Resolution Trust Corp. v. Federal Sav. and Loan Ins. Corp.

• Decision Date: 13 June 1994
• Docket Number: Nos. 93-2002,93-2015 and 93-2016,s. 93-2002
• Citation: 25 F.3d 1493
• Parties: RESOLUTION TRUST CORPORATION, as Conservator for Security Federal Savings and Loan Association, F.A., Plaintiff, First Southwest Financial Services, Inc., Clarence E. Ashcraft, Allen L. White, Plaintiffs-Appellees/Cross-Appellants, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, Federal Savings and Loan Insurance Corporation Resolution Fund, Defendants/Cross-Appellees, Federal Deposit Insurance Corporation, Federal Home Loan Bank Board, Director, Office of Thrift Supervision, in his own official capacity and as successor in interest to Federal Home Loan Bank Board, Defendants-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1493

25 F.3d 1493

63 USLW 2001

RESOLUTION TRUST CORPORATION, as Conservator for Security Federal Savings and Loan Association, F.A., Plaintiff First Southwest Financial Services, Inc., Clarence E Ashcraft, Allen L. White Plaintiffs-Appellees/Cross-Appellants, v. FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, Federal Savings and Loan Insurance Corporation Resolution Fund, Defendants/Cross-Appellees Federal Deposit Insurance Corporation, Federal Home Loan Bank Board, Director, Office of Thrift Supervision, in his own official capacity and as successor in interest to Federal Home Loan Bank Board, Defendants-Appellants/Cross-Appellees.

Nos. 93-2002, 93-2015 and 93-2016.

United States Court of Appeals, Tenth Circuit.

June 13, 1994.

Scott R. McIntosh, Attorney, Appellate Staff, Civ. Div., Dept. of Justice, Washington, DC, Teresa Scott, Attorney, Office of Thrift Supervision, Washington, DC (Carolyn B. Lieberman, Acting Chief Counsel, Thomas J. Segal, Deputy Chief Counsel, Aaron B. Kahn, Asst. Chief Counsel, Office of Thrift Supervision, Washington, DC, Stuart Schiffer, Acting Asst. Atty. Gen., Washington, DC, Don J. Svet, U.S. Atty., Albuquerque, NM, and Douglas N. Letter, Appellate Litigation Counsel, Dept. of Justice, Washington, DC, with them on the brief) for defendants-appellants and cross-appellees.

Paul M. Fish (Allen C. Dewey, Jr. and Lisa Mann Burke with him on the brief), Modrall, Sperling, Roehl, Harris & Sisk, P.A., Albuquerque, NM, for plaintiffs-appellees and cross-appellants.

Before MOORE and KELLY, Circuit Judges, and VAN BEBBER, District Judge. ^d PAUL KELLY, Jr., Circuit Judge.

The Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) ¹ appeal summary judgment in favor of First Southwest Financial Services, Inc. and other investors in Security Federal Savings and Loan Association (Security Federal) on their breach of contract claim. Because the Agencies breached their agreement to treat supervisory goodwill and the value of a subordinated debenture as assets for regulatory purposes, we agree that the investors properly rescinded the agreement and thus are entitled to restitution. Our jurisdiction arises under 28 U.S.C. Sec. 1291 and we affirm.

Background

Security Federal came under federal regulatory control in the 1980s. Rather than liquidate the association at a substantial loss to the Federal Savings and Loan Insurance Corporation (FSLIC), the regulators solicited First Southwest and two additional investors, Clarence E. Ashcraft and Allen L. White, (hereinafter collectively "the Investors"), to invest in and to operate a new savings and loan association, "New Security", as successor to Security Federal.

Under then applicable law, FSLIC and FHLBB had broad discretion in the use of accounting measures to facilitate mergers and acquisitions of savings and loan associations (S & Ls), 12 U.S.C. Sec. 1464(d)(11) (1982), as well as in enforcement of capitalization requirements, see 12 U.S.C. Sec. 1464(d)(1) (1982). Accounting for intangible assets created in the course of a merger or acquisition, such as supervisory and regulatory goodwill, assisted regulators in managing the burgeoning insolvencies and the ensuing liabilities of the FSLIC insurance fund. Both practices were departures from generally accepted accounting principles (GAAP). Accounting for supervisory goodwill allowed the S & L to treat unrealized losses as an intangible asset in order to comply with regulatory capitalization requirements, with amortization over a long period of time. This accounting treatment facilitated acquisitions of failing S & Ls and the necessary absorption of non-performing loans and overvalued collateral. Regulatory goodwill allowed the new S & L to record financial assistance from FSLIC as an intangible asset which also contributed to capitalization for compliance purposes. See H.R.Rep. No. 101-54(I), 101st Cong. 1st Sess. 302, reprinted in 1989 U.S.C.C.A.N. 86, 94.

Supervisory and regulatory goodwill played crucial roles in the acquisition of "Old Security," a mutual thrift institution owned by its depositors, by "New Security", a stock association owned by its investors. Unrealized losses--the excess of cost over the value of the assets at the time of New Security's acquisition--became $12.5 million of supervisory goodwill, amortized over 35 years. In addition, Old Security had a $7.4 million debt which it owed to FSLIC. New Security assumed this debt, which was restructured as a subordinated debenture with a ten year term. FSLIC and FHLBB then treated the amount associated with the debenture as regulatory capital as well.

The recapitalization was completed with a $6 million cash investment from the Investors, and a $14 million cash contribution from FSLIC. Nevertheless, without supervisory and regulatory goodwill, the capitalization would have fallen short of regulatory compliance by $6.5 million. See Affidavit of Phillip J. DeWald, Aplt.App. at 62.

The Investors' agreement to acquire the failing Security Federal and the Agencies' forbearance from GAAP necessary for the fledgling enterprise to succeed were memorialized in three documents: the Assistance Agreement, dated October 3, 1985; FHLBB Resolution 85-887, dated October 2, 1985, (FHLBB Resolution); and a letter to Security Federal from FHLBB, dated October 4, 1985, (FHLBB Letter). Security Federal then operated successfully from late 1985 until 1990. See Affidavit of Phillip J. DeWald, Aplt.App. at 62-63.

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub.L. No. 101-73, 103 Stat. 183 (1989), raised capital requirements and severely restricted the use of supervisory and regulatory goodwill, eventually phasing them out altogether. See 12 U.S.C. Sec. 1464(t) (1989). This change had disastrous ramifications for S & Ls such as Security Federal, whose successful operations depended, at least initially, on continued use of supervisory and regulatory goodwill for compliance with capitalization regulations.

On February 8, 1990, the Office of Thrift Supervision, successor to FHLBB, notified Security Federal by letter that it would apply the new FIRREA regulations to the S & L, and that OTS now considered Security Federal insolvent. In addition, OTS required Security Federal to infuse new capital and forbade it to make new loans, investments or to increase assets without OTS approval.

Shortly thereafter, on March 6, 1990, the Investors notified OTS that they were rescinding the agreement to acquire Old Security. They identified frustration of purpose, failure of consideration and breach of material terms of the agreement as bases for rescission. They tendered their stock in New Security to OTS and requested the return of their $6 million capital contribution. The Investors filed suit when OTS refused the tender, seeking rescission and restitution, declaratory and injunctive relief, damages, and mandamus relief directing FDIC to consider Security Federal's request for assistance.

In granting summary judgment on the Investors' breach of contract claim, the district court determined that no genuine issues of material fact existed between the parties. Security Fed. Sav. & Loan Ass'n v. FSLIC, 796 F.Supp. 1435, 1442 (D.N.M.1991). The court held that treatment of goodwill as regulatory capital was an express term of the overall contractual agreement. Id. at 1444. It determined that sections 11 and/or 17 of the Assistance Agreement incorporated the FHLBB Resolution and the FHLBB Letter. Id. The court reasoned that the supervisory goodwill treatment was fundamental to the agreement because the new institution was otherwise instantly insolvent, making the overall transaction senseless. Id. at 1445. The court noted that "no rational investor would have participated under those conditions." Id. Finally, the court observed that promoting certainty by holding the government to its bargain furthers the public interest by encouraging private investment in regulated industries. Id. at 1446. It held that OTS breached the 1985 agreement when it applied FIRREA's new regulations to Security Federal. Id. at 1447. Accordingly, the court ordered rescission and restitution.

We review de novo a grant of summary judgment and we apply the same legal standard used by the district court in evaluating the motion, namely Fed.R.Civ.P. 56(c). Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990). Summary judgment is appropriate if "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2511-12, 91 L.Ed.2d 202 (1986)).

I. The Investors as Parties

The Agencies argue that the Investors cannot state a claim for relief under the Assistance Agreement. According to the Agencies, the Investors are third-party beneficiaries whose rights are restricted by section 20 of the Assistance Agreement, which states that the agreement is for the sole benefit of FSLIC and New Security.

This argument appears somewhat akin to either a claim for dismissal under Fed.R.Civ.P. 12(b)(6), or an assertion that the Investors are not the real parties in interest under Fed.R.Civ.P. 17(a). Under either characterization, the Agencies waived the argument when they failed to raise it before liability was established. They did not file a motion to dismiss, raise the issue in a responsive pleading, nor raise it when the court considered the Investors' summary judgment motion on liability. Fed.R.Civ.P. 12(h)(2). Rather, they merely mentioned it at oral argument on the Investors' summary judgment motion for relief. Their interjection of the issue at such a late stage in the proceedings was untimely and constituted a waiver. Harris v. Illinois-California Express, Inc., 687 F.2d 1361, 1373-74 (10th Cir.1982) (citing Audio-Visual...