In re MCorp, Civ. A. No. 89-1677

• Decision Date: 19 June 1989
• Docket Number: Civ. A. No. 89-1677,Adv. No. 89-0298.,Bankruptcy No. 89-02312-H3-11
• Citation: 101 BR 483
• Parties: In re MCORP, MCorp Financial, Inc., and MCorp Management, Debtors. MCORP, MCorp Financial, Inc., and MCorp Management, Debtors in Possession, Plaintiffs, and Official Creditors' Committee, Intervenor, v. The BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM OF the UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of Texas

101 B.R. 483 (1989)

In re MCORP, MCorp Financial, Inc., and MCorp Management, Debtors MCORP, MCorp Financial, Inc., and MCorp Management, Debtors in Possession, Plaintiffs and Official Creditors' Committee, Intervenor, v. The BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM OF the UNITED STATES of America, Defendant.

Civ. A. No. 89-1677, Bankruptcy No. 89-02312-H3-11, Adv. No. 89-0298.

United States District Court, S.D. Texas, Houston Division.

June 19, 1989.

D.J. Baker, Melanie Gray, Weil, Gotshal & Manges, Houston, Tex., Alan B. Miller, Lori R. Fife, Weil, Gotshal & Manges, New York City, Thomas W. Luce, III, Hughes & Luce, Dallas, Tex., John D. Hawke, Jr., Arnold & Porter, Washington, D.C., for MCorp, MCorp Financial, Inc., and MCorp Management.

Sandra E. Mayerson, Mark I. Bane, Kelley Drye & Warren, New York City, for Manufacturers Hanover Trust Co., as Indenture Trustee, and Banco Atlantico, S.A.

Jarrell D. McDaniel, Kaaran E. Thomas, Vinson & Elkins, Houston, Tex., Ogden N. Lewis, John Fouhey, Davis Polk & Wardwell, New York City, for Morgan Guar. Trust Co. of New York.

William W. Wiles, Richard Ashton, Federal Reserve Bd., Washington, D.C., J. Christopher Kohn, Tracy J. Whitaker, Charles D. Stodghill, U.S. Dept. of Justice, Civ. Div., Washington, D.C., Henry Oncken, Kimberly Pignuolo, U.S. Atty., Houston, Tex., for Board of Governors of Federal Reserve System of USA.

Ben T. Head, Nancy L. Holley, U.S. Trustee, Houston, Tex., for U.S. Trustee.

OPINION ON THE PRELIMINARY INJUNCTION AGAINST THE FEDERAL RESERVE SYSTEM

HUGHES, District Judge.

1. Introduction.

As debtor in possession, a bank holding company and two of its nonbank subsidiaries (MCorp, MCorp Financial, Inc., and MCorp Management Debtor) applied for a preliminary injunction against the Board of Governors of the Federal Reserve System (Board). The Debtor seeks to enjoin the Board from prosecuting administrative proceedings against the holding company and its nonbank subsidiaries as part of the Board's regulation of the safety and integrity of the bank subsidiaries. The issue is whether a nonbank corporation that owns banks and nonbanks as subsidiaries is entitled to have its bankruptcy case principally directed by the banking agencies or by the bankruptcy process. An injunction will be issued to allow possible reorganization of the Debtor through the bankruptcy court.

2. Statutes.

The Debtor asserts:

A. This court sitting in bankruptcy has exclusive jurisdiction over all the property in the debtor\'s estate. 28 U.S.C. § 1334(d);

B. The Board\'s actions are in reality an attempt to control the assets of the estate in violation of the automatic stay. 11 U.S.C. § 362(a).

C. If the Board is exempt from the automatic stay, the bankruptcy code authorizes an injunction to protect the debtor from third-party interference. 11 U.S.C. § 105.

The Board counters:

A. The Financial Institutions Supervisory Act (FISA) withdraws jurisdiction from the courts, superseding the automatic stay imposed by the bankruptcy code. 12 U.S.C. § 1818(i).

B. The Board\'s proceedings are regulatory actions exempted from the automatic stay. 12 U.S.C. § 1818(b); 11 U.S.C. § 362(b).

C. The character of the regulation and the general scheme of banking supervision are not the third-party acts that should be subject to an injunction against interference with a bankruptcy case.

3. Background of the Controversy.

At the beginning of 1989, MCorp was a bank holding company, owning twenty-five bank subsidiaries and several nonbank subsidiaries. In common with many financial institutions, MCorp has suffered large, continuing losses from its real estate loans, having already written down its bad oil-related loans. In March, the comptroller of the currency declared twenty of MCorp's banks insolvent and closed them. The banks continued to operate as nationalized receiverships through the Federal Deposit Insurance Corporation under the name Deposit Insurance Bridge Bank.

This civil action was an adversary proceeding in the consolidated bankruptcy case to reorganize MCorp, and the reference by the district court to the bankruptcy court was withdrawn. (Adversary Number 89-0298.) The other actions are:

A. An involuntary petition was filed in the Southern District of New York against MCorp and it was transferred here to pend under Case Number 89-02848-H2-11.

B. A voluntary petition was filed in the Southern District of Texas by MCorp Management under Case Number 89-02324-H5-11.

C. A voluntary petition was filed in the Southern District of Texas by MCorp Financial, Inc., under Case Number 89-02312-H3-11.

The filing in New York of the involuntary case precipitated the bank closings by the comptroller and the voluntary cases by the subsidiaries. The Official Creditors' Committee of the debtors was allowed to intervene to assert essentially the same grounds as MCorp in support of an injunction.

MCorp is left with five bank subsidiaries and all of its nonbank subsidiaries, two of which are also debtors in bankruptcy. MCorp maintains that twelve of its banks were closed illegally or improvidently. The closed institutions are not under the control of MCorp because they are under FDIC receiverships.

The Federal Reserve Board has initiated administrative actions against MCorp as a bank holding company for violating its regulations that ensure the integrity of the banking system through the requirement that the holding company be a "source of financial strength" to the subsidiary banks. The administrative actions will conflict with MCorp's ability to address a global reorganization in the bankruptcy case.

4. Standard for Injunctive Relief.

This proceeding is in the nature of a preliminary declaratory judgment rather than a normal preliminary injunction which maintains some status between principal litigants until the merits of their claims have been heard. This injunction will prospectively assign one authority or another to supervise a restructuring.

Despite the peculiar nature, this injunction meets the regular requirements. Canal Auth. v. Callaway, 489 F.2d 567, 572 (5th Cir.1974).

A. MCorp is likely to prevail on the merits of its legal priority claim. The automatic stay is applied rigorously, and only in exceptional cases is there a departure from protecting the debtor. Where the regulation is inextricably mixed with the restructuring process rather than some ancillary public health or safety question, MCorp ought to succeed with its claim of insulation from the Board by the automatic stay. Even if the regulatory exemption applies, the highly probable result is MCorp\'s success because of the availability of the anti-interference protection.

B. Enjoining the Board is necessary to prevent imminent and irreparable harm to the Debtor; responding to the Board\'s proceedings deprives MCorp of resources desperately needed to prepare for its reorganization. If MCorp is to survive, to the benefit of the creditors and the government, it must act quickly, for a lingering Chapter 11 case inevitably becomes a liquidation. Obliging MCorp to respond in multiple forums to multiple agencies, each with its own internal and external priorities, would dissolve the focus MCorp needs to see the route to survival.

C. The risk to MCorp in both probability and magnitude exceeds the possible danger to the Board\'s interests. The safeguards of the bankruptcy code ensure the protection of the generalized interest of the Board in healthy holding companies. The Board\'s exposure to liability independent of its regulatory concern is minimal, and it is not jeopardized by this injunction. Its interest can adequately be represented in the bankruptcy proceedings.

D. The issuance of this injunction does not harm the public interest defined either as the general public interest or as the discernible interests of unrepresented third-parties. To the contrary, the public is served by having all proceedings in one forum, especially a forum where the individuals in the affected public can participate.

5. Issue.

When a bank holding company seeks reorganization under the bankruptcy code, does the general bankruptcy process supersede the processes of the agencies that regulate banking?

6. Regulatory Framework.

A. Comptroller of the Currency.

General supervision of national banks, including their creation and closing, is confided to the comptroller of the currency. If, on his examination, the comptroller determines that a bank is insolvent, he places it in receivership. That receiver is the FDIC. 12 U.S.C. § 191.

B. Federal Deposit Insurance Corporation.

The FDIC has two roles in banking regulation. First, it acts as a limited insurer of deposits to attract depositors to the banking system and to prevent runs, with their destructive effects. Second, the FDIC acts as a receiver for the estate of a bank that has been closed by the comptroller. 12 U.S.C. § 1811.

C. Federal Reserve Board.

The Federal Reserve System is the central bank for the United States, and among its powers are responsibilities for the regulation of banks and bank holding companies. The Board\'s regulation takes many forms, like its clearinghouse function, furnishing liquidity, margin and capital requirements, open market purchases and sales, and currency issuance.

Under the FISA, if the Board finds that a bank holding company has engaged in an unsafe or unsound practice, the Board has the authority to notify the company of its charges, stating the violations and setting a hearing before the Board. 12 U.S.C. § 1818(b). If the charges are proved, the Board can order the company to stop the derelict practices and to take affirmative steps to prevent future violations.

Temporary orders to desist may also be issued by the Board before proceedings are completed. These orders may be issued without a hearing and are effective immediately.

Because the purpose of vesting the Board with these powers is to assure the soundness of banks that are owned by

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