Carteret Sav. Bank, FA v. Office of Thrift Supervision, s. 91-5597

Citation963 F.2d 567
Decision Date07 May 1992
Docket NumberNos. 91-5597,91-5290,s. 91-5597
PartiesCARTERET SAVINGS BANK, FA v. OFFICE OF THRIFT SUPERVISION, in its own capacity and as successor in interest to Federal Home Loan Bank Board; T. Timothy Ryan, Jr., individually and in his official capacity as Director, Office of Thrift Supervision; Federal Deposit Insurance Corporation, in its own capacity and as successor in interest to Federal Savings and Loan Insurance Corporation Office of Thrift Supervision, and its Director, T. Timothy Ryan, Jr., Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Kenneth W. Starr (Argued), Sol. Gen., Stuart M. Gerson, Asst. Atty. Gen., Michael Chertoff, U.S. Atty., U.S. Dept. of Justice, Washington, D.C., Harris Weinstein, Chief Counsel, Thomas J. Segal, Deputy Chief Counsel, Aaron B. Kahn, Asst. Chief Counsel, Jory M. Hochberg, Sr. Trial Atty., Office of Thrift Supervision, Washington, D.C., for appellants, Office of Thrift Supervision, and its Director, T. Timothy Ryan, Jr.

Douglas Letter, Jennifer Zacks, U.S. Dept. of Justice, Washington, D.C., for appellants-amicus curiae, U.S.

Frederick B. Lacey (Argued), David S. Turetsky, Stephen H. Orel, Eric Proshansky, Jamie A. Gavrin, Robert E. Plunkett, LeBoeuf, Lamb, Leiby & MacRae, Newark, N.J., John J. Gibbons, Carlton E. Wessel, Crummy, Del Deo, Dolan, Griffinger &amp Charles J. Cooper, Michael A. Carvin, Robert J. Cynkar, Vincent J. Colatriano, Shaw, Pittman, Potts & Trowbridge, Washington, D.C., for appellee-amici curiae, Sec. Sav. Bank, S.L.A., Transohio Savings Bank, Transcapital Financial Corp., American Capital Corp., Citizens Federal Bank, Citizens Sav. Financial Corp., Northeast Sav., F.A., and Coast Federal Bank, F.S.B. in Support of appellee.

Vecchione, Newark, N.J., for appellee, Carteret Sav. Bank, FA.

Paul Blankenstein, Jeffrey T. Gilleran, Gibson, Dunn & Crutcher, Washington, D.C., David B. Fawcett, Jr., Dickie, McCamey & Chilcote, Pittsburgh, Pa. (Robert T. Messner, General Counsel, Pittsburgh, Pa., of counsel), for appellee-amicus curiae, Dollar Bank, F.S.B. in support of appellee.

Before: SLOVITER, Chief Judge, SCIRICA and ROTH, Circuit Judges.

OPINION OF THE COURT

SLOVITER, Chief Judge.

Before us are consolidated appeals from a preliminary injunction restraining defendant-appellant Office of Thrift Supervision (OTS) from excluding "supervisory goodwill" in calculating the capitalization of plaintiff-appellee Carteret Savings Bank, FA for regulatory purposes under the new standards established by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

I. Facts and Procedural History

Carteret is one of the largest savings and loan associations in New Jersey. In 1982, Carteret arranged to acquire First Federal Savings and Loan Association of Delray Beach, Florida (Delray), and Barton Savings and Loan Association of Newark, New Jersey (Barton). Both institutions were federally-insured thrifts, under the supervision of the Federal Home Loan Bank Board (Bank Board) and the Federal Savings and Loan Insurance Corporation (FSLIC).

The parties place different interpretations on Carteret's motivation for these acquisitions. The government notes, and Carteret does not dispute, that in 1981 and early 1982, it had suffered losses, as had other thrift institutions that held long-term, low yielding fixed rate mortgages while their cost of funds sharply increased as a result of record inflation. According to the government, Carteret, which was a federally chartered mutual association owned by its depositors, was planning to convert to a federally chartered stock association owned by public stockholders, and Carteret believed that expansion to Florida by acquiring a "sunbelt" institution would make it more attractive to investors. Thus it proposed to acquire Barton to make its bid to acquire Delray more attractive to the regulators whose approval was needed for the Delray acquisition.

Carteret, on the other hand, while conceding that it had business reasons for the acquisitions, presents its role in the 1982 transactions as a "rescue" of failing thrifts at the behest of the regulators. For purposes of this appeal and in light of our view of the applicable legal principles, we take no position on the underlying reasons for the acquisitions.

It is undisputed that both Barton and Delray had liabilities far in excess of their assets. On September 30, 1982, the date of acquisition, Barton had assets of $126 million and liabilities of $172 million. Delray had assets of $644 million and liabilities of $812 million. FSLIC gave Carteret $11.7 million of financial assistance in connection with its acquisition of Barton but offered no financial assistance with regard to the Delray acquisition. Following the mergers, Carteret converted to a stock association, raising fresh capital through a public offering.

Under the purchase method of accounting, an acquiring institution could treat the excess of liabilities over the assets of the institutions it acquired as an intangible asset denominated "supervisory goodwill," and could amortize (i.e., convert from asset to expense) a portion of the supervisory goodwill at the end of each year for the purpose of calculating regulatory capital. Regulatory capital is the amount of capital that the institution is required to maintain in order to fulfill its obligations under the governing statute and regulations. See 12 U.S.C.A. § 1464(t) (West Supp. 1991) (setting out FIRREA's regulatory capital standards); 12 C.F.R. § 563.13 (1989) (setting out regulatory capital requirements prior to enactment of FIRREA). Carteret's use of the purchase method of accounting and supervisory goodwill was consistent with the practice adopted by other institutions and approved by the Bank Board and the FSLIC in connection with mergers between troubled thrifts and more healthy institutions. The existence of supervisory goodwill had no tax consequences because, as Carteret acknowledges, the Department of the Treasury does not permit any tax deduction for goodwill, which is assumed to have an unlimited useful life. See 26 C.F.R. § 1.167(a)-3 (1991).

Carteret's intention to amortize supervisory goodwill is clear. In its revised letter bidding for Barton, Carteret stated that it would use the purchase method of accounting under which the "cost in excess of the fair market value of assets acquired (goodwill) is to be amortized to expense over a period of forty (40) years using the straight-line method." App. at 696. In its letter bidding for Delray, Carteret stated that it was "relying on the [Bank Board] to approve [Carteret's use] of the purchase method of accounting" and that it "expect[ed] the [Bank Board] to approve the amortization of any goodwill created by such adjustment for up to a 40-year period." App. at 87-88. Carteret added that if it could not obtain such approval, it would ask FSLIC to pay Carteret the difference in earnings caused by FSLIC's failure to adopt the suggested procedures.

Carteret contends that it stressed the importance of the accounting treatment because Barton and Delray had liabilities that exceeded their assets by $214 million, an amount that far exceeded Carteret's own net worth prior to the acquisitions, and Carteret wanted to treat this difference as an intangible asset that would be gradually converted into an expense over forty years.

The Bank Board agreed in its Merger Resolution of September 30, 1982 to permit Carteret to employ the purchase method of accounting to the acquisitions. The Merger Resolution further stated that the two mergers were "condition[ed upon the execution of an] Assistance Agreement between Carteret and the FSLIC." App. at 93. The Assistance Agreement bound the parties' successors, and stated in its integration clause that "any resolutions or letters issued contemporaneously" by the regulators would be considered part of the agreement, as long as they did not conflict with the agreement. App. at 806, 808-09.

On the same day as the Merger Resolution, the Bank Board sent a forbearance letter to Carteret which contained ten paragraphs listing forbearances that would be granted to Carteret in connection with the mergers. Carteret relies heavily upon paragraph 10 of this letter, which states:

Provided that Carteret submits to the ... Bank Board ... certification ... that Carteret has accounted for the assets and liabilities acquired in the Mergers, and the resulting periods for the amortization of goodwill and the accretion of the loan discount, in accordance with generally accepted accounting principles ("GAAP"), as GAAP existed at the time of the Bank Board's approval of the Mergers, such certification shall be considered to be satisfactory evidence that Carteret's use of the purchase method of accounting is in accordance with GAAP, and such use of the purchase method of accounting will be considered to be in accordance with regulatory accounting procedures.

Id. at 31.

However, the same forbearance letter also stated that the Bank Board and the FSLIC "expressly reserve[d] all of their statutory rights and privileges with respect to Carteret." Id. at 32. Carteret's counsel sought clarification of this provision by telephone. The Bank Board responded in a letter dated October 12, 1982 that the reservation clause "may be understood as if it read as follows[:] Other than actions to enforce the regulatory requirements waived in accordance with paragraphs 1 through 10 and the statutory provisions authorizing imposition of the waived requirements, insofar as such requirements are waived, the Bank Board and the FSLIC expressly reserve all of their statutory rights and privileges with respect to Carteret...."

Id. at 34.

Carteret acquired three more troubled thrifts on June 6, 1986, in a single supervisory merger. Two of these acquisitions generated supervisory goodwill: (1) First Federal Savings and Loan Association of...

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