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LODE v. LEONARDO

October 12, 1982

EDWARD LODE, JR., ET AL., PLAINTIFFS,
v.
GARY LEONARDO, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Kocoras, District Judge:

MEMORANDUM OPINION

This case is before the Court on the defendants' motion to dismiss the Amended Verified Complaint ("Complaint") in its entirety. The case involves a shareholders' derivative action brought on behalf of the shareholders of four Illinois corporations. Two of the defendant corporations, Hickory Bancorp, Inc. and Worth Bancorp, Inc., are bank holding companies. The other two corporate defendants are the banks controlled by these holding companies, Bank of Hickory Hills and Worth Bank & Trust. Three of the individual defendants, Gary Leonardo, Seymour Goldgehn, and Bernard Davis, are directors of all four corporations. Defendant Gary Leonardo is also the president and chairman of the board of each of the four corporations.

The action arises out of a series of loans made by the two banks. In Counts I, IV, V, VIII, and XII of their sixteen-count Complaint, the plaintiffs allege that various violations of section 104 of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRA"), 12 U.S.C. § 375b, occurred in connection with these loans. The plaintiffs assert that they have either an express or, in the alternative, an implied private right of action for these violations.

In Counts II and VI of the Complaint, the plaintiffs allege that certain activities of some of the individual defendants in connection with the loan transactions constituted violations of section 1962(c) of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-1968. The plaintiffs accordingly assert the private right of action granted to victims of RICO violations by section 1964(c) of the statute.

In support of their motion to dismiss the Complaint in its entirety, the defendants first argue that the plaintiffs have no private right of action under FIRA and that this Court thus lacks subject matter jurisdiction over the claims asserted under that statute. The defendants next argue that the claims based upon section 1964(c) of RICO must be dismissed because Congress never intended that RICO should be used in a case such as this one. If the claims grounded on federal statutes are thus dismissed, the defendants argue, then this Court lacks the jurisdictional basis upon which to hear the pendent claims, and they too must be dismissed.

A.

The provisions of 12 U.S.C. § 375b limit the loans which member banks of the Federal Reserve System may make to their executive officers and other insiders. These loan limiting provisions are made applicable to federally insured banks which are not members of the Federal Reserve System by 12 U.S.C. § 1828(j)(2). The Hickory Hills Bank and the Worth Bank & Trust are two such nonmember banks which are subject to the section 375b loan limits as applied through section 1828(j)(2). The plaintiffs allege that a number of loans made by the two banks violated the limits established by section 375b. The plaintiffs contend that a private right of action is expressly provided for such violations of section 375b by nonmember banks under 12 U.S.C. § 503.

An examination of 12 U.S.C. § 503 reveals that it expressly grants a private remedy for violations of sections 375, 375a, and 376. But section 375b, added to section 22 of the Federal Reserve Act in 1978 by FIRA, is not included among the sections listed in the United States Code at 12 U.S.C. § 503. The plaintiffs seek to overcome this difficulty by pointing out that the original version of 12 U.S.C. § 503, which appears in the Statutes at Large as subsection (f) of section 22 of the Federal Reserve Act, does not enumerate the particular provisions of the Federal Reserve Act to which it applies. Instead, the original version uses the general term "this section," referring to all of the provisions of section 22 of the Federal Reserve Act, to designate the provisions within its scope. Thus, since 12 U.S.C. § 375b was made a part of section 22 of the Federal Reserve Act when it was added in 1978, the plaintiffs argue that section 375b is within the scope of section 503 even though not enumerated in the codified version of that statute.

  It appears that the plaintiffs are correct on this point. The
Statutes at Large control when the version of a law appearing in
the United States Code is inconsistent with that in the original
statutes. See United States v. Welden, 377 U.S. 95, 98 n. 4, 84
S.Ct. 1082, 1085 n. 4, 12 L.Ed.2d 152 (1964) (and cases cited
therein). A fair reading of the original version of 12 U.S.C. § 503,
as it appears in the Statutes at Large, leads to the
conclusion that the private remedy it provides is applicable to all
provisions of section 22 of the Federal Reserve Act, including the
provision added in 1978 which is now codified at 12 U.S.C. § 375b.
  Page 678

This conclusion, however, does not end the inquiry into whether the plaintiffs may avail themselves of the private right of action 12 U.S.C. § 503 provides for violations of 12 U.S.C. § 375b. By its terms, section 503 applies only to banks which are "members" of the Federal Reserve System. Hickory Hills Bank and the Worth Bank & Trust are not members of the Federal Reserve System. The loan limitations of 12 U.S.C. § 375b apply to these two banks only because they are insured under the Federal Deposit Insurance Act. A section of that Act, 12 U.S.C. § 1828(j)(2), incorporates the "member" bank loan limits of section 375b by reference and makes them applicable to nonmember insured banks "in the same manner and to the same extent as if such nonmember insured bank[s] were . . . member bank[s]." Plaintiffs argue that this language not only extends the loan limitations of section 375b to nonmember insured banks, but that it also requires nonmember insured banks to be treated as "member" banks for purposes of private actions under section 503. The plaintiffs' rationale for this contention is that it would be senseless to impose upon nonmember banks the limiting provisions applicable to "member" banks under section 375b without also imposing the identical sanctions which are available against "member" banks for violations of section 375b.

While somewhat reasonable, this argument is not convincing. A reading of section 1828(j)(2) shows that the language, "in the same manner and to the same extent" can only refer to the language, "[t]he provisions of section 375b of this title, relating to limits on loans." This very specific incorporation of the loan limiting provisions can not be interpreted as an incorporation of the private right of action contained in section 503 with regard to "member banks." Section 1828(j)(2) incorporates the loan limits contained in section 375b; it does not thereby automatically incorporate a remedy from section 503. Accordingly, it is not possible to conclude that the plaintiffs have an express private right of action for the violations of section 375b which they allege in connection with the nonmember Hickory Hills Bank and Worth Bank & Trust.

In the alternative, the plaintiffs maintain that even absent an express private right of action, the circumstances are such that a private right of action should be implied for them under 12 U.S.C. § 1828(j)(2). In deciding whether a private cause of action is implicit in a federal law when the statute is silent on that issue, the focus is on the intent of Congress. Middlesex County Sewage Authority v. National Sea Clammers Association, 453 U.S. 1, 13, 101 S.Ct. 2615, 2622, 69 L.Ed.2d 435 (1981); Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 639, 101 S.Ct. 2061, 2066, 68 L.Ed.2d 500 (1981). "Congressional intent may be discerned by looking to the legislative history and other factors: e.g., the identity of the class for whose benefit the statute was enacted, the overall legislative scheme, and the traditional roles of the States in providing relief." Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 1839 n. 60, 72 L.Ed.2d 182 (1982) (citing California v. Sierra Club, 451 U.S. 287, 101 S.Ct. 1775, 68 L.Ed.2d 101 (1981); Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975)).

12 U.S.C. § 1828(j)(2) was enacted in 1978 as part of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, Pub.L. No. 95-630, § 108, 92 Stat. 3641, 3664. The section amended the Federal Deposit Insurance Act by adding provisions limiting the loans which federally insured banks that do not belong to the Federal Reserve System can make to their executive officers, directors, and certain classes of owners. The section also added enforcement provisions to be utilized by the Federal Deposit Insurance Corporation in the event the loan limits were violated.

According to the House report, Congress enacted FIRA in large measure because of its deep concern with various problems in the banking industry, especially self-dealing and other abuses by insiders. Overextension of credit to large shareholders and other insiders was documented as the leading cause of bank failures among state-chartered, federally insured institutions, and such abuses were therefore seen as a major threat to the security of the insurance fund maintained by the FDIC. A principal problem area was identified as the wide variation in state laws regulating insider loans. A means of ameliorating this problem was to create a uniform, nationwide standard for insider loans made by ...


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