IN RE FRANKLIN NAT. BANK SEC. LITIGATION MDL No. 196(JBW).
478 F.Supp. 210 (1979)
In re FRANKLIN NATIONAL BANK SECURITIES LITIGATION.
United States District Court, E. D. New York.
August 17, 1979.
Barrett, Smith, Schapiro, Simon & Armstrong, New York City, for trustee by William O. Purcell, New York City, of counsel.
Casey, Lane & Mittendorf, New York City, for F.D.I.C. by William E. Kelly, John T. Morin, Edward C. Cerny, III, James M. Shaugnessy, Gerald E. Singleton, New York City, of counsel.
Joan M. Bernott, James P. Klapps, Gerald Smolin, Jr., M. Faith Burton, U.S. Dept. of Justice, Washington, D.C., L. Robert Griffin for the Office of the Comptroller of the Currency, Washington, D.C., John Harry Jorgenson, Washington, D.C., for Board of Governors of the Federal Reserve System.
Donald Ringsmuth, Bradley K. Sabel, New York City, for Federal Reserve Bank of New York.
Rivkin, Leff & Sherman, Garden City, N. Y., for National Surety & Fire by Leonard Rivken, Jeffrey Silberfeld, Garden City, N. Y., of counsel.
Davis, Polk & Wardwell, New York City, for Ernst & Ernst by Daniel Kolb, Bartlett H. McGuire, Howard A. Ellins, New York City, of counsel.
Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Aetna by Mark A. Belnick, New York City, of counsel.
Kelley, Drye & Warren, New York City, for Continental Bank International by John M. Callagy, John P. Marshall, New York City, of counsel.
Shea, Gould, Climenko & Casey, New York City, for I.N.A. by Ronald H. Alenstein, Robert J. Hawley, New York City, of counsel.
Wachtell, Lipton, Rosen & Katz, New York City, for Tisch by Kenneth B. Forrest, Elizabeth Sabin, New York City, of counsel.
Chadbourne, Park, Whiteside & Wolff, New York City, for Beisler, Hogan, et al. by Bernard W. McCarthy, New York City, of counsel.
Mudge, Rose, Guthrie & Alexander, New York City, for Sindona by John Kirby, New York City.
Poletti, Freidin, Prashker, Feldman & Gartner, New York City, for Crosse by Barbara A. Lee, Nicholas R. Weiskopf, New York City, of counsel.
Dewey, Ballentine, Bushby, Palmer & Wood, New York City, for Gleason, Lewis, Merkin and Smith by Michael D. DiGiacomo, New York City, of counsel.
WEINSTEIN, District Judge:
The United States moves for summary judgment against all the third party claims which allege that the regulation of Franklin National Bank (FNB) by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Bank (FRB) and the Federal Reserve Bank of New York (FRBNY) makes the United States liable for some of the losses arising from the decline and ultimate demise of FNB. Despite the cogent arguments in favor of this motion, pragmatic considerations, arising from the complex posture of this multidistrict litigation, demand that the motion be denied at this time, with leave to renew should pre-trial conditions change.
I. Posture of Litigation
The numerous claims for relief now before us seek to fix responsibility for the financial collapse of FNB. See Generally In re Franklin National Bank Securities Litigation,
Extensive criminal charges have been brought against directors and officers of FNB and FNYC. Some have resulted in guilty pleas, some in jury verdicts of guilty, now on appeal, and some have not yet been tried. Almost all of the criminal defendants have pleaded the Fifth Amendment in this civil litigation, thus substantially inhibiting discovery. Nevertheless, pretrial practice has been vigorous, with some 100,000 pages of depositions, millions of documents and scores of motions, requiring many thousands of pages of briefs and supporting exhibits.
The issues now before us concern the third party claims filed by the primary defendants —the Bonding Companies, Ernst & Ernst, CBI and several of the officers and directors—against the United States under the Federal Tort Claims Act, 28 U.S.C. § 2671, et seq., alleging, under a variety of legal and factual theories, that the regulatory supervision of FNB by the OCC, FDIC, FRB and FRBNY makes the United States liable for some of the losses suffered by FNB. These third party plaintiffs seek indemnification or contribution for any judgment against them in the primary actions.
While each of the governmental agencies is independent, they, quite properly, cooperated closely in the period before and after bankruptcy and receivership in carrying out banking and other fiscal policies of the country. The relationship among officials has been close on both an informal and formal basis. For example, the Comptroller of the Currency, charged with, among other things, bank examinations, is one of the triumvirate supervising the FDIC which insured deposits and now acts as receiver of FNB's assets, being itself the defunct bank's largest creditor.
II. Possible Bases for a Cause of Action
The Federal Tort Claims Act partially waives the sovereign immunity of the Unites States, permitting suit
28 U.S.C. § 1346(b). This provision has never been interpreted to create any new causes of action (claims for relief) against the United States, but rather to confer only a procedural remedy. See, e. g., Dalehite v. United States,
The third party plaintiffs, arguing under the basic New York principles of contribution and indemnity, N.Y.C.P.L.R. § 1401; see, e. g., Bay Ridge Air Rights Inc. v. State,
A. Implying a Duty from the Bank Regulation Statutes
The third party plaintiffs first argue that the broad statutory schemes governing these bank regulatory agencies, see, e. g., Federal Reserve Act, 12 U.S.C. § 221 et seq.; Federal Deposit Insurance Act, 12 U.S.C. § 1811 et seq.; National Bank Act, 12 U.S.C. § 21 et seq., should provide a basis for implying a duty of care, running from those agencies to the banks and their shareholders, and that the failure of those agencies either to detect the weakness or alleged dishonesty at FNB, or to take appropriate regulatory action to remedy those problems, should be held a breach of that duty, and thus a basis for liability.
Similar claims have been raised in the litigations concerning other bank failures. So far no court has held that any of the statutory provisions governing the OCC, the FRB or the FDIC create any actionable duty running to the regulated institutions. See, e. g., First National Bank of Hudson
The provision most frequently analyzed in these earlier cases has been that requiring the OCC to conduct examinations of every national bank. 12 U.S.C. § 481. The courts have uniformly concluded that the Comptroller's primary duty is to supervise the banking system for the protection of the public and the national economy as a whole—and not for the protection of an individual banking institution. The purpose of national banking examinations under section 481 is to collect the information necessary to perform this broader regulatory function. See, e. g., Harmsen v. Smith,
Plaintiffs have fared no better in attempting to imply a duty from the statutory provision granting the FDIC power to examine insured banks. 12 U.S.C. § 1820(b). Again, courts have held that the primary purpose of the examination is not to protect the individual banking institutions. In the case of FDIC examinations, the fundamental purpose is to safeguard the insurance fund: "The purpose of the bank examinations by the FDIC under 12 U.S.C. § 1820(b) is to prevent losses that would result in claims against the insurance fund. . . . If bank examinations by the FDIC reveal any irregularities or fraud, such examinations, though they may inure incidentally to the benefit of a bank, are intended primarily for the protection of the insurance fund." First State Bank of Hudson County v. The United States of America,
The third party plaintiffs here have offered no persuasive argument why this consistent line of authority refusing to imply a duty from statutory provisions authorizing bank examinations should not also apply to the numerous other statutory provisions granting regulatory powers to the OCC, the FDIC, the FRB and the FRBNY. At an earlier point in this litigation, the District Judge to whom this case was previously assigned held that the bank "regulatory scheme does not create a duty to the banks regulated and any purported failure on the part of the United States to properly regulate the FNB cannot serve as the basis [of a claim for relief]." In re Franklin National Bank Securities Litigation,
This conclusion is not undercut by the analogy offered by the recently emerging trend of state decisions predicating liability upon negligent fire or electrical inspections. See, e. g., Adams v. State,
B. Regulatory Activity Constituting an Assumption of a Duty
Some of the decisions holding that no duty may be implied from the scheme of bank regulatory statutes have nonetheless suggested that under some circumstances the United States may be held liable for such regulatory activity. Two possible theories of liability have been proposed. First, there has been the suggestion that even though the government will not be held liable for negligent acts or omissions, it may be liable when its regulatory activity has been "grossly arbitrary and capricious." See In re Franklin National Bank Securities Litigation,
The banking laws grant the OCC, the FDIC and the FRB sweeping supervisory and enforcement powers. See 1 Davis, Administrative Law, § 4.04 at 247 (1965) ("The regulation of banking may be more intensive than the regulation of any other industry."); Englert, Bank Supervision in Historical Perspective, 34 Bus. Lawyer 1659 (1979). Even the briefest survey reveals their breadth.
The supervisory authority of the Comptroller extends over all aspects of a bank's existence. He certifies an institution's entry into the banking business, 12 U.S.C. § 27, and authorizes subsequent changes in its name or location, 12 U.S.C. § 30, and status, 12 U.S.C. § 51. His approval is required for any branching, 12 U.S.C. § 36, reorganization, 12 U.S.C. § 207, consolidation, 12 U.S.C. § 215, or merger, 12 U.S.C. § 215(a). Statutorily specified changes in a bank's capital structure, see, e. g., 12 U.S.C. §§ 51a, 51b, 51b-1, 57 & 59, or increases in its declared dividends, 12 U.S.C. § 60, also require his approval. In the event that a bank suffers serious financial difficulty, he may appoint a caretaker-conservator, 12 U.S.C. §§ 203, 205, or, if necessary, declare its insolvency and appoint its receiver, 12 U.S.C. § 191. The Comptroller's "visitorial power," authorizing on-the-scene examinations of a bank's conduct of business, provides the information necessary to effectively exercise these broad powers. 12 U.S.C. § 481. The frequency of these bank examinations, their scope, the sources of information, and the methods of obtaining it are all committed to the Comptroller's discretion. 12 U.S.C. § 481. If an examination discloses weakness or problems, the Comptroller may make any kind of "recommendations or suggestions" to the bank, and may publish the confidential Report of Examination if the bank fails to comply. 12 U.S.C. §§ 481, 1818.
The FRB and the Federal Reserve Banks have comparably broad authority over bank holding companies, their subsidiaries, and members of the Federal Reserve System. Unique among these powers, of course, is the Board's ability to extend credit to banks through the reserve banks. See, e. g., Huntington Towers, Ltd. v. Franklin National Bank,
The banking statutes grant these agencies flexible and far reaching enforcement tools. The most important is their ability to issue and enforce cease and desist orders. 12 U.S.C. § 1818. See generally S.Rep.No. 1482, 89th Cong., 2d Sess. (1966), reprinted in  U.S.Code Cong. & Admin.News 3532. An agency may use this power to prevent violations of a bank's agreements with the Comptroller; to stop violations of any "law, rule, or regulation, or any condition imposed in writing by the agency in connection with the granting of any application or other request by the bank," 12 U.S.C. § 1818(b)(1); or to prevent any practice or procedure that the Comptroller, in his discretion, deems "an unsafe or unsound practice," 12 U.S.C. § 1818(b)(1). Cease and desist orders have been used to regulate all aspects of a bank's operations. See, e. g., Groos National Bank v. Comptroller of the Currency,
These extensive powers are further magnified by the informality and flexibility that characterizes much of the agencies' regulatory activity. Achieving voluntary compliance with laws, recommendations and agreements is often the rule rather than the exception. The agencies' potent alternative of formal enforcement proceedings usually insures such voluntary compliance: "Recommendations by the agencies concerning banking practices tend to be followed by bankers without the necessity of formal compliance proceedings." United States v. Philadelphia National Bank,
When viewed against this statutory scheme of powers, and this pattern of informal enforcement, none of the actions taken by these agencies with respect to FNB stands out as extraordinary. The Government's recommendations for changing procedures in the bank's troubled departments; the numerous examinations conducted by the Government and the daily reporting required; the Comptroller's and the FDIC's close supervision of possible merger discussions; the FRB's massive loans to FNB; the demands for changes in key management positions; the FRB's close supervision of FNB's asset portfolio, and all of the other actions emphasized by the third party plaintiffs, are fully consistent with the scheme of intensive bank regulation drafted by Congress. There is no substance to the allegations in the third party complaints that the OCC, the FNB, the FDIC or the FRBNY engaged in "extra-regulatory" activity. As the Second Circuit has observed, the FRB "was doing, for better or worse, what Congress expected it to do." Huntington Towers Ltd. v. Franklin National Bank,
The numerous Congressional investigations of FNB's collapse lend assurance to this conclusion. See, e. g., H.Rep.No.94-1669 (Adequacy of the Office of the Comptroller of the Currency's Supervision of Franklin National Bank), 94th Cong., 2d
It is equally impossible to conclude that the Government's regulation of FNB was either arbitrary or capricious. It has been urged that the agencies' actions benefited some creditors of FNB more than others. See also Sinkey, Franklin National Bank of New York: A Portfolio and Performance Analysis of Our Largest Bank Failure, FDIC Working Paper No. 75-10; Welles, The Needlessly High Cost of Folding Franklin National, New York Magazine (Nov. 18, 1974); Rose, What Really Went Wrong at Franklin National, Fortune (October 1974). But if that did occur, it is only the result of the unavoidable conflict between the interests of a regulated bank— and its stockholders and creditors—and the broader public interest as viewed by the responsible government officials. The bank regulatory agencies, of course, are charged with protecting the public interest, and here all the actions of the agencies were arguably designed to preserve the stability of the banking system, to minimize the losses to the public, and to reduce the possibility of grave national and international financial repercussions.
III. The Discretionary Function Exception to the Federal Tort Claims Act
Even if the third party plaintiffs could successfully argue the implication of a duty from the bank regulatory statutes, or could establish facts supporting the theory of an assumed duty, it is highly unlikely that the resulting cause of action could be brought under the Federal Tort Claims Act. That Act does not afford a blanket waiver of the Government's sovereign immunity from suit; the waiver is narrowly circumscribed. Section 2680(a) of the Act provides that sovereign immunity has not been waived with respect to discretionary functions—i. e.,
28 U.S.C. § 2680(a).
The legislative history of this exception displays Congress' clear intention that government agencies should not be liable for the effects of their regulatory activity. Discussions of the suits that would be possible under the proposed bill were always limited to the "ordinary common law type of tort," Hearings on H.R.5373 and H.R. 6463, the House Committee on the Judiciary, 77th Cong., 2d Sess. 24 (1942); the most frequently mentioned example was the automobile collision. See, e. g., Hearings on H.R.5373 and H.R.6463, Before the House Committee on the Judiciary, 77th Cong., 2d Sess. 29 (1942) (discussing the "era of steadily growing Government activity, involving considerable use of automobiles and other mechanical equipment capable of causing damage to persons and property"); H.R.Rep.No.2428, 76th Cong., 3d Sess. 3 (1940). The debates convey no sense that Congess imagined it was creating a new allocation of the risks attendant upon governmental policy decisions and regulatory activity. Discussions of the possible ambit of Government liability under the Act always emphasized the presence of "certain limitations required for the protection of important governmental functions." Hearings on H.R.5373 and H.R.6463 House Committee on the Judiciary, 77th Cong., 2d Sess. 30 (1942). See H.R.Rep.No.1287, 79th Cong., 1st Sess. 1 (1945).
H.R.Rep.No.1287, 79th Cong., 2d Sess. 6 (1945). See Hearings on H.R.5373 and H.R. 6463, Before the House Committee on the Judiciary, 77th Cong., 2d Sess. 29 (1942) (suggesting that the earlier draft would have been interpreted by "judicial construction" to cover the "cases embraced within" the language finally adopted).
Defining the scope of this exception for discretionary functions has proved troublesome, since almost any action by an agency or official can be argued to involve at least some discretion. See, e. g., Ham v. Los Angeles County, 46 Cal.App. 148, 162, 189 P. 462, 468 (1920) ("It would be difficult to conceive of any official act, no matter how directly ministerial, that did not admit of some discretion in the manner of its performance, even if it involved the driving of a nail."); Jaffee, Suits Against Governments and Officers: Damage Actions, 77 Harv.L.Rev. 209, 222 (1963); Note, The Discretionary Function Exception of the Federal Tort Claims Act, 66 Harv.L.Rev. 488, 490 (1953). Courts have tried to resolve this difficulty by focusing upon the quality of the discretion involved. Guidance has been drawn from the historical evidence that Congress intended to exempt claims arising from decisions basic to the act of governing. "Congress exercised care to protect the Government from claims, however negligently caused, that affected the governmental functions." Dalehite v. United States,
The bounds of this concept of important governmental functions have been marked by a distinction between "planning" level activity and "operational" level activity. Dalehite v. United States,
This judicial interpretation of the scope of the discretionary function exception leaves little doubt that there is no claim for relief against the United States under the Federal Tort Claims Act for the regulation of FNB by the OCC, the FDIC, the FRB and the FRBNY. The bank regulatory statutes, as previously noted, grant sweeping discretionary powers to these agencies. The decisions here to exercise or not exercise those powers were all made at the highest levels of government. The critical choices were made by senior officials with special skills, training and expertise. Weighty considerations of policy and the public interest were central to those decisions; crises in the banking industry involve important national and international ramifications. In short, this was precisely the type of agency regulatory activity that Congress exempted from the coverage of the Federal Tort Claims Act. See, e. g., Davis v. FDIC,
Of all the regulatory actions involved here, only the alleged failure of the OCC's bank examinations to discover the putative dishonesty at FNB could arguably be outside the ambit of the discretionary function exception. Cf. Harmsen v. Smith, Civ. No. 73-450E (S.D.Cal. July 28, 1975), aff'd on other grounds,
Although the concept of sovereign immunity is deeply rooted in common law traditions, see generally Jaffee, Suits Against Governments and Officers: Sovereign Immunity, 77 Harv.L.Rev. 1 (1963); Blachly & Oatman, Approaches to Government Liability in Tort, 9 Law & Contemp.Prob. 181 (1942); Borchard, Government Liability in Tort, 34 Yale L.J. 1 (1924), a different scheme of government liability is not inconceivable. French law, for example, goes much further in allowing suits based upon legislative or administrative action. See generally Braband, Liability in Tort of the Government and Its Employees: A Comparative
These possible benefits from a broader rule of government liability, however, are outweighed in the United States by our pattern of separation of governmental executive, legislative and judicial authority. The numerous problems arising from the "intricate issues about [the] proper distribution of governmental powers," 3 Davis, Administrative Law § 25.11 at 484 (1965), involve both considerations of the most effective distribution of power and responsibility, and considerations of the constitutionally mandated separation of powers.
Officials of administrative agencies possess resources and expertise unavailable to courts. Their policy decisions rest upon delicate technical and political judgments of the risks and benefits of possible courses of action. It is highly unlikely that damage actions brought in the courts will consistently produce a more desirable balancing of the competing policy considerations. "A judge or a jury is not well equipped either to make such determinations or to review them." Jaffe, Suits Against Governments and Officers: Damage Actions, 77 Harv.L. Rev. 209, 235 (1963); 3 Davis, Administrative Law, § 25.11 at 490 (1965) ("The second guess of a court in a damages suit is about as likely to be wrong in an absolute sense as the first guess" of the agency involved).
Moreover, allowing such review of agency policy decisions in the guise of damage actions would disrupt the intricate balance of power among the branches of government that the constitution requires; it would unduly elevate the courts. See Raichle v. Federal Reserve Bank,
The critical national and international ramifications of crises in the banking industry require that the initiative and imagination
IV. Practical Considerations Requiring Denial of the Motion
In spite of these persuasive arguments for granting the Government's motion for summary judgment, more practical considerations, looking to the posture of this complex multidistrict litigation, require that the motion be denied. Although Rule 56 of the Federal Rules of Civil Procedure states that summary judgement "shall" be rendered when the stated conditions are met, the rule is not mandatory in operation: "a motion for summary judgment is always addressed to the discretion of the court." Perma Research & Development Company v. Singer Company,
Predominant among the considerations that guide this discretion is Rule 1's declaration that the Federal Rules of Civil Procedure "shall be construed to secure the just, speedy, and inexpensive determination of every action." Fed.R.Civ.P. 1. Thus, the courts must attempt to achieve a "more orderly and expeditious handling of the entire litigation," Powell v. Radkins,
Such practical considerations require the denial of this motion for summary judgment. In this complex multidistrict dispute, the trial court must remain cognizant of the fact that it is an entire series of related disputes it is seeking to resolve. The slight unfairness to one litigant of denying its motion for summary judgment may be more than overbalanced by advantages to all of the other litigants and the court system itself in more expeditious and fairer disposition of the whole dispute. Among these balancing factors are the following:
(1) Even though these claims against the Government are highly unlikely ultimately to prevail, the evidence relevant to these claims is also relevant to many other basic issues in this litigation—particularly those concerning the determination of the causes of any injury to FNB and the measurement of any damages. All of these issues will be tried regardless of the disposition of the claims against the Government. Summary judgment will not shorten the trial. The continued presence of the Government in
Were the moving party an individual who might find the costs of the litigation burdensome, this would be a weighty factor tilting towards granting of the motion. Cost of the litigation is not a substantial factor where the Government is involved, particularly since many of the witnesses are present and former officials of the OCC and its counsel will need to be in court during most of the trial to advise them.
(2) If a motion for summary judgment were granted now, it might be reversed under the stringent standard applied by some of the panels of the Second Circuit. The court cannot ignore the fact that judges sitting on the Court of Appeals for this Circuit have differed widely in their support of summary judgment procedure. Moreover, the panels often contain one or more judges from other courts whose views on this subject are unknowable to the trial judge faced with a dispositive motion. In the instant case, for example, a petition by the Government for mandamus to compel granting of its motion for summary judgment was denied by a panel consisting of one circuit and two district judges. See also, e. g., 1979 Ann.Rep.Div.Admin.Office U.S.Courts 51 (1979) (participation by visiting judges in Courts of Appeals decisions).
Absence of consistent guidance from above in the run-of-the-mill case is no great problem; the district judge decides as best he or she can and ignores the problem of possible reversal. But the circumstances here are unique. The trial of this action may well span six months; the evidence likely to be presented is staggering. Since the evidence relevant to the claims against the Government so closely overlaps that relevant to the rest of the litigation, a reversal would necessitate a costly and inefficient retrial. Given the pressures of other litigation in this court, it would be unfair to other litigants and judges of this court to run the serious risk of tying up a trial part for an additional six months. Since the trial will not be appreciably shortened by granting a motion for summary judgment, it is more expedient to try all of these claims together, now.
(3) While it is improbable to the vanishing point that anything crucial to the issues of summary judgment will be turned up by further discovery or by trial, key witnesses have yet to be deposed. The various FNB officials who have thus far pleaded privilege against self-incrimination may have unexpected light to throw on the claims made against the Government. We cannot tell. Given the other practical reasons for denying the motion for summary judgment, there appears no warrant for taking even the slightest risk of committing inadvertent injustice.
(4) Extensive settlement conferences have been conducted by the Court and the parties. The OCC is a necessary participant in any realistic appraisal of the various claims. One of the three directors of the FDIC, which has the key role in settlement discussions, is the Comptroller of the Currency. The court expects the Comptroller, among others, to utilize his knowledge and experience in discussions leading towards settlement. It is the court's view that the probabilities of settlement will be enhanced if the motion for summary judgment is not granted at this time.
The motion for summary judgment is denied, with leave to renew. On renewal, the motion was granted.
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