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KINEE v. ABRAHAM LINCOLN FED. S&L ASSN.

September 27, 1973

David and Mary Kinee, Individually and on behalf of all members of a class of borrowers similarly situated, et al.
v.
Abraham Lincoln Federal Savings & Loan Assn., et al.


Newcomer, Judge.


The opinion of the court was delivered by: NEWCOMER

NEWCOMER, Judge.

 Currently before this Court are a number of Rule 12 motions which raise an even larger number of problems. The Court will attempt to summarize the history of this litigation sufficiently that the reader may make intelligent sense of what follows, and then will deal with the issues, not so much in the logical order of their importance to the case, as in their order of difficulty, starting with the easiest first.

 The individual plaintiffs in this case are five husband and wife couples. Plaintiffs David and Mary Kinee obtained a mortgage from defendant Colonial Mortgage Service Company. The other four couples named as individual plaintiffs similarly obtained mortgages from four of the named defendants. Each plaintiff couple obtained only one mortgage from one named defendant. On November 16, 1972, suit was instituted against 177 named defendants by the five named plaintiff couples in their own right and on behalf of all those similarly situated. *fn1" The suit complains that the defendants, as writers of mortgages, required plaintiffs, as part of their mortgage agreements, to prepay, in monthly installments, a sum equal to one-twelfth the annual expected property tax, mortgage insurance premiums, sewer and water rentals, and other possible liabilities which, if not paid, might result in a lien on the mortgage property with higher priority than the lien held by the mortgagee. The essence of the complained-of practice as nearly as the Court can determine, is that the lending institutions pay no interest on the monies thus obtained even though they use the monies for their own investment purposes and obtain a return on those monies. Plaintiffs have proposed a number of theories as to why the failure to pay interest on the monies thus obtained is an actionable wrong in and of itself. They also allege that, even if the failure to pay interest is not in and of itself illegal, the defendants have conspired together to eliminate the alternative practice of paying interest on such deposits, a variation in the terms of the mortgage which is advantageous to borrowers, and a term upon which there might be some competition among lenders expected, and that in conspiring to eliminate competition as to this term in the mortgage, have violated the anti-trust laws. They also allege that the requirement of the acceptance of the prepayment agreement as a condition of obtaining a mortgage constitutes an illegal tie-in under Section 1 of the Sherman Act.

 To jump right into the heart of this affray, plaintiffs urge as one ground for the positive illegality of the actions of defendants that the actions of the defendants violate 15 U.S.C. § 1601 et seq., popularly known as the Truth-in-Lending Act. However, the practices of which plaintiffs complain have been expressly eliminated from the operation of the Truth-in-Lending Act by various provisions of that Act and regulations promulgated pursuant thereto. It is not necessary to go into a detailed analysis of this exemption in this memorandum, as such an analysis has already been done in Stavrides v. Mellon National Bank and Trust Co., 353 F. Supp. 1072 (W.D. Pa. 1973). See also, Graybeal v. American Savings and Loan Association, 59 F.R.D. 7, 1973-1 CCH TRADE CASES P 74,469 (D. Columbia, 1973); Umdenstock v. American Mortgage and Investment Company, 363 F. Supp. 1375 (W.D. Okla. 1973); and Williams v. American Savings Association, No. C.A.-3-6350-D (N.D. Tex. March 26, 1973.) The Court finds itself in complete agreement with the rationale of these cases, and accordingly plaintiffs' claims under the Truth-in-Lending Act will be dismissed pursuant to Rule 12(b) (6) for failure to state a claim upon which relief can be granted.

 Plaintiffs' so-called "fifth cause of action" alleges that, when the complained of actions are undertaken by "a savings and loan association" those actions violate the Homeowners Loan Act of 1933, 12 U.S.C. § 1461 et seq. The plaintiffs have failed to enlighten the Court as to which Section of the Homeowners Loan Act is violated by the complained-of actions, and as to the theory by which the complained-of actions violate that Act. First, it is obvious that the actions of the state chartered "savings and loan associations" are not subject to the Homeowners Loan Act, and therefore cannot be in violation of it. Therefore, as to the state chartered savings and loan association defendants, the fifth cause of action for a violation of the Homeowners Loan Act of 1933 must be dismissed pursuant to Rule 12(b) (6) for failure to state a claim upon which relief can be granted.

 As to the federally chartered savings and loan associations, it is not immediately apparent on the face of the pleadings, or of the briefs filed in opposition to the motions to dismiss, how the actions of the federal savings and loan associations violate the Homeowners Loan Act. On the other hand, the defendant federal savings and loan associations have argued quite persuasively that the complained of course of action is specifically authorized by the regulations of the Home Loan Bank Board, the administrative agency charged with regulating federally chartered savings and loan associations under the Homeowners Loan Act of 1933. The regulations cited by the defendants do indeed appear to authorize the complained of practice. Plaintiffs only attack on the existence of this authorization rests on such a strained interpretation of the word "distribute" as used in 12 C.F.R. P 544(1) (a) (1) and (b) (10) that the Court has concluded that it is wholly without merit. Even if this Court were to conclude that the regulations did not specifically authorize the practice complained of, the plaintiffs would still be in the position of never having brought to the Court's attention any provision of the Homeowners Loan Act or of the regulations promulgated pursuant thereto which forbid the practice and therefore might arguably create a cause of action for following the practice. However, it is not necessary for the Court to involve itself in this question, as the Court is convinced that the practice followed by the federally chartered savings and loan associations is specifically authorized by the regulations of the Home Loan Bank Board, and that therefore plaintiffs' fifth cause of action as it applies to federally chartered savings and loan associations alleging that the complained-of practices are in violation of the Homeowners Loan Act of 1933 must be dismissed pursuant to F.R.C.P. 12(b) (6) for failure to state a claim upon which relief can be granted.

 The only two remaining theories of the plaintiffs by which the per se legality of the complained-of practices is attacked are based on state law. One of the counts, or both, seem to be based on, or at least include, some theory of unjust enrichment. This latter claim, on nearly identical facts, has recently been dealt with by a Pennsylvania Court, which concluded that such a claim failed to set forth a cause of action against the defendants. Buchanan v. Brentwood Federal Savings and Loan Association, No. 2781 January 1972 Term (Pa. C.P. Allegheny Co., March 6, 1973). This may be some indication of which way the wind is blowing in the state courts concerning plaintiffs' third and fourth causes of action. However, until the Supreme Court of the State of Pennsylvania has spoken on these issues, the law of Pennsylvania relating thereto must be taken as an open and unsettled issue. With the dismissal of plaintiffs' second and fifth causes of action, the per se illegality of the complained-of actions is no longer before the Court on any federal ground. If this Court were to find that it had pendant jurisdiction over the plaintiffs' state law claims, and then to exercise such jurisdiction to decide those claims in advance of the Supreme Court of Pennsylvania, it would in effect be providing an advisory opinion on what it believed the state law of Pennsylvania should be, although this is usually framed in the more polite terms of putting forth what the deciding court thinks that the Supreme Court of Pennsylvania would decide. In a diversity case, with independent federal jurisdiction, this circumstance cannot always be avoided, but it is a legitimate consideration in deciding whether or not to exercise pendant jurisdiction. For as the Supreme Court of the United States said in United Mineworkers v. Gibbs, 383 U.S. 715, 726, 86 S. Ct. 1130, 16 L. Ed. 2d 218 (1966):

 The plaintiffs in this case have filed an action in state court against the defendants in this case on the state grounds. In that action they will indeed get a sure-footed reading of the state law. Further, the dismissal of the federal causes of action which called into question directly the per se legality of the complained of actions makes it questionable whether the federal cause of action which remains in the case and the state causes of action contained in plaintiffs' third and fourth causes of action contain sufficiently similar factual and legal issues that considerations of judicial economy, convenience, and fairness to the litigants militate for the exercise by this Court of pendant jurisdiction at all. In Stavrides, supra, the Court found insufficient similarity to justify exercise of pendant jurisdiction on similar facts, and with that decision we must agree. This Court does not choose to exercise pendant jurisdiction over the causes of action stated in plaintiffs' "third cause of action" and plaintiffs' "fourth cause of action", and accordingly they will be dismissed without prejudice.

 We now turn to the last remaining "cause of action" which plaintiffs assert. This alleges claims under Section 4 of the Clayton Act, 15 U.S.C. § 15, for violations of Sections 1, 2, and 3 of the Sherman Act and Sections 3 and 15, of the Clayton Act, but in fact the allegations make out only two alleged violations, one for a conspiracy in restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, and the other for the imposition of a contract in restraint of trade, to wit, one containing an unlawful tie-in arrangement, under the same Section. Here the plaintiffs have the upper-hand, for the time being at any rate. The plaintiffs came dangerously close, however, to losing this upper-hand through sloppy pleading. Paragraph 24 of the complaint reads:

 
"Beginning sometime in the 1960's, the exact date being unknown to the plaintiffs, and continuing up to and including the date of filing of this Complaint, the defendants, together with certain co-conspirators presently unknown to plaintiffs and members of the class they represent, have engaged in this unlawful combination and conspiracy in unreasonable restraint of interstate trade and commerce; an unlawful combination and conspiracy to monopolize interstate trade and commerce and an unlawful combination and conspiracy in restraint of trade and commerce in violation of Sections 1, 2, and 3 of the Sherman Act, and Sections 3, 4, 15 and 26 of the Clayton Act."

 Paragraph 25 of the complaint reads:

 
"The substantial terms of the aforesaid violations are that defendants with concerted action changed from the practice of deducting payments for taxes, assessments and insurance from borrowers' principal debt balance to the "escrow" practice with knowledge that other defendants, co-conspirators and lending institutions had made such a change or were intending to make such a change, and in reliance upon such changes and intentions and as a result of ...

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