Gibson v. First Federal Savings and Loan Association

• Decision Date: 04 August 1972
• Docket Number: Civ. A. No. 37900.
• Citation: 347 F. Supp. 560
• Parties: Harry GIBSON et al., Plaintiffs, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, Defendant.
• Court: U.S. District Court — Western District of Michigan

347 F. Supp. 560

Harry GIBSON et al., Plaintiffs, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, Defendant.

Civ. A. No. 37900.

United States District Court, E. D. Michigan, S. D.

August 4, 1972.

Harry Gibson, Robert Houston, Lloyd E. Powell, Detroit, Mich., for plaintiffs.

Laurence M. Scoville, Jr., Warren D. Couger, Clark, Klein, Winter, Parsons & Prewitt, Detroit, Mich., for defendant.

MEMORANDUM OPINION

FEIKENS, District Judge.

Plaintiffs in this action are mortgagors or have assumed mortgages which are held by the mortgagee defendant, First Federal Savings and Loan Association. Each mortgage provides that plaintiffs are to pay to defendant an amount for taxes, assessments, and premiums on insurance policies on the mortgaged premises in monthly installments which are then paid over by defendant on the annual county and city taxes and insurance premiums when due. These installments are accumulated by the mortgagee in an escrow account.

It is this escrow account and the method of calculation of the monthly installments which are the subject matter of this lawsuit.

Defendant, First Federal Savings and Loan Association, is a savings and loan association organized under the Home Owner's Loan Act of 1933, 12 U.S.C. § 1461 et seq., and is regulated by the Federal Home Loan Bank Board, 12 U.S.C. § 1464. Pursuant to that authority, the Board enacts regulations which direct the manner of collecting and accumulating funds in the escrow account. Specifically, 11 CFR § 545.6-11 states:

"A federal association may require that an equivalent of one-twelfth of the estimated annual taxes, assessments, insurance premiums and other charges on real estate security be paid in advance . . . to enable the association to pay such charges as they become due from the funds so received. . . ."

Plaintiffs allege that the method of payment required by the mortgage is as follows:

"Third: That, in order more fully to protect the security of this mortgage, the Mortgagor . . . in addition to the monthly installments of principal and interest . . ., will pay to the Mortgagee the following sums:

. . . . . .

"(b) A sum equal to . . . the premiums that will next become due on policies of fire and hazard insurance covering the mortgaged property, plus taxes and assessments next due on the mortgaged property (all as estimated by the mortgagee) less all sums already paid therefor divided by the number of months to elapse before one month prior to the dates when such (payments) will become delinquent, such sums to be held by the Mortgagee in trust to pay said (charges). (Emphasis added.)" Plaintiffs' brief dated April 12, 1972, p. 11.

Plaintiffs claim that defendant's construction of this language results in amounts greater than one-twelfth being paid at one time. This, it is asserted, is because defendant requires payment to be made one full month in advance of due date:

"The effect of Defendant's mortgage loan provision is to collect escrow monies on an equivalent of one-eleventh rate per month of the estimated taxes, assessments, etc., in advance which is greater than in excess and in violation of that provided by the onetwelfth rate per month provision of the governing regulation." Plaintiffs' brief dated April 12, 1972, p. 11.

Furthermore, plaintiffs contend that the retention of money held in account without a credit of earned interest thereon to that account results in a deprivation of property without due process of law in violation of the Fifth and Fourteenth Amendments.

Defendant has moved to dismiss for lack of jurisdiction. It argues that the action is essentially one based upon contract, and since there is no diversity the action must be dismissed.

Plaintiffs claim jurisdiction in the federal court under Sections 1331, 1337 and 1343 of the Judicial Code (28 U.S.C. § 1331, 1337, 1343).

Taking Section 1343 first—it gives jurisdiction to redress any deprivation of civil rights under color of state law. Plaintiffs contend that inasmuch as state process is used to foreclose mortgages, state action is involved. Judicial or executive action, combined with private action, has been held sufficient to find action under color of state law, Shelley v. Kraemer, 334 U.S. 1, 68 S.Ct. 836, 92 L.Ed. 1161 (1948). But not so here, for the nexus between the state action—possible foreclosure and execution of sale by the sheriff and the alleged taking by the defendant—is too remote. To hold that the taking is under color of law would subject every contract or mortgage to constitutional scrutiny. Although the mortgage in question may present legal questions under federal law, enforcement of that contract by the sheriff does not transform an illegal contract into an unconstitutional one.

We next consider possible Section 1331 jurisdiction. Plaintiffs also allege that federal savings and loan associations such as defendant are federal instrumentalities for certain purposes and that its action results in a taking by the Government without due process. If this assertion is supportable, jurisdiction is founded under Section 1331 as general federal question jurisdiction. As to this section it is doubtful that plaintiffs meet the requisite jurisdictional amount of $10,000.¹ But even more importantly, it is apparent that the acts of a savings and loan association are not such to give rise to inference that it is the act of federal government. Plaintiffs in support of their argument that defendant is a federal instrumentality cite Durnin v. Allentown Federal Savings and Loan Ass'n., 218 F.Supp. 716 (E.D.Pa.1963). That court stated: "A federal savings and loan association is without a doubt an instrumentality of the United States." 218 F.Supp. at 718. In that case three cases are cited which do not support that blanket proposition. United States v. Harper, 241 F.2d 103 (7th Cir. 1957), holds that an indictment for bank robbery was not fatally defective because it had failed to allege that the institution was insured by the Federal Savings and Loan Insurance Corporation. This was so because all savings and loan associations are so insured and the associations are "federal instrumentalities." People of State of California v. Coast Federal Savings and Loan Ass'n., 98 F.Supp. 311, 316 (S.D.Cal.1951), also relied upon in Durnin, supra, was an action by the State of California to apply certain California banking laws to a federal savings and loan association. The court held that these associations which are organized pursuant to federal law are completely regulated by Congress and the federal government having preempted the field, state law was inapplicable. See also Federal Savings and Loan Insurance Corp. v. Kearney Trust Co., 151 F.2d 720 (8th Cir. 1945) (action by Federal Savings and Loan Insurance Corporation as assignee of claims of a savings and loan association) and First Federal Savings & Loan Ass'n. v. Loomis, 97 F.2d 831 (7th Cir. 1938) (upholding constitutionality of act).

It is important tó distinguish in the cases the precise parties involved. A predecessor to the savings and loan association was the Home Owners' Loan Corporation, organized under 12 U.S.C. § 1463(a), repealed in P.L. 89-554 § 8 (a) 1966. That section specifically designated the corporation as an instrumentality of the United States. The stock of such a corporation was subscribed for by the Secretary of the Treasury on behalf of the United States; it was exempt from taxation and all dividends that were declared were to be paid to the United States. Several cases held that the Home Owners' Loan Corporation was not liable in tort because of sovereign immunity. See Schevitzky v. Home Owners' Loan Corporation, 26 F.Supp. 311 (E.D.Mo.1939); Walker v. Home Owners' Loan Corporation, 25 F. Supp. 589 (S.D.Cal.1938), but see Pennell v. Home Owners' Loan Corporation, 21 F.Supp. 497 (D.Maine 1937); Prato v. Home Owners' Loan Corporation, 24 F. Supp. 844 (D.Mass.1938).

In sharp distinction is the organization of present-day federal savings and loan associations. The charter is issued by the Federal Home Loan Bank Board, but the capital is raised by and through its membership. "Holders of savings accounts and obligors of an association shall . . . be members." Section 1464(b) (1). The Secretary of the Treasury may subscribe for preferred shares, and must if requested by the Board. Section 1464(g). Furthermore, it is directed that sums be set aside to retire any interest of the United States. Taxation by a state is not forbidden. It is only forbidden to tax at a greater rate than other cooperative or mutual home financing and thrift organizations. Section 1464(h). Importantly, the Act nowhere states that a savings and loan association is an instrumentality of the United States. What is stated is that an association ". . . may be employed as fiscal agent . . . and . . may act as agent for any other instrumentality of the United States when designated . . ." Section 1464(k).

Thus it is clear that a savings and loan association, even though completely regulated by Congress, is an organization of private persons and does not enjoy the identity with the government that the Home Owners' Loan Corporation, or its regulatory agency, the Federal Home Loan Bank Board, does.² To speak of the defendant as a federal instrumentality with respect to its loan function is a complete misnomer, and plaintiffs' cause of action insofar as it rests upon any constitutional basis must be dismissed.

Plaintiffs also claim federal jurisdiction because of a cause of action raised by defendant's failure to follow the statute and regulations promulgated by the Federal Home Loan Bank Board. Jurisdiction is based alternatively on Sections 1331 or 1337.

But to reiterate, a jurisdictional prerequisite of Section 1331, plaintiffs must still meet the $10,000 minimum amount in controversy. It is clear from the affidavit of defendant, and plaintiffs do not contest this, that as to the named plaintiffs, at no time could...