Northwest Racquet Swim & Health Clubs, Inc. v. Resolution Trust Corp.
| Decision Date | 28 February 1991 |
| Docket Number | Nos. 89-5526 and 89-5585,s. 89-5526 and 89-5585 |
| Citation | 927 F.2d 355 |
| Parties | NORTHWEST RACQUET SWIM & HEALTH CLUBS, INC., a Minnesota corporation, Appellant, v. RESOLUTION TRUST CORPORATION, as receiver for Midwest Federal Savings and Loan Association and Midwest Savings Association, F.A., Appellees. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Kay Nord Hunt of Minneapolis, for appellant.
John Paul Martin, Minneapolis, for appellees.
Before McMILLIAN, Circuit Judge, BRIGHT, Senior Circuit Judge, and BOWMAN, Circuit Judge.
Northwest Racquet Swim & Health Clubs, Inc. (Northwest) appeals the district court's 1 grant of summary judgment 2 in favor of the Resolution Trust Corporation (RTC) in this action for rescission of subordinated debt securities purchased from now insolvent Midwest Federal Savings and Loan Association (MWF). On appeal, Northwest contends that MWF's insolvency does not affect its right to rescind the securities which MWF fraudulently induced it to purchase. Northwest further asserts that its post-insolvency act of rescission of the securities elevated the subordinated debt to general creditor status, entitling it to set off the debt against its promissory note obligations to MWF. We affirm the judgment of the district court and substantially agree with its well-reasoned opinion.
On December 29, 1987, Northwest, a developer and operator of health clubs, purchased $15 million in subordinated debt securities (Securities) in a private offering by MWF, a Minneapolis based, federally insured savings and loan association. Northwest financed its investment with funds from two promissory notes totaling $59 million which it had previously executed with MWF also in December 1987. 3 The Securities contained language expressly subordinating Northwest's claim, in the event of liquidation, "to all claims against [MWF] having the same priority as savings account holders or any higher priority." 4 Joint Appendix (J.A.) 33. The parties also entered into a subordinated debt securities agreement (Agreement) which similarly subordinated Northwest's claim in the event of the liquidation of MWF. 5
The Agreement specified Northwest's remedies in the event of default. Events of default included failure to make timely payment of the principal or interest due, declaration of insolvency, or the appointment of a conservator, receiver or liquidating agent. A default would also arise in the event that "any representations or warranty made in writing by or on behalf of [MWF] herein or in connection with the transactions contemplated hereby shall prove to have been false or incorrect in any material respect on the date as of which made." J.A. 36.
In the event of a default, the remedies section provided that Northwest could act to protect and enforce its rights by instituting an action in law, suit in equity, or other appropriate proceeding. However, the Agreement placed three significant limitations upon Northwest's rights, powers and remedies. First, Northwest could accelerate payment in the event of default only to the extent that such payment did not leave MWF with insufficient capital to meet regulatory capital requirements set out in 12 C.F.R. Sec. 563.13 (1988). Second, in the event the Federal Savings and Loan Insurance Corporation (FSLIC) was appointed receiver for MWF, FSLIC would have no obligation to arrange for the assumption of the Securities. Finally, the Agreement bound Northwest to abide by the priority scheme set out in Federal Home Loan Bank Board 6 (Bank Board) regulations governing the distribution of assets in liquidation proceedings. 7
The sale of the Securities was contingent upon Bank Board approval pursuant to 12 C.F.R. Sec. 563.8-1 (1988), governing the issuance of subordinated debt securities by federal savings and loan associations. The Bank Board, on December 21, 1987, approved the sale and issuance of up to $25 million in MWF subordinated debt securities.
On December 31, 1987, MWF applied the Securities to its regulatory capital, where it constituted more than ten percent of MWF's total regulatory capital through November 1988. 8 In January 1989, however, the Bank Board issued a directive ordering MWF to prospectively remove the Securities from regulatory capital because Northwest had purchased them with funds it had borrowed from MWF on an unsecured basis. MWF, accordingly, did not report the Securities as regulatory capital in its 1988 fourth quarter report to the Bank Board.
Publicity concerning MWF's troubled financial condition prompted Northwest, by letter dated January 25, 1989, to notify MWF that it considered the subordinated debt security to be in default. The letter stated that the events of default "include[d] but are not limited to breach of representations and warranties" made in the Agreement regarding the financial condition of MWF. J.A. 197. Northwest accordingly declared that it was exercising its remedies as set forth in the Agreement. Specifically, Northwest declared an acceleration of payment of the balance of the principal and demanded immediate payment "in the manner and with the effect provided in the Debenture Agreement." J.A. 198. Northwest also declared an immediate setoff of any remaining amount against its promissory note obligations to MWF.
On February 13, 1989, the Bank Board declared MWF insolvent after finding that its obligations to its creditors (including savings account holders) exceeded its assets. Accordingly, the Bank Board, acting pursuant to its statutory authority under 12 U.S.C. Sec. 1464(d)(6)(A)(i) (1988), named FSLIC as conservator of MWF. FSLIC attempted to operate MWF as a going concern. On March 10, 1989, Northwest again informed MWF by letter that it had concluded that the sale of the Securities had "involved the misrepresentation of material facts and willful failure to disclose material facts ... pertaining to the financial condition of [MWF]." J.A. 201. This time, however, rather than assert its contractual remedies as it did in the January 25 letter, Northwest tendered the Securities in rescission and declared an immediate setoff of the amount due against the balance of the two promissory notes held by MWF.
Northwest formalized its allegations of fraud by filing the complaint giving rise to this action in April 1989. The complaint, as later amended, alleged that MWF's material misrepresentations and nondisclosures at the time of the transaction violated state and federal securities laws. 9 Northwest asked the court to declare the Securities and the Agreement rescinded. It further sought a declaration that the rescission elevated the Securities obligation to general creditor status. According to Northwest, the elevation of the Securities to general creditor status meant that the debt possessed a mutuality of obligation with the two promissory notes, entitling it to set off the Securities against the notes.
On May 4, 1989, the Bank Board, noting that MWF's liabilities continued to exceed its assets, concluded that MWF could not be operated as a going concern. Acting under statutory authority, 12 U.S.C. Sec. 1464(d)(6)(A) (1988); 12 C.F.R. Sec. 547 (1988), the Bank Board appointed FSLIC as receiver for the purpose of liquidating MWF. Accordingly, FSLIC, by operation of law, took possession of MWF and succeeded to all of MWF's rights, titles, powers, and privileges. See 12 U.S.C. Secs. 1464(d), 1729 (1988). In addition, the Bank Board determined that the total liquidation of MWF would not generate sufficient funds to satisfy the claims of MWF's general creditors, thus, it formally declared all subordinated debt and equity interests in MWF to be worthless. 10
The Bank Board also contemporaneously created a new savings and loan association, Midwest Savings Association (Midwest Savings), to facilitate the liquidation of MWF and the reorganization of its assets. The Bank Board immediately placed Midwest Savings under FSLIC conservatorship. It further directed FSLIC to enter into a purchase and assumption agreement with Midwest Savings, transferring most of MWF's assets to Midwest Savings in consideration for Midwest Savings' assumption of certain MWF liabilities.
Under the purchase and assumption agreement, Midwest Savings did not assume any MWF equity liabilities or obligations, including the subordinated debt securities at issue here. As a result of this transaction, the obligations arising from the Securities remained with FSLIC, as receiver for MWF, while Midwest Savings assumed possession of the promissory notes against which Northwest sought to exercise its claimed right of setoff. Northwest accordingly amended its complaint to include Midwest Savings as a defendant and requested that the court preliminarily enjoin Midwest Savings from further selling or transferring the notes which Northwest sought to set off.
FSLIC filed a Fed.R.Civ.P. 12(b)(6) motion to dismiss for failure to state a claim. The district court, finding that the disposition of the motion turned on matters outside the pleadings, treated it as a motion for summary judgment and ruled in favor of FSLIC. The district court adopted the analysis of the Second Circuit in In re Weis Securities, Inc., 605 F.2d 590 (2d Cir.1978), cert. denied, 439 U.S. 1128, 99 S.Ct. 1045, 59 L.Ed.2d 89 (1979), and held, as a matter of law, that because MWF had applied the funds from the sale of the Securities to its regulatory capital accounts, Northwest was precluded from rescinding the Securities after the Bank Board had declared MWF insolvent. The Securities, therefore, remained subordinated, and thus lacked the requisite mutuality of obligation necessary to set them off against the two promissory notes. 11 Northwest filed this appeal in which it renews the arguments it presented before the district court. 12
We review a grant of summary judgment under the same standard applied by the...
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