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Columbian Financial Corporation v. Stork

United States District Court, D. Kansas

November 18, 2014

COLUMBIAN FINANCIAL CORPORATION, THE COLUMBIAN BANK & TRUST CO., Plaintiffs,
v.
JUDI M. STORK, DERYL K. SCHUSTER, OFFICE OF THE STATE BANK COMMISSIONER OF KANSAS, EDWIN G. SPLICHAL, and J. THOMAS THULL, Defendants.

MEMORANDUM AND ORDER

SAM A. CROW, Senior District Judge.

This 42 USC § 1983 case alleging due process violations comes before the Court on Defendants' motion to dismiss.

I. Motion to Dismiss Standard

Defendants move to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6).

Defendants contend the complaint is jurisdictionally deficient. Rule 12(b)(1) of the Federal Rules of Civil Procedure authorizes a court to dismiss a claim for lack of subject matter jurisdiction. Federal courts are courts of limited jurisdiction, so may exercise jurisdiction only when specifically authorized to do so. Castaneda v. I.N.S., 23 F.3d 1576, 1580 (10th Cir. 1994). Upon a defendant's Rule 12(b)(1) motion to dismiss, the plaintiff bears the burden of proving jurisdiction.

Defendants also allege factual insufficiency. Under Rule 12(b)(6), the Court assesses whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted. Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991). The Supreme Court recently clarified the requirement of facial plausibility:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to "state a claim for relief that is plausible on its face." Id. [ Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)] at 570. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the Defendant is liable for the misconduct alleged. Id. at 556 [127 S.Ct. 1955]. The plausibility standard is not akin to a "probability requirement, " but it asks for more than a sheer possibility that a Defendant has acted unlawfully. Id. Where a complaint pleads facts that are "merely consistent with" a Defendant's liability, it "stops short of the line between possibility and plausibility of entitlement to relief.'" Id. at 557 [127 S.Ct. 1955].

Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Id. "[C]ourts should look to the specific allegations in the complaint to determine whether they plausibly support a legal claim for relief." Alvarado v. KOB-TV, L.L.C., 493 F.3d 1210, 1215 n. 2 (10th Cir. 2007).

II. Uncontested Facts

The facts are uncontested. Plaintiff Columbian Financial Corporation ("CFC") is a Kansas for-profit corporation and was the sole shareholder of Columbian Bank and Trust Company. Plaintiff The Columbian Bank and Trust Company ("Bank") was a state-chartered bank with its primary business location at 701 Kansas Avenue, Topeka, Kansas. It was organized under the laws of Kansas, was based in Topeka, and operated through nine branch offices in Kansas and Missouri.

Defendant Judi Stork is the Deputy Bank Commissioner of Kansas and is sued in her official capacity as well as in her individual capacity. Ms. Stork served as Acting Bank Commissioner from June 19, 2010, to January 6, 2011, and from November 2, 2013, to March 18, 2014. When not serving as Acting Bank Commissioner, she served as Deputy Bank Commissioner at all times relevant to this lawsuit. Defendant Deryl K. Schuster is the current State Bank Commissioner of Kansas and is sued in his official capacity in that position. He served as Acting Bank Commissioner from March 19, 2014 to April 6, 2014 then as Bank Commissioner from April 6, 2014 to the present. Defendant Edwin G. Splichal served as Bank Commissioner from January 7, 2011, to November 1, 2013, and is sued in his individual capacity. Defendant J. Thomas Thull served as Bank Commissioner from March 1, 2007, to June 18, 2010, and is sued in his individual capacity. Defendant Kansas Office of the State Bank Commissioner ("OSBC") is a self-funded regulatory agency.

As a state-chartered bank with federally-insured deposits, the Bank was subject to supervision by both the OSBC and the Federal Deposit Insurance Corporation ("FDIC"). In January of 2008, an FDIC examiner conducted an on-site evaluation of the Bank. On April 30, 2008, the FDIC issued its Report of Examination, which downgraded the Bank from its previous ratings in all six of the relevant components.

On July 15, 2008, the Bank stipulated and consented to the issuance of a cease and desist order with the OSBC and FDIC. Dk.15-2 pp. 3-31. On August 22, 2008, Commissioner Thull, acting in his official capacity, issued a Declaration of Insolvency and Tender of Receivership (the "Declaration") finding the Bank insolvent. The Declaration made no reference to the cease and desist order, but stated that Commissioner Thull was immediately taking charge of the Bank and all of its properties and assets on behalf of the State of Kansas pursuant to K.S.A. § 9-1903, § 9-1905, and § 77-536.

The latter statute permits a state agency to use emergency proceedings in a situation involving an immediate danger to the public health, safety or welfare requiring immediate state agency action. K.S.A. § 77-536. K.S.A. § 9-1903 allows a Commissioner taking charge of a bank to appoint a special deputy to manage the affairs of the bank "for such period of time as deemed reasonable and necessary by the commissioner before returning charge of the bank... to the board of directors." K.S.A. § 9-1905 requires a Commissioner taking charge of a bank to "ascertain its actual condition as soon as possible by making a thorough investigation into its affairs and condition, " and provides that "if the commissioner shall be satisfied that such bank... cannot sufficiently recapitalize, resume business or liquidate its indebtedness... the commissioner forthwith shall appoint a receiver." The Declaration stated that Mr. Thull was satisfied that the Bank could not resume business and appointed the FDIC as the Bank's receiver. The FDIC sold a substantial portion of the Bank's assets in a prearranged sale the same day as the seizure.

The Declaration notified the Bank that it could petition for judicial review of the OSBC's actions pursuant to the Kansas Judicial Review Act (KJRA), K.S.A. § 77-601 et seq. The Bank and CFC timely filed a petition for review in the District Court of Shawnee County, Kansas on September 22, 2008. In response, the OSBC argued the Bank was not entitled to review because no remedy could be had against the OSBC or the Commissioner. The district court apparently did not agree, as it reached the merits of Plaintiffs' due process claim, stating:

"It seems clear that bank seizures, given their exigency, have long been excused from any notice or pre-hearing seizure requirement ( Fahey v. Mallonee, 332 U.S. 245, 91 L.Ed.2030 (1947)). However, such is not necessarily the case post-seizure. Some substantive post-deprivation review is required in order to constitutionally ground the decision. Mathews v. Eldridge, 424 U.S. 319, 47 L.Ed.2d 18 (1976). A bank seizure is not excepted."

Columbian Bank and Trust Co. v. Splichal, 329 P.3d 557, 2014 WL 3732013, p. 9 (Kan. App. 2014) (quoting the district court decision). On March 29, 2010, the Shawnee County District Court remanded the matter to the Commissioner to conduct post-deprivation proceedings under K.S.A. § 77-536.

On remand, the OSBC initiated administrative proceedings to which both the Bank and CFC were parties. Both parties stated uncontested facts and filed motions for summary judgment. On April 18, 2012, then-Commissioner Splichal issued a decision in favor of the State Bank Commissioner on the parties' cross-motions for summary judgment.[1] That decision specifically stated that the Bank and CFC had the right to petition for judicial review.

The Bank and CFC filed two such petitions. The OSBC responded by filing motions to dismiss, arguing the Bank and CFC were not entitled to judicial review because no remedy was available. The Shawnee County District Court agreed so dismissed the petitions as moot on January 30, 2013.[2]

Both parties appealed that decision to the Kansas Court of Appeals (KCOA), which affirmed after consolidating the judicial review actions. The KCOA found that both CFC and the Bank had standing, that the FDIC as receiver did not need to be a party, and that the issues were not moot. But it affirmed the denial of relief because the Bank and CFC had not met their burden of proving the invalidity of the Commissioner's action under the KJRA. Columbian Bank and Trust Co. v. Splichal, 2014 WL 3732013, 1 (2014).

The KCOA noted that the judicial review action did not seek to recover assets of an estate but sought a declaratory judgment on the Commissioner's authority to close a bank, seize its assets, and appoint a receiver. The KCOA addressed the due process issue, finding that banks and owners of a FSLIC-insured savings and loan association have a constitutional right to be free from unlawful deprivations of their property, but that no pre-deprivation hearing was necessary. It held that CFC and the Bank had received sufficient notice and opportunity to be heard post-deprivation by the Commissioner's review under the KAPA and the court's review under the KJRA. Id., 2014 WL 3732013, at 9.

The KCOA further found that the Commissioner did not need to postpone its action to protect the public until after the bank was actually unable to meet a customer's demand for withdrawal of funds. Instead, the statute permits the Commissioner to reasonably consider future demands that will be made on a bank in order to prevent imminent harm to depositors and to the public. The KCOA found substantial evidence in support of the Commissioner's conclusion that the Bank was insolvent. Id. In sum, the Commissioner was authorized to declare the Bank insolvent under K.S.A. 9-1902(2), to take charge of the Bank and all of its assets under K.S.A. 9-1903, and to appoint a receiver under K.S.A. 9-1905. Id., at 11.

Plaintiffs filed a petition with the Kansas Supreme Court for review of the KCOA's decision, and it is pending.

Plaintiffs then filed this separate action, alleging procedural and substantive due process violations based on the seizure itself, the lack of a pre-deprivation hearing, and the lack of a timely and meaningful post-deprivation hearing. Plaintiffs seek damages, punitive damages, costs, fees, rescission of the Declaration of Insolvency and Tender of Receivership, a declaratory judgment that the Declaration of Insolvency and Tender of Receivership is invalid, an injunction requiring the Defendants "to comply with state and federal law, " and a constructive trust.

III. Younger Abstention

The parties raise multiple issues regarding Defendants' immunity, Plaintiffs' ability to bring suit under § 1983, Defendants' ability to be sued under that statute, and the Court's exercise of its Declaratory Judgment discretion. But first, the Court examines its power to hear the case, given the parallel state court proceedings.

Younger abstention requires federal courts to abstain from exercising jurisdiction in certain circumstances.

Younger abstention dictates that federal courts not interfere with state court proceedings by granting equitable relief-such as injunctions of important state proceedings or declaratory judgments regarding constitutional issues in those proceedings-when such relief could adequately be sought before the state court.

Amanatullah v. Colorado Bd. of Med. Exam'rs, 187 F.3d 1160, 1163 (10th Cir. 1999) (quoting Rienhardt v. Kelly, 164 F.3d 1296, 1302 (10th Cir. 1999)). Younger abstention requires federal courts to abstain from exercising jurisdiction when (1) there is an ongoing state criminal, civil, or administrative proceeding, (2) the state court provides an adequate forum to hear the claims raised in the federal complaint, and (3) the state proceedings "involve important state interests, matters which traditionally look to state law for their resolution or implicate separately articulated state policies." Taylor v. Jaquez, 126 F.3d 1294, 1297 (10th Cir. 1997)). See Middlesex Cnty. Ethics Comm. v. Garden State Bar Ass'n, 457 U.S. 423, 432, 102 S.Ct. 2515, 73 L.Ed.2d 116 (1982).

Plaintiffs do not dispute that the last two requirements are met, so the issue is only whether there is an ongoing state proceeding. This inquiry involves two subparts: whether there is a pending state proceeding and whether it is the type of state proceeding that is due the deference accorded by Younger abstention. Brown ex rel. Brown v. Day, 555 F.3d 882, 888 (10th Cir. 2009). Plaintiffs admit that there is a pending state proceeding, but contend that it is not due Younger deference because it is remedial rather than coercive in nature.

Brown distinguished between remedial proceedings, to which Younger does not apply, and coercive proceedings, to which it does apply. That distinction was made in "the unique context of applying Younger to administrative proceedings, " Morkel v. Davis, 513 Fed.Appx. 724, 728, 2013 WL 1010556, 3 (10th Cir. 2013), so is appropriate here. Brown identified the following factors relevant to the determination of whether an administrative proceeding is coercive or remedial in nature: (1) whether the state proceeding is an option available to the federal plaintiff on her own initiative to redress a wrong inflicted by the state or whether the participation of the federal plaintiff in the state administrative proceeding is mandatory; (2) whether the state proceeding is itself the wrong which the federal plaintiff seeks to correct via injunctive relief under section 1983; and (3) whether the federal plaintiff has committed an alleged bad act. Brown, 555 F.3d at 890-91.

Each of these factors points toward the conclusion that the administrative proceeding at issue here was coercive, and thus the type of state proceeding that is due the deference accorded by Younger abstention. Plaintiffs allegedly committed a "bad act" in reaching the point of risk or insolvency that led the OSBC to take emergency action to declare insolvency and appoint a receiver. This triggered the state-initiated administrative enforcement proceedings against Plaintiffs, who had to participate or forfeit their claims. And the state proceeding is itself the wrong which the federal plaintiff seeks to correct via injunctive relief, as the alleged deficiencies in the administrative proceedings form the basis for Plaintiff's due process claims - the only claims made in this case.

Where, as here, Plaintiffs claim that constitutional rights would be violated by virtue of the operation of the state proceedings, comity and federalism concerns are at their highest. Brown, 555 F.3d at 893.

State courts are generally equally capable of enforcing federal constitutional rights as federal courts. See Middlesex Cnty. Ethics Comm., 457 U.S. at 431, 102 S.Ct. 2515. And when constitutional challenges impact state proceedings, as they do here, "proper respect for the ability of state courts to resolve federal questions presented in state-court litigation mandates that the federal court stay its hand." Pennzoil Co., 481 U.S. at 14, 107 S.Ct. 1519.

Morkel, 513 Fed.Appx. at 728. The Kansas state courts addressed and resolved the same due process questions presented in this case. Because Plaintiffs are attempting to use the federal courts to shield themselves from state court enforcement efforts and to remedy alleged constitutional wrongs in the ongoing state proceedings, Younger abstention is appropriate.

Plaintiff's claims for injunctive relief, declaratory relief, a constructive trust, and rescission of the Declaration of Insolvency and Tender of Receivership shall thus be dismissed without prejudice for lack of subject matter jurisdiction. See Morkel, 513 Fed.Appx. at 729. See also Ecco Plains, LLC v. United States, 728 F.3d 1190 (10th Cir. 2013) (constructive trust is an equitable remedy); Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012) (rescission is an equitable remedy).

IV. Damages Claims, Official Capacity

In addition to equitable relief, Plaintiffs seek monetary damages against all Defendants, which are not included in Younger abstention. Accordingly, the Court addresses the parties' arguments relating to this relief.

A. Officials not Proper Defendants

Defendants Stork and Schuster, who have been sued in their official capacities, contend that they are not suable "persons" under § 1983.[3] Neither a State nor its officials sued in their official capacities for damages is a "person" under § 1983. Will v. Michigan Dept. of State Police, 491 U.S. 58, 71, 109 S.Ct. 2304, 2312 (1989).

Plaintiffs contend that they seek only prospective, injunctive relief against Defendants Stork and Shuster in their official capacities, Dk. 21 p. 36. The Court thus binds Plaintiffs to this position, which is not clear from the face of the complaint. A state official in his or her official capacity, when sued for injunctive relief, is a "person" under § 1983 because "official-capacity actions for prospective relief are not treated as actions against the State." Kentucky v. Graham, 473 U.S., at 167, n. 14, 105 S.Ct., at 3106, n. 14; Ex parte Young, 209 U.S. 123, 159-160, 28 S.Ct. 441, 453-454, 52 L.Ed. 714 (1908). But injunctive relief is barred by Younger abstention, as addressed above.

B. Bank not a Proper Plaintiff

The parties agree that the Bank is an unincorporated association. See Dk. 21, p. 35. Defendants claim that as an unincorporated association, the Bank is not a "person" capable of ...


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