PEOPLE, ETC. v. Coast Federal Sav. & Loan Ass'n

• Decision Date: 21 June 1951
• Docket Number: Civ. A. 10528-C.
• Citation: 98 F. Supp. 311
• Court: U.S. District Court — Southern District of California
• Parties: PEOPLE OF STATE OF CALIFORNIA et al. v. COAST FEDERAL SAV. & LOAN ASS'N.

98 F. Supp. 311

PEOPLE OF STATE OF CALIFORNIA et al. v. COAST FEDERAL SAV. & LOAN ASS'N.

Civ. A. 10528-C.

United States District Court S. D. California, C. D.

June 21, 1951.

COPYRIGHT MATERIAL OMITTED

Edmund G. Brown, Atty. Gen., Walter L. Bowers, Asst. Atty. Gen., Bayard Rhone, Deputy Atty. Gen., for plaintiffs.

Crail & Crail, Los Angeles, Cal. (Harry G. McMahon, Los Angeles, Cal., of counsel), and Frank P. Doherty, Los Angeles, Cal., for defendant.

Newell A. Clapp, Acting Asst. Atty. Gen., Ernest A. Tolin, U. S. Atty., Clyde C. Downing, Asst. U. S. Atty., and Reuben Rosensweig, Asst. U. S. Atty., all of Los Angeles, Cal. (Edward H. Hickey and

Hubert H. Margolies, Attys., Department of Justice, Washington, D. C., and Kenneth G. Heisler, General Counsel, and William F. McKenna, Asst. General Counsel, Home Loan Bank Board, Washington, D. C., of counsel), for United States, as amicus curiae.

Sheppard, Mullin, Richter & Balthis, Los Angeles, Cal. (Frank S. Balthis Jr. and James C. Sheppard, Los Angeles, Cal., of counsel), for the California Sav. & Loan League, as amicus curiae.

JAMES M. CARTER, District Judge.

This is an action for injunction and recovery of statutory penalties, in which the plaintiffs contend that defendant, a Federal savings and loan association, solicited and received deposits, representing itself to be a banking institution, and transacted its business in the manner of a savings bank, in violation of California state statutes and without authority.¹

The action was commenced in the State court and removed to the District Court. Due to the importance of the questions involved, leave was granted to the United States and to The California Savings & Loan League to appear as amici curiae.

The Facts

Defendant was chartered by the Home Loan Bank Board (hereafter referred to as the Board) under Sec. 5(a) of the Home Owners' Loan Act of 1933, as amended, Sec. 1464(a), Title 12 U.S.C.A., its principal place of business being in Los Angeles. It has not received a certificate from the State Superintendent of Banks (hereafter referred to as the Superintendent) to do a banking business, nor has it been authorized by the United States to transact business as a National Bank.

Defendant issued but two types of accounts: an "investment share account," in multiples of $100, and a "savings share account," in any amount. Under normal conditions,² holders of savings share accounts may add to or withdraw funds from the account, at will. Every person opening an account is issued a membership certificate and becomes a member of defendant, entitled to one vote at all membership meetings for every $100 or fraction, on deposit, with a maximum of 50 votes. Each holder of a savings share account is given a pass book. Subject to limitations prescribed by the Home Loan Bank Board, defendant's directors fix the dividend rate, semiannually, to apply for the next succeeding half year; otherwise the association does not agree to pay a fixed rate of earnings upon its accounts.

The charter of defendant, implemented by rules and regulations of the Board, expressly authorizes defendant to make loans on homes, within prescribed limits, if secured by a first lien; each such borrower becomes a member of defendant, with the right to cast one vote at membership meetings.

No evidence was offered which would support a finding that defendant was actually transacting its business other than strictly within the limited perimeter of its expressly authorized field. The gravamen of the complaint is that through signs and other means of advertising, defendant has transacted business in the manner of a bank and has held itself out as a bank or savings bank, and has led the public to believe that it was such a bank, without authority and in violation of state statutes. Plaintiffs further allege that defendant, unless restrained, will continue such advertising, and seek injunctive relief, as well as recovery of the $100-a-day statutory penalty.

In its various types of advertising, defendant uses a part of its corporate name, viz: "Coast Federal Savings". It uses such phrases as "Your savings account opened by the 10th earns interest from the 1st," "Open your Coast Federal Savings account, now," "Place your savings at Coast Federal," and "You can get your money when you want it."

Through emphasis upon certain words used in adjoining window signs, the very myopic would read, from a distance, "Coast Federal Savings Bank."³ Supervisory personnel of the Board saw such signs frequently. They were removed at the request of the Board about seven months before this action was commenced, but only after the Board received complaints, including those of the Superintendent. Thereafter, defendant's signs recited that it was a "Member of Federal Home Loan Bank," without emphasizing the word "bank."

In 1938, and prior to the time when, as alleged in the complaint, defendant commenced to use the advertising methods complained of, the Federal Savings and Loan Insurance Corporation (a federal instrumentality which insures deposits at Federal Savings and Loan Associations) published a handbook⁴ dealing with approved and recommended advertising by insured institutions, including federal savings and loan associations. The handbook approved the use of such phrases as "Accounts Federally Insured," "Insured savings accounts," "Save where savings are insured" and "Availability of funds." It stated that earnings distributed should be referred to as "dividends" and not as "interest." One of the advertisements used by the defendant stated "earns interest from the 1st." This statement was not within the letter or spirit of one of the regulations.⁵

At no time did plaintiffs request or petition the Board for a hearing or other administrative action concerning the defendant, with the exception of the informal complaints, above mentioned, as to the signs.

The answer asserts that (1) the complaint fails to state a justiciable claim; (2) the state statutes relied upon by plaintiffs are inapplicable; (3) defendant is an instrumentality and agency of the United States; (4) its acts were done by virtue of and under the authority of the United States; (5) plaintiffs have not resorted to or exhausted administrative remedies provided by the rules and regulations of the Board; and (6) the public has not been misled. Additionally, defendant and amici curiae urge that (7) primary jurisdiction lies with the Home Loan Bank Board, (8) the state courts did not have jurisdiction over the subject matter of this action, and, finally, (9) that this court is likewise without such jurisdiction.

The Questions For Determination

Four questions are presented: (1) whether primary jurisdiction over the subject matter lies with the Home Loan Bank Board, or in the state courts; (2) the effect of the failure of plaintiffs to exhaust administrative remedies; (3) if the state court was without jurisdiction over the subject matter, whether this court is also without jurisdiction thereof; finally, (4) whether the state regulatory statutes which plaintiffs seek to invoke, are valid.

The Law

I

Defendant is a Federal savings and loan association, organized and chartered by the Home Loan Bank Board. Sec. 5, Home Owners' Loan Act of 1933, as amended, Sec. 1464, Title 12 U.S.C.A. It is conceded that such an association is an instrumentality and agency of the United States.⁶

Federal savings and loan associations are created "to provide local mutual thrift institutions in which people may invest their funds and in order to provide for the financing of homes". Sec. 1464(a), Ibid. The Board issues charters for these associations, "giving primary consideration to the best practices of local mutual thrift and home-financing institutions in the United States." Sec. 1464(a), Ibid. North Arlington Nat. Bank v. Kearney Fed. Sav. & Loan Ass'n, 3 Cir., 1951, 187 F.2d 564.

Congress expressly delegated the duty and authority to the Board to make policy, including the power to make rules and regulations for the organization, incorporation, examination, operation, supervision and regulation of such associations, which delegation of authority is constitutional. Fahey v. Mallonee, 1947, 332 U.S. 245, 67 S.Ct. 1552, 91 L.Ed. 2030. No provision is made for sharing the Board's delegated authority with state regulatory or supervisory agencies. North Arlington Nat. Bank v. Kearney Fed. Sav. & Loan Ass'n, supra. First Fed. Sav. & Loan Ass'n v. Loomis, infra, note 4.

The Board has adopted comprehensive rules and regulations concerning the powers and operations of every Federal savings and loan association from its cradle to its corporate grave. Title 24, Code of Federal Regulations, 1949 Ed. Ch. I, sub-chapter C, published under authority of Secs. 311(d) and 311(a), Title 44 U.S.C.A. and Ex.O.No.9931, Feb. 4, 1948, 13 F.R. 519. These rules and regulations have the force and effect of law, and are noticed judicially. Secs. 301-314, Title 44 U.S.C.A.; Community Fed. Sav. & Loan Ass'n v. Fields, 8 Cir., 1942, 128 F.2d 705; Home Owners' Loan Corp. v. Gordon, 1939, 36 Cal.App.2d 189, 97 P.2d 845; Standard Oil Co. of California v. U. S., 9 Cir., 1939, 107 F.2d 402.

Sec. 142.2 of the Regulations, 14 F.R 5664, provides, in part: "The Board may order a hearing in connection with the consideration of any matter arising under any provision of the rules and regulations * * * whether or not any request therefor has been made by any person." The Board, in adopting that section, expressly found that its adoption would tend "to expedite the public business and simplify the operation of the regulations." F.R.Doc. 49-7437, Sept. 14, 1949. (24 C.F.R., 1949, Supp., 142.2)

Sec. 146.1 authorizes the Board to appoint a conservator or receiver for a Federal savings and loan association if the Board finds that the association is conducting its business in an unlawful or unauthorized manner, is pursuing a course that is jeopardizing...