Richard F. SCHEY, Plaintiff and Appellant, v. TRANS PACIFIC NATIONAL BANCORP, et al., Defendants and Respondents.
A federal statute allowing officers of national banks to be dismissed “at pleasure” (12 U.S.C. § 24, Fifth) does not preempt California law providing a cause of action in tort for dismissal in retaliation for reporting legal or regulatory violations to a government agency.
Richard F. Schey sued Trans Pacific National Bank (the Bank), Trans Pacific National Bancorp (a holding company), and various officers and directors of the Bank, alleging breach of contract and various torts arising from his termination as vice-president and director of the Bank. Defendants' demurrers were sustained as to all causes of action without leave to amend, primarily on the ground that the termination was allowed by 12 United States Code section 24, Fifth. Schey appeals from the ensuing judgment of dismissal. We reverse in part.
On review from the sustaining of a general demurrer, we accept as true all the properly pleaded allegations of the complaint, and examine them only for their legal sufficiency. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)
In February 1985 Schey was hired by the Bank as vice-president and senior loan officer. He was elected director in June 1985 and was promoted to senior vice-president in January 1986. While employed by the Bank and serving as one of its directors, Schey discovered that defendant Eddy Chan, Bank president and chairman of the board of directors, had engaged in practices (including commingling of depositors' and personal funds) which were contrary to regulations of the federal Office of the Comptroller of the Currency (OCC), which regulates national banks, as well as contrary to sound banking practice and the best interests of the Bank. Schey brought these facts to the attention of his fellow directors and, when required by law, disclosed them to an investigator from the OCC.
After Schey revealed his concerns, Chan harassed Schey by giving him a false negative evaluation and decreasing his management authority. In November 1986 Schey sought and received assurances from two other directors that his services were still desired and that his employment was secure. Based on those assurances he refrained from seeking other employment.
In September 1987 the executive committee of the Bank board of directors voted to terminate Schey's employment and remove him as a director. In his first cause of action (“Wrongful Retaliatory Termination”), Schey alleges the termination was in retaliation for his reporting of Chan's misconduct. The second cause of action alleges the firing was in violation of written, oral and implied contractual terms. The third and fourth causes of action allege that his removal as director was in violation of an implied covenant of good faith and fair dealing. The fifth alleges fraud and deceit in the assurances of secure tenure Schey received in November 1986, and the sixth alleges negligent misrepresentation as to the same acts. The seventh cause of action alleges that Schey's removal from the board of directors was in violation of public policy.
The trial court ruled all the causes of action barred by a provision of the National Bank Act granting certain powers to national banks: “To elect or appoint directors, and by its board of directors to appoint a president, vice president, cashier, and other officers, define their duties, require bonds of them and fix the penalty thereof, dismiss such officers or any of them at pleasure, and appoint others to fill their places.” (12 U.S.C. § 24, Fifth, italics added [hereafter § 24, Fifth].) Section 24, Fifth, has been widely held to preempt all state law breach of contract claims when a national bank officer is terminated by the bank's board of directors. (See, e.g., Mackey v. Pioneer Nat. Bank (9th Cir.1989) 867 F.2d 520, 524 [“An agreement which attempts to circumvent the complete discretion of a national bank's board of directors to terminate an officer at will is void as against public policy”]; Kozlowsky v. Westminster Nat. Bank (1970) 6 Cal.App.3d 593, 596–597, 86 Cal.Rptr. 52; Ambro v. American Nat. Bank and Trust Co. (1986) 152 Mich.App. 613, 394 N.W.2d 46, 48–49.)
While national bank officers serve at the pleasure of their boards they may not, in California, be discharged for disclosing to federal regulators the misconduct of their fellow officers. Although Schey was a national bank officer terminated by the Bank's board of directors, section 24, Fifth, does not preempt his tortious discharge claim (the first cause of action).
The federal laws governing national banks do not preempt all state regulation of such banks. Rather, the operations of national banks are generally subject to state laws, which are displaced only where they “infringe the national banking laws or impose an undue burden on the performance of the banks' functions.” (Anderson Nat. Bank v. Luckett (1944) 321 U.S. 233, 248, 64 S.Ct. 599, 607, 88 L.Ed. 692; National State Bank, Elizabeth, N.J. v. Long (3d Cir.1980) 630 F.2d 981, 985–986.) In these circumstances state law is preempted only to the extent it directly conflicts with the federal provisions or would stand as an obstacle to the full accomplishment of congressional purposes. (California Federal S. & L. Assn. v. Guerra (1987) 479 U.S. 272, 281, 107 S.Ct. 683, 689, 93 L.Ed.2d 613.)
Under California law, even an at-will employee may not be fired for reasons which violate an express statutory objective or undermine a firmly established principle of public policy. (Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 172, 164 Cal.Rptr. 839, 610 P.2d 1330.) The “public policy” limitation on employer discretion arises from a duty imposed by law, not from any express or implied promises of the contract. (Id., at p. 176, 164 Cal.Rptr. 839, 610 P.2d 1330.) “What is vindicated through the cause of action is not the terms or promises arising out of the particular employment relationship involved, but rather the public interest in not permitting employers to impose as a condition of employment a requirement that an employee act in a manner contrary to fundamental public policy.” (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 667, fn. 7, 254 Cal.Rptr. 211, 765 P.2d 373.) The tort is independent of the terms of employment, and is therefore equally applicable to an at-will employee and to one with a contract for a specified term. (Koehrer v. Superior Court (1986) 181 Cal.App.3d 1155, 1166, 226 Cal.Rptr. 820.)
“There is no question public policy forbids retaliatory action taken by an employer against an employee who discloses information regarding an employer's violation of law to a government agency.” (Garcia v. Rockwell Internat. Corp. (1986) 187 Cal.App.3d 1556, 1561, 232 Cal.Rptr. 490.) Since 1984 that policy has been codified in Labor Code section 1102.5, subdivision (b). In terms directly applicable to the allegations of this case, that section forbids retaliation “against an employee for disclosing information to a government ․ agency, where the employee has reasonable cause to believe that the information discloses ․ noncompliance with a ․ federal regulation.”
Under section 24, Fifth, national bank officers may be dismissed “at pleasure”—that is, at will. But because the “public policy” cause of action derives from a duty imposed by law, fully applicable to at-will employees, it does not follow from the “at pleasure” language that they may be dismissed for reasons violating well-established public policy. The federal statute, while “depriving a national bank of the power to employ its officers other than at pleasure” (Wiskotoni v. Michigan Nat. Bank–West (6th Cir.1983) 716 F.2d 378, 387), does not by its terms remove the remedy provided under state law for an employer's violation of state law or public policy.
Nor does recognition of the action for retaliatory discharge unduly burden the operation of a national bank or obstruct the full execution of congressional policy. Section 24, Fifth, must be construed in light of the entire National Bank Act. Congress has given the OCC extensive regulatory duties regarding the national banks, including the authority to determine whether an association may commence business (12 U.S.C. §§ 26, 27), approval power for long-term real property holdings (12 U.S.C. § 29), approval power for issuance of preferred stock (12 U.S.C. § 51a), rule-making authority over loan limits (12 U.S.C. § 84(d)(1)), approval authority for trust activities (12 U.S.C. § 92a), and the power to prosecute an action for revocation of franchise if any provisions of the National Bank Act are violated (12 U.S.C. § 93). In order that these regulatory powers may be effectively exercised the OCC is authorized to make a “thorough examination” of each national bank “as often as the Comptroller of the Currency shall deem necessary.” (12 U.S.C. § 481.) Each bank, in addition, must make periodic reports of condition to the OCC, and the comptroller may call for additional reports “whenever in his judgment the same are necessary for his use in the performance of his supervisory duties.” (12 U.S.C. § 161.)
It is apparent that Congress regards the flow of information from the national banks to the OCC to be vital to the OCC's important regulatory functions. This is the same policy served by Labor Code section 1102.5 and the tort action for discharge in retaliation for disclosure of misconduct. While section 24, Fifth, was intended to provide needed discretion for bank boards over the operation of their banks, there is no evidence of congressional intent that the board's discretion be used to obstruct the supervisory efforts of the OCC.1
Defendants cite cases holding that state law tort actions, as well as breach of contract claims, are preempted by section 24, Fifth. The tort claims in those cases, however, were not based on retaliatory discharge, but on misrepresentation, bad faith, or other allegations which, it could fairly be said, were derivative of the contract claim. (See Mackey v. Pioneer Nat. Bank, supra, 867 F.2d at pp. 522, 525–526 [causes of action for negligent misrepresentation and interference with business relations were preempted]; Ambro v. American Nat. Bank and Trust Co., supra, 394 N.W.2d at p. 49 [negligent misrepresentation and bad faith].)
Inglis v. Feinerman (9th Cir.1983) 701 F.2d 97, also cited by defendants, did not interpret section 24, Fifth, but a similarly worded statute governing Federal Home Loan Banks, 12 United States Code section 1432(a). The plaintiff claimed his discharge violated both contractual terms and public policy, the latter because it was motivated by his insistence that his employer comply with federal law. (Id., at p. 99.) Without analysis or citation of authority the court stated that the tort claim was barred because under section 1432(a) “no inroads into the ‘dismiss at pleasure’ language” were allowed. (Ibid.) The lack of analysis or authority for Inglis' cryptic pronouncement makes it less than persuasive. It is not directly on point, as it concerns a different statute and a somewhat different claim for relief. Even were it on point, we would not be bound by it. (Rohr Aircraft Corp. v. County of San Diego (1959) 51 Cal.2d 759, 764, 336 P.2d 521, revd. on other grounds (1960) 362 U.S. 628, 80 S.Ct. 1050, 4 L.Ed.2d 1002.) We decline to follow it here.
We conclude that the “at pleasure” language of section 24, Fifth, was not intended to allow a national bank officer to be discharged in retaliation for reporting regulatory violations to the Comptroller of the Currency. It therefore does not preempt California law allowing a claim for tortious discharge under such circumstances.
Schey has also stated a cause of action for retaliatory removal from the board of directors. Demurrers were sustained as to the third, fourth and seventh causes of action on the ground that Schey had no “private right of action” against defendants for removal from the board. On appeal defendants hold to that line of argument, maintaining that the National Bank Act affords no private right of action by a former director for violation of its provisions. Schey, however, did not allege his removal was in violation of the National Bank Act. He alleged that his removal violated an implied covenant of good faith and fair dealing (causes of action three and four) and public policy (cause of action seven).
The bad faith claims must fail as Schey has alleged no contractual relationship to which an implied covenant might adhere. He alleged that his “status” as director contained such a covenant, but neither below nor in this court has he explained or supported that legal assertion. In any event, a separate remedy for bad faith would be unavailable under the principles announced in Foley v. Interactive Data Corp., supra, 47 Cal.3d at pages 690–700, 254 Cal.Rptr. 211, 765 P.2d 373, in which tort damages were held unavailable for breach of the implied covenant in an employment relationship.
Schey's allegations that his removal violated public policy, however, state a claim as valid as his parallel action for tortious discharge. We see no reason why the executive committee, which could not retaliate against him by removing him as vice-president, should be able with impunity to retaliate by voting to remove him as director. (See Garcia v. Rockwell Internat. Corp., supra, 187 Cal.App.3d at p. 1561, 232 Cal.Rptr. 490 [Tameny action available for any retaliatory disciplinary action by employer].)
National bank directors are elected by the shareholders. They hold office “for one year, and until their successors are elected and have qualified.” (12 U.S.C. § 71.) Schey's one-year minimum term began in June 1985, and he was not removed until September 1987. But he alleges he was removed by the executive committee “and not by any action of the shareholders.”
Nothing in the National Bank Act allows a board of directors, much less its executive committee, to remove a fellow director. Generally the power to remove a director or officer is incidental to the power to appoint (American Center For Education, Inc. v. Cavnar (1978) 80 Cal.App.3d 476, 492, 145 Cal.Rptr. 736), and directors can therefore be removed only by the shareholders, not by fellow directors. (See 2 Fletcher on Corporations (1982 ed.) § 354, p. 158; Annot., Removal of Corporate Officers (1929) 63 A.L.R. 776, 781–782; Corp. Code, § 303 [removal by vote of outstanding shares].)
Our research has found no case recognizing a tort remedy for wrongful removal from a board of directors. But accepting the allegations of the complaint as true, Schey's removal as director violated the fundamental public policies favoring full revelation of misconduct to the federal regulatory agencies, and was unauthorized by law. It deprived him of a position which he alleges was valuable to him, and in which he could have legitimately expected to remain until a successor was duly elected. If he can prove these allegations and show some damages distinct from those arising from his dismissal as vice-president, he should be allowed a remedy.
Schey alleged he was terminated by vote of the executive committee. The discretion created by section 24, Fifth, belongs only to the board of directors, and termination by some other officer or body is not privileged by the statute. (Wiskotoni v. Michigan Nat. Bank–West, supra, 716 F.2d at p. 387; Mahoney v. Crocker Nat. Bank (N.D.Cal.1983) 571 F.Supp. 287, 290–292.) The power to terminate may, however, be assigned to an executive committee of the board, and when such an assignment has been made the termination remains privileged under section 24, Fifth. (Mackey v. Pioneer Nat. Bank, supra, 867 F.2d at p. 525.) The question is whether the record shows the executive committee acted on authority of an assignment.
The National Bank Act is silent as to the powers of an executive committee; a regulation of the OCC, 12 Code of Federal Regulations section 7.4425, provides that the board of directors of a national bank may assign its duties, but does not define the duties which must or may be assigned to an executive committee. Nor is there any general rule of corporate law providing an executive committee with the power to terminate officers. On the contrary, such committees have only the authority granted them by statute, by the corporate charter or by action of the full board, and in many states the range of assignable authority is expressly limited by statute. (2A Fletcher on Corporations, op. cit. supra, § 552.2, p. 9; see, e.g., Corp. Code, § 311 [board may form executive committee and assign it authority by resolution or bylaw, within limits set by section].) Some states do not allow executive committees to be assigned the authority to remove officers. (See, e.g., N.J. Stats. § 14A:6–9.) We therefore cannot assume that the executive committee of the Bank had such authority.
Schey has, however, alleged that each defendant in this action was the agent and employee of each remaining defendant, and “was at all times herein mentioned acting within the scope of such agency and employment.” Among the defendants are the Bank and several members of the Bank's executive committee. It is apparent, moreover, that the liability of several individual defendants is premised on their votes, as directors and executive committee members, to dismiss Schey since no other harmful actions are ascribed to them. The implication is that the executive committee members acted within the scope of their corporate authority in firing Schey. This implication is confirmed by discarded pleadings from the original complaint. There, Schey alleged that the Bank either preapproved or ratified each of the other defendants' actions, and that his firing constituted a breach of contract by “the Board of Directors.” In the absence of an explanation for the omission of these allegations from the superseded complaint, we may take notice of them and read them into the amended complaint. (Owens v. Kings Supermarket (1988) 198 Cal.App.3d 379, 383–384, 243 Cal.Rptr. 627.)
We conclude that, for purposes of the demurrer, Schey's firing was undertaken on the authority of the Bank's board of directors, and was thus facially within the protection of section 24, Fifth, preempting any contractual claim.
Schey nevertheless contends his causes of action for misrepresentation, directed at the two directors whom he alleges assured him his employment was secure, are not preempted by section 24, Fifth. We disagree. Schey alleged simply that two directors assured him his tenure was secure, and he relied on that assurance. His reliance implies he believed they spoke for the board or the Bank. An action based on those assurances runs squarely against section 24, Fifth, which prevents national banks from obliging themselves to employ officers other than at pleasure. If the contract claim is barred, so must be the claim for misrepresentation, since the alleged misrepresentation is simply a promise of secure employment. (Ambro v. American Nat. Bank and Trust Co., supra, 394 N.W.2d at p. 49; Mackey v. Pioneer Nat. Bank, supra, 867 F.2d at pp. 525–526; cf. Kozlowsky v. Westminster Nat. Bank, supra, 6 Cal.App.3d at pp. 597–598, 86 Cal.Rptr. 52 [officer could maintain cause of action for misrepresentation where alleged misrepresentation related to ownership of bank, not employment of plaintiff].)
The judgment of dismissal is reversed as to the first and seventh causes of action and affirmed as to the remaining causes of action.
1. In this connection we cannot close our eyes to the devastating wave of collapse and dissolution affecting depository institutions in the past decade, caused in part by a lack of effective regulatory oversight. One part of the congressional response has been a provision of a federal remedy for retaliatory discharge. (Pub.L. No. 101–73 (Aug. 9, 1989) § 932, 103 Stat. 494, 1989 U.S.Code Cong. & Admin.News, No. 6.)
LOW, Presiding Justice.
KING and HANING, JJ., concur.