Chevy Chase Sav. & Loan, Inc. v. State

Citation509 A.2d 670,306 Md. 384
Decision Date01 September 1986
Docket NumberNo. 9,9
PartiesCHEVY CHASE SAVINGS & LOAN, INC. v. STATE of Maryland and State of Maryland Deposit Insurance Fund Corporation. ,
CourtCourt of Appeals of Maryland
James J. Cromwell and James C. Chapin (J. Bradford McCullough, Beckett, Cromwell & Myers, P.A., on brief), Bethesda, for appellant/cross appellee

Robert A. Zarnoch, Asst. Atty. Gen., and Dennis M. Sweeney, Deputy Atty. Gen. (Stephen H. Sachs, Atty. Gen., and Kathryn M. Rowe, Asst. Atty. Gen., on brief), Baltimore, for appellees/cross appellants.

Perry, O. Barber, Jr., Charles M. Darling IV, Stephen L. Teichler, Dennis J. Moss, Mark R. Haskell and Baker & Botts, Washington, D.C., M. Albert Figinski, Ira C. Cooke, Stephen B. Caplis, David R. Sonnenberg and Melnicove, Kaufman, Weiner, Smouse & Garbis, P.A., Baltimore, for amicus curiae Epicenter Consolidated, Ltd. and EPIC Holdings, Ltd.

Mark H. Tuohey III, and Kirby, Gillick, Schwartz & Tuohey, P.C., on brief, Washington, D.C., for Clayton C. McCuistion and other amicus curiae.

Argued before MURPHY, C.J., and SMITH, ELDRIDGE, COLE, RODOWSKY, COUCH and McAULIFFE, JJ.

RODOWSKY, Judge.

Chevy Chase Savings and Loan, Inc. (Plaintiff or Chevy Chase), a state chartered association, sues to recover funds it had been assessed for insurance of its accounts through Maryland Savings-Share Insurance Corporation (MSSIC). The defendants are the State of Maryland and the State of Maryland Deposit Insurance Fund Corporation (MDIF), a State agency and successor by merger to the insolvent MSSIC. As a member of MSSIC, Plaintiff had been required by MSSIC's rules to contribute to the capital used by MSSIC in carrying out its programs. Having withdrawn from membership shortly after the MSSIC-MDIF merger, Plaintiff contends that MSSIC's rules relating to the rights of withdrawing members literally oblige the defendants to repay the assessments paid by Chevy Chase. We shall principally hold that as to funds used for insurance purposes, there is no breach of contract and that, as to the funds used for liquidity purposes, the contract has been modified by a constitutional exercise of the State's powers.

MSSIC

To understand Plaintiff's claim requires a review of MSSIC's purposes, structure, and operation. MSSIC was a product of the 1960 savings and loan crisis in Maryland. 1 See W. Preston, Report of the Special Counsel on the [1985] Savings and Loan Crisis, 33-35 and n. 5, 43-47 (1986) (Preston). Created by Ch. 131 of the Acts of 1962, MSSIC was a nonstock, nonprofit corporation. Its members were state chartered savings and loan associations that had been accepted for membership under statutes most recently codified as Md.Code (1980), Title 10 of the Financial Institutions Article (FI). The purposes of MSSIC were to:

(1) Promote the elasticity and flexibility of the resources of members;

(2) Provide for the liquidity of members through a central reserve fund; and

(3) Insure the savings accounts of members. [FI § 10-103.]

Until Ch. 479 of the Acts of 1968, Maryland law had never required that state chartered associations be insured. Chapter 479 mandated that on and after July 1, 1973, all free share accounts be insured by the Federal Savings and Loan Insurance Corporation (FSLIC) or by MSSIC. See FI § 9-426 ("A savings and loan association shall become and participate as a member in [MSSIC] or a federal home loan bank.").

The powers of MSSIC were exercised by a board of directors composed of eleven persons, of whom three were appointed by the Governor and the remainder elected by the members. FI §§ 10-108 and 10-109. The directors could adopt bylaws and rules and regulations to carry out the provisions of Title 10, but such action by the directors became effective only if approved by the director of the Division of Savings and Loan Associations, a State agency within the Department of Licensing and Regulation. FI § 10-111. MSSIC was not subject to Art. 48A of the Maryland Code, regulating insurance companies. FI § 10-114. It was exempt from taxation by Maryland or any of its political subdivisions. FI § 10-115. FI § 10-116 specifically provided that "[t]his title does not, and [MSSIC] may not, pledge the faith or credit of this State."

The capital with which MSSIC carried out its corporate purposes was derived from its member associations. Each member was required to "make the investments and pay the assessments, premiums, and other charges that are required for participation in [MSSIC]." FI § 10-107(c). In its internal accounting MSSIC segregated two funds, the central reserve fund (CRF) and the insurance fund. FI § 10-105 required MSSIC to "establish a central insurance Pursuant to MSSIC Rule § 3-301, each member, as a condition of membership and thus of insurance on accounts, was required to contribute "as a capital deposit" an amount equal to two percent of its free share accounts. Certificates of deposit evidencing these contributions were issued by MSSIC. Members could carry those certificates on their books as assets, but the certificates paid no interest or dividends. Rule § 3-306. In its accounting, MSSIC charged the liability on those certificates of deposit against the insurance fund.

                fund and through the fund [to] insure the savings accounts of members."   The statutory basis for CRF was FI § 10-103(2) by which MSSIC was to provide "for the liquidity of members through a central reserve fund."   By an amendment to the MSSIC statutes first made in 1974 (Ch. 152), the CRF was "not subject to any insurance claim against [MSSIC]."  FI § 10-104(c)(4).   These statutory provisions were fleshed out by bylaws, rules and regulations of MSSIC, discussed below.   The full text of the MSSIC rules and regulations relied on by the Plaintiff is set forth in the appendix hereto
                

Chevy Chase bases its claim to return of its capital contributions to the insurance fund on Rule § 3-503, which in relevant part provided:

Any member withdrawing from [MSSIC] ... shall be entitled to receive from [MSSIC] payment of the certificate of deposit ... in the following manner:

(a) A date shall be specified by [MSSIC] for the termination of insurance of free share accounts issued by the withdrawing members, which date shall not be later than twelve months from the date of the notice referred to in Section 3-501 (such date being referred to in these Rules as the "terminal date").

Rule § 3-501 in substance provided that any member which was not in default of its obligations to MSSIC might "withdraw from membership in [MSSIC] upon giving to it twelve months notice in writing of [the member's] intention to The CRF was treated in Rule § 3-901, which recited that MSSIC "and its members authorize the formation of a Central Reserve Fund to provide for the liquidity of member associations subject to the following provisions[.]" Membership in the fund was mandatory and was effected by subscribing to "Capital Notes" issued by MSSIC. 2 The capital note subscription obligation of a member institution was one-half of one percent of assets for an association having less than $75 million in assets and one and one-half percent of assets for associations having greater assets. Subscriptions were adjusted semi-annually. Capital notes are interest bearing.

                withdraw."   On the terminal date the withdrawing member was to receive its pro rata share of the cash of MSSIC, see Rule § 3-503(B) and (C), and a certificate of fractional participation which entitled the terminating member "to its proportionate share of any proceeds resulting from the liquidation of such remaining assets as they are liquidated by [MSSIC]."  A fractional participation certificate does "not entitle the holder thereof to any control over the manner, amount or date of liquidation of such assets."   Rule § 3-503(D) and (E)
                

There was a CRF committee appointed by MSSIC's board of directors which managed that fund. That committee, in its discretion, could make advances to members, with or without security, for a term of up to one year or, with the approval of the board of directors, for a longer term. Membership in CRF might be terminated by withdrawing from membership in MSSIC. Three months notice to the fund prior to termination of membership was required. "In the event of such termination ... the capital notes shall be surrendered and cancelled and payment shall be made of the investment in said notes plus accrued interest, if Any member having given notice of its intention to withdraw from membership and requesting payment of its capital notes, in accordance with the provision of Section 3-901-B(6) shall be entitled to receive the face amount of the capital notes within six months after notice of its intention to withdraw; in the event the Central Reserve Fund does not have sufficient cash available to pay the withdrawing member the full amount of the capital note, then, in that event the Fund may make partial payments of funds received from maturing securities to the withdrawing member until the full amount due the member is paid. Any such deferred payments shall continue to bear interest as though the member were still an active participant in the Fund.

                any...."  Rule § 3-901(B)(6).   Rule § 3-901(K) further provided
                

MSSIC's rules, following § 3-901(B)(8), stated:

NOTE: The Central Reserve Fund shall not be subject to payment of insurance claims against the Corporation by member associations, or their Free Share holders, or otherwise.

For the year ending December 31, 1984, MSSIC's balance sheet 3 reflected assets of $285,647,872, offset by $118,891,754 of liabilities, by a $5,000,000 reserve for insurance losses, and by "Capital funds" 4 of $144,260,100, leaving retained earnings of $17,496,018. The auditors' notes to the December 31, 1984, financials advise that "[i]t is the policy of [MSSIC] to establish a reserve for insurance losses at the time an association requires financial assistance or when

                such
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