Fidelity Financial Corp. v. Federal Home Loan Bank

• Decision Date: 03 October 1983
• Docket Number: No. C-82-1389 SW.,C-82-1389 SW.
• Citation: 589 F. Supp. 885
• Court: U.S. District Court — Northern District of California
• Parties: FIDELITY FINANCIAL CORPORATION, Plaintiff, v. FEDERAL HOME LOAN BANK OF SAN FRANCISCO, Defendant.

589 F. Supp. 885

FIDELITY FINANCIAL CORPORATION, Plaintiff, v. FEDERAL HOME LOAN BANK OF SAN FRANCISCO, Defendant.

No. C-82-1389 SW.

United States District Court, N.D.Cal.

October 3, 1983.

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Barry D. Hovis, Angell, Holmes & Lea, San Francisco, Cal., Palmer B. Madden, Stephen L. Kostka, Van Voorhis & Skaggs, Walnut Creek, Cal., for plaintiff.

Kirkpatrick, Lockhart, Hill, Christopher & Phillips, George L. Christopher, Ronald W. Stevens, Steven W. Grafman, Christopher B. Hanback, Washington, D.C., Pillsbury, Madison & Sutro, Charles B. Renfrew, James N. Roethe, Timothy S. Wahl, Gen. Counsel, Federal Home Loan Bank, San Francisco, Cal., for defendants Federal Home Loan Bank of San Francisco, et al.

Denis T. Rice, Robert E. Gooding, Jr., Howard, Rice, Nemerovski, Canady, Robertson & Falk, San Francisco, Cal., special counsel for Federal Sav. & Loan Ins. Corp. as receiver.

McCutchen, Doyle, Brown & Enersen, Bruce G. Vanyo, San Francisco, Cal., for non-party witness Larry Cushing.

Cooley, Godward, Castro, Huddleson & Tatum, Paul A. Renne, San Francisco, Cal., for Federal Home Loan Bank Bd.

Hopkins & Sutter, Robert W. Patterson, John L. Rogers, III, William J. McKenna, Jr., Antony S. Burt, Chicago, Ill., for FSLIC and FHLBB.

ORDER GRANTING IN PART, AND DENYING IN PART, DEFENDANT'S MOTION TO DISMISS

SPENCER WILLIAMS, District Judge.

ORDER AND MEMORANDUM OF LAW

Defendant Federal Home Loan Bank of San Francisco's (Bank's) motion to dismiss plaintiff Fidelity Financial Corporation's (Fidelity's) claims for failure to state cognizable claims for which relief may be granted, requires this Court to accept Fidelity's allegations of Bank's `dastardly deeds' in connection with the events leading to its closure and federal receivership, as true. On that premise, defendant's motion is hereby GRANTED in part, and DENIED in part.

The following is a brief summary of Fidelity's contentions, interspersed with facts that are basically undisputed:¹

In 1974, Bank initiated a special program concerning advances to member associations which, in its opinion, had less-thanrosy financial credentials ("Other Special Credit" (OSC)). This program offered less attractive interest and lending provisions and included: (a) A 2% interest rate penalty surcharge, (b) higher interest rates on "advances" than those charged on regular credit, (c) exclusion of alleged "black sheep" associations from participation in regular programs, (c) mandatory renewal of all maturing regular credit as OSC advances, and (d) certain other restrictions. Fidelity alleges that the OSC program was a purposeful attempt by the Bank to regulate management of the member associations along guidelines considered by Bank to be "prudent" and meting out punishment to those associations which failed to abide thereby.

On October 26, 1979, after the Federal Reserve Board decontrolled interest rates, Fidelity applied to Bank for an advance of $75,000,000 to cover both short term loan commitments and anticipated savings withdrawals. Although it alleges that it had no reason to suspect that its request would be denied, this request was met with regular credit denial and placement into this newly-instituted OSC program.

Fidelity appealed this administrative decision of Bank's staff to the executive branch of Bank — "Credit Exceptions Committee of the Board of Directors" — who, rubber-stamping the staff's recommendations, rejected Fidelity's requests. The Committee referred the matter to the entire Board of Directors, which notified Fidelity, by letter of April 5, 1982, of its refusal to excuse Fidelity from the OSC program.

Fidelity now alleges that all of its ensuing problems with its failing financial condition can be traced to Bank's fateful decision to place it into this punitive interest program.

We note that Fidelity alleges that it was the first, last and only association to be placed in this program.

The receivership action, which is also pending in this court (C-82-1592-SW), focuses attention upon the most visible penultimate effect of Fidelity's deteriorating financial condition — the carefully orchestrated closure and imposition of the FSLIC receivership by the California Savings and Loan Commissioner.²

Essentially, Fidelity charges, and we accept for the purpose of the instant motion, that Bank, determined to wrest Fidelity from its then officers and directors, manipulated its statutory authority to lend funds to member associations in order to cast Fidelity into a state vulnerable to imposing a receivership. By this novel, and spiteful abuse of its authority, Bank instead could decide which associations could be crushed beneath the unauthorized and heavily punitive OSC charges. Fidelity seeks to recover approximately $176 million damages: $62 million which it claims represents the excess interest it was forced to pay the Bank for these OSC advances, and the balance representing its consequential damages from the Bank placing it into the OSC program.

Fidelity bases its complaint on four alternative causes of action: (1) that Bank's actions in initiating and placing Fidelity into the OSC program exceeded its statutory authority under 12 U.S.C. § 1421 et seq. (Bank Act); (2) that the Bank violated Fidelity's rights under the Administrative Procedure Act, 5 U.S.C. § 551 et seq. (APA) to certain procedural safeguards prior to its placement in this OSC program; (3) that Bank's actions deprived Fidelity of its constitutional rights of due process and equal protection under the 14th Amendment and; (4) that Bank's actions violated its common law fiduciary duties toward Fidelity (fiduciary duties).

LAW:

Both sides offer general framework and characterizations of Bank's role in attempting to cast the four issues raised by Bank's Motion to Dismiss.

There are also several "red" herrings that both parties offer as emotional catalysts.

We note that although these questions, inter alia, might do much to focus our passions, they lend little to resolution of the broad issues raised by the defendants' motion.³

The "real" issues in this case are: (1) Does Fidelity have an implied private right of action under the Bank Act to challenge the Bank's actions in this Court; (2) Is the Bank an "agency" under the APA, for the purpose of its dealings with Fidelity; (3) Is there any real substance to Fidelity's constitutional challenges to the Bank's economic regulation of its activities; and, (4) Does the Bank Act preempt the common law doctrines applicable to evaluate the parties' dealings, or does it incorporate by reference those standards. We discuss each of these below.

Bank Act

The Bank Act is a narrowly drawn, and largely unambiguous statute which establishes a system of national and state chartered savings associations under the auspices of a national board with plenary administrative powers, with delegation of certain subsidiary functions to various regional banks. Although the equity investors in successful lending associations would no doubt prosper from the Bank Act by a strengthened market for their services, there is little room for debate as to who Congress intended as the ultimate beneficiaries of this legislation. The Act was primarily a populist measure to encourage private ownership of family homes.⁴

Opportunity for this Court to judicially imply private rights of action has been considerably constricted by recent decisions finding those rights rare indeed. Appeals to this Court's discretion to consider equitable arguments in support or opposition to a private right of action under legislation have little place, in light of the rigorous standard which emerges from those recent cases.⁵ Even if congressional policy has resulted in an outcome which runs roughshod over common sense and fair play, we are barred from smoothing out the rough edges of the Act in the manner that Fidelity urges here.

Regardless of the allure of Fidelity's arguments that the Bank's development of, and placement of Fidelity into, the OSC program exceeded its statutory authority under the Bank Act, the Bank maintains that Fidelity is without express or implicit standing to challenge Bank's dastardly deeds in this Court under the Bank Act. We agree with Bank.

Fidelity does not have an express private right of action against the Bank under the Bank Act. Fidelity does not contend that the Bank Act expressly confers a private right of action upon member associations to contest the Board's or Bank's actions. The language of the Bank Act does not provide for such a right of action; if there is a private right of action under the Act, it necessarily must be derived by judicial implication.

Fidelity does not have an implied private right of action against the Bank under the Bank Act. Despite Fidelity's attempt to circumvent the very restrictive interpretation that both the U.S. Supreme Court and the Ninth Circuit has applied to Cort v. Ash,⁶ recent cases support a drastically narrowing scope of implying private rights of action, and our reading of the most recent Supreme Court opinions, show a marked shift away from reliance upon the private right of action to police statutory obligations of regulated entities.⁷

In Cort, the Supreme Court "unanimously decided to modify its approach" of generously conferring private rights of action, in addressing the appropriateness of a private litigant recovering damages for violation of a criminal statute never thought to include a private remedy before. As the Court later summarized its ruling in Cort,

(i)n rejecting that claim the Court outlined criteria that primarily focused on the intent of Congress in enacting the statute under review. The increased complexity of federal legislation and the increased volume of federal litigation strongly supported the desirability of a more careful scrutiny of legislative intent .... Our cases subsequent to Cort v. Ash have plainly stated that our focus must be

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