Guaranty Financial Services, Inc. v. Ryan

• Decision Date: 25 March 1991
• Docket Number: No. 90-8773,90-8773
• Citation: 928 F.2d 994
• Parties: GUARANTY FINANCIAL SERVICES, INC., and Guaranty Federal Savings Bank, Plaintiffs-Appellees, v. T. Timothy RYAN, Director, Office of Thrift Supervision, in his official capacity and as successor in interest to the Federal Home Loan Bank Board, and Federal Deposit Insurance Corporation in its own capacity and as successor in interest to the Federal Savings and Loan Insurance Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 994

928 F.2d 994

59 USLW 2590

GUARANTY FINANCIAL SERVICES, INC., and Guaranty Federal

Savings Bank, Plaintiffs-Appellees, v. T. Timothy RYAN, Director, Office of Thrift Supervision, in his official capacity and as successor in interest to the

Federal Home Loan Bank Board, and Federal Deposit Insurance

Corporation in its own capacity and as successor in interest

to the Federal Savings and Loan Insurance Corporation,

Defendants-Appellants.

No. 90-8773.

United States Court of Appeals, Eleventh Circuit.

March 25, 1991.

Frank L. Butler, III, Asst. U.S. Atty., Macon, Ga., Jacob Lewis, Washington, D.C., for Dept. of Justice.

Aaron B. Kahn, Office of Thrift Supervision, Washington, D.C., for F.D.I.C.

F. Lane Heard, III, Williams & Connolly, Washington, D.C., Tracy Greer, Roy N. Cowart, Cowart & Varner, Warner-Robins, Ga., for plaintiffs-appellees.

Edward M. Selfe, Birmingham, Ala., William L. Gardner, Morgan, Lewis & Bockius, Washington, D.C., for amicus curiae, Secor Bank.

Appeal from the United States District Court for the Middle District of Georgia.

Before COX and BIRCH, Circuit Judges, and GIBSON ^*, Senior Circuit Judge.

COX, Circuit Judge:

This case is an appeal by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) of a preliminary injunction that, among other things, prevents the agencies from excluding an intangible asset called supervisory goodwill from the regulatory capital computation for Guaranty Federal Savings Bank. Because we hold that the district court mistakenly concluded that the plaintiffs had a substantial likelihood of success on the merits, we reverse.

I. BACKGROUND

Houston Federal Savings and Loan Association (Houston Federal) was a mutual savings and loan association based in Warner Robins, Georgia. It received a federal charter in 1981. In 1985, a new officer at Houston Federal discovered a series of questionable consumer loans that were expected to generate substantial losses. In 1986 Houston Federal reported a negative net worth.

In 1987 Houston Federal and Guaranty Financial Services, Inc. (Guaranty Financial) submitted an application to the Federal Home Loan Bank Board (the Bank Board) for approval of what is called a supervisory conversion. The application proposed that Houston Federal be converted to a stock association and merged into Guaranty Federal Savings Bank (Guaranty Federal), a federal stock savings bank, and that Guaranty Federal simultaneously be acquired by Guaranty Financial. Guaranty Financial was a holding company that would hold all the stock of Guaranty Federal and contribute $1 million in capital by purchasing Guaranty Federal common stock. Houston Federal's directors would own one-third of the stock of Guaranty Financial.

In December 1987, the Federal Savings and Loan Insurance Corporation (FSLIC) and the Bank Board approved the application subject to certain conditions. In January 1988, Guaranty Financial and the FSLIC entered into a written agreement entitled "Regulatory Capital Maintenance/Dividend Agreement" (the Capital Maintenance Agreement). This Agreement referred to and had attached to it a letter in which the FSLIC and the Bank Board agreed to grant Guaranty five forbearances, one of which related to accounting requirements concerning what is called "supervisory goodwill." The letter stated that "[f]or purposes of reporting to the Board, the value of any intangible asset resulting from the application of push-down accounting in accounting for the purchase, may be amortized by Guaranty Federal over a period not to exceed (25) years by the straight line method." The parties agree that this provision allowed amortization of supervisory goodwill over a twenty-five year period.

In mergers and acquisitions using the purchase method of accounting, when the purchase is being recorded using push-down accounting (a method by which the acquisition of a subsidiary is shown on the books of the subsidiary), the book value of the acquired thrift's assets and liabilities are adjusted to fair market value at the time of the acquisition. To the extent that fair market value of the acquired liabilities is more than the fair market value of the acquired assets, that difference is recorded as goodwill--an intangible asset that may be amortized over a period of years. The goodwill created in connection with mergers and acquisitions supervised by the FSLIC and the Bank Board is known as supervisory goodwill.

Following the supervisory conversion, Guaranty Federal had a negative tangible net worth. This was anticipated by the FSLIC and the Bank Board. Only by treating supervisory goodwill as capital for regulatory purposes could Guaranty Federal have been deemed a solvent institution. Treating this supervisory goodwill as capital, its net worth immediately after the conversion was more than $1 million.

In August 1989, Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), Pub.L. No. 101-73, 103 Stat. 183 (1989) (codified in scattered sections of 12 U.S.C.A.), making significant changes in the regulation of federally chartered and insured savings and loan institutions. Among other things, FIRREA abolished the FSLIC, transferring its functions to other agencies, and abolished the Bank Board, replacing it with the Office of Thrift Supervision (OTS), an office within the Department of the Treasury.

Section 301, Sec. 5(t)(3)(A) of FIRREA set in motion the events that led to this lawsuit. It provides that the use of supervisory goodwill in calculating core capital must be completely phased out by January 1, 1995. 12 U.S.C.A. Sec. 1464(t)(3)(A) (Supp.1990). Moreover, during that phase-out period goodwill must be amortized over no more than twenty years; in other words, the thrift must remove at least one-twentieth of its supervisory goodwill from its capital base and charge it against its profits each year. Id. Sec. 1464(t)(9)(B). The OTS, as the agency charged with enforcing the statute, interpreted these requirements as applying to all thrifts not specifically exempted by FIRREA. The OTS thus determined to enforce the new requirements even against institutions, such as Guaranty Federal, that had obtained capital and accounting forbearances pursuant to supervisory conversion agreements, since FIRREA makes no explicit exception for thrifts with such agreements. Thrift Bulletin 38-2 (Jan. 9, 1990), see R.1-6 (exhibit F).

Unable to include goodwill as capital for purposes of reporting to the OTS, Guaranty Federal was not able to meet its minimum capital requirements. As of December 1989, Guaranty Federal had approximately $2.7 million in unamortized supervisory goodwill on its books. The bank submitted a capital enhancement plan in January 1990, and a revised plan in February. Pending review of the plan, the OTS prohibited Guaranty Federal from growing beyond net interest credited, making capital distributions, or acting inconsistently with any other operational restrictions dictated by the OTS. See 12 C.F.R. Sec. 567.10(a)(3) (1990). Without approving or disapproving the plan, the OTS advised the Guaranty Federal Board of Directors in March 1990 that "Guaranty Federal is deemed to be insolvent" and directed that "Guaranty Federal may not increase its liabilities or make any new loans or investments without the prior written approval of the District Director." In June 1990 the OTS informed Guaranty Federal that it was preparing to send a "consent to merge" letter calling upon the bank to authorize the OTS to sell or merge the bank. This lawsuit followed.

II. PROCEEDINGS IN THE DISTRICT COURT

Guaranty Federal and Guaranty Financial (hereafter referred to collectively as "Guaranty" except where indicated otherwise) responded to the position taken by the OTS by filing in the district court in July 1990 an action for a declaratory judgment and injunctive relief. The complaint alleged, among other things, that the refusal of the defendant agencies to honor the agreement made by their predecessor agencies to allow Guaranty to treat supervisory goodwill as capital constituted a breach of contract and a taking of property without due process and just compensation, was barred by principles of estoppel, and in any event violated FIRREA. ¹

Following a hearing on Guaranty's application for a preliminary injunction, the district court concluded that there was a substantial likelihood that Guaranty would prevail on the merits on its contract and estoppel claims. The court found that the forbearance agreement was an integral part of the conversion agreement and that the $1 million investment made by the plaintiffs would not have been made in the absence of the forbearance agreement. The court assumed that the forbearance agreement was a contract that created rights, duties and obligations protected by the savings provision found in Section 401(g) of FIRREA. Finding that the other requisites for injunctive relief had also been met, the district court entered a preliminary injunction prohibiting the OTS and the FDIC "from requiring that plaintiffs execute a consent to merge agreement and from excluding the amortization of supervisory goodwill from any and all determinations of the plaintiff institution's capitalization as set out in the forbearance agreement." Guaranty Fin. Servs. v. Director, Office of Thrift Supervision, 742 F.Supp. 1159, 1163 (M.D.Ga.1990).

III. PRELIMINARY INJUNCTION

In order to grant a preliminary injunction, a district court must find the following:

(1) a substantial likelihood that plaintiff will prevail on the merits, (2) a substantial threat that plaintiff will suffer irreparable injury if the injunction is not granted, (3) that the threatened injury to plaintiff outweighs the threatened harm the injunction may do to the defendant, and (4) that granting the preliminary injunction will not disserve the public interest.

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