In re Overland Park Financial Corp.

• Decision Date: 31 March 1999
• Docket Number: Civ. No. 98-2061-KHV.,Bankruptcy No. 94-21190-11
• Citation: 232 BR 215
• Parties: In re OVERLAND PARK FINANCIAL CORPORATION, Debtor. Office of Thrift Supervision, Appellant, v. Overland Park Financial Corporation, Appellee.
• Court: U.S. District Court — District of Kansas

232 B.R. 215 (1999)

In re OVERLAND PARK FINANCIAL CORPORATION, Debtor.

Office of Thrift Supervision, Appellant, v. Overland Park Financial Corporation, Appellee.

Bankruptcy No. 94-21190-11, Civ. No. 98-2061-KHV.

United States District Court, D. Kansas, Kansas City Division.

March 31, 1999.

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, Ferry 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 And Order

VRATIL, District Judge.

This appeal is from the final judgment of the United States Bankruptcy Court for the District of Kansas entered in In re Overland Park Financial Corporation, 217 B.R. 879 (Bankr.D.Kan.1998). The Office of Thrift Supervision ("OTS") appeals the bankruptcy court's holding that a net worth maintenance stipulation which Overland Park Financial Corporation ("Financial") made in connection with its acquisition of Overland Park Savings & Loan Association ("OPSL") is not an enforceable contract, and therefore is not a capital maintenance commitment subject to 11 U.S.C. § 365(o). In lieu of an order reversing and remanding to the bankruptcy court, OTS seeks a judgment from this Court which allows the OTS capital maintenance claim, requires Financial to cure as much of the deficit under its capital maintenance commitment as possible, and orders dismissal of the case.

For reasons stated below, the order of the bankruptcy court is reversed and remanded.

Standard of Review

Under 28 U.S.C. § 158(a), district courts have jurisdiction to hear appeals from final judgments, orders and decrees of bankruptcy courts. In reviewing the decision of a bankruptcy court pursuant to Section 158(a), the district court applies the same standards of review that govern appellate review in other cases. See, e.g., Sender v. Johnson (In re Hedged-Investments Assocs., Inc.), 84 F.3d 1267, 1268 (10th Cir.1996). The Court therefore reviews the bankruptcy court's legal determinations de novo and its factual findings for clear error. See id.

Facts

Overland Park Financial Corporation ("Financial") incorporated in 1978 for the purpose of acquiring Overland Park Savings & Loan Corporation ("OPSL"), a Kansas thrift institution. Because the Federal Savings and Loan Insurance Corporation ("FSLIC") insured OPSL's deposits at the time, Financial was required to obtain the FSLIC's approval of its proposed acquisition. In 1979 Financial applied to the FSLIC for approval to acquire OPSL. See 12 U.S.C. § 1730a(e)(1)(B) (repealed 1989).¹

On February 21, 1979, the Federal Home Loan Bank Board ("FHLBB"), as operating head of the FSLIC, approved the proposed acquisition.² The approval was conditioned upon Financial's stipulation that it would maintain the net worth of OPSL.³ To comply with that condition, on April 24, 1979, Financial stipulated in writing that it would

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

The stipulation was signed by Clarke L. Henry, president of Financial. Financial subsequently completed its acquisition of OPSL.

On June 8, 1990, OTS advised OPSL that a Report of Joint Examination revealed that OPSL would fail to meet its minimum capital requirements. Accordingly, OPSL sent a letter to Financial on September 13, 1990, asking Financial to provide a capital infusion pursuant to the capital maintenance stipulation. On November 5, 1990, Financial responded that it was "not prepared to make the requested capital contribution at that time" in light of the "current economic and regulatory environment" and the "prevailing sentiment of investors." Although Financial further stated that it "might consider making a capital contribution in the future," it has not made any capital infusion to date.

On December 16, 1991, OTS issued a Capital Directive which called for Financial to comply with the capital maintenance stipulation. The Directive required that by April 30, 1992, OPSL either (a) comply with its fully phased-in capital requirements and have a minimum core capital ratio of 4%, or (b) present to OTS a letter of intent providing for the acquisition of OPSL by a qualified prospective investor acceptable to OTS. OPSL and each of its directors consented to the Directive; Financial, however, did not honor the Directive.⁵

On September 28, 1992, Advanced Financial, Inc., sought preliminary clearance from the OTS Midwest Regional Office to pursue acquisition of OPSL. On November 3, 1992, OTS responded with an extensive request for additional information and stated that its Midwest Regional Office was unwilling to recommend that OTS accept a non-cash contribution of purchase mortgage servicing rights as capital.

On November 13, 1992, the director of OTS ("Director") appointed the Resolution Trust Corporation ("RTC") as receiver for OPSL. The Director based his appointment on his findings that

(a) OPSL was in an unsafe and unsound condition to transact business due to having substantially insufficient capital, . . . had failed materially to comply with the terms of a Capital Directive issued December 16, 1991, and was unable to generate sufficient internal earnings to achieve capital compliance; and

(b) OPSL\'s failure to maintain capital at or above the minimum level required by the Capital Directive was an unsafe or unsound practice that was likely to weaken the condition of OPSL or otherwise seriously prejudice the interests of its depositors.

OTS Order No. 92-486 at 2. At the time of the receivership, OPSL was reporting a risk-based capital deficiency of at least $4,073,00.00, a core capital deficiency of at least $3,767,000.00, and a tangible capital deficiency of at least $567,000.00. OPSL did not challenge the receivership and has not transacted any business since that date.

OTS acknowledges that it incurred no losses that are compensable under Financial's stipulation to maintain OPSL's capital.

Procedural Background

On July 1, 1994, twenty months after OTS placed OPSL into receivership, Financial filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Since that date Financial has managed the property and affairs of the bankruptcy estate as a debtor-in-possession.

On December 12, 1994, OTS filed an unsecured proof of claim alleging Financial's breach of its capital maintenance stipulation and asserting its rights under 11 U.S.C. §§ 365(o) and 507(a)(8) now § 507(a)(9).⁶ OTS sought $4,073,000.00 as an unsecured priority claim. On January 17, 1995, Financial filed its objection to OTS's proof of claim, and filed a proposed Plan of Reorganization and Proposed Disclosure Statement.

The proposed Plan of Reorganization and Proposed Disclosure Statement categorized OTS's claim as an impaired, Class 2, § 507(a)(8) now § 507(a)(9) priority claim. The Plan of Reorganization proposed a liquidation of the estate, with its assets to be distributed among the allowed claim. As of August 31, 1995, Financial's Monthly Financial Report showed that Financial had total cash assets in the amount of $153,184.14. In addition, the RTC holds in trust additional tax refunds in the amount of $197,280.00.

On August 11, 1995, OTS moved for an order requiring an immediate cure of the alleged deficit under the capital maintenance stipulation and dismissal of the case. The parties have stipulated that a determination requiring Financial to comply with Section 365(o)'s immediate cure requirement would exhaust the bankruptcy estate and make it impossible for Financial to effectuate a plan of reorganization.

The Partial Pretrial Order filed December 14, 1995 (Doc. #124 in Overland Park) sets forth Financial's affirmative defenses to the OTS motion. On February 9, 1996, OTS moved to strike and/or dismiss Financial's defenses. Both sides submitted briefs on the issue.

On February 5, 1998, the bankruptcy court entered judgment denying OTS's motion for immediate cure and disallowing its claim.⁷

The Bankruptcy Court's Memorandum Opinion⁸

The bankruptcy court began its analysis with a detailed discussion of the history of informal and formal net worth maintenance stipulations.⁹ It concluded that Financial's stipulation is an informal net worth maintenance stipulation because it is open-ended and contains no limit on its duration and the amount of capital it requires to be infused; because it is not in the form of an agreement and contains no statement that it is enforceable administratively by a cease and desist order; because it simply mirrors the language of the FHLBB resolution; and because it is not in the form of a corporate resolution.

Citing case law which has interpreted similar net worth maintenance stipulations,¹⁰ the bankruptcy court held that informal net worth maintenance stipulations are not enforceable contracts. Such stipulations, the court stated, "do not reflect a meeting of the minds arrived at by negotiation nor do they reflect an intention to contract," and "are merely part of the process of applying for deposit insurance, registering as a holding company, or purchasing a banking or savings institution." Overland Park, 217 B.R. at 886. Financial's stipulation, the court therefore opined, is not an enforceable contractual obligation, but rather, "merely acknowledges the existence of certain federal regulations with which holding companies are obligated to comply."¹¹ Id.

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