Firstcorp, Inc., In re

• Decision Date: 10 August 1992
• Docket Number: No. 92-1108,92-1108
• Citation: 973 F.2d 243
• Parties: , 23 Bankr.Ct.Dec. 483, Bankr. L. Rep. P 74,802 In re FIRSTCORP, INCORPORATED, Debtor. RESOLUTION TRUST CORPORATION; Sir Walter Management, Incorporated; Office of Thrift Supervision, Plaintiffs-Appellees, v. FIRSTCORP, INCORPORATED; Alfred P. Carlton, Jr., Trustee, successor-in-interest to the Debtor, Firstcorp, Incorporated, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 243

973 F.2d 243

61 USLW 2113, 23 Bankr.Ct.Dec. 483, Bankr.

L. Rep. P 74,802

In re FIRSTCORP, INCORPORATED, Debtor RESOLUTION TRUST CORPORATION; Sir Walter Management Incorporated; Office of Thrift Supervision Plaintiffs-Appellees, v. FIRSTCORP, INCORPORATED; Alfred P. Carlton, Jr., Trustee successor-in-interest to the Debtor, Firstcorp, Incorporated, Defendants-Appellants.

No. 92-1108.

United States Court of Appeals, Fourth Circuit.

Argued June 3, 1992.

Decided Aug. 10, 1992.

Lacy H. Reaves, Poyner & Spruill, Raleigh, N.C., argued (Alfred P. Carlton, Jr., McNair Law Firm, on brief), for defendants-appellants.

Harvey Alan Levin, Asst. Chief Counsel, Office of Thrift Supervision, Washington, D.C., argued, for Appellee OTS (Michael Edward Tucci, Morrison & Hecker, Washington, D.C., on brief), for plaintiffs-appellees RTC and Sir Walter Management. (Jonathan B. Taylor, Sr. Atty., Resolution Trust Corp., Washington, D.C., Jonathan R. Harkavy, Martha A. Geer, Patterson, Harkavy, Lawrence, Van Noppen & Okun, Greensboro, N.C., on brief), for plaintiffs-appellees RTC and Sir Walter Management.

Before PHILLIPS, SPROUSE, and WILKINSON, Circuit Judges.

OPINION

WILKINSON, Circuit Judge:

This case raises the question of the appropriate treatment under federal law of a savings and loan holding company's commitment to maintain the capital of a purchased savings and loan subsidiary when the holding company files for bankruptcy under Chapter 11. For the reasons that follow, we hold that the appellant holding company had undertaken a capital maintenance obligation in this case and that it was required under 11 U.S.C. § 365(o ) to cure any deficit in that obligation before it could reorganize under Chapter 11. In so holding, we affirm the judgment of the district court.

I.

The facts relevant to this appeal are not in dispute. Appellant Firstcorp, Inc., is a multiple savings and loan holding company based in Raleigh, North Carolina. As of the events in question, Firstcorp had two wholly owned subsidiaries, First Federal Savings and Loan Association of Raleigh (FF-Raleigh) and First Federal Savings and Loan Association of Durham (FF-Durham). Both FF-Raleigh and FF-Durham are federally insured savings and loan institutions.

Firstcorp acquired FF-Raleigh in March 1985. Under federal law, this acquisition required the approval of the Federal Home Loan Bank Board (FHLBB), which was then the primary regulator of federally chartered savings and loans. See 12 U.S.C. § 1730a(e) (1988), repealed by Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub.L. No. 101-73, Title IV, § 407, 103 Stat. 183, 363. FHLBB approved Firstcorp's application in FHLBB Resolution No. 85-219 (Mar. 29, 1985). That approval, however, was subject to numerous conditions. Condition 5 required Firstcorp to maintain FF-Raleigh's capital at or above a specified level:

[T]he acquisition of [FF-Raleigh] by Firstcorp is approved provided the following conditions are complied with in a manner satisfactory to the Supervisory Agent:

. . . . .

5. That, on the date that the proposed acquisition is consummated and at each calendar quarter thereafter for as long as Firstcorp controls [FF-Raleigh], the regulatory net worth of [FF-Raleigh] shall be maintained at the greater of: (1) three percent of total liabilities ..., or (2) a level consistent with that required by Section 563.13(b) of the Rules and Regulations for Insurance of Accounts ..., as now or hereafter in effect, and where necessary, to infuse sufficient additional equity capital, in a form satisfactory to the Supervisory Agent, to effect compliance with such requirement. [Emphasis in the original.]

In January 1990, operating losses caused by non-performing real estate loans made it likely that FF-Raleigh would be unable to satisfy the minimum capital requirements imposed by federal law. See 12 C.F.R. §§ 567.1-567.20 (1990). Firstcorp therefore requested from appellee Office of Thrift Supervision (OTS), the regulatory successor to FHLBB, see 12 U.S.C. § 1462a(e) (Supp. II 1990), a "temporary forbearance" from the capital maintenance obligation imposed by FHLBB Resolution No. 85-219. OTS denied this request and directed Firstcorp on several occasions thereafter to bring FF-Raleigh into compliance with federal minimum capital requirements by infusing capital into FF-Raleigh. Although FF-Raleigh acknowledged that, as of March 31, 1990, its capital was less than that required by federal law, Firstcorp did not infuse any capital into FF-Raleigh. OTS has estimated that, as of the end of March, the deficiency in Firstcorp's capital maintenance obligation was about $6 million; by September 30, this figure had jumped to $45 million.

Following extensive negotiations, on November 30, 1990, FF-Raleigh and OTS entered into a consent agreement. That agreement, which contained an acknowledgement by FF-Raleigh that it had insufficient capital, imposed numerous restrictions on the continued operation of FF-Raleigh. It also explicitly provided that "[n]othing in this Agreement ... shall serve to preclude Firstcorp ... from honoring its net worth maintenance obligations pursuant to FHLBB Resolution 85-219, and [FF-Raleigh's] receiving the benefit of such obligations."

Also on November 30, OTS served Firstcorp with a notice of charges and hearing and with a temporary order to cease and desist. The notice of charges and hearing, issued pursuant to 12 U.S.C. § 1818(b), initiated an administrative proceeding against Firstcorp and charged it with committing an "unsafe or unsound practice" by failing to fulfill its obligation to maintain the capital of FF-Raleigh. The cease and desist order, issued pursuant to 12 U.S.C. § 1818(c), required Firstcorp, inter alia, to extinguish certain capital notes FF-Raleigh issued it and to transfer its ownership interest in FF-Durham to FF-Raleigh, both in partial satisfaction of its capital maintenance obligation.

In response to the OTS's actions, Firstcorp filed a complaint on December 4 in the Eastern District of North Carolina that sought to enjoin OTS from enforcing the cease and desist order. The next day, December 5, before the district court could rule on the complaint, Firstcorp filed a petition in bankruptcy under Chapter 11. ¹ Then, on December 7, OTS appointed appellee Resolution Trust Corp. (RTC) as receiver for FF-Raleigh based on the fact that FF-Raleigh was in an unsafe and unsound condition because it had insufficient capital. See 12 U.S.C. § 1464(d)(2)(A)(iii) (Supp. II 1990).

Following the appointment of RTC as receiver of FF-Raleigh, OTS chartered a new federal mutual savings institution, First Federal Savings Association of Raleigh (Raleigh Savings). RTC then entered into a "purchase and assumption" transaction with Raleigh Savings: in effect, Raleigh Savings assumed certain of FF-Raleigh's liabilities (including its deposit liabilities), and the new entity purchased certain of FF-Raleigh's assets. OTS then appointed RTC as the conservator of Raleigh Savings. Recently, OTS replaced RTC as conservator of Raleigh Savings with RTC as receiver of that institution.

In March 1991, both OTS and RTC, in separate motions, asked the bankruptcy court to order Firstcorp to assume its commitment under FHLBB Resolution No. 85-219 and to immediately cure the deficiency in the capital maintenance obligation existing as of the date of the bankruptcy filing. The motions were made pursuant to 11 U.S.C. § 365(o), which provides in part that:

In a case under chapter 11 of this title, the trustee shall be deemed to have assumed[,] ... and shall immediately cure any deficit under, any commitment by the debtor to ... the Director of the Office of Thrift Supervision ... or its predecessors ... to maintain the capital of an insured depository institution....

11 U.S.C. § 365(o) (Supp. II 1990). The bankruptcy court denied the motions. In re Firstcorp, Inc., 126 B.R. 688 (Bankr.E.D.N.C.1991). The court concluded that, even if the commitment is "deemed assumed" under § 365(o ) upon the bankruptcy filing, the commitment "expired by its own terms." Id. at 691. FHLBB Resolution No. 85-219 imposed the commitment only "for as long as Firstcorp controls" FF-Raleigh, and the court held that Firstcorp lost control of FF-Raleigh when it was placed in receivership two days after Firstcorp filed for bankruptcy. Thus, concluded the court, § 365(o ) was inapplicable. Id.

On appeal, the district court reversed. It held that, as of the date of the bankruptcy filing, Firstcorp controlled FF-Raleigh. Concluding that § 365(o )' § requirement of an immediate cure attaches at the moment of the bankruptcy filing, the court held that the subsequent appointment of RTC as receiver of FF-Raleigh did not relieve Firstcorp of the obligations imposed by § 365(o ) at the time of the bankruptcy filing. The district court then remanded the case to the bankruptcy court "with instructions to grant the relief which OTS and RTC seeks [sic ] through their section 365(o ) motion[s]."

From this decision Firstcorp has appealed.

II.

A.

Section 365(o ) was enacted as part of the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 (Thrift and Bank Fraud Act or the Act), which constitutes Title XXV of the Crime Control Act of 1990, Pub.L. No. 101-647, § 2522(c), 104 Stat. 4789, 4866-67. The Act was a response to the savings-and-loan crisis, which has cost American taxpayers tens of billions of dollars. See 136 Cong.Rec. S17,601 (daily ed. Oct. 27, 1990) (statement of Sen. Biden). As part of that response, Congress sought "to prevent institution-affiliated parties from using bankruptcy to evade commitments to maintain capital reserve requirements of a Federally insured depository institution." H.R.Rep. No. 681(I), 101st Cong., 2d Sess. 179 (1990), reprinted in 1990 U.S.C.C.A.N. 6472, 6585. It accomplished this goal through § 365(o ), which "prevent[s] the trustee from...