OLYMPIC FED. S&L v. Office of Thrift Supervision

• Decision Date: 21 March 1990
• Docket Number: Civ. A. No. 90-0482 (RCL).
• Citation: 732 F. Supp. 1183
• Parties: OLYMPIC FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. DIRECTOR, OFFICE OF THRIFT SUPERVISION, et al., Defendants.
• Court: U.S. District Court — District of Columbia

732 F. Supp. 1183

OLYMPIC FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. DIRECTOR, OFFICE OF THRIFT SUPERVISION, et al., Defendants.

Civ. A. No. 90-0482 (RCL).

United States District Court, District of Columbia.

March 21, 1990.

Charles J. Cooper, McGuire, Woods, Battle & Boothe, Washington, D.C., for Olympic Federal Sav. and Loan Assn.

Aaron B. Kahn, Office of Chief Counsel, Office of Thrift Supervision, Washington, D.C., for Director, Office of Thrift Supervision and Salvatore R. Martoche.

Leslie H. Southwick, Steve Frank, Mona B. Alderson, Dept. of Justice, Civ. Div., for FDIC.

MEMORANDUM OPINION

LAMBERTH, District Judge.

Plaintiff Olympic Federal Savings & Loan Association ("Olympic") filed a motion on March 6, 1990, requesting that the court issue a temporary restraining order ("TRO") and a preliminary injunction ("PI") enjoining the Director of the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC") from appointing a conservator or receiver for Olympic. Plaintiff argues the following in support of its motion: first, that both M. Danny Wall, the previous Director of OTS, and Salvatore R. Martoche, the current Acting Director of OTS, were unconstitutionally appointed and therefore have no legal authority to appoint a conservator or receiver; second, that the regulations issued by OTS changing the capital requirements for savings and loans ("S & Ls") were issued in violation of the Administrative Procedure Act's notice and comment requirements and therefore cannot serve as the basis for appointing a conservator or receiver; and third, that the grounds for appointing a conservator or receiver do not exist until the FDIC has reviewed and acted upon Olympic's request for assistance. The court need not address Olympic's second and third arguments at this time because, for the reasons discussed herein, the strong likelihood that Olympic will succeed on the merits of its Appointments Clause challenge alone entitles Olympic to the limited injunction it requests.

I. Factual Background.

In the late 1970's and early 1980's, the thrift industry was undergoing a crisis of unprecedented magnitude. High interest rates forced most thrifts to pay out more in interest on deposits than they earned on their portfolio of long-term, fixed-rate mortgages. This interest rate spread drove many thrifts into insolvency. Memorandum of Law in Support of Plaintiff's Motion for a Temporary Restraining Order and a Preliminary Injunction (filed Mar. 6, 1990) ("Plaintiff's Initial Memorandum"); see also Defendant FDIC's Memorandum in Opposition to Plaintiff's Motion for a Temporary Restraining Order at 2, 4-5 (filed Mar. 6, 1990) ("FDIC's TRO Opposition").

The thrift industry was regulated at the time by the Federal Home Loan Bank Board ("FHLBB") and its insurance arm, the Federal Savings and Loan Insurance Corporation ("FSLIC"). Faced with a large number of failing thrift institutions, the FSLIC and FHLBB recognized that the FSLIC insurance fund would quickly be exhausted if the government continued to provide financial assistance to all troubled thrifts. Plaintiff's Initial Memorandum at 3; see also FDIC's TRO Opposition at 5. In mid-1981, the FSLIC and FHLBB therefore revised their policies and practices to prevent, or at least forestall, the exhaustion of the FSLIC insurance fund. Plaintiff's Initial Memorandum at 3. They began inducing and arranging supervisory mergers by providing assistance in the form of an intangible asset — "supervisory goodwill" — rather than in the form of cash. Id.

This was accomplished by allowing thrifts to account for mergers using the "purchase method" of accounting. Id. Under this method, the book value of the assets and liabilities of an acquired thrift were adjusted ("marked to market") to their fair market value at the time of the acquisition. Id. at 4. The excess in the cost of the acquisition (including any liabilities assumed by the acquirer) over the fair market value of the acquired assets was then separately recorded on the acquiring thrift's books as "goodwill" — an intangible, non-earning asset subject to amortization on a straight-line basis over as many as 40 years. Id. FHLBB's regulations governing the minimum capital requirements for FSLIC-insured thrifts allowed thrifts to include "supervisory goodwill" in capital. Id. at 4-5.

Olympic is the product of a number of mergers consummated between 1982 and 1984. Id. at 7-13. Olympic booked more than $160 million in supervisory goodwill as a result of these mergers. Id. at 13. After the mergers had been completed, Olympic's tangible capital level was a negative $140 million, or negative 25.75 percent of total assets. Id. at 14. Since 1984, Olympic has amortized more than $43 million of its supervisory goodwill. Id.

The thrift industry's problems did not disappear when interest rates began declining in late 1982. Indeed, when President Bush took office in January of 1989 the S & L industry remained in a "crisis" situation. President Bush made the S & L crisis a top priority of his new administration. FDIC's TRO Opposition at 5. He submitted to Congress a bill proposing a major restructuring of the way in which the federal government regulates the savings and loan industry. The bill was approved by Congress and on August 9, 1989, President Bush signed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") into law. Plaintiff's Initial Memorandum at 15.

FIRREA dramatically changed the regulatory regime which oversees the S & L industry. It abolished the FHLBB and FSLIC and established a new agency — OTS — as an office in the Department of the Treasury. Id. at 15; FDIC's TRO Opposition at 6. It divided regulatory and insurance responsibilities between OTS (the regulator) and the Savings Association Insurance Fund ("SAIF") (the insurer). Defendant Director, Office of Thrift Supervision's Memorandum in Opposition to Temporary Restraining Order at 3 (filed Mar. 6, 1990) ("OTS' TRO Opposition"); FDIC's TRO Opposition at 5-6. It removed from OTS certain powers previously exercised by the FHLBB, but placed OTS in the hands of a single Director rather than a three-person board. OTS' TRO Opposition at 4. It vested in the Director responsibility for issuing S & L charters, reviewing proposed changes in control of thrifts, supervising and regulating federally-insured thrifts, and appointing receivers and conservators for ailing thrifts and their officers. Defendant Director's Opposition to Motion for Preliminary Injunction at 4 (filed Mar. 13, 1990) ("OTS' PI Opposition").

FIRREA provides that the Director of OTS shall be appointed by the President, by and with the advice and consent of the Senate, for a term of five years. FIRREA § 301, 103 Stat. 278. FIRREA also provides that vacancies in the office of Director which occur before the expiration of a term shall be filled by the President, by and with the advice and consent of the Senate. Id. However, FIRREA contains a "grandfather" clause pursuant to which the Chairman of the FHLBB on the date of FIRREA's enactment was statutorily appointed OTS' first Director. Id. By operation of this provision, M. Danny Wall became OTS' first Director. Plaintiff's Initial Memorandum at 16.

Under Mr. Wall's leadership, OTS promulgated new capital regulations in accordance with FIRREA's provisions. Id. at 19; FDIC's TRO Opposition at 8-9. The new capital regulations permit thrifts to include "supervisory goodwill" only to meet "risk-based" capital requirements and only in accordance with a phase-out schedule set forth in FIRREA. Plaintiff's Initial Memorandum at 20.

Olympic does not comply with the new capital requirements. Id. at 23. It is currently operating subject to a number of business restrictions imposed by OTS. Id. at 24. Moreover, because Olympic does not meet the new capital requirements, the Director has statutory authority to take over the thrift by appointing a conservator or receiver and, if necessary, to direct that person to liquidate the thrift. Id.

Recognizing the threat to its continued operations and believing that various statutory, constitutional and other grounds existed upon which it could challenge OTS' acts, Olympic filed its complaint in this case on March 1, 1990. Among other things, Olympic alleged that M. Danny Wall, then Director of OTS, had been unconstitutionally appointed. Complaint, at ¶ 61. Contemporaneously with filing its complaint, Olympic advised counsel for defendants that it intended to challenge the constitutionality of Mr. Wall's appointment. Supplemental Memorandum of Law in Support of Plaintiff's Motion for a Preliminary Injunction, at 2 (filed Mar. 9, 1990) ("Plaintiff's Supplemental Memorandum"). On March 5, 1990, Mr. Wall ceased to be Director of OTS and the President appointed Salvatore Martoche Acting Director of OTS pursuant to the Vacancies Act, 5 U.S.C. §§ 3345-49. OTS' TRO Opposition at 9.

On March 6, 1990, after OTS had refused to assure Olympic that it would not appoint a receiver or conservator and had refused to agree to provide Olympic with notice of its intent to appoint a receiver or conservator, Olympic filed its motion for a TRO and for a PI. Plaintiff's Supplemental Memorandum at 2. Defendants argued in opposition that plaintiff's Appointments Clause challenge had been mooted by Mr. Wall's resignation and that, in any event, plaintiff was not entitled to the extraordinary relief it requested. At oral argument on its motion for a TRO, Olympic countered by arguing that Salvatore Martoche's designation as Acting Director under the Vacancies Act was improper, and that therefore Mr. Wall's resignation had not mooted its Appointments Clause claim. After considering the briefs filed on behalf of all parties and hearing oral argument on Olympic's motion, the court granted Olympic's request and enjoined the Acting Director of OTS from appointing a receiver or conservator...