Glen Kermit Till and Bettie F. Till, Plaintiffs-appellants, v. Unifirst Federal Savings and Loan Association and Wortman &mann, Inc., Defendants-appellees, 653 F.2d 152 (5th Cir. 1975)

Appellants Glen and Bettie Till appeal from an adverse summary judgment by the district court dismissing their suit for damages against defendants Unifirst Federal Savings and Loan Association (Unifirst) and Wortman & Mann, Inc. (W&M), predicated on the alleged failure of defendants to comply with the provisions of the National Flood Insurance Program, 42 U.S.C. §§ 4012a(b) and 4104a (and all amendments),¹  and on state common law causes of action for fraud and negligence. This appeal presents for the first time the novel question whether a private right of action for damages against a federally insured savings and loan association is implied for failure to comply with the federal flood insurance laws. The district court held that no private right of action existed under the federal statutes and that all other claims presented by appellants failed since they were dependent upon implication of the private right of action in federal law. We affirm the district court's holding that the federal flood insurance statutes imply no private right of action cognizable in federal law. However, we vacate dismissal of the state common law causes of action and direct that they be remanded to the state court from which the suit originated.

Glen and Bettie Till purchased a residence in Jackson, Mississippi, on June 20, 1975, for $170,000 which was paid in part by a $75,000 secured loan obtained from Unifirst. In the spring of 1979, the Pearl River swelled over its banks and flooded much of Jackson and the surrounding area including the Tills' home.

The Tills filed this complaint in Mississippi state court seeking to recover $175,847.67 in special damages and $1,758,476.70 in punitive damages from defendants as a result of their losses in the 1979 flood. In their complaint, plaintiffs alleged that at the time the property was purchased, the area had been designated by the Department of Housing and Urban Development (HUD) as a flood hazard area. Accordingly, they claimed that under the federal flood program instituted by the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, Unifirst had two duties: (1) to notify the Tills at least ten days prior to closing their loan that the property was located in a flood hazard area, and (2) to require the purchase of flood insurance before executing the loan. Plaintiffs further alleged that Unifirst and its wholly owned subsidiary, W&M, failed to fulfill these duties. As a result of defendants' alleged failure to comply with federal law, the Tills asserted they were entitled to recover damages under state common law causes of action for fraud and negligence.

Defendants removed the case pursuant to 28 U.S.C. § 1441 to the United States District Court for the Southern District of Mississippi, claiming federal jurisdiction under 28 U.S.C. §§ 1331 and 1337.²  In federal court, plaintiffs made it clear that they sought damages from defendants through a private right of action implied from the federal flood statutes, as well as seeking relief through their general state claims. Following a lengthy discovery period, defendants filed a motion to dismiss under Fed. R. Civ. P. 12(b) (6). Both sides filed memoranda and other materials on the issues presented by the motion and a hearing on the motion was conducted by the district court. The district judge, after noting that both parties had presented materials and the court had considered matters that were outside the scope of the pleadings, ruled the Rule 12(b) (6) motion would be treated as a motion for summary judgment. Accordingly, the district court granted summary judgment to defendants dismissing the suit of plaintiffs, holding that no private right of action was implied from the federal law and that all alleged common law actions were dependent upon the existence of the federal action.

On appeal, appellants assert that the district court erred in holding that there is no implied federal private cause of action under the federal flood laws. They also contend that the common law actions in their original complaint are in no way dependent on the federal law.³ 

From 1968 to 1977, Congress passed a number of enactments which compose the National Flood Insurance Program (the "Program"). The first enactment, the National Flood Insurance Act of 1968, created a nationwide program to make flood insurance available to property owners in flood prone areas and to encourage the adoption by local communities of sound land use policies designed to diminish damage from flooding.⁴  In establishing this program, Congress summarized the factors that made this action necessary as follows:

(a) The Congress finds that (1) from time to time flood disasters have created personal hardships and economic distress which have required unforeseen disaster relief measures and have placed an increasing burden on the Nation's resources; (2) despite the installation of preventive and protective works and the adoption of other public programs designed to reduce losses caused by flood damage, these methods have not been sufficient to protect adequately against growing exposure to future flood losses; (3) as a matter of national policy, a reasonable method of sharing the risk of flood losses is through a program of flood insurance which can complement and encourage preventive and protective measures; and (4) if such a program is initiated and carried out gradually, it can be expanded as knowledge is gained and experience is appraised, thus eventually making flood insurance coverage available on reasonable terms and conditions to persons who have need for such protection.

42 U.S.C. § 4001(a).⁵ 

The procedures created by the 1968 Act were voluntary in nature. Congress anticipated that the local communities would voluntarily adopt the land use restrictions necessary for its citizens to participate in the flood insurance plan. However, it became clear that local acceptance of the voluntary program was inadequate.⁶  Accordingly, Congress enacted the Flood Disaster Protection Act of 1973 which amended the Program to essentially make its adoption by the local governing bodies mandatory.

The 1973 Act used severe sanctions against non-participating communities to encourage enrollment in the Program. Any community not participating by July 1, 1975 would receive neither federal financial assistance for acquisition or construction purposes⁷  nor federally related financing by private lending institutions for use in HUD designated flood risk zones.⁸  Participation was conditioned upon adoption by the local community of the HUD promulgated guidelines for land use. Thus, a community not adopting the land use controls and participating in the Program was virtually cut off from federal assistance.

In those areas such as Jackson that did adopt the requisite land use controls, the 1973 Act further directed the appropriate federal supervisory agencies⁹  to adopt regulations requiring lenders not to make loans in flood zones unless the property owners first purchased flood insurance. 42 U.S.C. § 4012a(b).¹⁰  This provision was followed with an enactment by Congress in 1974 that required the same federal supervisory agencies to promulgate regulations directing lenders to notify borrowers, a reasonable period in advance of closing, that the property is located in a HUD identified flood risk zone. 42 U.S.C. § 4104a.¹¹  It is upon these two provisions that appellants claim they are entitled to a private right of action for damages from the 1979 Jackson flood.

Once again we are asked to find from the language and history of a federal statute, an implied cause of action not explicitly provided for by Congress. The standards which such a cause of action must meet before it may be implied have become increasingly more stringent. Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S. Ct. 2479, 2490, 61 L. Ed. 2d 82 (1975). The factors to be considered in this regard were delineated by the Supreme Court in Cort v. Ash, 422 U.S. 66, 95 S. Ct. 2080, 45 L. Ed. 2d 26 (1975). They are as follows: (1) whether the plaintiff is one of a class for whose especial benefit the statute was enacted; (2) whether there is an indication of legislative intent to create or deny such remedy; (3) whether such a remedy would be inconsistent with the underlying legislative purpose; and (4) whether the cause of action is one traditionally relegated to state law. Cort v. Ash, supra, 422 U.S. at 78, 95 S. Ct. at 2088.

The theory of implied private actions is, of course, basically a matter of statutory construction. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 15, 100 S. Ct. 242, 245, 62 L. Ed. 2d 146 (1979) (hereinafter TAMA); Belluso v. Turner Communications Corp., 633 F.2d 393, 395 (5th Cir. 1980). In interpreting federal statutes, Cort and its progeny all focus upon the "ultimate issue" of whether it was Congress' intent to create a private remedy. California v. Sierra Club, --- U.S. ----, ----, 101 S. Ct. 1775, 1779, 68 L. Ed. 2d 101 (1981); Rogers v. Frito Lay, Inc., 611 F.2d 1074, 1078 (5th Cir. 1980), cert. denied, --- U.S. ----, 101 S. Ct. 246, 66 L. Ed. 2d 115 (1980). To that end, our search to determine the congressional intent concerning sections 4012a(b) and 4104a¹²  must consider the policies and purposes of the overall legislative scheme of which these two sections are a component.¹³ 

In deciding the first Cort factor whether appellants are the especial beneficiaries of sections 4012a(b) and 4104a we must determine if Congress intended to "create a federal right in favor of the plaintiff." Cort v. Ash, supra, 422 U.S. at 78, 95 S. Ct. at 2088. Accordingly, the proper focus is upon the "right- or duty-creating language of the statute (which) has generally been the most accurate indicator or the propriety of implication of a cause of action." Cannon v. University of Chicago, 441 U.S. 677, 690 n.13, 99 S. Ct. 1946, 1954 n.13, 60 L. Ed. 2d 560 (1979); United States v. Capeletti Bros., Inc., 621 F.2d 1309, 1313 (5th Cir. 1980); Rogers v. Frito Lay, Inc., supra, 611 F.2d at 1079.

Even cursory evaluation of the statutory language in sections 4012a(b) and 4104a reveals that no clearly defined right exists in favor of borrowers in either statute. The statutes merely require lending institutions to notify borrowers of flood plains and require appropriate flood insurance. However, this duty is imposed only indirectly on lenders. It is upon the various financial regulatory agencies in this case, the Federal Home Loan Bank Board that Congress directly assessed the responsibility for carrying out its plan.

The language of both statutes is therefore much like the statutes we considered in United States v. Capeletti Bros., Inc. and Rogers v. Frito Lay, Inc. In both cases, the statutory duty was imposed directly on federal agencies. Thus, we held that the benefits flowing to the plaintiffs were derived indirectly and not as a result of any private right of action conferred upon their class. United States v. Capeletti Bros., Inc., supra, 621 F.2d at 1314; Rogers v. Frito Lay, Inc., supra, 611 F.2d at 1079-80. See also Cannon v. University of Chicago, supra, 441 U.S. at 693 n.14, 99 S. Ct. at 1955 n.14. This conclusion is equally applicable to the circumstances in the present case.

Appellants argue, regardless of the statutory language, that borrowers are the primary beneficiaries of the flood insurance and notice requirements and, as such, they pass the Cort especial benefit test. However, even if borrowers could be considered primary beneficiaries of the flood laws, appellants would still not be the "especial beneficiaries." As previously stated, the Cannon v. University of Chicago test requires a showing that borrowers are granted federal rights under the statute; here, only duties are placed on the various regulatory authorities.

However, appellants fail at the outset even to establish that borrowers are the primary beneficiaries of the flood statutes. It would be disingenuous to suggest that when Congress passed the Program it did not intend to help those borrowers who had been damaged by flooding. On the other hand, borrowers of federal funds were not the only concern of Congress. Clearly, the principal purpose in enacting the Program was to reduce, by implementation of adequate land use controls and flood insurance, the massive burden on the federal fisc of the ever-increasing federal flood disaster assistance.¹⁴  Indeed, in requiring flood insurance the concern for the protection of lenders was just as great, if not more so, than the concern for borrowers.¹⁵  Lenders are only directed to require flood insurance for the amount and term of the outstanding loan balance. 42 U.S.C. § 4012a(b). There is no requirement that the flood insurance cover the equity of the borrower. Plainly, Congress was interested in protecting the lending institutions whose deposits the federal regulatory agencies insured. As for the notice requirement, the legislative history indicates that it too was enacted in part to help stem the development of flood hazard areas and further diminish the burden of federal disaster assistance.¹⁶ 

In short, appellants are not the especial beneficiaries of sections 4012a(b) and 4104a in view of the fact that the only duties imposed therein are upon the various federal regulatory agencies and the clear indication of concern not merely for borrowers but also for the federally insured lending institutions.

Under the second Cort factor, our quest is to search for "any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one." Cort v. Ash, supra, 422 U.S. at 78, 95 S. Ct. at 2088. The Supreme Court forewarns that in cases where the statutes and legislative history are silent on the question of a private remedy, "implying a private right of action on the basis of congressional silence is a hazardous enterprise, at best." Touche Ross & Co. v. Redington, supra, 442 U.S. at 571, 99 S. Ct. at 2486.

Our examination of the legislative history reveals no evidence of specific congressional intent to vest appellants with any federal right to damages for a violation of the federal flood laws under sections 4012a(b) and 4104a. Instead, the only discernible evidence of intent suggests no such private remedy was envisioned.

Congress, by directing the federal financial supervisory agencies to adopt regulations to implement the flood insurance and flood hazard notice requirements, has entrusted enforcement of these requirements to those agencies. In this case, the Federal Home Loan Bank Board (FHLBB) has the authority to issue cease and desist orders against appellees' officers,¹⁷  to terminate unsafe or unsound practices,¹⁸  to impose administrative remedies, including monetary penalties,¹⁹  and to require affirmative action to prevent or correct violations.²⁰  Existence of this administrative scheme of enforcement is strong evidence that Congress intended the administrative remedy to be exclusive. E. g., Belluso v. Turner Communications Corp., supra, 633 F.2d at 397; Smith v. Cotton Bros. Baking Co., Inc., 609 F.2d 738, 741 (5th Cir. 1980). Indeed, it is clear under the maxim expressio unius est exclusio alterius that a pervasive remedial scheme provided by Congress is an indication there was no intent to provide an additional private remedy. See TAMA, supra, 444 U.S. at 19, 100 S. Ct. at 247; National Railroad Passenger Corp. v. National Ass'n of Railroad Passengers, 414 U.S. 453, 458, 94 S. Ct. 690, 693, 38 L. Ed. 2d 646 (1974); United States v. Capeletti Bros., Inc., supra, 621 F.2d at 1315.

Furthermore, it is noteworthy that Congress did provide for private rights of action in certain other sections of the flood insurance laws. Under 42 U.S.C. §§ 4053 and 4072, flood insurance policyholders may sue on their policies in federal court. Likewise, owners and lessees of property, as well as communities which feel a flood hazard designation is incorrect, can appeal from an administrative review to federal court for redesignation pursuant to 42 U.S.C. § 4104. The Supreme Court in Touche Ross refused to imply a private cause of action partly because other sections of the same act expressly provided for private remedies. The Court reasoned that "when Congress wished to provide a private damages remedy, it knew how to do so and did so expressly." Touche Ross & Co. v. Redington, supra, 442 U.S. at 572, 99 S. Ct. at 2487.

Also useful is the opinion of the FHLBB itself. The Supreme Court directs that in matters of statutory interpretation, courts should be attentive "to the views of the administrative entity appointed to apply and enforce a statute." Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565, 100 S. Ct. 790, 797, 63 L. Ed. 2d 22 (1980). In this case, affidavits of three members of the FHLBB indicate their understanding that the statutory provisions do not encompass a private right of action.²¹ 

Finally, it is simply inconsistent and implausible to find from the federal flood laws that Congress intended to reduce the burden of federal disaster assistance by shifting it to federally supervised lenders, whose deposits are insured by federal agencies. Such a result would subject lenders like appellees to a liability not shared by other significant sources of funding, such as insurance companies, mortgage bankers, and state-chartered savings and loan associations, upon which the federal regulations do not apply.

No private remedy exists in a statute which does not provide private rights to an identifiable class, does not prohibit conduct as unlawful and whose legislative history is silent on the existence of a private cause of action. Touche Ross & Co. v. Redington, supra, 442 U.S. at 576, 99 S. Ct. at 2489. The third and fourth factors of the Cort test are relevant only if the first two indicate an intent to create the private remedy. California v. Sierra Club, supra, --- U.S. at ----, 101 S. Ct. at 1774. The initial two factors indicate that no such intent can be ascertained from the federal flood laws; therefore, appellants' quest for damages pursuant to 42 U.S.C. §§ 4012a(b) and 4104a fails.

The district court, by granting summary judgment against all claims, dismissed appellants' state claims for fraud and negligence²²  on their merits. The court held that "(i)nasmuch as all of Plaintiffs' claims herein are dependent upon the implication of a private cause of action, Plaintiffs' claims must be dismissed." Appellees, attempting to support the court's decision, reason that state common law does not provide all the elements of the asserted fraud or negligence. They assert that both causes of action require a breach of duty and that the only duty here arises from federal enactments. Therefore, they contend, there must exist a private cause of action in the federal statutes themselves before appellants can recover from the state based claims.

Whether this is true is a matter of state law. See, e. g., Moore v. Chesapeake & Ohio Ry., 291 U.S. 205, 211-17, 54 S. Ct. 402, 404-06, 78 L. Ed. 755 (1934); Crane v. Cedar Rapids & Iowa City Railway Co., 395 U.S. 164, 166-67, 89 S. Ct. 1706, 1708-09, 23 L. Ed. 2d 176 (1969); Moody v. McDaniel, 190 F. Supp. 24, 25-29 (N.D. Miss. 1960); W. Prosser, Handbook of the Law of Torts § 36, at 200-02 (4th ed. 1971).²³  This can best be determined by remand of the case to the Mississippi state court in which the suit was initially filed.²⁴ 

In removal cases the federal court may, in its sound discretion pursuant to 28 U.S.C. § 1441(c), return the parties to the state court for the trial of pendent state law claims. Ondis v. Barrows, 538 F.2d 904, 908 (1st Cir. 1976); Brough v. United Steelworkers of America, AFL-CIO, 437 F.2d 748, 750 (1st Cir. 1971). Since this case was originally filed in state court, it would be unreasonable to dismiss without prejudice and require appellants to file anew in state court. Therefore, the district court erred in granting a summary judgment on all claims, since its holding dismissed the Mississippi common law claims with prejudice.

We therefore remand this case to the district court with direction to remand it to the Mississippi state court in which it was originally filed.

AFFIRMED IN PART; VACATED AND REMANDED IN PART.

JOHN R. BROWN, Circuit Judge, concurring:

I concur fully in the opinion for the Court.

Although, on my approach, it might have been preferable that we simply remand to the District Court for consideration of the state-based claim, it is still open to the State Court on remand to apply, as relevant, perhaps controlling, substantive federal law not going solely to jurisdiction or the implication of a private right of action, the National Flood Insurance Program, 42 U.S.C. § 4012a(a, b) (and all amendments).

This Court has fully approved this approach.

Lowe v. General Motors Corp., 624 F.2d 1373, 1379-81 (5 Cir. 1980).