Fidelity Financial Corp. v. Federal Home Loan Bank of San Francisco

• Citation: 792 F.2d 1432
• Decision Date: 27 June 1986
• Docket Number: No. 84-2634,84-2634
• Parties: FIDELITY FINANCIAL CORPORATION, Plaintiff-Appellant, v. FEDERAL HOME LOAN BANK OF SAN FRANCISCO, Milton Feinerman, President of the Federal Home Loan Bank of S.F., et al., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1432

792 F.2d 1432

FIDELITY FINANCIAL CORPORATION, Plaintiff-Appellant, v. FEDERAL HOME LOAN BANK OF SAN FRANCISCO, Milton Feinerman,

President of the Federal Home Loan Bank of S.F.,

et al., Defendants-Appellees.

No. 84-2634.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 14, 1986.

Decided June 27, 1986.

Samuel Holmes, Angell, Holmes & Lea, San Francisco, Cal., for plaintiff-appellant.

Judd N. Poffinberger, Jr., Kirkpatrick & Lockhart, Pittsburg, Pa., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before GOODWIN, WALLACE, and ALARCON, Circuit Judges.

WALLACE, Circuit Judge:

Fidelity Financial Corporation appeals from the district court's final judgment in favor of the Federal Home Loan Bank of San Francisco (the Bank) in its action against the Bank for failure to provide regular credit advances. We have jurisdiction under 28 U.S.C. Sec. 1291, and we affirm.

I

Fidelity Financial Corporation is the parent corporation of Fidelity Savings and Loan Association (Fidelity), a state-chartered thrift institution. ¹ The Bank is one of twelve regional Federal Home Loan Banks that form part of the Federal Home Loan Bank System, which was created by Congress in 1932 to provide a reliable source of funds to homebuyers. See Federal Home Loan Bank Act, 12 U.S.C. Secs. 1421-1449 (the Bank Act). The Bank operates as the central credit facility for its member financial institutions. Primarily from funds obtained through the sale of the consolidated obligations of all Federal Home Loan Banks, the Bank is able to provide "advances"--loans made on the security of home mortgages--to its members. The Bank is wholly owned by its members, which are required by law to purchase and maintain a certain level of Bank stock. See 12 U.S.C. Sec. 1426(c)(1). The Bank operates under the supervisory and regulatory authority of the Federal Home Loan Bank Board (the Bank Board), an independent federal agency. 12 U.S.C. Sec. 1437.

Fidelity was a member institution of the Bank. In October 1979, Fidelity applied to the Bank for a $75 million regular short-term credit advance. Pursuant to its credit program adopted in 1975, the Bank denied the application on the ground that Fidelity was overcommitted (i.e., its loan commitments were not reasonably related to its anticipated inflow of funds). Instead, the Bank offered Fidelity its "Other Special Credit" option (OSC). Under OSC, a member could obtain funds for up to a year at interest rates equal to the Bank's regular rate plus 2%. A member was required to repay completely its outstanding OSC advances before it could again become eligible for regular credit. Fidelity applied for and obtained a $60 million OSC advance.

In December 1979, Fidelity requested reconsideration of its OSC classification. After the Bank determined that Fidelity was still ineligible, Fidelity continued to accept substantial OSC advances. In February 1980, the Bank again determined that Fidelity did not qualify for regular credit, but accorded Fidelity a special waiver of the extra 2% OSC interest charge. Fidelity proceeded to obtain further advances totaling hundreds of millions of dollars. In October 1980, the Bank reinstated the extra 2% on future OSC advances, but in February 1981, the Bank suspended the 2% charge for all member borrowers, including Fidelity.

In March 1982, Fidelity reported a net loss of $57 million for the prior fiscal year. In response, depositors withdrew massive amounts from Fidelity--nearly $70 million in the first week of April alone. At this time, the Bank determined that Fidelity's outstanding OSC advances approached $1.4 billion. On April 9, the executive committee of the Bank's board of directors decided that the Bank would make no further advances to Fidelity. Four days later, the State of California placed Fidelity's assets in receivership.

Fidelity sued the Bank in district court, alleging, in part, that the Bank's denial of regular credit to Fidelity was in violation of procedural due process and of common law fiduciary duties owed Fidelity. On the Bank's motion to dismiss for failure to state a claim upon which relief could be granted, the district court dismissed the claim based on procedural due process; it declined, however, to dismiss the claim of breach of common law fiduciary duty. Fidelity Financial Corp. v. Federal Home Loan Bank, 589 F.Supp. 885 (N.D.Cal.1983). After more than two years of discovery, the district court granted summary judgment for the Bank on the fiduciary duty claim, ruling that Fidelity had presented no evidence that the Bank's credit decisions were in bad faith or grossly negligent. Fidelity then moved to amend its complaint to allege breach of contract and breach of an implied covenant of good faith and fair dealing. The district court denied the motion.

II

Fidelity argues that the Bank's refusal to provide Fidelity regular credit advances violated its fifth amendment right to due process. The district court dismissed this claim for failure to state a claim upon which relief could be granted. The district court found two separate bases for this dismissal. First, it held that the Bank's actions did not constitute governmental action. Second, it determined that Fidelity had no protectible property interest in receiving regular credit advances. We review de novo the district court's dismissal for failure to state a claim upon which relief may be granted. Guillory v. County of Orange, 731 F.2d 1379, 1381 (9th Cir.1984). We may affirm only if it appears to a certainty that Fidelity would be entitled to no relief under any state of facts that could be proved. Halet v. Wend Investment Co., 672 F.2d 1305, 1309 (9th Cir.1982).

A.

The fifth amendment protects Fidelity against only federal governmental action. If, as the district court ruled, the Bank's actions did not constitute governmental action, Fidelity has not stated a claim upon which relief can be granted.

Whether the Bank's actions at issue constitute governmental action is not clear. On one hand, the Bank is privately owned and privately funded. It receives no government money, and its consolidated obligations are not guaranteed by the government. It is engaged in the business of making loans, which must be sound so that its obligations will be marketable. Its employees are not in the civil service, and it does not perform regulatory functions.

On the other hand, the Bank was created by a federal government agency, the Bank Board, to accomplish federal objectives and is closely regulated in order to promote these objectives. In addition, the Bank is subject to unusually extensive managerial supervision by the Bank Board: among other functions, the Bank Board appoints six of the Bank's fourteen directors, 12 U.S.C. Sec. 1427(a), designates the Bank's chairman and vice chairman, 12 U.S.C. Sec. 1427(g), and has the power to suspend or remove the Bank's directors, officers, employees, and agents. 12 U.S.C. Sec. 1437.

Supreme Court precedent provides instructive guidance on this issue. The fact that a business is subject to extensive and detailed regulation does not alone render its actions governmental. Jackson v. Metropolitan Edison Co., 419 U.S. 345, 350, 95 S.Ct. 449, 453, 42 L.Ed.2d 477 (1974) (Jackson ). Rather, "the inquiry must be whether there is a sufficiently close nexus between the [government] and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the [government] itself." Id. at 351, 95 S.Ct. at 453. This nexus may be established by showing that the government exercised such coercive power or such significant encouragement that it is responsible for the specific private conduct challenged, or by showing that the private entity has exercised powers that are traditionally the exclusive prerogative of the government. Blum v. Yaretsky, 457 U.S. 991, 1004-05, 102 S.Ct. 2777, 2785-86, 73 L.Ed.2d 534 (1982).

Fidelity does not allege that the Bank Board (or any other governmental agency) coerced or encouraged the Bank's specific denials of regular credit; on the contrary, Fidelity contends that the Bank has failed to comply with Bank Board regulations. Nor does it seem that the Bank's business of making loans can be characterized as a traditionally exclusive sovereign activity. It therefore appears questionable whether the challenged Bank actions may be deemed governmental. See, e.g., Warren v. Government National Mortgage Association, 611 F.2d 1229, 1232-35 (8th Cir.) (GNMA foreclosure did not constitute governmental action, even though the GNMA was also wholly owned by the government), cert. denied, 449 U.S. 847, 101 S.Ct. 133, 66 L.Ed.2d 57 (1980); Northrip v. Federal National Mortgage Association, 527 F.2d 23, 30-33 (6th Cir.1975) (although the FNMA was subject to extensive regulatory and supervisory control, had five of its fifteen directors appointed by the government, and had many employees subject to the civil service laws, its act of foreclosure did not constitute governmental action); accord Roberts v. Cameron-Brown Co., 556 F.2d 356, 358-60 (5th Cir.1977). But cf. Rust v. Johnson, 597 F.2d 174, 177-78 (9th Cir.) (suggesting that Federal Home Loan Banks may be federal instrumentalities for supremacy clause purposes), cert. denied, 444 U.S. 964, 100 S.Ct. 450, 62 L.Ed.2d 376 (1979); Fahey v. O'Melveny & Myers, 200 F.2d 420, 446, 454 (9th Cir.1952) (ruling, pre-Jackson, that Federal Home Loan Banks are "governmental banking agencies" in the context of determining that the banks do not have due process rights against the government), cert. denied, 345 U.S. 952, 73 S.Ct. 866, 97 L.Ed. 1374 (1953). We need not resolve this issue, however, for we find that the district court's second ground clearly disposes of Fidelity's procedural due process claim.

B.

Fidelity argues that it had a protectible property interest in receiving...