Finkielstain v. Seidel

• Decision Date: 22 January 1988
• Docket Number: No. 86 Civ. 8406 (PNL).,86 Civ. 8406 (PNL).
• Citation: 692 F. Supp. 1497
• Parties: Jacobo FINKIELSTAIN, Plaintiff, v. Julian M. SEIDEL, First Maryland Savings & Loan, Inc. and Maryland Deposit Insurance Fund Corp., as Receiver for First Maryland Savings & Loan, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

692 F. Supp. 1497

Jacobo FINKIELSTAIN, Plaintiff, v. Julian M. SEIDEL, First Maryland Savings & Loan, Inc. and Maryland Deposit Insurance Fund Corp., as Receiver for First Maryland Savings & Loan, Inc., Defendants.

No. 86 Civ. 8406 (PNL).

United States District Court, S.D. New York.

January 22, 1988.

COPYRIGHT MATERIAL OMITTED

Martha Solinger, Kronish, Lieb, Weiner & Hellman, New York City, John S. Mc Daniel, Cable, McDaniel, Bowie & Bond, Baltimore, Md., for plaintiff.

Joseph F. Donley, Adam B. Rowland, Shereff, Friedman, Hoffman & Goodman, New York City, Francis B. Burch, Sheila Mosmiller Vidmar, Piper & Marbury, Baltimore, Md., for defendants First Maryland Sav. & Loan and Maryland Deposit Ins. Fund.

MEMORANDUM AND ORDER

LEVAL, District Judge.

This action is for rescission of the sale of a security under the federal securities laws and common law fraud. Defendants First Maryland Savings & Loan, Inc. ("First Maryland") and Maryland Deposit Insurance Fund Corporation ("MDIF") (collectively "defendants")¹ move to dismiss this action pursuant to Fed.R.Civ.P. 12(b)(1) contending that as an "arm" of the State of Maryland, MDIF is protected from suit in federal court under the Eleventh Amendment and that the action against First Maryland must be dismissed because MDIF is the real party in interest. In the alternative, defendants argue that this court ought to abstain from exercising its jurisdiction under either the Burford or the Colorado River abstention doctrine. Defendants also move to dismiss this action on the grounds of forum non conveniens, and or to transfer this action to the District of Maryland pursuant to 28 U.S.C. § 1404(a).

BACKGROUND

This action concerns a two-phase transaction that occurred on October 31, 1983; in exchange for his note, defendant First Maryland loaned plaintiff Jacobo Finkielstain $1,000,000 which he used to purchase from First Maryland a $1,000,000 five-year subordinated debenture. The loan was offered to induce Finkielstain to purchase the debenture. The two instruments had almost identical repayment terms except that the interest paid by First Maryland on the debenture was two percent higher than that paid by Finkielstain to First Maryland on the promissory note. Finkielstain alleges that First Maryland and the defendant Seidel, who was then the president, chairman and largest stockholder of First Maryland, induced him to enter the transaction by making numerous false and misleading representations and material omissions regarding First Maryland's financial condition.

In May 1985, in response to the growing crisis in the Maryland savings and loan industry, the Maryland General Assembly enacted special legislation. According to this statutory scheme, MDIF was established, as part of the State Department of Licensing and Regulation, to bring stability to, and restore confidence in Maryland's savings and loan industry. MDIF was charged with insuring the accounts of member associations, enabling member associations to qualify for federal insurance, and reimbursing savings account holders for losses. MDIF assumed the powers, duties and responsibilities of the Maryland Savings-Share Insurance Corporation ("MSSIC"), the state guarantee association that had previously insured many Maryland savings and loan associations including First Maryland. MSSIC was then dissolved. MDIF was also granted the right to be appointed conservator or receiver of any savings and loan association that it insured.

On November 20, 1985, MDIF sought to be, and was appointed conservator of First Maryland by Judge Kaplan of the Circuit Court of Montgomery County, upon a finding that First Maryland was in an impaired condition. First Maryland continued to operate in an impaired condition. In June 1986, MDIF was appointed receiver by Judge Kaplan.

Plaintiff alleges that as of June 19, 1986, the effective date of the receivership order, First Maryland ceased making payments of principal or interest on the subordinated debenture, that in August 1986 he stopped making payments on his note, and that in October 1986 First Maryland accelerated the payments due on the promissory note. Finkielstain has not made any payments on the note since at least August 1986, and does not intend to make any payments. Complaint ¶¶ 34-35. On October 31, 1986, plaintiff filed this action alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (hereafter "Exchange Act") and Rule 10b-5 promulgated thereunder and of the principles of common law fraud, seeking rescission of the transaction, including cancellation of the promissory note and debenture.

On defendants' motions, I find that MDIF is protected by the State of Maryland's immunity under the Eleventh Amendment. As to First Maryland, I find on the facts of this action that it is not. I conclude finally that the court should not abstain, dismiss or transfer.

DISCUSSION

I. Eleventh Amendment Immunity

The Eleventh Amendment² principle of sovereign immunity is a constitutional limitation on the federal judicial power. Pennhurst State School and Hospital v. Halderman, 465 U.S. 89, 98, 104 S.Ct. 900, 906, 79 L.Ed.2d 67 (1984). Unless a state consents "in unequivocal terms" to be sued in federal court, or unless Congress, "pursuant to a valid exercise of power, unequivocally expresses its intent to abrogate" a state's immunity, a state or an arm of the state may not be sued in federal court. Green v. Mansour, 474 U.S. 64, 106 S.Ct. 423, 425, 88 L.Ed.2d 371 (1985). There is authority that the immunity the Eleventh Amendment confers upon states themselves or on arms of the states does not depend upon the type of relief that is sought. See Cory v. White, 457 U.S. 85, 90, 102 S.Ct. 2325, 2328, 72 L.Ed.2d 694 (1982); Alabama v. Pugh, 438 U.S. 781 (1978); Voisin's Oyster House, Inc. v. Guidry, 799 F.2d 183, 186 (5th Cir.1986); V.O. Motors, Inc. v. California State Bd. of Equalization, 691 F.2d 871 (9th Cir.1982); Richards v. State of New York, Appellate Division, 597 F.Supp. 689 (E.D.N.Y.1984), aff'd mem., 767 F.2d 908 (2d Cir.1985). But see Council of Commuter Organizations v. Metropolitan Transp. Auth., 683 F.2d 663 (2d Cir.1982) (Eleventh Amendment only bars suits for money damages against arms of the state). In contrast, a state official exercising a state function is cloaked with Eleventh Amendment immunity only "when the action is in essence one for recovery of money from the state." Edelman v. Jordan, 415 U.S. 651, 663, 94 S.Ct. 1347, 1356, 39 L.Ed.2d 662 (1974) (quoting Ford Motor Co. v. Department of Treasury, 323 U.S. 459, 464, 65 S.Ct. 347, 350, 89 L.Ed. 389 (1945)). I examine in turn MDIF's and First Maryland's claims of immunity under the Eleventh Amendment.

A. MDIF

1. Immunity

Not all agencies that exercise a "slice of state power" come within the scope of the Eleventh Amendment. Lake Country Estates, Inc. v. Tahoe Regional Planning Agency, 440 U.S. 391, 401, 99 S.Ct. 1171, 1177, 59 L.Ed.2d 401 (1979); see Matherson v. Long Island State Park Comm'n, 442 F.2d 566 (2d Cir.1971). In particular, the Supreme Court has refused to extend Eleventh Amendment immunity to entities such as counties and municipal corporations even if they receive guidance and significant funding from the state. See Mt. Healthy City School Dist. v. Doyle, 429 U.S. 274, 280, 97 S.Ct. 568, 512, 50 L.Ed.2d 471 (1974); Holley v. Lavine, 605 F.2d 638 (2d Cir.1979), cert. denied, 446 U.S. 913, 100 S.Ct. 1843, 64 L.Ed.2d 266 (1980). Thus, in deciding whether MDIF is immune from suit in federal court, the court must determine whether it should be treated as an arm of the state or as one of those political entities, such as a municipal corporation, to which the Eleventh Amendment does not extend.

The determination whether a state agency shares the state's Eleventh Amendment shield rests on numerous factors. See Trotman v. Palisades Interstate Park Comm'n, 557 F.2d 35, 38 (2d Cir.1977); Fitzpatrick v. Bitzer, 519 F.2d 559, 564 (2d Cir.1975), modified, 427 U.S. 445, 96 S.Ct. 2666, 49 L.Ed.2d 614 (1976). The most important factor is "the nature of the entity created by state law." Mt. Healthy, 429 U.S. at 280, 97 S.Ct. at 572. Because the intention of the state to extend its Eleventh Amendment immunity to the agency is relevant to the court's determination, see Lake Country Estates v. Tahoe Planning Agency, 440 U.S. 391, 400-01, 99 S.Ct. 1171, 1176-77, 59 L.Ed.2d 401 (1979), the court must look to such factors as the definition of the entity, the state's degree of control over the entity, and the fiscal autonomy of the entity. See Clark v. Tarrant County, 798 F.2d 736 (5th Cir.1986); Fouche v. Jekyll Island-State Park Auth., 713 F.2d 1518 (11th Cir.1983); Holley v. Lavine, 605 F.2d 638 (2d Cir.1979), cert. denied, 446 U.S. 913, 100 S.Ct. 1843, 64 L.Ed.2d 266 (1980). Where the state has "structured the agency to enable it to enjoy the special constitutional protection of the State," that intention will be accorded respect. See Council of Commuter Organizations v. Metropolitan Transp. Auth., 683 F.2d 663, 672 (2d Cir.1982).

Applying these standards, three federal courts have determined that MDIF is an arm of the state. See Second National Building & Loan, Inc. v. State of Maryland, Civ. No. R-86-934 (D.Md.1986), aff'd mem., 812 F.2d 1401 (4th Cir.1987); American Casualty Co. v. Community Savings & Loan, 635 F.Supp. 539 (D.Md.1986); Community Savings & Loan, Inc. v. Citibank, N.A., Civ. No. M-85-4005 (D.Md. Oct. 10, 1985). I see no reason to find otherwise.

The State of Maryland exercises a high degree of control over MDIF. Its director is appointed by the Governor, and exercises power and performs duties subject to the authority of the Secretary of Licensing and Regulation. Md.Fin.Inst.Code Ann. §§ 10-103(a), (b); 10-105. Its Board of Directors is composed of nine members, three appointed by member associations with the approval of the Secretary of Licensing and Regulation and six...