Woods v. Federal Home Loan Bank Bd.
| Decision Date | 27 August 1987 |
| Docket Number | 87-1272,Nos. 86-1750,s. 86-1750 |
| Citation | 826 F.2d 1400 |
| Parties | Jarrett E. WOODS, Jr., et al., Plaintiffs-Appellants, v. FEDERAL HOME LOAN BANK BOARD, et al., Defendants-Appellees (Two Cases). |
| Court | U.S. Court of Appeals — Fifth Circuit |
Erwin N. Griswold, Jones, Day, Reavis & Pogue, Terence M. Murphy, John B. Rizo, Dallas, Tex., Vaughn, Lynn & Hightower, Michael J. Vaughn, Waco, Tex., for plaintiffs-appellants in No. 86-1750.
Paul W. Grace, Washington, D.C., Butler & Binion, Hayden Burns, Kevin F. Risley, Houston, Tex., Fed. Home Loan Bank Bd., Office of Gen. Counsel, Kathleen Flake, Washington, D.C., for defendants-appellees in No. 86-1750.
Erwin N. Griswold, Waco, Tex., Terence M. Murphy, John B. Rizo, Dallas, Tex., Michael J. Vaughn, Waco, Tex., for plaintiffs-appellants in No. 87-1272.
Paul W. Grace, Asst. Gen. Counsel, Federal Home Loan Bank Bd., Kathleen Flake, Washington, D.C., Peter B. Freeman, Three First Nat. Bank Plaza, John L. Rogers, III, Chicago, Ill., James V. Hammett, Jr., Kevin F. Risley, Houston, Tex., Diane M. Kozub, Asst. U.S. Atty., Dallas, Tex., for defendants-appellees in No. 87-1272.
Appeals from the United States District Court for the Northern District of Texas.
Before CLARK, Chief Judge, BROWN, and JOHNSON, Circuit Judges.
This consolidated appeal involves the appointment by the Federal Home Loan Bank Board (Bank Board) of the Federal Savings and Loan Insurance Corporation (FSLIC) as receiver for Western Savings Association (Western) on September 12, 1986. The Bank Board determined that Western (1) was insolvent, (2) had suffered substantial dissipation of assets due to violations of regulations and unsafe or unsound practices by its management, and (3) was in an unsafe and unsound condition to transact business. See Home Owners' Loan Act, 12 U.S.C. Sec. 1464(d)(6)(A)(i), (ii), and (iii). Plaintiffs filed suit in the district court, seeking removal of the receiver and interim injunctive relief to restrain the receiver from transferring any of Western's assets. The district court immediately denied plaintiffs' request for an injunction. After review of the administrative record and consideration of the parties' arguments, the district court granted the Bank Board's motion for summary judgment, finding no genuine issue of material fact as to whether the decision to appoint the receiver was supported by the administrative record, was not arbitrary or capricious, and was based on three enumerated statutory grounds. Plaintiffs appealed both rulings, and this court consolidated the appeals.
The district court correctly applied the arbitrary or capricious standard in reviewing the Bank Board's decision to appoint a receiver for Western. That court also correctly concluded that no genuine issue of material fact existed as to whether the Bank Board's determination to appoint a receiver was supported by the record. The review procedure provided by Congress in Sec. 1464(d)(6)(A) is constitutional, and plaintiffs were not denied due process. We affirm.
Jarrett E. Woods, Jr. acquired Western on August 30, 1982. At that time, Western was a relatively small savings and loan association with reported assets of about $34 million. After Woods' acquisition, he made a substantial change in the strategy and business operation of the institution. Woods pursued an aggressive growth policy, relying on brokered deposits and so-called "jumbo" deposits of $100,000 or more. Investments shifted from single family, home mortgage loans to acquisition, development and construction loans, commercial real estate loans, and other commercial ventures. By June 30, 1986, Western reported assets of more than $1.9 billion.
Between October 1982 and September 1986 the Bank Board conducted a series of examinations of Western. In February 1984, Bank Board examiners filed a supervisory "adverse rating report" identifying Western's rapid growth and Woods' higher-risk commercial lending practices. The examiners found serious underwriting deficiencies in highly speculative ventures which included loans to borrowers of unsubstantiated creditworthiness and loans in excess of a property's purchase price. The examiners also found improperly documented large-scale loans to officers and shareholders of other Texas savings associations, as well as improperly documented participation by Western in loans granted by these other associations.
This initial examination led to a special examination in March 1984, which focused on Western's portfolio of real estate loans. This examination reviewed a sample of fifteen real estate loans of $1,000,000 or more and found each loan was made by Western without borrower equity. A majority of these loans were "wrapped around" existing loans, and, as a result, Western's liens were subordinate to the liens of other lenders. At least one loan was identified as a "flip"--where property was resold at an inflated price the day it was purchased. This did not appear to the examiners to be an arm's length transaction. Problems with lack of documentation were abundant.
A June 1984 examination of Western's commercial loans and financial accounting practices further revealed improperly substantiated credit information. For example, Western had made loans without obtaining current financial statements of the borrowers and failed to determine the value of the collateral securing the loans. The examiners also found that Western had inflated its reported net worth by more than $18 million through improper accounting.
The results of these examinations were furnished to both Western and the Bank Board. On June 22, 1984, the Bank Board adopted a resolution stating that Western "has engaged in unsafe and unsound practices in violation of the [National Housing Act, 12 U.S.C. Sec. 1730(e)(1) ]" and who issued a Temporary Cease and Desist Order along with a notice of Western's right to an administrative hearing to be conducted in accordance with the adjudicative provisions of the Administrative Procedure Act (APA), 5 U.S.C. Secs. 554-57. Western waived its rights to such a hearing and on July 27, 1984 consented to an Order to Cease and Desist. The order required, inter alia, that Western obtain proper appraisal reports as a condition for loans secured by real property, comply with regulations governing loans to one borrower, and conform its accounting practices to Bank Board requirements.
Further examinations by the Bank Board disclosed, however, that Western did not alter its practices. They noted Western's lack of compliance with the cease and desist order's requirements as well as additional unsound practices. A January 1985 examination found unacceptable loan concentrations, losses of more than $11 million on problem loans, continuing irregularities in accounting and appraisals, purchases of new participations in the loans of other associations, new violations of the limitation on loans to one borrower, and other questionable or prohibited practices. A February 1986 examination found that Western's loans totalled well over $1 billion. The examiners also found that 1985 losses had reduced Western's reported net worth to only 1.7 percent of total assets, which was below the legal minimum. See 12 C.F.R. Sec. 563.13(b). This examination also disclosed new loans without borrower equity, new loans without proper appraisals, and additional violations of the "loans to one borrower" limitations. An interim report in March 1986 questioned the high percentage of loans funded by jumbo and brokered deposits, extensive transactions between Western and a corporation whose board of directors included both Woods and Western's assistant secretary, and four more loans made in violation of the one-borrower limitations.
The examiners' findings and recommendations were the product of a long period of supervision. This process included numerous meetings and informal conversations between the examiners and Western's management and board of directors to discuss the Bank Board's concerns; analysis of Western's loan files and its monthly, quarterly, and annual financial statements; appraisals of the property securing the loans by outside experts; and a report prepared by Western's auditors. At all times it was or should have been apparent to Western that the examiners' efforts were producing a voluminous administrative record of the entire investigation.
Based on this record the Bank Board determined first that, despite a reported net worth of more than $65 million as of June 30, 1986, Western was actually insolvent by at least $56 million based on real estate and other losses of over $120 million not reflected in Western's books. The Bank Board found second that these losses were the result of violations of laws and regulations and unsafe or unsound practices. Based on Western's insolvency, the composition of its loan portfolio, and the apparent refusal of Western's management to utilize sound lending practices--as evidenced by Western's consistent actions and its non-compliance with the cease and desist order--the Bank Board concluded third that Western was in an unsafe and unsound condition to transact business. Pursuant to finding the existence of the above statutory grounds, see 12 U.S.C. Sec. 1464(d)(6)(A), the Bank Board appointed the FSLIC as receiver on September 16, 1987. The FSLIC immediately transferred Western's assets to a newly created federal savings and loan institution--Western Federal Savings and Loan Association.
Plaintiffs Woods, Western, Western's parent corporation, and a Western vice-president originally filed this action in June 1986 in an attempt to enjoin the appointment of a receiver. 1 The district court denied the request for an injunction. After the appointment of the receiver, plaintiffs amended their complaint to seek removal of the receiver--an action authorized under Sec. 1464(d)(6)(A)--as well as...
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