. 24) to which defendants replied. (doc. 26).

Plaintiff's predecessor, Charter Oak Savings Association, was an Ohio building and loan association subject to state regulation pursuant to Ohio Rev. Code chapter 1151 and Title 17. Charter Oak Savings was one of seventy state building and loan associations that also were members of the Ohio Deposit Guarantee Fund (hereinafter "ODGF,") a private, non-profit corporation organized under Ohio Rev.Code sections 1151.80 to 1151.92, in order to assure the liquidity of the member associations and to guarantee the deposits. See State ex rel. Celeste v. Smith, 17 Ohio St.3d 163, 478 N.E.2d 763 (1985). In order to perform this purpose, ODGF required each member association to maintain deposits in the fund which equaled two percent of the deposit liabilities of such member.

In March, 1985, Home State Savings Bank, a member of ODGF, became financially insolvent. As a result of Home State Savings Bank's collapse, the State of Ohio's Superintendent of Savings and Loan Associations on March 20, 1985, appointed a conservator for ODGF pursuant to Ohio Rev.Code 1157.01(A) and on April 12, 1985, the Superintendent began liquidation proceedings in the Court of Common Pleas of Hamilton County. Ultimately, ODGF was required to pay over $81 million for the benefit of Home State Savings Bank depositors. As a result of this payover, Charter Oak Savings Association alleges it lost the following: a $6.5 million certificate of deposit in ODGF and $126 million in connection with the collapse of Home State Savings Bank, which includes a $45 million unsecured advance made to Home State Savings Bank immediately before its collapse and $81 million paid by ODGF to the purchaser of Home State Savings Bank (complaint, par. 77, 78). Plaintiff further claims it lost its $3 million proportional interest in the reserve fund and suffered a run on deposits between March 5 and March 15, 1985. (Complaint, par. 81, 83).

Charter Oak Savings Association contends the State of Ohio defendants failed to properly regulate Home State Savings Bank and ODGF, failed to disclose the failing condition of Home State Savings and failed to disclose to Charter Oak Savings Association that its deposits were not backed by the full faith and credit of the State of Ohio.

Plaintiff alleges that these acts or omissions by the state constitute a violation of, or aided or abetted violations of, section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78j, and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. 240.10b-5. The complaint also includes allegations of Section 20(a) violations of the Securities Exchange Act and pendent common law claims.

Named in the suit are the State of Ohio, Division of Savings and Loan Associations, Connie J. Harris, superintendent; three former state superintendents; the ODGF; and 14 present or former ODGF officials. All individuals are sued in their official capacities.

Plaintiff asserts the Court has federal question jurisdiction in this case, while the state defendants maintain the Court lacks jurisdiction over the subject matter, due to the immunity provided by the eleventh amendment to the United States Constitution. For the reasons below, defendants' motions to dismiss pursuant to Fed.R.Civ. Pro. 12(b)(1) are granted.

DISCUSSION

Defendants claim immunity from suit in federal court based on the eleventh amendment to the United States Constitution which provides:

The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.

The amendment has been judicially extended to bar a citizen from bringing suit against his own state in federal court. Hans v. Louisiana, 134 U.S. 1, 10 S.Ct. 504, 33 L.Ed. 842 (1890). This bar remains in effect when state officials are sued for damages in their official capacity. Kentucky v. Graham, 473 U.S. 159, 169, 105 S.Ct. 3099, 3107, 87 L.Ed.2d 114 (1985).

The Supreme Court has observed the reason a state generally may not be brought into federal court against its will is that states of the Union still possess attributes of sovereignty "... save where there has been `a surrender of the immunity in the plan of the constitutional convention.'" Principality of Monoco v. Mississippi, 292 U.S. 313, 322-23, 54 S.Ct. 745, 747-48, 78 L.Ed. 1282 (1934) (footnote omitted), quoting The Federalist, No. 81. "The Constitution never would have been ratified if the States and their courts were to be stripped of their sovereign authority except as expressly provided by the Constitution itself." Atascadero State Hospital v. Scanlon, 473 U.S. 234, 238 n. 2, 105 S.Ct. 3142, 3146 n. 2, 87 L.Ed.2d 171 (1985).

As a consequence, the eleventh amendment forbids damage suits against a state in federal court, with two exceptions. Id. at 238, 105 S.Ct. at 3146. First, Congress may abrogate the states' eleventh amendment immunity. Id. Second, a state may consent to damage suits against it in the federal forum, thereby waiving its eleventh amendment immunity. Id. Plaintiff Charter Oak Savings Association contends both exceptions apply here and serve to remove defendants' eleventh amendment immunity. The Court will examine both theories against the applicable standard of review for a motion to dismiss. In considering a motion to dismiss for lack of subject matter jurisdiction, the allegations of the complaint should be construed favorably to the pleader. Ecclesiastical Order of the ISM of AM, 725 F.2d 398, 403 (6th Cir.1984), quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). The issue is not whether a plaintiff ultimately will prevail, but whether the claimant is entitled to offer evidence to support the claims. Id.

I. ABROGATION OF IMMUNITY

Plaintiff contends that Congress abrogated the states' eleventh amendment immunity in the area of securities fraud regulation when it enacted the Securities Act Amendments of 1975, Pub.L. No. 94-29, 89 Stat. 97, (hereinafter "1975 Amendments"). (Doc. 24, p. 2)

Until 1975, governmental entities had been excluded from the definition of "person" under the Securities Exchange Act of 1934, 15 U.S.C. section 78j(b), and only a "person" could be liable for fraudulent practices pursuant to Rule 10b-5.

But in 1975, Section 3(a)(9) expanded the definition of "person" to include the word "government":

The term `person' means a natural person, company, government, or political subdivision, agency or instrumentality of the government."

15 U.S.C. 78c(a)(9).

Plaintiff maintains that Congress, by enacting the 1975 Amendments, intended to include the states, their agencies and officials in the class of "persons" who may be sued under section 10(b) and Rule 10b-5. Defendants counter that such a definitional amendment is insufficient to constitute a congressional abrogation of the states' eleventh amendment immunity. (Doc. 14, p. 10.)

The first question to be addressed is whether Congress, pursuant to Article I, section 8, the "commerce clause," even has the power to abrogate the states' eleventh amendment immunity. The Securities Exchange Act Amendments of 1975 was enacted pursuant to the commerce clause. The state defendants contend that congressional abrogation only is valid when Congress acts under the fourteenth amendment, not when the legislation is passed pursuant to the commerce clause. (Doc. 14, p. 10). The validity of this contention is unclear.

It is true the Supreme Court has made clear that when Congress acts under section 5 of the fourteenth amendment, Congress may abrogate the eleventh amendment without the states' consent. Fitzpatrick v. Bitzer, 427 U.S. 445, 456, 96 S.Ct. 2666, 2671, 49 L.Ed.2d 614 (1976). Section 5 gives Congress the "power to enforce ... by appropriate legislation" the substantive provisions of the fourteenth amendment.

But it is unclear whether Congress also may abrogate the states' eleventh amendment immunity by enacting laws pursuant to Congress' Article I powers. McVey Trucking, Inc. v. Secretary of State of Illinois, 812 F.2d 311 (7th Cir.1987). (Judges Posner, Flaum and Senior District Judge Campbell comprised the panel.) In McVey the United States Court of Appeals for the Seventh Circuit explained that two recent Supreme Court decisions, Atascadero, supra, and Pennhurst State School & Hospital v. Halderman, 465 U.S. 89, 99, 104 S.Ct. 900, 907, 79 L.Ed.2d 67 (1984), expressly link the power of Congress to create a cause of action for money damages enforceable against an unconsenting state with Congress' exercise of its power under the fourteenth amendment. McVey at p. 314.

The Court's language may reflect the fact that, to date, it has only considered Congress' ability to create a cause of action for money damages enforceable against an unconsenting state in federal court in cases in which Congress has acted under its Fourteenth Amendment power. However, it is also possible that the Court may be indicating that the Fourteenth Amendment is the only grant of power that allows Congress to do so.

Id. at 315.

McVey concerned a debtor's action under the Bankruptcy Code to recover money that it claimed was transferred improperly to the...