Brown v. Weis, 920703-CA

• Decision Date: 11 March 1994
• Docket Number: No. 920703-CA,920703-CA
• Parties: Kent L. BROWN and Larry R. Hendricks, Plaintiffs and Appellants, v. Elaine B. WEIS and The Department of Financial Institutions of Utah, Defendants and Appellees.
• Court: Utah Court of Appeals

Page 552

871 P.2d 552

Kent L. BROWN and Larry R. Hendricks, Plaintiffs and Appellants, v. Elaine B. WEIS and The Department of Financial Institutions of Utah, Defendants and Appellees.

No. 920703-CA.

Court of Appeals of Utah.

March 11, 1994.

Arthur H. Nielsen, Richard M. Hymas, and John K. Mangum, Salt Lake City, for plaintiffs and appellants.

Ray R. Christensen, Jay E. Jensen, Elwood P. Powell, Denton M. Hatch, Salt Lake City, for defendants and appellees.

Before BENCH, JACKSON and ORME, JJ.

OPINION

ORME, Associate Presiding Judge:

Plaintiffs, the former owners of a defunct thrift institution, appeal the trial court's grant of summary judgment dismissing their action seeking damages for breach of contract, constitutional violations, and deprivation of federal civil rights. ¹ We affirm in part and reverse in part.

FACTS ²

In late 1984, the Department of Financial Institutions of Utah (the Department) determined that Western Heritage Thrift and Loan Company (Western Heritage), a Utah chartered industrial loan corporation, was a "failing depository institution" within the meaning of Utah Code Ann. § 7-19-1(1) (Supp.1994). In order to avoid closure and liquidation, the Department sought to arrange a merger or acquisition between the then-current owners of Western Heritage and some other party that could offer a better prospect of continuing Western Heritage's business.

In November of 1984, an officer of Western Heritage contacted plaintiffs and advised them of the situation regarding Western Heritage. Brown, a leasing expert, and Hendricks, a certified public accountant, ³ subsequently began exploring the possibility of purchasing Western Heritage. Plaintiffs later met and negotiated with Elaine B. Weis, who at the time was Commissioner of the Department, and other department officials, regarding the purchase of Western Heritage. During the course of negotiating with defendants, plaintiffs learned that any offer they intended to make needed to include a month-by-month projection, or pro forma, of Western Heritage's financial picture. Plaintiffs understood that unless they could show that they would be able to reverse Western Heritage's loss of approximately $30,000 per month, and begin making a profit within three years, the Department would not allow them to acquire the stock of Western Heritage.

The verified complaint indicates that Hendricks first constructed the pro forma on November 14, 1984, at the offices of the accounting firm KMG Main Hurdman. KMG Main Hurdman made its employees, computers, and software available to Hendricks, and Hendricks based his pro forma on representations made by James Munsee, an officer of Western Heritage. Munsee had provided Hendricks with a loan delinquency report, a provisional balance sheet and income statement, and a preliminary audit performed by KMG Main Hurdman. Hendricks revised this pro forma several times. The final pro forma, submitted to the Department in December of 1984, projected that even after the injection of new capital of $550,000 from plaintiffs, Western Heritage would continue to lose money until December of 1986. Plaintiffs' pro forma also indicated, according to plaintiffs' affidavit, that through the first two years of operation, Western Heritage would lose over $380,000 of the new capital plaintiffs proposed to contribute. It also projected that Western Heritage would make a profit of over $180,000 in the third year, and that plaintiffs would recoup their original capital investment by the end of the sixth year of their operation of Western Heritage. Thereafter, the pro forma projected a profit of $25,000 per month.

Plaintiffs' affidavit indicates that during their negotiations they learned that even with the infusion of $550,000 of capital into the business, Western Heritage would not meet the minimum capital requirements established under Utah law, and thus could not operate legally in 1985.

Plaintiffs allege in their verified complaint that the Department represented during negotiations that if plaintiffs purchased Western Heritage, the additional capital needed to meet the State's capital requirements would be supplied by the Industrial Loan Guaranty Corporation (ILGC) purchasing $2,000,000 in "net worth certificates" from Western Heritage. ⁴ Plaintiffs additionally aver, either in their verified complaint or affidavit, that the Department represented that: Use of the net worth certificates was a standard method of rehabilitating distressed thrifts in Utah; the ILGC was financially able to stand behind the net worth certificates; the ILGC was an arm of the State of Utah and, in essence, the ILGC's purchase of the net worth certificates would be supported by the full faith and credit of the State; the issuance and use of the net worth certificates, combined with the amounts plaintiffs would contribute, would raise the amount of Western Heritage's capital to a level that would satisfy the State's capital requirements; the use of the net worth certificates would allow plaintiffs to operate Western Heritage for a sufficient time to work out the financial difficulties existing on December 26, 1984; if plaintiffs met the proposed plan set forth in the pro forma cash flow statement that had been reviewed and accepted by the Department, they would be allowed adequate time to resolve the existing financial difficulties; and, finally, the Department had no information or knowledge which would indicate any reasonable probability of significant error in the then-current balance sheet of Western Heritage.

On December 26, 1984, plaintiffs entered into an agreement with the Department to purchase from Western Heritage all of its stock. On that same date, plaintiffs also entered into a written agreement with the ILGC. The ILGC agreement required the ILGC to (1) purchase a net worth certificate issued by Western Heritage in the sum of $1,000,000; (2) purchase a second net worth certificate issued by Western Heritage in the sum of $250,000 after plaintiffs infused an additional $150,000 into Western Heritage; (3) purchase a third net worth certificate issued by Western Heritage in the sum of $250,000 six months after the plaintiffs invested $150,000, but only if Western Heritage's improvement in net worth was then reasonably close to the projections contained in the pro forma; and (4) purchase a fourth net worth certificate in the amount of $500,000 on or before January 1, 1986, if Western Heritage's improvement in net worth then approximated the projections contained in the pro forma. The net worth certificates were to mature at the rate of $250,000 per year beginning ten years from the date of the first certificate.

Plaintiffs invested $400,000 in cash in Western Heritage and then an additional $150,000 in other assets within ninety days of December 26, 1984, as required by the agreements. During March and April of 1985, plaintiffs obtained a new and final audit of Western Heritage's accounts, books and records, which disclosed that the appropriate reserve for bad debts and anticipated losses should have been well in excess of the amount originally represented by the Department and others. In the period from April through December of 1985, plaintiffs gradually discovered that the Department and others had overstated Western Heritage's actual assets during negotiations. Despite the bleak financial condition, plaintiffs, according to their affidavit, operated Western Heritage with smaller losses than projected in the pro forma, and the ILGC purchased the additional net worth certificates pursuant to the Department's approval with respect to each purchase.

According to plaintiffs' affidavit, in January of 1986, eleven months ahead of the projections made in the final pro forma, Western Heritage began to show a profit. On May 2, 1986, Hendricks and representatives from other thrifts met with Governor Norman H. Bangerter and the Commissioner. During this meeting, Hendricks and other thrift representatives were informed that the ILGC was insolvent and the Department would take control of it on or about July 24, 1986. However, until that time Western Heritage and the other thrifts were to give the appearance of continuing business as usual, although without making new loans.

On June 2, 1986, plaintiffs contend the Commissioner ordered them to stop soliciting or accepting new loans or leasing business for Western Heritage, while still giving the outward appearance of doing business as usual. The Commissioner also informed plaintiffs that the Department intended to close seven thrifts, including Western Heritage; that the Commissioner intended to treat all seven thrifts individually, liquidating two or more and reorganizing three or more; and that it was the Commissioner's recommendation that Western Heritage reorganize. At the time the Commissioner informed plaintiffs of the State's plans, Western Heritage's financial operations were more profitable than they had been when plaintiffs purchased the company. At that time, and at all times thereafter, giving full credit for capital requirement purposes to the net worth certificates issued by Western Heritage, plaintiffs claim that Western Heritage met the capital requirements imposed by State law.

On June 3, 1986, plaintiffs began formulating a reorganization plan for Western Heritage which would have required a partial conversion of depositors' funds to equity. Since the Commissioner intended to treat each thrift individually, plaintiffs believed their reorganization plan would save Western Heritage and allow it to qualify for membership in the Federal Deposit Insurance Corporation (FDIC). The next day, plaintiffs notified the Commissioner of their basic reorganization plan, and the Commissioner indicated she would not object to such a plan.

At the end of June 1986, plaintiffs' plan was presented to FDIC representatives, who stated that the plan could work and be approved if the Commissioner...