LYONS S. & L. ASS'N v. Westside Bancorporation

• Decision Date: 26 March 1986
• Docket Number: No. 85 C 6501.,85 C 6501.
• Citation: 636 F. Supp. 576
• Court: U.S. District Court — Northern District of Illinois
• Parties: LYONS SAVINGS & LOAN ASSOCIATION, an Illinois association, Plaintiff, v. WESTSIDE BANCORPORATION, INC., a Delaware corporation, Westside Federal Savings and Loan Association, a Washington association, Robert A. King, Robert W. Abel, Daniel K. Woodruff, Anne E. Kelley, Jon W. Hosea, Robert D. Bly, Mary Ryan, and Kathy Konesky, Defendants.

636 F. Supp. 576

LYONS SAVINGS & LOAN ASSOCIATION, an Illinois association, Plaintiff, v. WESTSIDE BANCORPORATION, INC., a Delaware corporation, Westside Federal Savings and Loan Association, a Washington association, Robert A. King, Robert W. Abel, Daniel K. Woodruff, Anne E. Kelley, Jon W. Hosea, Robert D. Bly, Mary Ryan, and Kathy Konesky, Defendants.

No. 85 C 6501.

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

March 26, 1986.

COPYRIGHT MATERIAL OMITTED

Douglas Drenk and David Drenk, Guerard, Konewko & Drenk, Wheaton, Ill., for plaintiff Lyons Sav. and Loan Ass'n.

David Herbst, Portes, Sharp, Herbst & Kravets, Chicago, Ill., for intervenors.

Robert Patterson, Antony Burt and John Rogers III, Hopkins & Sutter, Chicago, Ill., for defendant FSLIC as receiver for Westside.

Steven McCormick, David Erie, Kirkland & Ellis, Chicago, Ill., for all individual defendants except Kathy Konesky.

MEMORANDUM AND ORDER

MORAN, District Judge.

This action centers around a loan participation agreement ("agreement") which financed construction of condominiums in Hawaii. Lyons Savings & Loan Association ("Lyons") and several other banks bought an interest in the loan from Westside Federal Savings & Loan Association ("Westside"). Westside Bancorporation is Westside's parent company. The individual defendants named are past or present directors or officers of Westside.

Lyons claims Westside breached the agreement by failing to disclose its purchase of an equity interest in the condominiums. Lyons' 13 counts in its first amended complaint all stem from this allegedly illegal conduct. The first eight counts are common law claims.¹ Our jurisdiction over them is based on diversity of citizenship, 28 U.S.C. § 1332. Count IX claims a violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). Count X claims securities fraud in violation of § 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5. Counts XI and XII are pendent state claims based on, respectively, Illinois security law and the Illinois Consumer Fraud and Deceptive Business Practices Act. Count XIII, against the individual defendants only, is for bank bribery in violation of 18 U.S.C. § 215.

Lyons filed its original complaint on July 19, 1985. On August 30, 1985 the Federal Home Loan Bank Board (FHLBB) found that Westside was insolvent and appointed the Federal Savings & Loan Insurance Corporation (FSLIC) receiver for Westside pursuant to 12 U.S.C. § 1464(d)(6)(A). FSLIC was substituted for Westside as a party to this action. Now FSLIC has moved to dismiss the Lyons complaint for lack of subject matter jurisdiction as to any claims against Westside because federal law mandates that these claims be brought through an administrative claims procedure. 12 U.S.C. § 1464(d)(6)(C).

The other banks involved in the agreement have intervened with a one-count complaint. They claim that the agreement gives them the right to select (by majority vote) a substitute lead lender for Westside given Westside's insolvency, and they request the court to so declare. The FSLIC seeks dismissal of the intervenors' complaint on the grounds that it has the power to act as lead lender and is currently lawfully exercising that power.

Also before the court is the individual defendants'² joint motion to dismiss for lack of venue, or for change of venue, on the grounds that most of them and most of the evidence in the case is located in or near Seattle, making Chicago an improper situs of the action.

I. FSLIC's Motion to Dismiss Lyons' Complaint Against Westside

Our analysis of the FSLIC's motion to dismiss starts with the following statutory provisions:

(C) Except as otherwise provided in this subsection, no court may take any action for or toward the removal of any conservator or receiver appointed by the FHLBB, or, except at the instance of the Board, restrain or effect the exercise of powers or functions of a conservator or a receiver.

12 U.S.C. § 1464(d)(6)(C), and

In connection with the liquidation of insured institutions, the FSLIC shall have power to carry on the business of and to collect all obligations to the insured institutions, to settle, compromise, or release claims in favor of or against the insured institutions, and to do all other things that may be necessary in connection therewith, subject only to the regulation of the Federal Home Loan Bank Board, or, in cases where the FSLIC has been appointed conservator, receiver, or legal custodian solely by a public authority having jurisdiction over the matter other than said Board, subject only to the regulation of such public authority.

12 U.S.C. § 1729(d).

The Fifth Circuit has recently held that these provisions to foreclose the federal courts from presiding over litigation of claims against a bank in receivership. North Mississippi Savings and Loan Association v. Hudspeth, 756 F.2d 1096 (5th Cir.1985), cert. denied ___ U.S. ___, 106 S.Ct. 790, 88 L.Ed.2d 768 (1986). See also Manning Savings and Loan Association v. Federal Home Loan Bank Board, No. 83 C 757, slip op. at 4 (N.D.Ill. Jan. 4, 1984); First American Savings Bank, et al., v. Westside Federal Savings and Loan Association, 639 F.Supp. 93 (W.D.Wash.1986). The Fifth Circuit reasons that "Congress wanted the FSLIC to be able to act quickly and decisively in reorganizing, operating or dissolving a failed institution and intended that the FSLIC's ability to accomplish these goals not be interfered with by other judicial or regulatory authorities". Hudspeth, 716 F.2d at 1101. Rather, the FHLBB has established an administrative process governing claims against assets of a savings and loan association in receivership. The FSLIC has the power to allow or disallow any claim, 12 C.F.R. § 549.5-1(b)(2), and its decision is subject to review by the FHLBB, 12 C.F.R. § 549.5-1(b)(3). The FHLBB's final decision is subject to judicial review under § 10 of the Administrative Procedures act, 5 U.S.C. §§ 701-706. See First Savings and Loan Association v. First Federal Savings and Loan Association, 531 F.Supp. 251, 254 (D.Haw.1981).

The legislative history of 12 U.S.C. §§ 1464(d)(6)(C) and 1729(d) supports the case law. The first provision was enacted in 1966 as part of the Financial Supervisory Act of 1966, which amended § 5(d) of the Home Owners' Loan Act of 1933 and § 407 of the National Housing Act. The amendment reworked all of what is now codified as 12 U.S.C. § 1464(d). The purpose of the amendment was to "arm regulatory agencies with a wider range of effective enforcement remedies" in order to "provide sorely needed flexibility to protect the public's money in the form of demand deposits and time and savings accounts...." H.R. Rep. No. 2077, 89th Cong., 2d Sess. 4-5 (1966). As part of this effort the amendment gave the FSLIC and the FHLBB the additional power to issue temporary and permanent cease-and-desist orders.

As part of this effort to broaden the powers of the FHLBB and other regulatory agencies involved in regulating the banks, Congress added the language contained in 12 U.S.C. § 1464(d)(6)(C) restricting the federal courts' jurisdiction. The only mention of this new provision in the legislative history of the amendment is in the section-by-section summary of the amendment done by the Senate Banking and Currency Committee, which states:

The provisions of this subparagraph 12 U.S.C. § 1464(d)(6)(C) would, in effect, limit the jurisdiction of a court to order the removal of a conservator or receiver, except in an action for removal brought by an association under authority of paragraph (6)(A) of the proposed amended section 5(d), or, except at the instance of the Board, to restrain the exercise of the powers or functions of a conservator or receiver.

(Emphasis added.) S.Rep. No. 1482, 89th Cong., 2d Sess. 14, reprinted in 1966 U.S. Code Cong. & Ad.News 3532, 3545.

This language indicates Congress' intent to channel claims against a bank in receivership through an administrative process over which the FSLIC and the FHLBB preside. Support for this interpretation of congressional intent comes from the passages in the 1966 legislative history which deal with judicial review of the administrative process. As reported by the House Committee on Banking and Currency:

The scope of judicial review shall also be in conformity with the provisions of Title 5 of the United States Code relating to judicial review of administrative action, ... except that agency action, findings, and conclusions may be set aside if not supported by the weight of the evidence.... The purpose of the new language is to safeguard the right of individuals and institutions from arbitrary and capricious agency action.

H.Rep. No. 2077, 89th Cong., 2d Sess. 6 (1966). This language shows that Congress wanted claims against a bank in receivership to go through the agencies before reaching the federal courts.

Section 1729(d) was amended in 1982 as part of an effort to provide "the FSLIC with conservatorship/receivership powers over State-Chartered insured institutions approximately equal to those which it now has with respect to Federal Associations...." S.Rep. No. 97-536, 97th Cong., 2d Sess. 48, reprinted in 1982 U.S.Code Cong. & Ad.News 3054, 3102. Even though § 1729 deals primarily with the FSLIC's power over state savings and loan associations, it is useful to our analysis here because its subsection (d) reiterates in its language the FHLBB's exclusive regulatory authority over FSLIC's actions.

The plaintiff argues that the judicial resolution of claims is a function distinct from a receiver's role of allocating assets to satisfy those claims. However,

as the FSLIC points out, resolution of even the facial merits of claims outside of the statutory reorganization process would delay the receivership function of distribution of assets: the FSLIC would not be able to determine how much to pay other claimants until the termination of the parallel litigation.

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