In re Overland Park Financial Corp.

• Citation: 217 BR 879
• Decision Date: 05 February 1998
• Docket Number: Bankruptcy No. 94-21190-11.
• Parties: In re OVERLAND PARK FINANCIAL CORPORATION, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Kansas

217 B.R. 879 (1998)

In re OVERLAND PARK FINANCIAL CORPORATION, Debtor.

Bankruptcy No. 94-21190-11.

United States Bankruptcy Court, D. Kansas.

February 5, 1998.

Benjamin F. Mann, Kathryn B. Bussing, Blackwell, Sanders, Matheny, Weary & Lombardi, L.C., Kansas City, MO, for Debtor.

Martin Jefferson Davis, Teresa A. Scott, Washington, DC, Joann E. Corpstein, Overland Park, KS, for Office of Thrift Supervision.

Robert D. Lantz, Steven M. Leigh, Cynthia C. Dunham, Berry F. Laws, III, Martin, Leigh & Laws, P.C., Erlene W. Krigel, Krigel & Krigel, P.C., Kansas City, MO, for Resolution Trust Corporation and its Statutory Successor, Federal Deposit Insurance Corporation.

MEMORANDUM OPINION¹

JOHN T. FLANNAGAN, Bankruptcy Judge.

Congress added § 365(o) to the Bankruptcy Code with the Crime Control Act of 1990.² The new subsection addresses "capital maintenance commitments" under the broader section heading of "Executory contracts and unexpired leases." These commitments are "net worth maintenance stipulations" that financial regulatory agencies demand from companies that hold the stock of banking and thrift institutions. Subsection 365(o) directs that in Chapter 11 cases, capital maintenance commitments are deemed assumed and must be immediately cured:

In a case under chapter 11 of this title, the trustee shall be deemed to have assumed (consistent with the debtor\'s other obligations under section 507), and shall immediately cure any deficit under, any commitment by the debtor to the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the Director of the Office of Thrift Supervision, the Comptroller of the Currency, or the Board of Governors of the Federal Reserve System, or its predecessors or successors, to maintain the capital of an insured depository institution, and any claim for a subsequent breach of the obligations thereunder shall be entitled to priority under section 507. This subsection shall not extend any commitment that would otherwise be terminated by any act of such an agency.³

As directed in a Federal Home Loan Bank Board resolution, Overland Park Financial Corporation gave Overland Park Savings & Loan Association a net worth maintenance stipulation. I hold that the net worth maintenance stipulation in this case is not an enforceable contract; therefore, it is not a capital maintenance commitment subject to § 365(o).⁴

Background

Overland Park Financial Corporation ("Financial" or "the debtor") is the parent of Overland Park Savings & Loan Association ("Association"), a Kansas thrift institution. The Office of Thrift Supervision ("OTS") placed the Association into conservatorship in 1992.

In 1979, Financial applied to the Federal Savings and Loan Insurance Corporation ("Corporation" or "FSLIC") for approval to acquire control of the Association. As the operating head of FSLIC, the Federal Home Loan Bank Board ("FHLBB" or "Board") granted conditional approval of the acquisition in Resolution No. 79-143 on February 21, 1979. Paragraph four of the resolution conditioned approval on Financial's stipulating that it would maintain the net worth of the Association:⁵

4. Financial shall stipulate to the Corporation that it (Financial) will cause the net worth of the Association to be maintained at a level consistent with that required by Section 563.13(b) of the Rules and Regulations for Insurance of Accounts ("Regulations"), as now or hereafter in effect, and where necessary, that it will infuse sufficient additional equity capital to effect compliance with such requirement in a form satisfactory to the Corporation.

To comply with this condition, Financial sent the FSLIC a stipulation that mirrored the resolution:

STIPULATION TO THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION

Overland Park Financial Corporation, a Missouri corporation, hereby stipulates to the Federal Savings and Loan Insurance Corporation (the "Corporation") that it will cause the net worth of Overland Park Savings and Loan Association, Overland Park, Kansas, to be maintained at 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, that it will infuse sufficient additional equity capital to effect compliance with such requirement in a form satisfactory to the Corporation.

Dated: April 24, 1979.

OVERLAND PARK FINANCIAL CORPORATION

By /s/ Clarke L. Henry, President

Clarke L. Henry, President

Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), effective August 9, 1989.⁶ In this Act, Congress created the Office of Thrift Supervision ("OTS") within the United States Department of the Treasury. FIRREA restructured the regulatory scheme for financial institutions and replaced the FHLBB with the OTS as the regulator of depository institutions.

The OTS notified the Association on June 8, 1990, that a recent examination had revealed the Association failed to meet minimum capital requirements.⁷ In response, the Association wrote to Financial on September 13, 1990, requesting a capital contribution under the stipulation.⁸ In a reply letter of November 5, 1990, Financial stated that it was not inclined to make the requested capital contribution in light of the current economic and regulatory environment and the prevailing sentiment of investors. Financial further stated that it had considered certain issues pending in the litigation challenging the Franklin Savings Association conservatorship, then on appeal,⁹ and that depending on the outcome of that litigation, Financial might reconsider its decision not to make a capital contribution to the Association.¹⁰

The OTS issued a Capital Directive to Financial on December 16, 1991, calling for it to comply with its stipulation.¹¹ Although Financial failed to honor the Capital Directive, it claims to have attempted eight separate times to infuse capital into the Association, and it suggests that the OTS failed to cooperate in good faith with those efforts.¹² Financial's last such attempt involved capital offered in the form of "purchase mortgage servicing rights" through an entity called Advance Financial, Inc. ("AFI"). AFI allegedly wrote to the Midwest Regional Office of the OTS on September 28, 1992, asking for preliminary clearance to pursue the acquisition of the Association.¹³ The OTS wrote back to AFI on November 3, 1992, requesting extensive additional information and stating, inter alia, that it was unwilling to recommend to its Washington office acceptance of a non-cash contribution of capital.¹⁴

A week later, on November 13, 1992, the Director of the OTS appointed the Resolution Trust Corporation ("RTC") as receiver for the Association on grounds that the Association lacked sufficient capital and was therefore in an unsafe and unsound condition to transact business.¹⁵ At the time of the RTC's appointment as receiver, the Association was reporting a risk-based capital deficiency of at least $4,073,000, a core capital deficiency of at least $3,767,000, and a tangible capital deficiency of at least $567,000.¹⁶

According to the stipulations in the Partial Pretrial Order filed December 14, 1995, the Association failed to challenge the receivership appointment.¹⁷ At no time since the receivership appointment has the Association transacted any business.¹⁸ Financial has not infused capital into the Association since its original refusal letter of November 5, 1990,¹⁹ and the OTS has not incurred any losses that are compensable under Financial's stipulation to maintain the Association's capital.²⁰

The Bankruptcy Case

Financial filed its Chapter 11 petition on July 1, 1994, approximately 1½ years after the Association was placed into receivership. Financial continues to manage the affairs of the bankruptcy estate as a debtor-in-possession.²¹

The OTS filed an unsecured proof of claim for $4,073,000 on December 12, 1994, based on Financial's net worth maintenance stipulation to the FSLIC/Association. In its proof of claim, the OTS recites that the priority of its claim is controlled by "11 U.S.C. § 365(o) or 11 U.S.C. § 507(a)(8) now § 507(a)(9), as appropriate."²² Financial objected to the OTS's proof of claim on January 17, 1995.

At a pretrial conference on August 10, 1995, the OTS announced its intention to request that Financial cure the deficit allegedly created by the net worth maintenance stipulation and that the bankruptcy case be dismissed. The parties were instructed to prepare a Pretrial Order that included Financial's responses to the OTS's anticipated motion. The OTS filed its motion to cure and to dismiss that same day, August 10, 1995.

The Partial Pretrial Order filed December 14, 1995, consolidates for decision the allowance of the OTS's proof of claim and the merits of OTS's motion to cure the deficit under the net worth maintenance stipulation or to dismiss the case under 11 U.S.C. § 1112(b)(2). Also for decision are Financial's affirmative defenses to the OTS's motion to cure or dismiss and the OTS's motion to strike and/or dismiss those defenses. The issues the OTS briefed on the later motion duplicate those created by its proof of claim.

Financial's amended bankruptcy schedule shows that it had total assets of $227,651.06 as of June 30, 1991.²³ Financial's Monthly Financial Report of August 31, 1995, shows total cash assets of $153,184.14. In addition, the RTC holds tax refunds of $197,280.00 in trust.²⁴ If Financial were to cure the Association's risk-based capital deficit of $4,073,000, no funds to pay administrative claims against the estate would remain.

History of Stipulations

In Capital Punishment: The Death of Limited Liability for Shareholders of Federally Regulated Financial Institutions,²⁵ the authors provide a history of net worth maintenance undertakings. They divide these undertakings into two categories: informal net worth maintenance stipulations and formal net...