Franklin Sav. v. Office of Thrift Supervision

• Decision Date: 05 September 1990
• Docket Number: Civ. A. No. 90-4054-S.
• Citation: 742 F. Supp. 1089
• Parties: FRANKLIN SAVINGS ASSOCIATION and Franklin Savings Corporation, Plaintiffs, v. DIRECTOR OF THE OFFICE OF THRIFT SUPERVISION, Defendant.
• Court: U.S. District Court — District of Kansas

742 F. Supp. 1089

FRANKLIN SAVINGS ASSOCIATION and Franklin Savings Corporation, Plaintiffs, v. DIRECTOR OF THE OFFICE OF THRIFT SUPERVISION, Defendant.

Civ. A. No. 90-4054-S.

United States District Court, D. Kansas.

September 5, 1990.

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Charles W. German, David E. Everson, Jr., Brant M. Laue, Richard F. Hunter, Stinson, Mag & Fizzell, Kansas City, Mo., Roger D. Stanton, Stinson, Mag & Fizzell, Overland Park, Kan., for plaintiffs.

Thomas J. Segal, Assoc. Chief Counsel, Elizabeth R. Moore, Sr. Trial Atty., James Hendrickson, Trial Atty., Washington, D.C., Nancy L. Ulrich, Asst. Atty. Gen., Topeka, Kan., Paul W. Grace, Steven W. Dimmick, Mary Boney Denison, Linda Hitt Thatcher, Paul J. Kennedy, Graham & James, Washington, D.C., Cheryl Johnson, Graham & James, Los Angeles, Cal., Lee Thompson, U.S. Atty., Topeka, Kan., Stuart M. Gerson, Asst. Atty. Gen., Theodore C. Hirt, Mark Batten, Gary Orseck, Attys., Dept. of Justice, Washington, D.C., Thomas J. Loughran, Susan B. Bovee, H. Lowell Brown, Finkelstein, Thompson & Loughran, Washington, D.C., Jan Hamilton, Hamilton, Peterson, Tipton & Keeshan, Topeka, Kan., for defendant.

MEMORANDUM AND ORDER

SAFFELS, District Judge.

In this case, Franklin Savings Association ("Franklin" or "the institution") and Franklin Savings Corporation ("FSC") challenge the Office of Thrift Supervision's ("OTS" or "the regulator") February 15, 1990, decision to appoint the Resolution Trust Corporation ("RTC") as conservator for the institution. Franklin attacks the legality of the appointment and seeks removal of the conservator, pursuant to Section 5(d)(2)(E) of the Home Owners' Loan Act ("HOLA"), as amended by Section 301 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), 103 Stat. 292 (to be codified at 12 U.S.C. § 1464(d)(2)(E)).

This case was filed on March 12, 1990, and was placed on an accelerated docket, given the crucial importance of timely action regarding this matter. An 18-day trial to the court was conducted between June 25, 1990, and July 20, 1990. In addition to considering the testimony and evidence presented at trial, the court has read numerous depositions submitted by the parties and has thoroughly examined the three volume administrative record compiled by OTS regarding the appointment of conservator. The court is now prepared to rule.

As an initial matter, the court wishes to comment that this is not a case involving an infamous or notorious savings and loan association, the likes of which the public has recently become more than familiar. This is not a case involving fraud, corruption, or self-dealing by the management or directors of Franklin.¹ There has been no allegation or even hint of illegal or unethical conduct by Franklin's management or directors. Essentially, this case boils down to a dispute over accounting practices. With that said, the following constitutes the court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.

I. THE PROPER ROLE OF THE COURT.

Before discussing the specific findings and conclusions in this case, it is necessary for the court to address exactly what role it is to play when a savings association challenges the regulator's appointment of a conservator. Legal questions must be resolved regarding the standard of review to be applied in reviewing the regulator's actions; the burden of proof; and what evidence the court can consider in resolving this case. In FIRREA Congress specifically provided for judicial review of the regulator's appointment of conservator.²

A. Standard of Review.

The provision of FIRREA which allows judicial review of the OTS's decision to appoint a conservator does not expressly define the scope or standard of that review.³ Since the statute does not specifically define the standard of review to be used in examining regulator's action, the court must look to the Administrative Procedures Act for guidance on this issue. See Washington Federal Savings & Loan Ass'n v. FHLBB, 526 F.Supp. 343, 350, 353-54 (N.D.Ohio 1981). Section 706 of the Administrative Procedures Act ("APA") sets forth the standard of review appropriate for a court reviewing an administrative agency's action.⁴ The APA provides that an agency action must be set aside if the action was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" or if the action failed to meet constitutional, statutory, or procedural requirements. 5 U.S.C. § 706(2)(A), (B), (C), (D). Although the APA allows for de novo review in limited situations, 5 U.S.C. § 706(2)(F), the court finds that it is not applicable to the present case and that the standards set out in 5 U.S.C. § 706(2)(A), (B), (C) and (D) apply in the present proceeding. Under the arbitrary, capricious and abuse of discretion standard, the agency's decision is entitled to a presumption of regularity. The presumption, however, does not shield the agency's action from "a thorough, probing, in depth review." Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971). The court must consider whether the OTS's decision to appoint a conservator was based on the consideration of the relevant factors and whether there has been a clear error of judgment. Id. at 416, 91 S.Ct. at 823-24. "Although this inquiry into the facts is to be searching and careful, the ultimate standard of review is a narrow one. The court is not empowered to substitute its judgment for that of the agency." Id. Notwithstanding this deference, the agency must "examine the relevant data and articulate a satisfactory explanation for its action including a `rational connection between the facts found and the choice made.'" Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2866, 77 L.Ed.2d 443 (1983) (quoting, Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 245-46, 9 L.Ed.2d 207 (1962)).

B. Burden of Proof.

The general rule is that the party challenging an agency's action has the burden of proving error. Telegraph Savings & Loan Ass'n v. FSLIC, 564 F.Supp. 862, 870 (N.D.Ill.1981) (citing Pacific States Co. v. White, 296 U.S. 176, 56 S.Ct. 159, 82 L.Ed. 138 (1935)). A presumption of validity exists for the agency's action. When an agency acts ex parte, as in the present case, its decision is still entitled to presumption of correctness, albeit a lesser one. Telegraph Savings & Loan, 564 F.Supp. at 870. Thus, the burden is on Franklin to overcome this presumption and to show by the preponderance of the evidence that the agency's decision lacked any basis in fact or law or was arbitrary, capricious, or an abuse of discretion.

C. Evidence the Court Can Properly Consider.

Throughout this case, the parties have disputed what evidence the court may properly consider in making its judicial review of the OTS's action. The OTS contends that the court is limited to reviewing solely the administrative record which OTS has prepared and filed with the court. The OTS argues that the court must determine if the agency's action is supported by the administrative record. Franklin insists that the court consider evidence outside the administrative record to determine the appropriateness of the conservatorship. The court has received an extensive amount of evidence outside the administrative record during the trial of this case, but took under advisement the issue of whether such evidence could be considered in determining the issues before the court.

After considering the parties' arguments and reviewing much case law, and some of the facts established in this case, this court finds, and is convinced, that evidence outside the administrative record may be properly considered. First, the court notes that the statutory scheme for judicial review set out in FIRREA calls for review "upon the merits." Courts interpreting this "unusual" phrase have reached a variety of conclusions on its meaning and what type of review is required by the phrase "upon the merits." Some courts find that the phrase should be given no different effect than the phrase "on the record," and thus, apply the traditional arbitrary and capricious standard of review, in which the court simply reviews the administrative record and determines whether, based on that record, the agency's action was arbitrary and capricious or an abuse of discretion. See Woods v. Federal Home Loan Bank Board, 826 F.2d 1400, 1406-07 (5th Cir.1987), cert. denied, 485 U.S. 959 (1988); Guaranty Savings & Loan Ass'n v. Federal Home Loan Bank Board, 794 F.2d 1339, 1342 (8th Cir.1986). Other courts have held that this language in effect provides a de novo review of the agency's decision. See Fidelity Savings & Loan Ass'n v. FHLBB, 540 F.Supp. 1374, 1377 (N.D.Cal.1982) ("If it means nothing more, the term `on the merits' reveals that a proceeding under the statute is more in the nature of a de novo review than an appellate review."); Telegraph Savings & Loan Ass'n v. FSLIC, 564 F.Supp. 862, 869-870 (N.D.Ill.1981);

A third view is advocated in Collie v. Federal Home Loan Bank Board, 642 F.Supp. 1147, 1150-52 (N.D.Ill.1986). The Collie court determined that the "upon the merits" language provides for a hybrid type of review in which the court would continue to apply the arbitrary and capricious standard of review, but that the record on which the review would be based is expanded. The challenging party is provided an opportunity to present evidence in addition to the administrative record. As the Collie's court properly surmised:

A reasonable reading of the phrase "upon the merits" is rather that it means a review in which the FHLBB predecessor of OTS does not necessarily control the evidence which reaches the reviewing court. "Upon the merits" contrasts with the more

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