F.D.I.C. v. Hurwitz

• Decision Date: 23 August 2005
• Docket Number: No. CIV.A. H-95-3956.,CIV.A. H-95-3956.
• Citation: 384 F.Supp.2d 1039
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. Charles E. HURWITZ, et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

384 F.Supp.2d 1039

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. Charles E. HURWITZ, et al., Defendants.

No. CIV.A. H-95-3956.

United States District Court, S.D. Texas.

August 23, 2005.

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Darryl W. Malone, Attorney at Law, Lionel M. Schooler, Jackson Walker LLP, Houston, TX, F. Thomas Hecht, Michael A. Ficaro, Ungaretti & Harris, John Rogers, Foley & Lardner, Chicago, IL, Gregory F. Taylor, Washington, DC, Lori Beyer Bellows, Nokia Inc., Irving, TX, Thomas Manick, Adorno & Zeder, Miami, FL, for Plaintiff.

Jacks C. Nickens, Richard P. Keeton, Nickens Keeton et al., Daniel K. Hedges, Porter & Hedges, Walter B. Stuart, IV, Vinson & Elkins, James Crawford Slaughter, Fulbright & Jaworski, Julia A. Cook, Schlanger Silver et al., Steven D. Grossman, Sheiness Scott et al., Houston, TX, Bruce Rinaldi, Richard C. Stearns, Office of Thrift Supervision, Washington, DC, for Defendants.

Opinion on Sanctions

HUGHES, District Judge.

1. Introduction.

This is a cautionary tale where the emperor has new clothes — a bandit's mask. The Federal Deposit Insurance Corporation sought to hold Charles Hurwitz individually responsible for all losses at United Savings, even though he had no obligation to the thrift or the government. Unable to focus its claims and unwilling to disclose its records in this suit — one that it brought — the FDIC surreptitiously paid another agency to bring a parallel administrative claim against Hurwitz, several companies, and other people. Later — much later — the FDIC dismissed its claims here. Hurwitz and two companies have asked that they recover their costs of defending the suit. They will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation.

2. Background.

This is the final stage in a suit that should have never happened. Ten years ago, the Federal Deposit Insurance Corporation sued Charles Hurwitz, a Texas businessman. In essence, it blamed him for the failure of a Texas thrift — United Savings Association of Texas. The case occurred on two fronts. The FDIC sued Hurwitz in this court. The Office of Thrift Supervision brought an administrative action. Together, the agencies claimed over one billion dollars from Hurwitz. Recovery in either action would go to the FDIC because the FDIC had procured the Thrift Office's proceeding against Hurwitz, paying it to bring that action.

A. Companies.

The FDIC sued Hurwitz because of his involvement in two companies that owned stock in the thrift's holding company. They owned no stock in the thrift. In the 1980s, Hurwitz was chairman and chief executive officer of Maxxam, Inc., a publicly held corporation with subsidiaries in aluminum, timber, and land. He was also chairman and chief executive officer of Federated Development Company, a New York business trust with a portfolio of real estate and mortgages. Until February 1988 — ten months before the United Savings failed — Hurwitz had been chairman of United Financial Group, its holding company.

Hurwitz owned about 52% of Federated, and Federated owned 63% of Maxxam. In 1988, Federated and Maxxam jointly owned less than one-quarter of United Financial. United Financial owned 100% of United Savings of Texas.¹ United Savings was a thrift; that is a bank that operated under a set of regulations slightly distinct from ordinary commercial banks. Thrifts are the current incarnation of the savings part of the old federal system of full-service banks and savings-and-loans. Along with credit unions — banks and thrifts are depository institutions. What each is permitted by the several regulatory agencies varies slightly.

B. Climate.

Despite the expensive and pervasive regulation by governmental agencies, in the decade 1986-1995, approximately 1,043 thrifts failed, leading to the insolvency of the agency that insured their deposits and supervised them — Federal Savings and Loan Insurance Corporation.² FSLIC's responsibilities were eventually passed to the FDIC, which is how it became interested in United Savings and Hurwitz. During 1980-1994, the FDIC itself lost 1,617 banks under its responsibility.³ In 1997 dollars, the direct cost of the thrifts to the public treasury was about $200 billion.

The FDIC may manage failures by simply honoring its insurance commitment and paying the depositors to the policy limits. It can also arrange for another bank or investor to buy the failed bank and assume its obligation to the depositors. Its third technique is to run the insolvent bank itself, supplying capital and management, until it can be sold or returned to independence. This is called a bridge bank. The FDIC prefers to sell with an assumption because it relieves it of having to collect the assets of the bank — the funds due it on loans mostly — and of having to pay the full depositor claims directly. Of 169 banks that failed in 1990, 20 were insurance payments, one was a bridge bank, and 148 were sales to other banks.

C. United Savings.

A thrift, Houston First American Savings Association, was insolvent in 1983 when it was owned by people wholly unrelated to Hurwitz and Maxxam. The FDIC allowed United Financial to take First American off its hands. After extensive negotiations, United Financial bought First American and merged it into its thrift, United Savings of Texas. The FDIC sought a personal guaranty from Hurwitz as part of the deal, but he declined. It asked for guaranties from Maxxam and Federated, but they declined. The final arrangement was simply that United Financial acquired the failed thrift and reconstituted it with its thrift as United Savings of Texas. United Financial committed the capital that it had agreed to invest.

Unfortunately, United Savings did not succeed. In 1989, the FDIC declared it insolvent. United Financial's investment was eroded completely. The FDIC met its insurance obligation by selling United Savings to Ranieri/Hyperion — a joint venture.

The cause of United's failure was indistinct from what caused most of the other insolvencies. The original plan for thrifts was that (a) they could pay slightly higher rates on savings accounts than banks, (b) their lending was essentially limited to home mortgages, and (c) deposit insurance was at a low level, reflecting the safety-net role it played. Prolonged, government-induced inflation eroded the assets of the whole system. The government's response was to release the interest rate restrictions, expand the lending authority to nearly everything, and raise the insurance coverage from $20,000 to $100,000. This allowed the industry as a whole to attempt to earn its way out of its general insolvency — an insolvency that was not publicly acknowledged.

The collapse of oil and real-estate prices in the middle 1980s made many of the high-rate, business loans unrecoverable. Other forces affected thrifts, like the rise of money market funds and corporate — non-deposit based — lending. Although actively dishonest people were in charge of some thrifts that failed, the bureaucratic response to the mess was generally to accuse officers and directors of malfeasance when misfeasance was the worst that the facts would support.

D. FDIC.

Soon after the collapse of United Savings in 1988, the FDIC approached Hurwitz about his contributing to paying its losses. Hurwitz agreed to extensions of the time limit for the FDIC to sue him. Having found no focus of their claims against him by 1995, Hurwitz declined to extend the deadline again, but the actual directors and officers of the thrift continued to sign tolling agreements. The FDIC sued Hurwitz right before the last extension expired.

After an adverse ruling or two from this court, the FDIC illegally paid the Office of Thrift Supervision to bring an administrative action. The Thrift Office sued Hurwitz, Barry Munitz, Jenard Gross, Arthur Berner, Ronald Huebsch, Michael Crow, Federated, and Maxxam. Munitz, Gross, Berner, Huebsch, and Crow were former directors and officers of United Financial and United Savings. While the claims by the Thrift Office had a technical regulatory basis, they were the same as the FDIC's contention that somehow the accused were responsible for the thrift's failure — responsible legally.

E. Hurwitz Responds.

The FDIC abandoned its claims here in November 2002. Hurwitz, however, had counterclaimed in this court that the suit was a ruse — political extortion. Its true purpose, he said, had nothing to do with the management of thrifts and everything to do with the politics of trees.

In the late 1980s, Maxxam had acquired Pacific Lumber, a timber company. Pacific Lumber owned 44,000 acres of redwoods in Northern California, including the Headwaters Forest, a 4,400-acre tract of ancient redwoods.

Environmentalist activists accused Hurwitz of plans to raze the forest. They lobbied the Clinton Administration, California officials, and members of Congress, urging the government to gain control of the forest. The Forest Service studied the redwoods, but it decided that acquiring them would require an appropriation that was not politically practical.

In the early 1990s, one environmental group proposed that the government make claims against Maxxam-related companies and people and then trade those claims for the trees — the "debt-for-nature" swap. The group insisted that the FDIC sue Hurwitz for so much money — creating the "debt" — that he would be compelled to settle by surrendering the redwoods — the "nature."

Hurwitz says that the FDIC joined the effort to appease the green lobby, congressional pressure, and Administration political preferences. Despite a learned opinion from its private counsel that it had no viable claim against Hurwitz and the others, the FDIC sued here and later illegally hired the Office of Thrift Supervision to...