# Appendix — Northwest Racquet Swim & Health Clubs, Inc. v. Resolution Trust Corp.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1991
- **Citation:** 502 U.S. 815

## Text

In the

Supreme QDourt of the United States
October Term, 1990

STEPHEN ADAMS,
Petitioner,
v.

RESOLUTION TRUST CORPORATION, as receiver for
MIDWEST FEDERAL SAVINGS AND LOAN 24

ASSOCIATION,
HAROLD W. GREENWOOD, JR.; DONALD SNEDE; and JOHN
DOES 1-10,
Respondents,
and
STEPHEN ADAMS,
Petitioner,

¥.

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
as manager of the FSLIC RESOLUTION FUND,
Respondent.

APPENDIX
TO PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

TIMOTHY D. KELLY

JOHN E. GRZYBEK

3720 IDS Center

Minneapolis, Minnesota 55402
. (612) 349-6171

Attomeys for Petitioner
May 29, 1991

1991 — Bachman Lega! Printing, 835 Second Ave. So., Mpls., MN 55402 — (612) 339-9518
@ FAX 612-337-8053

[4s

APPENDICES

Page
Appendix A
The Court of Appeals Decision,
A R lution Tr
Corp., et al., dated February 28,
cc Sp en erie aaa la
Appendix B

The Court of Appeals Judgment,
Adams v. Resolution Trust

Corp., et al., dated February 28,
CS eas os 5 es 6-6 086 wos 6:6 6b eee '29a

Appendix C

The Court of Appeals Decision,

Northwest Racquet Swim &
Health Clubs, Inc., v.

Resolution Trust Corp.,
et al., dated February 28,
WE a as Gk os oO Oe eee ee 31a

Appendix D

The District Court Decision,

Adams v. Resolution Trust

Corporation, dated February 9,
1990, as amended March 2,

Appendix E

The District Court ee
- ms v. Federal De it

ns. Corp., dated ola rx
oes et ee a ar a ae ee 98a

|

Appendix F

Statutes Relied Upon

eee. @ 6S .........
co. 96 ee, © 1444a ......
Ste. 02 0.8.€. § 1729 .......

Regulations Relied Upon
a 12 C.F.R. § 563.8-1

a sau bo 6 64 0 000 e
Iz. 12 €.9.8. § 563.13

PTC SESE kisses ce
III. 12 C.F.R. § 567.2(a)

i Oe
Appendix G

Transcript of Motion
Proceedings Before The
Honorable James M.
Rosenbaum, United States
District Court, dated

August 24, 1989 .............

ii

‘APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 90-5123

Stephen Adams,
Appellant,
Vv.

Resolution Trust Corporation as
Receiver for Midwest Federal
Savings and Loan Association;
Harold W. Greenwood, Jr.;
Donald Snede; and John

Does 1-10,

Appellees.

No. 90-5124

Stephen Adams,
Appellant,
Vv.
Federal Deposit Insurance
Corporation (FDIC) as manager

of the FSLIC Resolution Fund,

Appellee.

la

+ + + HF H HH HF HH HH HF HK

+ + * H HF HF HK F

Appeals from the United States
District Court for the
District of Minnesota.

Submitted: September 12, 1990

Filed: February 28, 1991

Before McMILLIAN, Circuit Judge, BRIGHT,
Senior Circuit Judge, and BOWMAN, Circuit
Judge.

BRIGHT, Senior Circuit Judge.

Stephen Adams (Adams) appeals’ the
district court's’ grant of summary
judgment? te the Resolution Trust
Corporation (RTC) in this action for
rescission of a subordinated debt
securities agreement which Adams executed

in conjunction with his purchase of $2.5

‘The Honorable James M. Rosenbaum,
United States District Judge for the
District of Minnesota.

*The district court's decision is

reported as Adams v,. Resolution Trust
Corp., 731 F. Supp. 352 (D. Minn. 1990).

2a

million in subordinated debt securities
from now insolvent Midwest Federal
Savings and Loan Association (MWF). On
appeal, Adams contends that MWF's
insolvency does not affect his right to
rescind the agreement by which MWF
fraudulently induced him to purchase the
securities. According to Adams, a post-
insolvency rescission would elevate the
subordinated debt to general creditor
status, entitling him to set off the debt
against a promissory note he executed in
favor of MWF. Adams also contends that
the district court should not have
dismissed as moot his common law fraud
claim against the RTC, in its capacity as
receiver for MWF, merely because MWF
possessed insufficient funds to satisfy
a successful damages judgment. Finally,

he contends that the district court erred

in dismissing his related claim against

the Federal Deposit Insurance Corporation
(FDIC) for violating ratable distribution
principles in disposing of MWF's assets.
We affirm.
I. BACKGROUND

This case arises out of the failure of
the Minneapolis based Midwest Federal
Savings and Loan Association (MWF) which
we visited in Northwest Racquet Swim

Health Clubs Inc. v. Resolution Trust

Corp., Nos. 89-5526, 89-5585, slip op.
(8th Cir. Feb. __, 1991) -- a companion
case which we discuss below. Stephen
Adams, a Florida businessman with
interests in banking, broadcasting and
publishing, purchased $2.5 million in
subordinated debenture securities
(Securities) from MWF on March 31, 1988.
Adams financed the purchase with funds he
borrowed on an apparently unsecured

promissory note he executed in favor of

4a

MWF at the time he _ purchased the
Securities. On the same day, Adams
executed a subordinated debt securities
agreement (Securities Agreement) setting
out the terms and conditions of the
purchase.

The Securities Agreement expressly
subordinated Adams's claims in the event
of MWF's liquidation, "to all claims

against [MWF] having the same priority
as savings account holders or any higher

priority."

Joint Appendix (J.A.) 66.
It also specified the remedies to apply

in the event of default. The Securities

‘The priority scheme governing
claims against an insolvent’ thrift
institution placed savings account
holders in the sixth priority position
after various administrative costs,
expenses and debts associated with the
operation of the receivership, various
wage and benefits claims of the employees
of the failed thrift, and certain
government tax claims. 14: C.F. FS
569c.11 (1989).

———eOOoO7OT

Agreement defined default as including
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 . . . shall prove to have
been false or incorrect in any material
respect on the date as of which made."
J.A. 69.

In the event of a default, the remedies
section provided that Adams could protect
and enforce his rights by an action in
law, suit in equity, or other appropriate
proceeding. However, the Securities
Agreement placed three significant
limitations upon Adams' rights, powers

and remedies. First, he 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. §. 563.13 (1968).
Second, in the ‘event that the Federal
Savings and Loan Insurance Corporation
(FSLIC) was appointed receiver of MWF,
FSLIC would have no obligation to arrange
for _the assumption of the Securities.
Finally, the Securities Agreement bound
Adams to abide by the priority scheme set
out in the Federal Home Loan Bank Board’
(Bank Board) regulations governing the

distribution of assets in liquidation

“The Federal Home Loan Bank Board
acted as the principal regulator of the
federal savings and loan industry until
August 9, 1989, when Title IV of the
Financial Institutions Reform, Recovery
and Enforcement Act of 1989, Pub. L. No.
101-73, 103 Stat. 354, abolished the Bank
Board and replaced it with the Office of
Thrift Supervision.

proceedings.”

The sale of the Securities was
contingent upon Bank Board approval
pursuant to 12 C.F.R. § 563.8-1 (1988),
governing the issuance of subordinated
debt securities by federal savings and
loan associations. By letter dated March
31, 1988, Donald Snede, MWF's’ chief
financial officer, stated that the Bank
Board had approved the issuance of the
note. The Bank Board apparently had
given prior approval, on December 21,
1987, to the sale and issuance of up to
$25 million in MWF subordinated debt

securities.

| *under the regulatory priority
scheme, see note 4, the claims of
subordinated debt holders like Adams held
a ninth rank priority, behind the claims
of all general creditors, and ahead only
of equity interest holders. 12C.F.R. §
569c.11 (1989).

MWF immediately applied the Securities
to its regulatory capital.° From March
31, 1988 through November 1988, the Bank
Board recognized the Securities as part
of MWF'’s regulatory capital. In January

1989, however, the Bank Board issued a

°Regulatory capital is the sum of,
inter alia, reserve accounts, retained
earnings, permanent common stock,
securities which constitute permanent
equity capital, appraised equity capital
and any other nonwithdrawable accounts
which constitute the institutions
reserves available for satisfying the
claims of depositors and other account
holders. See 12 C.F.R. § 561.13 (1988).
Pursuant to statutory authority, 12
U.S.C. § 1464(s) (1988), the Bank Board,
and its successor, the Office of Thrift
Supervision (OTS), sets the minimum
capital requirements for the industry.
Since 1973, the Bank Board or OTS has
permitted thrift institutions to include
long-term subordinated debt securities as
part of their regulatory capital because
such securities possess many of the
characteristics of permanent capital. 54
Fed. Reg. 34,148 (1989) (commentary
accompanying Final Rule amendments to
regulations governing the issuance and
use of subordinated debt (codified at 12
C.9.R.s @& $63.73 (1969))); 12 C.FR. §
561.13 (1988).

directive ordering MWF to prospectively
remove the Securities from regulatory
capital because Adams had purchased them
with funds he had borrowed from MWF on an
unsecured basis.

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 exercised its’ statutory
authority under 12 U.S.C. § 1464(d)
(6)(A)(i) (1988), and named FSLIC as
conservator of MWF. FSLIC attempted to
operate MWF as a going concern.

On March 21, 1989, Adams filed the
initial complaint against MWF and its
ottiows which gave rise to this action.
Adams brought claims for violations of
federal and state securities laws,

alleging that MWF had _ fraudulently

10a

induced him to purchase the Securities by
making material misrepresentations
regarding its financial condition at the
time of the transaction.’ Adams asked
the court to declare the Securities
Agreement subordinating the investment
rescinded and to set off the unpaid
balance of the Securities obligation

against a $7,485,000 promissory note

7Adams alleged that MWF and its
officers did not disclose that one of its
assets, which was carried on its books at
over $100 million, was the subject of a
legal dispute which brought its actual
value into question. The dispute over
the asset, currently the subject of
litigation in federal court, brought into
question at least $100 million of MWF's
$140 million regulatory capital base,

according to Adams. He asserted that
MWF's nondisclosure and the resulting
misrepresentations regarding its

financial condition violated § 10b of the
Securities Exchange Act of 1934, 15
U.S.C. § 783(b), Rule 10b-5 of the
Securities Exchange Commission, 17 C.F.R.
§ 240.10b-5 (1988), § 12(2) of the
Securities Act of 1933, 15 U.S.C. § 771,
and Minn. Stat. § 80A.01 (1986), and also
constituted common law fraud and breach
of contract.

lla

which he owed to MWF.®° He also sought
damages for common law fraud.

Soon after, on April 7, 1989, MWF
informed Adams that it would default on
the 1989 first quarter interest payment
due on the Securities. 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. The Bank
Board, acting _ pursuant to statutory
authority, 12 U.S.C. § 1464(d)(6)(A)
(1988); 12 C.F.R. § 547 (1988), appointed
FSLIC as receiver for the purpose of
liquidating MWF. FSLIC, by operation of
law, thus took possession of MWF and
succeeded to all of MWF's rights, titles,
powers and privileges. See 12 U.S.C. §§
1464(d), 1729 (1988). In addition, the

Bank Board determined that the total

®See note 3.
12 a

liquidation of MWF would not generate

sufficient funds to satisfy the claims of
MWF's general creditors. Therefore, it
formally declared all subordinated debt
and equity interests in MWF to be
mithises.’

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

*The settlement of claims in the
event of liquidation proceeded under an
absolute priority scheme, meaning that
ninth and tenth priority subordinated
debt and equity holders could receive
treatment of their claims only after all
claims of the first eight ranks had been
fully settled. See 12 C.F.R. §
569c.11(d) (1989). Thus, the Bank
Board's determination that MWF's assets
were insufficient to satisfy the claims
of seventh priority general creditors
meant that no money remained for the
claims of ninth priority subordinated
debt holders like Adams.

13a

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 subordinated debt or equity
liabilities or obligations, including the
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.

14a

Adams responded to these regulatory
actions by discontinuing payment on the
promissory note now held by Midwest
Savings. He also filed a_é second
complaint, on June 28, 1989, against
FSLIC in its corporate capacity, in which
he contended that the purchase _ and
assumption agreement violated ratable
distribution principles implicit in the
statutory provision governing the
liquidation of failed thrifts, 12 U.S.C.
§ 1729 (1988). Adams contended that
FSLIC should not have transferred Adams'
$7,485,000 note to Midwest Savings
because it knew that Adams sought to set
it off against the Securities which FSLIC
also knew MWF had fraudulently induced
Adams to purchase. Adams contended that
his rescission entitled him to share in
the pro rata distribution of MWF's assets

to the general creditors. Adams

consequently asked the court to declare
the purchase and assumption agreement
invalid and permit him to set off the
Securities obligations against his MWF
loan obligations now held by assignee
Midwest Savings.

In February 1990, the district court
granted FSLIC's motion for summary
judgment in the first action. Adams v.
Resolution Trust Corp., 731 F. Supp. 352
(D. Minn. 1990)."° The district court

adopted the analysis of the Second
Circuit in In re Weis Sec., Inc., 605

"in August 1989, as part of the
overhaul of the thrift industry embodied
in the Financial Institutions Reform,
Recovery and Enforcement Act, Congress
abolished Federal Savings and_ Loan
Insurance Corporation (FSLIC) and
replaced it with the Resolution Trust
Corporation (RTC). Pub. L. No. 101-73,
Title IV, 103 Stat. 354 (1989). During
the pendency of the proceedings before
the district court, the parties
accordingly stipulated to the
substitution of RTC, for FSLIC, as
receiver of MWF.

16a

F.2d 590 (2d Cir. 1978), cert. denied,
439 U.S. 1128 (1979), and held, as a
matter of iaw, that because MWF had
applied the funds from the sale of the
Securities to regulatory capital, Adams
was precluded from rescinding the
Securities Agreement 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
promissory note.

The district court also dismissed as
moot Adams' claim for common law fraud.
The Bank Board's determination that
Adams' subordinated debentures were
worthless because MWF's assets’ were
insufficient to satisfy general creditor
liabilities meant, according to the

district court, that FSLIC, as receiver,

17 4

simply had no assets with which to
satisfy a judgment if Adams were to
succeed on his common law fraud damages
claim. Thus, the court dismissed the
damages action on prudential grounds.

In a separate proceeding, the district
court also dismissed Adams' second action
against FSLIC seeking to invalidate the
purchase and assumption agreement with

, The district court

Midwest Savings. '
again held that because Adams could not
rescind the Securities Agreement, he
remained a subordinated interest who had

no right to participate in the pro rata

distribution of assets to the general

“puring the pendency of this action,
Congress abolished FSLIC, in its
corporate capacity, and replaced it with
the Federal Deposit Insurance Corporation
(FDIC). Financial Institutions Reform,
Recovery and Enforcement Act of 1989,
Pub. L. No. 101-73, Title IV, 103 Stat.
354. FDIC, accordingly, now stands in
FSLIC's place as defendant and appellee
in Adams, second filed action regarding
the purchase and assumption agreement.

18a

a aaa Nati bates OS TRE Op RRR A TY

creditors."

Adams filed this consolidated appeal.
II. DISCUSSION

All but one of Adams' contentions on
appeal hinge upon the validity of the
district court's determination that the
application of his investment to MWF's
regulatory capital precluded him from
rescinding the Securities Agreement after
the date of MWF's’ insolvency. We

addressed this very issue in Northwest

Racquet Swim & Health Clubs. Inc. v.

Resolution Trust Corp., Nos. 89-5526, 89-
5585, slip op. (8th Cir. Feb. __, 1991),

For the same reasons, the district
court also denied Adams, motion to
preliminarily enjoin FSLIC from further
transferring the assets of MWF and from
enforcing the promissory note which Adams
had ceased paying. Because Adams was not
entitled to rescind the Securities
Agreement, the Securities obligation
remained subordinated to the higher
priority promissory note of general
creditor rank. Thus, Adams had no legal
interest in the note which might justify
enjoining its further transfer.

19a

TD

which was argued before this court on the
same day we heard the present appeal. In
Northw Racquet, we held that where
investors in a federally regulated
institution subordinate their claims in
such a manner as to make the investments
eligible for use as regulatory capital,
and where the issuing institution applies
such investments to regulatory capital,
the investments must be regarded as fully
encumbered by the regulatory obligation
to remain subordinate to the claims of
depositors and general creditors in the
event of insolvency.

The Securities and Securities Agreement
at issue in this case are nearly

identical to those discussed in Northwest

Racquet. As in Northwest Racquet, there

is no dispute that the investment, in
fact, was included in MWF's regulatory

capital from March through November 1988.

20a

Further, the underlying allegations of

fraud in the inducement presented in each
case also are nearly identical. We
therefore refer the reader to our
discussion in Northwest Racquet, and hold
that MWF's insolvency precludes Adams
from rescinding the Securities
Agreement. '° Adams' claim therefore
remains subordinate to the claims of
general creditors. The continuing
subordinated status of the Securities

means that they lack the requisite

‘Swe also note that Adams, unlike the
plaintiff in Northwest Racquet, did not
initiate any remedial action against MWF
prior to the declaration of MWF's
insolvency. Northwest Racquet attempted
to exercise its contractual right to
accelerate payment prior to the
declaration of insolvency. Adams, by
comparison, did not take any remedial
action until he filed his’ initial
complaint on March 21, 1989, five weeks
after the declaration of insolvency.
Thus, the facts of this case provide an
even stronger basis for holding that the
subordinated debt holder is precluded
from rescinding than those presented in
Northwest Racquet.

21a

mutuality of obligation required to set
them off against the promissory note
which holds a superior general creditor
rank.'* The continuing subordination also
means that Adams is not entitled to share
in any pro rata distribution of assets
with MWF's general creditors. Because
Adams has no right to participate in any
pro rata distribution of assets’ to

general creditors, we also hold that the

“Generally, the right to setoff
exists only as to mutual debts. See,
e.g., Sioux Line R.R. v. Escabana & Lake
Superior R.R., 840 F.2d 546, 551 (7th
Cir. 1988). To exhibit the requisite
mutuality, the debts must be in the same
right. See 5A Michie, Banks & Banking
ch. 9, § 115c (1983). Subordinated
debentures, however, do not exist in the
same r.ght as promissory notes, thus they
may not be set off against each other.

See FDIC v. Texarkana Nat'l Bank, 874
F.2d 264, 268-69 (5th Cir. 1989)

(subordinated debentures in insolvent
bank do not, as a matter of both law and
equity, meet mutuality of obligation

test); see also FDIC v. de Jesus Velez,
678 F.2d 371 (1st Cir. 1982)

(subordinated debentures in insolvent
bank not mutually extinguishable with
promissory notes).

22a

district court properly dismissed his

Claim attacking the validity of the
purchase and assumption agreement between
FSLIC and Midwest Savings.

One final issue merits individual
attention. Adams contends that the
district court should not have dismissed
as moot his common law fraud claim for
damages against FSLIC in its capacity as
receiver for MWF. We agree with the
district court's decision declaring the
claim moot on prudential grounds because
the Bank Board's determination that MWF's
assets were insufficient to meet the
Claims of general creditors meant that
the court could not grant subordinate
debt holder Adams any effectual relief.
731 F. Supp. at 357-58.

Although it is true, as Adams contends,
that in some instances a claim for

damages is not mooted merely because of

23a

the insolvency of the defendant, see
Ratn ioux N —_. Tre
F.2d 512 (Sth Cir. 1985), “the
feasibility or futility of effective
relief should a litigant prevail" remains
a crucial consideration in this court's
determination of whether to adjudicate a
claim on its merits. In re AOV Indus.

Inc., 792 F.2d 1140, 1147-48 (D.C. Cir.
1986). To satisfy the case or
controversy requirement of Article III of
the Constitution, Adams' claimed injury
must be redressable by a favorable
judicial decision. Iron Arrow Honor

Society v. Heckler, 464 U.S. 67, 70
(1983) (per curiam).

The Bank Board formally determined that
the claims of subordinated debt holders
like Adams are worthless. We are bound

by the Bank Board's worthlessness

24a

determination in this proceeding.” See
1 Vv nbel v., F.S.B., 902 F.2d

348, 351 (5th Cir. 1990), cert. denied,

ge. ls SRY Bs Ge. «6G Ree
Villa h int Venture v. Federal
Deposit Ins. Corp., 733 F. Supp. 50 (N.D.
Tex. 1990); Federal Sav. & Loan Ins.

‘Sa Bank Board determination of
worthlessness is a "final agency action,
which is reviewable under the provisions
of the Administrative Procedure Act [, 5
U.S.C. §§ 701-706,] in an action against
the Bank Board, but not subject to
collateral attack through discovery or
other means in individual lawsuits
against the receiver.'"' Federal Sav. &
Loan In r v. Locke, 718 F. Supp.
573, 586 (W.D. Tex. 1989). Adams has not
directly challenged the Bank Board's
worthlessness determination. Rather, he
has attacked the determination only
collaterally, in the context of this
action, which does not name the Bank
Board as a party to the litigation, but
is stated simply against the RTC, as
receiver for MWF. Such a collateral
attack is not sufficient to create a
justiciable issue in the context of the
present case. In the absence of a prior
adjudication that the Bank Board's
worthlessness determination was arbitrary
and capricious, Adams has failed to
sufficiently state a claim upon which
relief could be granted.

25 a

Corp. v. Locke, 718 F. Supp. 573, 586
(W.D. Tex. 1989). The import of this
determination is that FSLIC, as receiver
for MWF, will never have any assets with
which to satisfy a common law fraud
judgment. Under these circumstances, we
follow the axiomatic principle that when
"it [is] impossible for [a] court, if it
should decide the case in favor of the
plaintiff, to grant him any effectual
relief whatever, the court will not

proceed to a formal judgment."'® Mills v.

In Ratner v. Sioux Natural Gas
Corp., 770 F.2d 512 (5th Cir. 1985),
which Adams cites in support of his
arguments, the court, in addressing a
mootness defense by an insolvent
corporation, stated that the "mere
possibility that a judgment debtor lacks
the means to satisfy its monetary
liability" does not necessarily mean that
the case is moot. 770 F.2d at 516 (5th
Cir. 1985). Here we are dealing not with
the "mere possibility," but rather an
absolute certainty that defendant RTC, as
receiver for MWF, lacks the means to
satisfy a judgment on the common law
fraud claim. See Federal Sav. & Loan
In r v. Locke, 718 F. Supp. 573,
587 n.4 (W.D. Tex. 1989). Adams contends

26a

0 lille

Green, 159 U.S. 651, 653 (1895).

Adams contends that adjudication of his
claim on the merits is warranted,
nonetheless, because resolution of the
fraud claim on the merits would aid him
in pursuing his pending claims against
the former officers of MWF individually.
Prudential concerns of judicial economy
and preservation of scarce judicial
resources counsel that Adams pursue any
overlapping issues of fraud within the

context of those proceedings.

that pending litigation over disputed MWF
assets raises the possibility that some
money may be available, at some future
date, to satisfy a common law fraud
judgment. This argument, however,
overlooks the fact that the assets now
belong to Midwest Savings as a result of
the purchase and assumption agreement,
not to the RTC, as receiver for MWF. RTC
no longer holds any MWF assets, let alone
assets which might be used to satisfy a
judgment in favor of Adams.

27 a

III. CONCLUSION
For the reasons expressed above, we
affirm the judgment of the district
court.
A true copy.
Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH
CIRCUIT.

28a

=

APPENDIX B
UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

No. 90-5123MN

Stephen Adams,
Appellant,
vs.

Resolution Trust Corporation as
Receiver for Midwest Federal
Savings and Loan Association;

Harold W. Greenwood, Jr.j;
Donald Snede; and John Does 1-10,

Appellees.

No. 90-5124MN

Stephen Adams,
Appellant,
vs.
Federal Deposit Insurance
Corporation (FDIC) as manager

of the FSLIC Resolution Fund,

Appellee.

Appeals from the United States
District Court for the
District of Minnesota

29a

JUDGMENT
This appeal from the United States

District Court was submitted on the
record of the district court, briefs of
the parties and was argued by counsel.
After consideration, it is ordered and
adjudged that ‘the judgment of fhe
district court in this cause is affirmed
in accordance with the opinion of this

Court.

February 28, 1991
A true copy.
ATTEST: /s/ Robert D. St. Vrain
CLERK, U.S. COURT OF APPEALS,

EIGHTH CIRCUIT
MANDATE ISSUED: 4/2/91

30a

NS

APPENDIX C

UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT

Nos. 89-5526 and 89-5585

Northwest Racquet Swim
& Health Clubs, Inc.,
| a Minnesota corporation,

Appellant,
Vv.
Resolution Trust Corporation,
as receiver for Midwest Federal
Savings and Loan Association

and Midwest Savings Association, F.A.,

Appellees.

Submitted: September 12, 1990

Filed: February 28, 1991

Appeals from the United States District
Court for the District of Minnesota.

Before MCMILLIAN, Circuit Judge, BRIGHT,
Senior Circuit Judge, and BOWMAN, Circuit
Judge.

BRIGHT, Senior Circuit Judge.

3la

Northwest Racquet Swim & Health
Clubs, Inc. (Northwest) appeals the
district court's’ grant of summary
judgment? 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

‘The Honorable Harry H. MacLaughlin,
United States District Judge for the
District of Minnesota.

‘The district court's decision is

reported as Northwest Racquet Swim §&

H n Vv 1 Vv Loan

Ins. Corp., 721 F. Supp. 211 (D. Minn.
1989).

32a

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.
I. BACKGROUND

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.° The Securities contained

“Northwest executed the promissory
notes for $10 million and $49 million on
December 1 and December 10, 1987,
respectively.

33a

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."
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.°

“The priority scheme governing

claims against an insolvent’ thrift
institution placed savings account
holders in the sixth priority position
after various administrative costs,
expenses and debts associated with the
appointment and operation of the
receivership, various wage and benefits
claims of the employees of the failed
thrift and certain government tax claims.
12 C.F.R. § 569c.11 (1989).

"In addition, Northwest executed an
Offeree Statement representing that it
had "sufficient knowledge and experience
in financial and business matters to be
capable of evaluating the merits and
risks of [the] proposed investment," that
it was "able to bear the economic risk of
the proposed investment," and that it had
"considered that it might have to hold

34a

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

the proposed investment for an indefinite
period of time and might have to bear a
complete economic loss." J.A. hs mF
Northwest similarly executed a
Subscription Agreement in which it again
stated it had "considered and understands
the high degree of risk of the securities
offered." J.A. 178.

35 a

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.
§ 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

36 a

SO then sok Cts eaten ae tee rll

PA MANS RE tlt RM LS NO OF ae ingle a OT 208 Bm

nna ret? sath wee ©

On

Loan Bank Board® (Bank Board) regulations

governing the distribution of assets in
liquidation proceedings.’

The sale of the Securities was
contingent upon Bank Board approval
pursuant to 12 C.F.R. § 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

°The Federal Home Loan Bank Board
acted as the principal regulator of the
federal savings and loan industry until
August 9, 1989, when Title IV of the
Financial Institutions Reform, Recovery
and Enforcement Act of 1989, Pub. L. No.
101-73, 103. Stat. 354, became _ law,
abolishing the Bank Board and replacing
it with the Office of Thrift Supervision.

7under the regulatory priority
scheme, see note 4, the claims of
subordinated debt holders like Northwest
held a ninth rank priority, behind the
claims of all general creditors, and
ahead only of equity interest holders.
12 C.F.R. § 569c.11 (1989).

37 a

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.° In January 1989,

however, the Bank Board issued a

SRegulatory capital is the sum of,
inter alia, reserve accounts, retained
earnings, permanent common stock,
securities which constitute permanent
equity capital, appraised equity capital
and any other nonwithdrawable accounts
which constitute the institutional
reserves available for satisfying the
claims of depositors and other account
holders. See 12 C.F.R. § 561.13 (1988).

Pursuant to statutory authority, 12
U.S.C. § 1464(s), the Bank Board, and its
successor, the Office of Thrift

Supervision (OTS), sets the minimum
capital requirements for the industry.
Since 1973, the Bank Board or OTS has
permitted thrift institutions to include
long-term subordinated debt securities in
their regulatory capital because such
securities possess many of the
characteristics of permanent capital. 54
Fed. Reg. 34,148 (1989) (commentary
accompanying Final Rule amendments to
regulations governing the issuance and
use of subordinated debt (codified at 12
C.F.R. § 563.13 (1989))).

38 a

directive ordering MWF to prospectively
remove the Securities from regulatory
capital because Northwest had purchased
them with funds it had borroweac 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 deciared
that it was exercising its remedies as

set forth in the Agreement.

39 a

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. §
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

40 2

sa ena tome Ob ie

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

41a

Northwest asked the

securities laws.
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

*The financial statements appended
to and incorporated into the Agreement
stated that an MWF asset identified as a
"Pinance and Excess Service Fee Income
Receivable" had a value of approximately
$207 million. Northwest alleged that, at
the time of the’ transaction, MWF
officials knew and failed to disclose to
Northwest that the asset, which is
presently the subject of separate
litigation, was likely worth far less
than $207 million represented in the
financial statements upon which Northwest
based its decision to invest. Northwest
asserted in its complaint that this
material misrepresentation violated §
10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 783(b), Rule 10b-5 of
the Securities Exchange Commission, 17
C.F.R. § 240.10b-5 (1988), and Minn.
Stat. § 80A.01 (1986).

42 a

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. § 1464(d)(6)(A) (1988); 12 C.F.R.
§ 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. §§ 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

43a

debt and equity interests in MWF to be
worthless.
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

The settlement of claims in the
event of liquidation proceeded under any
absolute priority scheme, meaning that
ninth and tenth priority subordinated
debt and equity holders could receive
treatment of their claims only after all
claims of the first eight ranks had been
fully satisfied. 12 C.F.R. § 569c.11(d)
(1989). Thus, the Bank’ Board's
determination that MWF's assets. were
insufficient to satisfy the claims of
seventh priority general creditors meant
that no money remained for the claims of
ninth priority subordinated debt holder
like Northwest.

44a

tetra

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.

45a

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 Sec., Inc., 605
F.2d 590 (2d Cir. 1978), cert. denied,
439 U.S. 1128 (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

46a

promissory notes.'' Northwest filed this
appeal in which it renews the arguments
it presented before the district court. °
Ez. DISCUSSION

We review a grant of summary judgment
under the same standard applied by the

district court. McCuen v. Polk Count

Iowa, 893 F.2d 172, 173 (8th Cir. 1989).

“The district court also denied
Northwest's motion to enjoin Midwest

Savings from further selling or
transferring the promissory notes because
the motion was predicated upon

Northwest's claimed right to set off the
Securities against the notes.

‘“2puring the pendency of this action,
Congress created the Resolution Trust
Corporation (RTC) as part of its 1989
restructuring of the federal savings and
loan regulatory system. See Financial
Institutions Reform, Recovery and
Enforcement Act of 1989, Pub. L. No. 101-
73, 103 Stat. 183. Under the regulatory
reorganization, the RTC assumed most of
the receivership, conservatorship and
liquidation functions of the _ FSLIC.
Consequently, RTC replaced FSLIC as
receiver for MWF and conservator of
Midwest Savings, and now stands in
FSLIC's place as defendant and appellee
in this action.

47 a

Thus, we review the facts de novo, Didier
v. J.C. Penney Co., 868 F.2d 276 (8th
Cir. 1989), and affirm the district court
only if we agree that "there is no
genuine issue of material fact, viewing
the facts in the light most favorable to
the non-moving party, and that the moving
party is entitled to judgment as a matter
of law."" McCuen, 893 F.2d at 173 (citing
Kegel v. Runnels, 793 F.2d 924, 926 (8th
Cir. 1986)); see Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 247, 48
(1986).

Viewing the facts in the light most
favorable to Northwest, we must assume
that MWF did indeed fraudulently induce
Northwest to purchase the Securities by
making material misrepresentations
regarding its financial condition at the
time of the transaction. Neither party

disputes that MWF immediately applied the

48a

investment to regulatory capital. In

addition, neither party disputes that, as
of February 13, 1989, MWF was insolvent.
On the basis of these facts, the district
court held that Northwest, as a matter of
law, was precluded, as of the date of
MWF's insolvency, from rescinding the
sale of the Securities. Northwest did
not attempt to rescind until March 10,
1989, nearly one month after the Bank
Board's declaration of MWF's insolvency,
thus it was barred from rescinding the
Securities.

In reaching its decision, the district

court concluded that In re Weis Sec.,

Inc., 605 F.2d 590 (2d Cir. 1978),

resolved the outcome of this case. We
therefore focus our attention on Weis.
In Weis, lenders to a securities broker-
dealer subordinated their loans to the

claims of all other creditors in exchange

49a

for a higher rate of return. The
subordination, which in effect rendered
the loans unencumbered for regulatory
purposes, enabled Weis to comply with
industry regulatory capital requirements
necessary to continue operations.
Following Weis' insolvency, the lenders,
claiming fraud in the inducement, sought
to rescind the subordination agreements.

The Second Circuit rejected the
Subordinated lenders' claims, holding
that because the lenders had subordinated
their loans specifically to enable Weis
to comply with regulatory capital
requirements, they were estopped from
rescinding their subordination agreements
following Weis' declaration of
insolvency, regardless of whether general
creditors actually relied upon’ the
subordination in extending credit to the

company. The Weis court analogized the

50 a

—t

Ee ee SS eee ee “Cm ee

position of the lenders to shareholders
in a series of cases arising under the
old National Banking Act, in which those
purchasing shares of a national bank were
conclusively presumed to have known that
they had increased the bank's capital and
facilitated its conduct of business. 605

F.2d at 595 (construing Scott v. Deweese,

181 U.S. 202 (1901)). Having assumed
such a position, the shareholders were
not permitted to escape their statutory
liability to the banks creditors at the

time of insolvency.'*

In Scott v. Deweese, for example, a
shareholder claiming that he was
fraudulently induced to invest in a
national bank sought to rescind after the

bank had declared its insolvency. In

prior to 1959, shareholders of
national banks were statutorily liable
for the banks' obligations to the extent
of the par value of their shares. 12
U.S.C. § 63 (1958) (repealed 1959).

51a

rejecting the shareholder's claim, the
Court stated:

The present suit is primarily
in the interest of creditors of the
bank. It is based upon a statute
designed not only for their
protection but to give confidence to
all dealing with national banks in
respect of their contracts, debts
and engagements, as well as to
stockholders generally. If the
subscriber became a shareholder in
consequence of frauds practiced upon
him by others, whether they be
officers of the bank or officers of
the Government, he must look to them
for such redress as the law
authorizes, and is estopped, as
against creditors, to deny that he
is a shareholder .. . if at the
time the rights of creditors accrued
he occupied and was accorded to
rights appertaining to that
position.

181 U.S. at 213. By analogy, the court
in Weis held that, having assumed a
subordinate position in order to enable
to company to meet federally mandated
regulatory capital requirements necessary
to continue operations, the lenders were
Similarly estopped from rescinding their

subordination after the date of

52 a

insolvency.”

The district court deemed Weis

analogous to the present action because
Northwest's investment, like those of the
lenders in Weis, was applied to the
regulatory capital of the issuing
institution. We agree. The district
court stated the Weis "is premised on the
fact that the capital regulations
reflected ‘a strong desire to assure
investors of the stability and integrity
of the securities markets and of the

broker-dealers responsible for channeling

investments into them.'" Northwest

Racquet Swim & Health Clubs, Inc. vv.

“the declaration of insolvency is
the critical moment in determining the
relationship between various competing
interests because "[i]t is well settled
that the rights and liabilities of a bank
and the bank's debtors and creditors are
fixed at the declaration of the bank's
insolvency." American Nat'l Bank v.
Foic, 710 F.2d 1526, 1540 (11th Cir.
1983) (citations omitted).

53a

Federal Sav. & Loan Ins. Corp., 721 F.
Supp. 211, 216 (D.Minn. 1989) (quoting
Weis, 605 F.2d at 596). We believe,
contrary to Northwest's assertion, that
the regulatory capital requirements of
the thrift industry serve similar
regulatory interests and purposes as
those in the securities industry.

In both industries, regulatory capital
acts as a cushion helping the institution
to absorb losses in lean times, thus |
ensuring customers, investors in the

5

securities context and depositors’ in the

the purposes of regulatory capital
requirements are typically framed in
terms of the risk of loss borne by FSLIC
(and now the Federal Deposit Insurance
Corporation (FDIC) ) rather than
depositors per se. However, Congress
created thrift deposit insurance to
promote thrift and protect savings by
ensuring that the "saver will get his
money back." H.R. Rep. No. 1922, 73d
Cong., 2d Sess. 3 (1934) (accompanying
Title IV of the National Housing Act,
codified as amended as 12 U.S.C. §§ 1724-

2D Lath a ee MOOR ey Ole aI Vis NAS Ee MAO A Ain BR Sie

1730i (1988), xrepealed by Financial
Institutions Reform, Recovery and

Enforcement Act of 1989, Pub. L. No. 101-

ny |

544

savings and loan context, of the
stability and integrity of the
institution in which they have placed
their money. See 53 Fed. Reg. 51,800
(proposed Dec. 23, 1988) (commentary on
"Purpose of Regulatory Capital"
accompanying proposed amendments to
regulatory capital requirements codified
748 ©.9:8: 66 861, 3$63).™ The
protection provided by regulatory capital

requirements, thus, is most critical

73, Tatle IV, § 407, 103 Stat. 363)
(emphasis added). It is therefore
appropriate to view the interests of
FSLIC as synonymous with the interests of
depositors.

Regulatory capital requirements

also "reduce the ‘moral hazard'
engendered when the insurer bears most of
the cost of a thrift's failure .. . [by

ensuring that] initial losses are borne
not by the insurer, but by the
institution's equity and subordinated

h r wh hr h their ntrol

of the institution's management, control

the actions most likely to lead _ to
insurance losses." 53 Fed. Reg. 51,800

(1988) (emphasis added).

55a

during an economic downturn, and
particularly in the event of insolvency.
This protection would be severely
undermined if, at the time when the
protection was most sorely needed, claims
of general creditors or depositors were
made contingent upon the lower priority
claims of subordinated debt and equity

interests.’

"We disagree with Northwest that
Oppenheimer _v. Harriman Nat'l Bank &
Trust Co., 301 U.S. 206 (1937), sanctions
just such a contingency of depositor and
general creditor claims. in Oppenheimer,
the Court did permit a shareholder in a
national bank to rescind his investment
on the basis of the bank's fraud after
the bank had declared its insolvency.
However, the Court deemed the right to
rescission contingent upon prior
satisfaction of Oppenheimer's statutory
liability to the bank's creditors. The
Court allowed Oppenheimer's rescission
only because he had previously satisfied
his statutory obligation:

Plaintiff appeared by the bank's
records to be a stockholder and, as
against creditors for whose benefit
the statutory liability was created,
was estopped from denying that
status. Recognizing that the bank's
fraud and his rescission availed

56a

10“ a Nh anal Oh AC i AIBN | atl NN

An action for rescission by a
subordinated debt holder after the date
of insolvency must be viewed, in effect,
as one between the investor and general
creditors, including innocent depositors,

Scott v. Deweese, 181 U.S. at 212,

because the claim of the rescinding
investor "Can be satisfied only out of

assets which otherwise would be allocated

to making innocent parties whole." Slain
& Kripke, The Interface Between
ecuriti R lation and Bankruptcy--

Allocating the Risk of Illegal Securities
Issuance Between Securityholders and the

Issuer's Creditors, 48 N.Y.U. L.Rev. 261,

286 (1973); see also Scott v. Abbott, 160

F. 573, 581 (8th Cir.), cert. denied, 212
U.S. 571 (1908); In re Stirling Homex

nothing against the comptroller's
assessment, plaintiff paid the
amounts laid against him.

301 U.S. at 214.

57a

Corp., 579 F.2d 206, 213 (2d Cir. 1978),
cert. denied, 439 U.S. 1074 (1979). It
is fair to suggest, in a case such as the
one now before us, that all of the
parties are victims of the institution's
fraud. The question thus becomes which
party should receive priority in the
settlement of their claims: the
investor, who is in the best position to
judge the condition of the thrift and

influence its management, or the innocent

depositors and general creditors.

Northwest asks that the subordinated
debt holder be given an equal bite at the
apple. This argument is a familiar one |
which brings to mind the observation of
this court many years ago that in the
event of an insolvency, "the temptation
to lay aside the garb of a stockholder,
on one pretense or another, and to assume

the role of a creditor, is very strong.”

58 a

itera

OO ———oOorrwrrS —— ao

Newton Nat'l Bank v, Newbegin, 74 F. 135,
140 (8th Cir. 1896), quoted in In re

irling Homex co., Sree F.24 et 213.
Northwest's request overlooks the fact
that the depositors and general creditors
"did nothing to create the rescinder's
problems and in the overwhelming majority
of cases .. . relifed] on the existence
of the equity or junior debt cushion
which the rescinder purported to
provide." Slain & Kripke, 48 N.Y.U. L.
Rev. at 286. In such situations,
fairness and equity dictate that
investors, having undertaken the greater
risk, give way to the depositors and
general creditors by honoring the
regulatory obligations they have assumed.
It is the regulatory interest of
protecting the innocent depositors and
general creditors which drove the Second

Circuit's analysis in Weis which we now

59a

adopt.

Northwest asserts, however, that under
Weis, it cannot be said to have
undertaken such a regulatory obligation
without a showing that it subordinated
its claims with the specific intent of
enabling MWF to meet its regulatory
capital requirements. As noted above,
the lenders in Weis did execute the
subordination agreements with the
specific intention of enabling Weis to
meet its regulatory capital requirements.
By comparison, Northwest asserts that it
did not know the MWF needed, or would
use, the proceeds of the sale of the
Securities for regulatory capital
purposes. Northwest thus asserts that
Weis does not apply under the facts of
this case.

We agree that the specific intention

of the lenders in Weis was a factor in

60a

ir a a EI OI

the Second Circuit's decision. However,
we believe that Northwest reads the
implications of Weis too narrowly in
light of the regulatory interests at
stake. While the facts of Weis appear to
limit its application to subordinations
with the specific intent of enabling a
federally regulated institution to meet
mandatory capital requirements, we
believe its rationale extends to
situations in which parties subordinate
their claims in such a manner as to make
the investments eligible for use as
regulatory capital. Once a federally
regulated institution applies such
investments to its regulatory capital
base, the investors must be conclusively
presumed to know that they have increased
the institution's capital and facilitated
the conduct of its business. See Scott

v. Deweese, 181 U.S. at 212. Any other

614

result would undermine the regulatory
protections and priorities accorded
innocent third parties who rely upon
stated capital reserves.

Under the standard we now enunciate,
it is clear that under the facts as
presently constituted, Northwest, as a
matter of law, is not entitled to any
relief. First, both the Securities and
the Agreement were structured to render
the investment available for use as
regulatory capital. The Agreement
expressly required that the sale be
approved by the Bank Board pursuant to 12
C.F.R. § 563.8-1 (1988), which sets forth
numerous terms and conditions for the
issuance of subordinated debt securities.
Subordinated debt securities meeting the
terms and conditions of § 563.8-1 were
eligible for use as regulatory capital.

12 C.F.R. § 561.13(c)(1) (1988) ("The

62a

ee eee ee ee ee

Pieris seein.

term ‘regulatory capital' also includes

subordinated debt securities issued
pursuant to § 563.8-1").

Section 563.8-1 expressly employs the
term "regulatory capital" in conjunction
with subordinated debt securities. See
12 C.F.R. § 563.8-1(b)(2)(i) (1988).
This provision suggests to us that a
subordinated investor such as Northwest
should recognize the link between
subordinated debentures and regulatory
capital, and, more to the point, that
this sort of investment might be applied
to regulatory capital. We also consider
telling the language in the Agreement, as
required by the regulations, 12 C.F.R. §

563.8-1(d)(1)(iv) (1988), clearly stating

ye also note that the regulatory
capital requirements set out at 12 C.F.R.
§ 563.13 were expressly referred to in
both the regulation governing the
approval of the sale of the Securities,
and the Agreement itself.

63a

that no payment of principal shall be
accelerated without approval of the Bank
Board if such payment would leave MWF
with insufficient regulatory capital. In
agreeing to this provision, Northwest,
again, expressly limited its rights and
remedies to those available to
contributors to regulatory capital.
Finally, Northwest agreed to subordinate
its claims to those claims having the
Same priority as savings account holders
or higher, again a condition of
investments to be devoted to regulatory
capital. Sean 12 C.F7R. § 563.8-
1(d)(1)(ii) (1988). Having agreed to
terms and conditions that made its
investment eligible for use as regulatory
capital, Northwest should not now be

heard to complain that it was in fact

64a

used in this manner.’?

Having determined that Northwest
Clearly subordinated its investment ina
manner that made it eligible for use as
regulatory capital, we next look to the
record to determine whether the funds, in

fact, were used for that purpose. On

‘this issue, there is not dispute. MWF

included the investment in regulatory
capital beginning in the fourth quarter
of 1987 and continuing at least through
the third quarter of 1988. We should
note that the Bank Board's January 1989

directive instructing MWF to remove the

"ST Northwest had alleged that, at
the time of the transaction, MWF
specifically indicated that the money
would not be used for regulatory capital
purposes, then we might view this case
differently. However, that is not the
case we have before us. Northwest has
merely asserted that MWF did not
expressly state that the investment would
be used as regulatory capital. This
allegation simply does not create a
genuine issue of material fact in light
of the terms of the Agreement.

65a

Securities from its reported regulatory
capital does not affect our analysis.
The Bank Board directed MWF to remove the
Securities from regulatory capital only
prospectively. The purely prospective
nature of the action means that, for
regulatory purposes, the Securities must

be regarded as regulatory capital from

December 1987 until November 1988. Thus, |
in the final analysis, Northwest's
investment must be regarded as fully
encumbered by the regulatory obligation
to remain subordinate to the claims of
depositors and general creditors in the

event of insolvency.”

Had the Bank Board ordered the
removal of the Securities from MWF's
regulatory capital account
retrospectively as well as prospectively,
this case might have more closely
resembled FDI i
Bank, 685 F.2d 270 (9th Cir. 1982), upon
which Northwest relies. In United States
Nat'l Bank, the court permitted a
subordinated debt holder to rescind its
fraudulently induced investment in a hank
despite the fact that the debt holder did

66a

a ee

In holding that Northwest may not
rescind, we emphasize that we do not hold
that a subordinated investor who had
agreed to terms and conditions that make
his investment eligible for inclusion in
regulatory capital never had recourse for
fraud. We hold only that such investors

may not rescind after’ the issuing

not rescind until after the bank had been
declared insolvent. The FDIC, as
receiver for the insolvent bank, argued
that Weis should apply and that no
rescission should be permitted post-
insolvency. However, National Banking
Act regulations governing the
subordinated loan at issue in United

States Nat'l Bank prohibited the use of

subordinated debt as regulatory interests
at stake in United States Nat'l Bank.
Thus, the court ruled that Weis, in which
the subordinated loans could be, and
were, used as regulatory capital, was
distinguishable and did not apply. For
the very reason that the court in United
States Nat'l Bank concluded that “‘eis did
not apply, we conclude that United States
Nat'l Bank must be distinguished on its
facts and does not apply in the present
case.

67a

institution has been declared insolvent.°'
The continuing subordinated status of the
Securities meas that they lack the
requisite mutuality of obligation
required to set them off with the
promissory note which possesses a

superior general creditor rank.

“IRTC has asserted that Northwest
bound itself to an exclusive set of
remedies to apply even in the event of
fraud in the inducement, thus suggesting
that Northwest cold not have rescinded
even prior to the date of insolvency.
Our holding does not require us to pass
judgment on this issue.

Generally, the right to setoff

exists only as to mutual debts. See,
e.q., Sioux Line R.R. v. Escabana & Lake

Superior R.R., 840 F.2d 546, 551 (7th
Cif. tHe6). To exhibit the requisite
mutuality, the debts must be in the same
right. See 5A Michie, Banks & Banking
ch. 9, § 1718e (1963). Subordinated
debentures do not exist in the same right
as promissory notes, thus they may not be
set off against each other. See FDIC v.
Texarkana Nat'l Bank, 874 F.2d 264, 268-
69 {Sth Cir. 1989) (subordinated
debentures in insolvent bank do not, as
a matter of both law and equity, meet
mutuality of obligation test); see also

FDIC v. de Jesus Velez, 678 F.2d 371 (1st

Cir. 1982) (subordinated debentures in

insolvent bank not mutually
68 a

ait. CONCLUSION

For the reason expressed above, we
affirm the judgment of the district
court.
A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH
CIRCUIT.

extinguishable with promissory notes).

69a

APPENDIX D

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
FOURTH DIVISION
Civil No. 4-89-330

Stephen ADAMS
Vv.

RESOLUTION TRUST
CORPORATION, as
Receiver for
Midwest Federal
Savings and Loan,
et al.

February 9, 1990.
As Amended
March 2, 1990.

Timothy D. Kelly, Diane M. Helland,
KELLY & # BERENS, 80 South Eighth
Street, #3720, Minneapolis, Minnesota
55402, for plaintiff.

John Paul Martin, John E. /Yanish,
Jeffrey G. Stephensen, PETERSON, TEWS
& SQUIRES, 80 South Eighth Street,
#4800, Minneapolis, Minnesota 55402,
for defendant RTC.

ORDER
ROSENBAUM, District Judge

Defendant FSLIC (the Federal Savings

and Loan Insurance Corporation), now the

70a

RTC (Resolution Trust Corporation), in
its role as receiver for Midwest Federal
Savings and Loan Association (Midwest
Federal), seeks judgment on the
pleadings, pursuant to Rule 12, Federal
Rules of Civil Procedure,
(Fed.R.Civ.P.).* Based upon the files,
records, proceedings, and oral arguments

herein, and for the reasons set forth

‘On August 9, 1989, the Financial
Institutions Reform, Recovery, and
Enforcement Act (FIRREA) became law.
Pub.L.No. 101-73, 103 Stat. 183. Section
401(f£) (2) abolishes the FSLIC_ and

substitutes the Resolution Trust
Corporation (RTC) as its successor. Id.
at 356. A stipulation and order to

substitute RTC, as receiver, for FSLIC,
as receiver, was signed by the parties
and the magistrate and was filed November
7, 1989. For purposes of this motion the
Court will continue to refer to the
defendant as the FSLIC.

‘while the FSLIC has styled its
pleading as a motion to dismiss pursuant
to Rule 12(b)(6), Fed.R.Civ.P., the Court
has considered affidavits and documents
outside the pleadings. Thus, this motion
is treated as one for summary judgment.
Rule 12(b) and (c) and Rule 56,
Fed.R.Civ.P.

Tia

below, defendant's motion, considered as
if for summary judgment, is granted.
Facts

Plaintiff is a Florida businessman who
purchased $2.5 million in subordinated
debentures issued by Midwest Federal on
March 31, 1988. Defendant FSLIC was a
congressionally created agency of the
United States charged with protecting the
financial integrity of the savings and
loan industry. The RTC, FSLIC's
statutory successor, is currently the
receiver for Midwest Federal, a failed
financial institution.

On February 13, 1989, some ten months
after plaintiff's purchase of the
subordinated debentures, the Federal Home
Loan Bank Board (FHLBB) determined that
Midwest Federal was insolvent and
appointed the FSLIC as conservator of

Midwest Federal. FHLBB Resolution 89-

72a

Dares 1 ar i

7B, OC Be

On March 21, 1989, plaintiff brought
this action against Midwest Federal and
several former officers of Midwest
Federal.’ Plaintiff seeks to rescind the
subordination agreement claiming he was
fraudulently induced to make the $2.5
million loan. Plaintiff also seeks to
set off the entire unpaid balance of the
subordinated debentures against a
$7,845,000 promissory note, dated June
30, 1988, which plaintiff owes to Midwest
Federal.

On May 4, 1989, having determined

Midwest Federal's assets to be less than

3The action was originally filed in
Hennepin County as a Minnesota state
court proceeding against Midwest Federal
and others as_ defendants. It was
subsequently removed to this Court on the
petition of the FSLIC, as conservator.
The parties stipulated on July 6, 1989,
to the substitution of the FSLIC, as
receiver, as party defendant for Midwest
Federal.

73a

its obligations, the FHLBB replaced the
FSLIC as conservator with the FSLIC as
receiver. FHLBB Resolution 89-1388 at 1-
2. On the same date, the FHLBB created
a new savings and loan association,
Midwest Savings Association. The FHLBB
then directed the FSLIC as receiver to
transfer substantially all of Midwest
Federal's assets, and certain of its
liabilities, to Midwest Savings via a
purchase and assumption transaction.
FHLBB Resolution 89-1389 at 2-5.

The result of these proceedings is
that the FSLIC (now RTC), as receiver,
holds Midwest Federal's obligation on the
subordinated debentures and Midwest
Savings, with FSLIC (now RTC) as its
conservator, holds plaintiff's obligation
on the promissory note.

At the time this case was removed,

jurisdiction was conferred upon this

74a

Costes

Court by 12 U.S.C. §1730(k)(1).‘
Plaintiff's Contentions

Plaintiff's 1988 debenture purchase
was memorialized in a written agreement.
A review of that document shows it to be
replete with language making clear the
subordinate nature of the debt. The
document is entitled ''SUBORDINATED DEBT
SECURITIES AGREEMENT." Amended
Complaint, Ex. C, title page. The
introductory paragraph of the agreement
states "the Lender agrees to purchase,
subordinated debt securities.'"' Id. at 1.
Paragraph 1 of the agreement sets forth
Midwest Federal's authority to issue

subordinated debt securities. Id.

“Section 407 of FIRREA repeals 12
U.S.C. §1730 (k)(1). Pub.L. No. 101-73,
§407, 103 Stat. 183, 363 (1989). Section
209 of FIRREA amends 12 U.S.C. §1819,
which is now the relevant jurisdictional
provision. aa... @@ 206. This Court
presently has jurisdiction, pursuant to
12 U.S.C. §1819, as amended.

rey |

Paragraph 3 states the notes are not

secured by the assets of Midwest Federal
and cannot be held by an FSLIC-insured
institution. i, et 3: Paragraph 11
states:

Payment of the principal of and
interest on the Notes is hereby
expressly subordinated on
liquidation to all claims (including
post default interest) against
[Midwest Federal] having the same
priority as savings account holder
or any higher priority. Further,
for any and all purposes whatsoever,
the Notes shall be subordinate to
the 8-1/4% $8 million subordinated
debentures of [Midwest Federal] due
in 1993.

Id. at 14. Paragraph 20 also contains an
explicit subordination in the event of
the failure of Midwest Federal:
If the FSLIC shall be appointed
receiver for [Midwest Federal] and
shall arrange for. the

assumption of less than all of the
liabilities of [Midwest Federal] by

one or more other insured
institutions, the FSLIC shall have
no obligation . . . to contract for
or otherwise arrange for the
assumption of the obligation
represented by the Note in whole or
in part

76a

2 tame rah hot anne

wee ee ee!

ia, at 26.

It is plaintiff's contention that he
did not know his investment in these
debentures would be used to enable
Midwest Federal to meet its regulatory
capital requirements. In the absence of
contrary evidence, at this point in the
proceedings, the Court assumes this to be
true. But whatever the state of
plaintiff's knowledge, Midwest Federal
did include the $2.5 million in its
regulatory capital. Affidavit of Steven
L. Opsal, 497-9; Affidavit of Lynne
Blixt, 4974-6. In January, 1989, the
FSLIC directed that Midwest Federal cease
the inclusion of the subordinated
debentures in its regulatory ~ capital
base. Opsal Affidavit at 410. The
directive was issued because it appeared
the subordinated debentures had been

purchased with funds loaned by Midwest

T7a

Federal.”

Plaintiff, by this action, first seeks
to rescind the subordinated debenture
agreement and, then, seeks to set off the
amount he claims is due against his
promissory note, now held by Midwest
Savings. Plaintiff argues he is entitled
to rescission because Midwest Federal
made material misrepresentations which
induced him to enter into the
subordinated debt securities agreement.
It is his position that upon rescis»' >n
he would be entitled to rank in parity
with general creditors. He then argues
that this elevation in status creates a
mutuality of obligation which permits the

debentures to be set off against his

“This arrangement was acknowledged.
by counsel for plaintiff at oral
argument. Tr. of motion proceedings, at
19-20 (Aug. 24, 1989). Plaintiff
borrowed from Midwest Federal to secure
the funds he used to purchase these
debentures.

78a

promissory note. Plaintiff contends the

right to set-off was effective upon
Midwest Federal's insolvency, so that
Midwest Savings took the promissory note
subject to the set-off.
Analysis

Summary judgment is appropriate if
there is not genuine issue as to any
material fact and the moving party is
entitled to judgment as a matter of law.
Rule 56(c), Fed.R.Civ.P. "Summary
judgment procedure is properly regarded
not as a disfavored procedural shortcut,
but rather as an integral part of the

Federal Rules as a whole . Celotex

Corp. v. Catrett, 477 U.S. 317, 327

(1986). Prior to the Feceral Rules of
Civil Procedure and notice pleading,
motions to dismiss a complaint or strike
a defense were the primary tools to

prevent factually insufficient claims

719 a

from proceeding to trial. Id. Under
notice pleading, summary judgment assumes
this integral function. Id.

Summary judgment may be- granted
against a party who fails to make a
showing sufficient to establish the
existence of an element essential to its
case and on which that party will bear
the burden of proof at trial. Id. at
322-23. The party opposing summary
judgment must produce concrete facts
demonstrating there is a genuine issue of
fact for trial. Buford v. Termayne, 747
F.2d 445, 447 (8th Cir.1984).

Plaintiff asserts he is entitled to
set off these debentures against his loan
from Midwest Federal. The right to set-
off exists only as to mutual debts. Soo

Line R. Co. v. Escanaba & Lake Superior
R. Co., 840 F.2d 546, 551 (7th Cir.1988);

Qlsen-Frankman Livestock Mktg. Serv.,

80 a

VW econ aes aad attend as

Inc. v. Citizens Nat'l Bank, 605 F.2d
1082, 1087 (8th Cir.1979). Here,
plaintiff purchased debentures which,by
their terms, were expressly subordinated
to all claims having the same or higher
priority as savings account holders.

In Northw Rack wim Health
Clubs, Inc. v. Federal Sav. & Loan, Ins.
Corp., 721 F.Supp. 211 (D.Minn.1989),
Judge MacLaughlin, of this court,
considered claims virtually identical to

these. \His analysis in Northwest Racket
is fully applicable here.

The words of the subordinated debt
agreement are precisely to the contrary
of plaintiff's position. The agreement,
by its terms, provides for the purchase
of subordinated debt. To overcome this
contractual bar, plaintiff attempts to

establish mutuality based upon the rule

set forth in Oppenheimer v. Harriman

81a

Nat' nk = , 301 U.S. 206
(1937). Claiming Midwest Federal's fraud
and misrepresentation, he asserts himself
to be a defrauded purchaser. Citing
Oppenheimer, plaintiff concludes a
defrauded purchaser is entitled to rank
on a parity with general creditors. It
is, then, to Oppenheimer, its
progenitors, and its progeny which the
Court must turn.

It is noted, first, that Oppenheimer
did not involve subordinated debt. In
Oppenheimer the Supreme Court held that
defrauded purchasers of a bank's capital
stock could rescind their purchase and
rank with the bank's unsecured creditors.
301 U.S. at 214-15. The Court, however,
found rescission to be contingent upon

payment of a statutorily defined

82a

liability to the bank's creditors.®° "by
payment of the comptroller's assessment
they fully discharged their liabilit, as
stockholders. And as claimants’ they

stand on the same footing as other

creditors.” 301 U.S. at 215. See also
In WwW riti Inc., 605 F.2d

590, 596 n.12 (2d Cir.1978), cert.
denied, 439 U.S. 1128 (1979).

This issue was then considered by the
Second Circuit in Weis Securities, which
did involve subordinated debt. The
Second Circuit refused to allow defrauded
lenders to rescind their subordination
agreements. That court held that when a

lender subordinates a loan to enable a

®Prior to 1959, shareholders of a
national bank were statutorily liable for
all obligations of the bank to the extent

of the par value of their shares. 12
U.S.C. §64 #=[repealed]; In re Weis
Securities, Inc., 605 F.2d at 590, 595

(2d Cir. 1978), cert. denied, 439 U.S.
1128 (1979).

83 2

securities broker to comply with
regulatory capital requirements, the
lender will be estopped from rescinding

the subordination agreement. 605 F.2d at

596. Weis Securities is consistent with
Oppenheimer and reflects the fact that

the subordination agreements allowed the
broker-dealer to comply with regulatory
capital requirements. Id.

In Weis Securities, the Court found
that whether customers and creditors of
the broker-dealer relied on the
subordination agreements was irrelevant.
Id. This finding was premised on Scott

v. Deveese, 181 U.S. 202 (1901). In

Scott, the plaintiff sought to rescind
his purchase of bank stock, claiming the
purchase was fraudulently induced. The
Court denied rescission, finding a
purchaser of bank shares’ must be

conclusively presumed to have known he

84a

i

he SE rhea al

Soa cA tS Sli A nl, sr le

Pinter ti atin» Wie rae ae

had increased the bank's capital and
facilitated the conduct of its business.
Id. at 212.

It is true that in Federal Deposit
Ins. Corp. v. United States Nat'l Bank
685 F.2d 270 (9th Cir.1982), the Ninth
Circuit allowed a defrauded purchaser to
rescind its subordinated note agreement
and thereby rank with the bank's other
creditors. But, in that case, the court
found the loan could not be used for
regulatory capital under the National
Banking Act. Id. at 274-75. Thus, since
the subordinated loan in United States
Nat'l Bank was not used to enable the
bank to comply with regulatory capital
requirements, the Ninth Circuit found
Weis Securities was not analogous and the
Oppenheimer rule was applicable. Id.

Plaintiff argues that, in the absence

of his actual knowledge that his loan to

85a

Midwest Federal would be used to meet
Midwest Federal's regulatory capital
requirements, he fits within the
Oppenheimer rule and Weis Securities does
not apply. But, like the plaintiff in
Wei rities, the present plaintiff
purchased subordinated debt which allowed
Midwest Federal to meet’ regulatory
capital requirements. Opsal Affidavit,
197-9; Blixt Affidavit q14-6.
Plaintiff's contention, that subjective
knowledge is the critical concern,
misreads the law.

Close analysis reveals that
vindication of regulatory interests in
the predicate to rescission. In
Oppenheimer, the plaintiff's right to
parity with other unsecured creditors
accrued only upon his payment of a
statutory liability to those creditors.

The bank's fraud did not discharge that

86 a

2st shea cling

nn

liability. 301 U.S. at 214-15. In Weis
Securities, the court's holding was based

on the purposes underlying regulatory

capital requirements. Weis Securities,
605 F.2d at 596. In United States Nat'l

Bank, the plaintiff's right to parity
with unsecured creditors existed only
because the subordinated loans did not,
in fact, enable the bank to meet
regulatory requirements. 685 F.2d at
274-75. In other words, the regulatory
interests in Oppenheimer and Weis
Securities were satisfied and there was
no regulatory interest implicated in

United States Nat'l Bank.

The regulatory capital requirements
clearly are designed to bolster public
confidence in the stability and integrity
of financial institutions, thereby
encouraging orderly financial

transactions and supporting the national

87 a

economy. See Weis Securities, 605 F.2d

at 596. "To assure creditors that they
could rely on the stated capital
resources of a bank, the legislature
compelled those who had _ contributed
capital to stand by their commitments."
Id. When a subordinated loan is used to
enable a financial institution to comply
with capital regulations, the
subordinated lender properly is estopped
from rescinding its agreement. See Weis
Securities, 605 F.2d at 596.

In this case, plaintiff expressly
purchased subordinated debentures.
Amended Complaint Ex. C, title page,
introductory paragraph, 41, 3, 11, 20.
Midwest Federal reported these
subordinated debentures as part of its
regulatory capital. Opsal Affidavit,
117-9; Blixt Affidavit, 114-6.

Plaintiff's own documents’ repeatedly

88a

:
a
|
|
}
3
:
:
+
j
¢

refer to regulatory capital, federal
regulations governing subordinated debt
and regulatory capital, and Midwest
Federal's treatment of other subordinated
debt as part of regulatory capital.

The Court finds that, as in Scott v.
Dew , Plaintiff must be presumed to
know that his loan increased Midwest
Federal's capital and facilitated the
conduct of its business.’ See Scott,
181 U.S. 202, 212 (1901). Accordingly,
plaintiff's present claim of lack of
subjective knowledge that Midwest Federal
would report the subordinated debentures

as regulatory capital is irrelevant.

7Indeed, at ora’. argument
plaintiff's counsel acknowledged that
plaintiff knew he had purchased equity of
the bank. Tr. of motion proceedings, at
18 (Aug. 24, 1989).

89a

Plaintiff is a sophisticated

businessman.®

In this transaction, he
purchased subordinated debt -- and that
is precisely what he received. That debt
was made part of Midwest Federal's
regulatory capital. As a result,
plaintiff is estopped from rescinding the
purchase of the debentures and escaping
his subordinated status.

As a second line of attack, plaintiff
seeks rescission of the transaction under
the Minnesota Blue Sky law, Minnesota
Statutes, §§ 80A.01 and 80A.23.
Equitable principles apply in a
purchaser's action. for rescission under
§ 80A.23. Minnesota Statutes, §
80A.23(1); Logan v. Panuska, 293 N.W.2d
359, 363 (Minn.1980); McCauley _v.

8In Weis Securities, the Second

Circuit rejected an argument that a lack
of sophistication converts a subordinated
debenture holder into a general creditor.

Weis Securities, 605 F.2d at 597.
90a

Michael. 256 N.W.2d 491, 500 (Minn.1977).

Rescission under § 80A.23 serves a
dual function: it protects innocent
purchasers and compels sellers to comply

with securities regulations by depriving
9

them of ill-gotten gains. Note, The
Minnesota Supreme Court: 1980, 65 Minn.

L. Rev. 1063, 1069 (1981). Here, neither
policy of § 80A.23 will be furthered by
allowing rescission.

This transaction, even at this early
stage of the proceeding, cannot be
regarded as one conducted in the regular
course of business dealings. As
acknowledged at oral argument, plaintiff
took a loan from Midwest Federal and
immediately loaned the selfsame funds

back to the institution from which he had

But plaintiffs cannot use the Blue
Sky law to save themselves from errors in
business judgment; equity will not allow
blind protection of purchasers. Logan,
293 N.W.2d at 363.

9la

just secured the loan. Tr. of motion
proceedings, at 19-20 (Aug. 24, 1989).
These are the funds which purchased the
subordinated debt. Id. See Bond v.
Charlson, 374 N.W.2d 423, 430 (Minn.1985)
(a defrauded purchaser is estopped from
rescinding if performed with knowledge of
the facts which constituted the fraud).

Plaintiff also asserts a claim for
money damages on the basis of common law
fraud. In response, the FSLIC seeks to
have this claim dismissed as moot since
plaintiff can never obtain satisfaction
of a money judgment. The Court
recognizes that the general rule is
"[c]Jlaims for damages or other monetary
relief automatically avoid mcotness, so
long as the claim remains viable." 14A C.
Wright & A. Miller, Federal Practice and
Procedure, § 3533.3 (1984).

92a

As demonstrated above, plaintiff is a
subordinated creditor. The FHLBB has
already determined the subordinated
debentures are worthless because Midwest
Federal's assets were insufficient to
satisfy general creditor liabilities.
FHLBB Resolution 89-1388 at 3. Thus, the
FSLIC argues, even if plaintiff were to
succeed on his subordinate debt claims,
his victory would be unavailing; his
claim is not viable.

At least three courts have ruled that
if the receiver would never have any
assets with which to satisfy a judgment,
a damages action is properly dismissed on

prudential grounds. MTriland Holdin &

Co. v. Sunbelt Serv. Corp., 884 F.2d 205,
208 (5th Cir.1989); Federal Sav. and Loan
Ins. Corp. v. Locke, 718 F.Supp. 573, 587
(W.D.Tex.1989); Stevenson v. Federal Sav.
and Loan Ins. Corp.. 716 F.Supp. 981, 982

93a

(S.D.Tex.1989). This Court adopts this
rule.

Accordingly, in order to conserve the
limited resources of the judiciary, this
Court declines to adjudicate plaintiff's
futile damages claim.

Plaintiff, citing Rule 56(f),
Fed.R.Civ.P., also asserts defendant's
summary judgment motion to be premature,
claiming a need to conduct’ further
discovery. The request for additional
discovery is wholly general and offers no
specifics as to what discovery is

sought. '° A court may grant a continuance

‘under the rule, one who claims a
need for additional discovery must file
an affidavit stating the reasons they
cannot sufficiently establish the
existence of a material factual dispute.

Beckers ¥. International Snowmobile
Indus. Ass'n, 581 F.2d 1308, 1311 (8th
Cir.1978), (citing C. Wright & A. Miller,
Federal Practice and Procedure §2740),
cert. denied, 440 U.S. 986 (1979). See
also Burlington Coat Factory v. Esprit De
Corp., 769 F.2d 919, 926 (2d Cir.1985)
(affidavit under Rule 56(f) must explain
what facts are sought, how they are to be

94a

aN AIEEE es vinta

in accordance with Rule 56(f£),
Fed.R.Civ.P. United States v. Light, 766
F.2d 394, 398 (8th Cir.1985). That rule,
however, does not require a court to
order further discovery prior to summary
judgment. Id. at 397.

The Court finds no reason for further

-discovery or for delay here. At oral

argument, plaintiff's counsel indicated
the proposed discovery pertained to
plaintiff's subjective knowledge
concerning whether his investment would
be used to enable Midwest Federal to

comply with regulatory capital

obtained, how those facts are expected to
create an issue of material fact, what
efforts the affiant has made to obtain
the facts, an why the efforts have been
unsuccessful; failure to file such an
affidavit is enough to reject a claim of
inadequate discovery), aff'd in part,
rev'd inpart, 769 F2d 919 (2d Cir.1985).

95a

requirements. '' Tr. of motion pro-
ceedings, at 28-29 (Aug. 24, 1989). The
Weis Securities discussion of subjective
knowledge, above, makes clear that the
proposed discovery would be superfluous.

Plaintiff's final contention is that
the purchase and assumption transaction
was flawed. This entire argument is
premised upon a finding that plaintiff is
able to rescind’ the subordination
agreement and occupy the same posture as
Midwest Federal's general creditors. The
Court has found that plaintiff is not
entitled to rescind his agreement and
remains a _ subordinated creditor of
Midwest Federal. Thus, since plaintiff
is not to be treated as a _ general

creditor, he is not entitled to

"The Court finds it difficult to
understand why one would need to conduct
discovery to discern his own subjective
state of mind.

96a

participate ratably in the distribution
of Midwest Federal's assets pursuant to
12 U.S.C. § 1729.

Accordingly, IT IS ORDERED that:

1. The motion of defendant FSLIC as
receiver for Midwest Federal to dismiss
Counts III, IV, V, VI, and VII of the
third amended complaint is granted.

2. In light of this Court's dismissal
of all claims against the FSLIC (now
RTC), the remaining parties are directed
to submit letters to this Court within
ten days of this order addressing whether
to remand this action to the state court

from whence it came.

97a

APPENDIX E
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
FOURTH DIVISION
Civil No. 4-89-558

Stephen Adams

Federal Deposit
Ins. Corp.

)
)
Vv. ) ORDER
)
)
)

This matter is before the Court on
defendant's motion to dismiss’ or,
alternatively, for summary judgment.
Defendant's motion is granted. Oral
arguments were heard January 12, 1990.

This action arises out of plaintiff's
purchase of $2.5 million in subordinated
debentures from Midwest Federal. The
relevant facts concerning this event are
set forth in this Court's February 9,
1990, order in the related case of Adams

v. R lution Tru rp., et al., Civil

No. 4-89-330 (D.Minn). In that order,

this Court dismissed plaintiff's claims

98 a

against the Resolution Trust Corp. In
particular, the Court found plaintiff is
not entitled to rescission of the
subordinated debenture purchase = and
therefore retains his subordinated
status.

The gravamen of plaintiff's complaint
in this case is that the purchase and
assumption transaction was flawed and he,
as a general creditor, is entitled to
ratable distribution. As was
acknowledged at oral argument,
plaintiff's entire case is premised on a
finding that he is entitled to ratable
distribution. Tr. of motion proceedings
at 20 (Jan. 12, 1990). Because this
Court, in Adam v. Resolution Trust
Corp., determined plaintiff is not a
general creditor entitled to ratable
distribution, this action must be

dismissed. Accordingly, based on the

99a

files, records, and proceedings herein,
IT IS ORDERED that:

Defendant's eekion to dismiss is
granted and this matter is dismissed with

prejudice.

Dated: February 23rd, 1990

ls/ James M. Rosenbaum
JAMES M. ROSENBAUM

United States District Judge

100 a

Iit.

Itt.

APPENDIX F

STATUES RELIED UPON

TERS oe.
12 Uv8.C. 6 1444a ........
ve. ee Freee

REGULATIONS RELIED UPON
12 C.F.R. § 563.8-1
| eae
12 C.F.R. § 563.13
CE Glos CUM Ob ew ks iG das

BAe rere Crest eT Tee

101a

APPENDIX F

I. 12 U.S.C. § 63

The shareholders of every national
banking association shall be held
individually responsible, equally and
ratably, and not one for another, for all
contracts, debts, and engagements of such
association, to the extent of the amount
of their stock therein, at the par value
thereof, in addition to the amount
invested in such shares.

Repealed Pub.L. 86-230, § 7, Sept. 8,
1959, 73 Stat. 457.

102 a

tz. 2 U.S.C. 1441a

Financial Institutions Reform,
Recovery and Enforcement Act of 1989

* * *

(b) Resolution Trust Corporation
established. (1) Establishment. (A) In
general. There is hereby established a
Corporation to be known as the Resolution
Trust Corporation which shall be an
instrumentality of the United States.

* *~ *

(3) Duties. The duties of the Corporation
shall be to carry out a program, under
the general oversight of the Oversight
Board and through the federal Deposit
Insurance Corporation (or any replacement
authorized pursuant to subsection (m)),
including:
(A) To Manage and resolve all cases
involving depository institutions-
(i) the accounts of which were insured
by the Federal Savings and _ Loan
Insurance Corporation before the
enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 [enacted Aug. 9, 1989]; and
(ii) for which a conservator or
receiver--
(I) had been appointed at any
time during the period beginning
on January 1, 1989, and ending on
the date of the enactment of such
Act (including any institution
described in paragraph (6)); or
(II) is appointed within the 3-
year period beginning on the date
of the enactment of such Act.

103a

(B) To manage the Federal Asset
Disposition Association, subject to
the provisions of subsection (f)-

(C) To conduct the operations of the
Corporation in a manner which--

(i) maximizes the net present value
return from the sale or other
disposition of institutions described
in subparagraph (A) or the assets of
such institutions;

(ii) minimizes the impact of such
transactions on local real estate and
financial markets;

(iii) makes efficient use of funds
obtained from the Funding Corporation
or from the Treasury;

(iv) minimizes the amount of any loss
realized in the resolution of cases;
and

(v) maximizes the preservation of the
availability and affordability of
residential real property for low- and
moderate-income individuals.

* * *

(6) Successor to FSLIC as conservator or
receiver. As of the date of enactment of
the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989
[enacted Aug. 9, 1989], the Corporation
shall succeed the Federal Savings and
Loan Insurance Corporation as conservator
or receiver with respect to any
institution for which the Federal Savings
and Loan Insurance Corporation was
appointed conservator or receiver during
the period beginning on January 1, 1989
and ending on such date of enactment.

104 a

III. Federal Savings and Loan Insurance
Corporation Act, 12 U.S.C. § 1729,

et seq. (excerpt)
A. 12 U.S.C. § 1729'

* * *

(b) Powers of corporation on default of
Federal Savings and Loan Association. In
the event that a Federal savings and loan
association is in default, the
Corporation shall be appointed as
conservator or receiver and is authorized
as such (1) to take over the assets of
and operate such association, (2) to take
such action as may be necessary to put it
in a sound and solvent condition, (3) to
merge it with another insured
institution, (4) to organize a new
Federal savings and loan association to
take over its assets, or (5) to proceed
to liquidate its assets in an orderly
manner, whichever shall appear to be to
the best interests of the insured members
of the association in default; and in any
event the Corporation shall pay the
insurance as provided in section 405 [§
1728 of this title] and all valid credit
obligations of such association. The
surrender and transfer to the Corporation
of an insured account in any such
association which is in default shall
subrogate the Corporation with respect to
such insured account, but shall not
affect any right which the insured member
may have in the uninsured portion of his
account or any right which he may have to

"Repealed by Act August 9, 1989,
P.L. 101-73, Title Iv, § 407, 103 Stat.

105 a

participate in the distribution of the
net proceeds remaining from the
disposition of the assets of such
association.

106 a

REGULATIONS RELIED UPON
I. 12 C.F.R. § 563.8-1 (1989)

I n rdinat

debt securities

(a) General. No insured institution
shall issue subordinated debt securities
pursuant to this section or amend the
terms of such securities unless it has
obtained written approval of the
Corporation. Approval of the issue under
this section, in order to meet the
requirements of § 561.13, may be obtained
either before or after the securities and
the form and manner of filing of the
application are in accordance with the
provisions of this section.

II. 12 C.F.R. § 563.13 (1989).

R 1 r ital R irement.

* * *

(b) Minimum required amount. Except as

otherwise provided in this section, the
minimum regulatory capital requirement
for any calendar quarter (commencing with
the quarter ending March 31, 1987) shall
be an amount equal to the sum of an
institution's liability component and
contingency component minus its maturity
matching credit. An institution shall
not use the maturity matching credit to
reduce its required amount of regulatory
capital below 3 percent of _ total
liabilities for the period from December
31, 1986, until December 31, 1989, or to
reduce its required capital below 4

107 a

1

percent of total liabilities on or after
January 1, 1990.

III. 12 C.F.R. § 567.2 (1991)

Minim r iremen

(a) To meet its regulatory capital
requirement a savings association must
satisfy each of the following capital
standards;

(1) Risk-based capital requirement.
(i) A savings association's minimum
risk-based capital requirement shall be
an amount equal to 6% of its risk-
weighted assets as measured pursuant to
§ 567.6 of this part plus 2% of its risk-
weighted assets as measured pursuant to
that section.

(ii) A savings association may not use
supplementary capital to satisfy this
requirement in an amount greater than
100% of its core capital as defined in §
567.5 of this part.

108 a

APPENDIX G
TRANSCRIPT OF MOTION PROCEEDINGS
HAD BEFORE THE HONORABLE
JAMES M. ROSENBAUM
August 24, 1989

United States District Court
District of Minnesota

Page 19, Lines 18-25

Page 20, Lines 1-8

THE COURT: Well, let me go a
little further here. Are you familiar
with the source of the two and a half
million dollars:

MR. KELLY: Yes.

THE COURT: Where is that from?

MR. KELLY: It was a bridge loan
from Midwest Federal.

THE COURT: So let me get clear
in my mind. Midwest Federal loaned two
and a half million dollars, and that two
and a half million dollars was
immediately lent back for subordinated

debentures.

109 2

MR. KELLY: Yes, Your Honor.

THE COURT: And less than a
quarter later, there was a seven and some
large change million dollar loan that was
made to Mr. Adams, correct?

MR. KELLY: Correct.

110a

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_2173%3A2. Public record. Not legal advice.