Harmsen v. Smith, Nos. 74-3262

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtBefore HUFSTEDLER and SNEED; SNEED; HUFSTEDLER
Citation542 F.2d 496
PartiesFred H. HARMSEN et al., Plaintiffs and Appellees, v. C. Arnholt SMITH et al., Defendants and Appellants. FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver of United States National Bank, Plaintiff in Intervention and Appellant, v. C. Arnholt SMITH et al., Defendants and Appellees.
Decision Date10 August 1976
Docket NumberNos. 74-3262,74-2962

Page 496

542 F.2d 496
Fred H. HARMSEN et al., Plaintiffs and Appellees,
v.
C. Arnholt SMITH et al., Defendants and Appellants.
FEDERAL DEPOSIT INSURANCE CORPORATION as Receiver of United
States National Bank, Plaintiff in Intervention
and Appellant,
v.
C. Arnholt SMITH et al., Defendants and Appellees.
Nos. 74-3262, 74-2962.
United States Court of Appeals,
Ninth Circuit.
Aug. 10, 1976.
Rehearing and Rehearing En Banc Denied Oct. 13, 1976.

Page 497

Stanley H. Williams (argued), of Agnew, Miller & Carlson, Los Angeles, Cal., for defendants and appellees in No. 74-2962 and for defendants and appellants in No. 74-3262.

Charles A. Legge (argued), of Bronson, Bronson & McKinnon, San Francisco, Cal., for appellant in No. 74-2962.

Page 498

Joseph W. Cotchett (argued), of Cotchett, Hutchinson & Dyer, San Mateo, Cal., and Roger A. Parkinson (argued), of Long & Levit, Los Angeles, Cal., for defendants and appellants in No. 74-3262.

Before HUFSTEDLER and SNEED, Circuit Judges, and THOMPSON, * District Judge.

SNEED, Circuit Judge:

This case arises out of the insolvency of the United States National Bank of San Diego (USNB), a national banking association. To understand the posture of the case on appeal it is necessary to commence with October 18, 1973, the date the Comptroller of Currency declared the USNB insolvent. On that same day the Comptroller appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Several days thereafter two separate groups of minority shareholders brought class actions against the directors of USNB alleging violations of the federal securities laws and the National Banking Act, as well as pendent state law claims of fraud and breach of fiduciary duty. In due course the two groups filed a second amended and consolidated complaint which is the complaint to which this opinion is directed.

Shortly after the initiation of these proceedings by the minority shareholders, the FDIC moved to intervene therein and to displace the shareholder-plaintiffs. The district court determined that the FDIC was a proper intervening party plaintiff but that the FDIC could not preclude the minority shareholders from proceeding as party plaintiffs in this action. In addition, the district court certified this question:

That the question of the shareholder-plaintiffs' right to maintain an individual and representative action in their own right under Section 93 of the National Banking Act after a bank has failed involves a controlling question of law upon which there is substantial ground for difference of opinion, the decision of which will materially advance the ultimate termination of this litigation. The claimed right of the FDIC to assert such causes of action to the exclusion of shareholder-plaintiffs therefore involves a question certifiable under 28 U.S.C. § 1292(b).

The FDIC thus appeals from the district court's refusal to displace the minority shareholders.

Thereafter, the directors of the USNB for their part moved to dismiss the complaint. The district court granted the motion with respect to alleged violations of Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 CFR 240.10b-5) thereunder on the ground that the asserted fraud did not take place in connection with the purchase or sale of any security. No appeal has been taken from this ruling.

The district court, however, denied the motion with respect to allegations of violations of the National Banking Act and the pendent state law claims. It also certified the following question:

The question of the shareholder-plaintiffs' right to maintain an individual and representative action in their own right under § 93 of the National Banking Act and under state law for a breach of fiduciary duty and fraud where the only damages claimed are the diminution of the value of their shares after the bank failed involves a controlling question of law upon which there is a substantial ground for difference of opinion, the decision of which will materially advance the ultimate termination of this litigation. The claimed right of the shareholder-plaintiffs to assert such causes of action therefore involves a question certifiable under 28 U.S.C. § 1292(b).

The defendant directors appeal the district court's denial of their motion to dismiss.

We hold that the district court properly refused to permit the FDIC to displace the minority shareholders as plaintiffs and that Section 93 of the National Banking Act

Page 499

enables the minority shareholders as plaintiffs to maintain an individual action in their own right after a bank has failed. We also hold that the district court properly declined to dismiss in its entirety the complaint of minority shareholders with respect to its allegations of violations of the National Banking Act. However, we do hold that certain portions of the complaint, as hereinafter described, alleging violations of the National Banking Act should have been dismissed. Finally, we respond to the second certified question by holding that minority shareholders may, under Section 93 of the National Banking Act, maintain in their own right a cause of action for damages after their bank has failed where the only damages claimed are the diminution of the value of their shares.

Before turning to the exposition of our reasons for these holdings we call attention to the fact that on June 27, 1975, the district court certified this action by the minority shareholders as a class action in which the class consists of "all persons and entities, excluding the defendant-shareholders, who were beneficial owners of United States National Bank common stock on October 18, 1973." The district court reserved the right to limit the class "by excluding any persons whose claims do not qualify for class treatment." There has been no certification under 28 U.S.C. § 1292(b) of a question directed to the propriety of this action by the district court on June 27, 1975, unless the phrase "individual and representative action" in the two certified questions set out above is construed to include such a question. Because the June 27, 1975 class certification followed the formulation of the two certified questions before us, we prefer to assume for the purposes of this appeal that the propriety of class certification is not before us. Hereinafter we shall point out, however, that the district judge may desire to alter in the light of this opinion, his class certification of June 27, 1975.

Our reasons for these holdings may be conveniently divided into two parts, viz. (1) those supporting the conclusion that Section 93 of the National Banking Act permits a shareholder to bring a direct action against the directors of a national bank subject to FDIC receivership, and (2) those that provide the basis for concluding that the complaint, in part, alleges such an action. To these reasons, so divided, we now turn.

I

Section 93 of the National Banking Act.

Section 93 of the National Banking Act comes to us from Section 50 of the National Bank Act of 1863 (12 Stat. 679) and Section 53 of the National Bank Act of 1864 (13 Stat. 116). See 12 U.S.C. § 38. Its present form reads as follows:

If the directors of any national banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate any of the provisions of this chapter, all the rights, privileges, and franchises of the association shall be thereby forfeited. Such violation shall, however, be determined and adjudged by a proper district or Territorial court of the United States in a suit brought for that purpose by the Comptroller of the Currency, in his own name, before the association shall be declared dissolved. And in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation. R.S. § 5239; Mar. 3, 1911, c. 231, § 291, 36 Stat. 1167.

Save in one respect, which, as we shall point out, is significant to this case, this section is essentially unchanged from the date of its enactment.

Given the longevity of Section 93 it would be surprising if the issue of whether the section permits a shareholder to bring a direct action against a director violating the designated provisions had not arisen before. As one would expect, the issue has so arisen and the Supreme Court has interpreted the section to permit a direct action. In Chesbrough v. Woodworth, 244 U.S. 72, 37 S.Ct.

Page 500

579, 61 L.Ed. 1000 (1917), the Supreme Court approved the following ruling by the lower court in which the case arose:

The general demurrer was rightly overruled. The making and publishing of the reports are not merely for the information of the Comptroller, but are to guide the public, and he who buys stock in a bank in reliance upon the reports has a right of action under § 5239, Rev.Stat. (Comp.Stat.1916, § 9831) (section 93), against any officer or director who, knowing its falsity, authorizes such report. Id. at 76, 37 S.Ct. at 582.

The general demurrer was to a complaint in which a plaintiff-shareholder had charged the director-defendants with violating the provisions of what is now 12 U.S.C. § 161, which requires that certain reports be made to the Comptroller of Currency. Thus, it is beyond dispute that under proper circumstances Section 93 creates a direct cause of action by the shareholders against the directors of a national bank. 1

This cause of action requires that the plaintiff demonstrate that the damages he seeks are personal to him. Section 93 does not permit him to recover for injuries done to the bank of which the defendant is a director. Again the Court in Chesbrough approved the lower court ruling, which put it this way:

The damages in such a case are personal to the plaintiff. He sues in his...

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37 practice notes
  • Sunrise Securities Litigation, In re, No. 89-2116
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • October 17, 1990
    ...misconduct injured shareholders generally. Relying on Chesbrough, the Court of Appeals for the Ninth Circuit in Harmsen v. Smith, 542 F.2d 496 (9th Cir.1976), held that an allegation by shareholders that they had relied to their detriment upon Page 886 false reports issued by bank officers ......
  • Leach v. Federal Deposit Ins. Corp., No. 87-1921
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • December 2, 1988
    ...grounds, 828 F.2d 1145, 1146 (1987) (state law claims). Our result also accords with the Ninth Circuit's decision in Harmsen v. Smith, 542 F.2d 496, 502-03 (9th Cir.1976). A cursory reading of Harmsen may leave the impression that it conflicts with our decision. A careful reading, however, ......
  • Marx v. Centran Corp., No. 83-3602
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • November 8, 1984
    ...circumstances Section 93 creates a direct cause of action by the shareholders against the directors of a national bank." Harmsen v. Smith, 542 F.2d 496, 500 (9th Cir.1976) (citing Chesbrough v. Woodworth, 244 U.S. 72, 37 S.Ct. 579, 61 L.Ed. 1000 (1917)). But see Russell v. Continental Illin......
  • Adato v. Kagan, No. 772
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • January 29, 1979
    ...may sue in their own right, however, if they have suffered a wrong that is distinctly theirs and not common to all. Harmsen v. Smith, 542 F.2d 496, 500 (9th Cir. 1976); 1 Michie, Supra at 289. We see no reason why this exception to the general rule should not apply to a section 22(g) It can......
  • Request a trial to view additional results
37 cases
  • Sunrise Securities Litigation, In re, No. 89-2116
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • October 17, 1990
    ...misconduct injured shareholders generally. Relying on Chesbrough, the Court of Appeals for the Ninth Circuit in Harmsen v. Smith, 542 F.2d 496 (9th Cir.1976), held that an allegation by shareholders that they had relied to their detriment upon Page 886 false reports issued by bank officers ......
  • Leach v. Federal Deposit Ins. Corp., No. 87-1921
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • December 2, 1988
    ...grounds, 828 F.2d 1145, 1146 (1987) (state law claims). Our result also accords with the Ninth Circuit's decision in Harmsen v. Smith, 542 F.2d 496, 502-03 (9th Cir.1976). A cursory reading of Harmsen may leave the impression that it conflicts with our decision. A careful reading, however, ......
  • Marx v. Centran Corp., No. 83-3602
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • November 8, 1984
    ...circumstances Section 93 creates a direct cause of action by the shareholders against the directors of a national bank." Harmsen v. Smith, 542 F.2d 496, 500 (9th Cir.1976) (citing Chesbrough v. Woodworth, 244 U.S. 72, 37 S.Ct. 579, 61 L.Ed. 1000 (1917)). But see Russell v. Continental Illin......
  • Adato v. Kagan, No. 772
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • January 29, 1979
    ...may sue in their own right, however, if they have suffered a wrong that is distinctly theirs and not common to all. Harmsen v. Smith, 542 F.2d 496, 500 (9th Cir. 1976); 1 Michie, Supra at 289. We see no reason why this exception to the general rule should not apply to a section 22(g) It can......
  • Request a trial to view additional results

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