Carteret Sav. Bank v. Office of Thrift Supervision

• Decision Date: 25 April 1991
• Docket Number: Civ. A. No. 91-661.
• Citation: 762 F. Supp. 1159
• Parties: CARTERET SAVINGS BANK, FA, Plaintiff, 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 of Office of Thrift Supervision; and Federal Deposit Insurance Corporation, in its own capacity and as successor in interest to Federal Savings and Loan Insurance Corporation, Defendants.
• Court: U.S. District Court — District of New Jersey

762 F. Supp. 1159

CARTERET SAVINGS BANK, FA, Plaintiff, 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 of Office of Thrift Supervision; and Federal Deposit Insurance Corporation, in its own capacity and as successor in interest to Federal Savings and Loan Insurance Corporation, Defendants.

Civ. A. No. 91-661.

United States District Court, D. New Jersey.

April 25, 1991.

COPYRIGHT MATERIAL OMITTED

LeBoeuf, Lamb, Leiby & MacRae by Frederick B. Lacey, Newark, N.J., for plaintiff.

Office of Thrift Supervision, Dept. of the Treasury by Aaron B. Kahn and Stephen E. Hart, Special Counsel, Washington, D.C., for defendants Office of Thrift Supervision and T. Timothy Ryan, Jr.

U.S. Dept. of Justice, Civ. Div. by Marcia K. Sowles, Trial Atty., Washington, D.C., and Michael Chertoff, U.S. Atty. by Susan C. Cassell, Asst. U.S. Atty., Newark, N.J., for defendant Federal Deposit Ins. Corp.

OPINION

BISSELL, District Judge.

This matter arises before the Court on the basis of plaintiff Carteret's application for a preliminary injunction restraining the defendants from taking any regulatory action against it for failure to meet any and all such regulations as a result of defendants' refusal to permit plaintiff to utilize its "supervisory goodwill" in determining compliance with such regulations.

I. FACTS AND BACKGROUND

A. The Parties

Plaintiff Carteret Savings Bank, FA ("Carteret") is one of the largest savings and loan associations in New Jersey. (Plaintiff's Br. at 5; O'Brien¹ Aff., ¶¶ 4-6). Carteret converted, in 1982, to a federally chartered mutual association. In 1983, it converted to a federally chartered stock association. Its shares were publicly traded until 1986, and are presently owned by Carteret Bancorp, which is in turn owned by AmBase Corporation, whose shares are publicly traded.

Defendant Office of Thrift Supervision ("OTS") is the successor in interest to the Federal Home Loan Bank Board ("FHLBB"), which had worked in conjunction with the Federal Deposit Insurance Corporation's ("FDIC") predecessor, Federal Savings and Loan Insurance Corporation ("FSLIC"). FHLBB was charged with regulating and supervising federally chartered thrift institutions, acting as the operating head of FSLIC, and enforcing compliance by such institutions with various banking regulations, particularly the regulatory capital (or "net worth") requirements. Home Owners' Loan Act of 1933, Pub.L. No. 101-73, § 301, 83 Stat. 277 ("HOLA," codified as amended at 12 U.S.C. §§ 1461-1468c). FHLBB was also authorized to appoint FSLIC as conservator or receiver for an insolvent thrift, 12 U.S.C. § 1464(d)(6), and to prescribe rules for the liquidation of such thrifts under the circumstances provided in the statute and applicable regulations. 12 U.S.C. § 1464(d)(1).

FSLIC was essentially designed to insure deposit accounts of federally chartered thrifts upon compliance with Title IV of the National Housing Act of 1934 ("NHA"), 12 U.S.C. § 1724 et seq., in addition to numerous other assigned duties. One of these duties, however, is particularly important to the present case: FSLIC was authorized to extend assistance to failing thrifts, including the arrangement of mergers with "healthy" thrifts. 12 U.S.C. § 1729(f)(1) (repealed).

Both the FHLBB and FSLIC were abolished by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub.L. No. 101-73, 103 Stat. 183, codified at 12 U.S.C. and other titles. OTS was then established and acquired most of the functions of FHLBB. 12 U.S.C. §§ 1462a, 1464. FIRREA also transferred many of FSLIC's functions to the FDIC. 12 U.S.C. §§ 1811, 1814. FIRREA was further amended by the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990, Pub.L. No. 101-647, 104 Stat. 4859 (Nov. 19, 1990), to be codified throughout 12 U.S.C. In addition, FIRREA has been modified by the Technical and Miscellaneous Amendments Act, Pub.L. No. 101-647, 104 Stat. 4906 (Nov. 19, 1990) (collectively, the "1990 Act").

B. The Events

The "S & L crisis" of the late 1970's and early 1980's is well documented. High interest rates and record inflation caused many thrifts which held long-term, low-yield, fixed-rate mortgages to experience operating losses and ultimately fail. The government had to act in order to diminish the crisis.

The present litigation revolves around what the government did then. The parties herein tell the story differently, as to what exactly the government did and pursuant to what authority. Carteret describes the events of the 1980's as follows. FHLBB and FSLIC implemented a policy of requiring problem thrifts to merge into healthy institutions, in order to save the cost and cash outlays required to liquidate the failing bank. (Plaintiff's Br. at 8; Faucette² Aff., ¶ 6; O'Brien Aff., ¶¶ 8, 9). Despite any possible savings, the cost of the mergers was very high because FSLIC provided supervisory financial assistance to the merging institutions. (Plaintiff's Br. at 8 (citing Beesley³ Remarks, 3/3/82, at Plaintiff's App., Exh. 6)). These cash outlays were threatening to bankrupt the FSLIC. (Plaintiff's Br. at 9 (citing Beesley Remarks 9/9/82, at Plaintiff's App., Exh. 4)). Therefore, FSLIC promised healthy acquiring institutions that goodwill derived under the purchase method of accounting⁴ would count dollar-for-dollar as regulatory capital, for purposes of determining compliance with government standards. (Plaintiff's Br. at 9; Beesley Remarks, 4/13/82 at 6-8, Plaintiff's App., Exh. 5; Pratt⁵ Interview, 11/24/81 at 6-7, Plaintiff's App., Exh. 9).

The latter "promise" represents the crux of the present dispute. OTS asserts, essentially, that the government made no such promise, and even if it did FIRREA overrides it to preclude the use of supervisory goodwill in determining compliance with the capital regulations.

C. The Relevant Transactions and Related Documents

1. The 1982 Acquisitions

On September 30, 1982, Carteret acquired, under the supervision of FSLIC and FHLBB, two FSLIC-insured failing thrifts. (O'Brien Aff., ¶ 14). One was the First Federal Savings and Loan Association of Delray Beach ("Delray") in Florida, and the other was the Barton Savings and Loan Association ("Barton") of New Jersey. (Id.) Carteret received $11.7 million in financial assistance for the acquisition of Barton, but no financial assistance for the acquisition of Delray. (Id.) As of the acquisition date, Barton had assets with a fair market value of $126 million and liabilities with a fair market value of $172 million, such that the acquisition left $46 million of goodwill. (Id., ¶ 15). Similarly, Delray had assets with a fair market value of $644 million and liabilities valued at $812 million, such that it had $168 million in goodwill. (Id.) Thus, the acquisition of these two institutions provided Carteret with $214 million in supervisory goodwill, about 90% of the amounts presently in question. (Id., ¶¶ 15, 16).

Numerous documents were generated as a result of the merger of Delray and Barton into Carteret. The first is a letter from FHLBB Secretary J.J. Finn to Robert O'Brien of Carteret, dated September 30, 1982, which confirms the parties' understanding. (See O'Brien Aff., Exh. A (referred to herein as "1982 Forbearance Letter")). This letter was subsequently clarified by letter of the FHLBB dated October 12, 1988. (See O'Brien Aff., Exh. B). The second is an "Assistance Agreement" between FSLIC and Carteret, dated September 29, 1982 and signed by the parties on the 29th and 30th of that month. (See O'Brien Aff., Exh. C). The third document is FHLBB Resolution No. 82-662, adopted on September 30, 1982, approving the merger. (See Faucette Aff., Exh. H). Carteret has also provided the Court with the various bid letters it submitted to FHLBB prior to completion of the transaction. (See Faucette Aff., Exhs. D, E, F).

2. The 1986 Transactions

On June 6, 1986, Carteret acquired two⁶ additional troubled thrifts in another supervisory merger. One is the First Federal Savings and Loan Association of Montgomery County ("First Federal"), in Blacksburg, Virginia, and the other is Mountain Security Savings Bank ("MSSB") of Wytheville, Virginia. (O'Brien Aff., ¶ 25). The acquisition of these two thrifts resulted in additional supervisory goodwill in the amount of $22,059,000. (Id.) As with the 1982 acquisitions, this transaction generated various documents: FHLBB Resolution No. 86-566 (Blanco⁷ Aff., Exh. D); an Acquisition Agreement between FSLIC and Carteret (id., Exh. E); an Assistance Agreement between FSLIC and Carteret (id., Exh. F); and various revised bid letters to FSLIC and FHLBB from Carteret (Blanco Aff., Exhs. A, B, C).

Carteret contends that the documents for each transaction constitute a binding contract, permitting it to use supervisory goodwill in determining whether it has met its regulatory requirements.

D. FIRREA

FIRREA sharply curtailed the use of supervisory goodwill in determining whether regulatory capital requirements are met. Amortization of supervisory goodwill is limited to 20 years. 12 U.S.C. § 1464(t)(9)(B). In addition, its use to calculate "core capital," an accounting category that now must amount to no more than three percent of the institution's total asset base, is being phased out. 12 U.S.C. § 1464(t)(2)(A). By January 1, 1995, supervisory goodwill cannot be used at all to calculate core capital. 12 U.S.C. § 1464(t)(3)(A).

At the same time, FIRREA has strengthened the capital standards which savings associations must meet. Specifically, "the Director of OTS shall, by regulation, prescribe and maintain uniformly applicable capital standards for savings associations. Those standards shall include (i) a leverage limit; (ii) a tangible capital requirement; and (iii) a risk-based capital...