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Emch v. United States

decided: September 12, 1980.

HAROLD H. EMCH, JR., AND ELIZABETH R. EMCH, AS CO-PERSONAL REPRESENTATIVES OF THE ESTATE OF HAROLD H. EMCH, PLAINTIFFS-APPELLANTS,
v.
THE UNITED STATES OF AMERICA, ET AL., DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Eastern District of Wisconsin. No. 77-C-677 -- John W. Reynolds, Chief Judge .

Before Swygert, Circuit Judge, Wood, Circuit Judge, and Noland, District Judge.*fn*

Author: Noland

This is an appeal by Harold H. Emch, Jr. and Elizabeth R. Emch as co-representatives of the estate of Harold H. Emch. Appellants challenge the district court's dismissal of their complaint against the United States for failure to state a claim upon which relief can be granted and its subsequent refusal to permit the filing of an amended complaint. For the reasons set forth below, we affirm the district court's actions in all respects.

The facts may be briefly summarized as follows. On October 21, 1975, the American City Bank & Trust Company (American City Bank) was declared insolvent by the Comptroller of the Currency and was taken over by the Federal Deposit Insurance Corporation (FDIC), acting as receiver. This action allegedly rendered worthless some 39,480 shares of stock held by Emch, Sr., in American Bankshares Corporation, a bank holding company holding 100% of the outstanding shares of American City Bank, its largest subsidiary. Emch thereafter filed administrative claims with the Comptroller, the FDIC, and the Federal Reserve Board pursuant to 28 U.S.C. § 2675,*fn1 which were subsequently denied. The substance of the claims, in pertinent part, was as follows:

d. Said undersigned claim they have been damaged as the result of your failure for the years 1971, 1972, 1973, 1974, and 1975 inclusive, to properly and adequately supervise, examine and control the condition, performance, operation, liquidity and solvency of American City Bank and Trust Company N.A., a banking entity of Milwaukee, Wisconsin, and in failing to take proper and adequate measures to correct deficiencies, including but not limited to violation of lending and collateral rules existing in said bank and in said holding company and in failing to take proper and adequate measures to preserve and conserve the assets of said bank and said holding company.

e. As the result of paragraph (d) above, the said holding company, to-wit: American Bankshares Corporation became insolvent and its stock (including the stock of the undersigned) became worthless.

Following the denial of his claims at the administrative level Emch, on April 18, 1977, instituted the action underlying this appeal. The complaint, filed under the provisions of the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b) and 2671-74, charged that the United States, by way of the Comptroller's Office, the FDIC, and the Federal Reserve Board, was negligent at the "operational level" in the regulation and examination of American City Bank and American Bankshares Corporation, and that such negligence proximately caused the insolvency of American City Bank and the resultant investment losses suffered by Emch. Upon motion by the Government, the district court dismissed the Comptroller, the FDIC, and the Federal Reserve Board as defendants, as well as a separate claim against the FDIC alleged under 12 U.S.C. § 1819. These actions are not challenged in this appeal. Subsequently, however, the district court ruled that the alleged wrongs on the part of the United States fell within the "discretionary function" or "misrepresentation" exceptions to Federal Tort Claim liability.*fn2 In its order reported at 470 F. Supp. 206 and again at 474 F. Supp. 99 (E.D.Wis.1979), the court dismissed Emch's claim, saying:

The government argues, and numerous cases have held, that § 2680(a) precludes suits based on negligence by agencies of the United States in the regulation and examination of banks . . . and that § 2680(h) precludes suit against the United States for withholding relevant information from the public or for permitting a bank to publish misleading or fraudulent reports . . . Indeed, at the oral argument held on March 9, 1979, it appeared to the Court that plaintiff is not arguing that tort claims against the United States can arise out of the ordinary, although negligent, performance by federal agencies of their regulatory banking functions.

474 F. Supp. at 101 (citations omitted). The district court rejected Emch's contention that the federal agencies acted beyond the scope of their normal regulatory roles and "undertook to perform extraordinary and extrastatutory functions, i. e., the day-to-day management of the affairs of the bank," and were therefore not entitled to the protections afforded by the discretionary function or misrepresentation exceptions to tort liability contained in Sections 2680(a) and (h). Id. Referring to the decision in In re Franklin National Bank Securities Litigation, 445 F. Supp. 723 (E.D.N.Y.1978), in which claims of operational level negligence by federal agencies were held sufficient to withstand a dismissal motion based upon the provisions of Section 2680(a), the district court held that, despite Emch's use of the word "operational" in his complaint, the cause of action alleged was not of the type set forth in In re Franklin National Bank Securities Litigation, and was accordingly barred by the provisions of 28 U.S.C. §§ 2680(a) and (h). 474 F. Supp. at 102.

Plaintiff Emch thereafter moved to amend the order of dismissal and for leave to file an amended complaint so as to more fully assert that the examining agencies had taken over, and were negligent in, the day-to-day management and operation of American City Bank. The district court denied the motion, noting that in his administrative claims, a prerequisite to suit under the Federal Tort Claims Act, Emch nowhere alleged such extrastatutory or "operational level" negligence. 474 F. Supp. at 103. This appeal followed.

The issues presented for review are (1) whether the district court erred in dismissing Emch's complaint for failure to state a claim cognizable under the Federal Tort Claims Act, and (2) whether the district court erred in refusing to modify the dismissal order and to allow Emch to amend his complaint so as to specifically allege extrastatutory or operational level negligence. As previously indicated, we have concluded that the court below acted correctly in all respects, and therefore affirm the decision of which the appellants complain. The following discussion will outline the reasons for our conclusion.

The adoption of the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b), 2671-80, marked a major step away from the long tradition, rooted in common law, of sovereign immunity. The Act permits the maintenance of private actions for money damages against the United States "under circumstances where the United States, if a private person, would be liable to the claimant in accordance with the law of the place where the act or omission occurred."*fn3 However, the amenability of the government to private suits under the Act is not without restriction. As noted in the oft-cited decision in Dalehite v. United States, 346 U.S. 15, 73 S. Ct. 956, 97 L. Ed. 1427 (1953), the Act's legislative history indicates that it was not contemplated that the government should be subject to liability for errors in administration or in the exercise of discretionary functions. Id. at 26-27, 73 S. Ct. at 963. This sentiment is embodied in section 2680(a), the discretionary function exception, which formed the basis for the Court's holding in Dalehite that the Government could not be held liable for damage arising out of the explosion of shipboard fertilizer grade ammonium nitrate under government supervision.

Considerable conflict has revolved around the concept of "discretionary functions or duties" in the context of tort claim immunity. Although the Court in Dalehite declined to define the boundaries of the phrase, it did note that

(it) includes more than the initiation of programs and activities. It also includes determinations made by executives or administrators in establishing plans, specifications or schedules of operations. Where there is room for policy judgment and decision there is discretion. It necessarily follows that acts of subordinates in carrying out ...


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