Homes By Michelle, Inc. v. Federal Sav. Bank

• Decision Date: 03 April 1990
• Docket Number: Civ. A. No. 1:89-CV-1971-MHS.
• Citation: 733 F. Supp. 1495
• Parties: HOMES BY MICHELLE, INC., et al., Plaintiffs, v. The FEDERAL SAVINGS BANK, et al., Defendants.
• Court: U.S. District Court — Northern District of Georgia

733 F. Supp. 1495

HOMES BY MICHELLE, INC., et al., Plaintiffs, v. The FEDERAL SAVINGS BANK, et al., Defendants.

Civ. A. No. 1:89-CV-1971-MHS.

United States District Court, N.D. Georgia, Atlanta Division.

April 3, 1990.

Steve J. Davis, Charles Anthony Smith, Phears & Dailey, Norcross, Ga., for plaintiffs.

George William Long, III, Kirk W. Watkins, Parker Johnson Cook & Dunlevie, Atlanta, Ga., for Federal Sav. Bank.

James Tolbert Johnston, Jr., Hunter MacLean Exley & Dunn, Savannah, Ga., Timothy

J. Sweeney, Harman Owen Saunders & Sweeney, Atlanta, Ga., for Thomas Stacey.

Anthony L. Cochran, Chilivis & Grindler, Atlanta, Ga., for Bruce Milligan.

ORDER

SHOOB, District Judge.

Amidst allegations of what the Court must term an unusual fraudulent financing scheme, plaintiffs have filed this suit seeking damages for banking violations, racketeering activity, and pendent state law claims. Defendants have filed separate motions to dismiss, all of which argue that the complaint should be dismissed for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. A thorough review of the complaint and the numerous relevant statutes reveals the deficiencies of plaintiffs' federal claims. Under such circumstances, the Court cannot retain jurisdiction over the pendent state law claims and must dismiss plaintiffs' complaint in its entirety.

I. FACTUAL BACKGROUND

Plaintiffs Warren E. Hanchey and Michelle M. Hanchey are respectively Secretary and President of plaintiff Homes By Michelle, Inc., a Georgia home-building company. Plaintiffs allege that they were contacted during the summer of 1987 by defendant G. Thomas Stacey ("Stacey"), a loan officer for defendant The Federal Savings Bank ("FSB"), concerning lot purchases at a residential subdivision known as Helmsley Place. Plaintiffs allege that Stacey told them that FSB was providing discounts to certain builders for purchases at the subdivision, because the Helmsley Place developer needed cash to overcome financial problems on a separate project financed by FSB.

Plaintiffs decided not to purchase any Helmsley Place lots because they could not afford to pay interest that would accrue on the property if the structures built there did not sell quickly. In response, according to their complaint, Stacey assured plaintiffs that FSB would finance both construction on the lots and any interest that accrued prior to sale (referred to as "interest carry charges"). Given those assurances, plaintiffs agreed to purchase two Helmsley Place lots in November 1987, closed on the sale in May 1988, and received the promised discounts from Stacey shortly thereafter. Plaintiffs never received any construction financing from FSB, however, and, as a result, defaulted on acquisition loans they had received from FSB. FSB then foreclosed on the Helmsley Place property—and other properties owned by plaintiffs—during the summer of 1989.

Although the above description of the facts alleged in plaintiffs' complaint suggests a straightforward breach of contract or fraud action, this case is complicated because plaintiffs had neither a written contract nor a financing agreement with FSB, and because several third parties were involved in the Helmsley Place purchases. For reasons that are not clear, plaintiffs paid the deposit for the Helmsley Place lots in November 1987 to an organization known as Dom-Per, Inc. ("Dom-Per"). The draft was endorsed by defendant Bruce Milligan ("Milligan"), who was President of FSB. For reasons that also are not clear, the Helmsley Place lots were transferred by the Helmsley Place developer to The Buckhead Real Estate Partners ("BREP") and then transferred to The Lot Draw, Inc. ("Lot Draw") in May 1988, just before plaintiffs closed on the property. BREP apparently made a downpayment on the lots to the Helmsley Place developer one week after plaintiffs paid their deposit to Dom-Per.

Plaintiffs do not allege in their complaint that the involvement of the various non-parties to this suit in the Helmsley Place purchases clouded their title to the property. Indeed, even when construed in the light most favorable to plaintiffs, it is not clear what significance attaches to the activities of Dom-Per, BREP, and Lot Draw, other than creating the appearance of impropriety. The complaint does allege that the developers of Helmsley Place made payments to Milligan and Stacey in order to obtain financing for the sub-division and that BREP paid Lot Draw to serve as the "seller" during the closings involving plaintiffs. The complaint does not indicate, however, how these payments affected plaintiffs.

II. PENDENT STATE LAW CLAIMS

Counts I through VI of plaintiffs' complaint state causes of action for violation of state law. Count I alleges that FSB breached an oral contract with plaintiffs by failing to provide the construction financing and interest carry charges promised by its agent Stacey. Count II alternatively alleges fraud in the inducement of that contract since Stacey knew that FSB would not provide such financing but represented on behalf of FSB that it would. Counts III and IV claim that FSB wrongfully foreclosed on plaintiffs' interest in the Helmsley Place lots and other properties FSB financed for plaintiffs and Count V alleges that FSB libelled and slandered plaintiffs through those foreclosures. Finally, Count VI states another fraud claim based on the unrecorded transfer of title from the Helmsley Place developer to BREP and FSB's refusal to provide plaintiffs funds for construction and interest carry charges at Helmsley Place.

Although the parol evidence rule may preclude plaintiffs from maintaining the breach of oral contract claim set out in Count I of their complaint—and each state law claim against FSB ultimately will depend on proof that Stacey and Milligan acted within their authority as agents for FSB in the Helmsley Place transactions— the Court is not required to address the sufficiency of the pendent state law claims at this juncture. While pendent jurisdiction is a doctrine of discretion, the Court cannot retain jurisdiction over well-pleaded state law claims if it dismisses the federal claims before trial. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). Because the Court concludes that plaintiffs' federal claims must be dismissed, the Court will dismiss the pendent state law claims contained in Counts I through VI of their complaint without prejudice.

III. BANKING VIOLATIONS

Count VII of plaintiffs' complaint alleges violations of several federal banking laws in conjunction with the Helmsley Place project. First, the complaint maintains that Milligan and Stacey received payments of an unspecified type from the Helmsley Place developer in exchange for financing from FSB in violation of 18 U.S.C. § 215 (Supp. V 1987). Second, the complaint claims that Milligan and Stacey made false entries in FSB's books and reports in an attempt to defraud plaintiffs in violation of 18 U.S.C. § 1005 (1982). Third, the complaint asserts that FSB made unspecified loans to Milligan and Stacey in violation of 12 U.S.C. § 375b(3) (1988). Based on these violations, plaintiffs maintain that they are authorized to bring a private cause of action against defendants pursuant to 12 U.S.C. § 503 (1988).

Even a cursory review of the applicable statutes should have revealed that FSB cannot be liable based on Count VII of plaintiffs' complaint. First, FSB cannot violate 18 U.S.C. § 215 (receipt of commissions or gifts for procuring loans) nor 18 U.S.C. § 1005 (bank entries, reports and transactions) since it is not an individual.¹ Second, FSB cannot be liable under 12 U.S.C. § 375b(3) since it is not a "member bank" of the Federal Reserve System.² Although plaintiffs protest that dismissal of Count VII on this latter ground would require an inappropriate factual determination as to whether FSB is a member of the Federal Reserve System, the Court observes that plaintiffs did not (and could not) allege in their complaint that FSB is a member of the Federal Reserve System, which is an essential element of claims based on statutes that apply only to banks that are members of the Federal Reserve System. Finally, 12 U.S.C. § 503, the statute that plaintiffs rely on to state a cause of action for the various alleged violations, imposes liability only on directors and officers of member banks. Plaintiffs should not require the Court's assistance to realize that a federal savings bank cannot be a director or officer subject to liability under 12 U.S.C. § 503.

Similar problems arise concerning the liability of Stacey and Milligan under Count VII of the complaint. Although as individuals Stacey and Milligan could face criminal liability for any violations of 18 U.S.C. §§ 215 and 1005, neither statute authorizes a private cause of action. The only statute that provides a private cause of action for violations of 18 U.S.C. §§ 215 and 1005 is 12 U.S.C. § 503, which imposes personal liability against officers and directors of member banks for damages based on violations of the banking laws.³ Because FSB is not a member of the Federal Reserve System, however, Stacey and Milligan are not subject to liability under 12 U.S.C. § 503. The Court therefore must concur with defendants that 12 U.S.C. § 503 does not provide express authorization for Count VII of plaintiffs' complaint. Accord Lode v. Leonardo, 557 F.Supp. 675, 678 (N.D.Ill.1982) (no private cause of action against officers and directors of non-member banks under statute that requires non-member banks to comply with loan limitations governing member banks).

Plaintiffs nevertheless contend that the Court should imply a private cause of action against defendants based on the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub.L. 101-73 ("FIRREA"). Because FIRREA eliminated many regulatory distinctions between...