Social Security Admin. Baltimore FCU v. United States

• Citation: 138 F. Supp. 639
• Decision Date: 26 January 1956
• Docket Number: Civ. A. No. 7191.
• Parties: SOCIAL SECURITY ADMINISTRATION BALTIMORE FEDERAL CREDIT UNION, a corporation duly incorporated under the "Federal Credit Union Act," and Liberty Mutual Insurance Company, Intervenor, v. UNITED STATES of America.
• Court: U.S. District Court — District of Maryland

138 F. Supp. 639

SOCIAL SECURITY ADMINISTRATION BALTIMORE FEDERAL CREDIT UNION, a corporation duly incorporated under the "Federal Credit Union Act," and Liberty Mutual Insurance Company, Intervenor, v. UNITED STATES of America.

Civ. A. No. 7191.

United States District Court D. Maryland, Civil Division.

January 26, 1956.

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Z. Townsend Parks, Jr., and Rignal W. Baldwin, Baltimore, Md., for plaintiff.

Jeffrey B. Smith, Baltimore, Md., for intervenor.

George Cochran Doub, U. S. Atty., and Herbert F. Murray, Asst. U. S. Atty., Baltimore, Md., for defendant.

THOMSEN, Chief Judge.

This is an action against the United States under the Federal Tort Claims Act by a Federal credit union to recover losses sustained as the result of embezzlements extending over a period of years by its office manager, Mrs. Naomi Ringrose. An examination and investigation by Federal examiners in March, 1953, disclosed a shortage of approximately $395,000 in members' share accounts not recorded on the books. Mrs. Ringrose pleaded guilty to an indictment charging her with the embezzlement of approximately $34,000. She testified in the case at bar that her defalcations began in the year 1945 and totaled not more than $100,000; but since there was no evidence implicating any one else, it is a reasonable inference that she misappropriated whatever cash was taken. There was no evidence as to the amount taken in any particular year, except that Liberty Mutual Insurance Company, the co-plaintiff, which issued a $75,000 blanket fidelity bond to the credit union in 1952, concluded that $67,598.42 had been taken by Mrs. Ringrose between January 2, 1952, and March 10, 1953, confirmed a 1951 loss of at least $4,570.85, and, since its bond had a superseded suretyship rider, reimbursed the credit union in the full amount of its bond. The exact amount taken was not proved, but it was probably about $397,860.25, less such part of that amount as represented dividends credited to the accounts, which figure has never been calculated. The plaintiff credit union salvaged $49,966.21, in addition to the $75,000 paid by the Liberty Mutual under its blanket fidelity bond.

From 1934 to 1943 Federal credit unions were under the supervision of the Farm Credit Administration. From 1943 to 1948 they were under the supervision of the Federal Deposit Insurance Corporation. From 1948 to date they have been under the supervision of the Bureau of Federal Credit Unions, the Director of which is appointed by the Secretary of the Department of Health, Education and Welfare. These agencies will be referred to collectively as "the Bureau".

Plaintiffs contend that examiners of the Bureau were negligent in failing to discover the embezzlements and in the manner in which they reported to the credit union the conditions which they did find. There is no contention that any examiners had actual knowledge of the embezzlements prior to their discovery by Examiner Davis in 1953, and plaintiffs' principal contention is that the examinations made by the Bureau should have been more thorough.

The defenses raised by the government present the following issues:

I. Whether the government owed any duty to plaintiff credit union in connection with the examinations which can be made the basis of a claim under the Federal Tort Claims Act; and, if so

II. The nature and extent of such duty;

III. Whether the government was guilty of any negligent breach of that duty which was a proximate cause of the loss, and which does not come within the "discretionary function" exception, 28 U.S.C.A. § 2680(a), or the "misrepresentation" exception, 28 U.S.C.A. § 2680 (h);

IV. Whether plaintiffs' claim is barred by contributory negligence; and

V. Whether all or any part of plaintiffs' claim is barred by limitations, 28 U.S.C.A. § 2401(b).

Federal Credit Unions

Plaintiff credit union is a cooperative association of employees of the Social Security Administration organized as a Federal credit union under the Federal Credit Union Act, 48 Stat. 1216, as amended, 12 U.S.C.A. § 1751 et seq. There are 7,778 credit unions organized under this Act, and approximately 8,000 under State laws. Plaintiff credit union could have been organized under either State or Federal law, and the fact that its members are employees of the Federal government is not significant.

Under the Federal Act the charter of a proposed Federal credit union must be presented to the Director of the Bureau for approval. 12 U.S.C.A. § 1756 provides that Federal credit unions shall be under the supervision of the Director, shall make such financial reports to him as he may require, and shall be subject to examination by, and for this purpose shall make its books and records accessible to, any person designated by the Director. The Director fixes a scale of examination fees to be paid by the credit unions, in addition to a $10 annual supervision fee.

Supervision by the Bureau of individual credit unions is committed to the Division of Field Operations, which has six regional offices, each headed by a regional representative. In 1948 fifty examiners were employed to make periodic examinations of the 4,000 credit unions then existing. In 1955 there were 174 examiners to supervise nearly 8,000 credit unions. The number of examiners has been limited by the budget Congress has made available for this purpose. Due to the shortage of examiners the Bureau has never been able to examine all credit unions each year, and the average examiner, usually acting alone, must examine 35 to 70 credit unions per year, depending upon their size, location, conditions found, etc. Plaintiff credit union was supervised from the Atlanta Regional Office, out of which 7 field examiners supervised 512 credit unions. More examiners were not assigned to the Atlanta region because of the budgetary limitations.

From 1945 to 1952 the Civil Service requirements for employment as a field examiner by the Bureau, were: four years of progressively responsible experience in performing accounting or bookkeeping duties of a commercial type, including one year as a credit union examiner for either a state or federal supervisory authority or as the responsible manager of the affairs of a credit union under federal or state charter. For the other three years, a study in accounting subjects above high school level could be substituted on the basis of one full year's study for nine months of experience. The field examiners who examined plaintiff credit union were not certified public accountants; such accountants rarely accept employment by the Bureau, and even more rarely remain in such employment, because of the limited salaries paid. Starting salaries for examiners are as follows: Grade 5 — $3,670; Grade 7 — $4,525; Grade 9 — $5,440. These salaries and the number of examiners in each grade are fixed by Congress.

The regional representative checks each examiner's report and work papers, to see that all required steps have been taken by the examiner, to review the policy questions involved, and to edit the report.

The Director has determined that most credit unions, including the plaintiff, shall receive portions of the reports of examination made to him by the examiners, but that some credit unions shall not receive any reports but shall merely receive a letter confirming any recommendations which the examiners made orally to the credit union at the time of examination.

The regional representative ordinarily decides what should be emphasized in the letter of transmittal which accompanies the report.

The charter and by-laws of plaintiff credit union are in the standard form approved by the Bureau. From time to time the Bureau issues and distributes to Federal credit unions a Federal Credit Union Handbook and a Supervisory Committee Manual. References herein to the Handbook are to the July, 1947, edition, Pl.Ex. 72; references to the Manual are to the April, 1949, edition, Pl.Ex. 49.

The statute, 12 U.S.C.A. § 1761, provides that a Federal credit union shall be managed by a board of not less than five directors elected by the members and from their number. The Handbook emphasizes that the directors have a duty of control and "should set up procedures that will let them know what is going on. * * * The board should have a planned program for maintaining control" (p. 13), and "should see that the supervisory committee functions" and makes the audits the Act requires the supervisory committee to make (pp. 23, 24, 27).

The president of the credit union is specifically enjoined to act upon reports of the Federal examiners, and to see that any incorrect practices are promptly corrected. Handbook, p. 33. If the supervisory committee does not function, he should call a special meeting of the members of the credit union to suspend the members of the committee and replace them with members who will function. By-laws, Article V, Section 3.

The statute makes the treasurer the general manager of the corporation. He has custody of all funds and records and is required to prepare a monthly financial statement for submission to the board and posting in the credit union office, and to submit such financial reports to the Bureau as it may require. He is the only officer compensated for his services.

The statute provides for a supervisory committee of three members, a majority of whom shall not be directors, elected by the members from their number, sec. 1761(a). The supervisory committee is charged by the statute, sec. 1761(e), with the duty of making quarterly "audits" and an annual "audit" of the books of the credit union. This statutory duty is also set out in the Handbook, the Supervisory Committee Manual and the by-laws of the plaintiff credit union. The committee has the power to call a meeting of the members to consider any violation of the statute, charter or by-laws, or any practice of the corporation deemed by the committee to...