IBJ Schroder Bank & Trust Co. v. Resolution Trust Corp.

Decision Date15 June 1994
Docket NumberD,No. 1252,1252
Citation26 F.3d 370
PartiesIBJ SCHRODER BANK & TRUST COMPANY, as Trustee, Plaintiff-Appellee, Employees' Retirement System of Alabama, Plaintiff-Intervenor-Appellee, v. RESOLUTION TRUST CORPORATION, as Conservator for Franklin Savings Association, Defendant-Appellant. ocket 93-7858.
CourtU.S. Court of Appeals — Second Circuit

Michael A. Cooper, New York City (Theodore Edelman, Diane D'Arcangelo, Scott L. Lessing, Sullivan & Cromwell, Elinor R. Hoffmann, Carolyn T. Ellis, Coudert Brothers, of counsel), for plaintiff-appellee.

Mitchell A. Karlan, New York City (Robert F. Serio, Colleen D. Duffy, W. James Hall, Gibson, Dunn & Crutcher, of counsel), for plaintiff-intervenor-appellee.

Glen H. Kanwit, Chicago, IL (David B. Goroff, John P. Ratnaswamy, Claudette P. Miller, Hopkins & Sutter, Chicago, IL, Jonathan W. Miller, Robin D. Adelstein, Jennifer L. Jones, Dewey Ballantine, New York City, of counsel), for defendant-appellant.

Before: NEWMAN, Chief Judge, VAN GRAAFEILAND, Circuit Judge, and LASKER, District Judge. *

VAN GRAAFEILAND, Circuit Judge:

Resolution Trust Corporation ("RTC"), as conservator for Franklin Savings Association, appeals from a judgment of the United States District Court for the Southern District of New York (Leval, J.) holding RTC's purported repudiation of an indenture and the bonds issued thereunder to be unauthorized, void and of no effect. See 803 F.Supp. 878. RTC also appeals from the district court's order denying post-judgment relief pursuant to Rules 60(b)(6), 52(b), and 59 of the Federal Rules of Civil Procedure. Because we conclude that RTC's repudiation was effective, we reverse the district court's judgment and remand for further proceedings.

On December 12, 1984, Franklin, a federally-insured stock savings and loan association, issued a series of zero coupon bonds with an aggregate face value of $2.9 billion, pursuant to an Indenture between Franklin and IBJ Schroder Bank & Trust Company as Trustee for the bondholders. The bonds were issued in three tranches with terms respectively of 30, 35 and 40 years. As provided in the Indenture, Franklin furnished the Trustee with collateral to secure payment of the bonds at maturity. The collateral, termed "Eligible Collateral," consisted of cash and certificates issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Government National Mortgage Association. The Indenture provided that, in an "Event of Default," the Trustee was to liquidate the Eligible Collateral and purchase U.S. Treasury securities and other similar government obligations, i.e., Eligible Zero Coupon Securities, in an amount sufficient to pay the principal amount of the outstanding bonds at their respective maturities. The Indenture provided further that the appointment of a conservator for Franklin would be an "Event of Default."

RTC, a wholly-owned government corporation, was created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183, 369, "to manage and dispose of the assets acquired from failed thrifts." H.R.Rep. No. 54(I), 101st Cong., 1st Sess. 308 (1989), reprinted in 1989 U.S.C.C.A.N. 86, 104. A primary function of RTC is to act as the conservator or receiver for failed thrift institutions, operating "in a manner which ... maximizes the net present value return from the sale or other disposition" of assets under its control. 12 U.S.C. Sec. 1441a(b)(3)(C)(i). To assist RTC in its role, Congress has conferred on it certain extraordinary powers, including the right to repudiate contracts of the controlled institution that it determines to be burdensome, and whose repudiation would promote the institution's orderly administration. See 12 U.S.C. Secs. 1441a(b)(4)(A), 1821(e)(1).

On February 16, 1990, the Office of Thrift Supervision ("OTS") appointed RTC as conservator for Franklin. Acting pursuant to authority granted it by the Indenture, section 1102(c), and by statute, 12 U.S.C. Sec. 1821(e)(12), RTC instructed the Trustee not to pursue the Event-of-Default remedies available to it under the Indenture, and the Trustee refrained from so doing.

In the weeks that followed, representatives of RTC and the Trustee attempted to resolve some of the issues involving their respective rights, and on March 6, 1990, a "standstill agreement" respecting certain of these rights was reached. The Trustee agreed that it would not exercise any of its rights under the Indenture without first giving RTC fifteen days written notice. RTC agreed in turn that it would not disaffirm or repudiate the Indenture or the bonds without having given ten days prior notice to the Trustee.

The Indenture also obligated the Trustee to liquidate the Eligible Collateral and purchase the Eligible Zero Coupon Securities if Franklin submitted a report to the OTS disclosing that it had failed to meet certain regulatory net worth or capital requirements. If within ninety days after the filing of such a report Franklin failed to report to OTS that it again was in compliance with regulatory net worth or capital requirements, the Trustee was obligated to "defease" the bonds by transferring the U.S. Treasury securities and other government obligations to defeasance trusts held by the Trustee for the benefit of the bondholders.

On April 10, 1990, RTC, as conservator for Franklin, submitted a form to OTS indicating that Franklin was not in compliance with regulatory minimum capital requirements. This triggered the Trustee's obligation to liquidate the Eligible Collateral. Aware that RTC might exercise its statutory power to repudiate the bonds and the Indenture, the Trustee filed a complaint in the United States District Court for the Southern District of New York on April 24, 1990 seeking, among other things, a declaration that the Trustee was both entitled and obligated to pursue remedies available under the Indenture.

Although RTC was aware of its right under 12 U.S.C. Secs. 1441a(b)(4)(A) and 1821(e)(1) to repudiate or disaffirm the bonds at issue, it did not immediately do so. Instead, on April 10, 1990, its Board of Directors adopted a policy accompanied by a news release stating that it would repudiate or disaffirm direct collateralized borrowings, such as the bonds, within sixty days. Thereafter, on May 30, 1990, RTC notified the Trustee that it intended to disaffirm and repudiate the Indenture and the bonds on June 9, 1990 (60 days after the April 10th notice). In a letter that accompanied the notice of intent, Michael Tucci, RTC's Senior Counsel, stated that RTC reserved the right to reconsider its position and ultimately might decide not to repudiate. However, on June 8, 1990, Senior Counsel Tucci sent the Trustee a letter which read in pertinent part as follows:

Pursuant to its authority under Section 11(e) of the Federal Deposit Insurance Act, as amended by Section 212 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), made applicable to the RTC under Section 501 of FIRREA, the Conservator hereby disaffirms and repudiates the Indenture and the Bonds issued thereunder, effective June 9, 1990.

The Conservator will be in contact with you to discuss all matters relating to the repudiation of the Indenture and Bonds, including procedures for payment of the Bonds and the orderly return of the Eligible Collateral to the Conservator. For your information, a copy of the RTC's April 10, 1990 Policy Statement regarding such matters is attached.

You are requested to immediately notify the Bondholders, in the manner provided in the Indenture, of the repudiation of the Indenture and Bonds, and to confirm such notice to the undersigned.

You are again directed to refrain from taking any actions pursuant to Sections 604, 607, 1102, and 1301 of the Indenture. The Conservator will hold you strictly responsible for any losses or damages incurred by the Conservator or any other adverse financial effects arising out of or as a result of any such action taken by you without the prior written consent of the Conservator.

A similar letter was sent to Security Bank of Kansas City, custodian of the Eligible Collateral. It read in part:

This letter is to inform you that effective June 9, 1990, the Resolution Trust Corporation ("RTC") as conservator of Franklin (the "Conservator") has disaffirmed and repudiated the Indenture and the Bonds issued thereunder. Attached hereto is a letter dated June 8, 1990, from the Conservator notifying the Trustee of this action.

On July 25, 1990, RTC informed the Trustee by letter that on August 8, 1990, it would tender to the Trustee the accreted value of the bonds, i.e., $124,626,640.24. At the same time, it issued a news release concerning the payment which stated in part:

The Resolution Trust Corporation (RTC) today announced August 8, 1990, as the payment date for $2.9 billion in zero coupon bonds from Franklin Savings Association, Ottawa, Kansas.

The GNMA/FHLMC/FNMA-Secured bonds, series A, due 2014, 2019, and 2024, had been disaffirmed by the RTC and repudiated on June 9, 1990.

On July 9, 1990, RTC filed its answer to the Trustee's amended complaint in the April 24th action with a counterclaim against the Trustee, and a third-party complaint against Security Bank of Kansas City, the holder of the Eligible Collateral, in which RTC repeatedly alleged that it had repudiated the Indenture and Bonds on June 9, 1990.

Following a "trial" consisting largely of written submissions, see 803 F.Supp. at 879, the district court correctly noted that Section 1821(e)(1) empowered RTC as conservator to repudiate the bonds if, in RTC's discretion, the performance of the bonded obligation was determined to be burdensome and the repudiation of which would promote the orderly administration of Franklin's affairs. Id. at 882. It then held that RTC had satisfied the...

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