In Re Franklin Nat. Bank Sec. Litigation

• Decision Date: 17 August 1979
• Docket Number: MDL No. 196(JBW).
• Citation: 478 F. Supp. 210
• Parties: In re FRANKLIN NATIONAL BANK SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of New York

478 F. Supp. 210

In re FRANKLIN NATIONAL BANK SECURITIES LITIGATION.

MDL No. 196(JBW).

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

August 17, 1979.

COPYRIGHT MATERIAL OMITTED

Barrett, Smith, Schapiro, Simon & Armstrong, New York City, for trustee by William O. Purcell, New York City, of counsel.

Casey, Lane & Mittendorf, New York City, for F.D.I.C. by William E. Kelly, John T. Morin, Edward C. Cerny, III, James M. Shaugnessy, Gerald E. Singleton, New York City, of counsel.

Joan M. Bernott, James P. Klapps, Gerald Smolin, Jr., M. Faith Burton, U.S. Dept. of Justice, Washington, D.C., L. Robert Griffin for the Office of the Comptroller of the Currency, Washington, D.C., John Harry Jorgenson, Washington, D.C., for Board of Governors of the Federal Reserve System.

Donald Ringsmuth, Bradley K. Sabel, New York City, for Federal Reserve Bank of New York.

Rivkin, Leff & Sherman, Garden City, N. Y., for National Surety & Fire by Leonard Rivken, Jeffrey Silberfeld, Garden City, N. Y., of counsel.

Davis, Polk & Wardwell, New York City, for Ernst & Ernst by Daniel Kolb, Bartlett H. McGuire, Howard A. Ellins, New York City, of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Aetna by Mark A. Belnick, New York City, of counsel.

Kelley, Drye & Warren, New York City, for Continental Bank International by John M. Callagy, John P. Marshall, New York City, of counsel.

Shea, Gould, Climenko & Casey, New York City, for I.N.A. by Ronald H. Alenstein, Robert J. Hawley, New York City, of counsel.

Wachtell, Lipton, Rosen & Katz, New York City, for Tisch by Kenneth B. Forrest, Elizabeth Sabin, New York City, of counsel.

Chadbourne, Park, Whiteside & Wolff, New York City, for Beisler, Hogan, et al. by Bernard W. McCarthy, New York City, of counsel.

Mudge, Rose, Guthrie & Alexander, New York City, for Sindona by John Kirby, New York City.

Poletti, Freidin, Prashker, Feldman & Gartner, New York City, for Crosse by Barbara A. Lee, Nicholas R. Weiskopf, New York City, of counsel.

Dewey, Ballentine, Bushby, Palmer & Wood, New York City, for Gleason, Lewis, Merkin and Smith by Michael D. DiGiacomo, New York City, of counsel.

MEMORANDUM

WEINSTEIN, District Judge:

The United States moves for summary judgment against all the third party claims which allege that the regulation of Franklin National Bank (FNB) by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Bank (FRB) and the Federal Reserve Bank of New York (FRBNY) makes the United States liable for some of the losses arising from the decline and ultimate demise of FNB. Despite the cogent arguments in favor of this motion, pragmatic considerations, arising from the complex posture of this multidistrict litigation, demand that the motion be denied at this time, with leave to renew should pre-trial conditions change.

I. Posture of Litigation

The numerous claims for relief now before us seek to fix responsibility for the financial collapse of FNB. See Generally In re Franklin National Bank Securities Litigation, 478 F.Supp. 577, MDL 196 (E.D. N.Y.1979); In re Franklin National Bank Securities Litigation, 445 F.Supp. 723 (E.D. N.Y.1978); In re Franklin Nat'l Bank Securities Litigation, 73 F.R.D. 25 (E.D.N.Y. 1976). Both the FDIC, in its corporate capacity as receiver of FNB, and the Trustee in Bankruptcy of Franklin New York Corporation (FNYC), the parent holding company of FNB, have filed suit seeking recovery on the various Bankers Blanket Bonds that insured both FNB and FNYC against any loss through dishonest or fraudulent acts by employees of either corporation. See Federal Deposit Insurance Corp. v. National Surety Corp., 425 F.Supp. 200 (E.D.N.Y.1977). The FDIC and the Trustee have also sued directly various officers and directors of FNB and FNYC. Finally, both the FDIC and the Trustee have filed complaints against Ernst & Ernst, the auditors of FNB and FNYC, alleging negligence in the audits. Overlapping claims have been made by a class of securities holders of FNYC. See In re Franklin National Bank, 381 F.Supp. 1390 (E.D.N.Y. 1974), aff'd. in part, rev'd. in part, rem'd., 574 F.2d 662 (2d Cir. 1978), clarified, 599 F.2d 1109 (2d Cir. 1979). The FDIC alone has sued Continental Bank International (CBI) alleging that when FNB was considering hiring Donald Emrich, a former employee of CBI, and allegedly a prominent figure in the subsequent dishonesty at FNB, CBI misrepresented Emrich's record and character.

Extensive criminal charges have been brought against directors and officers of FNB and FNYC. Some have resulted in guilty pleas, some in jury verdicts of guilty, now on appeal, and some have not yet been tried. Almost all of the criminal defendants have pleaded the Fifth Amendment in this civil litigation, thus substantially inhibiting discovery. Nevertheless, pretrial practice has been vigorous, with some 100,000 pages of depositions, millions of documents and scores of motions, requiring many thousands of pages of briefs and supporting exhibits.

The issues now before us concern the third party claims filed by the primary defendants —the Bonding Companies, Ernst & Ernst, CBI and several of the officers and directors—against the United States under the Federal Tort Claims Act, 28 U.S.C. § 2671, et seq., alleging, under a variety of legal and factual theories, that the regulatory supervision of FNB by the OCC, FDIC, FRB and FRBNY makes the United States liable for some of the losses suffered by FNB. These third party plaintiffs seek indemnification or contribution for any judgment against them in the primary actions.

While each of the governmental agencies is independent, they, quite properly, cooperated closely in the period before and after bankruptcy and receivership in carrying out banking and other fiscal policies of the country. The relationship among officials has been close on both an informal and formal basis. For example, the Comptroller of the Currency, charged with, among other things, bank examinations, is one of the triumvirate supervising the FDIC which insured deposits and now acts as receiver of FNB's assets, being itself the defunct bank's largest creditor.

II. Possible Bases for a Cause of Action

The Federal Tort Claims Act partially waives the sovereign immunity of the Unites States, permitting suit

. . . for injury or loss of property . . . caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred.

28 U.S.C. § 1346(b). This provision has never been interpreted to create any new causes of action (claims for relief) against the United States, but rather to confer only a procedural remedy. See, e. g., Dalehite v. United States, 346 U.S. 15, 73 S.Ct. 956, 97 L.Ed. 1427 (1953); Certain Underwriters at Lloyds, 511 F.2d 159 (5th Cir. 1975); Kaufman v. Evans, No. 127-71 (D.N.J. July 21, 1977). State law defines the possible causes of action. See, e. g., First State Bank of Hudson County v. The United States of America, 599 F.2d 558 (3rd Cir. 1979); Harmsen v. Smith, 586 F.2d 156 (9th Cir. 1978); Birnbaum v. U. S., 436 F.Supp. 967, 976 ff. (E.D.N.Y.1977), aff'd, 588 F.2d 319 (2d Cir. 1978). But cf. Davis, Administrative Law, § 25.08-2 at 566 (Supp.1976) (arguing that the Supreme Court has occasionally neglected this statutory requirement).

The third party plaintiffs, arguing under the basic New York principles of contribution and indemnity, N.Y.C.P.L.R. § 1401; see, e. g., Bay Ridge Air Rights Inc. v. State, 44 N.Y.2d 49, 404 N.Y.S.2d 73, 375 N.E.2d 29 (1978); Klinger v. Dudley, 41 N.Y.2d 362, 393 N.Y.S.2d 323, 361 N.E.2d 974 (1977); North Colonie Central School Dist. v. McFarland Const. Co., Inc., 60 A.D.2d 685, 399 N.Y.S.2d 933 (1977), contend that an action for contribution or indemnity is possible here because the regulatory agencies named as third party defendants owed an actionable duty to FNB and its shareholders. Cf. First State Bank of Hudson County v. The United States of America, 599 F.2d 558 (3rd Cir. 1979); Harmsen v. Smith, 586 F.2d 156 (9th Cir. 1978); Social Security Admin. Baltimore F.C.U. v. United States, 138 F.Supp. 639 (D.Md.1956) (identical claims raised under law of New Jersey, California and Maryland). See also United States v. Yellow Cab Co., 340 U.S. 543, 71 S.Ct. 399, 95 L.Ed. 523 (1951). Two primary theories are offered to justify finding such a duty: (i) a duty should be implied from the statutory obligations imposed upon these regulatory agencies, see, e. g., Runkel v. City of New York, 282 A.D. 173, 123 N.Y.S.2d 485 (1953), and (ii) a duty should be found to have been spontaneously generated by any or all of the specific actions taken by those agencies in their supervision of FNB—essentially a theory of assumption of duty. See, e. g., Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922); Zibbon v. Town of Cheetowaga, 51 A.D.2d 448, 382 N.Y.S.2d 152 (4th Dept.), appeal dismissed, 39 N.Y.2d 1056, 387 N.Y. S.2d 428, 355 N.E.2d 388 (1976); Paul v. Staten Island Edison Corporation, 2 A.D.2d 311, 155 N.Y.S.2d 427 (2d Dept. 1956). Neither contention is convincing.

A. Implying a Duty from the Bank Regulation Statutes

The third party plaintiffs first argue that the broad statutory schemes governing these bank regulatory agencies, see, e. g., Federal Reserve Act, 12 U.S.C. § 221 et seq.; Federal Deposit Insurance Act, 12 U.S.C. § 1811 et seq.; National Bank Act, 12 U.S.C. § 21 et seq., should provide a basis for implying a duty of care, running from those agencies to the banks and their shareholders, and that the failure of those agencies either to detect the weakness or alleged dishonesty at FNB, or to take appropriate regulatory action to remedy those problems, should be...