Foremost Guar. Corp. v. Community Sav. & Loan, Inc.
| Decision Date | 31 August 1987 |
| Docket Number | 86-1663,Nos. 86-1662,s. 86-1662 |
| Citation | 826 F.2d 1383 |
| Parties | FOREMOST GUARANTY CORPORATION, Plaintiff-Appellee, v. COMMUNITY SAVINGS & LOAN, INC., a Maryland Association, Defendant-Appellant, and Philadelphia Savings Fund Society; Epic Mortgage, Inc., a Delaware Corporation; Dominion Federal Savings & Loan Association, a federal savings and loan association; First National Bank of Maryland, a national banking corporation; Silverado Banking Savings and Loan Association, Colorado Corporation; Unity Loan and Building Company, Ohio, Defendants. UNITED GUARANTY RESIDENTIAL INSURANCE OF IOWA, an Iowa Corporation, Plaintiff- Appellee, v. COMMUNITY SAVINGS & LOAN, INC., a Maryland Association, Defendant-Appellant, and Epic Mortgage, Inc., a Delaware Corporation; Dominion Federal Savings & Loan Association, a federal savings and loan association; First National Bank of Maryland, a national banking corporation; Continental Federal Bank, a federal savings bank; American Savings & Loan an Indiana savings and loan association, individually and Behalf of others similarly situated, Defendants. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Dennis Michael Sweeney, Deputy Atty. Gen. (Stephen H. Sachs, Atty. Gen. of Maryland, Baltimore, Md., Alexander E. Bennett, Murray R. Garnick, Arnold & Porter, Washington, D.C., on brief), for defendant-appellant.
Edward Cyrus Winslow, III (James T. Williams, Jr., Mack Sperling, Brooks, Pierce, McLendon, Humphrey & Leonard, Greensboro, N.C., Irving P. Margulies, Randal D. Shields, Weiner, McCaffrey, Brodsky & Kaplan, P.C., Washington, D.C., on brief), for plaintiff-appellee.
Before WIDENER, Circuit Judge, HAYNSWORTH, Senior Circuit Judge, and MAXWELL, United States District Judge for the Northern District of West Virginia, sitting by designation.
Foremost Guaranty Corporation (Foremost) and United Guaranty Residential Insurance Company (UGI), two mortgage insurance companies, have filed civil actions each seeking Declaratory Judgment enabling the rescission of certain mortgage guaranty insurance policies and commitments which they had issued to EPIC Mortgage, Inc. (EMI), a subsidiary of Community Savings and Loan, Inc. (Community).
The Maryland Deposit Insurance Fund Corporation (MDIF), as receiver of Community, moved the district court to dismiss these civil actions on Eleventh Amendment grounds. The district court denied the motion, holding as follows:
MDIF occupies a bifurcated status: as insurer of Community's deposits, and as receiver of Community. In connection with these suits, MDIF is fulfilling its role as receiver. I find that such a proprietary capacity does not render it an arm or "alter ego" of the State so as to defeat diversity.
I would also find that the possibility that the Maryland treasury could be affected in that MDIF qua insurer has a claim against the assets of Community and a judgment may diminish those assets, does not constitute the direct depletion of the State treasury needed to invoke the Eleventh Amendment. Dyson v. Lavery, 417 F.Supp. 103, 108 (E.D.Va.1976).
Accordingly, it is hereby ordered that the motions to dismiss are DENIED.
MDIF appeals, arguing multiple reasons for reversing the district court's decision. The substantive issue presented in this appeal is whether a Declaratory Judgment action brought against Community is barred under the Eleventh Amendment because MDIF, a state agency, has been appointed its receiver.
Inasmuch as we hold that MDIF, while functioning in its limited capacity as a receiver, a legal representative for Community, does not obtain immunity from suit in federal courts under the Eleventh Amendment, we affirm the decision below.
This case arises out of the extensive litigation, concerning mortgage insurance policies associated with the State of Maryland's 1985 savings and loan crisis, which has been consolidated by the Judicial Panel on Multi-District Litigation for further proceedings in the Eastern District of Virginia.
Before May 1985, 102 savings and loan associations chartered in Maryland were insured by the Maryland Savings Share Insurance Corporation (MSSIC), a private non-profit corporation which derived its capital from member institutions whose deposits it insured. A series of depositor runs on several Maryland savings and loan institutions touched off a financial crisis which prompted the Governor of the State of Maryland to issue an Executive Order on May 14, 1985, suspending withdrawals from MSSIC-insured institutions and seeking emergency legislation. The Maryland General Assembly enacted extensive emergency legislation in May 1985 that, among other things, established MDIF effective June 1, 1985 and merged the functions of MSSIC into MDIF. See generally Chevy Chase Savings & Loan v. State, 306 Md. 384, 509 A.2d 670 (1986) ().
MDIF is a non-stock, non-profit corporation and a state agency within the Maryland Department of Licensing and Regulation. Chevy Chase, 306 Md. at 393, 509 A.2d at 674-75. Virtually all the assets and liabilities of MSSIC were transferred to MDIF by the statutory merger. See 1985 Md.Laws Ch. 6 Sec. 4 (1st Sp.Sess.), 1986 Md.Laws Ch. 12 Sec. 2. MDIF was initially capitalized from Maryland's state general revenue fund in order to have sufficient funds to satisfy its insurance obligations to failed financial institutions.
Primarily MDIF was established as an insurer of member institutions, but it also was granted all the "rights, powers, duties, obligations, and functions" of MSSIC. See 1985 Md.Laws ch. 6, Sec. 4 (1st Sp.Sess.), 1986 Md.Laws, ch. 12, Sec. 2. By legislative permission the Maryland Deposit Insurance Fund director may institute proceedings for the appointment of a conservator or a receiver for any member association when he determines that it "is being operated in an unsafe and unsound manner, or that there is not a substantial likelihood that a major association will qualify for federal insurance and that it is in the public interest." Md.Fin.Inst.Code Ann. Sec. 10-117(c) (1986). See also Md.Fin.Inst.Code Ann. Sec. 9-701(b).
The relationships of the entities involved as defendants in the case at bar are somewhat complex. Community, a Maryland savings and loan association, was a unit of a holding company which included dozens of affiliated companies, many of which were directly or indirectly involved in mortgage lending. Equity Programs Investment Corporation (EPIC) was another unit of the holding company that owned both Community and EMI. EPIC syndicated approximately 350 limited partnerships to purchase over 20,000 single family homes. EPIC financed these homes with loans originated by EMI. EMI, Community's subsidiary, engaged in the business of making residential mortgage loans. EMI obtained mortgage guaranty insurance on these loans from, among others, UGI and Foremost, and then assigned the loans to Community.
In August, 1985, when EMI was experiencing severe financial problems United rescinded all outstanding insurance coverage on the EPIC loans. United then filed a diversity action in the United States District Court for the Middle District of North Carolina seeking Declaratory Judgment that it was entitled to rescission of these insurance agreements because of fraud and misrepresentations in the insurance application process. The defendants are EMI, Community, and other financial institutions to which certain loans were assigned.
On September 5, 1985, the Circuit Court for Montgomery County, Maryland, appointed MDIF as conservator of Community, directing that MDIF "shall exercise all powers, rights and privileges of the officers, directors, and members of the Defendant Association [Community] and its subsidiaries, and shall conduct the operations of the Defendant Association and its subsidaries (sic)." Board of Savings & Loan Ass'n Comm'rs, et al. v. Community Savings & Loan, Inc., No. 9276 Civil (Cir.Ct., Montgomery County, Md., Sept. 5, 1985). MDIF was later appointed receiver In November, 1985, Foremost filed its action in the Eastern District of Virginia, similarly seeking a Declaratory Judgment that it was entitled to rescission of its outstanding insurance coverage of EPIC loans due to fraud and misrepresentation. The defendants named in that action are the same as those in UGI's suit. In April, 1986, the Judicial Panel on Multi-District Litigation consolidated these two suits and a few others, all involving the rescission of private mortgage insurance issued to EMI, in the Eastern District of Virginia, with Judge Claude M. Hilton presiding. In re Epic Mortgage Insurance Coverage Litigation, No. 680 (J.P.M.D.L., April 11, 1986).
of Community, after Foremost, too, had filed an action.
Judge Hilton ruled that complete diversity was absent in Foremost's suit because MDIF, as receiver for Community, was both the real party in interest in the suit and an arm of the State of Maryland. Foremost responded by amending its complaint to include a federal RICO count against Community and EPIC.
Following consolidation of the cases, MDIF moved the district court to dismiss the UGI and Foremost claims as barred under the Eleventh Amendment. Judge Hilton denied the motions, ruling that MDIF's status as a receiver did not compel dismissal and that any possible effect on the Maryland treasury was not sufficiently direct so as to invoke Eleventh Amendment immunity. Subsequently, MDIF moved to amend Judge Hilton's order for purposes of certification for interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b). This motion was denied by the Court. This appeal followed.
Generally, an interlocutory appeal is not permitted from orders of district courts prior to the entry of final judgment. 28 U.S.C. Sec. 1291. Moreover, the district court has declined to certify its order for an...
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