Fenning v. Glenfed, Inc., B091212

• Decision Date: 08 December 1995
• Docket Number: No. B091212,B091212
• Citation: 40 Cal.App.4th 1285,47 Cal.Rptr.2d 715
• Court: California Court of Appeals Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 9392, 95 Daily Journal D.A.R. 16,309 Mark J. FENNING, Plaintiff and Appellant, v. GLENFED INC. et al., Defendants and Respondents.

Page 715

47 Cal.Rptr.2d 715

40 Cal.App.4th 1285, 95 Cal. Daily Op. Serv. 9392,

95 Daily Journal D.A.R. 16,309

Mark J. FENNING, Plaintiff and Appellant, v. GLENFED INC. et al., Defendants and Respondents.

No. B091212.

Court of Appeal, Second District, Division 5, California.

Dec. 8, 1995.

Review Denied March 28, 1996.

Chimicles, Jacobsen & Tikellis, Patrick J. Grannan, Robin B. Howald, Marc A. Seligman, Kramer & McShane, and Philip A. Kramer, Los Angeles, for Plaintiff and Appellant.

Irell & Manella, Sheldon Eisenberg, and Daniel A. Saunders, Los Angeles, for Defendants and Respondents.

ARMSTRONG, Associate Justice.

Plaintiff Mark J. Fenning appeals from a judgment dismissing his class action complaint ¹ after demurrer by defendants Glendale Federal Bank, its former and current parent companies, and its securities brokerage subsidiary. We reverse.

FACTS

Glendale Federal Bank (the Bank) is a federally chartered savings and loan association organized and operating under the Home Owners' Loan Act of 1933 (HOLA), as amended, 12 U.S.C. § 1461 et seq. The Bank is federally insured by the Federal Deposit Insurance Corporation (FDIC), and federally regulated by the Office of Thrift Supervision (OTS, formerly known as the Federal Home Loan Bank Board). Glendale Brokerage Services, Inc. doing business as Glenfed Brokerage Services (Glenfed Brokerage) is a wholly owned subsidiary of the Bank, organized and existing under the laws of the State of California. As such, it is a "service corporation" within the meaning of the HOLA regulations. (12 C.F.R. § 545.74.) A member of the National Association of Securities Dealers, Glenfed Brokerage provides securities brokerage and investment advisory services. Glenfed, Inc. and Glendale Investment Corporation are, respectively, the former and current holding companies of the Bank.

In his complaint, plaintiff alleges that he walked into a branch office of the Bank where he maintained a checking account, seeking to reinvest the proceeds of a certificate of deposit from his pension and employee benefit plans. After explaining his investment objectives to an "investment consultant" whom he believed to be a Bank employee, he was persuaded to invest his money in two mutual funds, neither of which was FDIC insured. Plaintiff first learned that his investment was not with the Bank, and not FDIC insured, when he received his first quarterly account statement, which reported an investment loss.

Plaintiff filed this class action suit against defendants, alleging causes of action for unfair and deceptive business practices in violation of California Business and Professions Code sections 17200 and 17500, ² fraud, and Defendants demurred to the complaint, asserting that plaintiff's claims are preempted by HOLA, and specifically by 12 C.F.R. § 545.2, which provides that "The regulations in this part 545 are ... preemptive of any state law purporting to address the subject of the operations of a Federal savings association." The trial court sustained defendants' demurrer on that basis, and dismissed the complaint. Plaintiff appeals. We reverse the judgment, finding that the state law causes of action against the defendants are not preempted by HOLA or its implementing regulations.

negligent misrepresentation. The gravamen of the complaint is that the [40 Cal.App.4th 1290] advertising and sales practices of Glenfed Brokerage purposefully deceive customers by blurring the distinction between the Bank, whose investment products are safe and federally insured, and Glenfed Brokerage, which sells uninsured investments subject to substantial risks of loss, in order to induce customers to purchase investment products from Glenfed Brokerage. Plaintiff maintains that these advertising and sales practices are unfair and deceptive business practices. Plaintiff also alleges that these business practices are in direct violation of federal regulations applicable to service corporations such as Glenfed Brokerage. Moreover, plaintiff maintains that the Bank is separately liable for this conduct because, by means of the improper and misleading use of the Bank's personnel, logo, and facilities to sell securities, the Bank, in effect, actively engaged in consumer fraud.

CONTENTIONS

Plaintiff contends that the trial court erred in dismissing his complaint, urging that (1) although a state may not regulate the "operations" of a federally chartered savings association, plaintiffs' claims against the Bank do not implicate its "operations" as a savings association; (2) the activities of a subsidiary service corporation are not "operations" of the parent association so as to be precluded from state regulation; and (3) neither Congress nor the OTS have manifested any intent to subject the entire field of service corporations to exclusive federal regulation.

FEDERAL PREEMPTION

Under the Supremacy Clause of the United States Constitution (art. VI, cl. 2), federal law preempts state law where Congress so intends. (Fidelity Federal Sav. and Loan Ass'n. v. de la Cuesta (1982) 458 U.S. 141, 153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664 [hereafter de la Cuesta ].) Federal regulations enacted pursuant to a grant of authority by Congress are entitled to the same preemptive effect as are federal statutes. (Id. at p. 154, 102 S.Ct. at pp. 3022-3023.) Since M'Culloch v. State of Maryland (1819) 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579, the United States Supreme Court has consistently held that federal preemption of state laws requires a clear congressional intent. Thus, preemption exists only where there is a "clear and manifest purpose of Congress" to foreclose a particular field to state legislation. (Jones v. Rath Packing Co. (1977) 430 U.S. 519, 525, 97 S.Ct. 1305, 1309, 51 L.Ed.2d 604, quoting Rice v. Santa Fe Elevator Corp. (1947) 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447.)

Congressional intent to preempt state law may be established in one of three

                ways.  First, Congress may expressly state that the field is preempted.  (California Federal Sav. and Loan Ass'n. v. Guerra (1987) 479 U.S. 272, 280, 107 S.Ct. 683, 689, 93 L.Ed.2d 613.)   Second, congressional intent will be inferred where the regulatory scheme is "so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it" or where "the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject."  (de la Cuesta, supra, 458 U.S. 141, 153, 102 S.Ct. 3014, 3022, citation omitted.)   Whether state laws are preempted expressly or by implication, all state law in the field, whether conflicting or consistent with federal law, is preempted.  (KVUE, Inc. v. Moore (5th Cir.1983) 709 F.2d 922, 931, aff'd (1984) 465 U.S. 1092, 104 S.Ct. 1580, 80 L.Ed.2d 114)  Finally, even in the absence of express or implied preemption of all state regulation in a given area, "state law is nullified to the extent that it actually conflicts with federal law."  (Ibid.)
                

HOLA REGULATIONS

With the foregoing principles in mind, we review the regulatory scheme governing federal savings and loan associations such as the Bank.

In HOLA, Congress created a system of federal savings and loan associations to be regulated by the Federal Home Loan Bank Board (the Bank Board). ³ Pursuant to its broad statutory authorization, the Bank Board "has promulgated regulations governing the powers and operations of every Federal savings and loan association from its cradle to its corporate grave." (de la Cuesta, supra, 458 U.S. 141, 145, 102 S.Ct. 3014, 3018, citation omitted.)

In 1983, the Bank Board promulgated 12 C.F.R. § 545.2 to codify the preemptive effect of the Board's regulations. That section provides: "The regulations in this Part 545 are promulgated pursuant to the plenary and exclusive authority of the Office to regulate all aspects of the operations of Federal savings associations, as set forth in section 5(a) of the [Home Owners' Loan] Act [of 1933, 12 U.S.C. 1464, as amended]. This exercise of the Office's authority is preemptive of any state law purporting to address the subject of the operations of a Federal savings association." (12 C.F.R. § 545.2 (1995).)

12 C.F.R. § 545.74, entitled "Service corporations," authorizes and regulates a savings association's activities with respect to commercial enterprises other than residential lending. Thus, the regulations permit an association to "invest in service corporations organized under the laws of the state ... in which the association's home office is located, ..." (12 C.F.R. § 545.74(b).) Among the activities in which a service corporation may engage are residential, consumer, educational, and commercial lending (12 C.F.R. § 545.74(c)(1)); financial services (such as credit analysis, escrow, and internal auditing services) (12 C.F.R. § 545.74(c)(2)); real estate services (including real property management, relocation and real estate brokerage services) (12 C.F.R. § 545.74(c)(3)); securities brokerage services (12 C.F.R. § 545.74(c)(4)); and insurance brokerage services (12 C.F.R. § 545.74(c)(6)).

The regulations governing a securities brokerage service corporation such as Glenfed Brokerage provide that the service corporation must conduct such activities "in an area that is clearly identified and distinguished from the areas where the association's depository functions are performed" (12 C.F.R. § 545.74(c)(4)(i)(A)), and that the service corporation must distinguish between its advertising and that of the association's "such that advertising does not confuse securities transactions executed, securities purchased, or investment advice provided by the service corporation with the federally-insured deposits" and must ensure "that the advertising indicates that the service corporation and broker-dealer, and not the association, is providing the securities brokerage or investment advisory services, identifies the...