SEC. FED. SAV. & LOAN v. FED. SAV. & LOAN INS.

• Decision Date: 27 July 1992
• Docket Number: No. CIV 89-1358 JC/RWM.,CIV 89-1358 JC/RWM.
• Citation: 796 F. Supp. 1435
• Parties: SECURITY FEDERAL SAVINGS AND LOAN ASSOCIATION OF ALBUQUERQUE; First Southwest Financial Services, Inc.; Clarence E. Ashcraft; and Allen L. White, Plaintiffs, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION; Federal Home Loan Bank Board; Director, Office of Thrift Supervision, in his own official capacity and as Successor in Interest to Federal Home Loan Bank Board; Federal Deposit Insurance Corporation, in its own capacity and as Successor in Interest to Federal Savings and Loan Insurance Corporation; and Federal Savings and Loan Insurance Corporation Resolution Fund, Defendants.
• Court: U.S. District Court — District of New Mexico

796 F. Supp. 1435

SECURITY FEDERAL SAVINGS AND LOAN ASSOCIATION OF ALBUQUERQUE; First Southwest Financial Services, Inc.; Clarence E. Ashcraft; and Allen L. White, Plaintiffs, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION; Federal Home Loan Bank Board; Director, Office of Thrift Supervision, in his own official capacity and as Successor in Interest to Federal Home Loan Bank Board; Federal Deposit Insurance Corporation, in its own capacity and as Successor in Interest to Federal Savings and Loan Insurance Corporation; and Federal Savings and Loan Insurance Corporation Resolution Fund, Defendants.

No. CIV 89-1358 JC/RWM.

United States District Court, D. New Mexico.

November 5, 1991.

Reconsideration Denied July 27, 1992.

Gretchen Friedlander, Douglas Foster, Paul Fish, Modrall Law Firm, and Robert J. Muehlenweg, and Orlando Lucero, Poole Law Firm, Albuquerque, N.M., for plaintiffs.

Douglas C. Henson, U.S. Attorney's Office, Albuquerque, N.M., George O. Barnwell, FDIC Legal Div., Gary A. Orseck, Dept. of Justice, and Aaron B. Kahn, Randy W. Thomas, Harris Weinstein, and Thomas J. Segal, Thrift Supervision Office, Washington, D.C., for defendants.

MEMORANDUM OPINION AND ORDER

CONWAY, District Judge.

THIS MATTER comes on for consideration of Defendant Director of the Office of Thrift Supervision's Motion to Dismiss and Defendant Federal Deposit Insurance Corporation's Partial Motion to Dismiss (defendants' Motion to Dismiss), plaintiffs' Motion for Partial Summary Judgment, and Defendant FDIC's Objections to Magistrate's Order. The Court, having considered the motions, their accompanying memoranda, and the applicable law, having heard oral argument on the first two motions, and being otherwise fully advised in the premises, finds that defendants' Motion to Dismiss is well-taken in part and will be granted in part, plaintiffs' Motion for Partial Summary Judgment is well-taken in part and will be granted in part, and Defendant FDIC's Objections to Magistrate's Order will be denied as moot.

I

Plaintiff Security Federal Savings and Loan Association of Albuquerque (Security Federal) is a federally chartered stock savings association. It was formed in 1985 by the merger of the previously existing, but financially troubled, Security Federal Savings and Loan Association of Albuquerque (Old Security) with New Security Federal Savings and Loan Association (New Security). Following the merger New Security adopted Old Security's name.

Due to the impending failure of Old Security, the Federal Home Loan Bank Board (FHLBB) and the Federal Savings and Loan Insurance Corporation (FSLIC) were faced with either liquidating Old Security and paying off its depositors or finding new sources of capital. After determining that the latter course would be more cost effective, FSLIC entered into an Assistance Agreement with Old Security and plaintiffs First Southwest Financial Services, Inc. (First Southwest), Clarence E. Ashcraft, and Allen L. White (these three plaintiffs will be referred to collectively as "the Investors"). The Investors created New Security for the purpose of acquiring Old Security. To this end they contributed $6,000,000 in cash to New Security. That amount, however, was not sufficient to bring the merged institutions into solvency.

FSLIC agreed in the Assistance Agreement to several provisions which supplied the necessary additional capital. The two relevant to this case provided that: 1) New Security could include as regulatory capital the outstanding amount of a $7,410,000 subordinated debenture which it would issue to FSLIC, until less than one year remained to maturity, and 2) FHLBB Resolution 85-887, which allowed New Security for purposes of reporting to FHLBB or FSLIC to use purchase-method accounting and to amortize any intangible assets thereby resulting by the straight line method for a period not to exceed 35 years, would govern accounting for the transaction where the Resolution differed from generally accepted accounting principles (GAAP). The latter provision allowed the shortfall between Security Federal's liabilities and the market value of its tangible assets to be treated as an intangible asset called "goodwill," amortizable over a period of up to 35 years. At the time of the merger goodwill amounted to $12,567,436.

An additional feature of the Assistance Agreement required Security Federal to assign to FSLIC, on demand and in the form and manner required by FSLIC, any so-called "Acquired Association Claims." FSLIC was then to reimburse Security Federal for the value of these claims, as reflected on the books of Old Security immediately prior to the effective date of the merger. FSLIC requested this assignment in 1986.

Security Federal apparently operated profitably pursuant to the terms of the Assistance Agreement. Passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub.L. No. 101-73, 103 Stat. 183, however, significantly affected its financial position. Among other sweeping changes, FIRREA abolished FSLIC and FHLBB, establishing the Office of Thrift Supervision (OTS) to charter, supervise, and regulate all federally insured savings associations. Additionally, FIRREA required the Director of OTS (Director) to promulgate strengthened regulatory capital standards for the thrift industry, to become effective December 7, 1989. Specifically, thrift capital standards were to be no less stringent than those for national banks, FIRREA § 301, 103 Stat. 280, severely restricting use of goodwill as regulatory capital. Possible sanctions for failure of a thrift to meet the new regulatory capital standards include imposition of asset growth restrictions, issuance of a capital directive limiting use of thrift funds, and treatment of failure to meet capital requirements as an unsafe or unsound practice. Home Owners' Loan Act of 1933 §§ 5(t)(6)(A)(i), (t)(6)(B)(i)-(ii), (t)(6)(C), (s)(3), 103 Stat. 303, 307-08 (1989).

Following imposition of the new regulatory standards, OTS found Security Federal to be tangibly insolvent and imposed restrictions, including limiting the maximum loan amount to any one borrower to $500,000. By letter dated March 6, 1990, plaintiffs tendered ownership of Security Federal back to defendants and requested restitution. Defendants refused to accept the tender.

In their Amended Complaint plaintiffs allege that the Director's actions in disallowing treatment of intangible assets and, possibly, subordinated debenture as regulatory capital, as mandated by FIRREA, constitute a breach of the Assistance Agreement, failure of consideration, frustration of purpose, and an unconstitutional taking of property without just compensation. Plaintiffs also claim breach of contract and failure of consideration for failure of FSLIC and the Federal Deposit Insurance Corporation (FDIC), FSLIC's successor, to pay for expenses incurred by Security Federal in collecting on alleged Acquired Association Claims and for their alleged failure to compensate Security Federal for Acquired Association Claims it purportedly assigned to FSLIC. Plaintiffs pray, alternatively, for: 1) a decree rescinding the Assistance Agreement and all related agreements and providing restitution to the Investors; 2) judgment that the Assistance Agreement has been totally breached by defendants and an award of damages to the Investors and Security Federal; and 3) if the Assistance Agreement is found to remain in effect, damages in favor of Security Federal and damages in favor of the Investors for the diminished value of their investment, a declaratory judgment permitting Security Federal to offset interest and principal payments due on the subordinated debenture by amounts owed by defendants for the Acquired Association Claims, a decree of specific performance enjoining defendants to comply with the terms of the Assistance Agreement, and relief in the nature of mandamus directing FDIC to give good faith consideration to Security Federal's request for assistance.

Plaintiffs notified the Court on May 17, 1991, that OTS had placed Security Federal in receivership with the Resolution Trust Corporation (RTC) as receiver. Accordingly, counsel for plaintiffs withdrew from representation of Security Federal, with new counsel entering for RTC. The Investors' counsel also informed the Court that they would not pursue Acquired Association Claims issues, as those claims were solely those of Security Federal. The Investors do continue the litigation to obtain rescission and restitution, however, viewing the appointment of RTC as receiver for Security Federal as merely effectuating their March 6, 1990, tender of Security Federal to defendants.

The Director and FDIC (collectively referred to as "the defendants") move for dismissal of Counts I-IV and VIII-X of the Amended Complaint on grounds that this Court lacks subject matter jurisdiction over the claims in these counts and that they fail to state claims upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6). Defendants label these counts as the "FIRREA Claims" in that plaintiffs base them on FIRREA's new capital requirements and the Director's regulations implementing those capital requirements. In these claims plaintiffs allege failure of consideration (Count I), frustration of purpose (Count II), unconstitutional taking of property (Count III), breach of the Assistance Agreement (Counts IV, VII, and IX), and seek relief in the form of mandamus compelling FDIC to consider Security Federal's application for open assistance (Count X).

Plaintiffs move for partial summary judgment, contending that they are entitled as a matter of law to rescission of the merger of Old Security with New Security on grounds of failure of consideration or breach of contract and to restitution to the Investors of the $6,000,000 they contributed to the merger. Alternatively, if rescission is not granted plaintiff Security Federal...