TELEGRAPH S & L ASS'N v. FEDERAL S & L INS. CORP.

• Decision Date: 05 August 1981
• Docket Number: No. 80 C 2792.,80 C 2792.
• Citation: 564 F. Supp. 862
• Parties: TELEGRAPH SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

564 F. Supp. 862

TELEGRAPH SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, et al., Defendants.

No. 80 C 2792.

United States District Court, N.D. Illinois, E.D.

June 9, 1981.

On Motion for Modification August 5, 1981.

COPYRIGHT MATERIAL OMITTED

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Baker & McKenzie, Chicago, Ill., for plaintiff.

Roger Flahaven, Michael J. Hayes, Jerome Webb, Asst. Attys. Gen., William J. Scott, Atty. Gen., Chicago, Ill., for Schilling.

Jeremiah Marsh, Robert W. Patterson, Michael F. Duhl, John L. Rogers, III, Peter F. Lovato, III, Hopkins, Sutter, Mulroy, Davis & Cromartie, U.S. Atty. Thomas P. Sullivan, Asst. U.S. Atty. Mary Ann Mason, Chicago, Ill., for FSLIC and Federal Home Loan Bank Bd.

MEMORANDUM OPINION

GRADY, District Judge.

Plaintiff brings this action to remove the Federal Savings & Loan Insurance Corporation ("FSLIC") as receiver of its assets and to obtain equitable relief for harm suffered as a result of the sale of those assets. Before the court is the motion for summary judgment of defendants Federal Home Loan Bank Board ("FHLBB") and FSLIC on Count III. The motion is granted in part and denied in part.

I. FACTS

The uncontroverted facts are as follows. Telegraph Savings and Loan Association ("Telegraph" or "the Association") was a state chartered, federally insured savings and loan association. Several years prior to 1980, Telegraph began experiencing financial difficulties as a result of an adverse "spread" between the yield on its portfolio mortgages and the rising cost of money. Strasser Affid., ¶ 3. As a federally insured association, Telegraph was required by law to maintain reserve and net worth requirements as set forth in 12 C.F.R. § 563.13. In 1977 and again in 1978, it met these requirements only by earmarking paid-in surplus from the issuance of preferred stock. Roy Affid., ¶ 2. As of June 30, 1979, Telegraph failed to meet its minimum reserve requirement by $303,480.00 and had fallen short of its net worth requirement by $704,513.00. Id. For the six months ending June 30, 1979, the Association suffered losses in excess of $650,000.00 and logged a total loss for 1979 of $237,469.00. Id., ¶ 3. As of June 30, 1979, Telegraph's net worth was set at $4,806,938.00. Id.; Conover Affid., Ex. 3 (8-26-80). Over the following ten months, Telegraph's net worth steadily declined to an April 30, 1980, level of $449,389.¹ Roy Affid., ¶¶ 3, 4; Conover Affid., Exhs. 2-13. In the month of April 1980 alone, the Association lost over $730,000.00. Conover Affid., Ex. 13. Telegraph's daily operational losses accelerated from $15,500.00 per day in February to $18,700.00 in March to $24,500.00 in April.

As a result of its financial difficulties, late in 1979 Telegraph became the subject of careful scrutiny by the Illinois Commissioner of Savings and Loan Associations ("the Commissioner"), the FHLBB and the FSLIC. As a result, a special meeting of Telegraph's Board of Directors was called on December 20, 1979, and was attended by the Deputy Commissioner of Savings and Loan Associations. At this meeting, Telegraph's president, William Strasser, reviewed the position of the Association and concluded that it "clearly was undercapitalized." Strasser also stated that various plans for the infusion of new capital were under consideration, including the sale of $3 million of preferred stock to a publicly held corporation. Nelson Affid., Ex. 2. The Deputy Commissioner responded that if Telegraph's financial condition did not improve by March 31, 1980, the Commissioner would have to consider taking custody of the Association. Id.

Another special meeting of the Board was held on March 5, 1980, and was attended by the Commissioner who presented a number of resolutions intended to prevent the Association's financial demise. The minutes report that merger possibilities were discussed in detail. Nelson Affid., Ex. 3. The Commissioner stated that if no buyers appeared by March 31, 1980, he would be compelled to proceed with custody.

In the meantime, Telegraph's position had continued to deteriorate. On May 19, 1980, Telegraph's comptroller prepared reports projecting losses of over $590,000.00 for the period of May 1 to May 19 and losses of nearly $1 million for the entire month. Conover Affid., ¶ 3 (8-26-80). These losses, were they actually to occur, would have given Telegraph a substantial negative net worth by mid-May. It appeared that Telegraph would in fact suffer these losses when, on May 21, 1980, Virgil Seeley, Telegraph's executive vice-president and treasurer, informed the Commissioner that, "Nothing has come to my attention that would indicate operating results materially more favorable for May, 1980 than those experienced in April, 1980." Seeley Affid., ¶ 3 (8-26-80).

In early May, Strasser finally came up with a buyer for the Association. Strasser obtained a written commitment from The Heron Corporation to purchase 80 per cent of Telegraph's preferred stock for $7 million. The deal was conditioned, however, on FSLIC's promise to provide Telegraph with a 15-year, $15 million interest-free loan, to be extended for an additional five years at six per cent interest. This proposal was evaluated by the FHLBB at a closed meeting on May 22 and rejected for two reasons: First, it was thought to provide insufficient capital to turn the Association around and second, it appeared that a sale of the assets would prove more costly to the FSLIC than other alternatives under consideration.² Compilation of Materials Filed by FHLBB in Support of Motion for Summary Judgment, "Certified Transcript," pp. 6, 16, 22-26. At this meeting, it was also decided that when the State Commissioner took custody of Telegraph, the FHLBB would, pursuant to its statutory authority,³ appoint FSLIC receiver and immediately transfer the assets and liabilities to First Federal Savings & Loan Association under a purchase and assumption agreement. Id.

Later in the day, without giving prior notice, the Commissioner took custody of Telegraph.⁴ The Commissioner's custody notice stated that Telegraph's withdrawal capital and permanent capital reserve were impaired; that it was unable to continue operations; and that its financial condition constituted an emergency, thereby excusing the Commissioner from giving Telegraph prior notice and an opportunity for corrective action.⁵ Complaint, Ex. A. Moments later, the FHLBB's order appointing FSLIC receiver went into effect. The order stated the following grounds for the receivership:

Telegraph is in an unsafe and unsound condition to transact business in that the association's losses have placed Telegraph in a condition of insolvency or imminent insolvency;

Complaint, Ex. B. The final act of the drama took place later that evening, when the FSLIC, as receiver, executed the purchase and assumption agreement with First Federal Savings & Loan Association. By the end of May 22, 1980, Telegraph had ceased to exist.

II. DISCUSSION

On June 3, 1980, the Association filed a ten-count complaint against a number of parties, including the Illinois Commissioner, the FHLBB and the FSLIC. Count III, attacking the legality of the receivership, is the keystone of the complaint, as a brief survey of the federal statutory framework demonstrates.

Title 12 U.S.C. § 1464(d) and § 1729 contain the provisions governing the appointment of federal receivers for state savings and loan associations and challenges to such appointments. With respect to challenges to a receivership, § 1464(d)(6)(A) provides that

In the event of such appointment of a receiver, the association may, within thirty days thereafter bring an action in the United States district court for the judicial district in which the home office of such association is located ... for an order requiring the Board to remove such conservator or receiver, and the court shall upon the merits dismiss such action or direct the Board to remove such conservator or receiver.

Suit under § 1464(d)(6)(A) is the only means of attacking the legality of the conduct of a receivership, as § 1464(d)(6)(C) makes clear:

Except as otherwise provided in this subsection, no court may take any action for or toward the removal of any conservator or receiver, or, except at the instance of the Board, restrain or affect the exercise of power or functions of a conservator or receiver.

Plaintiffs argue that if the court finds that the receiver was unlawfully appointed, a full panoply of equitable relief should be available to set aside the sale of assets.⁶ Nonetheless, the parties do agree that if plaintiff does not prevail under § 1464(d)(6)(A), all other causes of action challenging the appointment and conduct of the receiver must be dismissed.

We turn then to the law governing the appointment of receivers under Title 12. Section 1729(c)(2) provides the FHLBB with "exclusive power and jurisdiction" to appoint the FSLIC receiver for the assets of an insured state savings and loan association in the event the Board determines:

(A) that ... (ii) an insured institution (other than a Federal savings and loan association) has been closed by or under the laws of any State;

(B) that one or more of the grounds specified in paragraph (6)(A) of section 1464(d) of this title, existed with respect to such institution at the time a conservator, receiver, or other legal custodian was appointed, or at the time such institution was closed ...; and

(C) that one or more of the holders of withdrawable accounts in such institutions is unable to obtain a withdrawal of his account, in whole or in part;

Section 1464(d)(6)(A), referred to in subsection (B) of the foregoing statute, provides that

The grounds for the appointment of a conservator or receiver for an association shall be one or more of the following:

(i) insolvency in that the assets of the association are less than its obligations to its creditors and others, including its members;

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