MCorp v. Clarke

• Decision Date: 01 February 1991
• Docket Number: No. CA3-89-0831-F.,CA3-89-0831-F.
• Parties: MCORP and MCorp Financial, Inc., Plaintiffs, v. Robert Logan CLARKE, Comptroller of the Currency, and the Federal Deposit Insurance Corporation, both in its Corporate Capacity and in its Capacity as Receiver, and the Deposit Insurance Bridge Bank, N.A., Defendants.
• Court: U.S. District Court — Northern District of Texas

755 F. Supp. 1402

MCORP and MCorp Financial, Inc., Plaintiffs, v. Robert Logan CLARKE, Comptroller of the Currency, and the Federal Deposit Insurance Corporation, both in its Corporate Capacity and in its Capacity as Receiver, and the Deposit Insurance Bridge Bank, N.A., Defendants.

No. CA3-89-0831-F.

United States District Court, N.D. Texas, Dallas Division.

February 1, 1991.

Alan Miller, Weil Gotshal & Manges, New York City, Alan Miller, Weil Gotshal & Manges, Dallas, Tex., John D. Hawke, Jr., Pauline Heller, Howard N. Cayne, Bruce Rigelman, Arnold & Porter, Washington, D.C., Thomas W. Luce, III, Jeffrey C. King, Andrew L. Siegel, R. Doak Bishop, Kim J. Askew, Hughes & Luce, Dallas, Tex., for plaintiffs.

Stuart E. Schiffer, Acting Asst. Atty. Gen., Marvin Collins, U.S. Atty., Linda Groves, Stuart M. Gerson, Asst. U.S. Atty., Theodore Hirt, Karen Stewart (Lead Counsel), U.S. Dept. of Justice, Civil Div., Washington, D.C., L. Robert Griffin, Carol Connelly, Office of the Comptroller of the Currency, of counsel), for Robert Logan Clarke.

Michael Lowenberg, P.C., John R. Hulme, Akin Gump Strauss Hauer & Feld, Dallas, Tex., Robert J. Rosenberg, Latham & Watkins, New York City, John P. Lynch, Deborah C. Paskin, Latham & Watkins, Chicago, Ill., for Official Creditors' Committee of MCorp, MCorp Financial, Inc., & MCorp Management.

Robert W. Patterson, Nancy J. Anglin, John L. Rogers, III, Peter F. Lovato, III, William J. McKenna, John H. Spellman, Robert F. Reklaitis, Lawrence F. Bates, Steven F. Warnath, Hopkins & Sutter, Dallas, Tex., (Mark I. Rosen, Deputy Gen. Counsel, Thomas A. Schulz, Asst. Gen. Counsel, Robert G. Clark, Sr. Litigation Atty., Joan E. Smiley, Sr. Atty., F.D.I.C., Washington, D.C., of counsel), John Ratnaswamy, Hopkins & Sutter, Chicago, Ill., Lawrence F. Bates, Hopkins Sutter Hamel & Park, Washington, D.C., for FDIC.

MEMORANDUM OPINION AND ORDER

ROBERT W. PORTER, District Judge.

Before the Court are six motions: (1) the Comptroller of the Currency's Motion to Dismiss or, in the Alternative, for Summary Judgment; (2) the Comptroller's Motion to Dismiss the Complaint in Intervention of the Creditors' Committee of MCorp, MCorp Financial, Inc., and MCorp Management or, in the Alternative, for Summary Judgment as to the Complaint in Intervention; (3) the FDIC Defendants' Motion to Dismiss the Creditors' Committee's Complaint in Intervention; (4) Plaintiffs' Motion for Partial Summary Judgment; (5) the Creditors' Committee's Motion for Partial Summary Judgment; and (6) Plaintiffs' Motion to Dismiss Defendants' Counterclaim or, in the Alternative, for Summary Judgment with Respect to Defendants' Counterclaim. After careful consideration of the pleadings and exhibits in this case, the arguments of counsel, and the pertinent authorities, the Court is of the opinion that the entry of summary judgment in favor of Plaintiffs MCorp and MCorp Financial, Inc., is appropriate in this case.

I. Summary of the Facts

MCorp is a Delaware corporation and Dallas-based bank holding company that, through MCorp Financial, Inc., owned twenty-five national banks (the MBanks), with roughly eighty-five branches among them, doing business throughout Texas. MCorp owned 100 percent of the stock of MCorp Financial. In 1988, several of the MBanks faced financial difficulty. In October of that year, MCorp asked the FDIC to provide open-bank assistance so that the banks might stay afloat.¹

Instead of providing a rescue to those banks in danger of failing (MBanks Dallas, Houston and Abilene), the FDIC devised a way to bring the entire MBank network under its control. Minutes of directors' meetings of the FDIC board, of which the Comptroller of the Currency is a member, contain statements indicating that FDIC officials thought the MBanks together would prove a more attractive package to prospective buyers than would a handful of banks individually. The subsequent actions of the FDIC and the Comptroller were consistent with these statements, as the agencies planned and carried out a scheme to technically render insolvent as many MBanks as possible.

As a condition for considering open-bank assistance, the FDIC demanded MCorp agree to a so-called "Standstill Agreement." By this pact, MCorp was, for a specific period of time, to maintain the funding of its banks, particularly the troubled MBanks Dallas and Houston, consistent with the levels of funding at the time FDIC assistance was sought. This meant that other MBanks that had been lending federal funds to MBanks Dallas and Houston, to shore up those banks' liquidity, were to continue these federal funds transactions.² In exchange for this promise from MCorp, the FDIC was to actively seek a buyer for those troubled MBanks, that they might be transferred without closure.

Additional pressure to accept this agreement came from the Board of Governors of the Federal Reserve. In October 1988 the Federal Reserve Board brought charges against MCorp, alleging the holding company engaged in unsafe banking practices. The Board told MCorp, in an Amended Notice of Charges, that it should implement a plan to use all the corporation's available assets to recapitalize the troubled MBanks.

FDIC officials did have contact with several companies interested in buying MBanks, but no accord was reached. In the meantime, MBanks Dallas and Houston suffered additional losses and became insolvent, save for the regular infusions of capital they received in the form of federal funds lent by other MBanks and the borrowing capacity they were allowed at the discount window of the Federal Reserve. Other MBanks also had become insolvent, according to evaluations by the FDIC and the Comptroller.³ Rather than closing these banks, however, the FDIC chose to wait.

In late March 1989, events spurred the FDIC to action. On March 21, 1989, a group of shareholders brought an involuntary Chapter 7 action against MCorp in federal court in New York. On March 27, MCorp informed the heads of the individual MBanks of this litigation and issued a press release announcing it intended to convert the suit to a voluntary bankruptcy for reorganization under Chapter 11.⁴

Also on March 27, those individual MBanks with federal funds on loan to MBank Dallas began to demand their return. The first bank to press its demand, MBank New Braunfels, was granted in full its request for the release of $46.9 million in overnight federal funds. As more demands poured in throughout the day, employees at the MBank Dallas money desk sought the advice of James Gardner, the president of MBank Dallas. He advised his employees to withhold payment, both that day and on March 28. The affiliated banks sought a total of $502,305,000 in federal funds.

For several months, MBank Dallas had been handling its liquidity problem by obtaining advances at the discount window of the Federal Reserve Bank of Dallas. Loans from Federal Reserve banks typically are 24-hour borrowings, and the limit the Federal Reserve set on the amount it would loan MBank Dallas changed daily. On March 27, after the release of funds to MBank New Braunfels, Gardner saw that MBank Dallas was approaching its borrowing limit for the day. The FDIC and the Office of the Comptroller of the Currency (OCC) noticed this as well.

The FDIC and the OCC had been monitoring MCorp's finances on a daily basis since at least November 1988.⁵ At 6:56 p.m. on March 27, Stephen Sage, an OCC employee stationed at the MBank Dallas money desk to monitor the bank's liquidity, sent an electronic message to his supervisor in Washington, D.C., Mark O'Dell. Sage wrote that several of the MBanks had made unsatisfied demands on MBank Dallas that day and that some of the MBanks, including MBank New Braunfels, were refusing to continue with the regular practice of selling overnight federal funds to MBank Dallas. The next morning, March 28, O'Dell received electronic messages from both Sage and his co-worker, Jeris Hager. These messages stated that the MBanks were continuing to pressure MBank Dallas for the return of their funds. Also on March 28, the directors of MBanks Dallas and Houston, through their counsel, wrote to the FDIC Chairman William Seidman telling him of the liquidity crisis and requesting swift assistance. That same day, March 28, Dean S. Marriott, Senior Deputy Comptroller of the Currency, told the Federal Reserve Bank in writing that the Comptroller believed MBank Dallas "is no longer viable from either a capital or liquidity standpoint." The letter said the FDIC had decided against providing open bank assistance to the troubled MBanks, and that without aid from the FDIC or the Federal Reserve, MBank Dallas would be "liquidity insolvent." On that day, March 28, the Federal Reserve cut off MBank Dallas's line of credit and demanded immediate payment of all outstanding advances: $1.425 billion.

With its bloodline to the Federal Reserve severed, MBank Dallas did not have enough liquidity to pay the demands from its affiliates. None of the demands, including a second demand by MBank New Braunfels for the return of $17.1 million in term federal funds, were satisfied.⁶ MBank Dallas also was unable to pay back the loans it had received from the Federal Reserve.

On the evening of March 28, FDIC personnel entered the MBanks and began assessing the solvency of each one. By the next day, twenty of the twenty-five MBanks were declared insolvent.⁷ The only ones that survived were four MBanks that traded federal funds among themselves, rather than to MBanks Dallas or Houston,⁸ and MBank New Braunfels, which had been paid its $46.9 million by MBank Dallas on March 27. The banks declared insolvent were immediately placed in an FDIC-formed institution, the Deposit Insurance Bridge Bank (DIBB). They were subsequently sold to Banc One, an Ohio corporation.

II. Contentions of the Parties

In this suit, MCorp contends that the FDIC acted unlawfully in closing twelve of the MBanks.⁹ MCorp maintains...