Smith v. Dearborn Financial Services, Inc.

• Decision Date: 07 January 1993
• Docket Number: No. 92-1432,92-1432
• Citation: 982 F.2d 976
• Parties: Clifton SMITH, Plaintiff-Appellant, v. DEARBORN FINANCIAL SERVICES, INC., and Dearborn Federal Credit Union, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 976

982 F.2d 976

61 USLW 2438

Clifton SMITH, Plaintiff-Appellant, v. DEARBORN FINANCIAL SERVICES, INC., and Dearborn Federal

Credit Union, Defendants-Appellees.

No. 92-1432.

United States Court of Appeals, Sixth Circuit.

Argued Dec. 8, 1992.

Decided Jan. 7, 1993.

Robert F. Harrington (argued and briefed), Farmington Hills, MI, for plaintiff-appellant.

Thomas R. Bowen (briefed) Susan L. Brown (argued) Harvey, Kruse, Westen & Milan, Troy, MI, for defendants-appellees.

Before: MARTIN and MILBURN, Circuit Judges; and WELLFORD, Senior Circuit Judge.

MILBURN, Circuit Judge.

Plaintiff Clifton Smith appeals the district court's order finding that the Federal Credit Union Act ("FCUA"), 12 U.S.C. §§ 1751-1795k, provides no private cause of action and dismissing plaintiff's federal claims for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). On appeal, the sole issue is whether the district court erred in holding that no private right of action exists for the enforcement of the FCUA, under either the statute or the applicable regulations, 12 C.F.R. § 721.2. For the reasons that follow, we affirm.

I.

Defendant Dearborn Federal Credit Union ("DFCU") is a federal credit union subject to the provisions of the FCUA. The National Credit Union Administration ("NCUA") is a federal agency empowered to enforce the FCUA and to make rules for its administration pursuant to 12 U.S.C. § 1752a and § 1766(a). One of the regulations promulgated by the NCUA, 12 C.F.R. § 721.2, regulates the manner in which federal credit unions may sell noncredit and nonshare related insurance, such as family group life insurance, to its members. Specifically, 21 C.F.R. § 721.2(b) provides that a credit union may only sell such insurance to its members at cost and may not retain any compensation beyond its actual cost.

Plaintiff is a DFCU member who purchased family group life insurance from DFCU. Plaintiff is also a licensed insurance agent who, during the time period covered by this action, was under contract with Dearborn Financial Services ("DFS") to provide certain administrative functions. For many years prior to mid-1984, DFCU had a family group life insurance program covering approximately 7,000 members out of the nearly 120,000 members of DFCU. During those years when there was a low life insurance loss payout, DFCU had a policy of returning a portion of the premiums of the group life insurance to the members who had paid the premiums. Rather than making numerous payments of small sums of money to individual members, DFCU generally implemented its policy by placing the returned premiums into a fund and using the fund to purchase one free quarter of life insurance for its members.

In early 1984, DFCU created DFS to act as an "in-house" insurance agency. DFS is a federally chartered credit union services organization and a wholly-owned subsidiary of DFCU. DFCU planned to institute a new family group life insurance plan with Royal Maccabees Life Insurance Company ("Royal Maccabees") utilizing DFS to administer the plan. Royal Maccabees Life Insurance Company also does business under the name Maccabees Mutual Life Insurance Company.

On September 1, 1984, DFCU became the policyholder of a Family Group Life Insurance Plan issued by Royal Maccabees. The family group life insurance policy is a "cost plus" system by which the insurer annually deducts its administration fees and paid-out claims, as well as its fixed percentage profit from the gross paid-in premiums. After such deductions, the insurer returns any leftover premiums to the holder of the policy by means of a premium refund check to the administrator, DFS. Article XIX of the family group life insurance contract states:

DIVIDENDS--This Policy may participate in the divisible surplus of the Company. The amount of the divisible surplus as well as the amount and method by which this surplus is apportioned to this Policy will be determined by the Board of Directors of the Company.

J.A. p. 118. Plaintiff asserts that Article XIX gives DFCU members who participate in the family group life insurance contract the right to participate in the return of the premiums or divisible surplus.

DFCU received a return of premiums from Royal Maccabees in 1989 and 1991 due to a low payout during those years. J.A. p. 109. However, defendant DFS retained the surplus premiums rather than return them to DFCU members who had paid premiums for family group life insurance.

On August 29, 1991, plaintiff filed his complaint seeking to enforce the provisions of 12 C.F.R. § 721.2 as a private individual. Plaintiff not only filed his complaint in his individual capacity, but he also sought certification of the action as a class action pursuant to Federal Rule of Civil Procedure 23(b). However, the district court did not rule on plaintiff's motion for class certification prior to the dismissal of the action.

Plaintiff asserted four grounds for relief in his complaint. Count one asserted a federal common law right to recover for the breach of defendant's statutory duties under 12 C.F.R. § 721.2(b)(2). Count two asserted a breach of fiduciary duty under state common law based upon the unlawful retention of the returned premiums by DFS/DFCU. Count three asserted a federal common law claim under the FCUA for inflated administration fees. Count four asserted a state law claim for inflated administration fees.

On March 5, 1992, the district court granted defendants' motion for summary judgment on the ground that no private right of action exists for the enforcement of the FCUA under either the statute or the provisions of 12 C.F.R. § 721.2. The district court also held that it had no basis to create a remedy under federal common law. This timely appeal followed.

II.

A.

Plaintiff challenges the district court's dismissal of the federal issues in his complaint for lack of subject matter jurisdiction. Plaintiff acknowledges that there is no express private right of action under the FCUA. Appellant's brief, p. 10; J.A. p. 82. Plaintiff also acknowledges that all of the federal decisions which have dealt with the issue have found that there is no implied private right of action under the FCUA. Appellant's brief, p. 11; J.A. p. 82.

However, plaintiff argues that it is possible that there is an implied private right of action under the regulations promulgated pursuant to the FCUA, specifically 12 C.F.R. § 721.2. ¹ Plaintiff asserts that the alleged implied private right of action arises out of 12 C.F.R. § 721.2 due to its specificity as well as the intent of the regulation to protect members of federal credit unions who purchase nonshare related group insurance from being charged premiums greater than the cost to their own credit union. According to plaintiff, 12 C.F.R. § 721.2 demonstrates Congressional intent that a federal credit union which charges members above the cost of nonshare related group insurance may not retain such profits.

However, federal regulations cannot themselves create a cause of action; that is a function of the legislature. See Stewart v. Bernstein, 769 F.2d 1088, 1092-93 n. 6 (5th Cir.1985). A grant of federal rulemaking power is not authority to create federal jurisdiction. That authority lies solely with Congress. See Marshall v. Gibson's Prods., Inc. of Plano, 584 F.2d 668, 677-78 and n. 16 (5th Cir.1979). Therefore, no implied private right of action can be found from the regulations standing alone. Rather, the statute must be examined to determine if an implied private right of action can be found from the statute.

As was noted above, plaintiff has acknowledged that all of the federal decisions which have examined whether a private right of action is implied under the FCUA have concluded that no such implied cause of action exists. See Barany v. Buller, 670 F.2d 726 (7th Cir.1982); Ridenour v. Andrews Fed. Credit Union, 897 F.2d 715 (4th Cir.1990); Heller v. CACL Fed. Credit Union, 775 F.Supp. 839 (E.D.Pa.1991); Rosenberg v. A T & T Employees Fed. Credit Union, 726 F.Supp. 573 (D.N.J.1989); and Montford v. Robins Fed. Credit Union, 691 F.Supp. 347 (M.D.Ga.1988). According to plaintiff, in all of these decisions which found no implied private right of action, the plaintiffs tried to imply the private right of action from the general enabling provisions of the FCUA. Plaintiff asserts that due to the degree of specificity present in 12 C.F.R. § 721.2, it can serve as the basis for an implied private right of action as compared to the general enabling provisions of the FCUA.

Plaintiff's argument is somewhat disingenuous, however, since it gives the impression that the arguments in favor of an implied private cause of action under the FCUA, which were rejected in the cases listed above, were based only on generalized, nonspecific provisions of the FCUA. For instance, the claim of the plaintiffs in Barany was based on the removal provision of 12 U.S.C. § 1761d. Likewise, the claims of the plaintiff in Ridenour were based upon his alleged rights as a credit union member under 12 U.S.C. §§ 1760, 1761, and 1761b. Similarly, the plaintiff in Rosenberg predicated his claims on 12 U.S.C. § 1786(g)(6), and the plaintiff in Heller based his claims on the requirements of 12 U.S.C. §§ 1761(b)(2), 1766(h), and 1786(f)(1). Only in Montford did the plaintiff present a generalized claim that an implied private right of action existed under the FCUA. Thus, plaintiff's claim that an implied private right of action is created under 12 C.F.R. § 721.2 by virtue of the specificity of the regulations is misplaced.

In Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), the Supreme Court set forth the following factors to determine if a private right of action is implicit in a federal statute that does not expressly provide for one:

(1) is the plaintiff one of the class for whose special benefit the statute was enacted--e.g., does the statute create a federal...