Franklin Sav. Ass'n v. OTS

• Decision Date: 14 April 1993
• Docket Number: 93-4039-SAC.,No. 92-4196-SAC,92-4196-SAC
• Citation: 821 F. Supp. 1414
• Court: U.S. District Court — District of Kansas
• Parties: FRANKLIN SAVINGS ASSOCIATION, a Kansas Savings and Loan Association, and Franklin Savings Corporation, a Kansas Corporation, Plaintiffs, v. OFFICE OF THRIFT SUPERVISION, Director Department of the Treasury, Defendant.

821 F. Supp. 1414

FRANKLIN SAVINGS ASSOCIATION, a Kansas Savings and Loan Association, and Franklin Savings Corporation, a Kansas Corporation, Plaintiffs, v. OFFICE OF THRIFT SUPERVISION, Director Department of the Treasury, Defendant.

Nos. 92-4196-SAC, 93-4039-SAC.

United States District Court, D. Kansas.

April 14, 1993.

Mark S. Gunnison, McDowell, Rice & Smith, P.C., Overland Park, KS, R. Pete Smith, Jonathan A. Margolies, McDowell, Rice & Smith, P.C., Kansas City, MO, for plaintiffs.

Thomas J. Segal, Harris Weinstein, Aaron B. Kahn, J. Amanda Machen, Laurie Romanowich, Kerry W. Kircher, Office of Thrift Supervision, Washington, DC, Joann E. Corpstein, Office of Thrift Supervision, Shawnee Mission, KS, for defendant.

MEMORANDUM AND ORDER

CROW, District Judge.

The case comes before the court on the defendant's motion to dismiss (Dk. 12) pursuant to Rule 12 of the Federal Rules of Civil Procedure. By order filed February 17, 1993, the court withdrew reference of the adversary action pending in bankruptcy court filed by the plaintiff and consolidated it with the identical district court case filed by the plaintiff. The defendant filed its motion to dismiss in the district court case before the consolidation. For judicial economy and the parties' convenience, the court considers the motion to dismiss to be pending in both cases.

Franklin Savings Corporation ("FSC") is a Kansas corporation and the record holder of more than ninety percent of the stock in Franklin Savings ("FSA").¹ FSA is a state chartered savings and loan association. Besides its offices in Ottawa, Kansas, FSA has eight branch facilities located in eastern Kansas. The Office of Thrift Supervision ("OTS"), created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"),² is primarily responsible through its Director for regulating the federally insured savings and loan associations.

In response to the mounting crisis in the nation's banking and savings and loan industries, Congress enacted FIRREA. In 1989, Congress' perception was that "the nation's thrift industry and its insurance fund, the Federal Savings and Loan Insurance Corporation ("FSLIC") are currently in precarious financial condition and consumer confidence in the savings and loan industry is waning." H.R.Rep. No. 54, 101st Cong., 1st Sess., pt. 1, at 302 (1989), reprinted in 1989 U.S.C.C.A.N. 86, 98. Among the purposes of FIRREA, Congress intended it to increase regulatory supervision over the thrift industry and to establish agencies and procedures for addressing failing thrifts and for disposing of the assets of failed thrifts. H.R.Rep. No. 54 at 307-08, reprinted in 1989 U.S.C.C.A.N. at 103-04. FIRREA abolishes the Federal Home Loan Bank Board ("FHLBB") and the FSLIC and assigns their functions to the newly created OTS and the Federal Deposit Insurance Corporation ("FDIC"). FIRREA confers substantial regulatory authority on the Director of the OTS. The Director may appoint a conservator or receiver ex parte for a federally insured savings association when there exists one or more of the statutory indicia of a savings association in financial trouble. 12 U.S.C. § 1464(d)(2)(E). The Director also may replace a conservator without any notice, hearing or other action. 12 U.S.C. § 1464(d)(2)(F). This case turns on the Director's exercise of that power to replace a conservator.

HISTORY

This case comes to this court with some procedural history. In February of 1990, the Director appointed the Resolution Trust Corporation ("RTC") as conservator for FSA. The Director's appointment order set forth these findings as the grounds for the appointment:

The Association is in an unsafe and unsound condition to transact business in that, among other things, the Association has a significant level of high risk assets, and has placed undue reliance on brokered deposits, (b) the Association has incurred and is likely to incur losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the Association's capital to be replenished without Federal assistance, and (c) there is a violation or violations of laws or regulations, or an unsafe or unsound practice or condition which is likely to cause insolvency or substantial dissipation of assets or earnings, or is likely to weaken the condition of the Association or otherwise seriously prejudice the interests of its depositors....

(Dk. 1, Complaint, Ex. 2F). The director appointed "not for the purpose of liquidation" the RTC as conservator for Franklin. Id.

In March of 1990, Franklin filed an action pursuant to 12 U.S.C. § 1464(d)(2)(E) seeking the removal of the conservator. After a lengthy bench trial, the district court concluded that the director's stated grounds for appointment of the conservator were without a factual basis and that the director acted arbitrarily and capriciously in appointing the conservator. Franklin Sav. v. Office of Thrift Supervision, 742 F.Supp. 1089, 1126 (D.Kan.1990). On appeal, the Tenth Circuit reversed and vacated the district court's decision and remanded the case with instructions to dismiss the action. Franklin Sav. v. Director, Office of Thrift Super., 934 F.2d 1127, 1151 (10th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1475, 117 L.Ed.2d 619 (1992).

The Tenth Circuit first held that judicial review of the director's decision to appoint a conservator is limited to the information or administrative record before the director when the decision to appoint was made. 934 F.2d at 1140. The Tenth Circuit offered several reasons for this limited scope of review. FIRREA authorizes the director to appoint a conservator or receiver if "in the opinion of the Director, a ground for the appointment ... exists." 12 U.S.C. § 1464(d)(2)(E). To assure a quick response to the danger of an association's swift loss of liquidity, FIRREA gives the director the power to act promptly in appointing a conservator once the director believes that a statutory ground for appointment exists. 934 F.2d at 1137. Generally, when Congress fails to articulate a standard and procedure for judicial review, the courts limit their review to the administrative record. Id. The language of § 1464(d)(2)(E) does not mandate de novo review with a full adversarial evidentiary hearing. Id. at 1139. Persuaded that these reasons sustain a limited scope of review, the Tenth Circuit found that the district court erred in hearing additional evidence, making credibility determinations, and deciding the appointment was wrong on the weight of the court's own findings. Id.

As for the standard of review, the Tenth Circuit looked to the Administrative Procedure Act ("APA") for guidance since § 1464(d)(2)(E) failed to provide one. The APA directs an arbitrary and capricious standard of review, 5 U.S.C. § 706(2)(A), unless the statute prohibits judicial review or the "agency action is committed to agency discretion by law," 5 U.S.C. § 701(a). 934 F.2d at 1141. De novo review is appropriate in two circumstances, but neither one is present here. 934 F.2d at 1141.³ In an apparent effort to bolster its conclusion, the Tenth Circuit next observed:

We believe it significant to note the case before us does not involve the more severe decision to appoint a conservator for the purpose of liquidation. Indeed, a conservator ordinarily acts as a guardian or a protector. The decision to appoint a conservator is not a judgment to divest the owner of his property. Rather, it is a judgment that the owner is unable or unwilling to properly manage or control the assets and it is an attempt to put the institution back into a safe and sound condition. H.R.Rep. No. 101-54(I), at 126, 211. This fact permits both a restricted scope of review and a deferential standard of review.

934 F.2d at 1141. The Tenth Circuit followed this statement with the citation and discussion of two other circuit court opinions applying an arbitrary and capricious standard of review. 934 F.2d at 1141 (citing Woods v. FHLBB, 826 F.2d 1400 (5th Cir. 1987), cert. denied, 485 U.S. 959, 108 S.Ct. 1221, 99 L.Ed.2d 422 (1988); Guaranty Sav. & Loan Ass'n v. FHLBB, 794 F.2d 1339 (8th Cir.1986)). "We are persuaded by the analysis employed in these decisions and believe it is applicable to FIRREA and, therefore, to the case before us." 934 F.2d at 1142. Curiously, both cases involved the appointment of a receiver instead of a conservator.⁴ The Tenth Circuit held that the district court articulated the correct standard but it erred in applying what, in effect, was a de novo standard of review. 934 F.2d at 1142. The Tenth Circuit found substantial evidence in the administrative record to support each of the director's three grounds for appointing a conservator. Id. at 1143-49.

By order dated July 16, 1992, the director replaced the conservator for FSA with a receiver pursuant to 12 U.S.C. § 1464(d)(2)(F). As for his grounds and authority, the director stated in the order:

The Director, or his or her designee, based upon the administrative record, and for the reasons set forth in the supporting legal and supervisory memoranda dated July 15, 1992, contained in the administrative record from various offices within the OTS finds and determines that authority for the replacement of the RTC as conservator with the RTC as receiver for OLD THRIFT exists in that the Director is authorized to replace a conservator with a receiver for any savings association without any prior notice, hearing, or any other action pursuant to section 5(d)(2)(F) of the Home Owners' Loan Act ("HOLA").

(Dk. 1, Complaint, Ex. 1). On August 14, 1992, the plaintiffs simultaneously filed in bankruptcy court and in district court complaints seeking the removal of the receiver "on the basis of the findings and determinations ... in Franklin Savings Association v. Director, Office of Thrift Supervision, 742 F.Supp. 1089 (D.Kan.1990)," rev'd, 934 F.2d 1127 (10th Cir.1991), ...