Federal Sav. and Loan Ins. Corp. v. Quinn

• Decision Date: 14 April 1989
• Docket Number: No. 89 CV 98.,89 CV 98.
• Citation: 711 F. Supp. 366
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORP., et al., Plaintiffs, v. Robert W. QUINN, et al., Defendants.
• Court: U.S. District Court — Northern District of Ohio

711 F. Supp. 366

FEDERAL SAVINGS AND LOAN INSURANCE CORP., et al., Plaintiffs, v. Robert W. QUINN, et al., Defendants.

No. 89 CV 98.

United States District Court, N.D. Ohio, E.D.

April 14, 1989.

Harry D. Cornett, Arter & Hadden, Cleveland, Ohio, for plaintiffs (Stephen Kessler, Trial Atty., Office of Gen. Counsel, Federal Home Loan Bank Bd., Washington, D.C., of counsel).

Nancy A. Shaw, Spieth, Bell, McCurdy & Newell, Cleveland, Ohio, and James D. Friedman, Quarles & Brady, Milwaukee, Wis., for defendants.

ORDER

SAM H. BELL, District Judge.

Plaintiffs Federal Savings and Loan Insurance Corporation (FSLIC) and Cardinal Federal Savings Bank (Cardinal) filed the complaint in this case on January 18, 1989, seeking declaratory judgment, preliminary and permanent injunctive relief and damages from defendants Robert W. Quinn and Daniel J. Gannon, former Cardinal employees. FSLIC is authorized to sue under, and bases jurisdiction on, Title 12 of the United States Code, sections 1725(c) and 1730(k)(1). See FSLIC v. Ticktin, ___ U.S. ___, 109 S.Ct. 1626, 104 L.Ed.2d 73 (1989), reversing, 832 F.2d 1438 (7th Cir.1987). Savings deposits at Cardinal are insured by FSLIC, and FSLIC has regulatory jurisdiction and authority over Cardinal.

Plaintiffs filed a motion for temporary restraining order with their complaint. The parties came before the court but ultimately entered an agreement holding the status quo until a preliminary injunction motion could be heard. Substantial discovery took place during the interim and answers and counterclaims were filed by the defendants. The motion for preliminary injunction was heard over a three-day period, February 21-23, 1989. The parties agreed to file post-hearing briefs and were directed to address three issues: (1) FSLIC's standing to bring this motion; (2) the effect of a separate contract between Cardinal and Society National Bank (Society) which has been fully executed and which yielded the funds sought to be recovered in this lawsuit; and (3) the merits of the preliminary injunction motion. Post-hearing briefs have been filed and considered. The court's findings of fact and conclusions of law on the motion for preliminary injunction follows. But first, a brief summary of the pleadings filed in this case is in order.

I. The Pleadings

The complaint's allegations arise from the employment relationship which existed between Cardinal and defendants Quinn and Gannon. Quinn served as Chief Executive Officer of Cardinal and Gannon as President and Chief Operating Officer from November 24, 1987 until December 30, 1988. Each was a member of Cardinal's board of directors.

Quinn and Gannon entered one-year employment contracts commencing December 1, 1987, and which, for the most part, are similar. The contracts provided for automatic renewal for one-year terms absent timely notice to the contrary. Quinn's annual salary was set at $210,000.00, and Gannon's was $200,000.00. Cardinal agreed to secure an irrevocable letter of credit as security for certain specifically enumerated obligations under each contract. On July 21, 1988, Cardinal did in fact secure from Society separate letters of credit for Quinn, in the amount of $440,000.00 and Gannon, in the amount of $410,000.00.

On December 17, 1987, the Federal Home Loan Bank Board (FHLBB), as operating head of FSLIC, entered into a consent agreement with the board of directors of Cardinal; both Quinn and Gannon were signatories. Among the supervisory powers and authority over Cardinal granted to the FHLBB was approval of all employment contracts and renewals. Although the FHLBB approved the employment contracts of Quinn and Gannon, it did not approve the renewal of those agreements. FHLBB contends that absent such approval, the employment contracts could not be renewed and the contract renewal relied on by Quinn and Gannon constituted a violation of the consent agreement and a breach of their fiduciary obligations.

On December 30, 1988, Cardinal was acquired by First Nationwide Financial Services, Inc. (First Nationwide) through a FSLIC-assisted transaction pursuant to section 406(f) of the National Housing Act. Section 2.8(d) of Quinn and Gannon's employment contract provides that in the event of a FSLIC-assisted takeover, all obligations under the contract would be terminated. By resolution, dated December 30, 1988, the FHLBB terminated all employment contracts of Cardinal. Quinn and Gannon then made demand upon Society for payment under the letter of credit. Society in turn notified Cardinal of its intention to honor those demands.

Plaintiffs contend that the defendants are not entitled to payment under the letters of credit because their employment contracts were approved without FHLBB consent in violation of section 16(o) of the consent agreement and/or all obligations of Cardinal were terminated pursuant to section 2.8(d) of their employment contracts upon a FSLIC-assisted takeover.

Plaintiffs seek a declaratory judgment in their first claim stating that: (1) the Quinn and Gannon contracts were improperly renewed in violation of the consent agreement for failure to obtain FHLBB approval and (2) that even if they were renewed in some manner, they were terminated by operation of section 2.8 of the employment contracts which was called into effect on December 30, 1988, when the FSLIC-assisted takeover occurred. Further, they seek a declaration that Cardinal has no further monetary obligation to them and that any money distributed under the letters of credit should be returned to Cardinal.

In their second claim, plaintiffs allege that the defendants breached their fiduciary and statutory duties by failing to seek FHLBB approval for renewal of their employment contracts and renewal of the letters of credit. Plaintiffs' third claim is this: defendants are not entitled to the funds contained in the letters of credit, and they would be committing a conversion of Cardinal property if it is distributed to them. Once distributed, a loss will be created to Cardinal for which FSLIC will be required to make reimbursement. They seek an injunction to prevent this conversion. In their fourth claim, plaintiffs seek an accounting, constructive trust and order of restitution of any funds distributed under the letters of credit. Finally, they seek a temporary restraining order, preliminary and permanent injunction in their fifth claim related to the funds held under the letters of credit.

Both Quinn and Gannon have filed answers to the complaint. In addition, each has advanced multifaceted counterclaims.

II. Motion for Temporary Restraining Order

The parties were before the court on FSLIC's motion for temporary restraining order on January 19, 1989. Society was represented at that proceeding even though not a named party.

Before the matter was formally heard, however, the parties entered an agreement which effectively maintained the status quo. Specifically, all parties agreed that the defendants' demands under the letters of credit held by Society could be honored but that the funds, once received by the defendants, were to be maintained locally pending the outcome of the court's consideration of the motion for preliminary injunction. The defendants were prohibited from using the principal amount. Neither FSLIC nor Cardinal have any lien against the proceeds of either letter of credit.

III. Motion for Preliminary Injunction

A. Findings of Fact

1. In August, 1986, Robert W. Quinn began employment with Chicago West Pullman (CWP), a holding company owned by two individuals which invests in undervalued companies in need of capital and management. CWP originally invested primarily in railroads but in 1986 decided to consider opportunities in the thrift industry. Quinn, who has a background in finance and experience in the thrift industry, was hired to identify thrifts for CWP to acquire.

2. In keeping with its customary practice in other similar circumstances, CWP issued a letter of intent in December, 1986 regarding the possible acquisition of Cardinal. Quinn went to Cardinal as CWP's representative in the acquisition. He had an office at Cardinal and went there on a day-to-day basis. The accounting firm of Arthur Anderson & Co. was hired to assist in the due diligence review of Cardinal's assets.

3. As of December, 1986, and continuing until its acquisition by First Nationwide, Cardinal was a federal savings and loan association chartered under the authority of the FHLBB. It was a mutual institution owned by its depositors.

4. FSLIC first noted problems at Cardinal in late 1983 or early 1984 through examiner reports. Gerald P. Summers, Vice President of the Federal Home Loan Bank of Cincinnati (Bank of Cincinnati) and Director of the Department of Supervision, had a number of meetings with Cardinal's management and board of directors. In time, it became clear that management was not operating prudently and losses were likely. The focus of FSLIC in 1986 was on ensuring that Cardinal made no more imprudent loans. At that time, FSLIC was not considering further assistance for Cardinal.

5. On March 5, 1987, a meeting was scheduled to review the early findings of the due diligence review by Arthur Anderson & Co. Representatives from Cardinal and CWP (including Quinn) as well as FSLIC agents employed by the Cincinnati Bank attended. Quinn and CWP expressed concern that Cardinal's financial condition was even worse than they had previously thought.

6. From March through October, 1987, Quinn became more involved in Cardinal's operations and was sought out by Summers to assist Cardinal in a number of way concerning problems ranging from recommending personnel to liason with CWP.

7. In August, 1987, Korn/Ferry, an executive search firm, contacted defendant Gannon in relation to the position of chief operating officer at Cardinal. Gannon was then serving as president and chief executive officer of Marine National Exchange Bank in...