First State Bank of Hudson County v. U.S.

• Citation: 599 F.2d 558
• Decision Date: 30 May 1979
• Docket Number: No. 78-2013,78-2013
• Parties: FIRST STATE BANK OF HUDSON COUNTY, Appellant, v. The UNITED STATES of America.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 558

599 F.2d 558

FIRST STATE BANK OF HUDSON COUNTY, Appellant, v. The UNITED STATES of America.

No. 78-2013.

United States Court of Appeals Third Circuit.

Argued March 21, 1979.

Decided May 30, 1979.

Daniel E. Horgan (argued), Waters, McPherson, Hudzin & McNeill, Jersey City, N.J., for appellant.

Barbara Allen Babcock, Asst. Atty. Gen., Washington, D.C., Robert J. Del Tufo, U. S. Atty., Newark, N.J., Ronald R. Glancz, Asst. Director, Appellate Staff, Harland F. Leathers, Sp. Asst. to the Asst. Atty. Gen. (argued), Civ. Div., Dept. of Justice, Washington, D.C., for appellee.

Before SEITZ, Chief Judge, and ALDISERT and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

On June 14, 1976, the New Jersey Commissioner of Banking closed the doors and seized the assets of the First State Bank of Hudson County (the "Bank"), a commercial institution chartered under the laws of New Jersey, whose deposits were insured by the Federal Deposit Insurance Corporation ("FDIC"). Alleging that in the course of a bank examination the FDIC had discovered that the Bank's president was engaging in serious criminal violations involving the misapplication of bank funds but that the FDIC had negligently failed to report such discovery to the Bank, the Bank brought an action against the United States to recover damages pursuant to the Federal Tort Claims Act, 28 U.S.C. §§ 2671 et seq. (1976). Because we believe the FDIC, under the circumstances of this case, owed no duty to warn the Bank, we affirm the judgment for the defendant.

I.

The Bank began business in December 1969. In September 1970, Edward P. Dooley ("Dooley"), whose subsequent misconduct would contribute to the Bank's downfall, became president. In the autumn of 1971, the Bank applied for approval to open a new branch and this application occasioned a routine investigation by the FDIC. That investigation, which the FDIC began in February 1972, uncovered some questionable operations by the Bank.

In a report to the Bank, sent on June 1, 1972, the FDIC observed a "failure on the part of the active management to adhere to banking principles and related laws and regulations." The FDIC noted that a large portion of the Bank's loans were in arrears, that the Bank maintained insufficient credit information, that loans exceeded statutory lending limits and were improperly concentrated in a few borrowers, and that the Bank was lax in its internal controls. The FDIC urged "that effective action be taken to improve the unsatisfactory conditions noted." The report further detailed violations of New Jersey's banking statutes and FDIC regulations and urged that effective action be taken as quickly as possible. Replying by letter to the FDIC on June 20, the Bank declared that it was taking steps to correct these problems. According to the Bank's complaint in the instant suit, this reply went to the FDIC over the signature of the secretary of the board of directors but had actually been prepared by Dooley. As the complaint alleges, the reply "contained willfully false information and deliberately concealed material facts known at the time only to Dooley."

The FDIC allegedly undertook a further investigation on July 11, 1972, without the Bank's knowledge, to verify the paydowns reported by the Bank in its letter of June 20. The examiner, Thomas J. Spillane ("Spillane"), is asserted to have made a second examination on September 11 and 12. While conducting these examinations, Spillane allegedly discovered that Dooley, in violation of law, was giving the FDIC false statements about the Bank's operations. He did not inform the bank of this discovery. On October 20, 1972, the Bank sent a second letter to the FDIC, which again affirmed that it was reforming its practices, but which the Bank asserts in its complaint contained willfully false information and deliberately concealed facts. The FDIC acknowledged this letter and requested further information. The Bank replied with another letter dated October 30, 1972, which it also characterizes as containing willfully false statements and misleading information. ¹

On July 19, 1973, after the FDIC had evidently informed the Bank more specifically about its president's misdeeds, the Bank summarily dismissed Dooley. Dooley later pleaded guilty to charges that he had misapplied funds of a bank insured by the FDIC. 18 U.S.C. §§ 2, 371 & 656 (1976). As the Bank alleges, it first learned in February 1976 that Spillane had discovered Dooley's misapplication of funds in July 1972 and that the FDIC had not immediately shared its knowledge with the Bank. Having first exhausted its administrative remedies, the Bank then filed a complaint against the United States, in which it asserted a cause of action under the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b), 2671-80 (1976).

The Bank sought to recover from the United States for damages caused by Dooley between July 11, 1972, and July 19, 1973 when Dooley was discharged. The Bank contended that the FDIC had breached a duty to inform it of Dooley's misapplication of funds. Although the Bank argued that Spillane had actual knowledge of Dooley's crime, it alternatively pleaded that Spillane had failed to discover the malfeasance, and thus had violated the standard of due care. After the filing of this complaint, the Banking Commissioner of New Jersey seized the Bank's business and assets, which are now being liquidated. With the approval of the Superior Court of New Jersey, the Commissioner allowed the management of the Bank to prosecute this suit.

The United States moved to dismiss the complaint under Fed.R.Civ.P. 12(b)(1) & (6) for lack of jurisdiction over the subject matter and for failure to state a claim, asserting the following reasons:

(1) The alleged negligence did not constitute a breach of any duty owed to the plaintiff (2) The plaintiff's claim is excepted by the Federal Tort Claims Act because it arises from the exercise or performance of a discretionary function and an alleged misrepresentation, 28 U.S.C. § 2680(a) and (h); and

(3) The claim was not presented in writing to FDIC within two years after it accrued and it is therefore barred under 28 U.S.C. § 2401(b).

The district court granted the motion. Because the district court considered documentary evidence outside the pleadings, such as the FDIC Report on Examination, we treat the district court's action as a grant of summary judgment under Fed.R.Civ.P. 56. Dindo v. Whitney, 451 F.2d 1, 2 (1st Cir. 1971). See also Hubicki v. ACF Industries, Inc., 484 F.2d 519, 523 (3d Cir. 1973).

II.

The district court concluded that the FDIC could not be held to owe any duty, either express or implied, to the bank or to its shareholders. It reasoned that the duty to protect the corporate entity and its shareholders rested solely on the Bank's board of directors and that the 1972 Report on Examination by the FDIC put the Board on notice of the gravity of the Bank's affairs. The court also held that even if there were a duty by the FDIC to the Bank, the claims were barred by the misrepresentation (28 U.S.C. § 2680(h)) and the discretionary function (28 U.S.C. § 2680(a)) exceptions to the Federal Tort Claims Act, and by the statute of limitations, 28 U.S.C. § 2401(b).

The Federal Tort Claims Act permits suit against the United States

for injury or loss of property . . . caused by the negligent or wrongful act or omission of any employee of the government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.

28 U.S.C. § 1346(b) (1976). The Bank must therefore show that the officials of the FDIC, if private persons, would have been liable to it under the law of New Jersey. See Fisher v. United States, 441 F.2d 1288, 1289 (3d Cir. 1971). There can be no liability unless, under New Jersey law, the officials of the FDIC would owe a duty to the Bank.

The Bank suggests three possible sources of a duty owed to it by the FDIC: (1) the statute creating the FDIC and mandating its supervisory and regulatory role over banks insured by it; (2) the FDIC Manual of Examination Policies; and (3) the FDIC's assumption of a supervisory role over the bank. After carefully reviewing the Bank's contentions as to the duty owed to it, we conclude that no duty arose from these sources, either separately or together.

New Jersey law instead places a duty of supervision upon each bank's board of directors. A New Jersey statute requires that the director of a bank must

take an oath that he will, so far as the duty devolves upon him, diligently and honestly administer the affairs of the bank, and that he will not knowingly violate, or knowingly permit to be violated, any provision of this act . . . .

N.J.Stat.Ann. § 17:9A-103(B) (West Supp.1979). It is, moreover, a general principle of banking law that "(i)f, through recklessness and inattention to the duties confided to him, frauds and misconduct are perpetrated by other officers and agents or codirectors, which ordinary care on his part would have prevented, (a director of a bank) is personally liable for the loss resulting." 1 Michie on Banks and Banking, ch. 3, § 63 (1973) (footnote omitted).

The Federal Deposit Insurance Act, 12 U.S.C. §§ 1811 et seq. (1976), as amended by Pub.L. 95-630, 92 Stat. 3641 (1978) (the "Act"), sets up a system of insurance, the primary function of which is "stabilizing or promoting the stability of banks." Doherty v. United States, 94 F.2d 495, 497 (8th Cir.), Cert. denied 303 U.S. 658, 58 S.Ct. 763, 82 L.Ed. 1117 (1938); Fed. Deposit Ins. Corp. v. Godshall, 558 F.2d 220 221 (4th Cir. 1977). The purpose of the bank examinations by the FDIC under 12 U.S.C. § 1820(b) is to prevent losses that would result in claims against the insurance fund. Nothing in the Act purports to establish any duty...