Levitt v. State of Maryland Deposit Ins. Fund Corp., CV 85-4099.

• Decision Date: 18 September 1986
• Docket Number: No. CV 85-4099.,CV 85-4099.
• Citation: 643 F. Supp. 1485
• Parties: William J. LEVITT, Plaintiff, v. STATE OF MARYLAND DEPOSIT INSURANCE FUND CORPORATION, for itself, as Conservator for Old Court Savings & Loan, Inc., Chevy Chase Savings & Loan, Inc., Frank Saul, Frederick Dewberry, as Secretary of Licensing and Regulation of the State of Maryland, and Maryland Savings Share Insurance Corporation, Defendants.
• Court: U.S. District Court — Eastern District of New York

643 F. Supp. 1485

William J. LEVITT, Plaintiff, v. STATE OF MARYLAND DEPOSIT INSURANCE FUND CORPORATION, for itself, as Conservator for Old Court Savings & Loan, Inc., Chevy Chase Savings & Loan, Inc., Frank Saul, Frederick Dewberry, as Secretary of Licensing and Regulation of the State of Maryland, and Maryland Savings Share Insurance Corporation, Defendants.

No. CV 85-4099.

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

September 18, 1986.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Shaw, Goldman, Licitra, Levine & Weinberg, P.C., Garden City, N.Y., for plaintiff.

Kramer, Levin, Nessen, Kamin & Frankel, New York City, for defendants.

MEMORANDUM AND ORDER

WEXLER, District Judge.

Plaintiffs William J. Levitt and the Levitt Community Corp. ("LCC"), both allegedly of New York, commenced this diversity suit on November 13, 1985 against the State of Maryland Deposit Insurance Fund Corporation ("MDIF"), the Chevy Chase Savings and Loan, Inc. ("Chevy Chase"), Frank Saul, Frederick Dewberry, who is Maryland's Secretary of Licensing and Regulation, and the Maryland Savings Share Insurance Corporation ("MSSIC") for negligence, fraud, intentional interference with business relationships, business libel, and breach of fiduciary duty. LCC subsequently withdrew from the lawsuit. Rule 41(a), Fed.R.Civ.P. Levitt seeks damages of no less than $100,000,000. Defendants now move to dismiss the Complaint on the basis of lack of subject-matter jurisdiction, lack of personal jurisdiction, and abstention. Rule 12(b)(1), (2), Fed.R.Civ.P. Alternatively, defendants seek a transfer of this action to the United States District Court for the District of Maryland. 28 U.S.C. § 1404. Both sides have moved for sanctions pursuant to Rule 11. By an Order of this Court, all discovery was stayed pending disposition of the cross-motions.

I.

This lawsuit is one aspect of the extensive litigation that followed the highly publicized Maryland savings bank crisis in the summer of 1985. In 1984, Levitt, who is a real estate developer, approached the management of a Maryland thrift institution, the Old Court Savings and Loan, Inc. ("Old Court"), in order to obtain financing for a projected Florida real estate venture. After some negotiation, a partnership agreement¹ was entered into among various parties that, among other things, obligated Old Court to advance funds for the Florida project. Old Court's mismanagement and financial weakness, which led to Old Court being placed in conservatorship on May 13, 1985,² cast considerable doubt on the future of the project. Levitt, who had already experienced difficulty in obtaining cash advances from Old Court before the conservatorship, encountered more resistance as MDIF, Old Court's conservator, began to examine the partnership agreement in detail. Levitt attempted to meet with MDIF and state officials in an effort to procure additional funding, but these labors were without success as on September 20, 1985, MDIF, OCIC, and OCJV sued Levitt, LCC, and the partnership in the Circuit Court of Baltimore City for a judicial dissolution of the partnership and an accounting. In that lawsuit (the "Maryland Action"), which is apparently near trial, the Complaint alleges breach of contract and breach of fiduciary duty.

II.

In this action, defendants have moved to dismiss the Complaint. They contend first that the Court lacks subject-matter jurisdiction on two grounds: (a) defendants are not "citizens" within the meaning of 28 U.S.C. § 1332; and (b) the Eleventh Amendment bars a suit for damages against defendants, all of whom are part of the State of Maryland. Defendants contend second that there is no basis under New York law for the exercise of in personam jurisdiction over any of the defendants. N.Y.Civ. Prac.L. §§ 301-02 (McKinney's 1986). Third, defendants argue that the Court should abstain from exercising jurisdiction under either Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976) or Burford v. Sun Oil, 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943). Fourth, defendants propose that in the event the lawsuit is not dismissed outright, it should be transferred to the District of Maryland. 28 U.S.C. § 1404(a). Finally, defendants contend fifth that sanctions should be imposed upon plaintiff's counsel because of the multiple fatal defects in the Complaint. Rule 11, Fed.R.Civ.P. Simultaneously, Levitt has cross-moved for sanctions. The essence of Levitt's cross-motion for sanctions is that the conduct of defendants and their counsel, including the filing of an obstructive motion to dismiss or transfer, merits the imposition of sanctions.

III.

The Court will first address defendants' challenge to this Court's subject-matter jurisdiction.³ Under the Eleventh Amendment of the Constitution, the federal courts lack competence to entertain a suit for damages by a citizen against one of the fifty states. U.S. Const. amend. 11; Pennhurst State School and Hospital v. Halderman, 465 U.S. 89, 105 S.Ct. 900, 79 L.Ed.2d 67 (1984); Ford Motor Company v. Department of Treasury, 323 U.S. 459, 65 S.Ct. 347, 89 L.Ed. 389 (1945). Although a state may not be named as a party, a suit is nonetheless barred if the state is the real party in interest and the recovery will be paid out of the state treasury. State Highway Commission of Wyoming v. Utah Construction Company, 278 U.S. 194, 49 S.Ct. 104, 73 L.Ed. 262 (1929); Dwyer v. Regan, 777 F.2d 825 (2d Cir.1985). The issue in this case is whether any of the defendants should be treated as an arm of the state for the purposes of the Eleventh Amendment.⁴Mount Healthy City School District v. Doyle, 429 U.S. 274, 97 S.Ct. 568, 50 L.Ed.2d 471 (1977). The issue is decided by reference to federal and not state law, but "the answer depends, at least in part, upon the nature of the entity created by state law." Mt. Healthy, 429 U.S. at 280, 97 S.Ct. at 580.

The question is one of first impression in this District, but in light of the litigation arising out of the 1985 Maryland thrift crisis, the issue has already been resolved in MDIF's favor by a number of other courts. See American Casualty Company of Reading, Pa. v. Community Savings and Loan, Inc., 635 F.Supp. 539 (D.Md.1986) and cases cited therein. In addition to the reasons put forth in those cases, it is significant that the emergency legislation creating MDIF does not authorize it to pay judgments or settle lawsuits. Therefore, any judgment against MDIF would have to be satisfied out of the state treasury. Md.Fin.Inst.Code Ann. § 10-110 (1985). MDIF's origins also support this conclusion. MDIF is apparently a new entity, created by the Maryland legislature in 1985 in direct response to the banking crisis and as a successor to MSSIC. Defendant Dewberry, for a time MDIF's Action Director, states that MDIF is a state agency under the jurisdiction of Maryland's Department of Licensing and Regulation. Therefore, this Court holds that MDIF is an agency of the State of Maryland under the Eleventh Amendment and immune from a suit for damages in federal court.

Levitt maintains that MDIF is similar to a state highway authority and points to a series of cases holding such state agencies outside the coverage of the Eleventh Amendment. See, e.g., S.J. Groves & Sons, Inc. v. New Jersey Turnpike Authority, 268 F.Supp. 568 (D.N.J.1967); Zeidner v. Wulfrost, 197 F.Supp. 23 (E.D.N. Y.1961). These citations are, however, distinguishable on their facts. In those cases, state highway authorities were not financed out of the state treasury but raised revenue through tolls and the issuance of bonds. Despite the state's obligation to back the highway bonds, the defendants were not an alter ego of the state because there was no showing that the highway authority was unable to meet its obligations. E.g., Zeidner, 197 F.Supp. at 25. By contrast, it is clear in this case that MDIF is unable to meet all of the financial obligations out of its own funds and must look to the state treasury to make up the shortfalls. Indeed, in the midst of the Maryland crisis, the Maryland State Legislature agreed to hold harmless all depositors and, in effect, guarantee all the deposits. Office of Special Counsel, Report on the Savings and Loan Crises 453 (1986); Maryland's Governor announced that $100 million would be loaned to MDIF from the state treasury to protect depositors. MDIF, Questions and Answers, Old Court Savings & Loan, Inc. 3 (Jan. 22, 1986) (Exhibit GG to defendants' papers in opposition).

It follows, therefore, that MSSIC, MDIF's now-defunct predecessor, is also immune from suit in federal court. Relying on United States v. The Maryland Savings Share Insurance Corporation, 400 U.S. 4, 91 S.Ct. 16, 27 L.Ed.2d 4 (1970), Levitt maintains, however, that MSSIC is not instrumentality of the State. 400 U.S. at 7 n. 2, 91 S.Ct. at 18 n. 2. This citation is inapposite. First, in that case the Supreme Court did not address the question of MSSIC's status in the context of the Eleventh Amendment. Second, all of the functions of the MSSIC have been taken over by MDIF, an entity that is an arm of the State.

Frederick Dewberry, who is sued here as Maryland's Secretary of Licensing and Regulation, is also immune. Suits against state officials are barred by the Eleventh Amendment insofar as the lawsuit is actually against the state itself. Edelman v. Jordan, 415 U.S. 651, 94 S.Ct. 1347, 39 L.Ed.2d 662 (1974). Here the plaintiff's only claims are those brought under state law. There is no request for prospective injunctive relief and no allegation that federal law was violated. Nor is this a situation where the damages are ancillary to the main relief sought because damages are the only remedy sought by plaintiff. Therefore, the claims against Dewberry are barred by the Eleventh Amendment. Quern v. Jordan, 440 U.S. 332, 99 S.Ct. 1139, 59 L.Ed.2d 358 (1979).

It is a very different matter,...