Charter Federal Sav. Bank v. Office of Thrift Supervision

Decision Date02 November 1992
Docket Number91-2708,Nos. 91-2647,s. 91-2647
Citation976 F.2d 203
PartiesCHARTER FEDERAL SAVINGS BANK, Plaintiff-Appellee, v. OFFICE OF THRIFT SUPERVISION, Director, in his own official capacity and as successor in interest of Federal Home Loan Bank Board; Federal Deposit Insurance Corporation, in its own capacity and as successor in interest to Federal Savings and Loan Insurance Corporation, Defendants-Appellants. (Two Cases).
CourtU.S. Court of Appeals — Fourth Circuit

Aaron Baer Kahn, Asst. Chief Counsel, Office of Thrift Supervision, Washington, D.C., argued (Harris Weinstein, Chief Counsel, Thomas J. Segal, Associate Chief Counsel, David H. Enzel, Sr. Trial Atty., Laurie Romanowich, Office of Thrift Supervision, on the brief), for defendant-appellant OTS.

Jacob Matthew Lewis, Civ. Div., U.S. Dept. of Justice, Washington, D.C., argued (Stuart M. Gerson, Asst. Atty. Gen., Douglas Letter, Civ. Div., U.S. Dept. of Justice, Washington, D.C., E. Montgomery Tucker, U.S. Atty., Roanoke, Va., Thomas A. Schulz, Asst. Gen. Counsel, Loretta R. Pitt, Sr. Counsel, Colleen Bombardier, Sr. Counsel, Thomas L. Holzman, F.D.I.C., Washington, D.C., on the brief), for defendant-appellant F.D.I.C.

Thomas Matthews Buchanan, Winston & Strawn, Washington, D.C., argued (Eric W. Bloom, Winston & Strawn, on the brief), for plaintiff-appellee.

Before RUSSELL, Circuit Judge, BUTZNER, Senior Circuit Judge, and SIMONS, Senior United States District Judge for the District of South Carolina, sitting by designation.


DONALD RUSSELL, Circuit Judge:

The Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC), defendants in the action below, appeal on jurisdictional and substantive grounds the district court's declaratory judgment in this case. At issue here is whether enforcement of the strict capital requirements of the recently enacted Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub.L. No. 101-73, 103 Stat. 183 (1989) (codified in various sections of 12 U.S.C.), abrogates prior agreements permitting use of supervisory goodwill as capital. The district court ruled that the Federal Home Loan Bank Board (FHLBB), predecessor of OTS, had contracted with Charter Federal Savings Bank (Charter) to permit Charter to treat supervisory goodwill as an asset for statutory capital reporting requirements in return for Charter's acquisition of certain failing thrifts. Subsequent to entering into the contracts, Congress enacted FIRREA, which severely restricted use of supervisory goodwill as capital. The court decided that if OTS were to enforce FIRREA's more restrictive capital requirements and if its enforcement substantially burdened Charter's operations, Charter could rescind the contracts and, consequently, rescind its acquisitions of failing thrifts.

We affirm the district court's jurisdiction to decide this case, except as to the FDIC as a party. We conclude that the claims as against the FDIC are not ripe for review and, therefore, dismiss it as a party. We reverse the district court's decision on the merits and hold that the FHLBB did not contractually obligate itself (or its successor agencies) to permit Charter to use supervisory goodwill to meet capital requirements in the face of contrary new regulations. Therefore, OTS may enforce FIRREA's supervisory goodwill requirements against Charter without consequence.


Around 1980, in response to the large number of financially troubled savings and loan institutions, the FHLBB began encouraging healthy financial institutions to acquire financially troubled thrifts. See Transohio Sav. Bank v. Director, Office of Thrift Supervision, 967 F.2d 598, 601-03 (D.C.Cir.1992) (detailing history of 1980 savings and loan industry crisis). As a cost-saving alternative to previously offered cash incentives, the FHLBB, within its authorized discretion, offered to permit acquiring institutions to treat the negative net worth of the acquired thrift as an intangible asset, called supervisory goodwill. Supervisory goodwill could then be amortized against income over a period of time up to forty years. Treating supervisory goodwill as an asset enabled acquiring institutions, which would have had negative actual net worth after taking on a troubled thrift, to meet regulatory capital requirements for a number of years until they could absorb the negative net worth of the acquired thrift. H.R.Rep. No. 54(V), 101st Cong., 1st Sess. 26-27, reprinted in 1989 U.S.C.C.A.N. 86, 409-10.

In June 1981, agents of the Atlanta Federal Home Loan Bank (FHLB) contacted Charter in an effort to persuade Charter to acquire First Federal Savings & Loan Association of New River Valley (New River). New River had a deficit net worth of $13.5 million. Charter initially declined to pursue the merger because it considered the merger financially imprudent. 1 Several months later, supervisory agents again contacted Charter. This time they encouraged Charter to acquire both New River and Peoples Federal Savings and Loan Association (Peoples). Through negotiations, the FHLB agents assured Charter that it could treat the combined negative net worth of these two thrifts ($47.1 million) as supervisory goodwill and amortize it over forty years. Charter then agreed, but only after receiving permission to use the purchase method of accounting 2 and thereunder treat supervisory goodwill as an intangible asset.

Charter signed a merger agreement with the two acquired institutions dated December 8, 1981. The FHLBB subsequently approved the merger through a written resolution, subject to several conditions. One of those conditions was:

That [Charter] shall furnish analyses, accompanied by a concurring opinion from its independent accountant, satisfactory to the Supervisory Agent and to the Office of Examinations and Supervision, which (a) specifically describe, as of the effective date of the merger, any intangible assets, including goodwill, or discount on assets arising from the merger to be recorded on [Charter's] books and (b) substantiate the reasonableness of amounts attributed to intangible assets, including goodwill, and the discount of assets and the related amortization periods and methods[.]

(J.A. at 53.) In response, Charter's independent accountant, A.M. Pullen & Co., submitted a letter detailing Charter's method of accounting for the merger. The letter described Charter's treatment of negative net worth as follows:

(9) The difference between the fair values ... of New River's and Peoples' assets less liabilities were recorded as intangible assets and goodwill.

In evaluating the factors prescribed by generally accepted accounting principles and the guidelines described in FHLB Memorandum R-31(b), goodwill will be amortized over forty years. The straight-line method of amortization will be used.

(J.A. at 61.) The FHLBB accepted Charter's treatment of the acquired negative net worth as supervisory goodwill and formally approved the merger. Charter has since treated the supervisory goodwill as an asset for regulatory capital requirements, offsetting an amortized amount each year from income without objection from the FHLBB. 3

In early 1985, the FHLB again approached Charter about acquiring a failing thrift, New Federal Savings and Loan (New Federal). 4 Charter agreed, conditioned upon obtaining the same terms as governed the 1982 acquisition. That is, Charter conditioned acquisition on inter alia permission to treat supervisory goodwill as an asset for purposes of capital regulatory requirements. At the time of the acquisition, New Federal had negative net worth of approximately $15 million.

As in the previous transaction, Charter signed a merger agreement with New Federal and received subsequent approval of the merger by resolution of the FHLBB. Charter's independent accountants again submitted a letter to the FHLBB describing the method of accounting for the merger and specifically outlining treatment of supervisory goodwill as an asset to be amortized over fifteen years. The FHLBB issued a forbearance letter to Charter stating that the FHLBB would not enforce any net worth requirements for a period of five years (until 1990), provided that deficiencies in those requirements were due to the acquisition of New Federal.

Later that year, the FHLBB approached Charter about acquiring yet another thrift, Magnolia Federal Savings and Loan Association (Magnolia). Magnolia had nominal negative net worth of approximately $24,000. The acquisition was consummated in June 1985, on substantially the same terms as the prior acquisitions. Charter treated the $24,000 as supervisory goodwill, amortized over fifteen years, which it listed as an asset on its subsequent monthly reports to the FHLBB.

Congress enacted FIRREA in August 1989, seven years after Charter's first acquisition. One purpose of FIRREA was to restore public confidence in the savings and loan industry by strengthening the soundness of individual institutions. Pub.L. No. 101-73, § 101(2), 103 Stat. at 187; H.R.Rep. No. 54(I), 101st Cong., 1st Sess. 307, reprinted in 1989 U.S.C.C.A.N. 86, 103. Congress, therefore, imposed uniformly applicable, strict capital requirements on all savings associations. Section 301(t) of FIRREA mandated that the OTS promulgate regulations no later than ninety days after August 9, 1989, requiring savings and loan institutions to (1) maintain "core capital" as defined in the statute in an amount not less than 3 percent of the institution's assets; a specified, limited amount of supervisory goodwill can be used in calculating core capital; (2) maintain "tangible capital" in an amount not less than 1.5 percent of the institution's assets, which cannot include supervisory goodwill; and (3) maintain "risk-based capital" in an amount not materially less than that required for national banks. 12 U.S.C. § 1464(t) (Supp. II ...

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