# Petition — Benjamin Franklin Federal Savings & Loan Ass'n v. Derenco, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1978
- **Citation:** 439 U.S. 1051

## Text

Supreme Court, U. S
FILED

'

| way 26 1978

ICHAEL RODAK, JR., CLERK

In the Supreme Court

of the United States

OCTOBER TERM 1977

97-1694

BENJ. FRANKLIN FEDERAL SAVINGS
AND LOAN ASSOCIATION,
a corporation,

Petitioner,
v.
DERENCO, INC.,
a Nevada corporation,
Respondent.

PETITION FOR A WRIT OF CERTIORARI
TO THE SUPREME COURT OF OREGON

JAMES H. CLARKE
800 Pacific Building
520 S. W. Yamhill Street-
Portland, Oregon 97204
Counsel for Petitioner
C. /E. WHEELOCK
~ Benj. Franklin Plaza
One S. W. Columbia
Portland, Oregon 97258
Of Counsel

STEVENS-NESS LAW PUB. CO., PORTLAND, ORE. 5.78

————————

INDEX

The Oregon Supreme Court has decided a sub-
stantial federal question not heretofore de-
termined by this Court, in a way probably in-
consistent with this Court’s decisions. The im-
pact of the decision on federal savings and
1oan associations, and the state court’s asser-
tion of broad authority to apply local common
law to their businesses make review by this
Court a matter of urgent concern.

Discussion

1. The decision is inconsistent with the con-
gressional purpose to create a national sav-
ings and loan system in which the Board exer-
cises exclusive and unlimited authority over the
business of member associations according to
the “best practices” of such institutions in
the United States Sa
2. The decision is inconsistent with decisions of

this Court forbidding state regulation of mat-
ters in which the national interest is dominant

Page

Opinion Below 1

Jurisdiction 2

Questions Presented 2
Constitutional Provisions, Statutes and

Regulations Involved 3

Statement of the Case . 3

1. The material facts 3

2. Proceedings in the state courts - 7

Reasons for Granting the Writ . 10

10

a

ii
INDEX (Cont.)
Page

or which are subject to comprehensive federal
control, or where regulation by the states will
interfere with federal purposes ................... 15

8. The Board’s regulation of reserve accounts
in C.F.R. § 545.6-11 occupied the field, and
common law rules are not applicable to such ac-
counts, whether or not the regulation covers
the particular matter in issue —.......... 16

4. If the Board’s failure to define such liabil-
ity prior to 1975 creates a regulatory gap, the
question is governed by federal common law,
which does not recognize a duty to account for
profits in the absence of an express contract. 19

Conclusion -...........-- -- iol ban He al WP aa 21
Appendix A (Opinion of the Oregon Supreme
Appendix B (Judgment of the Oregon Supreme

Court) Sr he: ae

Appendix C (Constitutional Provisions, Statutes
and Regulations Involved) .......-.....-..-. T7

Appendix D (Recent Decisions of State and Fed-
— Courts Rejecting Claims for Interest or
Profits on Reserve Accounts) actinides 81

23

TABLE OF AUTHORITIES

Page
Cases

Bethlehem Co. v. State Board, 330 U.S. 767

(1947) OS aE
Brooks v. Valley National Bank, 113 Ariz. 169,

548 P.2d 1166 (1976)

Cale v. American Nationai Bank, 37 Ohio Mise.
56, 66 Ohio Op. 2d 122 (1973) ¥ 81

Campbell v. Hussey, 368 U.S. 297 (1961) 15

Carpenter v. Suffolk Franklin Savings Bank, 76
(Mass.) Raush 1305, 346 N.E.2d 892 (1976) 81

City Federal Savings and Loan Ass’n v. Crow-
ley, 393 F. Supp. 644 (E.D. Wisc. 1975) -_12, 16

City of Burbank v. Lockheed Air Terminal, 411

81

U.S. 624 (1973) REALAGE POL
Clearfield Trust Co. v. U. S., 318 U.S. 368
IE electiiastint coon. EEE SRNEND eC:
Cox Broadcasting Corp. v. Cohn, 420 U.S. 469
RA RL RE ERC TERRES a
De Canas v. Bica, 424 U.S. 351 (1976) 16, 18
Durkee v. Franklin Savings Association, 17 Ill.
App. 2d 978, 309 N.E.2d 118 (1974) 81
Fahey v. Mallonnee, 332 U.S. 245 (1947) 11
Guss Vv. Utah Labor Board, 353 U.S. 1 (1957) _ 15
Hines v. Davidowitz, 312 U.S. 52 (1941) 15

Jones V. Rath Packing Co., 430 U.S. 519 (1977) 15

Kaski vy. First Fed. S & L Ass’n of Madison,
72 Wisc. 2d 132, 240 N.W.2d 367 (1976). 16, 20

Kupiec v. Republic Federal Savings & Loan
Ass’n, 512 F.2d 147 (7th Cir. 1975) . 20

Lyons Savings & Loan Ass’n v. Federal Home
1918) Bank Bd., 377 F. Supp. 11 (N.D. IIL -

iv

TABLE OF AUTHORITIES (Cont.)
Page
Manchester Gardens v. Great West Life Assur.
Co., 205 F.2d 872 (D.C. Cir. 1953) _.... 82

Merrill Lynch, Pierce, Fenner & Smith v. Ware,
GAG Wak BG SD cet icectneteniedidtiiatess 16

Meyers v. Beverly Hills Federal Savings and
Loan Ass’n, 499 F.2d 1145 (9th Cir. 1 1974). 18

Missouri Pacific v. Porter, 273 U.S. 341 (1927) 17

Murphy v. Colonial Federal Savings and Loan
ssociation, 388 F.2d 609 (2d Cir. 26% om

(1926) isiaslon anpncrssnsedetaiptaleaidiaaaaicaatelaaads 17

New York Dept. of Social Services V. Dublino
413 U.S. 405 (1978) - eal 10, 16

Pennsylvania v. Nelson, 350 US. 497 (1956) 15
People, etc. v. Coast Federal Sav. & Loan Asen.,

98 F. Supp. 311 (S.D. Cal. 1951) —..... 1l
Ray Vv. Atlantic Richfield, — U.S. —, 98 S. Ct.
—, 55 L. Ed. 2d 179 (1978) _ ._... _...... 15

Rettig v. Arlington Hgts. Fed. Sav. & Loan
Ags’ n, 405 F. Supp. $19 (N.D. Ili. 1975) 20

Rice v. Santa Fe Elevator sia 331 U.S. 218

CREF D - -—-.2~<<esecpecninhaptaeiipa ee 15
Richman v. Security Santee & Loan Ass’n., 57
Wisc. 2d 358, 204 N.W.2d 511 (1973) _~— 81

Sears v. First Federal Savings & L. Ass’n of
Chicago, 1 Iil. ee 3d 621. 275 N.E.2d 300
(397i) =... . 81

Surr Stes V. - Dollar -_ Bk. 36
N.Y.2d 173, 325 uments 366 N.Y.S.2d
Me Cee insu 81

TABLE OF AUTHORITIES (Cont.)

Teamsters Local v. Lucas Flour Co., 369 U.S.

95 (1962) . 20
Textile Workers vy. Lincoln Mills, 353 U. 3, 448
(1957) . 20

Tucker Vv. Pulaski Federal Stes 8 € L0an yn
sociation, 252 Ark. 849, “481 S.W.2d 725
(1972) 81

Udall vy. Tallman, 380 U.S. 1 (1965) 10

Umdenstock v. American Mtg. & Inv. Co. o on
lahoma City, 363 F. Supp. 1375 (

Okla. 1973) - } " $2
United States v. Standard Oil Co., 332 U.S. 301
(1947) 20

Zelickman Vv. Bell Federal Savings and Leon
Ass’n, 13 Ill. App. 3d 631, 301 N.E.2d 47
(1973) 81

Constitutional Provisions

United States Constitution, Article VI 3, 77
Statutes

12 U.S.C. § 1437(b) 5

12 U.S.C. § 1464(a), Ch. 64, § 5(a), 48 Stat.
132 3, 11, 12, 19, 77

28 U.S.C. § 1257(3) 2

ORS 13.400. re» . 8

ORS 722.012(2) 12

ORS 722.204 ES

TABLE OF AUTHORITIES (Cont.)

Regulations
ens
12 C.F.R. Part 543 - sciielhevstnileiiabinnapcade 6
12 C.F.R. Part 563 . hail 6
12 C.F.R. § 500.3, 38 F.R. 19017, July 1, 1973 ™
12 C.F.R. § 545.6-1(a) (4) (iii) =... 5
12 C.F.R. p Ses, 23 F.R. 9902, December

Ses an 6, 16, 17, 78
12 C.F.R. § 545.6-11(€), 4 40 PR. 20942, May

S = = 5 10, 18, 80
8 FEE
32 F.R. 9041, June 24, 1967 eee %

Other Authorities
Anno.: 31 L. Ed. 2d 1006 (1973) tie
F.H.L.B.B. Journal, April 1977 _. : 13
Marvel, The American Home Loan Bank Board

(1969) . ale _.6, 11, 18

McKenna, Control par Management a Federal
Savings and Loan Associations, 27 So. Cal.
L. Rev. 47 (1953) ies 12

In the Supreme Court

of the linited States

OCTOBER TERM 1977

No..

BENJ. FRANKLIN FEDERAL SAVINGS
AND LOAN ASSOCIATION,
a corporation,

Petitioner,
v.
DERENCO, INC.,
a Nevada corporation,
Respondent.

PETITION FOR A WRIT OF CERTIORARI
TO THE SUPREME COURT OF OREGON

Petitioner prays for a writ of certiorari to review
the judgment of the Supreme Court of Oregon.

OPINION BELOW

The opinion of the Supreme Court of Oregon has
been reported only at 281 Or. 533. A copy is attached
as Appendix A, infra 22.

2
JURISDICTION

The judgment of the Supreme Court of Oregon
was entered March 21, 1978. A copy is attached as
Exhibit B, infra 75. Petitioner did not petition for
rehearing. The jurisdiction of this Court is invoked
under 28 U.S.C. § 1257(3). Cox Broadcasting Corp.
v. Cohn, 420 U.S. 469 (1975).

QUESTIONS PRESENTED

In a decision applying local common law, the
state court required petitioner, a federally-chartered
savings and loan association, to account to borrowers,
retroactive to July 1, 1968, fer profits earned on tax
and insurance reserve accounts that are authorized
and regulated by the Federal Home Loan Bank Board.

1. The first question presented for review is wheth-
er federal law and regulation have preempted any
duty under local common law to account for such
profits.

2. The second question is whether “business us-
ages and ethics” of local common law apply to author-
ized and regulated lending practices of federal associa-
tions.

3. A fina! question is whether respondent’s claim,
if not wholly barred by federal law and regulation,
is controlled by federal common law, which does not
recognize a duty to account for such profits in the ab-
sence of an express contract.

3

CONSTITUTIONAL PROVISIONS, STATUTES
ANv REGULATIONS INVOLVED

The constitutional provision involved is Article

VI, the Supremacy Clause. It is printed in Appendix
C, infra 76.

The statute involved is Ch. 64, § 5(a), 48 Stat.
132, 12 U.S.C. § 1464(a). It is printed in Appendix
C, infra 76.

In addition, the following regulations of the Fed-
eral Home Loan Bank Board are involved:

12 C.F.R. § 500.3, 38 F.R. 19017, July 17,

1973; and its predecessor, 32 F.R. 9041, June 24,
1967;

12 C.F.R. § 545.6-11, 23 F.R. 9902, Dec. 23,
1958; and

12 C.F.R. § 545.6-1i(¢c), 40 F.R. 20942, May
14, 1975.

These regulations are also printed in Appendix C,
infra 76-79. |

STATEMENT OF THE CASE
1. The material facts

a. This is a class action commenced in Multnomah

County Circuit Court for an accounting of profits
earned by petitioner, a federally-chartered savings

and loan association, on borrowers’ tax and insurance
reserve accounts. Petitioner has more than 26,000 bor-
rowers whose loans, primarily residential, total nearly

4

$600 million (Tr. 394-895, 418-419, 425-426; Exs.
2N2, 41, 56). Nearly all of them maintain reserve ac-
counts to create funds for the prompt payment of real
estate taxes and insurance premiums. With his regular
monthly payment of principal and interest, the bor-
rower pays petitioner a sum which is debited to a sep-
arate reserve account and withdrawn by petitioner to
pay taxes and insurance premiums when they fall due.'
Petitioner maintains a general ledger account on which
reserve accounts are segregated as a liability (Ab. 21-
22).

Petitioner places reserve account funds in its gen-
eral account, where they are commingled with its
other funds and are used for purposes normal to its
business (Ab. 22; Tr. 86, 114-115). Income from
such funds is included in petitioner’s earnings, and
assists it to maintain the 5 percent minimum re-
serve required by regulations of the Federal Home
Loan Bank Board (Tr. 92, 107-109, 132-135, 145-
150). None of petitioner’s mortgages provide for
payment of interest or earnings on reserve accounts,
and it has never capitalized such payments or paid
interest on those accounts (Ab. 21-22; Tr. 86, 131).

Until 1976, petitioner required all residential bor-
rowers to maintain tax reserve accounts. Since 1967,
reserve accounts for hazard insurance have been re-
quired only on loans of more than 80 percent of the

‘If the account is insufficient to pay the taxes in time
for the maximum discount, petitioner advances the balance
without interest, recovering the sum advanced over the next
ten months (Tr. 363, 398; Ex. 25).

5

value of the security (Tr. 245). In October 1974,
shortly before real estate taxes fell due, reserve ac-
count balances totalled $18,900,000, more than 90
percent of that sum being in tax resc.ves (Tr. 116,
118; Ex. 238A).

b. Federal savings and loan associations are char-
tered by the Federal Home Loan Bank Board, an
independent agency of the United States, 12 U.S.C.
§ 1437(b), under the Home Owners Loan Act of

1938, 12 U.S.C. §§ 1462 et seq., as amended. Section
5(a) of the Act provides:

“In order to provide local mutual thrift in-
stitu\ions in which people may invest their funds
and in order to provide for the financing of
homes, the board is authorized, under such rules
and regulations as it may prescribe, to provide
for the organization, incorporation, examination,
operation, and regulation of associations to be
known as ‘Federal Savings and Loan Associa-
tions’, and to issue charters therefor, giving pri-
mary consideration to the best practices of local
mutual thrift and home-financing institutions in
the United States.” 12 U.S.C. § 1464(a).

The Board’s general regulations describe its author-
ity in broad terms:

“. .. the Board issues charters for the associa-
tions, is responsible for their examination and su-

Under 12 C.F.R. § 545.6-1(a) (4) (iii) the mortgage
must require tax and hazard insurance reserve accounts for
these “mandated” loans. Petitioner had about 6500 mandated
loans in 1974. In addition, some 7500 borrowers voluntarily
maintained reserve accounts for hazard and other kinds of

a (Tr. 206-207, 215-217, 228-229, 245-246, 362-363;
xX. .

6

pervision, and prescribes regulations governing
their operations. . . .” 32 F.R. 9041, June 24, 1967;
see also 12 C.F.R. § 500.3.

Those functions are carried out under compre-
hensive regulations.

“The Federal Regulations consist of ninety
pages of small print filled with various rules
concerning permissible operations of federal S &
L’s. These rules cover lending, borrowing, sav-
ings accounts, investments, reserves, management
practices, accounting, and a host of other related
functions.” Marvel, The Federal Home Loan
Bank Board, 138 (1969).

Lending practices of federal associations are reg-
ulated under 12 C.F.R. § 545.6, which contains rules
covering all aspects of their real estate loans. That
regulation has authorized and regulated the use of
tax and insurance reserve accounts by federal associ-
ations for many years. As amended in 1958, § 545.6-
11 required that mortgages of federal associations
protect the lender with respect to insurance pre-
miums, real estate taxes and other security risks, and
allowed the association to

3 The Board administers three sets of regulations that ap-
ply to federal savings and loan associations: “Bank Regula-
tions,” 12 C.F.R. Part 523, apply to members of Federal Home
Loan Banks; “Federal Regulations,” 12 C.F.R. Parts 543 et
seq., regulate federal savings and loan associations; and
“Insurance Regulations,” 12 C.F.R. Parts 563 et seq., apply
to institutions that are insured by the Federal Savings and
Loan Insurance Corporation. A state-chartered association
may or may not be a bank member, and it may or may not
provide insurance of accounts. A federal association is sub-
ject to all three sets of regulations. See Marvel, op. cit., 137.

|

7

“. .. require that the equivalent of one-twelfth
of the estimated annual taxes, assessments, insur-
ance premiums, and other charges on real estate
security, or any of them, be paid in advance to
such association in addition to interest and prin-
cipal payments on its loans, to enable the associ-
ation to pay such charges as they become due
from the funds so received.”

The regulation did not require or authorize the
payment of interest on reserve accounts until May
1975, when the Board added § 545.6-11(c). The new
regulation requires federal associations to pay lim-
ited interest on reserve accounts maintained for resi-
dential loans closed on or after June 16, 1975, if a
statute of the state in which the security is located
requires state-chartered institutions to do so. It also
provides that federal associations shall have no other
obligation to pay interest on such accounts, except by
contract.

2. Proceedings in the state courts

In its answer filed in circuit court, petitioner
alleged affirmatively that

“Federal regulation preempts application of
common law to impose any obligation on defend-
ant to pay interest or earnings with respect to
reserve accounts.” (Ab. 26).

After a trial, the circuit court ordered petitioner to
account for profits on most of its reserve accounts
at passbook rates of interest commencing July 1,

8

1968, which marked the applicable limitation period
under state law (Ab. 71). Over petitioner’s objection,*
it concluded that

“ the laws of the United States or the

rules and regulations of the Federal Home Loan

Bank Board does not [sic] preempt the applica-
tion of common law principles to a resolution of

this case.” (Conclusion of Law VI, Ab. 37).

To secure “a final determination of controlling
issues” before taking statements of claim and pro-
ceeding to judgment, the parties appealed from the
circuit court’s decision under ORS 13.400 (Ab. 71-72;
infra 23).

On appeal, petitioner contended that

“Federal law and the regulations of the Board
have preempted the application of state law to
the issues of this case, and defendant cannot be
required to pay interest or earnings on tax and
insurance reserve accounts under Oregon com-
mon law.” (Proposition of Law No. 2, App. Br.
60).

In its decision, the Oregon Supreme Court held
that petitioner must account to borrowers, retroactive
to July 1, 1968, for profits on reserve accounts re-
quired by mortgages whose terms do not exclude the

4
«“_ . [T]he laws of the United States and the rules
and regulations of the Federal Home Loan Bank Board
preempt the application of local common law in this
ease.” (Objection 11 to the court’s findings and conclu-
sions, Ab. 40).

9

payment of interest. The duty to account does
not arise out of a breach of contract or of trust, but is
quasi-contractual and is imposed to avoid “unjust en-
richment.””*

The court conceded that Oregon is the first state
to announce this common law rule which, as applied
to federal savings and loan associations, “could” in-
terfere with federal purposes. However, it rejected
petitioner’s preemption defense, holding that such
conflict is speculative and that there was no “occupa-
tion of the field” by Congress, or by the Federal Home
Loan Bank Board prior to 1975. The court concluded
that federal associations are subject to all of the
“business usages and ethics” imposed on local associ-
ations by local common law, unless they

“... actually conflict or interfere with federal
purposes or unless Congress or the federal regula-
tory body unmistakably indicates otherwise.” In-
fra 42.

The court also rejected petitioner’s contention
(App. Br. 55-59) that respondent’s claim, if not
wholly barred by federal regulation, is controlled by
federal common law, which does not recognize a duty
to account for profits in the absence of an express con-
tract. It held that there is “no necessity for exclusive
use of federal decisional law in interpreting the parties’

5 The court dismissed as “hindsight” petitioner’s uncon-
tradicted proof that reserve accounts confer suhstantial bene-
fits on borrowers, thousands of whom maintain them volun-
tarily, Infra 46.

10

relationship in this case and their resultant obliga-
tions, if any.” Infra 44.

The judgment of the court modified® and affirmed
the circuit court’s decision in accordance with the opin-
ion. Infra 75.

REASONS FOR GRANTING THE WRIT

The Oregon Supreme Court has decided a substantial
federal question not heretofore determined by this Court,
in a way probably inconsistent with this Court’s decisions.
The impact of the decision on federal savings and loan as-
sociations, and the state court’s assertion of broad author-
ity to apply local common law to their businesses make
review by this Court a matter of urgent concern.

DISCUSSION

The decision of the Oregon court will have a heavy
impact on federal associations for which the Board
has exclusive regulatory responsibility.” It is of con-
cern to this Court because of the challenge it presents
to Congress’ plan for federal supervision of the federal
savings and loan system.

6 The court relieved petitioner from liability to account
for profits on voluntary reserve accounts and on accounts
maintained under mortgages executed after February 1, 1972,
when petitioner changed its conventional mortgage form to
exclude interest on reserve accounts. It also eliminated claims
accruing after June 16, 1975, the effective date of 12 C.F.R.
§ 545.6-11(c). Infra 57-59, 62-66.

7 The Board vigorously supported petitioner’s preemption
defense in a brief amicus curiae in the Oregon Supreme Court,
and, we can state, it will “strongly recommend” filing one in
this Court if certiorari is granted. See Udall v. Tallman,
380 U.S. 1, 16 (1965); New York Dept. of Social Services V.
Dublino, 413 U.S. 405, 420-421 (1973).

11

1. The decision is inconsistent with the
congressional purpose to create a national
savings and joan system in which the Board
exercises exclusive and unlimited authority
over the business of member associations
according to the “‘best practices” of such
institutions in the United States.

In the Home Owners Loan Act of 1933 Congress
authorized the Board to charter federal savings and
loan associations

Se . to provide local mutual thrift institu-
tions in which people may invest their funds and
in order to provide for the financing of homes
..» 12 U.S.C. § 1464(a).

Federal associations are “created, insured and aided
by the Federal Government”, Fahey v. Mallonnee,
332 U.S. 245, 250 (1947), to expand the availability
of residential financing in the United States, to in-
still confidence in savers, and to cure confusion result-
ing from the inconsistent regulation of thrift institu-
tions by various states. Marvel, The Federal Home
Loan Bank Board, supra, 26 (1969).

To achieve those purposes, Congress delegated to
the Board, in the most sweeping terms, power to
charter federal associations and to prescribe regula-
tions for their “organization, incorporation, examina-
tion, operation and regulation.” 12 U.S.C. § 1464(a).
Under the Act, a federal association is regulated ex-
clusively by the Board “from its cradle to its corpo-
rate grave”. People, etc. v. Coast Federal Sav. & Loan

12

Assn., 98 F. Supp. 311, 316 (S.D. Cal. 1951).°

The controlling regulatory standard is found in
the Board’s statutory duty to give
‘“. primary consideration to the best prac-
tices of local mutual thrift and home-financing
institutions of the United States.” 12 U.S.C. §
1464 (a).

These statutory provisions are inconsistent with the
view of the Oregon court that federal associations
are subject to “business usages and ethics” dictated
by local common law. On the contrary, the stated
objective of Congress was to create a national
system of home -financing institutions that would
be uniformly regulated by a single agency ac-
cording to the best lending practices “in the United
States.” A major objective of such a system is to
improve and ultimately to make uniform the states’
regulation of local savings associations that operate
alongside federal associations in national markets.°

8

“In the creation and operation of no other major
financial system, state or federal, has so much author-
ity been delegated to an administrative agency as in the
case of federal savings and loan associations.” McKenna,
Control and Management of Federal Savings and Loan
Associations, 27 So. Cal. L. Rev. 47, 47-48 (1953). See
also Lyons Savings & Loan Ass’n V. Federal Home Loan
Bank Bd., 377 F. Supp. 11, 17 (N.D. Ill. 1974); Ci
Federal Savings and Loan Ass’n V. Crowley, 393 F.
Supp. 644, 655 (E.D. Wisc. 1975).

° Federal associations are exempt from compliance with
the Oregon Savings Association Act, ORS 722.012(2). How-
ever, the state savings and loan supervisor is authorized to
adopt the Board’s rules and allow local associations to do any-
thing that federal associations can do. ORS 722.204.

13

The national interest in the financial strength
of the federal savings and loan system also supports
the Board’s exclusive authority to regulate the busi-
ness of federal associations. In 1976 there were more
than 2,000 of them, with total assets of more than $220
billion representing 60 percent of the assets of the en-
tire industry (FHLBB Journal, April 1977, at p. 32,
Table 7, and at p. 30, Chart 1). The Board’s regulations
protect “huge amounts of other people’s money,” as
well as federal funds which stand behind the insurance
of the associations’ savings accounts'° and funds loaned
to associations through the Federal Home Loan Bank.
Marvel, op. cit., at 148.

The decision of the Oregon court, by imposing
burdens under local common law, without the Board’s
permission, on authorized and regulated lending prac-
tices of federal associations, challenges the congres-
sional purpose and interferes with its execution. First,
it permits a retroactive financial burden to be imposed
on those lending practices by any state whose courts
may choose to accept this or some other theory of
liability for profits on reserve accounts, at whatever
rate and on whatever terms the state may choose,
limited only by the local period of limitations.

'© The Board’s insurance regulations contain detailed rules
governing the business of federal associations and other in-
sured institutions, and specifically require that they

“ee maintain safe and sound management and shall
pursue financial policies that are safe and consistent
with economical home financing and the purposes of in-
surance of accounts and are appropriate to their re-
spective types of operations; .. .” 12 C.F.R. § 563.17(a).

14

Second, it subjects federal associations to each of
“the business usages and ethics” applied to Jocal asso-
ciations under local law in the absence of a direct and
irreconcilable conflict with federal regulation.'' Gen-
e1al authority to supervise federal associations is no
longer to be exercised exclusively by the Board, but will
be broadly shared by each state; and the regulatory
standard is not the best practices of such institutions
in the United States, but local common law and
statutes.

Finally, the Oregon court’s decision undermines
the effective regulation of federal associations by ret-
roactively modifying one incident of a complex lending
operation, in a way that requires large transfers of
money from savers to borrowers and interferes with
the Board’s margin requirements, all without concern
for the adjustments in current operations that must
accompany such a decision.

This case clearly is of far-reaching significance
to a major element of the nation’s savings system.
The state regulation of federal savings and loan asso-
ciations, particularly with respect to their lending prac-

'! The scope of the court’s decision is shown by its applica-
tion to petitioner’s loans insured by the Federal Hous-
ing Administration, which that agency requires to be secured
by reserve accounts on prescribed mortgage terms that do not
include the payment of interest (Ab. 17; infra 57). It can be
assumed that the Oregon court would also apply incidents of
state law to mortgages on forms specified by eral National
Mortgage Association and Federal Home Loan Mortgage Cor-
poration as to matters not specifically covered by the loan
documents or regulations.

15

ww

tices, is an important issue that has not been, but should
be decided by this Court.

2. The decision is inconsistent with decisions

of this Court forbidding state regulation

of matters in which the national interest is

dominant or which are subject to comprehensive

federal control, or where regulation by the

states will interfere with federal purposes.

Ray v. Atlantic Richfield Co., — U.S. —,

98 S. Ct. —, 55 L. Ed. 2d 179 (1978).

The dominant federal interest in and superin-
tendence of the business of federal associations'? and
the congressional intent that they be regulated by a
single agency under uniform practices’? exclude sup-
plemental state regulation based on local “business
usages and ethics,” whether or not the Board’s
regulations precisely respond to a particular claim.
“Congress has expressed its judgment in favor of uni-
formity.” Guss v. Utah Labor Board, 353 U.S. 1, 10-11
(1957).

These controlling principles have been applied to
federal savings and loan associations by other state
and lower federal courts whose decisions refusing to
supplement the Beard’s rules with state common law

'2 City of Burbank v. Lockheed Air Terminal, 411 US.
624, 638-639 (1973); sce also Pennsylvania v. Nelson, 350
U.S. 497, 502, 504 (1956).

's Rice V. Santa Fe Elevator Corp., 331 U.S. 218, 236
(1947). The question is whether state law stands as an
obstacle to the accomplishment and execution of the full pur-
poses and objectives of Congress in passing HOLA. Jones Vv.
Rath Packing Co., 450 U.S. 519, 526 (1977), quoting from
Hines Vv. Davidowitz, 312 U.S. 52, 67 (1941). See also Camp-
bell V. Hussey, 368 U.S. 297 (1961).

16

are inconsistent with the view of the Oregon court.'*
Those cases are based on Congress’ delegation to the
Board of unlimited authority to charter and supervise
federal associations, without providing for that author-
ity to be shared with the states. They also recognize
and effectuate Congress’ intent to establish a national
home-financing system under uniform regu!stion in-
corporating the “best practices” of such institutions
in the United States.

The Oregon court’s decision cannot withstand an-
alysis under established principles of federal preemp-
tion.'®

3. The Board’s regulation of reserve accounts
in 12 C.F.R. § 545.6-11 occupied the field,
and common law rules are not applicable
to such accounts, whether or not the regulation
covers the particular matter in issue.

While these broad considerations make the case
appropriate for a review of corresponding scope, the
Court should also consider the preemptive effect of

14 E.g., Murphy v. Colonial Federal Savings and Loan As-
sociation, 388 F.2d 609, 611 (2d Cir. 1967) (Issue of avail-
ability of membership list to dissident member required “a
fleshing out of the Board’s regulations,” and was a question
of federal law) ; Kaski v. First Fed. S & L Ass’n of Madison,
72 Wisc. 2d 132, 240 N.W.2d 367, 371-372 (1976) (Validity
of interest rate escalation clause controlled by federal law).
Many of the cases are collected in City Federal Savings and
Loan Ass’n V. Crowley, supra, 393 F. Supp. 644, 655 (E.D.
Wisc. 1975).

15 The Oregon court cited Merrill Lynch, Pierce, Fenner
& Smith v. Ware, 414 U.S. 117 (1973); De Canas v. Bica,
424 U.S. 351 (1976); and New York Dept. of Social Serv-
ices V. Dublino, 413 U.S. 405 (1973) in support of its con-
clusion. In each, however, this Court concluded that the
federal program was incomplete, and that a particular rule
of state law was outside the area of intended federal super-
vision and would not interfere with federal purposes.

17
the Board’s actual regulation of reserve accounts.

a. The specific practice of requiring and main-
taining reserve accounts has been the subject of
active regulation by the Board for many years, and,
as amended in 1958, 12 C.F.R. § 545.6-11 authorized
and regulated their use without, however, imposing
or permitting any noncontractual duty to pay inter-
est that might affect their use by member associa-
tions.'* Infra 77-79.

No one disputes the Board’s authority to regulate
the question of liability to account for profits on re-
serve accounts. Respondent’s case proceeded beyond
the pleadings only because the Board’s regulation did
not expressly cover that precise question. It does not
follow, however, that this constituted a regulatory
gap to be “filled” by common law. It is more consist-
ent with the terms of the regulation to conclude that
the Board considered a specific lending practice in
light of its entire regulatory program and provided all
of the regulation that was appropriate to its use
by federal associations. In such circumstances, the
regulation occupies the field and excludes any sup-
plemental regulation of that subject under state law.'’

_ 18 As noted at p 5 above, the Board requi

in the case of mandated loans. ee

“ “a Bethlehem Co. vy. State Board, 330 U.S. 767, 774

“(When federal administration has made compre-

hensive regulations effectively governing the subject
matter of the statute, the Court has said that a state
regulation in the field of the statute is ‘invalid, even
though that particular phase of the subject has not been
taken up by the federal agency.”

See also Napier v. Atlantic Coast Line, 272 U.S. 605 (1926) ;

Missouri Pacific v. Porter, 273 U.S. 341, 345-346 (1927).

18

The state cannot impose “additional burdens not con-
templated by Congress”. De Canas v. Bica, supra, 424
U.S. 351, 358, n. 6 (1976). In Meyers v. Beverly
Hills Federal Savings and Loan Ass’n, 499 F.2d
1145 (9th Cir. 1974) the court adopted this view of
the Board’s regulations, holding that a state statute
regulating prepayment penalties was preempted by
the Board’s general regulation of the subject of pre-
payments.

b. The adoption of 12 C.F.R. § 545.6-11 (c) in May
1975 does not affect the significance of this case or
support the Oregon court’s decision.

The new regulation does not subject federal as-
sociations to large liabilities arising out of past trans-
actions. Instead, it gives them notice of a new lia-
bility limited to future loans, one that a lender can
fund or avoid by limiting its use of reserve accounts,
or perhaps handle in some other way. It does not cre-
ate a retroactive obligation with a heavy impact on
current operations.

Second, the 1975 regulation does not show that the
uniformity of rules governing the lending practices of
federal associations has become a matter of in-
difference to the Board. In fact, the new regulation
represents a careful balancing of interests in a diffi-
cult area, one appropriately made by the agency that
is responsible under the Act for the entire federal
system. It does not apply state law to the associa-
tions; instead, it prescribes a limited duty under the
regulation to pay interest on reserve accounts main-

19

tained for new loans, as required of local institutions
by state statutes. Not one of these carefully articu-
lated circumstances is present in this case, and if the
Board’s solution to this recurring problem tolerates a
limited measure of nonuniformity, it plainly does not
approve or support an open-ended common law obliga-
tion on past transactions that has no uniform point of
beginning or duration from state to state, and no ceiling
except as dictated by the “quirks of local law’”.'*

Finally, the 1975 regulation provides that federal
associations shall have “no obligation to pay interest
on escrow accounts apart from the duties imposed
by this paragraph”. Those duties exist only as to new
loans, and the prohibition of any other non-contractual
liability is without limitation. The Board did not adopt
its new rule as a limitation on prior state authority;
rather, it was creating as well as defining the duty of

federal associations to pay interest on reserve accounts, “

on the assumption that they were not otherwise re-
quired to do so.

4. If the Board's failure to define such
liability prior to 1975 creates a regulatory
gap, the question is governed by federal
common law, which does not recognize
a duty to account for profits in the absence
of an express contract.

The dominant federal interest in the sound regu-
lation of the national savings and home financing
system finds expression in § 1464(a), which requires

_ '8 Murphy Vv. Colonial Federal Savings and Loan Associa-
tion, supra, 388 F.2d 609, 611 (2d Cir. 1967).

.

20

the Board to consult the best national practices of
thrift institutions in the United States. Consequently,
if federal law and regulations do not foreclose a duty to
account for profits on reserve accounts, that regulatory
gap should not be filled by applying the common law
of each state, but by reference to federal common
law, which consists of rules that have received ‘‘wide-
spread recognition” in state and federal courts and
are consistent with the statutory policy. Murphy v. Co-
lonial Federal. Savings and Loan Association, supra,
388 F.2d 609, 612 and n. 2; Kupiec v. Republic Federal
Savings & Loan Ass’n, 512 F.2d 147, 152 (7th Cir.
1975); Rettig v. Arlington Hgts. Fed. Sav. & Loan
Ass’n, 405 F. Supp. 819, 824-827 (N.D. Ill. 1975);
Kaski v. First Fed. S. & L. Ass’n of Madison, supra,
72 Wisc. 2d 132, 240 N.W. 2d 367, 371-72 (1976)."°
It is the policy of the 1933 Act that the Board should
direct the affairs of federal associations by complex
administrative controls under uniform national stand-
ards. Incidents of those regulated activities not pre-
cisely covered by administrative rules should be 4de-
termined by reference to federal common law.?°

19 The principle finds prominent, but certainly not pri-
mary expression in labor cases. Textile Workers v. Lincoln
Mills, 353 U.S. 448, 456-457 (1957); Teamsters Local v. Lu-
cas Flour Co., 369 U.S. 95, 102-104 (1962). See Anno.: 31
L. Ed. 2d 1006 (1978).

20 A second basis for applying federal common law lies in
the direct financial interest of the United States in the ques-
tion. Clearfield Trust Co. v. U. S., 318 U.S. 363, 366-367
(1943) ; United States v. Standard Oil Co., 332 U.S. 301, 306
(1947). The exposure of the federal purse to losses on in-
sured accounts and uncollectible loans to member associations
makes supplemental rules affecting their lending practices a
matter of federal commor law.

21

Under federal common law, however broadly its

sources are defined, the judgment of the state court
must be reversed. That law imposes no duty to account

for profits on reserve accounts in the absence of an
express contract.?'

CONCLUSION

The petition for a writ of certiorari should be
granted. a

Respectfully submitted,
JAMES H. CLARKE

Counsel for Petitioner Benj. Franklin
Savings and Loan Association

Dated: May 25, 1978

C. E. WHEELOCK
Of Counsel

21 A list of some recent decisions of state and federal courts

denying liability in cases brought on various theories i
in Appendix D, infra 80. ae

23

APPENDIX A

FILED
SUPREME COURT
MAR. 21, 1978

State Court Administrator

IN THE SUPREME COURT
OF THE STATE OF OREGON

Derenco, Inc., a Nevada
corporation,
Respondent/Cross-Appellant,
v.

Benj. Franklin Federal Savings
and Loan Association,
a corporation,

Appellant/Cross. Respondent.

* * * * *

No. 404-741
SC 24467

Appeal from Circuit Court, Multnomah County.
Pat Dooley, Judge.

Argued and Submitted July 8, 1977.

James H. Clarke, of Dezendorf, Spears, Lubersky &
Campbell, Portland, argued the cause for appellant/
cross-respondent. With him on the briefs were C.
E. Wheelock, of Wheelock, Niehaus, Baines, Mur-

24

phy & Ogilvy, Portland, and Wayne Hilliard and
Vawter Parker, Portland.

James Kirkham Johns, Portland, argued the cause
for respondent/cross-appellant. With him on the
brief were Henry A. Carey, Michael A. Corn, Ed-
ward Fitzgibbon, and James Morrell, Portland.

John R. Faust, Jr., of Hardy, Buttler, McEwen,
Weiss & Newman, Portland, filed a brief for ami-
cus curiae Oregon Savings and Loan League.

Before Denecke, Chief Justice, and Holman, Howell,
Lent, and Linde, Justices.

HOLMAN, J.
Affirmed as modified.

HOLMAN, J.

This is an interlocutory appeal accepted by this
court under ORS 13.400. Plaintiff, Derenco, Inc.,
filed suit upon behalf of itself and others for an ac-
counting of profits. The suit was certified by the
trial court as a class action. The court found for
plaintiff and ordered an accounting. Both sides seek
review to secure a final determination of controlling
issues before entertaining statements of claim from
class members under ORS 13.260(2) and proceeding
to judgment under ORS 13.380.

Defendant is a federally chartered savings and
loan association engaged in making loans on single
family dwellings. This suit, brought upon behalf of
borrowers from defendant, claimed entitlement to the

-

nae om

25

income derived from defendant’s investment of funds
deposited by borrowers for the payment of taxes and
insurance premiums on their dwellings, which served
as security for their loans. With each month’s pay-
ment of interest and principal on his loan, each bor-
rower also deposited one-twelfth of the amount esti-
mated to be required annually for taxes and insurance
premiums. At the end of the period of accumulation,
defendant used the deposits to pay the taxes and in-
surance premiums. During the period of accumula-
tion defendant used the funds as its own, and it is
reimbursement for this use which is in question here.

Plaintiff instituted this suit in July of 1974. We
are concerned with the period commencing six years
prior to that time. Not all of the security instruments
used by defendant during the relevant period had the
same provisions for prepayment of taxes and insur-
ance premiums. The “conventional” mortgage form,
used by defendant until February 1, 1972, contained
the following language:

“. . . The monies so deposited by Mortgagors
shall be credited to a reserve account, and Mort-
gagee is herewith authorized to charge against
said account as a withdrawal sufficient amounts
to pay accruing taxes and insurance premiums
when due to the full extent of said account, if
necessary. If there should be insufficient sums
in said account to pay said taxes and insurance
premiums when due, Mortgagor shall, upon de-
mand, pay to Mortgagee an amount necessary to
satisfy said deficiency. . . .” (Emphasis added.)

26

On February 1, 1972, there were inserted into the
conventional mortgage form set forth above the words
emphasized in the following excerpt:

“| The monies so deposited by Mortgagors
shall be credited to a non-interest bearing reserve
account, and Mortgagee is herewith authorized

The trial judge required an accounting by defendant
on the reserve accounts established through both of
these forms on the theory that defendant was the
borrowers’ agent.'

In addition, a third form was required by the
Federal Housing Administration (FHA) on loans
which it insured, which form contained the following

language.

“|. such sums to be held by the Beneficiary
in trust to pay said ground rents, premiums, taxes
and special assessments, before the same become
delinquent. .. .”” (Emphasis added. )

The trial judge required an accounting on reserve ac-
counts established through this form on the theory
that the instrument created a trust relationship.’

1 Restatement (Second) of Agency § 388 states the rule
requiring an agent to account to his principal for any profits
derived from activities conducted for the principal’s benefit.

2 Defendant used a fourth security instrument on mort-
gages made by it and sold to the Federal Home Loan Mort-
gage Corporation. The trial court determined that this instru-
ment created a mere debtor-creditor relationship, and that
defendant owed no accounting duty to borrowers under it.
The correctness of this ruling is not challenged on appeal.

PE a eee

27

On the question of the appropriate remedy, the
trial judge held that because the exact amount of
earnings enjoyed by defendant for its own purposes
as a result of its use of the reserve accounts could
not be ascertained, and because defendant had in-
curred some expense in administering the account
and in investing the funds, it was equitable for de-
fendant to pay interest on the reserve account funds
only at the same rate as that which defendant paid
to depositors on ordinary demand savings accounts
during the same period of time.

We will first consider an issue of consequence
which may obviate all other problems, depending upon
how it is decided. Defendant contends that the rele-
vant federal law in this area has a preemptive effect
and that the state is therefore precluded from regu-
lating defendant’s activities via enforcement of the
common law. This contention is based upon the fol-
lowing language from Article VI of the United States
Constitution, which language is known as the suprem-
acy clause:

“This Constitution, and the Laws of the Unit-
ed States which shall be made in Pursuance
thereof; . . . shall be the supreme Law of the
Land; and the Judges in every State shall be
bound thereby, any Thing in the Constitution or
Laws of any State to the Contrary notwithstand-
ing.

28

The federal scheme in the present case is designed
“to provide local mutual thrift institutions in which
people may invest their funds . . . to provide for the
financing of homes.” 12 U.S.C. § 1464. Federal sav-
ings and loan associations are by federal statute sub-
ject to regulation by the Federal Home Loan Bank
Board (the Board).? The primary enabling statute
provides that the Board

“|. is authorized, under such rules and reg-
ulations as it may prescribe, to provide for the
organization, incorporation, examination, opera-
tion, and regulation of associations to be known
as ‘Federal Savings and Loan Associations’, and
to issue charters therefor ... .” 12 U.S.C. §
1464(a).

Pursuant to this grant of authority, the Board has
promulgated detailed regulations concerning many as-
pects of a federal association’s operations.* Since
1938 it has authorized tax and insurance premium
reserve accounts. As amended in 1958, the regulation
which applied until after the filing of this case, 12
C.F.R. § 545.6-11, provided that each loan contract
of a federal association

“ . . shall provide specifically for full protec-
tion with respect to insurance, taxes, assessments,
other governmental levies, maintenance, and re-

2 See Home Owner’s Loan Act of 1933, 12 U.S.C. §§ 1461
et seq.

4 See 12 C.F.R. §§ 545.1 et seq.

29

pairs, and it may provide for an assignment of
rents and for such other protection as may be
lawful or appropriate ....A Federal association
may require that the equivalent of one-twelfth
of the estimated annual taxes, assessments, in-
surance premiums, and other charges on real
estate security, or any of them, be paid in advance
to such association in addition to interest and

principal payments on its loans, to enable the
association to pay such charges as they become
due from the funds so received . . . .” (Empha-
sis added.)

The regulations also required that such accounts be
maintained for loans of more than 80 per cent of
the value of the security. 12 C.F.R. § 545.6-11(a) (4)
(iii). The question of the authority of a federal as-
sociation to use funds deposited in reserve accounts
as its own, or of its duty to compensate borrowers for
such use, was not addressed under these earlier ver-
sions of the regulation. After the commencement of
this suit, however, in an amendment to section
545.6-11 (12 C.F.R. § 545.6-11(c)), effective June
16, 1975, the Board required federa] associations to
pay interest® (not earnings) on such accounts if the
parties provide for it in their agreement or, in the
case of loans made after the regulation’s effective
date, if a state statute imposes a similar duty on

5 As we explain below, we construe the regulation’s use
of the term “interest” to include any payments a federal
association may be required to make to borrowers for use of
reserve account monies.

30

locality authorized associations.*° The amendment then
provides:

“Except as provided by contract, a Federal
association shall have no obligation to pay inter-
est on escrow accounts apart from the duties
imposed by this paragraph.”

The regulations at no time say anything specifically
about the right of an association to use the funds
deposited.

Defendant’s specific contention concerning pre-
emption is stated thus:

“Defendant contends that it cannot be re-
quired to pay interest or earnings on reserve ac-
counts, because the terms of the federal regula-
tions preclude that obligation, and second, fed-
eral regulation has occupied the field of reserve
accounts, so as to preclude any state regulation
of that subject matter or the imposition of any
duty to pay interest or earnings under state law.
Defendant contends that this is so as a matter
of law, whether or not the federal regulation
precisely responds to plaintiff’s claim.”

If the contention that the regulations preclude
payment of interest or earnings is based on that part
of the 1975 amendment to the regulation quoted above,

6 Oregon adopted a statute requiring the payment of inter-
est on deposits on loans entered into subsequent to Septem-
ber 1, 1975, at the highest rate currently authorized to be
paid by banks on their open passbook accounts, minus three-
quarters of one per cent, but, in any event, no less than four
per cent. ORS 86.245 (1975 Oregon Laws ch 337, § 8).

31

we reject it insofar as it relates to the period before
the effective date of the amendment. There is no
indication of any intention that the regulation be
retroactive, and we do not so construe it.’

Finding no express preclusion of state regulation
in this area, we turn to a more detailed analysis of
the bases upon which state regulation may be pre-
empted. Unfortunately, the United States Supreme
Court has not adopted a uniform approach to pre-
emption issues. Many of the cases are inconsistent
with each other, but it is extremely rare that a case
is overruled. The result is a variety of methods of
dealing with preemption problems and some guess-
work as to which analysis will be employed in a given
case. One point that may “excuse” the apparent con-
fusion and inconsistency in the cases is that the par-
ticular circumstances of each case are of compelling
importance in reaching a decision. Since the language
and interpretation of both the state and federal laws,
and their interaction and possible or actual conflict,
provide the real answers to specific questions, it
would not be expected that any one test would be sat-
isfactory for all cases. The Court has noted from time
to time that by virtue of the nature of the problem

7 Statutes or regulations which say nothing about retro-
active application are not applied retroactively if such a con-
struction will impair existing rights, create new obligations
or im additional duties with respect to past transactions.
Joseph v. Lowery, 261 Or. 545, 547, 495 P.2d 273 (1972);
Kempf Vv. Carpenters & Joiners Union, 229 Or. 337, 341-43,
367 P.2d 436 (1961).

32

no one test could work in all cases. See, e.g., Hines Vv.
Davidowitz, 312 U.S. 52, 67, 61 S. Ct. 399, 85 L. Ed.
581 (1941).

In addition to the occasions in which the federal
law expressly precludes state action, it would seem that
there are three situations in which state law is
preempted. The first is when the state law is in direct
conflict with the federal law and therefore must fall.
The “conflict” ground of preemption appears to be
restricted to cases in which the federal and state laws
require a defined group of persons to act in contrary
ways. Hirsch, Toward a New View of Federal Pre-
emption, 1972 U. Ill. Law Forum 515, 526-27. In this
case there is no such conflict between the federal stat-
utes and regulations and the application of Oregon
common law.

The second situation in which state law is struck
down is when it interferes with the operation of the
federal enactment or impairs attainment of federal
goals. This test appears to be the favored one in
recent times. The original statement of the interfer-
ence rule comes from Hines v. Davidowitz, supra at
67, in which the Court’s task was stated to be “to de-
termine whether, under the circumstances of [the]
particular case, [the state’s] law stands as an obstacle
to the accomplishment and execution of the full pur-
poses and objectives of Congress.”

The imposition of an accounting as sought by
plaintiff here could produce an obstacle to attainment
of federal goals, but a considerable amount of specu-

-——~ag

33

lation is required to entertain the possibility seri-
ously. Requiring defendant to account for profits on
the deposits in question could conceivably impair its
economic health and thereby prevent it from carrying
out its statutory function. However, we do not believe
that preemption occurs simply because under some
imaginable set of economic facts the application of
state law could impede the efficient execution of a
federal statutory purpose.

The interference basis for preemption in this case
is further weakened by the regulation subsequently
promulgated by the Board under which a federal
association is required to pay interest on reserve ac-
counts when state law imposes the same duty on state
chartered associations, or when the association has
entered into an agreement with the borrower to pay
interest. 12 C.F.R. § 545.6-11. This action by the
Board amounts to an administrative determination
that imposition of a duty to pay interest does not in
all situations result in the creation of an obstacle to
attainment of the federal goals. Since the economic
impact of the amended regulation could be similar to
that resulting from the trial court’s decree, it would
be inappropriate to conclude that the imposition of
the duty to account creates an obstacle to attainment
of federal goals justifying a holding that state law
is preempted.

The third basis for preemption is the so-called
“occupation of the field” doctrine. If it is determined
that Congress has occupied a field, the states are pre-

34

cluded from enacting any laws covering the subject
matter, even if they are consistent with the federal
law or are complementary to it. The application of
this basis for preemption is difficult to predict be-
cause every act of Congress occupies some field. The
boundaries of the field must be known before a de-
termination can be made, and that usually requires
an exercise in construction and depends upon how
narrowly or broadly the court desires to construe the
statutes in question. This technique appears to be
losing ground as a method for striking down state
law, although it was employed to preclude application
of a municipal noise ordinance forbidding landings
and take-offs during certain hours in Burbank Vv.
Lockheed Air Terminal, 411 U.S. 624, 93 S. Ct. 1854,
36 L. Ed. 2d 547 (1973). Occupation analysis is us-
ually expressed as a search for congressional intent
to preclude the states from: enacting legislation cover-
ing the same subject matter dealt with in federal
statutes. The intent purportedly sought is most often
a fiction, but it is not always unreasonable to infer
from a given scheme of federal regulation that there
is “no room” for the stuves to act.

Several factors have been looked to in determining
that Congress has occupied a field. In some cases it
will be significant that the subject matter is of par-
ticularly important federal interest. Thus, in Hines
v. Davidowitz, supra (state law requiring registration
of aliens), and Pennsylvania v. ~"elson, 350 U.S. 497,
76S. Ct. 477, 100 L. Ed. 640 (1956) (state sedition

35

act), it was significant that the subject matter im-
pinged on foreign relations.®

Congressional intent to occupy a field also is some-
times found when the federal regulatory scheme is
pervasive or comprehensive in its coverage of the
subject matter. When Congress has undertaken thor-
ough, and therefore seemingly complete, regulation
in an area, the inference is that the states are de-
prived of all power to take action on the same sub-
ject. Rice v. Santa Fe Elevator Corp., 331 U.S. 218,
230, 67 S. Ct. 1146, 91 L. Ed. 1447 (1947). In recent
cases, however, the Court has limited application of
this approach to preemption by narrowly defining
the field regulated by Congress. Detailed regulation
of a wide range of problems will not serve to preempt
state law if the Court determines that the state law
has its effect in an area outside the thrust of the
federal enactment. For example, in De Canas v. Bica,
424 U.S. 351, 96 S. Ct. 933, 47 L. Ed. 2d 43 (1976),

® Recent cases have allowed the states more latitude in
areas involving some matters which are of considerable fed-
eral interest where the Court is convinced that the state action
has its effect outside the “field” Congress is actually regu-
lating. E.g., De Canas v. Bica, 424 U.S. 351, 96 S. Ct. 933, 47
L. Ed. 2d 43 (1976) (enactment of immigration and Natural-
ization Act does not preempt state law forbidding employ-
ment of illegal aliens) ; Goldstein v. California, 412 U.S. 546,
93 S. Ct. 2303, 37 L. Ed. 2d 163 (1973) (Copyright Clause
and Copyright Act do not preclude state record piracy stat-
ute); Merrill, Lynch, Pierce, Fenner & Smith v. Ware, 414
U.S. 117, 139, 94 S. Ct. 383, 38 L. Ed. 2d 348 (1973) (New
York Stock Exchange Rule adopted pursuant to Securities
Act does not preempt state law providing that as wage
~~ - may not be restricted to arbitration when applied
to Exchange member).

36

California was allowed to forbid the hiring of illegal
aliens even though the Immigration and Naturaliza-
tion Act had dealt quite specifically with a wide range
of issues involving entry into the country and the
status of illegal entrar’ 3s. Employment relationships
were seen as being outside the field occupied by Con-
gress, and the states were thus free to act. The stat-
utes enacted by Congrses were detailed but this did
not impress the Court since it was to be expected that
legislation dealing with such a complex subject mat-
ter would involve considerable detail.®

The cases dealing with preemption problems which
concern this particular subject or similar subjects
point in different directions and are not very helpful.
We will first deal with the cases from which it can
be most easily argued that defendant’s position is
correct. The cases rely, in the main, on the notion that
federal law has occupied the field pertaining to fed-
eral savings and loan associations. In Meyers v. Bev-
erly Hills Federal Savings & Loan Ass’n., 499 F.2d
1145 (9th Cir. 1974), a class action by borrowers was
filed which claimed the provision used by defendants
in their loan agreements concerning prepayment of
the loan was void under California law. The court
held the subject was preempted by a Board regula-
tion on the specific matter, a result that is inescap-
ably correct. However, in doing so it used much gen-

° The Court had previously expressed a reluctance to find
preemption on the basis of detail of a statutory scheme in
New York State Dept. of Social Services v. Dublino, 413 U.S.
405, 93 S. Ct. 2507, 37 L. Ed. 2d 688 (1973).

37

eral language, including a statement quoted from the
opinion in People v. Coast Federal Sav. & Loan Ass’n.,
98 F. Supp. 311, 316 (S.D. Cal. 1951), to the effect
that the Board, and not the court, has primary juris-
had promulgated comprehensive regulations concern-
ing all aspects of every savings and loan association
“from its cradle to its corporate grave.”

In People v. Coast Federal Sav. & Loan Ass’n.,
just mentioned, an injunction was sought, together
with statutory penalties, against a federal savings
and loan association because it was claimed it had
transacted business as a savings bank in violation of a
California statute. The actual holding of the case was
that pursuant to valid statutory authority the Board
diction over matters relating to the operation of fed-
eral associations; but the court went on to express
its belief that “... Congress has preempted the
field,” and that state law could, therefore, not be ap
plied. 98 F. Supp. at 318.

In Rettig v. Arlington Hgts. Fed. Sav. & Loan
Ass’n., 405 F. Supp. 819 (N.D. Ill. 1975), the plain-
tiff contended that the directors and the association
had diverted corporate opportunities by causing indi-
vidual borrowers to be referred to director controlled
insurance agencies to procure the necessary insurance
in connection with loans. In holding state law pre-
empted, the court noted that “the Board has consist-
ently taken the position that under governing provi-
sions of HOLA, savings and loan associations are not
permitted to engage directly in the insurance busi-

_—_ ae

38

ness .. .,” 405 F. Supp. at 318, and that although
they were authorized to invest in service corporations
organized under state law to facilitate services of
the association, they could do so only in connection
with activities pre-approved by the Board. There had,
apparently, been no such approval. The Board had
also adopted a regulation concerning conflict of inter-
est and corporate opportunity. These specific regu-
latory actions obviously governed over state law; how-
ever, the court gratuitously used general preemption
language, including the “cradle to its corporate grave”
quote, which only proves it pays to turn a phrase.

Defendant’s strongest case is Kaski v. First Fed.
S. & L. Ass’n. of Madison, 72 Wis. 2d 132, 240 N.W.
2d 367 (1976). The plaintiff brought an action to
declare that an interest rate escape clause con-
tained in its mortgage note was invalid because it
was unconscionable, vague, and indefinite. The court
said, 240 N.W.2d at 372-73:

“Applying these general principles of law to
the case at hand, it is apparent that Congress
has substantially occupied the field in regard to
the regulation of federal savings and loan asso-
ciations, particularly in the area of the regula-
tion of lending practices. This scheme of federal
regulation is pervasive. Moreover, it has long been
held that the establishment of a federal system of
banking or of lending is of such importance in
our national life that, for the most part, state
laws should not be allowed to interfere. McCul-
loch v. Maryland (1819), 17 U.S. (4 Wheaton)

39

316, 4 L. Ed. 579. It is apparent that the Con-
gress considered that the regulation of lending
procedures of federal institutions was one that
required national and uniform regulation.

“In federal cases arising in the state of Wiscon-
sin, the courts have held that Congress intended
to occupy the field of control of federaiiy char-
tered savings and loan associations and has dele-

gated the regulatory authority to the Federal
Home Loan Bank Board... .

“The general tenor of these cases is that any
regulatory power which a state attempts to exer-
cise that potentially conflicts with federal legis-
lation or its purpose, or that results in lack of
uniformity in the internal management or lend-
ing practices of federal savings and loan associa-
tions, is subordinate to federal law. The regula-
tion of loan practices directly affects the internal
management and operations of federal associa-
tions and therefore requires uniform federal con-
trol. The present litigation ought, therefore, be
resolved as a matter of federal law.”

The court then proceeded to remand the case to the
lower court to be disposed of by what it considered to
be “federal law.”

The principal cases upon which plaintiff depends
include Federal National Mortgage Assoc. v. Lefko-
witz, 390 F. Supp. 1864 (S.D. N.Y. 1975). This was
an action to declare unconstitutional as applied to the
plaintiff a New York statute which required lending

40

institutions to pay interest of at least two per cent on
accounts of the same nature as those in question in
the present case. The plaintiff was a national mort-
gage association established pursuant to 12 U.S.C.
1716 et seg. for the purpose of creating a secondary
market for home mortgages. Generally, it bought
mortgages from investors and mortgage companies
which originated the mortgages. The Secretary of
Housing and Urban Development was given general
regulatory authority over such institutions. In addi-
tion, Congress had exempted the plaintiff from having
to qualify to do business in any state and had given
it state taxation immunity.'°

The court stated that payment of interest on the
accounts did not impose a burden upon the perform-
ance of the plaintiff’s functions and because Congress
had not regulated upon this particular subject, the
state was free to regulate it. The language is in con-
formance with Derenco’s contention; however, the dif-
ficulty with the case from its standpoint is that the
favorable language seems to be unnecessary to the
holding. Federal National was not a party to the
original mortgage but only purchased it subject to
those obligations created by the original parties. The
original parties, of course, were subject to and con-
trolled by state law and, upon purchase of the mort-
gage, the plaintiff only succeeded to those rights
which the mortgagee had under that law. Having only
succeeded to the rights of another who was unques-

10 See 12 U.S.C. §§ 1723a(a), 1723a(c) (1).

41

tionably subject to state regulations, FNMA was in
no position to claim the law was unconstitutional as
applied to it.

In Johnson vy. First Fed. Sav. & Loan Ass’n. of
Detroit, 418 F. Supp. 1106 (E.D. Mich. 1976), the
plaintiff brought a class action of the same nature
as in the instant case. In determining whether the
case should be remanded to state court, the court con-
sidered defendant’s argument that the defense of fed-
eral preemption raised a federal question which gave
it jurisdiction.'' Referring to the recent amendments
to the regulations, the court expressed the following
opinion in dicta. 418 F. Supp. at 1109:

“The court doubts that there is federal pre-
emption in this case. The regulation principally
relied upon by defendant (12 CFR 545.6-11)
demonstrates implicitly that preemption was not
intended. That regulation incorporates by refer-
ence state law in the several jurisdictions, and
allows disparate results where bargained for in
express contracts. Since a desire for uniformity
is a major reason that Congress uses to decide
that federal law preempts a given field, the spe-
cific rejection of uniformity by it indicates that
federal preemption was not intended.”

In Pierson v. First Federal Savings and Loan

''The court concluded that “preemption is a matter of
defense to a state law claim,” and does not warrant removal
of a case from state court. Johnson V. First Fed. Sav. & Loan
Ass'n. of Detroit, 418 F. Supp. 1106, 1109, (ED Mich, 1976),
quoting Washington v. American League of Professional Base-
ladlien” 460 F.2d 654 (9th Cir. 1972). See 28 U.S.C. §

c).

42

Ass’n., 149 So. 2d 891 (Fla. App. 1963), the plain-
tiffs were depositors who complained in state court
of mismanagement on the part of the directors.
Among other questions were the legality of proxies
given by the depositors to the directors and the man-
agement’s methods in securing them. A request was
made that the proxies be declared invalid. Although
the right of the members to vote by proxy was con-
ferred by charter, neither the statute nor the Board’s
rules had any provisions with which to determine the
validity of the proxies. The court held that a deter-
mination of the validity of the proxies by a state
court would not frustrate the purpose for which the
association was created nor impair its efficiency.

In Durnin Vv. Allentown Federal Savings and Loan
Ass’n., 218 F. Supp. 716 (E.D. Pa. 1963), the plain-
tiff, a depositor in a federal savings and loan asso-
ciation, made a request of the association for a list of
all members of the association; the request was de-
nied, and the plaintiff brought a proceeding to secure
relief. There were no federal regulations on the sub-
ject. In the face of a preemption argument that si-
lence on the subject indicated an intent to deny ac-
cess to the list of members, the court held that more
than silence of the regulations would be required to
overcome the general “common law” right of a mem-
ber of a corporation to inspect and copy a member’s
list, and that publie policy required such an inspec-
tion in the absence of expressed statutory or equiv-
alent denial.

Oe ee eee ee ees

43

We conclude that the type of state regulation
sought to be imposed here is not preempted on any
of the bases discussed. The present tendency of the
United States Supreme Court appears to be to accom-
modate, if possible, both federal and state law. There
is no substantial conflict or interference between the
trial court’s holding in the case and the regulation
of federal associations by Congress and the Board.
Neither do we believe the field has been entirely oc-
cupied. Congress is always capable of saying if it in-
tends to occupy the field exclusively and so are fed-
eral regulators.

It is our belief that federal law should not and
will not be held to occupy the field to the exclusion
of state common law in the absence of more compelling
reasons than those which exist here. Federally char-
tered institutions doing business within the state
should comply with the business usages and ethics
required of others engaged in similar businesses with-
in the state unless such usages and ethics actually
conflict or interfere with federal purposes or unless
Congress or the federal regulatory body unmistakably
indicates otherwise. Though the most recent regula-
tion is not applicable retroactively, we consider a fair
inference therefrom to be that the Board must neces-
sarily have come to the conclusion that the kind of
relief granted by the trial court here does not unduly
interfere with federal aims. We agree.

Defendant also makes the contention that a deci-
sion in this case must be based on “federal law,” that

44

state rules for interpretation of the parties’ relation-
ship are not applicable, and it cites authority favor-
able to its position that it has no responsibility for
the use of the funds in the deposit. It is our conclu-
sion that this is not a field which requires the exclu-
sive use of federal law. In some fields, such as federal
labor law, uniformity of decision is so necessary to
the carrying out of congressional intent that the
United States Supreme Court has decided that fed-
eral decisional laws is exclusively applicable in order
that the labor law be formulated “according to the
precepts of labor policy.” Teamsters Union v. Lucas
Flour Co., 369 U.S. 95, 103, 82 S. Ct. 571, 7 L. Ed. 2d
593, 599 (1962). It has never laid down such a rule
applicable to federal savings and loan associations
and, although we find such expressions in some infe-
rior federal court cases, we believe, for the reasons
expressed in deciding the preemption issue, that there
is no necessity for exclusive use of federal decisional
law in interpreting the parties’ relationship in this
case and their resultant obligations, if any.

The next issue of major consequence is whether
plaintiff has proved any obligation on behalf of de-
fendant to pay to borrowers the funds generated by
defendant’s use during the period of accumulation
of the money deposited with it for the payment of
taxes and insurance premiums. If such an obligation
exists, it arises out of the relationships between hor-
rowers and defendant rather than the contracts alone,
because the contracts, which are found in the security

ey Qe oe. OR ee ne iy Ot

<a

45

instruments used by defendant, are silent on the sub-
ject and, in fact, do not even provide for defendant’s
use of the money, other than permitting it to pay the
taxes and insurance premiums when they are due.
Only the “conventional” mortgage form used since
1972 says anything concerning any kind of payment
to borrowers and it says only that defendant is not
obligated to pay interest as distinguished from the
proceeds from its use of the money. As a result, all
of the written contracts are ambiguous, insofar as
the question here is concerned, and the situation
must be assessed in view of the total circumstances
surrounding the relationship of the parties, of which
the contracts are only one part.

We will commence with consideration of the con-
ventional mortgage form used by defendant prior to
the change of that form in 1972. Defendant contends
that the mortgage is a contract delineating the rights
of the parties, that it has no provision for any pay-
ment by it to borrowers, and that any such payment
is therefore foreclosed by the lack of any such provi-
sion requiring it. Any rights of the parties, whether
consensual in nature or otherwise, necessarily depend,
at least in part, on how we construe the parties’ ob-
ligation under the contract. The mortgage provides
that the payments for taxes and insurance premiums
“shall be credited to a reserve account, and mortgagee
is herewith authorized to charge against said account
.... It then specifies what defendant is authorized
to do with the money; it makes no mention, however,

46

of its being used for defendant’s own purposes other
than to protect its security. We also infer from the
evidence that it was not usual for defendant to tell
borrowers at the time of the loan of its intended use
of the funds during their period of accumulation.

An important aspect in the consideration of the
surrounding circumstances is the purpose of the de-
posits. There is no substantial controversy in this re-
gard. The deposits were for the purpose of protecting
the security of defendant’s mortgages from unpaid
taxes and uncompensated loss of the improvements
by fire or other disaster. In the absence of other evi-
dence, it would be reasonable for us to assume that
defendant should have whatever interest in the money
that was necessary to accomplish the purpose of the
deposits. Beneficial interest in the money by defend-
ant during its period of accumulation was unneces-
sary to the security of its mortgages. However, there
is no doubt that defendant had the unexpressed in-
tention to have such interest. Insofar as the value of
its use of the money might exceed the expense of ad-
ministering the accounts and making payments, de-
fendant’ would receive a gratuitous windfall. It re-
sults in the borrowers’ paying defendant for the use
of the money they have secured from it, while defend-
ant is paying nothing for the use of the money it has
obtained from borrowers for a purpose which can be
fully accomplished without defendant’s beneficial use
thereof. At the time of the making of the contract
there would have been no reason for the borrowers

47

to assume, in the absence of their being otherwise in-
formed, that defendant would have any interest other
than that which was necessary to accomplish the pur-
pose of the deposits.

Defendant contends that part of the quid pro quo
for the use of the money is the benefit which borrow-
ers derived from having their homes protected by the
budgeted monthly amount against non-payment of
taxes and risk of casualty loss. This is only argu-
ment from hindsight to justify what has occurred.
The real reason for the deposits, at least in the case
of all taxes and some insurance premiums, is that de-
fendant required such deposits for its own protection
rather than out of any sense of concern for the bor-
rowers. '*

There is another aspect of the matter which we
consider to be important. We infer from the evidence
that loans were required to be transacted on defend-
ant’s security forms. Ambiguous contracts are us-
ually construed against the party who drafts them.
Silence on the subject of a right which the drafter
later contends he has is usually fatal to his conten-
tion unless such right is one which necessarily results
from the other terms of the contract. In the present
situation a beneficial interest in defendant in the
money does not necessarily result from the written
terms of the contract. Construction against the draft-
er of the contract is particularly appropriate in a

12 The Board’s regulations required the deposits if loans
were close to the actual value of the property.

48

situation like the present where the contract is one
of adhesion with the borrowers having no opportun-
ity to negotiate its terms. We therefore reject the ar-
guments that the borrowers were equally responsible
for the omission of any provisions concerning the use
of the money and that, since the parties contracted
for reserve accounts without providing for payment
of interest or earnings, the agreement is conclusive of
defendant’s right to use the funds without reimburse-
ment.'? The borrowers were in no position to question
or negotiate the terms of the contract.

Defendant contends, however, that there is reason
in the present situation for the borrowers to know of
defendant’s proposed use of the money due to the gen-
eral knowledge which people possess of banks and sim-
ilar institutions making their profits by loaning funds
deposited with them. Defendant depends on the follow-
ing language from 1 Restatement (Second) of Trusts
§ 12, comment 1., at 41-42:

“If money is deposited in a bank for a special
purpose, the bank is not a trustee or bailee of
the money unless it is the clear understanding of
the parties that the money deposited is not to be
used by the bank for its own purposes.

13 For cases agreeing with defendant’s contention but
which fail to consider who drew the contract or to examine
its adhesion nature, see Cale v. American National Bank, 37
Ohio Mise 56, 66 Ohio Op. 2d 122, 124 (CP Cuyahoga City
1973) ; Brooks v. Valley National Bank, 113 Ariz. 169, 548
P.2d 1166, 1171 (1976).

49

“Where the deposit is in escrow, that is where
the money is to be paid to a third person on the
happening of a designated event and in the mean-
time the depositor has no right to withdraw the
money, it depends upon the manifestation of the
intention of the parties whether the bank may use
as its own money deposited or whether the money
shall be held in trust. Such a deposit ordinarily
indicates an intention that the bank may use
the money as its own, the bank undertaking to
pay to the third person the amount of the deposit
on the happening of the designated event.”

V Scott on Trusts § 524 at 3669 (3d ed. 1967) is not
so sure of the result:

“'.. one circumstance of great importance is
custom in the business of banking. It has some-
times been held that a custom is so well estab-
lished and well known that the courts will take
judicial notice of it. In many cases, however, the
courts have required evidence of custom; and the
amount of evidence and the character of the evi-
dence offered have so varied that it is not un-
natural perhaps that the decisions have shown a
wide divergence in determining the character of
the relation created. Moreover a custom may be
one not known to the person whose rights are
involved, and one not so well established and gen-
erally known that he is chargeable with notice
of it; in which case, in spite of the existence of
the custom, he will not be bound by it. Banking
customs, however, are becoming better established
and better known, and will doubtless play an in-
creasing part in determining the results reached
by the courts.” (Footnote omitted.)

50

There is no evidence in this case of a uniform cus-
tom among lenders as to how, and for whose benefit,
any earnings on funds representing prepayments are
handled. To the contrary, there is evidence that some
savings and loan associations do give borrowers, while
the money is being accumulated, the benefit of any
earnings from use of the deposits made for taxes and
insurance premiums. This is accomplished by use of
the “capitalization” method of administering reserve
accounts. Under it, whenever a borrower makes a
payment, the entire amount, including that portion
attributable to taxes and insurance premiums, is cred-
ited to interest and debt. When the time comes for
payment of the taxes and insurance premiums, the
account is charged with these amounts. In this man-
ner the purpose of the deposit, security for the lender,
is accomplished and the borrower is given the bene-
fit of the use of the funds.'*

In addition, the concepts that persons who borrow
money on their homes have knowledge of banking
practices and that those who make reserve deposits
are even aware of the beneficial use of such deposits
are highly suspect. It is questionable whether home-
owners would look at funds deposited with a savings
and loan association or a bank for the payment of
taxes and insurance premiums on premises put up
as security for a loan in the same manner as they
would look at money deposited in such institutions

'4 It also obviates the expense of maintaining two or more
accounts for each borrower.

51

on which they were being paid interest. When a de-
positor is paid interest, it would seem to us probable
that he realizes that the lending institution must
have the use of the money in order to pay the interest
it pays him.'* However, when he is not paid interest
nor told that deposited funds will be put to the insti-
tution’s use, but instead is told that they will be put
into a reserve account, we believe it is doubtfu! that
he would expect the money to be used for the benefit
of such institution.

It would seem to us reasonable for a depositor
to assume, in the usual situation in which money is
deposited in a checking account or, at the request of
the depositor, deposited for a special purpose, that
the funds will be used by the bank in order that it
be paid for its service. However, the deposits in
question here were not established for the convenience
of the depositor, as is the usual case, but were estab-
lished at the insistence of defendant for its protection
and for a purpose which had nothing to do with de-
fendant’s having a beneficial interest in the money.

From the testimony of defendant’s officer in
charge of loans and from the small value of the bene-
ficial use of the deposits for each loan, we infer that
the instances in which the beneficial use of the money
even occurred to borrowers were isolated and infre-

15 “Where the bank undertakes to pay interest on the
deposit, it is clearly the intention of the parties that the
bank should have the use of the money, .. .” V Scott on Trusts
§ 530 at 3685 (3d ed 1967).

52

quent.'® Defendant’s officer testified that the in-
stances in which any information was requested by
borrowers concerning income from their deposits were
limited to three or four oral inquiries a year and to
two or three written inquiries every five years. These
inquiries were apparently limited to whether interest
was paid and to the response that interest was not
paid. Considering that the borrowers who are affected
by this opinion are in the many thousands, it would
appear that the number of people who were knowl-
edgeable enough to ask anything about the deposits
at all is inconsequential. It could be argued that the
balance did not inquire because they knew of the cus-
om of loaning institutions making use of such deposits
and they assented to it. However, because of the lack
of evidence establishing such a custom and the other
evidence, we believe the inference of the borrowers’
lack of awareness of the subject of the benficial use
of the deposits is a fair one.'’

For the reasons given, despite the following lan-
guage from V Scott on Trusts § 530 at 3684-3685 (3d

16 Defendant accumulated deposits for taxes payable on
Oregon real estate of approximately $18,000,000 annually.
In addition, it made loans on property in southern Washing-
ton.

'7 It is both interesting and revealing to see how defend-
ant’s right to use the funds was treated for internal account-
ing purposes by defendant. According to the testimony of
defendant’s officer, the funds were designated as “. . . ad-
vance payments on borrow for taxes and insurance. . .”
(Emphasis added.) Thus, the funds were labeled for ac-
counting purposes as prepayments which were borrowed by
defendant.

ee

53

ed. 1967), it is our conclusion that justice and fair
dealing require a recovery by borrowers:

“The qnestion in each case is a question of
the intention of the depositor and the bank. Us-
ually the intention is not expressed in words and
frequently the matter is not even in the minds of
the parties. The courts in such cases have to
struggle with the question what the parties would
have thought if they had considered the matter.
In most cases a depositor surely would not ex-
pect a bank to segregate the money deposited nor
would the bank expect to do so. It is believed that
the cases which hold that a debt is intended show
a more realistic attitude on the part of the courts,
and that in many of the cases at least in which
the courts have said that a trust was intended
they have gone counter to the real intention of
the parties. .... The mere fact that a deposit is
made for a special purpose is not a sufficient
reason, unless there is an understanding that the
money deposited should not be used as a part of
the general assets of the bank.

“Tt would seem that the presumption is that
when a bank receives money it is intended that
the bank should use the money; and the burden
is on the depositor to show that the understand-
ing was different. The mere fact that the money
deposited is not an ordinary general deposit, and
is not subject to withdrawal by check of the de-
positor, is insufficient to rebut the presumption
and to show an intention to make the deposit spe-
rr ” (Emphasis added; footnote omitted.)

In summation, because (1) the class consists of
persons unfamiliar with banking practices (homeown-

54

ers); (2) borrowers were not informed of defendant’s
use of the deposits; (3) defendants did not provide
in the contract for its use of the money; (4) the con-
tract was drawn by defendant and is one of adhesion;
(5) the purpose of the particular deposits is limited
to protecting defendant’s security interest; and (6)
no uniform practice exists concerning the use of the
kind of deposits in question, it is our conclusion that
the borrowers were entitled to any income from the
use of the funds during the period of accumulation.
The borrowers being so entitled, they would be de-
prived of what was justly theirs and defendant would
be unjustly enriched were defendant permitted to
kcep the proceeds of the use of the funds.

Because courts have had difficulty with a legal
rationale for recovery in similar cases, we will at-
tempt to delineate ours. It is that of quasi-contract: an
obligation implied in law which is not consensual.
It is a remedial device which the law affords to ac-
complish substantial justice by preventing unjust
enrichment.

“. . The implied in law contract is indeed no
contract at all, it is simply a rule of law that
requires restitution to the plaintiff of something
that came into defendant’s hands but belongs to
the plaintiff in some sense. Yet it is called a con-

tract implied in law, or a quasi-contract.... .”
Dobbs, Remedies § 4-2 at 235 (19738).

The Restatement of Restitution § 125(1) covers the
situation:

“A person who, as the holder of a title to

55

property in which another has the beneficial in-
terest, receives a direct product of the property,
income or other proceeds from it, is under a duty
to account to the other.”

Defendant had title to the funds, but borrowers
had the beneficial interest in the deposits until the
time came to pay taxes and insurance premiums.
They had this interest because its transfer was un-
necessary to the accomplishment of the purposes for
which the deposits were created, and because the
agreements, which were drawn by defendant to its
required form, made no provision for the transfer
of the beneficial interest, though it was defendant’s
uncommunicated intention to use the funds for its
own benefit during their period of accumulation.

The protagonists in this case have used citations
of authority in the language of both quasi-contracts
and constructive trusts. Quasi-contracts and construc-
tive trusts are parallel means at law and equity, re-
spectively, of accomplishing substantial justice by pre-
venting unjust enrichment and forcing restitution to
the plaintiff of something which in equity and good
conscience did not belong to the defendant. It is only
proper to use a constructive trust when there is some
specific property identified as belonging to the plain-
tiff. When the possession of no specific identifiable
property is sought and only a money judgment is re-
quested, quasi-contract is the remedy. As stated by
Professor Lacy in Constructive Trusts and Equitahle
Liens in Iowa, 40 Iowa Law Review 107, 114 (1954):

56

“The vital distinction between a quasi-con-
tractual obligation and a constructive trust is that
the former is purely personal and is enforced by
a money judgment while the latter involves the
creation of an equitable property interest in some
thing. . . . [U]nless the res is land or a unique
chattel or the transferee is insolvent, it is un-
likely that specific recovery may be had from
him. In any case where a constructive trust might
properly be imposed against a transferee, he will
also be under a quasi-contractual obligation which
will in many cases furnish an adequate remedy.
....” (Footnote omitted.)

The rationale of the two remedies is identical, and
the citations of authority from both sources are rele-
vant. In the present case only a money judgment is
requested, and there is no need to resort to a construc-
tive trust. However, we are in equity in this case be-
cause an accounting is requested.

Although we talk of agreements being construed
against the lender and of adhesion agreements—con-
cepts frequently associated with implied contractual
provisions—we do not hold that defendant’s obliga-
tion to pay borrowers the net proceeds of the use of
the money was contractual. We conclude that the sub-
ject of the use of the funds did not occur to borrowers
and that defendant, without saying so, consciously in-
tended to use the deposits for its own benefit. There
was, therefore, no contract, actual or implied. Defend-
ant’s obligation is one imposed by law because, under
all of the circumstances of the parties’ relationship,
in our opinion defendant would be unjustly enriched

57

if allowed to retain the net proceeds generated by
these funds. Among the relevant circumstances of the
relationship are the facts that defendant drafted the
contracts and that borrowers were not given an op-
portunity to negotiate over their terms.

We realize that this is the first case in the United
States by a court of last resort which has held after
trial that borrowers have a right to recover in a case
of this kind. There have been two decisions of courts
of last resort which have upheld a complaint in a simi-
lar case as against an attack by demurrer. They are
Buchanan Vv. Brentwood Federal Savings & Loan Assn.,
457 Pa. 135, 320 A.2d 117, 127 (1974), and Carpenter
v. Suffolk Franklin Savings Bank, 362 Mass. 770, 291
N.E.2d 609 (1973).'® There are a considerable number
of cases which have held to the contrary for various
reasons.'® Most of them can be distinguished upon the

18 Carpenter V. Suffolk Frankin Savings Bank, 362 Mass
770, 291 N.E.2d 609 (1973), was subsequently tried on the
merits and judgment for defendant was affirmed on appeal.
76 Mass. Adv. Sh. 1305, 346 N.E.2d 892 (1976).

19 See, e.g., Gibson V. First Federal Savings and Loan
Assoc. of Detroit, 364 F. Supp. 614, aff’d., 504 F.2d 826 (6th
Cir. 1974) (federal law does not require defendant to pay
interest or earnings on reserve accounts, state law claims
net heard) ; Kinee v. Abraham Lincoln Federal Savings and
Loan Assoc., 365 F. Supp. 975 (E.D. Pa. 1973) (same) ;
Brooks v. Valley National Bank, 113 Ariz. 169, 548 P.2d
1166 (1976) (absence of provision for payment of interest) ;
Mareh Vv. Home Federal Savings and Loan Assoc., 66 Cal. App.
3d 674, 156 Cal. Rptr. 180 (1977); Lathrop v. Bell Federal
Savings and Loan Assoc., 42 I). App. 3d 183, 355 N.E.2d 667
(1976) ; Durkee v. Franklin Savings Assoc., 17 Ill. App. 3d
978, 309 N.E.2d 118 (1974) ; Cale v. American National Bank,
37 Ohio Misc. 56, 66 Ohio Op. 2d 122, 124 (C.P. Cuyahoga or
1973) (absence of provision for payment of interest) ; Rich-
man V. Security Savings and Loan Assoc., 57 Wis. 2d 358, 204
N.W.2d 511 (1973).

58

facts; with any that cannot be so distinguished, we dis-
agree. Most of the cases which hold for the defendant
do so upon the basis of custom, upon the absence of
any provision in the agreement that the borrower will
receive any recompense, or upon a particular wording
of the security agreement which is different than the
ones here involved.

Everything which has been said previously is ap-
plicable to FHA insured loans. In such cases the se-
curity agreements provide that defendant is to hold
the deposit in trust instead of in a reserve account.
An argument could be made that an express trust was
contemplated; however, this position is unnecessary
in view of our holding.

The conventional mortgage form used by defend-
ant after February of 1972 poses an additional prob-
lem. It provides that the deposits will be “‘non-interest
bearing.” Borrowers of the class here involved would,
in our opinion, equate interest from the money with any
income the money would generate.*° Therefore, the
provision is the equivalent of an agreement that the
deposits would not be the source of any income to the
borrowers. Because borrowers agreed and knew,
therefore, that there would be no income for them
from the deposits during their period of accumula-
tion, and because the question of the beneficial use

20 See a subsequent portion of this opinion in which it is
concluded that the Board contemplates “interest” in its most
recent regulation as being the equivalent of any income from
the deposits.

59

of the funds during this time was thereby suggested
to them, it is our conclusion that borrowers are in
no position now to disown that to which they have
agreed. That portion of the trial court’s order is set
aside which permits recovery by borrowers who signed
the conventional mortgage form which included the
“non-interest bearing” language.

Defendant also contends that because it did not
require deposits for insurance premiums on loans of
less than 80 per cent of the value of the property and
because the arrangement for reserve accounts in such
circumstances was optional on the part of the bor-
dower, there is no basis for a recovery of the income
on those deposits. Defendant makes the same conten-
tion concerning deposits for insurance against other
kinds of risks, such as mortgage life insurance and
accident and disability insurance, for which voluntary
deposits were made at the request of the borrower.
It. is our conclusion that as to all deposits for insur-
ance which were not required by defendant (deposits
for all taxes were required) and which were there-
fore voluntary, the borrowers should be excluded from
recovery.

When the purpose of the deposit is for the security
of defendant, there is a basis for a borower to assume
that the use of the deposit is so limited. On the other
hand, if the sole purpose of the deposit is the conven-
ience of the borrower and it is requested by him,
there is a basis for an assumption that defendant will
have the use of the deposit as its quid pro quo. A

60

checking account is such an example. In addition, be-
cause the borrower is free to accept or reject the pro-
vision for the reserve account, it is not such a situa-
tion as would result in a contract of adhesion. Insofar
as the order of the trial court may be construed to
include those accounts, the order is set aside.

Another problem is the computation of the amount
of the borrowers’ recovery. There is no way to de-
termine exactly the amount of defendant’s earnings
on the deposits since the money from the deposits was
commingled with defendant’s other funds for invest-
ment. There is evidence from which defendant’s earn-
ings from its direct loans on real property can be de-
cermined as well as evidence .rom which its yield on
its portfolio of other investments can be ascertained.
There is, however, no way to determine the amount of
money from the deposits which was in each type of in-
vestment. Of course, funds for taxes had to be avail-
able at taxpaying time and this meant that sufficient
investments in short term securities had to be main-
tained for this purpose. These yields can vary from
other investments.

The cost of servicing the accounts of deposited
funds as of June 30, 1975, was estimated by defend-
ant to be $4.87 per tax account and $4.58 per insur-
ance account. The testimony was that this expense
had steadily diminished through the years because
of the gradually increased use of computers and that
it was impossible to reconstruct the expense of main-
taining the accounts for past years. Defendant also

eet

61

produced testimony that approximately one million
dollars a year was advanced by it to make up defi-
ciencies for borrowers in their tax accounts so that
the three per cent tax discount for early payment
could be secured. However, the expense of the ad-
vancement of these funds was computed in the aver-
age cost of servicing the accounts.

In addition to the servicing cost there was the
cost of the investment and handling of the funds so
that they would generate income. On top of all of this,
defendant is required by the Board to maintain a re-
serve from accumulated profits which has to be a
percentage of total savings accounts. As such ac-
counts increase, profits have to be generated to main-
tain additional reserves so that the Board will per-
mit defendant to continue to operate. This is also, in
a way, an expense of doing business.

The trial judge looked at this complicated compu-
tation problem and resolved it with rough justice.
He awarded income from the accounts to plaintiffs
equal to the interest that was paid by defendant on
ordinary pass book savings accounts. This is emi-
nently sensible. The defendant is a mutual associa-
tion. The total cost of all operations, including the
maintenance of the reserve accounts as well as their
investment, has necessarily been deducted from in-
come before payment of such pass book interest. The
‘eposits in question were completely commingled with
defendant’s other invested funds. The costs of servic-
ing the accounts and investing the funds were not

62

capable of being isolated as separate components of
defendant’s total expenses. It is true that the Board,
and not defendant, sets the rates for pass book sav-
ings accounts. However, these rates are presumably
set by the Board with a view to allowing defendant
to pay expenses, to maintain the necessary reserves,
and thus to perform the functions for which it was
created. Lack of availability of evidence from which
one can be completely accurate about computation of
earnings does not prevent borrowers from prevailing
when recovery is otherwise proper.?'

The borrowers cross-appeal from the trial court’s
decision on this point and contend that they are en-
titled to recovery at the legal rate of interest on the
deposited funds. The appropriate measure of damages
is the income generated by the use of the deposits
less defendant’s costs attributable thereto. It is not
the legal rate of interest. It is our opinion that the
method used by the trial judge more accurately rep-

215 Corbin on Contracts § 10 at 125-26 (1964) says:

“There are many cases in which, by reason of the
ordinary experience and belief of mankind, the trial
court is convinced that substantial pecuniary harm has
been inflicted, even though its amount in dollars is in-
capable of proof. If the defendant had reason to foresee
this kind of harm and the difficulty of proving its amount,
the injured party will not be denied a remedy in dam-
agus because of the lack of certainty. . . .” (Footnote
omitted.)

This is a contract measure of damages. We believe its theory
is appropriate here because the recovery results from our
interpretation of the rights of the parties arising out of a

) aa relationship. A quasi-contract is only a remedial
evice.

63

resents defendant’s gain than does the legal rate of
interest or a futile attempt to compute the actual
gain from the available information by determining
the amount of income generated by the deposits and
deducting the expense attributable thereto.**

Plaintiff cites authority to the effect that a cestui
que trust may elect between actual earnings and in-
terest where trust funds have been used by the trustee
for his own purposes.*° This authority is not con-
trolling here. The present case does not deal with
misuse of a trust res; we have merely held that the
borrowers are entitled to quasi-contractual recovery
of funds to which defendant is not entitled. Defend-
ant was under no duty to make the reserve deposits
profitable for borrowers, but it was not empowered
to derive a profit from them for itself. Since it has
done so, we have determined that borrowers are en-
titled to the sums so earned. Ordering an accounting
on earnings from the deposits at pass book rates is
a method of determining the extent of the profits as |
closely as possible. We conclude it is the appropriate
measure of recovery in this case.

Defendant also contends that the trial court erred
in failing to terminate defendant’s duty to account
to members of the class upon the adoption of an

22 Plaintiff’s cross-appeal asks only that the legal rate
of interest be assessed. It does not ask that an attempt be
made to compute the actual profit.

23 Bogert, The Law of Trusts and Trustees § 863 (2d ed
1962) ; Restatement (Second) of Trusts § 207(1).

64

amended regulation effective June 16, 1975. The reg-
ulation, 12 C.F.R. § 545.6-11(c) is:

“Payment of interest on escrow accounts. A
Federal association which makes a loan on or aft-
er June 16, 1975 on the security of a single-family
dwelling occupied or to be occupied by the bor-
rower (except such a loan for which a bona fide
commitment was made before that date) shall pay
interest on any escrow account maintained in
connection with such a loan (1) if there is in ef-
fect a specific statutory provision or provisions
of the State in which such dwelling is located by
or under which State-chartered savings and loan
associations, mutual savings banks and similar
institutions are generally required to pay inter-
est on such escrow accounts, and (2) at not less
than the rate required to be paid by such State-
chartered institutions but not to exceed the rate
being paid by the Federal association in its regu-
lar accounts (as defined in § 526.1 of this chap-
ter). Except as provided by contract, a Federal
association shall have no obligation to pay inter-
est on escrow accounts apart from the duties im-
posed by this paragraph.” (Emphasis added. )

It would have been helpful if even one writing in
this case were not ambiguous. The regulation is ob-
viously so. It says that federal associations shall pay
“interest” on deposits (1) where it contracts to do
so and (2) where the deposits resulted from loans
made after June 16, 1975, if state law requires state
associations so to pay;?* there is no obligation to pay

24 See ORS 86.245 enacted Oregon Laws 1975, ch. 337, § 8.

65

interest on deposits other than those enumerated.

The first ambiguity is whether the Board intend-
ed to encompass income produced from the deposits or
only interest. These are not the same. The borrowers’
claim is one for income—not interest. Plaintiff ar-
gues the borrowers are entitled to interest in lieu of
being able to compute the income accurately, but this
does not alter the nature of their claim from one for
income. Plaintiff contends that the regulation, since
‘¢ mentions only interest, is not applicable to the bor-
rowers’ claims. It is our conclusion that it was the
intent of the Board to include all payments which a
federal association might be required to make. When
it made the regulation the Board was undoubtedly
looking at the adjudicated cases which speak mostly
in terms of interest from the use of the money rather
than of income, although the latter is what is actually
involved. The regulation would not be too helpful in
solving the problems to which it is obviously addressed
if it were limited as borrowers suggest.

The second ambiguity is whether the language “no
obligation to pay” in the last sentence of the regula-
tion refers to deposits made as the result of all loans
or of only those loans made after June 16, 1975. Was
the provision intended to terminate any obligation
to pay which resulted from loans made prior to the
effective date of the amendment “except as provided
by contract”? By the literal terms of the last sen-
tence it does, and we believe this is what was intend-
ed. The entire thrust of the regulation seems to be to

66

lay to rest the obligations of federal associations to
pay for the use of deposits except in enumerated in-
stances, and this could be accomplished only by the
construction we adopt. Any other construction would
permit the problem to linger on for the life of the
most recent loan made prior to the effective date of
the regulation.

The third ambiguity, as the regulation applies to
the facts of this case, revolves around what is in-
tended by the use of the term “contract” in the ex-
cerpt, “Except as provided by contract a Federal as-
sociation shall have no obligation to pay .. . .” Is de-
fendant’s obligation to pay, as required by this opin-
ion, an obligation “provided by contract” so that it
continues in existence after the adoption of the June
16, 1975, regulation? Defendant’s obligation to pay in
this case arose out of a contractual arrangement be-
tween it and its borrowers, but it did not arise out of
an express or implied agreement. The duty was im-
posed by law from the circumstances of the transac-
tion. Undoubtedly it was the uncommunicated inten-
dion of defendant not to pay. We think that it is more
probable than not that the Board contemplated a
knowing, intentional agreement by which a federal
association obligated itself to pay. It would appear
that the Board, by the provision, intended to allow
the associations to pay interest if they desired. This
option was probably granted for the purpose of al-
lowing them to compete for business, if necessary.
If such was the case, it would mean that the Board

67

had in mind an intentional agreement to pay on the
part of the associations.

We therefore conclude the trial judge was in error
in not terminating defendant’s obligation to pay in-
terest on all accounts as of June 16, 1975.

It is next contended by defendant that the claims
of members of the class are barred by laches and
waiver. The rule concerning laches is stated in Ste-
phan Vv. Equitable S. & L. Ass’n., 268 Or. 544, 569,
522 P.2d 478 (1974):

“In order to constitute laches there must have
been full knowledge of all of the facts, concurring
with a delay for an unreasonable length of time,
and laches does not start to run until such knowl-
edge is shown to exist. Wills v. Nehalem Coal
Co., 52 Or 70, 89, 96 P 528 (1908); Kelly v.
Tracy, 209 Or 153, 172, 305 P2d 411 (1956). In
addition, the delay must result in substantial
prejudice to the defendant to the extent that it
would be inequitable to afford the relief sought
against the party asserting laches as a defense.
Dahlhammerand Roelfs v. Schneider Exec., 197
Or 478, 498, 252 P2d 807 (1953); Hanns Vv.
Hanns, 246 Or 282, 305, 423 P2d 499 (1967).
Thus, the doctrine of laches is not an inflexible
rule, but its application depends upon the particu-
lar circumstances of each case.....

Defendant argues that class members have always
been on notice that defendant does not pay for the use
of the money in deposits because they received a no-
tice each year showing all transactions in their ac-

68

_ counts and no interest was included. Laches require
full knowledge and there is no evidence that the
members of the class were aware that defendant was
using the deposits for its own purposes during the
period of accumulation.

In addition, it is difficult to discern the prejudice
to defendant. It is in the business of borrowing money
from depositors at pass book rates and of loaning it
to others. Under the trial court’s decree it only has
to account at simple pass book rates. As a result de-
fendant had more money to loan at its usual cost.
Defendant claims the cost of maintaining an account
for a pass book depositor and that of maintaining a
reserve account for taxes or insurance premiums are
not comparable. There is no evidence whether they are

or not; but the facts are, obviously, within the knowl-
edge of defendant alone.

Defendant’s defense of waiver is subject to the
same deficiency. A waiver can be made only with full
knowledge, and there is no evidence that members
of the class were aware of defendant’s use of the de-
posits for its own purposes during the period of ac-
cumulation.

Another of defendant’s contentions is that because
it is a mutual association, the burden of accounting
will not fall on those who received earnings derived
from the use of past deposits, which are in question
here, but will fall upon present pass book depositors.
Theoretically, this sounds fine; but if carried to its
logical conclusion, it would result in defendant’s be-

69

ing free of all claims for past obligations in that pres-
ent, and not past, investors would have to pay for
past obligations. We therefore ignore this contention.

Defendant says that Derenco, Inc., is not a proper
representative of the plaintiff class since its claims
are not “typical” of the class and that the case should
therefore not be allowed to proceed as a class action.
It would appear that Derenco has no claim for the
use by defendant of an insurance premium deposit.
However, the claims arising out of deposits for taxes
and deposits for insurance premiums are sufficiently
similar, in our opinion, that, for litigation purposes,
a claim for taxes is typical of one for insurance, and
that Derenco, Inc., is sufficiently representative of
the class to protee both fairly and adequately the
interests of all members of the class and is not dis-
qualifiea from representing both groups of claims.
ORS 18.220(1)(c) and (d).?°

Defendant argues particularly that Derenco, Inc.’s,
claims are not typical of those of the class because
three different security instruments are involved.
Plaintiff, obviously, could have used only one in se-
curing its loan. Because we have found that the un-

25 ““(1) One or more members of a class may sue or be
sued as representative parties on behalf of all only if:

“(c) the claims or defenses of the representative par-
ties are typical of the claims or defenses of the class; and

“(d) the representative parties will fairly and ade-
quately protect the interests of the class; and

70

derlying bases for the claims are the same as to all
security instruments under which borrowers are al-
lowed by this opinion to recover, we hold that no im-
pediment to class treatment exists.

Defendant vigorously contends that the situation
is not a proper one for certification of a class action
because questions of law and fact common to the
members of the class do not predominate over ques-
tions affecting individual members. This contention
is based upon the following statutory language of
ORS 13.220(2(c), which provides that a class action
may be certified only if

“. . . [t]he court finds that the questions of
law or fact common to the members of the class
predominate over any questions affecting only
individual members . . . . Common questions of
law or fact shall not be deemed to predominate
over questions affecting only individual members
if the court finds it likely that final determina-
tion of the action will require separate adjudica-
tions of the claims of numerous members of the
class, unless the separate adjudications relate
primarily to the calculation of damages.” (Em-
phasis added. )

Defendant raises several arguments intended to
establish the likelihood of a need for separate adjudi-
cations of the claims of numerous members of the
plaintiff class. It is our opinion that none of those
points pose a bar to certification within the meaning
of the statute.

71

It is first argued that the difference in the word-
ing of the conventional mortgage form used since
1972 presents a need for numerous separate adjudi-
cations. We find this claim without merit. The reason
for our conclusion is that the language change does
not lead to a need for nwmerous separate adjudica-
tions because we have ruled as a matter of law that
defendant owes no responsibility to any borrowers
under this form.

Defendant next argues that the proffered defenses
of laches and waiver present individual questions pre-
venting certification of the class. As we have already
indicated, the evidence offered in support of these
defenses is insufficient in that it fails to show that
members of the class had the full knowledge of their
rights required as an element of either defense. This
lack of knowledge is further discussed in our subse-
quent treatment of what we consider to be the prin-
cipal thrust of defendant’s position.

Defendant’s basic position arises from the borrow-
ers’ claims being the outgrowth of a contractual re-
lationship. The relationship between each borrower
and defendant could vary according to what each
borrower knew concerning defendant’s practice of
using the deposits. Borrowers who, at the time of bor-
rowing the money, knew of defendant’s use would be
bound by their knowledge. It is plaintiff’s burden to
demonstrate that it is not “likely” that separate ad-
judications will be required to resolve this issue in
“numerous” instances.

72

In Bernard v. First Nat’l. Bank, 275 Or. 145, 550
P.2d 1203 (1976), we considered a similar problem
concerning the knowledge of borrowers of the custom
of banks in charging interest. Based upon the evidence
in that case we held that the probabilities were that
sufficiently numerous members of the class had
knowledge of the banks’ method of charging interest
to justify an individual inquiry in each case and that
the situation was therefore inappropriate for a class
action. We said, 275 Or. at 157-59:

“This brings us to the principal question in
the case. Is it ‘likely’ that final determination
will require as to ‘numerous’ claims a separate
adjudication of each claimant’s knowledge of the
banks’ method of computing interest? If a claim-
ant had knowledge at the time he secured his loan
that the bank was intending to compute interest
thereon by the 365/360 method, or if he had in-
formation which would put him on inquiry as to
the method of computation, he would not be en-
titled to recover, because computation by the 365/
360 basis would be a term of the contract with
respect to such borrowers.

“If plaintiffs have presented a case which is
otherwise proper for a class action, it would be
unreasonable to construe the statute to mean that
defendants can automatically prevent such an ac-
tion from proceeding by dreaming up a theoret-
ical defense requiring individual inquiries, for
which there is little basis in fact. The language
of the statute, ‘. . . if the court finds it likely
that final determination . . . will require sep-

73

arate adjudications of the claims of numerous
members of the class,’ indicates that the legisla-
ture intended that the court, in ruling whether it
is proper to proceed with any class action, has the
obligation to decide if a defendant is pressing an
issue or a defense which possesses sufficient basis
and substance to justify its litigation in ‘numer-
ous’ instances or merely an issue or defense
which is being presented for the sole purpnse of
avoiding a class action. ....

“On the other hand, if, at the time the court
must first rule on whether the case may proceed
as a class action, it appears probable that an
issue or a defense which requires a separate ad-
judication as to each claim does have substance
in enough instances to justify the defendants’
asserting it, we believe the legislature intended
that the case should not proceed as a class action.
To hold that a case may proceed as a class action
when there appears to be a legitimate issue or
defense which will require an individual inquiry
of a considerable number of the claimants would
attribute to the legislature an intention either to
overload the courts with an unmanageable pro-
ceeding or to deprive the defendants of valuable .
procedural and substaritive rights by preventing
them from asserting what appears to be a bona
fide defense. .... “

In our prior discussion in this opinion of the
borrowers’ knowledge of custom, we referred to the
testimony of defendant’s loan officer concerning the
frequency of inquiries by borrowers about earnings
from the deposits, which testimony indicated that the

74

instances in which the question of the use of the
money even occurred to borrowers were isolated and
infrequent. Also, we draw the inference from the
documents which borrowers were required to execute
and from the testimony that borrowers were not told
of defendant’s use of the money.

In addition, we have a different situation here
than we did in Bernard. The class in the instant case
is made up of homeowners, whereas Bernard dealt
with a class of “commercial” loan borrowers. Al-
though the loans in that case were not all strictly
commercial (in fact, the majority of them were not),
nevertheless, the evidence indicated there were a sub-
stantial number of such borrowers who, it was rea-
sonable to assume, likely would have had knowledge
of the banks’ method of charging interest. We con-
clude from the evidence in this case that the contrary
is true concerning the knowledge of members of the
class about defendant’s use of the deposits for its own
benefit. As is indicated from a previous quotation
from Scott on Trusts, it is probable that few borrow-
ers ever thought of the matter at all, and it is reason-
ably certain that “numerous” of their numbers were
not told about it.

It would be difficult to imagine a situation in
which the circumstances surrounding separate con-
tracts were more likely to be the same as they are in
the present case. We have a uniform class of borrow-
ers who were submitted an identical (insofar as ma-
terial here) adhesion contract under strictly regi-

75

mented procedures. The only unknown factor is the
knowledge of each borrower concerning the use of
the deposits by defendant for its own purposes. It is
our conclusion that the proof here indicates that it is
“unlikely” that “numerous” members of the class
possessed such knowledge or that the subject of the
beneficial interest in the funds even occurred to them.
It is therefore proper that this proceeding continue
as a class action. In answer to the possible argument
that no claims arising out of separate contractual
situations are proper for class action treatment, we
acknowledge that there is no doubt they present spe-
cial problems. However, had it been the intention of
the legislature to exclude contractual situations from
class action relief, we believe it would have said so.
We doubt that a situation otherwise suitable for a
class action will ever be found where there is a
greater probability of identity of separate contractual
circumstances than that which exists in this case.

The decree requiring defendant to account is af-
firmed as modified, and the case is remanded to the
trial court for an accounting in conformance with
this opinion.

76
APPENDIX B

JUDGMENT OF THE OREGON SUPREME COURT

STATE OF OREGON
SUPREME COURT

DERENCO, INC., a Nevada )
corporation )

Respondent-Cross-A ppellant) prose we
V.
BENJAMIN FRANKLIN ) MULTNOMAH
SAVINGS ANDLOAN __) County
ASSOCIATION, a ) No. 404 741
corporation, ) SC 24467
Appellant-Cross-Respondent, )

This cause having come on to be heard on appeal
and having been duly submitted and considered;

IT IS HEREBY ADJUDGED and ORDERED that
the decision entered below in this cause requiring de-
fendant to account is affirmed as modified in the opin-
ion and order of the court entered MARCH 21, 1978.

ISSUED at Salem, Oregon: May 11, 1978.

77
APPENDIX C

Article VI, Constitution of the United States:

“This Constitution, and the Laws of the
United States which shall be made in Pursuance
thereof; and all Treaties made, or which shall
be made, under the Authority of the United
States, shall be the supreme Law of the Land;
and the Judges in every State shall be bound
thereby, any Thing in the Constitution or Laws
of any State to the Contrary notwithstanding.”

Ch. 64, § 5(a), 48 Stat. 132, 12 U.S.C. § 1464(a):

“In order to provide local mutual thrift in-
stitutions in which people may invest their funds
and in order to provide for the financing of
homes, the board is authorized, under such rules
and regulations as i

[Text truncated at 120,000 characters. The full text is on the page linked above.]

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1078%3A1. Public record. Not legal advice.