In re Franklin Nat. Bank Securities Litigation

• Decision Date: 04 May 1978
• Docket Number: No. 75 C 684.,75 C 684.
• Citation: 445 F. Supp. 723
• Parties: In re FRANKLIN NATIONAL BANK SECURITIES LITIGATION Robert GOLD, on behalf of himself and on behalf of all others similarly situated, Plaintiff, and Louis Pergament, Intervenor-Plaintiff, v. ERNST & ERNST et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

445 F. Supp. 723

In re FRANKLIN NATIONAL BANK SECURITIES LITIGATION

Robert GOLD, on behalf of himself and on behalf of all others similarly situated, Plaintiff, and Louis Pergament, Intervenor-Plaintiff, v. ERNST & ERNST et al., Defendants.

No. 75 C 684.^*

United States District Court, E. D. New York.

January 17, 1978.

For Supplemental Opinion May 4, 1978.

COPYRIGHT MATERIAL OMITTED

Milberg, Weiss, Bershad & Specthrie, New York City, Liaison Attys. for class plaintiffs, for plaintiff Gold in No. 75 C 684.

Jessel Rothman, Mineola, N. Y., for intervenor plaintiff Pergament in No. 75 C 684; Melvyn I. Weiss, Jerome M. Congress, New York City, of counsel.

Casey, Lane & Mittendorf, New York City, for plaintiff in Nos. 76 C 2339, 77 C 293.

Davis, Polk & Wardwell, New York City, for defendant in No. 76 C 2339.

Kelley, Drye & Warren, New York City, for defendant in No. 77 C 293.

Casey, Lane & Mittendorf, New York City, for plaintiff in Nos. 76 C 494, 76 C 515; William E. Kelly, Edward C. Cerny, III, New York City, of counsel.

Rivkin, Leff & Sherman, Garden City, N. Y., for National Surety and Firemen's Fund in Nos. 76 C 494, 76 C 515; Leonard L. Rivkin, Garden City, N. Y., Jeffrey Silberfeld, Point Lookout, N. Y., Harry Weinig, Hempstead, N. Y., of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Aetna Cas. & Sur. Co. in Nos. 76 C 494, 76 C 515; Mark A. Belnick, Richard Wasserman, New York City, of counsel.

Shea, Gould, Climenko, Kramer & Casey, New York City, for Ins. Co. of N. A. in Nos. 76 C 494, 76 C 515; Ronald H. Alenstein, Robert Hawley, New York City, of counsel.

Barrett, Smith, Schapiro & Simon, New York City, for Corbin in Nos. 76 C 494, 76 C 515; Michael O. Finkelstein, New York City, of counsel.

Mordecai Rosenfeld, New York City, for plaintiff in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Casey, Lane & Mittendorf, New York City, for FDIC in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Poletti, Freidin, Prashker, Feldman & Gartner, New York City, for Crosse in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Mudge, Rose, Guthrie & Alexander, New York City, for Sindona in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Chadbourne, Parke, Whiteside & Wolff, New York City, for defendants in Nos. 74 C 894, 74 C 894A, 74 C 1174.

DiFalco, Field & O'Rourke, New York City, for Bardoni in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Townley, Updike, Carter & Rodgers, New York City, for Andersen in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for Gleason et al. in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Barrett, Smith, Shapiro & Simon, New York City, for Franklin N. Y. Corp. and Corbin in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Hughes, Hubbard & Reed, New York City, for Franklin Nat. Bank in Nos. 74 C 894, 74 C 894A, 74 C 1174, 75 C 1611, 76 C 539.

Breed, Abbott & Morgan, New York City, for Schreiber in Nos. 74 C 894, 74 C 894A, 74 C 1174.

David G. Trager, U. S. Atty., Brooklyn, N. Y., Henry Brachtl, New York City, for James Smith in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Wachtell, Lipton, Rosen & Katz, New York City, for Tisch in Nos. 74 C 894, 74 C 894A, 74 C 1174.

Battle, Fowler, Lidstone, Jaffin, Pierce & Kheel, New York City, for Luftig in Nos. 74 C 894, 74 C 894A, 74 C 1174.

David G. Trager, U. S. Attorney, Brooklyn, N. Y.; J. Christopher Jensen, Asst. U. S. Atty.; James P. Klapps, Trial Atty., Civil Division, U. S. Depart. of Justice, Washington, D. C., for United States of America in Nos. 76 C 494, 76 C 515; Dorothy S. Kulig and Peter C. Schaumber, Office of the Comptroller of the Currency, Washington, D. C., of counsel.

For Supplemental Opinion May 4, 1978. See 449 F.Supp. 574.

OPINION

PLATT, District Judge.

Statement

The United States of America, a third-party defendant in Federal Deposit Insurance Corporation v. National Surety Corporation, et al., 76 C 494, and Corbin v. National Surety Corporation, et al., 76 C 515, moves pursuant to Rule 12 of the Federal Rules of Civil Procedure (FRCP) to dismiss the third-party complaints of the National Surety Corporation, Fireman's Fund Insurance Company, the Aetna Casualty and Surety Company, and the Insurance Company of North America ("Insurance Companies") on the grounds that this Court lacks subject matter jurisdiction over the claims and that the third-party complaints fail to state a claim upon which relief can be granted.

The Federal Deposit Insurance Corporation ("FDIC") moves pursuant to FRCP 12 to dismiss various counterclaims and affirmative defenses asserted against it in FDIC v. National Surety Corporation, et al., supra, FDIC v. Ernst & Ernst, 76 C 2339, and FDIC v. Continental Bank International, 77 C 293, by the Insurance Companies, Ernst & Ernst, and Continental Bank International ("CBI").

Ernst & Ernst moves pursuant to FRCP 13, 14 and 15 to amend its answer in various respects in Gold v. Ernst & Ernst, 75 C 684, and FDIC v. Ernst & Ernst, supra, and, by serving a third-party complaint, to bring in as third-party defendants in these two cases the United States and various directors, officers and/or other employees of Franklin National Bank ("FNB") and Franklin New York Corporation ("FNYC"). Ernst & Ernst also moves to amend its answers to third-party complaints served on it in FDIC v. National Surety Corporation, et al., supra, and Corbin v. National Surety Corporation, et al., supra, so as to add cross-claims against the United States and various directors, officers, and/or other employees of FNB and FNYC. In addition, certain individual defendants have joined Ernst & Ernst's motions and also seek to add claims against the United States.

FACTS

On October 8, 1974, the Franklin National Bank was declared insolvent by the Comptroller of the Currency who appointed the FDIC as receiver of FNB. On the same day Judge Judd of this Court approved a purchase and assumption agreement whereby certain assets of FNB were transferred to the European-American Bank and Trust Company as purchasing (of certain assets) and assuming (of certain liabilities) bank. In re Franklin National Bank, 381 F.Supp. 1390 (E.D.N.Y.1974). The FDIC as receiver sold to itself in its corporate capacity all the remaining assets of FNB including the rights of the FNB on various Bankers Blanket Bonds. Those bonds insured FNB and its parent holding company, FNYC, against loss through any dishonest or fraudulent act of employees of either corporation.

The FDIC has brought suit against the issuers of those bonds, the above-named Insurance Companies. Sol Neil Corbin as Trustee in Bankruptcy of FNYC also seeks recovery on those bonds. See Federal Deposit Insurance Corp. v. National Surety Corp., 425 F.Supp. 200 (E.D.N.Y.1977).

The FDIC has also sued the auditor of FNB, i. e., Ernst & Ernst, in FDIC v. Ernst & Ernst, supra, based on a claim of purported negligence of Ernst & Ernst in its auditing of FNB. That firm is also being sued in a stockholder class action, Gold v. Ernst & Ernst, supra, on substantially the same grounds.

Finally, the FDIC is suing CBI, in FDIC v. Continental Bank International, supra, based on a claim of purported negligence of CBI in failing to notify FNB about the past employment record of an employee alleged to have subsequently caused FNB significant monetary losses.

The facts leading up to the collapse of FNB on October 8, 1974 are, to say the least, complex. Judge Judd in a related case, Huntington Towers v. Franklin National Bank, 75 C 972 (E.D.N.Y. July 1, 1976), aff'd in part, rev. in part, 559 F.2d 863 (2d Cir. 1977), summarized those facts as follows (at p. 6):

"The Comptroller's affidavit in support of his motion for summary judgment sets forth that as of December 31, 1973 Franklin was the twentieth largest bank in the United States, with $5 billion in resources, $3.7 billion of total deposits, and 103 branches in addition to its main office. The stock of its holding company, Franklin New York Corporation (FNYC), was publicly owned, and registered with the Securities & Exchange Commission. A regular examination of Franklin by the Comptroller, begun on November 14, 1973 and concluded on March 8, 1974, showed that Franklin's total resources had grown much faster than its capital; that its growth had been financed almost entirely by short-term borrowed funds representing about 50 percent of the bank's liabilities; and that it had loans which were subject to criticism, although not necessarily uncollectible, amounting to more than its equity capital of $170 million.

"During the week of May 6, 1974, the Comptroller's Office and the Federal Reserve System learned from Franklin that severe losses had occurred in its foreign exchange department, that announcement of these losses would cause a severe liquidity crisis, and that an immediate and massive loan from FRB (Federal Reserve Bank of New York) might be necessary. On May 12, 1974, FNYC, Franklin's parent corporation, announced that the foreign exchange department of Franklin had sustained losses of $12 million and that additional losses might be as high as $25 million. Trading in securities of FNYC was promptly suspended. These announcements caused a large runoff of borrowings, in spite of the announcement that the Federal Reserve System would advance funds to Franklin as needed, within the limits of acceptable collateral. Within ten days (by May 22, 1974), the loans from FRB reached an amount of $1,125 billion.

"Between May and October, the Comptroller's Office endeavored to develop long-term solutions to Franklin's problems, including efforts to obtain help from other banks with its liquidity problems, to arrange a purchase of Franklin by some other bank, and to negotiate with FDIC to assist a purchase and assumption of Franklin's assets and liabilities by another commercial bank. A substantial impairment of the bank's equity capital was revealed by a special examination begun on August 14, 1974. By October 7, 1974, FRB informed the Comptroller that

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