Walker v. Cardinal Sav. and Loan Ass'n, Civ. A. No. 88-0123-R.

• Decision Date: 19 July 1988
• Docket Number: Civ. A. No. 88-0123-R.
• Parties: William M. WALKER, et al., Plaintiffs, v. CARDINAL SAVINGS AND LOAN ASSOCIATION, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

690 F. Supp. 494

William M. WALKER, et al., Plaintiffs, v. CARDINAL SAVINGS AND LOAN ASSOCIATION, et al., Defendants.

Civ. A. No. 88-0123-R.

United States District Court, E.D. Virginia, Richmond Division.

July 19, 1988.

Donald W. Lemons, Alfred S. Bryant, Wyatt B. Durrette, Jr., William J. Irvin, McCarthy & Durrette, Richmond, Va., for Walker, et al.

William G. Broaddus, Anne M. Whittemore, Warren E. Zirkle, McGuire, Woods, Battle & Boothe, Richmond, Va., Robert H. Loeffler, Philip D. Bartz and Daniel A. O'Fallon, Morrison & Foerster, Washington, D.C., for Cardinal Sav. and Loan Ass'n.

Francis T. Eck, Thomas P. Collins, Eck, Lewis, Anderson & Collins, Richmond, Va., for Brown.

James C. Roberts, Robert L. Brooke, Mays & Valentine, Richmond, Va., for Lissenden, November, Viener, Howlette, Ginn, Forloine and Spriggs.

Mahlon G. Funk, Jr., John R. Walk, Hirschler, Fleischer, Weinberg, Cox & Allen, Richmond, Va., for Harlow.

Samuel W. Hixon, III, William A. Young, Jr., Williams, Mullen, Christian & Dobbins P.C., Richmond, Va., for McLaren.

Charles F. Midkiff, Steve Theisen, Midkiff & Associates, Richmond, Va., for Sanders.

George B. Little, L.B. Cann, III, James T. Moore, III, Little, Parsley & Cluverius, Richmond, Va., for Heilman, Walker and Owens.

MEMORANDUM OPINION AND ORDER

SPENCER, District Judge.

The defendants' motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) have been argued by the parties and are now ripe for decision. The following statement of the case takes into account the plaintiffs' decision to abandon certain elements of the original complaint, and to dismiss all their claims against one of the defendants.

I

The plaintiffs are stockholders of Cardinal Savings and Loan Association, a Virginia-chartered, federally-insured, stock savings and loan association, and one of the defendants in this case. The remaining defendants were, at all times pertinent to the complaint, members of Cardinal's Board of Directors, or officers of Cardinal, or both.

The plaintiffs allege:

(A) failure to disclose in violation of 12 C.F.R. subpart 563g.2(a), a regulation of the Federal Home Loan Bank Board ("the Board") promulgated pursuant to Section 5 of the Home Owners' Loan Act of 1933 ("HOLA") (12 U.S.C. section 1464) (Count I);

(B) fraud in violation of: 12 C.F.R. subpart 563g.10 (Count II), section 12(2) of the Securities Act of 1933 (15 U.S.C. section 77l (2)) (Count III), section 17(a) of the 1933 Act (15 U.S.C. section 77q), section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. section 78j(b)), and Rule 10b-5 (Count IV), Va.Code Ann. section 13.1-522.A(ii) (Count V), and common law principles (Count VI);

(C) "controlling person" liability as provided in 15 U.S.C. sections 77o and 78t, and Va.Code Ann. section 13.1-522.C for damages arising under Counts III through V (Count VII); and

(D) a contract rescission claim based on mutual mistake (Count VIII).

Assuming the best possible case for the plaintiffs, the defendants made a series of material misstatements or omissions at a meeting held on March 10, 1987 for the purpose of inducing the plaintiffs to buy stock in Cardinal. These misstatements and omissions related to Cardinal's financial condition, its financial prospects, a planned public offering of Cardinal's stock, the possibility of a takeover, and the plaintiffs' chances to realize a substantial gain on their investment in Cardinal. All defendants not present at this meeting knew or should have known of the meeting, its purpose, and the content of the defendants' communications with the plaintiffs.

In late March 1987, one of the plaintiffs received a copy of a preliminary offering circular which was purported to have been filed with the Board, and which described a public offering of Cardinal stock. The circular contained material misstatements and omissions in connection with the purpose of the offering, Cardinal's business practices, the status of Cardinal's loan assets, the extent of subscription agreements, Cardinal's liquidity and investments, and Cardinal's litigation exposure. Cardinal's financial statements in the circular also overstated its performance and financial condition. The defendants knew or should have known the contents of the circular, the fact that it would be provided to the plaintiffs, and that the plaintiffs would rely on the circular in deciding whether to buy Cardinal stock.

In reliance on the above misstatements and omissions, the plaintiffs purchased a total of 236,929 Cardinal shares for $1,182,716.

II

The defendants contend that: (A) there is no private right of action under the Board regulations at issue in this case; (B) there is no private right of action under section 17(a) of the 1933 Act; (C) Virginia law does not permit an award of punitive damages on the allegations of Count VI; and (D) the complaint does not adequately allege controlling person liability.¹ These contentions will be addressed in turn.

A. Private Right of Action under Subparts 563g.2 and 563g.10

The parties agree that neither HOLA nor the regulations at issue² expressly provide a private damages action based on the securities violations that the plaintiffs allege in this case. The Court must therefore survey the pertinent statutory and regulatory background to determine whether the legislative intent favors implication of a private remedy. Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 15-16, 100 S.Ct. 242, 245, 62 L.Ed.2d 146 (1979); Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 99 S.Ct. 2479, 2485, 61 L.Ed.2d 82 (1979); Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed. 2d 26 (1975). Legislative intent includes agency intent where Congress has explicitly left a gap for the agency to fill. See, e.g., Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984) (where Congress did not actually have an intent regarding grouping of pollution-emitting devices for regulatory purposes, reasonable EPA intent controlled).

Section 5 of HOLA (12 U.S.C. section 1464), the pertinent statutory authority, neither prohibits nor regulates the conduct on which the plaintiffs' complaint is based, and for good reason. Congress had a much broader purpose. Congress intended to ensure the vitality of federal³ savings and loan associations and to provide for the financing of homes. See Fidelity Fed. Sav. and Loan Ass'n v. de la Cuesta, 458 U.S. 141, 160, 102 S.Ct. 3014, 3026, 73 L.Ed.2d 664 (1982). Congress intended that the Board's principal concern in supervising thrift institutions would be their soundness, which benefits depositors and preserves public confidence in the home financing system. See 12 U.S.C. section 1464(a)(1); S.Rep. No. 902, 93d Cong., 2d Sess., reprinted in 1974 U.S.Code Cong. & Admin.News 6119, 6128. Congress chose to particularize its general intent by delegating its own legislative power to the Board. Id. at 6129. Obviously "it would have been difficult for Congress to give the Bank Board a broader mandate." Glendale Fed. Sav. and Loan Ass'n v. Fox, 459 F.Supp. 903, 910 (C.D.Cal.1978) (quoted approvingly with regard to HOLA in Fidelity Fed., 458 U.S. at 161, 102 S.Ct. at 3026).

Nothing in the pertinent statutory language or legislative history indicates that Congress contemplated a private remedy for the regulatory violations alleged in this case. See Eureka Fed. Sav. & Loan Ass'n v. Kidwell, 672 F.Supp. 436, 438 (N.D.Cal. 1987) (Congressional choice not to signal implied remedy when it amended HOLA in 1966 and 1982 weighed heavily against implication); First Hawaiian Bank v. Alexander, 558 F.Supp. 1128, 1131 (D.Haw. 1983) (distinguishing Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982) by absence of evidence Congress considered existence or nonexistence of implied remedy when it enacted HOLA). Securities investors like the plaintiffs herein are not "especial beneficiaries" under HOLA whose protection and benefit were the primary congressional goal of the statute. HOLA was enacted for the protection of the public at large, not for the especial benefit of any particular class. See Taylor v. Citizens Sav. and Loan Ass'n, 846 F.2d 1320, 1322 (11th Cir.1988) (citing Cannon v. University of Chicago, 441 U.S. 677, 692 n. 13, 99 S.Ct. 1946, 1955 n. 13, 60 L.Ed.2d 560 (1979)). The plaintiffs have shown no nexus between the soundness of thrift institutions and the issuance and trading of their securities that would make a private remedy "necessary to effectuate Congress' goals." Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477, 97 S.Ct. 1292, 1303, 51 L.Ed.2d 480 (1977); Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 26, 97 S.Ct. 926, 942, 51 L.Ed.2d 124 (1977). Finding no Congressional intent favoring an implied remedy in the case at bar, we turn to the question of agency intent.

To the extent that any nexus between savings and loans' soundness and offering or sale of their securities has been identified, the Board has specifically and fully addressed it. Subparts 563g.2 and 563g.10, respectively, resemble securities statutes prohibiting violations of the registration and prospectus requirements of the 1933 Act (15 U.S.C. section 77l) and antifraud provisions of the 1934 Act (15 U.S.C. section 78j(b)). In establishing disclosure procedures under subpart 563g.2, the Board adopted many of the forms and regulations of the Securities and Exchange Commission. This was done because

such forms and regulations require the disclosure of information which is considered to be material to an investment decision, they are recognized in the capital markets, and it would be difficult for insured institutions to compete for capital in those markets if their offering documents were not comparable with those of other companies also seeking capital.

Proposed FHLBB Securities Offerings Rules, 50 Fed.Reg. 38,839, 38,846 (1985). In...