F.D.I.C. v. Maxxam, Inc.

• Decision Date: 03 April 2008
• Docket Number: No. 05-20808.,05-20808.
• Citation: 523 F.3d 566
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, As manager of the FSLIC Resolution Fund; Plaintiff-Appellant, v. MAXXAM, INC., Intervenor Plaintiff-Appellee, v. Charles E. Hurwitz, et al., Defendants, Charles E. Hurwitz; Defendant-Appellee, Federated Development Co., Intervenor Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

523 F.3d 566

FEDERAL DEPOSIT INSURANCE CORPORATION, As manager of the FSLIC Resolution Fund; Plaintiff-Appellant, v. MAXXAM, INC., Intervenor Plaintiff-Appellee, v. Charles E. Hurwitz, et al., Defendants, Charles E. Hurwitz; Defendant-Appellee, Federated Development Co., Intervenor Defendant-Appellee.

No. 05-20808.

United States Court of Appeals, Fifth Circuit.

April 3, 2008.

Frank Thomas Hecht, Kathleen Holper Champagne, Ungaretti & Harris, Chicago, IL, James A. Brown, Gene W. Lafitte, Sr. (argued), Liskow & Lewis, New Orleans, LA, Colleen J. Boles, FDIC, Jonathan Goldman Cedarbaum, Kelley Brooke Snyder, Randolph Moss, Paul R. Wolfson, WilmerHale, Washington, DC, for FDIC.

David J. Beck (argued), Russell Stanley Post, Beck, Redden & Secrest, Jacks C. Nickens, Nickens, Keeton, Lawless, Farrell & Flack, Houston, TX, for Appellees.

Stephen D. Susman, Susman Godfrey, Houston, TX, for Maxxam, Inc.

Appeal from the United States District Court for the Southern District of Texas.

Before HIGGINBOTHAM, GARZA and BENAVIDES, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

This case arises from the failure of the United Savings Association of Texas in 1988, estimated to have cost taxpayers $1.6 billion.¹ The Federal Deposit Insurance Corporation sued Charles Hurwitz in federal district court for his alleged involvement in the failure of the large Texas thrift. At the behest of the FDIC, the Office of Thrift Supervision pursued similar allegations against Hurwitz and others in an administrative proceeding that concluded with a holding that the claims were meritless. When the FDIC then moved to dismiss its suit in the district court, the court found that the FDIC's claims were baseless and had an improper purpose of gaining government ownership of approximately 3,800 acres² of California redwoods owned by MAXXAM, Inc. ("Maxxam") and harassing Defendants.³ It assessed large sanctions. The FDIC timely appealed.

I

In 1983, United Financial Group and First American Financial of Texas — two savings and loan companies — merged. UFG became the holding company of USAT, holding 100% of USAT's stock.⁴ USAT, with a core business of lending to homeowners, expanded its business as it struggled to stay afloat during the thrift crisis when more than 1,000 thrifts failed throughout the United States.⁵ While there was variation among them, all faced a system-wide squeeze in interest rate differentials — between earnings on fixed-interest long-term mortgages and rising market rates. UFG had several substantial stakeholders, including MCO Holdings, Inc., later Maxxam, Inc.,⁶ and Federated Development Company. A prominent Texas businessman, Charles Hurwitz, was Chairman and CEO of these two stakeholders as well as the Chairman of UFG, and he owned 52.5% of Federated's shares; Federated in turn owned at least 60% of Maxxam voting stock. By 1984, Federated and Maxxam (then MCO) owned 23.5% of UFG's outstanding shares.⁷ Maxxam and Federated applied to acquire up to 35% of the shares of UFG. FHLBB approved the application on the condition that, inter alia, Maxxam and Federated commit to maintaining the net worth of USAT.⁸ This net worth commitment arose because by statute, an entity acquiring 25% or more voting power in an insured institution becomes obligated to contribute to the institution's minimum required capital.⁹ Maxxam and Federated tried to negotiate changes to the obligation but ultimately declined it,¹⁰ and UFG remained as the guarantor of USAT's minimum capital. In turn, Maxxam and Drexel Burnham Lambert, a company owning stock in UFG, entered into a "call-put" contract.¹¹ The agreement allowed Maxxam to call UFG's shares held by Drexel, a total of 300,000 outstanding shares.¹² Maxxam indemnified Drexel for the risk of loss associated with the agreement. Through this stock arrangement with a shareholder of UFG — the company that controlled USAT — Maxxam gained at least potential control over USAT,¹³ as did Federated, in turn, with its approximate 60% stake in Maxxam and its ownership with Maxxam of nearly 25% of UFG's shares. In other words, Hurwitz owned the majority of Federated's stock, Federated owned a majority of Maxxam, and Maxxam and Federated had a measure of control over UFG and USAT through Maxxam's stock arrangement with Drexel and Maxxam and Federated's combined ownership of UFG shares.¹⁴ An FDIC investigation also indicated that in 1985, Maxxam and Federated acquired shares in UFG that, when converted two years later, could give Maxxam and Federated an additional 15% of ownership in Federated. Maxxam and Federated allegedly exchanged these shares for another series of Federated stock to postpone the conversion date and avoid any potential control obligations.¹⁵

The FDIC investigation also concluded that USAT, Federated, and Maxxam had common management and that Hurwitz participated in UFG's and USAT's Investment Committee meetings and UFG/USAT's joint board meetings. Hurwitz was a member of UFG's Executive Committee and of UFG/USAT's Strategic Planning Committee. USAT's investment manager reported his trade decisions to Hurwitz,¹⁶ and Hurwitz often recommended investment strategies to USAT.¹⁷ An employee of Federated also established USAT's investment department.¹⁸

The FDIC and OTS focused on two transactions involving Hurwitz as likely contributors to USAT's demise. First, USAT made a real estate loan to a close friend of Hurwitz's, the "Park 410 loan," resulting in a loss of approximately $57 million. Second, USAT, struggling with a changing home lending market, sought additional revenue in mortgage backed securities and junk bonds. These investments were funded by sales of parts of USAT's business, with financing by Drexel of approximately $1.8 billion of its junk bond acquisitions.¹⁹ This, according to the FDIC, evidenced Hurwitz's indirect control over USAT's investments.

Through United MBS, a USAT subsidiary that Hurwitz helped form, USAT invested nearly $180 million in mortgage backed securities, resulting in losses of nearly $97 million. The FDIC later labeled USAT investments in mortgage backed securities as "Joe's Portfolio," for the USAT junk bond analyst who managed the investments. Rather than unwinding the portfolio when interest rates rapidly fell and more homeowners began prepaying mortgages with the decline in mortgage rates, USAT decided to sell the mortgage backed securities before prepayment and buy other mortgage backed securities in a hasty "roll down" strategy. According to the FDIC, this strategy resulted in very large losses. As USAT's losses increased, the Federal Home Loan Bank Board informed UFG that it must help USAT meet its minimum capital obligation. UFG did not contribute capital. In February 1988 Hurwitz resigned from UFG's Board. FHLBB closed USAT on December 30, 1988, and designated as receiver the Federal Savings and Loan Insurance Corporation in its corporate capacity. With the Federal Institutions Reform, Recovery, and Enforcement Act of 1989, the FDIC succeeded the FLSIC as receiver for USAT.

Working with OTS, which oversees the enforcement of thrifts and the activities underlying their failure, the investigation by the FDIC of USAT's downfall took much of the next six years. To avoid losing potential legal claims, the FDIC entered into several tolling agreements with Hurwitz and others involved in the failure.

In 1993 — at least four years after commencing its investigations of Hurwitz's involvement in USAT and two years before suing Hurwitz — the FDIC began to receive communications from environmental groups, and later members of Congress, encouraging it to settle with Hurwitz for his California redwood lands, called the "California Headwaters." These environmental groups and several government agencies wanted to ensure preservation of the Headwaters.²⁰

By a November 17, 1993, memorandum to the FDIC Board of Directors, Jack D. Smith, Deputy General Counsel, and Stephen N. Graham, Associate Director, recommended that the FDIC "file suit by December 31, 1993 for at least $418 million in damages" against individuals involved in USAT's failure, including Hurwitz. However, the FDIC's lawyers later recommended that it not sue due to hurdles posed by the statute of limitations as well as difficulties in demonstrating Hurwitz's indirect management of USAT through Maxxam's agreement with Drexel.²¹ As the FDIC investigation continued, members of Congress urged the FDIC to proceed, stating,

We understand that there has still been no formal action initiated to recover the taxpayers' losses in the estimated amount of $1.6 billion resulting from this fifth most expensive savings and loan failure.... In light of the continued passage of time without action, we are concerned that the ability to recover these very significant losses is being jeopardized. Many of the possible targets whose conduct the FDIC has alleged contributed to USAT's failure, continue to enjoy vast personal wealth. Justice for the Federal taxpayer requires resolution of this matter.²²

The chairwoman of the FDIC — Ricki Tigert, later Ricki Helfer — similarly expressed concern regarding the "egregious" actions that may have contributed to the thrift's failure and pushed for legal action against Hurwitz. Following a meeting between two FDIC lawyers and chairwoman Helfer, where she encouraged them "to take another look" at their recommendation not to sue, staff hastily revised their initial memorandum recommending against suit.²³

The pressure on FDIC regarding the redwoods issue also increased as the end of the tolling agreement neared. On July 24, 1995, Congressmen Pete Stark and George Brown wrote a letter to Helfer asking "the FDIC to pursue the possibility of a debt-for-nature swap which would apply the debt arising from the failure of USAT towards the purchase of the Headwaters Forest."

Persuaded that a parallel administrative proceeding by OTS enhanced its chances at obtaining...