Petition — Prudential Federal Savings & Loan Ass'n v. Madsen

Otfice Supreme Court, 1S

DAE

70-1700 8§=|"'

APK 13 (981

we ALEXAND..< & STEVAS,

oe

SUPREME COURT OF THE UNITED say

OCTOBER TERM 1980

RICHARD MADSEN and

NANCY MADSEN, his

wife, for themselves

and all others

Similarly situated,

Respondents,

VS.

PRUDENTIAL FEDERAL SAVINGS & LOAN

ASSOCIATION, for itself and all

others similarly situated,

Petitioner,

UTAH BANKERS ASSOCIATION,

Intervenor,

PRUDENTIAL FEDERAL SAVINGS &

LOAN ASSOCIATION,

Petitioner,

vs.

RICHARD MADSEN and NANCY MADSEN,

Respondents.

ON WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

Joseph J. Palmer, and

Reid E. Lewis, of

MOYLE & DRAPER

600 Deseret Plaza

Salt Lake City, Utah 84111

Attorneys for Petitioner

QUESTIONS PRESENTED FOR REVIEW

(1) Does an action against a federally

chartered savings and loan association,

framed as a state common law claim for

earnings on a mortgage reserve account,

present federal question jurisdiction and

is it, therefore, removable on the basis:

a. that a regulation (12 C.F.R.

§545.6-ll(c)) adopted by the Fed-

eral Home Loan Bank Board, under

the authority of the Home Owner's

Loan Act of 1933, expressly pre-

empted all state law bearing on

the payment of earnings on the

mortgage reserve accounts; or,

b. that adjudication of the ac-

tion requires the application and

interpretation of the regulation,

and the analysis can only be done

under federal commun law.

(2) Does a federal declaratory suit,

brought by a federally chartered savings

and loan association under 29 U.S.C.

§§2201 et seq., demonstrate a present and

actual controversy, and thereby convey

original jurisdiction on the district

court, when it pleads, among other items,

a claim that the declaratory defendants

demand the payment of earnings on their

mortgage reserve account with the associa-

tion and that the association is not re-

quired to pay earnings by virtue of a re-

gulation (12 C.F.R. §545.6-ll(c)) adopted

by the Federal Home Loan Bank Board.

(ii)

LIST OF PARTIES TO PROCEEDINGS IN

COURT OF APPEALS

The following were parties to the

proceeding in the United States Court of

Appeals for the Tenth Circuit:

Richard Madsen

Nancy Madsen

Prudential Federal Savings &

Loan Association!

Utah Bankers Association

The Honorable Aldon J.

Ander son2

Federal Home Loan Bank Board

lpursuant to Rule 28.1 of the Rules

of the Supreme Court of the United States,

Prudential Federal Savings & Loan Associa-

tion represents that it does not have any

parent companies or affiliates, but it

does have two subsidiaries known as Wa-

satch Management Company and Prudential

Service Corporation, and the latter entity

has a subsidiary known as Olympus Capital

Corporation.

2Judge Aldon J. Anderson was a party

to the proceeding in the Court of Ap-

peals. Prudential Federal Savings & Loan

Association represents that it has filed a

notice with the Clerk of this Court, pur-

Suant to Rule 19.6 of the Rules of the

Supreme Court of the United States, which

reflects Prudential's belief that Judge

Anderson does not have an interest in the

outcome of the petition for certiorari.

(iii)

TABLE OF CONTENTS

Official Reports of Opinions

in Courts Below... « «© see 6 so 6

Jurisdiction

Constitutional Provisions, Statutes

and Regulations Involved .....

Statement of the Case . «6 «+ 6 6

Ae

Factual Basis and

Procedural History

OF Che CHee < ss“

Basis for Federal Juris-

diction of the District

eg ee a

A. Removal Juris-

Gieesen sé 3

(i) Preemption

(ii) Federal

Common Law...

B. Declaratory Judgment

Jurisdiction. .

Reasons for Allowance of the Writ .

Re

The Court of Appeals

Incorrectly Held that

Federal Preemption

Does Not Give Rise to

Removal Jurisdiction

The Court of Appeals

Incorrectly Held that

(iv)

Page

34

Page

the Need to Apply Fed-

eral Common Law to the

Bank Board's Regulation

Does Not Give Rise to

Removai Jurisdiction . 34

3. The Court of Appeals

Incorrectly Held that

All Issues in Pruden-

tial's Declaratory

Judgment Action were

Defensive and Could

Not, Therefore, Convey

Federal Jurisdiction . 44

Contents of Appendix .....+4... 61

Conclusion . . ° + . ° . . . . . . * 62

(v)

TABLE OF AUTHORITIES

Page

Avco Corp. v. Aero Lodge No. 735,

263 F.Supp. 177 (M.D. Tenn. 1966),

aff'd, 376 F.2d 337 (6th Cir. 1967),

att*a, 390 U.S. S57 (1968) . +6 w-« +s

Ashley v. Southwestern Bell Tele-

Phone Co., 410 F.Supp. 1389 (W.D.Tex.

1976) ° . . . * ° o . . s s . * . . .

Bailey v. First Federal Savings &

Loan Assn. of Ottawa, 467 F.Supp. 23,

cae eee 2ees SET) es ee ee «SS

Banco Nacional de Cuba vy. Sabbatino,

(bs SSE ll’) ee

Brooks v. Valley National Bank

("Brooks I"), 24 Ariz. App. 484, 539

P.2d 958 (1975) ° . a e ° ° . ° ° . ° 8

Brooks vy. Valley National Bank

("Brooks II"), 113 Ariz. 169, 548

eG i a Cg, Oe

Cale v. American Nat'l Bank, 370

Ohio Misc. 56 (1973) a Eee :

a

Carpenter v. Suffolk Franklin Sav.

Bank, 346 N.E.2d 892 (Mass. 1976)

gi ee & ee Pe er eee ee

City Federal Savings and Loan Assn.

vy. Crowley, 393 F.Supp. 644 (E.D.

Wis. 1975) o ° . o J -_ o . = . o oo . 23

City of New Orleans v. United Gas

Pipe Line Co., 390 F.Supp. 861,

Pecans BOeEts 6 ak wk se ee ele eee

(vi)

Page

Community Federal Savings & Loan

Assn. of Independence, Mo. v.

Fields, 128 F.2d 705 (8th Cir. 1942)

° = . ° ° . ° e . ° ° ° e . ° ° . 23

Conference of Federal Savings & Loan

Associations v. Stein, 604 F. 2d r+

1256 (9th Cir. 1979), aff'd, 445 33,

oe Pee > ee: ee a ce ee a ae 57

Durkee v. Franklin Savings Assn., 17

Ill. App. 3d 978, 309 N.E. 2d 118

fete). 2s aos es 4 ee 8 a eee 8

Fay v. American Cystoscope Makers,

56 F. Supp. 276 (S.DeNeXe LOSL) « 2 44

Federal Savings & Loan Ins. Corp. v.

Third National Bank in Nashville,

i53 F.2a4 678 (6th Cir.), cert.

Genied, 329 U.S. 7iB (1946) . . « « « 23

Federal Savings and Loan Ins. Corp.

v. Kearney Trust Co., 151 F.2d 720

(8th ak TP 1945) @ e . ° o . a es ° s . 23

First Federal Savings & Loan Assn. 23,

of Boston v. Greenwald, 591 F.2d 417 33%

[a0G Gals BOTS) 2 se eee eR Si

First Federal Savings & Loan Assn.

of Jackson County v. First Federal

Savings & Loan Assn. of Huntsville,

446 F.Supp. 210 (N.D.Ala.1978); .. . 43

Gardner v. Clark Oil & Refining

Corp., 383 F.Supp. 151 (E.D.Wis.

1974) .. . 43

Gibson v. First Federal Savings and

Loan Assn., 364 F.Supp. 614 (E.D.

Mich. 1973), aff'd, 504 F.2d 826 8,

(Gtn Cit. 3974) « 2 ew es we 6 tet we we

(vii)

Glendale Federal Savings & Loan

Assn. vy. Fox, 459 F.Supp. 903 (C.D.

i. SOR 6 ak ee le ee ae |e

Goldman v. First Federal Savings &

Loan Assn. of Wilmette, 518 F.2d

1247 (7th oi 1975) . * . . . « . . 23

Gully v. First National Bank, 299

eS 109 (1936) * . . 2 o . . . . © ° 18

Hayes v. C. Schmidt & Sons, 374

Fim. Gee eels FAs LETS) «6 se 6 'e 43

Illinois v. City of Milwaukee, 406 25,32,

U.S. 91 (1972). ° ° ° e . 7 ° . ° . . 44,48

Ingrahm Co. v. Local 260, 171 F.

Supp. 103 (D. Comm. 1959). ...s » 44

Johnson yv. First Federal Savings &

Loan Assn., 418 F.Supp. 1196 (1976)

* * e oe ° J es * s . J . J 46

Kinee yv. Abraham Lincoln Federal

Savings & Loan Assn., 365 F.Supp.

2 Bam. 2s > eR ee 9

Kronisch v. Howard Savings

Institution, 161 N.J. Super 592, 392

Bene ate Sere) 6 8 ee 8 ee

Madsen v. Prudential Federal Savings

& Loan Association, 558 P.2d 1337

ee See Ss 6 ee we ee ee a ROO

Madsen v. Prudential Federal savings

& Loan Assn., 635 F.2d 797 (10th

Cir. 1960). 2. 2 2 ee ee ew ewes 2

Manchester Gardens, Inc. v. Great

West Life Assurance Co., 205 F.2d

oy Pg re 8

(viii)

Page

Meyers v. Beverly Hills Federal

Savings & Loan Assn., 499 F.2d 1145 | 23,

(StR CLE. Seren @ © Bele 8 «© ee oo 25

Minkoff v. Scranton Frocks, Inc.,

172 F.Supp. 870 (S.D.N.Y. 1959). .

44

Murphy v. Colonial Federal Savings

and Loan Assn., 388 F.2d 609 (2d Cir. 23,

1967) o . ° . . ° ° e . ° . ° ° ° 7 . 30

New York v. Local 144, Hotel

Services Union, 410 F.Supp. 225

(S.D.N.Y. 1976); se — * oe 7 ° e oo * * 43

North American Phillips Corp. v.

Emery Air Freight Corp., 579 F.2d

229 (20 CBEs Geren we es oe ow we ew ew 25

People v. Coast Federal Sav. & Loan

Assn., 98 F.Supp. 311 (S.D. Cal.

1951) ° ° ° ° ° e ° . ° e ° . . 7 . 23

Petherbridge yv. Prudential Savings &

Loan Assn., 79 Cal. App. 3d 509

(1978) ° . . * . . . . ° ° . . o e ° 9

Public Service Commission of Utah yv.

Wycoff Co., 344 U.S. 237 (1952) ... 50

Rettig v. Arlington Heights Federal

Savings & Loan Assn., 405 F.Supp. 23,

S19 (N.D. Tii. L975). 2 2 «© © © 2 © 43

Richman v. Security Savings & Loan

Assn., 57 Wis. 2d 358, 204 N.W. 2d

SLi CES ais es Bee ee ee 8 le lw 8

Stavrides v. Mellon National Bank,

353 F. Supp. 1072 (W.D. Pa. 1973),

aff'd 487 F.2d 953 (3d Cir. 1973)... 8

(ix)

Page

Surrey Strathmore Corp. v. Dollar

Savings Bank of New York, 36 N.Y. 2d

173, 366 N.Y.S. 2d 107, 325 N.E. 2d

S27 (a0re)) See eee eee ee ee 8

Sylgab Steel & Wire Corp. v.

Strickland Transportation Co., 270

F.Supp. 264 (E.D.N.Y¥Y. 1967) .~. . « « -« 43

Teamsters Local 116 v. Fargo-Moor-

head Automobile Dealers Assn. 459

.SGR8. S58 (Osos, £908) 6 6 ee 43

Tierney v. Whitestone Sav. & Loan

Assn., 83 Misc. 2d 855, 373 N.Y.S.

me tae CASTS 6 6 6 sk * 6 Se ee 9

Tucker v. Pulaski Fed. Sav. & Loan

Assn., 481 S.W.2d 725 (Ark. 1972) .. 9

Ulichny v. General Electric Co., 309

F.Supp. 437 (N.D.N.Y. 1970) 43

Umdenstock v. American Mortgage &

Investment Co., 363 F.Supp. 1375

(W.D. Ok. 19 3) s . . _ . s _ . . * 7. 8

Yudkin v. Avery Fed. Sav. & Loan

Assn., 507 S.W. 2d 689 (Ky.App.

LOTS) 0 6 Ss 60) eee Ue ee ee ce 8

Zelickman v. Bell Federal Savings

and Loan Assn., 1 Ill. App. 3d 621,

21S Woes 26 ome UAOTiSs % St 4S eS 8

(x)

TABLE OF STATUTES

Page

U.S. Constitution, art. VI, cl. 2. 2

a2 U.S.C. § 1437(B) « 6 6 0 0 6 8 21

52° G00. L008 Ot Gee. 6 x 8 ks 21

Se wemeee 8 2EORtRT © & ee ee se +!) RG

20 Uae 8 TESA(1) 2. 2. ws ee 2

oe Usewts G EAST CH): ss ee 8) wie 3,17

28 U.S.C. § BSG2 1G) 4 0 -e © ) % 8 : Pe

20 0.8.0; 96 2201 et sees i -.-ss. 392533

Utah Code Ann. (1953), § 7-7-5(a) (3)

a . . . . * . . ° . . . . . o . . . 26

Utah Code Ann. (1953), §8§ 7-17 et

seg . _ oo . . _ . - . — 7 > 7. - + . 26

TABLE OF RULES AND REGULATIONS

~

12 CeF eRe § 545.6-11 . ° . . . + . . S,iZ¢h30

26 ,51,53

TABLE OF OTHER AUTHORITIES

Annot., 50 A.L.R.3d 697 (1973) ae 8

Annot., 31 L. Ed. 2d 1006 (1973) . 48

1A J. Moore's Federal Practice,

Seenee. Cae O68. E900). os & 6s se. &- 20

1A J. Moore Federal Practice 40.168

fou@Gs €26 66. EGGG) 2 6 «2 6 6 4% 19

(xi)

Page

40 Fed. Reg. 20942, May 14, 1975... 29

Wright, Miller and Cooper, Federal

Practice and Procedure: Jurisdiction

S-Syae teerer <.«.6's «6 + & «& @ « < 19

(xii)

a

OFFICIAL REPORTS OF OPINIONS

IN COURTS BELOW

This action was originally com-

menced in the Third Judicial District

Court for Salt Lake County, State of

Utah. Summary judgment was granted in

favor of Prudential Federal Savings & Loan

Association, and the Supreme Court of Utah

reversed and remanded for further pro-

ceedings. The Supreme Court's opinion is

reported at Madsen v. Prudential Federal

Savings & Loan Assn., 558 P.2d 1336 (Utah

1977).

The action was later removed to

the United States District Court for the

District of Utah, Central Division. The

District Court, in an unpublished opinion,

rendered judgment in favor of Prudential

Federal Savings & Loan Association. The

United States Court of Appeals for the

Tenth Circuit reversed, holding there was

no federal jurisdiction. The opinion of

the Court of Appeals is reported at Madsen

vy. Prudential Federal Savings & Loan Assn.,

635 F.2d 797 (10th Cir. 1980).

JURISDICTION

The judgment of the United States

Court of Appeals for the Tenth Circuit was

entered December 3, 1980. Prudential

filed a Petition for Rehearing, which was

denied by the Court in an order dated Jan-

vary 23, 1981. Title 28 U.S.C. § 1254(1)

confers jurisdiction on this Court to re-

view the judgment by writ of certiorari.

CONSTITUTIONAL PROVISIONS, STATUTES

AND REGULATIONS INVOLVED

The case involves Article VI,

Clause 2 (the Supremacy Clause) of the

Constitution of the United States. It

provides:

This Constitution, and the

Laws of the United States which

shall be made in Pursuance

= ee

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.

Two statutes are invwelved. The

first is 28 U.S.C. § 144l(a) (1973 and

Supp. 1980). It provides:

(a) Except as otherwise

expressly provided by Act of Con-

gress, any civil action brought

in a State court of which the

district courts of the United

States have original juris-

diction, may be removed by the

defendant or the defendants, to

the district court of the United

States for the district and divi-

sion embracing the place where

such action is pending.

The second statute is 28 U.S.C. § 1337 (a)

(Supp. 1980). It provides:

(a) The district courts

shall have original jurisdiction

of any civil action or proceeding

arising under any Act of Congress

regulating commerce or protecting

trade and commerce against re-

straints and monopolies: Provid-

ed, however, That the district

courts shall have original juris-

diction of an action brought un-

der section 20(11) of part I of

the Interstate Commerce Act (49

U.S.C. 20(11)) or section 219 of

part II of such Act (49 U.S.C

319), only if the matter in con-

troversy for each receipt or bill

of lading exceeds $10,000, exclu-

sive of interest and costs. (Ita-

lics in original).

The case involves one regulation

of the Federal Home Loan Bank Board. The

pertinent portion of the regulation, 12

C.F.R. § 545.6-11 (c), provides:

(c) Payment of interest on

escrow accounts. A Federal asso-

ciation which makes a loan on or

after June 16, 1975 on the secur-

ity of a single-family dwelling

occupied or to be occupied by the

borrower (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

effect a specific statutory pro-

vision 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 re-

quired to pay interest on such

escrow accounts, and (2) at not

less than the rate required to be

~~

paid by such State-chartered in-

stitutions but not to exceed the

rate being paid by the Federal

association in its regular ac-

counts (as defined in § 526.1 of

this chapter). Except as pro-

vided by contract, a Federal as-

sociation shall have no obliga-

tion to pay interest on escrow

accounts apart from the duties

imposed by this paragraph.

(Italics in original).

STATEMENT OF THE CASE

a Factual Basis and Procedural

History of the Case.

On September 21, 1964, Richard

Madsen and his wife, Nancy (the "Mad-

sens") borrowed money from Prudential Fed-

eral Savings & Loan Association ("Pruden-

tial") to purchase a home in Salt Lake

County, Utah. Pursuant to the loan, the

Madsens signed a trust deed which required

them to pay, together with the monthly

payment of principal and interest, one-

twelfth of the estimated annual taxes and

insurance premiums on the mortgaged pro-

perty. The funds were accumulated in a

"reserve or escrow account" and were used

annually for the payment of taxes and in-

~

Surance. Under the trust deed, the funds

were also designated as additional

security for repayment of the loan.3

3The trust deed provided:

A. To protect the security of the

deed of trust, TRUSTOR agrees:

2. To keep the buildings ... in-

sured against loss by fire

+ « e, and to pay the premiums therefore

promptly when due... ..

3. To pay before delinquent all

taxes and assessments affecting said pro-

DOETY «6 + es

In addition to the monthly payments as

provided in said note, the TRUSTOR agrees

to pay to the BENEFICIARY, upon the same

day each month, budget payments estimated

to equal one-twelfth of the annual taxes

and insurance premiums; said budget pay-

ments to be adjusted from time to time as

required, and said budget payments are

hereby pledged to the BENEFICIARY as addi-

tional security for the full performance

of this deed of trust and the note secured

hereby. The budget payments so accumu-

lated may be withdrawn by the BENEFICIARY

for the payment of taxes or insurance pre-

miums due on the premises. The BENEFICI-

ARY may at any time, without notice, apply

said budget payments to the payment of any

sums due under the terms of this deed of

trust and the note secured hereby or ei-

ther of them. MTRUSTOR'S failure to pay

said budget payments shall constitute a

default under this trust.

on

On February 27, 1975, the Mad-

sens* filed a class action against Pru-

dential, as the sole defendant, in the

Third Judicial District Court for Salt

Lake County, Utah. The class action was

brought on behalf of a plaintiff class

composed of all Prudential's mortgagors

who had trust deeds "similar or identical"

to the Madsens'. The complaint alleged

Prudential had breached the trust deed

agreements by not paying interest on the

reserve accounts; alternatively, it al-

leged Prudential was unjustly enriched

through use of the reserve funds and it

prayed for the reasonable value of the

benefit received by Prudential. The com-

plaint did not seek relief for future

reserve payments.

4mhe complaint of February 27, 1975,

named only Richard Madsen as plaintiff.

The amended complaint filed April 10,

1975, merely joined his wife, Nancy.

Prudential moved for summary

judgment. It contended that the great

majority of courts, on similar facts, had

expressly held, on either a motion to

dismiss the complaint or on summary

judgment, that the lender, as a matter of

law, has no obligation to account or pay

earnings on the reserve funds.°2 In

9Gibson v. First Federal Savings and

Loan Association, 364 F. Supp. 614 (E.D.

Mich. 1973), aff'd, 504 F.2d 826 (6th Cir.

1974); Stavrides v. Mellon National Bank,

353 F.Supp. 1072 (W.D. Pa. 1973), aff'd,

487 F.2d (3d Cir. 1973); Manchester Gar-

dens, Inc. v. Great West Life Assurance

Co., 205 F.2d 872 (D.C. Cir. 1953); Umden-

stock v. American Mortgage & Investment

Co., 363 F.Supp. 1375 (W.D. Ok. 1973);

Zelickman v. Bell Federal Savings and Loan

Assn., 1 I1l1.App. 3d 621, 275 N.E. 2d 300

(1971); Brooks v. Valley National Bank

("Brooks I"), 24 Ariz. Apo. 484, 539 P.2d

958 (1975), vacated, Brooks v. Valley Na-

tional Bank ("Brooks II"), 113 Ariz. 169,

548 P.2d 1166 (1976); Surrey Strathmore

Corp. v. Dollar Savings Bank of New York,

36 Hiete 26 173, 366 B.keS. 24 107, 325

N.E. 2d 527 (1975); Richman v. Security

Savings & Loan Assn., 57 Wis. 2d 358, 204

N.W. 2d 511 (1973); Durkee v. Franklin

Savings Assn., 17 Ill. App. 3d 978, 309

N.E. 2d 118 (1974); Yudkin v. Avery Fed.

Sav. & Loan Assn., 507 S.W. 2d 689

(Ky.App. 1974); Annot., 50 A.L.R. 3d 697

(1973).

other cases, the borrowers were unsuc-

cessful on such theories as breach of

contract, breach of trust, unjust enrich-

ment, fraud, truth-in-lending, antitrust,

pledgor-pledgee or agency.°

In March, 1976, the state dis-

trict court granted Prudential's motion

for summary judgment. The Supreme Court

of Utah, in January 1977, reversed,’

The Court indicated that under Utah law,

the essential elements of a pledge were

6Kinee yv. Abraham Lincoln Federal

Savings & Loan Assn., 365 F.Supp. 975

(E.D.Pa. 1973); Petherbridge v. Prudential

Savings & Loan Assn., 79 Cal. App. 3d 509

(1978); Kronisch yv. Howard Savings Insti-

tution, 161 N.J. Super. 592, 392 A.2d 178

(1978); Tierney v. Whitestone Sav. & Loan

Assn., 83 Misc. 2d 855, 373 N.Y.S. 2d 724

(1975); Tucker v. Pulaski Fed. Sav. & Loan

Assn., 481 S.W.2d 725 (Ark. 1972); Cale v.

American Nat'l Bank, 370 Ohio Misc. 56

(1973); Carpenter v. Suffolk Franklin Sav.

Bank (Carpenter II), 346 N.E.2d 892 (Mass.

1976). Kronisch, Carpenter II and Brooks

II summarize recent history of the liti-

gation.

7See Madsen v. Prudential Federal

Savings & Loan Association, 558 P.2d 1337

(Utah 1977).

contained in the trust deed, and that ab-

sent an agreement to the contrary, a pled-

gee must account to the pledgor for pro-

fits earned on the pledged property. How-

ever, a review of the opinion indicates

there was a question of fact, thereby pre-

cluding summary judgment, about the exis-

tence of a pledgor-pledgee relationship

between the parties. The opinion did not

order Prudential to account. The case was

merely remanded for further proceedings.

On October 12, 1977, after re-

mand, the Madsens amended their com-

plaint. The new complaint alleged an en-

larged plaintiff class of all Utah bor-

rowers against an alleged defendant class

of all Utah mortgage lenders. It alleged

the lenders used standardized trust deeds

with language "in substance and effect"

Similar to the Madsens' trust deed. The

causes of action in the original complaint

alleging (1) breach of contract for inter-

est and (2) unjust enrichment for benefit

-10-

received from prior use of the funds, were

omitted from the second amended com-

plaint. It alleged, instead, one new

cause of action for an accounting, includ-

ing claims (1) that each member of the

defendant class should account to the bor-

rowers for “profits” earned from use of

the reserve funds; (2) that each member of

the defendant class should account to the

borrowers for the "future profits" to be

earned from use of the reserve funds; (3)

that each member of the defendant class

should pay to the borrowers the "future

profits" to be earned from use of the re-

serves; and (4) that each member of the

defendant class pursued uniform, identical

policies in administering the reserve ac-

counts.

When the Madsens amended their

complaint, Prudential promptly removed the

action to the United States District Court

for the District of Utah. It contended

that the new relief requested by the Mad-

~ i

sens arose under and was controlled by

federal law, and that the members of the

defendant class were entitled to have the

action heard in a federal court.8

8prudential contended that its remo-

val petition was timely filed. It con-

tended (i) that when the Madsens filed

their initial complaint on February 27,

1975, federal case law then held there was

no basis for federal jurisdiction over

common law claims for interest on reserve

funds; (ii) that the Federal Home Loan

Bank Board adopted a regulation (12 C.F.R.

§546.6-ll(c)) om May 9, 1975, which speci-

fically governed the terms for payment of

interest on reserve funds and, therefore,

the Madsens' voluntary amendment of their

complaint on October 12, 1977, provided

Prudential with its initial opportunity to

remove; (iii) that even if the original

complaint were removable, removal juris-

diction still existed because the Madsens,

by amending their complaint, so changed

the nature of their suit that they revised

Prudential's removal rights; (iv) that

Prudential could remove as the representa-

tive of all members of the defendant class

newly alleged in the amended complaint;

(vy) that even if the state action were

improvidently removed, the federal dis-

trict court could properly assume juris-

diction over the interest-on-escrow con-

troversy by pursuing the federal declara-

tory judgment action filed by Prudential.

The federal district court held the action

was timely removed. The Court of Appeals

did not address the issue and it is not

now before this Court.

=~ t=

Meanwhile, in April, 1977, Pru-

dential had filed a separate action for

declaratory relief in the United States

District Court for the District of Utah.

The suit sought a determination of the

rights and obligations of Prudential and

the Madsens under the trust deed. Pruden-

tial contended that due to the regulation

(12 C.F.R. §545. 6-l1l(c)) adopted by the

Federal Home Loan Bank Board (the "Bank

Board"), Prudential did not have an

obligation to pay the Madsens interest on

the reserve funds. The regulation pro-

vides:

A Federal association which

makes a loan on or after June 16,

1975, on the security of a sin-

gle-family dwelling occupied or

to be occupied by the borrower

(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

effect a specific statutory pro-

vision or provisions of the State

in which such dwelling is located

by or under which the State-

chartered savings and loans

associations, mutual savings

banks and similar institutions

a 9a

are generally required to pay

interest 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 on the

regular accounts (as defined by

Section 526.1 of this chapter).

Except as provided by contract, a

Federal association shall have no

obligation to pay interest on

escrow accounts apart from the

duties imposed by this paragraph.

(Emphasis added).

In January, 1978, the federal

district court denied the Madsens' first

motion to remand, and the Utah Bankers

Association, a trade association of com-

mercial banks domiciled in Utah, inter-

vened. In February, 1978, Prudential

moved for summary judgment in the removed

action. Shortly thereafter, the removed

action and the declaratory action were

consolidated. In September, 1978, the

Bank Board filed an amicus curae brief

urging its federal regulatory scheme ex-

clusively governs lending practices of

federal associations and that under its

_

regulation (set forth above) or under

federal common law, Prudential has no ob-

ligation to pay the Madsens compensation

on the reserve funds. On March 9, 1979,

Prudential also moved for summary judgment

in the declaratory judgment action.

On April 19, 1979, the federal

district court denied the Madsens' second

motion to remand and their motion to dis-

miss for lack of federal question juris-

diction. It granted Prudential's motions

for summary judgment in each case and, for

that reason, determined not to proceed

with the Madsens' motion to certify the

alleged plaintiff class. It granted the

Utah Bankers Association's motion to

strike the defendant class allegations.

That same day, the Madsens appealed to the

United States Court of Appeals for the

Tenth Circuit.?

9In June, 1979, the Madsens also

petitioned the Court of Appeals for a writ

of mandamus directing the Judge of the

(Footnote? Continued on page 16)

t=

On December 3, 1980, the Court of

Appeals reversed and ordered the removed

action remanded to state court and the

declaratory action dismissed. It held

there was no federal controversy disclosed

on the face of the Madsens' complaint and

that any federal question set forth in

Prudential's declaratory complaint was

defensive. Consequently, there was no

federal jurisdiction in either case.

Ze Basis for Federal Jursi-

diction of the District Court.

Prudential contends the federal

district court had jurisdiction on any one

of three bases: (1) because federal law

preempted state law in the regulation of

(Footnote? Continued from page 15)

District Court, the Honorable Aldon J.

Anderson, to remand the removed action and

to dismiss the declaratory judgment action

for lack of federal jurisdiction. Pruden-

tial moved to dismiss the petition because

its basis, lack of federal jurisdiction,

was an issue already pending on the ap-

peal. A ruling was not entered by the

Court of Appeals on the petition or the

motion to dismiss.

wits

federal savings and association; (2) be-

cause the trust deed between the parties

must be interpreted under federal common

law rather than state law; and (3) because

Prudential filed an independent federal

declaratory action. Each basis for juris-

diction is discussed below.

A. Removal Jurisdiction.

Any civil action founded on a

federal claim or right that is within the

federal district courts' original juris-

diction, may be removed from the state

court pursuant to 28 U.S.C. § 1441 (a) .?°

The original jurisdiction was invoked by

Prudential's removal petition under 28

U.S.C. § 1337(a), which provides:

The district courts shall have

original jurisdiction of any

civil action or proceeding aris-

ing under any Act of Congress

regulating commerce or protecting

trade and commerce against re-

straints and monopolies.

10: The text of 28 U.S.C. § 1441 (a)

is set forth in this Petition, Supra at 3.

at te

To determine whether a suit arises under a

law of the United States, the court must

ascertain from the complaint whether fed-

eral law is a pivotal issue in the case,

one that is basic in the determination of

the conflict between the parties. The

principle was fashioned by this Court in

Gully v. First National Bank, 299 U.S. 109

(1936):

To bring a case within the sta-

tute, a right or immunity created

by the Constitution or laws of

the United States must be an ele-

ment, and an essential one, of

the plaintiff's cause of action.

The right or immunity must be

such that it will be supported if

the Constitution or laws of the

United States are given one con-

struction or effect, and defeated

if they receive another. A gen-

uine and present controversy, not

merely a possible or conjectural

one, must exist with a reference

thereto, and the controversy must

be disclosed upon the face of the

complaint, unaided by the answer

or by the petition for removal.

299 U.S. at 112-113. (Citations

omitted).

However, the lack of any refer-

ence to federal law in the complaint is

not controlling. If a plaintiff's claim

site

is truly based on a federal question, he

may not avoid removal by an artful attempt

to conceal true federal questions inherent

in his complaint. A suit may be removed

where the real nature of the claim asser-

ted is federal, irrespective of whether it

is so characterized. In his treatise,

Professor Moore has stated the rule suc-

cinctly:

When removal is on the basis

of a federal question complica-

tions may arise because of the

principle that for original

jurisdiction the federal question

must appear in the plaintiff's

complaint well pleaded. And,

where the plaintiff's claim rests

on both a federal and state

ground, plaintiff may pitch his

suit on the state ground. But

though the defendant's removal

petition may not be used to

change the basis of the plain-

tiff's choice, courts have al-

lowed the removal petition to

supplement a poorly pleaded fed-

eral question necessarily raised

by the plaintiff's pleading. And

this is sound, for if the plain-

tiff chooses or must choose a

federal ground, the defendant's

statutory right of removal should

not be defeated by poor pleading

on the part of the plaintiff,

intentional or otherwise. 1A J.

Moore Federal Practice ¥ 0.1468

tte

[3.-4] at 459-460 (2d ed. 1980).

(Footnotes omitted).

Wright and Miller support the conclusion:

- « « [I]n many contexts plain-

tiff's claim may be one that is

exclusively governed by federal

law, so that the plaintiff ne-

cessSarily is stating a federal

cause of action, whether he

chooses to articulate it in that

way or not. If the only remedy

available to plaintiff is feder-

al, because of preemption or

otherwise, and the state court

necessarily must look to federal

law in passing on the claim, the

case is removable regardless of

what is in the pleading. Wright,

Miller and Cooper, Federal Prac-

tice and Procedure: Jurisdiction

§ 3722 at 567-569 (1976). (Foot-

note omitted).

See also Sylgab Steel & Wire Corp. v.

Strickland Transportation Co., 270 F.

Supp. 264, 267 (E.D.N.Y. 1967); 1A J.

Moore Federal Practice ¥ 0.160 at 185-187

(2d ed. 1980).

The Madsens' claim "arises under

an Act of Congress," within the meaning of

the removal statute, because the Bank

Board's regulation preempted the payment

of interest on reserve funds and because

«260

the court, in passing on their claim, must

interpret and apply the Bank Board's regu-

lation.

(i) Preemption.

The Home Owner's Loan Act of 1933

("HOLA";: 12 U.S.C. §§1461 et seq.) created

an entire system of federal savings and

loan associations. Congress could have

made federal associations subject to state

law, but, instead, gave plenary authority

over them to the Bank Board. 12 U.S.C

§1464(a). The Bank Board, an independent

agency of the United States (12 U.S.C.

§1437(b)), is responsible for the "organi-

zation, incorporation, examination, opera-

tion and regulation" of all federal asso-

Ciations. 12 U.S.C. §1464(a). HOLA spe-

cifically gave the Bank Board wide dis-

cretion to review the prevailing commer-

cial banking practices in all of the

states and to select those practices it

deemed necessary or desirable to arrive at

«%te

a uniform federal savings and loan system.

12 U.S.C. §1464(a). The imposition of

conflicting and inconsistent state deci-

sions on the management of federal asso-

ciations would impinge upon the compre-

hensive regulatory scheme drawn by the

Bank Board. It would permit a federal

association to do in one state what it

could not do in another, thereby preclud-

ing the uniformity which Congress clearly

intended. Consequently, the regulatory

control of the Bank Board leaves no room

for state regulatory control. This prin-

ciple of federal preemption of federal

savings and loan associations' affairs is

clearly stated in recent case author-

ity./?

In recent years lenders have been

inundated with borrowers' class actions

demanding that compensation be paid on

llconference of Federal Savings &

Loan Associations v. Stein, 445 U.S. 921

(Footnote++ continued on page 23)

o%%=

reserve funds and, even more burdensome,

that the associations account for years or

decades past when neither the Bank Board,

the associations nor their borrowers anti-

cipated accounting for profits and the

reserve funds were, with the Bank Board's

blessing, commingled. As noted previous-

ly, the great majority of courts expressly

(Footnotell continued from page 22)

(1980); First Federal Savings & Loan Assn.

of Boston v. Greenwald, 591 F.2d 417 (lst

Cir. 1979); Meyers v. Beverly Hills Feder-

al Savings & Loan Assn., 499 F.2d 1145

(9th Cir. 1974); Goldman v. First Federal

Savings & Loan Assn. of Wilmette, 518-F.2d

1247 (7th Cir. 1975); Murphy v. Colonial

Federal Savings and Loan Assn., 388 F.2d

609 (2d Cir. 1967); Federal Savings & Loan

Ins. Corp. v. Third National Bank in Nash-

ville, 153 F.2d 678 (6th Cir.), cert.

denied, 329 U.S. 718 (1946); Federal Sav-

ings and Loan Ins. Corp. v. Kearney Trust

Co., 151 F.2d 720 (8th Cir. 1945); Com-

munity Federal Savings & Loan Assn. of

Independence, Mo. v. Fields, 128 F.2d 705

. (8th Cir. 1942); Bailey v. First Federal

Savings & Loan Assn. of Ottawa, 467

F.Supp. 1139 (C.D. Ill. 1979); Glendale

Federal Savings and Loan Assn. v. Fox, 459

F. Supp. 903 (C.D. Cal. 1978); Rettig v.

Arlington Heights Federal Savings and Loan

Assn., 405 F. Supp. 819 (N.D. Ill. 1975);

City Federal Savings and Loan Assn. vy.

Crowley, 393 F.Supp. 644 (E.D. Wis. 1975);

People v. Coast Federal Sav. & Loan Assn.,

98 F.Supp. 311 (S.D. Cal. 1951).

o23e

held that the lender, as a matter of law,

had no obligation to account or pay earn-

ings on the reserve funds. ‘2 Never the-

less, facing that tremendous wave of liti-

gation, the Bank Board sought to put an

end to the controversy by adopting the

regulation. Thereafter, under either of

the two circumstances set forth in the

regulation (i.e., a statute or an express

contract, either of which would define a

rate and manner of compensation), both the

borrower and the federal association would

know at the end of each year that compen-

sation would or would not be paid, and the

association could keep records and make

payments accordingly. Furthermore, the

Bank Board prescribed, unifermly and once

and for all, that there be no implied

obligation to pay interest as a matter of

federal law.

l2see cases collected in notes 5 and

6 supra, at 8-9.

atte

On that basis, Prudential re-

moved. Since federal substantive law is

found to be controlling by reason of fed-

eral preemption, the suit is properly re-

movable. See, e.g., North American Phil-

lips Corp. v. Emery Air Freight Corp., 579

F.2d 229 (2d Cir. 1978); Meyers v. Beverly

Hills Federal Saving & Loan Assn., 449

F.2d 1145 (9th Cir. 1974).

(ii) Federal Common Law.

The proper adjudication of the

Madsens' claim requires the application of

the Bank Board's regulation. The inter-

pretation and analysis of the regulation

can only be done under federal common

law. The application of federal common

law to a plaintiff's cause of action is

sufficient to invoke federal jurisdiction

and, thus, support removal. [Illinois v.

City of Milwaukee, 406 U.S. 91 (1972).

The Bank Board's regulation be-

came effective on June 16, 1975. No Utah

a3

statute then)? required interest on re-

a4 Therefore, the only

serve funds.

instance when a federal association in

Utah could be required to pay compensation

on reserve funds is if it had so con-

tracted with the borrower and then, ac-

cording to the regulation, only at a rate

not exceeding the rate paid on regular

accounts.

The immediate question presented

here was whether Prudential had contracted

to pay interest or account to the Madsens

for profit on their reserve account. An

evaluation of their trust deed is tell-

ing. It does not promise interest or any

130n July 1, 1979, after the appeal

to the Court of Appeals was filed, a newly

enacted Utah statute (§§ 7-17 et seq. Utah

Code Ann. (1953)), governing interest on

reserve accounts, became effective. It

does not bear on the merits here.

l4pederal regulation (12 C.F.R. §

545.6-11) and Utah statute (§ 7-7-5(a) (3),

Utah Code Ann. (1953)), expressly author-

ize the collection of the reserve funds.

Utah Statutes are silent about the bor-

rower's right to compensation on the funds.

o48-

form of compensation; it is silent. —

sequently, the Madsens' claim is not based

on explicit, bargained-for terms of the

mortgage contract between them and Pruden-

tial. To come within the "contract" ex-

ception to the Bank Board's regulation,

the Madsens contend the mere use of the

word "pledge" in the trust deed implies an

obligation to account under state common

law.

Their theory requires, at the

outset, an examination and construction of

the federal regulation to determine whe-

ther implied obligations are within the

meaning of the term "contract." Addi-

tional threshold federal questions are

presented. The Madsens seek "compensa-

tion" and/or "profits" for the use of the

reserve funds. Thus, they contend the

regulation is not applicable because it

only refers to the payment of "interest."

-27- 1

Prudential considers the distinction spe-

cious. Nevertheless, the regulation must

be interpreted to determine whether "“in-

terest" encompasses the payment of "“pro-

fits" or “compensation.” Furthermore,

Suppose the profits or compensation exceed

the interest rate paid by an association

on regular accounts. The federal regula-

tion must be applied to limit the rate.

Hence, the Madsens' claim for (1) compen-

sation, (2) at an undetermined rate, (3)

based upon an implied contractual duty to

pay, necessarily involves construction of

the Bank Board's regulation to determine

what is a "contract" (must it be expressed

or can it be implied), whether “interest”

means “any compensation", and what rate of

interest must be paid.

The question then is, what is the

Substantive law to be applied? The answer

is inescapable. The regulation does not

leave it to state law to determine when

=2@~<

and how much compensation may be paid on

reserve funds by a federal association.

What contractual circumstances constitute

a contract of a federal association to pay

compensation and how much may be paid are,

under the regulation, federal questions.

The substantive law to apply could only be

federal, or the regulation becomes point-

less. The official comment which accom-

panied promulgation of the Bank Board's

regulation in the Federal Register under-

scores this conclusion. The comment

unequivocally states that the payment of

interest on reserves is done "Solely as a

matter of federal law":

The Federal Home Bank Board

on January 24, 1975, proposed an

amendment to § 545.6-11 of the

rules and regulations for the

Federal Savings and Loan System

(12 CFR 545.6-11) for the pur-

poses of conforming § 545.6-11l

with section 10 of the Real Es-

tate Supplement Procedures Act of

1974 (Pub. L. 93.533; December

22, 1974) and requiring Federal

associations, solely as a matter

of Federal Law, under certain

circumstances ans subject to cer-

a2Oe

tain Limitations to pay interest

on funds held by them in escrow

accounts. (Notice of such pro-

posed rule-making was published

in the FEDERAL REGISTER on Jan-

uary 31, 1975 (40 FR 4646), with

an invitation for interested per-

sons to submit written comments

by March 4, 1975.)

On the basis of its consid-

eration of all relevant material

presented by interested persons

and otherwise available, the

Board hereby amends said Part 545

aS proposed, except for editorial

changes and certain changes to

Clarify that the obligation to

pay interest under certain cir-

cumstances 1S belng imposed as a

matter of Federal law, by revis-

ing § 545.6-l1l thereof to read as

set forth below, effective June

16, 1975. 40 Fed. Reg. 20942,

May 14, 1975. (Emphasis added).

A leading case, Murphy v. Colon-

ial Federal Savings & Loan Assn., 388 F.

2d 609 (2d Cir. 1967), supports the con-

clusion that the issue must be resolved

solely by application of federal common

law and not by application of Utah law.

In Murphy, the plaintiffs sought a member-

ship list of a federal savings and loan

association in order to solicit proxies

for the election of directors. Although a

=$Gq

Bank Board regulation allowed association

members to vote by proxy, it set up no

solicitation procedure, and did not deal

specifically with the availability of the

membership list. To fill this gap in the

Bank Board's regulations, the Second Cir-

cuit decided it had to look to federal

common law:

The Board's regulations .. .-:

provide that members may vote in

person or by proxy. Question

naturally arises whether a member

desiring to enlist the aid of

others in an election is entitled

to find out who they are. Such

an issue, which requires a flesh-

ing out of the Board's regula-

tions, is one of federal law...

This would become readily appar-

ent if the common law of the

state where the association oper-

ated denied members a right of

inspection; Congress could hardly

have intended that the rights of

members of federal savings and

loan associations to fair elec-

tions should vary with quirks of

local law. 388 F.2d at 61l.

(Citations omitted).

On this basis, too, Prudential

removed. The Madsens' claim raises issues

which are matters of federal common law.

Consequently, the claim arises under fed-

aBtn

eral law which regulates an aspect of com-

merce, and it could be removed. [Illinois

vy. City of Milwaukee, 406 U.S. 91 (1972).

B. Declaratory Judgment Juris-

diction.

Even if the state action were

deemed to have been improperly removed,

the federal district court properly had

jurisdiction over the interest-on-escrow

controversy when Prudential filed its in-

dependent declaratory judgment action un-

der 29 U.S.C. §§2201 et seq. The com-

plaint alleged that Prudential is a feder-

al savings and loan association, regulated

exclusively by the Bank Board pursuant to

the Home Owners' Loan Act of 1933; that

Prudential makes residential real estate

loans which are insured and guaranteed by

federal agencies; and that it is not per-

mitted to pay interest or otherwise to

account for profits realized on reserve

funds paid by mortgagees except as pro-

a3 2%=

vided by applicable federal regulations.

The complaint then alleged that the Mad-

sens had filed a class action in state

court seeking interest on the reserve

funds held by Prudential; that a proper

resolution of the controversy requires a

declaration of the rights and obligations

of Prudential and the Madsens under the

trust deed; and that the declaration pre-

sented a question under federal laws regu-

lating commerce or under federal common

law. Since the competing positions of the

parties created an actual justiciable con-

troversy, federal jurisdiction existed.

Conference of Federal Savings and Loan

Assns. v. Stein, 604 F.2d 1256 (9th Cir.

1979), aff'd, 445 U.S. 921 (1980). First

Federal Savings and Loan Assn. of Boston

vy. Greenwald, 591 F.2d 417 (lst Cir. 1979).

REASONS FOR THE ALLOWANCE OF THE WRIT

Prudential contends the Court of

Appeals erred in its decision. To con-

a%3<

clude that federal jurisdiction did not

exist in the removed action or in the de-

claratory judgment action, the Court made

legal analysis which conflicts irrecon-

cilably with the decisions of this Court

and with other Courts of Appeal, and it

incorrectly interpreted a regulation adop-

ted by the Bank Board. fThe errors are

discussed below.

1. The Court of Appeals Incor-

rectly Held that Federal Preemption Does

Not Give Rise to Removal Jurisdiction.

The Court of Appeals held that a

claim of federal preemption is purely de-

fensive and can never give rise to removal

jurisdiction. That holding is in error

for at least two reasons. First, it inac-

curately views the use of the preemption

doctrine as a purely defensive measure

and, second, it squarely conflicts with

other federal case authority.

The Court of Appeals held that

"preemption" arguments are always raised

a%io

as defenses to affirmative claims and,

consequently, that preemption may never be

an appropriate basis for the exercise of

federal question jurisdiction. This con-

clusion, however, ignores the function of

"preemption" when it identifies the source

of the decisional law for a case, whether

it be state or federal. An indication

that the decisional law is federal because

of "preemption" does not necessarily mean

that the defendant has a federal law de-

fense to the claim which is to be decid-

ed. Rather, it indicates federal law has

supplanted state law and the plaintiff

must recover, if at all, under federal

law. The proper inquiry is whether feder-

al or state law controls the disposition

of the case, without regard to potential

defenses. When the concept of preemption

is put in proper perspective and applied

to the cause of action raised in this

case, it is apparent that the Madsens'

right to recover is federal in nature. By

-35-

adopting the regulation, the Bank Board

unequivocally preempted state law in the

determination of when compensation will be

paid and at what rate. This is not to say

the regulation provides an unassailable

defense to Prudential or any other federal

association. Rather, it is recognition

that if the Madsens are to recover, they

must do so, if at all, pursuant to the

terms of the regulation.

Borrowers routinely claim the

lender has an obligation, arising from the

requirement in the borrower's mortgage

contract to pay the budget payments in the

first instance, to pay compensation on the

reserve funds. Unless it is recognized at

the outset that federal law preempts and

that the Bank Board's regulation must be

applied, there never will be a case where

a federal association will not have an

obligation to pay interest if a state

court implies such a duty. Here, then, is

the risk--and it is a real one--which

«36<

Prudential must endure: if the case is

remanded to state court, the Madsens

contend that because the trust deed has

pledge language, Prudential contracted to

pay interest; then, they contend the

regulation does not apply because it

specifically excludes contracts; and, at

that point, the regulation is inapplicable

and rendered meaningless, since no

judicial interpretation of the regulation

will ever be made. Clearly, then,

interpretation of the regulation ce i

done now, at the beginning of the suit, in

order to give any operative effect to the

regulation.

If the complaint discloses a con-

troversy in an area where federal law pre-

empts, a federal question is necessarily

implicit in the complaint and the action

may be removed. That position was fol-

lowed in Johnson v. England, 356 F.2d 44

a3To

(9th Cir. 1966), cert. denied, 384 U.S.

961 (1966). There, plaintiff brought an

action in state court based solely on a

state created right for violation of a

collective bargaining agreement, seeking

only a remedy under state law. The action

was removed. The district court and the

Ninth Circuit Court of Appeals both upheld

removal jurisdiction. They held that §301

of the Labor Management Relations Act had

preempted the state law in the area of the

controversy and, for that reason, a con-

struction of the complaint compelled the

conclusion that the action was brought

pursuant to § 30l(a), thereby arising un-

der federal law for removal purposes.

This Court declined to grant certiorari.

Two years later this Court ad-

dressed the issue in Avco Corp. yv. Aero

Lodge No. 735, 263 F. Supp. 177(M.D. Tenn.

1966), aff'd, F.2d 337(6th Cir. 1967),

7

aff'd, 390 U.S. 557 (1968). There, the

employer had brought suit in state court

to enforce a no-strike clause in its con-

tract with the union. After the state

court had granted an ex-parte injunction,

the union removed the case to federal

court. The district court denied the

employer's motion to remand and dissolved

the state court's injunction. This judg-

ment was affirmed by the Court of Appeals

and by this Court.

In holding that the case was pro-

perly removed, this Court began by review-

ing the employer's suit and noting that

federal law, specifically §301l(a) Labor

Management Relations Act, exclusively gov-

erned the area to the exclusion of any

state law. Therefore, the claim under the

collective bargaining agreement was one

arising under an Act of Congress within

the meaning of the removal statute. The

Court expressly based its finding of ori-

ginal jurisdiction on 28 U.S.C. §1337, the

-39-

Same basis urged here by Prudential. Avco

thus agrees with Prudential's contention:

when state law has been preempted by fed-

eral law, the plaintiff's right of action

is purely federal and removal is permiss-

ible.

A similar result was reached by

the Second Circuit Court of Appeals in

North American Phillips Corp. v. Emery Air

Freight Corpo. 579 F.2d 229 (2d Cir.

1978). There, a shipper brought an action

against an air cargo carrier for the value

of lost cargo. The action was commenced

in state court and based on a state claim

for simple damages. The carrier removed

the action on the ground the claim arose

under federal law, claiming specifically

that its liability was limited by federal

regulations promulgated by federal regula-

tory agencies.

The question of removal jurisdic-

tion was not expressly addressed by the

district court. However, the Court of

wiiin

Appeals raised the question on its own

motion and, after reviewing the issue,

concluded that federal question jurisdic-

tion did indeed exist. It noted that Con-

gress had created a broad, comprehensive

scheme covering the interstate shipment of

freight. This scheme occupied the field

to the exclusion of any state law. The

allegations in the shipper's complaint

revealed that its claim was based upon the

loss of goods during interstate transpor-

tation by the carrier, who was subject to

the regulatory scheme. Consequently, from

the substance of the allegations, it was

clear the complaint set forth a claim

arising under federal law.

The Ninth Circuit Court of

Appeals has reaffirmed its position on the

question in Meyers v. Beverly Hills

Federal Savings and Loan Assn., 499 F.2d

1145 (9th Cir. 1974). There, plaintiff

brought an action in state court against a

number of federal and state savings and

loan associations, challenging the

exercise of pre-payment penalty pro-

visions. The complaint stated claims only

under state law. The defendants removed

the case to federal court and on a motion

to remand, the district court severed the

claims against the state associations and

remanded them to state court. The court

refused to remand the claims against the

federal associations and subsequently dis-

missed them. The Ninth Circuit affirmed

the dismissal on the ground that federal

law preempted state regulation of federal

savings and loan associations. To affirm

the dismissal, the Court must first have

been satisfied that federal question jur-

isdiction existed in fact.

Other courts, too, have held that

if the complaint discloses a controversy

in an area where federal law preempts, a

federal question is necessarily implicit

in the complaint and the action may be

removed. See, e.g., Bailey v. First Fed

-42-

eral Savings & Loan Assn. of Ottawa, 467

F. Supp. 1139 (C.D. Ill. 1979); Teamsters

Local 116 v. Fargo-Moorhead Automotbile

Dealers Assn., 459 F.Supp. 558 (D.N.D.

1978); First Federal Savings & Loan Assn.

of Jackson County v. First Federal Savings

& Loan Assn. of Huntsville, 446 F.Supp.

210 (N.D.Ala.1978); Ashley v. Southwestern

Bell Telephone Co., 410 F.Supp. 1389, 1392

(W.D.Tex. 1976) (dictum); New York v. Lo-

cal 144, Hotel Services Union, 410 F.Supp.

225 (S.D.N.Y.1976); Rettig v. Arlington

Heights Federal Savings & Loan Assn., 405

F.Supp. 819, 822-23 (N.D.I11. 1975); City

of New Orleans v. United Gas Pipe Line

Co., 390 F.Supp. 861, 863 (E.D.La. 1974)

(by implication); Gardner v. Clark Oil &

Refining Corp., 383 F.Supp. 151, 152-53

(E.D.Wis. 1974) (dictum); Hayes v. C.

Schmidt & Sons, 374 F.Supp. 422, 445 (E.D.

Pa. 1974) (dictum); Ulichny v. General

Electric Co., 309 F.Supp. 437 (N.D.N.Y.

1970); Sylgab Steel & Wire Corp. v.

nil Hu

Strickland Transportation Co., 270 F.Supp.

264, 269 (E.D.N.Y. 1967); Minkoff v.

Scranton Frocks, Inc., 172 F.Supp. 870

(S.D.N.Y. 1959); Ingraham Co. v. Local

260, 171 F. Supp. 103 (D. Conn. 1959); Fay

vy. American Cystoscope Makers, 98 F. Supp.

278 (S.D.N.Y. 1951).

2. The Court of Appeals Incor-

rectly Held that the Need to Apply Federal

Common Law to the Bank Board's Regulation

Does Not Give Rise ' to Removal Jurisdiction.

The Court of Appeals, citing

Illinois v. City of Milwaukee, 406 U.S. 91

(1972), agreed with Prudential's argument

that the application of federal common law

to a plaintiff's cause of action is suffi-

cient to invoke federal jurisdiction and

thus support removal. But it also noted

that federal common law is not automati-

cally applied to disputes in a field which

is subject to pervasive federal regula-

tion. To apply federal common law, the

Court said, there must first be a signifi-

-44-

cant conflict between some federal policy

or interest and the use of state law. It

found no such conflict here. It first

identified in its opinion’? the poten-

tial area of conflict which it believed

Prudential had urged on appeal: "Here, it

is vigorously argued that application of

state law would create a significant con-

flict because federal policy requires

uniform nationwide standards for the

handling of escrow accounts by federal

savings and loan associations." Then, it

answered with the following observa-

tion! ®, "This argument founders on the

very language of the regulation cited to

Support it. Section 545.6-ll(c) provides

that a federal savings and loan associa-

tion shall pay interest on escrow accounts

if a state statute requires such payments

to be made by state-chartered institu-

l5see the Court's opinion, 635 F.2d

at 802.

l6See the Court's opinion, 635 F.2d

at 802.

a)

oe, "3 me ,

tions, or if payments are required by con-

tract. The regulation expressly antici-

pates that the obligation of a federal

institution to pay interest on escrow ac-

counts not only will vary from state to

state, but from contract to contract."

The problem with the Court's con-

clusion is that it rests on an incorrect

characterization of the Bank Board's regu-

lation.?? It is important to recall the

circumstances which prompted the adoption

l7The Court cited the case of

Johnson yv. First Federal Savings & Loan

Assn., 418 F. Supp. 1106, 1109 (E.D. Mich.

1976), in its opinion, at 12. It was used

(Footnote !7 continued on page 46)

(Footnote 17 continued from page 45)

as authority for the Court's conclusion

that there is no federal policy requiring

nationwide uniformity in the handling of

reserve accounts because the regulation

itself incorporates by reference state law

in several jurisdictions, and allows dis-

Parate results when bargained for in ex-

press contracts. Johnson is not applic-

able, however, since it too focused on the

wrong policy. The uniform policy behind

the regulation is to limit the payment of

interest to only these two conditions, and

to eliminate the vexatious reserve account

litigation founded on equitable or extra-

contractual grounds.

oh6a

of the regulation. The objective of the

regulation was not to achieve uniform

nationwide standards for the handling of

all reserve accounts by federal associa-

tion. Rather, it was designed to achieve

uniformity in all cases except those two

specific instances where an association

already knows when and how much interest

it must pay: when a state legislature

requires it, or when the parties expressly

agree in contract. In those two in-

stances, the association knows it must pay

and can plan and budget for the payment.

Only where there is an implied obligation

claimed does an association not know

whether or how much it may or must pay.

The policy behind the regulation is to

limit the payment of interest to only

these two situations and, thereby, to

eliminate the claims for interest founded

on implied theories or extra-contractual

grounds.

my

Where there is an overriding in-

terest in the need for a uniform rule of

decision or where the controversy touches

the basic interest of federalism, this

Court has fashioned federal common law.

See Illinois v. City of Milwaukee, 406

U.S. 91, 105 n. 6 (1972); Banco Nacional

de Cuba vy. Sabbatino, 376 U.S. 398 (1964);

Annot., 31 L.Ed. 2d 1006 (1973). Cer-

tainly, these same demands for applying

federal common law are present here.

There must be a cohesive, uniform inter-

pretation of the regulation. Subjecting

federal associations to conflicting, im-

plied obligation decisions is cumbersome

and inefficient, and it inevitably leads

to a patchwork standard for federal asso-

ciations, varying from state to state.

Only the adoption of a consistent federal

common law standard for the application of

the regulation will fulfill the underlying

objective of the statute to cure the im-

plied obligation claims. See Gibson v.

-48-

First Federal Savings & Loan Assn., 364

F.Supp. 614 (E.D. Mich. 1973), aff'd, 504

F. 2d 826, 829 (6th Cir. 1974) ("Insofar

as the Federal Home Loan Bank Board deter-

mines to regulate relationships between

federal savings and loan associations and

their borrowing and investing members,

consideration of such regulations by fed-

eral courts is most likely to produce uni-

formity"). There is present, therefore, a

significant conflict between the Madsens'

state law claim and federal policy on in-

terest. That significant conflict sup-

ports federal jurisdiction and, hence,

removal.

3. The Court of Appeals Incor-

rectly Held That All Issues [In Pruden-

tial's Declaratory Judgment Action Were

Defensive And Could Not, Therefore, Convey

Federal Jurisdiction.

The Court of Appeals held the

federal issues raised in Prudential's de-

claratory complaint were merely affirma-

-49-

tive defenses to the removed action and

were not sufficient, therefore, to convey

original jurisdiction on the district

court. The Court based its holding on the

case of Public Service Commission of Utah

vy. Wycoff Co., 344 U.S. 237 (1952). In

doing so, however, the Court of Appeals

inappropriately applied the reasoning of

the Wycoff decision. In that case, a mo-

tor carrier sought a declaratory judgment

that a specific haul was interstate com-

merce and not subject to the regulation of

the Public Service Commission of Utah.

There was no proof of any threatened act

by the commission which would constitute

an actual controversy; rather, the carrier

was only seeking to establish a defense to

use if the commission sued it. This Court

dismissed the action, concluding the car-

rier was only seeking a present declara-

tion that it would have a good defense

should the commission take action in the

future.

=§$6~-

A recent decision from the United

States Court of Appeals for the First Cir-

cuit, First Federal Savings and Loan Assn.

of Boston v. Greenwald, 591 F.2d 417 (lst

Cir. 1979), is precisely in point, both

substantially and procedurally, and it is

diametrically contrary to the opinion of

the Tenth Circuit Court of Appeals. On

facts virtually identical to those pre-

sented here, and applying the Wycoff de-

cision, the Court found federal jurisdic-

tion in a federal declaratory suit.

In Greenwald, the State of Massa-

chusetts had enacted a statute which re-

quired all mortgagees operating in the

state to pay interest on their tax reserve

accounts and to file informational reports

concerning the accounts. Greenwald, the

Massachusetts Commissioner of Banks,

initiated a state declaratory action to

compel every federal savings and loan as-

sociation in the state to comply with the

statute. First Federal, which was sued as

én

the representative party on behalf of the

federal associations, removed the case to

the federal district court on the ground

it would involve the interpretation and

application of federal statutes, speci-

fically 12 C.F.R. §545.6-11, the same Bank

Board regulation presented here. Green-

wald's motion to remand was denied.

While the remand issue was being

resolved, First Federal filed an answer

which included several affirmative de-

fenses of particular relevance here: (1)

federal regulations promulgated by the

Bank Board totally occupy the field of

regulation of the practices and procedures

of federal savings and loan associations

relating to the maintenance and payment of

interest on reserve accounts; and (2)

those portions of the state statute which

the Commissioner sought to enforce were in

conflict with the federal regulations and

were, therefore, inapplicable to federal

associations under the Supremacy Clause.

a§ %e

First Federal also filed a counterclaim

against the Commissioner and the Bank

Board for declaratory relief to resolve

the conflicting positions between the

Commissioner and the Bank Board

regarding First Federal's obligation to

pay interest on the reserve accounts.

In addition to the counterclaim,

First Federal and the other federal asso-

ciations in the state instituted a separ-

ate action against the Commissioner and

the Bank Board in the federal district

court. The new action paralleled the

First Federal counterclaim in the removed

suit and sought an adjudication under the

Declaratory Judgment Act (28 U.S.C.

§§2201, 2202) of the conflicting positions

of the Commissioner and the Bank Board.

The two actions were consolidated for

hearing in the district court.

Each party in Greenwald moved for

summary judgment. The district court in

each case granted First Federal's and the

«$3

Bank Board's motions for summary judgment

and denied the Commissioner's. It held

that the state statute violated the Supre-

macy clause when applied to federally-

chartered savings and loan associations

because (1) federal law had preempted the

field of compensation on reserve accounts

by federal associations, and (2) the state

statute directly conflicted with 12 C.F.R.

§545.6-11l. The Court of Appeals affirmed

the decision. It held that the state

statute, as applied to federal associa-

tions, actually conflicted with 12 C.F.R.

§545.6-ll(c) and, therefore, was preempted.

The opinion is significant in

this case for its discussion of the pro-

priety of the removal. On appeal, the

Commissioner argued in part that the fed-

eral district court erred in refusing to

remand to the state court because it lack-

ed subject matter jurisdiction over the

removed action. The Court of Appeals

rejected the argument. It noted that the

-54-

district court had based removal juris-

diction over the Commissioner's state ac-

tion on the ground that it arose under

federal law: federal law had preempted

the area of the payment of interest on

real extate tax escrow accounts. But the

Court of Appeals did not pass on this

determination because it held that the

district court could decide the merits of

the controversy on the basis of the asso-

ciations' federal declaratory judgment

action: |

. « - {E]ven if removal of the

Commissioner's action were impro-

per, the district court clearly

had jurisdiction over the asso-

ciations' separate declaratory

judgment action which involved

the same issues and was consoli-

dated with the Commissioner's

action for hearing and decision.

The matter of preemption and re-

lated federal issues were the

focal point of the declaratory

judgment suit, hence federal

question jurisdiction existed in

that case under any analysis.

591 F.2d at 423.

Then, on the question of jurisdiction, the

Court held:

o§5<

The associations' declara-

tory judgment action raises more

than a mere defense to the Com-

missioner's action. See gener-

ally Public Service Comm'n v.

Wycoff Co., 344 U.S. 237, 248, 73

S.Ct. 236, 97 L.Ed. 291 (1952).

Both the state and federal regu-

lations are currently in effect,

subjecting the associations to

conflicting requirements ...

which would have presented a

justiciable controversy even if

the declaratory suit had been

brought prior to the Commis-

soner's enforcement act, Lake

Carriers' Ass'n yv. MacMullan, 406

U.S. 498, 506-08, 92 S.Ct. 1749,

32 L.Ed 2d 257 (1972). It there-

fore has a vitality of its own

and may be maintained. Rath

Packing Co. v. Becker, 530 F.2d

1295, 1305-06 (9th Cir. 1975),

aff'd sub nom Jones v. Rath Pack-

ing Co., 430 U.S. 519, 37 S.Ct.

1305, 51 Leed. 2d 604 (1977).

591 F.2d at 423, n. 8.

The suit raised more than a mere

federal defense to the contemporaneously

removed action between the same parties,

Since the declaratory plaintiff was cur-

rently subjected to conflicting legal re-

quirements and the declaratory suit pro-

vided a forum for resolution of the con-

The same is true here. Pruden-

tial's declaratory action raises more than

afEe

a mere defense; it presents a present and

genuine controversy over the parties'

rights and duties under the Bank Board's

regulation. The Madsens demand compensa-

tion; Prudential cannot pay under the re-

gulation. The Madsens' argue the Supreme

Court of Utah ordered Prudential to pay

compensation on the reserve accounts. If

true, that decision and the Bank Board's

regulation would then subject Prudential

to conflicting requirements. That con-

flict alone presents a justiciable con-

troversy - precisely as in Greenwald - and

provides jurisdiction.

This Court recently affirmed an

identical conclusion reached by the United

States Court of Appeals for the Ninth Cir-

cuit in Conference of Federal Savings and

Loan Assns. v. Stein, 604 F.2d 1256 (9th

Cir. 1979), aff'd, 445 U.S. 921 (1980).

In that case, the State of California en-

acted an act designed to regulate "red-

lining" practices of mortgage lenders in

ofFa

the state. After passage of the act,

Stein, the State's Secretary of the Busi-

ness and Transportation Agency, notified

all lending institutions operating in

California, including federal savings and

loan associations, that they would be re-

quired to abide by the provisions of the

act. The Federal Home Loan Bank Board

responded with an opinion that the state

act did not apply to federal associations.

The Conference of Federal Savings

and Loan Associations, joined by several

federal associations, commenced a federal

declaratory suit against Stein and the

Bank Board. They sought a declaration

that the act was preempted by the Home

Owner's Loan Act of 1933 and by regula-

tions adopted by the Bank Board. The Bank

Board, in turn, filed a cross claim

against Stein, seeking to enjoin him from

enforcing the act against federal associ-

ations. Stein responded by bringing an

independent suit against West Coast Feder-

ǤO~

al Savings and Loan Association, charging

it with violations of the state act and

seeking statutory damages.

The federal district court held

Stein did not have the power to regulate

federal associations under the act. It

determined that the regulatory authority

of the Bank Board, under the HOLA, pre-

empted state regulation.

Stein appealed, contending the

district court did not have jurisdiction

because there was no federal question.

Citing Wycoff, he offered the same argu-

ment made by the Court of Appeals in this

case: that preemption is only a federal

defense to a potential state claim. The

Ninth Circuit flatly disagreed:

[Wycoff] is distinguishable,

however. There, the majority

concluded that there was no proof

of any threatened or probable act

by the state commission which

might cause the irreparable

injury essential to equitable

relief or which could serve to

Create the actual controversy

necessary for declaratory judg-

ment jurisdiction. Here, an

=§9=

actual conflict exists created by

the conflicting positions taken

by [Stein] and the Bank Board.

See First Federal Savings and

Loan Ass'n of Boston v. Green-

wald, 591 F.2d 417, 423 n. 8 (1st

Cir. 1979).

"Both the state and federal

regulations are currently in

effect, subjecting the

associations to conflicting

reguirements . i

An actual justiciable controversy

is thus presented. 604 F.2d at

1259.

As noted above, an actual controversy

between adversary parties is presented

here, too. The declaratory action affords

a procedure for its resolution.

Jurisdiction existed, therefore.

-60-

CONTENTS OF APPENDIX

The Appendix contains the fol-

lowing documents, in order:

(i) A copy of the opinion ren-

dered by the United States Court

of Appeals for the Tenth Cir-

cuit. (Appendix A).

(ii) A copy of the Order entered

by the United States District

Court for the District of Utah.

(Appendix B).

(iii) A copy of the Judgment

entered by the United States Dis-

trict Court for the District of

Utah in the removed action.

(Appendix C).

(iv) A copy of the Judgment

entered by the United States Dis-

trict Court for the District of

Utah in the declaratory judgment

suit. (Appendix D).

(vy) A copy of the opinion ren-

dered by the Supreme Court of

Utah. (Appendix E).

(vi) A copy of the Order on

Rehearing, entered by the United

States Court of Appeals for the

Tenth Circuit. (Appendix F).

a61<

CONCLUSION

The petition for writ of cer-

tiorari should be granted.

DATED this 10th day of April,

1981.

MOYLE & DRAPE

C—_.

h\k% Palmer

Rel ewls .

600 Deseret Plaza

Salt Lake City, Utah 84411

Attorneys for Petitioner

Prudential Federal

Savings & Loan

Association

af 2<

CERTIFICATE OF SERVICE

I, Reid E. Lewis, hereby certify

that on the 10th day of April, 1981, I

deposited three (3) copies of the Petition

for Writ of Certiorari in a United States

mailbox, with first-class postage prepaid,

addressed to each of the following:

Honorable Aldon J. Anderson

United States District Judge

350 South Main Street

Salt Lake City, Utah 84101

Robert J.DeBry

2040 East 4800 South, Suite 203

Salt Lake City, Utah 84117

Attorney for Richard Madsen and

Nancy Madsen

Peter W. Billings

FABIAN AND CLENDENIN

800 Continental Bank Building

Salt Lake City, Utah 84101

Attorneys for Utah Bankers

Association

Harvey Simon

Assistant General Counsel

Federal Home Loan Bank Board

1700 G. Street, N.W., 3rd Floor

D.C. 20552

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

Richard MADSEN and Nancy Madsen, his wife,

for themselves and all others similarly

situated, Plaintiffs-Appellants,

V.

PRUDENTIAL FEDERAL SAVINGS & LOAN ASSO-

CIATION, for itself and all others

Similarly situated, Defendant-Appellee,

Utah Bankers Association,

Intervenor-Appellee.

Richard MADSEN and Nancy Madsen, for

themselves and all others similarly

situated, Petitioners,

Vv.

Honorable Aldon J. ANDERSON, Judge of the

United States District Court for the

District of Utah, Central Divisior,

Respondent.

Nos. 79-1362, 79-1535

Decided December 3, 1980

Rehearing Denied January 23, 1981

Before LOGAN, PECK* and SEYMOUR,

Circuit Judges.

SEYMOUR, Circuit Judge.

The Madsens, plaintiffs-appellants, bor-

rowed money from Prudential Federal Savings

%0f the United States Court of Appeals for the

Sixth Circuit sitting by designation.

APPENDIX A

& Loan Association (Prudential) to purchase

a home in 1964. Pursuant to this loan, the

Madsens signed a trust deedl requiring them

to make "budget payments" of one-twelfth of

the annual estimated taxes and insurance

along with their monthly payments of prin-

cipal and interest. Under the agreement,

these budget payments were pledged as addi-

tional security for repayment of the loan.

Ifhe trust deed provides in pertinent part:

"In addition to the monthly payments as pro-

vided in said note, the TRUSTOR agrees to pay

to the BENEFICIARY, upon the same day each

month, budget payments estimated to equal

one-twelfth of the annual taxes and insurance

premiums; said budget payments to be adjusted

from time to time as required, and said budget

payments are hereby pledged to the BENEFICIARY

as additional security for the full performance

of this deed of trust and the ncte secured

hereby. The budget payments so accumulated

may be withdrawn by the BENEFICIARY for the

payment of taxes or insurance premiums due on

the premises. The BENEFICIARY may at any time,

without notice, apply said budget payments to

the payment of sums due under the terms of this

deed of trust and the note secured hereby or

either of them. TRUSTOR'S failure to pay said

budget payments shall constitute a default

under this trust."

App., vol. I, at 5.

The funds were accumulated in a reserve

account and used annually for the payment

of taxes and insurance.

On March 3, 1975, the Madsens filed

3 in Utah state court seek-

a class action

ing to recover interest realized from

Prudential's use of the escrowed funds,

based on claims of breach of contract and

unjust enrichment. The state trial court

granted Prudential's motion for summary

judgment. In January 1977, the Utah Su-

preme Court reversed the summary judgment

and remanded for further proceedings. It

held that the trust deed contained the essen-

tial elements of a pledge, and that under

Utah common law a pledgee must account to

the pledgor for profits resulting from the

use of the pledged property. In October

- the original complaint named Richard Madsen only

as plaintiff. An amended complaint was filed

April 10, 1975, joining his wife Nancy.

3Numerous issues regarding the classes named in

these proceedings have been raised on appeal. They

are not relevant to our disposition of this case

and are not addressed in our opinion.

A=-3

1977, the Madsens amended their complaint to

ask for an accounting and recovery of the

profits earned by Prudential on the escrowed

amounts. This amended complaint added a

defendant class of lenders with similar es-

crow arrangements.

Meanwhile in April 1977, Prudential

filed a separate action for declaratory

relief in federal court, asserting that

under 12 C.F.R. §545.6-1l(c) 4 (hereinafter

412 C.F.R. §545.6-11(c) provides:

"A Federal association which makes a loan on

or after June 16, 1975, on the security of a

single-family dwelling occupied or to be occu-

pied by the borrower (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 effect a specific statu-

tory provision or provisions of the State in

which such dwelling is located by or under which

the State-chartered savings and loan associa-

tions, mutual savings banks and similar institu-

tions are generally required to pay interest 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 on

its regular accounts (as defined by Section 526.1

of this chapter). Except as provided by con-

tract, a Federal association shall have no obli-

gation to pay interest on escrow accounts apart

from the duties imposed by this paragraph."

(Emphasis added).

A-4

referred to as section 545.6-ll(c)), it is

not required to pay interest or account to

the Madsens on the escrowed funds. The

complaint based jurisdiction on 28 U.S.C.

§ 1337° and sought a declaration of the

rights and obligations of the parties to

the trust deed. When the Madsens amended

their state complaint, Prudential promptly

filed a removal petition, alleging that the

relief requested arises under and is con-

trolled by federal law. The Utah Bankers

Association, a trade association of commer-

cial banks domiciled in Utah, intervened in

the action, and the Federal Home Loan Bank

Board filed an amicus curiae brief. The

federal court denied the Madsens' motion to

remand the case, consolidated the removed

action and the declaratory judgment suit,

228 U.S.C. § 1337 provides:

"The district courts shall have original

jurisdiction of any civil action or proceeding

arising under any Act of Congress regulating

commerce or protecting trade and commerce

against restraints and monopolies."

amg

and granted summary judgment in favor of

Prudential.

On appeal, the Madsens contend, inter

alia, that the federal court lacks juris-

diction over either the removed case or the

declaratory judgment action. We agree, and

reverse with directions to remand the re-

moved action to state court and to dismiss

the declaratory action. .

I.

Removal Jurisdiction

Prudential sought removal pursuant to

28 U.S.C. § 1441(b), which provides in perti-

nent part:

"Any civil action of which the dis-

trict courts have original jurisdiction

founded on a claim or right arising

under the Constitution, treaties or

laws of the United States shall be re-

movable without regard to the citizen-

ship or residence of the parties."

Jurisdiction was claimed under 28 U.S.C.

A-6

)

§ 1331° and section 1337 because the cause

of action allegedly arose under the laws of

the United States and Acts of Congress regu-

lating commerce.

The Madsens contend their claim in

state court is founded upon contract rights

and obligations created by state law. They

assert that Prudential retains the Madsens'

budget payments for up to a year before

using the funds to pay the taxes and insur-

ance, that Prudential invests the funds in

the interim and receives a profit, and that

the Madsens are entitled to be paid the

profits earned on the pledged funds. The

Madsens point out that no federal law or

regulation was invoked, relied on, attacked,

608 U.S.C. §1331(a) provides in pertinent part:

"The district courts shall have original juris-

diction of all civil actions wherein the matter

in controversy exceeds the sum or value of

$10,000, exclusive of interest and costs, and

arises under the Constitution, laws or treaties

of the United States."

We note that the same standards apply to whether

the issue "arises under" federal law in both this

section and section 1337.

A-7

ee el

or cited in their complaint. Consequently,

they say, their claim did not arise under

federal law.

Prudential and Intervenor argue, on

the other hand, that the trust agreement

between Prudential and the Madsens contains

no express language requiring the payment

of interest on the escrowed funds, and that

the federal regulation does not contemplate

interest payments under such circumstances.

They say that interpretation of the agree-

ment arises under federal law because Pru-

dential is a regulated federal meviaes and

loan association and Congress has preempted

the area.

The conditions under which a suit may

be said to "arise under" the laws of the

United States were definitively set out in

Gully v. First National Bank, 299 U.S. 109,

57 S.Ct. 96, 81 L.Ed. 70 (1936). There the

Court stated that the required federal right

or immunity must be an essential element of

the plaintiff's cause of action, and that

A-8

the federal controversy must be "disclosed

upon the face of the complaint, unaided by

the answer or by the petition for removal."

Id. at 113, 57 S.Ct. at 98. It is beyond

argument that a defense predicated upon

federal law is not enough by itself to con-

fer federal jurisdiction, even though the

defense is certain to arise. Pan American:

Petroleum Corp. v. Superior Court, 366

U.S. 656, 663, 81 S.Ct. 1303, 1307, 6

L.Ed.2d 584 (1961); Seneca Nursing Home

v. Kansas State Board of Social Welfare,

490 F.2d 1324, 1328 (10th Cir. 1974),

cert.' gaenied, 419 U.&8.'$4ii, 35 S.Ct. 72,

42 L.Ed.2d 69 (1974); Warner Bros. Records,

Inc. v. R. A. Ridges Distributing Co., 475

F.2d 262 (10th Cir. 1973).

In Mountain Fuel Supply Co. v. Johnson,

586 F.20 1375; i381 (idth Cir. i373), cart.

denied, 441 U.S. 952, 99 S.Ct. 2182, 60

L.Ed.2d 1058 (1979), we described the test

for determining whether a complaint asserts,

A-9

on its face, a substantial federal question:

"A case 'arises' under the laws of

the United States if it clearly and sub-

stantially involves a dispute or contro-

versy respecting the validity, construc-

tion or effect of such laws which is

determinative of the resulting judgment.

Shulthis v. McDougal, 225 U.S. 561, 32

S.Ct. 704, 56 L.Ed. 1205 (19ig)... 2

if the action is not expressly authorized

by federal law, does not require the con-

struction of a federal statute and/or

regulation and is not required by some

distinctive policy of a federal statute

to be determined by application of fed-

eral legal principles, it does not arise

under the laws of the United States for

federal question jurisdiction. Lindy

v. Lynn, 501 F.2d 1367 (324 Cie. aeeeee

No argument has been made on appeal that

the Madsens' claim is expressly authorized

by federal law. Consequently, federal re-

moval jurisdiction is established in this

case only if the Madsens' claim requires

the construction of a federal regulation

or the application of federal law.

| The federal trial court based its find-

ing of jurisdiction on North Davis Bank v.

First National Bank, 457 F.2d 820 (10th Cir.

1972). We find that case distinguishable.

There the central issue in the complaint

A-10

was whether the defendant's facility consti-

tuted a branch of a national bank. We noted

that the Supreme Court in First National Bank

v. Dickinson, 396 U.S. 122, 133, 90 S.Ct. 337,

343, 24 L.Ed.2d 312 (1969), held this deter-

Mination to be a "threshold question of fed-

eral law." 457 F.2d at 822. Therefore we

held: "[(t]Jhis is not a case in which a fed-

eral statute is indirectly or collaterally

involved but it is one having its source in

and arising under [the McFadden Act] 12

U.S.C. § 36(£)." Id. at 823.

Here the basic issue in the Madsens'

complaint is whether the contract between

the Madsens and Prudential requires the

payment of profits or interest on escrowed

funds. Although construction of the fed-

eral regulation cited by Prudential may

be relevant to the defense Prudential

asserts, i.e., that section 545.6-11l(c)

does not require payment of interest, the

meaning of the regulation is absolutely

irrelevant to the Madsens' theory of

A-1l

recovery. Because the Madsens have predi-

cated their suit upon rights created under

state law, the fact that federal regula-

tions may create a defense to recovery on

such a claim is immaterial to a finding

of federal question jurisdiction. See

Phillips Petroleum Co. v. Texaco, 415 U.S.

125, 94 S.Ct. 1002, 39 L.Ed.2d 209 (1974);

Pan American Petroleum, 366 U.S. at 662-64,

81 S.Ct. at 1307-1308.

Prudential and Intervenor contend

that removal jurisdiction exists because

federal law has preempted state law in the

area of federal savings and loan regula-

tion. The amicus curiae brief supports

the argument that the field of regulatory

control over federal associations has been

preempted. However, even if federal pre-

emption were established, it would not con-

fer jurisdiction when it is raised by the

defendant to defeat a common-law contract

claim brought in state court. See Pan Ameri-

can Petroleum, 366 U.S. at 662-65, 81 S.Ct.

A-12

at 1307-1309; Washington v. American League

of Professional Baseball Clubs, 460 F.2d 654,

660 (9th Cir. 1972), and cases cited there-

in. In Home Federal Savings & Loan Asso-

ciation v. Insurance Department, 571 F.2d

423 (8th Cir. 1978), the court dismissed

the case for lack of subject matter juris-

diction despite a federal preemption argu-

ment:

"[{T] he Commissioner's proceeding

against Home Federal was based solely

upon alleged violations of Iowa's

insurance law and raised no federal

question. Home Federal's allegations

of preemption and failure to engage in

the 'business of insurance,' asserted

in its federal petition, actually are

in the nature of defenses to the Com-

missioner's charges. Hence they will

not suffice for federal question juris-

diction here. The case is basically

simply an alleged violation of state

law. It is not a federal case and is

not converted to one by Home Federal's

defenses to the state's basic allega-

tions."

Id. at 427. Prudential's claim of federal

preemption is in the nature of a defense

to the Madsens' cause of action and cannot

be the basis of federal question jurisdic-

tion on removal.

A-13

It is also argued that the Madsens'

claim arises under the laws of the United

States because the contract must be inter-

preted under federal common law rather

than state law. This is so, Prudential

urges, because the regulation addressing

the payment of interest by federal savings

and loan associations, section 545.6-ll(c),

states that "[e]xcept as provided by con-

tract, a Federal Association shall have no

Obligation to pay interest On escrow ac-

counts apart from the duties imposed by

this paragraph." (Emphasis added). Pru-

dential contends that the circumstances

constituting a "contract" within the mean-

ing of the federal regulation is a federal

question.

It is true that the application of

federal common law to a plaintiff's cause

of action is sufficient to invoke federal

jurisdiction and thus support removal. See

Illinois v. Milwaukee, 406 U.S. 91, 100, 92

S.Ct. 1385, 1391, 31 L.Ed.2d 712 (1972).

A-14

However, federal common law is not auto-

matically applied to resolve all disputes

in a field subject to pervasive federal

regulation. "In deciding whether rules of

federal common law should be fashioned,

normally the guiding principle is that a

Significant conflict between some federal

policy or interest and the use of state

law in the premises must first be specifi-

cally shown." Wallis v. Pan American Petro-

leum Corp., 384 U.S. 63, 68, 86 S.Ct. 1301,

1304, 16 L.Ed.2d 369 (1966). Here, it is

vigorously argued that application of state

law would create a significant conflict be-

cause federal policy requires uniform

nationwide standards for the handling of

escrow accounts by federal savings and loan

associations. This argument founders on the

very language of the regulation cited to

Support it. Section 545.6-ll(c) provides

that a federal savings and loan associa-

tion shall pay interest on escrow accounts

if a state statute requires such payments to

A-15

be made by state-chartered institutions, or

if payments are required by contract. The

regulation expressly anticipates that the

Obligation of a federal institution to pay

interest on escrow accounts not only will

vary from state to state, but from contract

to contract. See Johnson v. First Federal

Savings & Loan Association, 418 F.Supp.

1106, 1109 (E.D.Mich. 1976). Any argument

that federal policy requires nationwide

uniformity with regard to this issue is

7

untenable. See United States v. Yazell,

382 U.S. 341, 86 S.Ct. 500, 15 L.Ed. 2d

404 (1966).

We note Intervenor's argument that this case arises

under federal law because the mortgage form must be

approved by the regulatory agency, see 24 C.F.R.

§203.17, and because the mortgage must provide for

monthly escrow payments for taxes and insurance,

see 24 C.F.R. § 203.23(a). However, these regula-

tions are silent on the issue of interest payments

on escrow accounts, and therefore do not conflict

with section 545.6-11(c), which allows interest

to be required or prohibited by the individual

contract terms. Accordingly, we reject the argu-

ment that the use of these forms mandates a uni-

form interpretation under federal law.

A~-16

Contractual obligations are created by

state law. See Gully, 299 U.S. at 114-15,

57 S.Ct. at 98-99. See also Pan American

Petroleum v. Superior Court, 366 U.S. at

662-663, 81 S.Ct. at 1307-1308. "The inter-

pretation and enforcement of contracts is

[sic] traditionally within the province of

state courts," Mariniello v. Shell Oil Co.,

511 F.2d 853, $858 (3d Cir. 1975), and the

general presumption is in favor of applying

state law. Note: Federal Common Law, 82

Harv.L.Rev. 1512 (1969). Given the absence

of a significant conflict between the feder-

al policy expressed in section 545.6-1l(c)

and the use of state law, we hold that state

law is applicable in determining whether

Prudential contracted to pay interest on the

Madsens' escrow account.

Since no federal controversy was dis-

closed on the face of the Madsens' state

court complaint, as amended, removal was

improper and the consolidated case must be

remanded to state court.

A-17

II.

Declaratory Judgment Jurisdiction

The question remains whether the fed-

eral court has subject matter jurisdiction

over Prudential's declaratory judgment ac-

tion. The federal complaint alleges that

Prudential is a federal savings and loan

association regulated by the Federal Home

Loan Bank Board, that it makes residential

real estate loans insured and guaranteed

by federal agencies, and that it is not

permitted to pay interest or to otherwise

account for profits realized on escrowed

funds paid by mortgagors "except as provided

by applicable federal regulations." App.,

vol. II, at 180. It points out that the

Madsens have filed a class action in state

court seeking interest on the escrowed funds

under the contractual arrangements between

Prudential and its borrowers, that "[a]

proper resolution of said controversy re-

quires a declaration of the respective

rights and obligations of the parties to

A-18

said contractual arrangements," id. at 181,

and that this determination presents a ques-

tion under federal laws regulating commerce

or under federal common law. 8

As we have noted, the federal regula-

tion that Prudential cites in its complaint

provides that interest shall be paid on

escrow accounts if a statute in the state

whether the mortgaged property is located

requires similar lending institutions to

pay such interest. 12 C.F.R. 545.6-ll(c),

supra n. 4. The regulation also provides

that a federal association has no other

Obligation to pay such interest "[e] xcept

as provided by contract." Id. Consequently,

the controversy underlying the federal de-

claratory judgment action is the same as in

state court: whether Prudential is obli-

gated by its contract with the Madsens to

pay interest on the escrowed funds.

Bie have already concluded in part I, supra, that

federal common law is not applicable to interpret

the contract between Prudential and the Madsens.

A-19

This court has consistently adopted the

rationale set out by the Supreme Court in

Public Service Commission of Utah v. Wycoff

Co., 344 U.S. 237, 248, 73 S.Ct. 236, 242=

243, 97 L.Ed. 291 (1952):

"Where the complaint in an action for

declaratory judgment seeks in essence to

assert a defense to an impending or

threatened state court action, it is

the character of the threatened action,

and not of the defense, which will deter-

mine whether there is federal-question

jurisdiction in the District Court. If

the cause of action, which the declara-

tory defendant threatens to assert, does

not itself involve a claim under federal

law, it is doubtful if a federal court

may entertain an action for a declara-

tory judgment establishing a defense to

that claim. This is dubious even though

the declaratory complaint sets forth a

claim of federal right, if that right is

in reality in the nature of a defense to

a threatened cause of action. Federal

courts will not seize litigations from

state courts merely because one, nor-

mally a defendant, goes to federal court

to begin his federal-law defense before

the state court begins the case under

state law. (citations omitted)."

(Emphasis added). In Monks v. Hetherington,

573 F.2d 1164, 1167 (10th Cir. 1978), we

applied the traditional view "that a party

cannot by artful pleading anticipate a de-

fense based on federal law and thus bring

A-20

within federal jurisdiction an action that

could not otherwise be heard in federal

court." And in Chandler v. O'Bryan, 445

F.2d 1045, 1055-56 (10th Cir. 1971), we

noted that this principle is particularly

applicable where, as here, the state court

action has been instituted and issues have

been decided.

We held in part I, supra, that the

federal preemption argument is defensive

in nature. This is true whether the claim

is made as the basis of removal or to sup-

port federal jurisdiction in a declaratory

judgment action. See, e.g., Home Federal

Savings & Loan Association v. Insurance De-

partment, 571 F.2d 423 (8th Cir. 1978). This

case is not like Conference of Federal Sav-

ings & Loan Associations v. Stein, 604 F.2d

1256 (9th Cir. 1979), aff'd mem., 445 U.S.

921, 100 S.Ct. 1304, 63 L.Ed.2d 754 (1980),

First Federal Savings & Loan Association v.

Greenwald, 591 F.2d 417 (lst Cir. 1979), or

others cited by Prudential, Intervenor,

A-21

and amicus curiae, where state regulations

directly conflict with federal regulations

governing federal associations. No such

conflict exists here.

The defensive nature of Prudential's

claim is expressed throughout its complaint.

It alleges that a state action has been

brought seeking interest pursuant to the

contractual arrangements between the par-

ties, and that any order of the state court

requiring Prudential to pay interest or

otherwise account to the Madsens would be

contrary to the federal regulations. If

the Madsens had attempted to bring their

action in federal court by anticipating or

responding to Prudential's possible federal

defense, the case would lack federal juris-

diction. See Phillips Petroleum, 415 U.S.

at 128, 94 S.Ct. at 1004; Skelly Oil Co.,

339 U.S. 667, at 672, 70 S.Ct. 876, 879,

94 L.Ed. 1194; Home Federal Savings & Loan

Association, 571 F.2d at 426-27. It is

irrelevant for purposes of jurisdiction that

A-22

"federal consent is the source of state

authority." Gully, 299 U.S. at 116, 57

S.Ct. at 99; Oklahoma ex rel. Wilson v.

Blankenship, 447 F.2d 687, 691 (10th Cir).,

cert. denied, 405 U.S. 918, 92 S.Ct. 942,

30 L.Ed.2d 787 (1971).

Here as in Gully "[t]he most one can

Say is that a question of federal law is

lurking in the background." 299 U.S. at

117, 57 S.Ct. at 99-100. Accordingly, we

hold the court has no jurisdiction over

the declaratory judgment complaint and the

actions must be dismissed.

Reversed.

A-23

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF UTAH,

CENTRAL DIVISION

RICHARD MADSEN and

NANCY MADSEN, his

wife, for themselves

and all others simi-

larly situated,

Plaintiffs,

We

PRUDENTIAL FEDERAL

SAVINGS & LOAN ASSO-

CIATION, for utself

and all others simi-

larly situated,

Defendants.

UTAH BANKERS ASSOCI-

ATION,

Intervenor.

PRUDENTIAL FEDERAL

SAVINGS & LOAN ASSO-

CIATION,

Plaintiff,

Ve

RICHARD MADSEN and

NANCY MADSEN,

Defendants.

C 77-0350

ORDER

C Tf@iil

APPENDIX

B

The above-entitled actions came before

the court on April 6 and 9, 1979, for

hearing on various motions. The court,

having considered the memoranda of counsel

and their oral arguments, enters the

following order:

(1) Madsens' motion to remand in

C 77-0350 is denied. Federal question

jurisdiction is present in this action by

virtue of 12 C.F.R. § 545.6-11(c) and the

rule of North Davis Bank v. First National

Bank of Layton, 457 F.2d 820 (10th Cir.

1972) (action is removable if "directly

concerned with the construction of federal

law and a determination of rights there-

under"). The action was timely removed in

that Prudential filed a petition for re-

moval on behalf of the defendant class

within thirty days after October 12, 1977,

the date when Madsens were granted leave

to amend their complaint to allege a de-

fendant class. Prudential was entitled

B-2

to remove on behalf of the defendant class

without cegard to the probability or im-

probability of eventual certification of

the defendant class.

(2) Madsens' motion to dismiss for

lack of federal question jurisdiction in

C 77-0350 is denied. Important federal

questions remain in this action. Madsens'

reliance on res judicata is inappropriate.

Res Judicata does not prevent this court

from considering federal issues that were

previously ignored by the state courts in

the course of this litigation. No subse-

quent lawsuit is involved here. This is

Simply a later stage of the same lawsuit

that was before the state courts.

(3) The Federal Home Loan Bank Board's

motion for leave to file an amicus brief

is granted. The Board's brief, which was

filed with the court on September 21, 1978,

is received.

(4) Madsens' motion to continue dis-

position of Prudential's motion to dismiss

Or motion for summary judgment pending de-

termination of class issues is denied. For

reasons stated below, the court is per-

suaded that Madsens' claim against Pruden-

tial is wholly without merit. Since it is

manifest that they cannot succeed on the

merits, it is unnecessary to proceed to

class certification before resolving the

controversy on the merits.

(5) Prudential's motions for summary

judgment in both cases are granted. Under

the federal preemption doctrine, Madsens

have no claim against Prudential for in-

terest on their escrow account. 12 C.F.R.

§ 545.6-ll(c) clearly precludes the relief

the Madsens are seeking. That regulation

is not subject to attack under the theory

that it retroactively abrogates vested

rights. There is no assurance that, under

State law, Madsens at any time had any

B-4

kind of right, much less an inviolable

vested right, to receive interest on the

escrow funds. More importantly, the regu-

lation cited above dces not appear to alter

the federal law applicable to loans made

before June 16, 1975, but instead appears

to reaffirm the impact of 12 C.F.R. §§

544.1 ("association is not required to

distribute earnings on short-term savings

accounts") and 541.5 (defining shcrt-term

Savings account as including mortgage loan

escrow accounts for taxes and insurance).

(6) Intervenor's motion to strike de-

fendant class allegations is granted.

Under the holdings of La Mar v. H & B

Novelty & Loan Co., 489 F.2d 461 (9th Cir.

1973) and Weiner v. Bank of King of Prussia,

358 F. Supp. 684 (E.D. Pa. 1973), the Mad-

sens lack standing to sue defendants other

than Prudential and cannot, as a matter of

law, satisfy the Rule 23(a) requirements

of typicality and adequate representation.

B-5

Moreover, it appears to the court that

certification of the defendant class would

be futile in any event because of the great

probability that defendant class members

would take advantage of the "opting out"

provisions of Rule 23(c).

The conspiracy and juridical relation-

ship exceptions to the La Mar and Weiner

doctrines are not applicable in this case.

No conspiracy or juridical relationship

among defendants has been pleaded or shown

to exist. The vague allegation of an in-

dustrywide practice provides tien bistene

basis for finding a juridical relationship.

Moreover, the lending institutions in ques-

tion operate under diverse bodies of law

and distinctly separate regulatory agencies.

(7) Madsens' motion to maintain plain-

tiff and defendant classes is denied. The

defendant class cannot be maintained for

the reasons stated above with respect to

the motion to strike class allegations and

B-6

for the further reason that a defendant

class action does not appear to be superior

to other available methods for the fair

and efficient adjudication of the contro-

versy. Since the defendant class cannot

be maintained, neither can the plaintiff

class survive except for those who are

Prudential borrowers. Since those persons

clearly have no cause of action, it serves

no useful purpose to certify a class of

Prudential borrowers. The court is per-

suaded that no class certification is now

in effect. The certification orde: en-

tered by the state court was nullified by

the amendment of Madsens' complaint to

allege a vastly broader class of plaintiffs.

(8) Madsens' motion to give notice to

class members and motion for leave to com-

mMunicate with citizens committee are denied.

(9) All other motions pending in these

actions are dismissed as moot.

B-7

For the reasons stated herein and for

the further reasons stated by the court on

the record on April 6 and 9, 1979,

IT IS SO ORDERED.

DATED this 19th day of April, 1979.

/s/ ALDON J. ANDERSON

United States District

Judge

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF UTAH, CENTRAL DIVISION

RICHARD MADSEN and

NANCY MADSEN, his

wife, for themselves

and all others simi-

larly situated, JUDGMENT

Plaintiffs,

Vv. C 77-0350

PRUDENTIAL FEDERAL

SAVINGS & LOAN ASSO-

CIATION, for itself

and all others simi-

larly situated,

Defendants.

UTAH BANKERS ASSOCIA-

TION,

RR de de eee ee ee

Intervenor.

For the reasons stated in the court’‘s

order dated April 19, 1979,

IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that this action is dismissed with

prejudice, plaintiffs having no cause of

action against defendants.

APPENDIX C

DATED this 19th day of April, 1979.

/s/ ALDON J. ANDERSON

United States District Judge

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF UTAH, CENTRAL DIVISION

PRUDENTIAL FEDERAL

SAVINGS & LOAN ASSO-

CIATION,

Plaintiff, JUDGMENT

C 7fGilli

RICHARD MADSEN and

)

)

)

)

)

)

Vv. )

)

)

NANCY MADSEN, )

)

)

Defendants.

For the reasons stated in the court's

order dated April 19, 1979, the court

HEREBY ORDERS, ADJUDGES, AND DECLARES

the rights of the parties as follows:

Under applicable federal law, plaintiff

has no o} ligation to pay and cannot be com-

pelled to pay interest or otherwise account

to defendants for the net earnings on funds

held by plaintiff in defendants' mortgage

loan escrow account.

APPENDIX D

DATED this 19th day of April, 1979.

/s/ ALDON J. ANDERSON

United States District

Judge

D-2

Supreme Court of Utah.

Richard MADSEN and Nancy A. Madsen,

his wife, Plaintiffs and Appellants,

V o

PRUDENTIAL FEDERAL SAVINGS &

LOAN ASSOCIATION, Defendant

and Respondent.

No. 14530.

Decided Jan. 14, 1977.

MAUGHAN, Justice:

On appeal is a summary judgment granted

to defendant, hereafter Prudential, against

plaintiffs, hereafter Madsen or trustors.

The action is founded upon terms of a deed

of trust; and was brought to determine the

status of the parties, and the legal conse-

quences pursuant to such terms. We reverse

the summary judgment, and remand for further

proceedings. Costs are awarded to Midsen.

Statutory references are to U.C.A. 1953.

Madsens are trustors, and defendant is

both the trustee and beneficiary under a

deed of trust executed September 21, 1964,

APPENDIX E

for the purpose of securing a promissory

note in the sum of $16,800. The security

conveyed was the home in which plaintiffs

4

reside.

To protect the security, the trustors

further agreed:

2. To keep the buildings and im-

provements on the above described pre-

mises insured against loss by fire, and

such other casualties and in such forms

of insurance, and in such amounts, and

in such companies as may be required by

and as may be satisfactory to the bene-

ficiary, for the benefit of the bene-

ficiary, and to pay the premiums there-

for promptly when due, and the policies

of insurance shall be held by the bene-

ficiary, it being understood, however,

that the beneficiary shall in no event

be responsible for the sufficiency or

form or substance of any policy of in-

surance, or for the solvency or suffi-

ciency of any insurance company in re-

spect to the insurance herein provided.

4. To pay before delinquent all taxes

and assessments affecting said property

(including assessments on appurtenant

water stock and costs, interest and pen-

alties thereon); and all encumbrances,

charges and liens, with interest and

penalties on said property or any part

thereof, which appear to be or are prior

Or superior hereto.

E-2

In addition to the monthly payments

as provided in said note, the trustor

agrees to pay to the beneficiary, upon

the same day each month, budget pay-

ments estimated to equal one-twelfth

of the annual taxes and insurance pre-

miums; said budget payments to be ad-

justed from time to time as required,

and said budget payments are hereby

pledged to the beneficiary as addi-

tional security for the fill perfor-

mance of this deed of trust and the

note secured hereby. The budget pay-

ments so accumulated may be withdrawn

by the beneficiary for the payment of

taxes or insurance premiums due on the

premises. The beneficiary may at any

time, without notice, apply said bud-

get payments to the payment of any sums

due under the terms of the deed of

trust and the note secured hereby or

either of them. Trustor's failure to

pay said budget payments shall consti-

tute a default under this trust.

[Emphasis supplied. ]

Madsen's appeal is predicated on the

theory that the monthly budget payments

under provision 4 of the instrument con-

stitute a common law pledge. They alleged

defendant had invested this pledged pro-

perty, and earned a substantial profit.

An accounting is sought on the ground the

Substantial profits from the investment

of the pledged funds constitute an unjust

E-3

enrichment, entitling them to restitu-

tion.

The trial court ruled the funds ac-

cumulated, from the monthly budget pay-

ments, were not pledged property. There-

fore, the law of pledge was not applicable.

In Campbell v. Peter! this court

stated:

A pledge is really one of the sim-

plest forms of security. It is the

passing of possession of a chattel by

the owner thereof to the pledgee who

is thereby entitled to hold it until

the debt is paid or the obligation

performed. [Citations]

We further cited with approval the

definition in the Rest&@@ement Security,

Sec. l, p. 5, which provides:

A pledge is a security interest in

a chattel or an intangible represented

by an indispensable instrument, the

interest being created by a bailment

for the purpose of securing the pay-

ment of a debt or the performance of

some other duty.

Comment d. of Sec. 1, p. 10 states:

1. 108 Utah 565, 568, 162 P.2d 754, 755

(1945).

E-4

The term "chattel" means any phy-

sical object which is capable of

manual delivery and which is not the

subject-matter of real property. It

includes instruments and documents.

A deposit of money as security for

the performance of a contract has been

recognized as a valid pledge. *

- - « it [is] of no consequence

that the amount of funds subjected to

the lien, and thus, the amount of the

lien, may vary during the existence of

the pledge. The amount is ascertain-

able at any given time, and thus the

lien is perfected as to amount.3

In the current matter, plaintiffs, as

the trustors, agreed to protect the se-

curity of Prudential by paying the insur-

ance and taxes. Madsen agreed to pay the

budget payments, and to pledge them to the

beneficiary "as additional security for

the full performance" of the deed of trust

and the note secured thereby.

2. Anderson v. Pacific Bank. 112 Cal. 598,

44 P, 1063 (1896); United States v. Harris,

USDC WD La.1966, 249 F. Supp. 221, 224;

68 Am.Jur.2d, Secured Transactions, Sec. 58,

pp. 886-887.

3. United States v. Harris, note 2 supra.

E=-5

The essential elements of a pledge

are contained in the agreement, viZ.,

the existence of a debt or obligation,

a transfer of property to the pledgee, to

be held as security and, if necessary,

to be used to assure performance of the

Obligation. Furthermore, the payments

accumulated, may, in the discretion of

the beneficiary, be withdrawn for the

payment of taxes, insurance premiums due,

or any sum due under the deed of trust,

Or note. There is no contract right grant-

ed to Madsen to compel defendant to pay

the insurance premiums or taxes. The pay-

ments accumulated may be retained as se-

curity or applied for the purposes stated.

The primary obligation to pay the insurance,

taxes, and any sum due under the deed of

trust or note is Madsen's. The provisions

of section 4 grant a security interest

to Prudential, for the purpose of securing

performance of trustors' obligations.

E-6

Madsen cites Hoyt v. Upper Marion

Ditch Company? to establish the legal con-

sequences, under a common law pledge,

wherein profits accrue to pledgee; as a

result of the possession of a pledged

chattel. We there said it is the duty of

a pledgee to collect the accruals, from

the security, and apply them to the debt.

We there explained: when the property

pledged is of such a character as not to

be lessened by use, the pledgee does not

incur liability by using it; but, if from

the use of it profits are derived, pledgee

must, in the absence of a special agreement,

account for them to the pledgor. There

cited as authority was 21 R.C.L. 665-666,

Sec. 28; the relevant provisions of which

are:

. - - Lf from the use of the pro-

perty pledged profits are derived,

the pledgee must in the absence of a

special agreement to the contrary ac-

count therefor to the pledgor, and

4. 94 Utah 134, 143, 76 P.2d 234 (1938).

E-7

apply the net proceeds of such use to

the extinction of the debt. So if

any profits accrue from property held

as collateral, such profits, while

they may be collected and retained by

the pledgee, must be credited to the

pledgor, or applied to the sum due

from him, as where dividends accrue

on pledged stock, or interest is

collected on a security held as col-

lateral.°

The foregoing principles of the law of

pledge are not new. Indeed, Madsen's

counsel cites the Code of Manu and that

of Hammurabi, for early examples. © These

principles have not been discarded. In

our Uniform Commercial Code we find:

Unless otherwise agreed, when

collateral is in the secured party's

possession

(c) the secured party may hold as addi-

tional security any increase or

profits (except money) received

from the collateral, but money so

received, unless remitted to the

debtor, shall be applied in

5. See 69 Am.Jur.2d Secured Transactions,

§ 223, pp. 58-59. .

6. I. A. Rocureck and J. S. Wigmore,

Source of Ancient and Primitve Law,

p. 401 (1915).

E-8

reduction of the secured obliga-

tions. « +s!

An excursus to 9-207, of the Uniform

Commercial Code, illuminates the provi-

sion: 8

2. Subsection (2) states rules,

which follow common law precedents,

and which apply, unless there is agree-

ment otherwise, in typical situations

during the period while the secured

party is in possession of the collateral.

This principle is also set forth in the

Restatement, Security, Sec. 27, p. 91:

The pledgee has the duty to account

to the pledgor for the increase or

profits accruing to the pledgee as a

result of the possession of the pledged

chattel.

ELLETT and WILKINS, JJ., concur.

CROCKETT, Justice (dissenting).

I have no disagreement with the general

proposition advocated by the plaintiffs,

and as set forth in the main opinion, that

7. TOA=9—-207(2), U.C.A., 1953.

8. 3 ULA, Uniform Commercial Code

(Master Edition) § 9-207 p. 123.

E-9

where there is a simple pledge of pro-

perty, which can be put to profitable

use without lessening its value, and the

pledgee uses it for a profit, the profit

should inure to the benefit of the pledgor,

unless the understanding of the parties

is to the contrary. It is not my under-

standing that the position of the defen-

dant or of the trial court is in disagree-

ment therewith. That position briefly

stated is this: That it is shown that

both the plaintiffs and the defendant were

fully aware of the manner in which this

so-called monthly "budget payment" of one-

twelfth of the taxes and insurance for the

year was to be made and handled to insure

payments of those essentials; that even

though plaintiffs were so aware and con-

sidered this to be unfair, they did not

then so state, nor make any request that

interest should be paid thereon, but volun-

tarily entered into the contract fully and

E-10

clearly setting forth the rights and

obligations of the parties, but without

the contract containing any such cove-

nant as to the payment of interest.

There are some elementary principles

of contract law that should be given con-

sideration here: that when parties nego-

tiate on a subject matter and reduce their

agreement to writing, it should be presumed

to consolidate their entire understanding

as to mutual rights and obligations on

: and further, that

that subject matter;

the contract should be enforced and en-

forceable against each party only in ac-

cordance with the covenants expressed

therein. ?

Pertinent to the plaintiffs' demand

for payment of interest on the "budget pay-

ment" it is to be noted that the documentary

1. Mawhinney v. Jensen, 120 Utah 142,

232 P.2d 769.

2. See Jones v. Acme Bldg. Products, 22

Utah 2d 202, 450 P.2d 743.

E-1l

evidence shows that over the years of

their contract that account had an aver-

age balance of $275.42, which at an

interest rate of 5% would produce $13.70

per year; and that the estimated cost to

the bank of the collecting, accounting and

disbursing of such "budget payments"

would be $16 + per account per year.

When all of the foregoing is considered

in the light of the principles of law set

forth above, I think the trial court was

justified in adopting the position essayed

by the defendant: that if the plaintiffs

had desired a covenant to pay interest on

the "budget payment" they should have so

stated and negotiated for such a covenant

in the contract. But having failed to do

so, they should not be permitted to stand

by and make these payments for 11 years

without expressing any expectation or

making any demand for interest thereon,

and then attempt to impose a new obligation

E-12

upon the defendant, not provided for in

the contract.

I would affirm the judgment, leaving

the parties to their rights as expressed

in the covenants of the contract as made,

Or as may be made in the future with re-

spect to interest on such payments.

HENRIOD, C. J., concurs in the views

expressed in the dissenting opinion of

CROCKETT, J.

E-13

NOVEMBER TERM - January 23, 1981

Before Honorable Oliver Seth, Honorable

William J. Holloway, Jr., Honorable Robert

H. McWilliams, Honorable James E. Barrett,

Honorable William E. Doyle, Honorable Mon-

roe G. McKay, Honorable James K. Logan,

Honorable Stephanie K. Seymour and Honor-

able John W. Peck*, Circuit Judges.

RICHARD MADSEN and NANCY )

MADSEN, his wife for them-)

selves and all others

similarly situated,

Plaintiffs-Appellants,

Vv. No. 79-1362

PRUDENTIAL FEDERAL SAV-

INGS & LOAN ASSOCIATION,

for itself and all others

similarly situated,

Defendant-Appellee,

UTAH BANKERS ASSOCIATION,

Intervenor,

FEDERAL HOME LOAN BANK

BOARD,

ee ee a ee ee ee eet ee”

Amicus Curiae.

RICHARD MADSEN and NANCY

MADSEN, his wife, for

themselves and all others

similarly situated,

No. 79-1535

eee eee ee

Petitioners,

APPENDIX F

Ve

HONORABLE ALDON J. ANDER-

SON, Judge of the United

States District Court for

the District of Utah,

Central Division,

ee eee eee ee

Respondent.

This matter comes on for considera-

tion of appellees' petition for rehearing

and suggestion for rehearing en banc in

the captioned causes.

Upon consideration whereof, the pe-

tition for rehearing is denied by the panel

to whom the cases were argued and submitted.

The petition for rehearing having

been denied by the panel to whom the cases

were argued and submitted, and no member

of the panel nor judge in regular active

service on the Court having requested that

the Court be polled on rehearing en banc,

Rule 35, Federal Rules of Appellate Proce-

dure, the suggestion for rehearing en banc

is denied.

HOWARD K. PHILLIPS, Clerk

By: /s/ Robert L. Hoecker

Chief Deputy Clerk

*Of the United States Circuit Court for the

Sixth Circuit, sitting by designation.