Appendix — Biscayne Federal Savings & Loan Ass'n v. Federal Home Loan Bank Board
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“Office - Supreme Court, U.S
— TFN
FEB 23 1984
No. ALEXANDER L STEVAS.
in the
Supreme Court
of the
United States
OCTOBER TERM, 1983
BISCAYNE FEDERAL SAVINGS & LOAN
ASSOCIATION and KAUFMAN & BROAD, INC.,
Petitioners,
vs.
FEDERAL HOME LOAN BANK BOARD
and FEDERAL SAVINGS AND LOAN
INSURANCE CORPORATION,
Respondents.
APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
Bruce W. Greer
Gerald B. Cope, Jr.
Counsel of Record
Peter W. Homer, Patricia Ireland,
Kevyn D. Orr, Carol W. Soret,
Bradford Swing, Martin B. Woods
Arky, Freed, Stearns, Watson, Greer,
Weaver & Harris, P.A.
One Biscayne Tower, Suite 2800
Miami, Florida 33131
Telephone: (305) 374-4800
Attorneys for Petitioners
eS
APPENDIX A
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
Nos. 83-5432
83-5654
BISCAYNE FEDERAL SAVINGS
& LOAN ASSOCIATION, ET AL.,
Plaintiffs-Appellees,
Cross-Appellants,
versus
FEDERAL HOME LOAN BANK BOARD
and FEDERAL SAVINGS & LOAN ©
INSURANCE CORP.,
Defendants-A ppellants,
Cross-Appellees,
RICHARD T. PRATT, ET AL.,
Defendants.
Appeals from the United States District Court
for the Southern District of Florida
(November 29, 1983)
Before FAY and HENDERSON, Circuit Judges, and
TUTTLE, Senior Cireuit Judge.
PAY, Cireuit Judge:
App. | ‘
iin. J
This case is a consolidated appeal from two orders
entered in the United States District Court for the
Southern District of Florida. It has its origin in a dispute
over the Federal Home Loan Bank Board’s (FHLBB or
“the Board”) appointment, pursuant to 12 U.S.C. §172%b)
(1982), of the Federal Savings and Loan Insurance
Corporation (FSLIC) as federal receiver for a federally
chartered association, Biscayne Federal Savings and
Loan Association (“Biscayne”). The appointment of the
FSLIC triggered an action by Biscayne and its majority
shareholder pursuant to 12 U.S.C. §1464(dX6XA) seeking
an order requiring the Board to remove the receiver.
The FHLBB and the FSLIC, defendants below and
appellants here, appeal from the district court’s April
12, 1983 order, issued in the nature of a preliminary
injunction, which prevented the defendants from disposing
of Biscayne’s assets pending a trial on the merits of the
propriety of the Board's intervention. The FHLBB and
the FSLIC also appeal from the district court’s September
9, 1983 holding, issued subsequent to a bench trial, that
they improperly seized Biscayne and from that court's
accompanying order that the FHLBB and the FSLIC
should therefore devise a plan whereby the FSLIC
would be removed as receiver and the assets held by
the receiver returned to Biscayne. The September 9
order in effect continues the April 12 injunction, as it
prohibits the FSLIC from taking any further action
with regard to Biscayne. Because we find that the
Board and the FSLIC satisfied the statutory requirements
for the of a federal receiver under 12
U.S.C. Fi) and 1464(dN6XA) and that the district
court therefore had no authority to remove the FSLIC
as receiver or force a return of Biscayne’s assets to its
shareholders, we reverse and vacate both orders of the
district court.
App. 2
FACTS AND PROCEDURAL BACKGROUND'
Biscayne began experiencing financial difficulties
with the rise of interest rates in the late 1970's. These
difficulties were endemic to the savings and loan (8 &
L”) industry, as the historical practice by S & Ls of
accepting savers’ deposits, paying interest at low fixed
rates on those deposits and then reinvesting the deposits
in long-term loans with slightly higher fixed rates left
the S & Ls vulnerable to the effects of the recent
inflationary spiral. Many of these institutions were
unable to overcome the changes in the financial market
which resulted from the rising interest rates and
widespread deregulation of that market. Investors in
the late 1970's began moving their funds out of S & Ls
and into other liquid investments which produced higher
rates of return. As funds were depleted from the S &
Ls, most of those institutions were unable to make new
loans and were forced to borrow money elsewhere at
high market rates to support their existing loan
commitments.
Caught up amid the industry upheaval, Biscayne
in July 1981 reported the first annual loss in its history,
and its positive net worth of $31,850,000 began to erode.
In light of the continuing losses projected, Kaufman &
Broad, Inc., a multinational corporation and Biscayne's
majority shareholder, contacted the FHLBB to discuss
possible strategies for recapitalizing Biscayne. From
July of 1981 through March of 1983, Biscayne, through
Kaufman & Broad, and the Board negotiated
unsuccessfully in search of a mutually acceptable plan
to save Biscayne from receivership. During that time,
Biscayne’s net worth dropped from a positive $24 million
to a negative $30 million.’
App. 3
At 2:05 p.m. on April 6, 1983, after Biscayne's net
worth had dropped below a record negative $30 million,
the Board appointed the FSLIC as receiver for Biscayne
pursuant to 12 U.S.C. §1729(b) (1982) on the grounds
that Biscayne was insolvent and in an unsafe and unsound
condition. It is undisputed that Biscayne’s negative net
worth as of this date constituted statutory insolvency
as defined in 12 U.S.C. §1464(dX6XAXi) (1982).* Shortly
thereafter, the FSLIC as receiver took possession of
the property and assets of Biscayne and conveyed them
to a new federal mutual association, New Biscayne
Federal Savings and Loan Association of Miami (“New
Biscayne”). Within hours after the FSLIC had taken
possession, Biscayne and Kaufman & Broad as its
principal shareholder filed an action pursuant to 12
U.S.C. §1464(dx6XA) seeking an order requiring the
Board to remove the receiver. Joined as defendants
were the Board and the FSLIC in both its receivership
and corporate capacities. The plaintiffs also filed a
motion for a temporary restraining order (TRO) which
would prevent the Board from acting upon Biscayne’s
assets. On April 12, 1983, after conducting several hearings
on preliminary motions, the district court entered an
order which denied Biscayne’s motion for a TRO but
which enjoined the Board and the FSLIC from selling
or otherwise disposing of Biscayne's assets pending
the outcome of a trial on the merits. The defendants
FHLBB and the FSLIC immediately appealed from
that order.
Pursuant to statutory preference the matter was
expedited and from April 28, 1983 through June 14,
1983, the district court, sitting without a jury, conducted
a trial on the merits as to the propriety of the Board's
appointment of a receiver. On September 9, 1983, the
App. 4
district court entered a memorandum opinion, examining
allegations of wrongdoing on the part of the Board and
the FSLIC, which Biscayne had brought under five
counts, and ruling that Biscayne should be returned to
its shareholders.’ On September 21, 1983, the Board
and the FSLIC filed their notice of appeal from the
September 9 order. On September 29, 1983, this court
granted defendants-appellants’ motion to expedite this
appeal and to consolidate it with the appeal from the
April 12 order. Briefs were filed and oral argument
conducted on November 15, 1983.
The district court found in favor of Biscayne under
Count II of the complaint which alleged that the Board’s
appointment of a receiver constituted “an abuse of
discretion, was arbitrary and capricious, was undertaken
contrary to prior representation, and was not warranted
by the facts and circumstances.” The Board and the
FSLIC contend that this was error because the court
did not have the jurisdictional power to rule on this
issue. It was this malfeasance of the Board that the
district court used as the predicate for its conclusion
that the Board was not authorized to appoint a receiver
for Biscayne. We reverse the district court’s order as
to Count II and direct that the court enter judgment
for the defendants. The court held the contention under
Count III, that the Board should have availed itself of a
less drastic remedy than receivership, to be without
merit.’ In a cross-appeal, Biscayne challenges as erroneous
the district court’s entry of judgment in favor of
defendants as to Count ITI. We agree with the district
court as to this count.
App. 5
THE ISSUES
A. THE BOARD'S CAPACITY TO ACT
The district court reviewed in detail the entire
course of conduct engaged in by the FHLBB staff
throughout its twenty months of negotiations with
Kaufman & Broad and Biscayne, particularly the staff's
refusal to seriously consider proposals made by Kaufman
& Broad to alleviate Biscayne’s financial crisis. It found
that the conduct of the staff during the period from
late in 1982 to April 6, 1983 was arbitrary, capricious
and an abuse of discretion. Specifically, the court found,
inter alia, that on several occasions the Board's staff
had deliberately misrepresented the Board's position
with regard to a branch sale proposal made by Kaufman
& Broad in hopes of generating working capital. As
Board approval was a prerequisite for any action taken
by Biscayne during the relevant period of negotiations,
such deception by the Board’s staff was found to have
caused the plaintiffs much needless time and expense.
The court characterized the Board’s conduct as
“outrageous,” “outlandish,” “egregious” and “wrapped
in a shroud of deception.” Recognizing that the district
court found a pattern of outrageous conduct on the
part of the Board's staff, and without reviewing whether
or not that finding is clearly erroneous, we hold that
the trial court as a matter of law had no authority to
grant the relief ordered.
The statutory scheme which prescribes the procedure
for the appointment of a conservator or receiver for
federal savings and loan institutions is unambiguous.
12 U.S.C. §172%b) (1982) authorizes the FSLIC to be
appointed as conservator or receiver of any federal
App. 6
savings and loan institution which is in default. It further
authorizes the FSLIC, once the receivership has been
established, to take “such action as may be necessary
to put [the institution] in a sound and solvent condition.”
Section 1464 of the same statute complements the grant
of authority under §172%b), as it delineates five grounds
which authorize the FSLIC’s appointment. One of the
grounds expressly stated in §1464 authorizes the Board
to appoint a receiver for an insolvent association:
The grounds for the appointment of a
conservator or receiver for an association shall
be one or more of the following: (i) insolvency
in that the assets of the association are less
than its obligations to its creditors and others,
including its members. . If, in the opinion
of the Board, a ground for the appointment of
a conservator or receiver exists, the Board is
authorized to appoint ex parte and without
notice a conservator or receiver for the
association."
12 U.S.C. §1464(dX6XA).
The statute also authorizes an association which has
been placed in receivership to bring an action in the
federal courts for removal of the FSLIC as receiver:
In the event of such appointment, the association
may, within 30 days thereafter, bring an action
in the United States district court . . . for an
order requiring the Board to remove such
conservator or receiver, and the court shall
upon the merits dismiss such action or direct
App. 7
the Board to remove such conservator or
receiver
Id.
These statutory provisions, created by Congress
as part of the Home Owners’ Loan Act of 1933,“ function
as an integral part of the congressional plan to protect
depositors through the Act and to restore the public
faith in financial institutions which was eroded by the
monetary crises of the Depression. Recognizing that
swift action is often necessary to minimize economic
loss in instances of troubled and failing financial
institutions, Congress has given, in the statutory
provisions at issue here, an awesome amount of control
and authority to the FHLBB in the event of such crises.
We find that in actions brought under §1464(d\X6XA),
the sole question properly before the district court and
this Court is whether a statutory ground authorizing
the appointment of the FSLIC exists. The statute,
while authorizing a role for the courts in review of
appointment decisions, does not expressly define the
scope of judicial review. However, the limits of such a
review seem clearly apparent: a determination as to
whether one of the statutory grounds has been met.
When one of the stated grounds relied upon by the
Board is statutory insolvency, as is the case here, the
issue for the courts should be a straightforward one:
whether the association in question was statutorily
insolvent at the time of the FSLIC’s appointment.
In this case statutory insolvency was established
at the first pre-trial hearing in the district court, since
plaintiffs at that time stipulated to the fact of Biscayne's
App. 8
insolvency as of April 6, 1983.“ Any allegations by
plaintiffs as to Biscayne’s liquidity at that time or as to
its potential to pull itself out of its dire circumstances
are simply irrelevant. Section 1464, in our opinion,
gives courts very limited jurisdiction, permitting a suit
by an association subject to the Board's intervention
for solely one purpose —that of ascertaining whether a
statutory ground exists to support the Board's action.
The statute does not require the Board to negotiate
with or set guidelines for restructuring a failing
association. The undisputed satisfaction of a statutory
ground for the appointment of a receiver, coupled with
the fact that there was no finding by the trial court
that the Board's “outrageous conduct” in any way
contributed to Biscayne’s insolvent status as of April 6,
thus renders the district court without authority to
proceed further.
Other courts that have addressed the legality of
Board conduct in analagous circumstances have likewise
held that the scope of judicial review under §1464
should be limited to determining whether or not at
least one of the five statutory grounds for appointing a
receiver existed as of the date the receiver was appointed.
In Telegraph Savings and Loan Association v. FSLIC,
564 F.Supp. 862 (N.D. Ill. 1981), affd sub nom, Telegraph
Savings and Loan Association u Schilling, 703 F.2d
1019 (7th Cir. 1983), petition for cert. filed, 52 U.S.L.W.
3123 (U.S.Aug. 23, 1983) (No. 83-244), the state
commissioner took custody of an association under Illinois
law and the Board then appointed the FSLIC as receiver.
The Seventh Circuit discussed at length the proper
role of the courts in reviewing the appointment of
federal receivers under 12 U.S.C. §§1729 and 1464(dN6XA)
(1982)." It approved the trial court’s conclusion that
App. 9
under the legislative scheme a federal court may hold a
“trial on the merits,” which is
limited to the issue of whether the Board has
statutory authority to appoint the FSLIC
receiver. We are concerned in this proceeding
not with the reasonableness or wisdom of the
Board’s conduct, but only with the question of
whether the requirements of Section 172912)
existed at the time Telegraph passed into
receivership.
564 F.Supp. at 870.
When the association moved for a modification of the
court’s order, the Telegraph court upheld its decision,
finding that the wisdom of the Board's decision to
exercise its power of receivership is an issue that Congress
has rested in the Board and that is ‘not subject to
re-examination in the federal courts under the guise of
judicial review of agency action.) Id. at 875 quoting
Vermont Yankee Nuclear Power Corp. v. Natural
Resources Defense Council, 435 U.S. 519, 558, 98 S.Ct.
1197, 1219, 55 L.Ed.2d 460 (1978)).
The decision by the United States Court of Appeals
for the Ninth Circuit in Fidelity Savings and Loan
Association u FHLBB, 689 F.2d 803 (9th Cir. 1982),
cert. denied, 103 S.Ct. 1893 (1983), reversing a district
court order which had mandated removal of a federal
receiver, see 540 F.Supp. 1374 (N.D. Cal. 1982), also
held the scope of judicial review under §1464 to be
severely restricted. In Fidelity, the district court stated
that once it has determined that the three prerequisites
under §172%cX2) for the federal takeover of a state
App. 10
savings and loan institution have been satisfied, including
the finding of a ground for intervention under
§1464(dX6XA), the court will not disturb the decision of
the Board to exercise its jurisdiction unless there has
been an abuse of discretion in the exercise of that
power. The district court therefore did examine the
Board’s conduct in order to determine whether or not
the Board had acted precipitously and overzealously. It
ordered removal of the federal receiver. The appellate
court reversed and remanded to the district court,
stating in very clear language that the district court
was only to consider whether any one of the conditions
required by §i729%cX2XB) for the federal takeover of a
state savings and loan institution existed prior to the
Board's appointment of the FSLIC as receiver.
Nor do we agree with the contention by the plaintiffs
that the district court’s opinion in Washington Federal
Savings and Loan v. FHLBB, 526 F.Supp. 343 (N.D.
Ohio 1981), supports judicial review beyond an inquiry
as to the existence of the statutory receivership grounds.
In Washington Federal, the Board appointed a receiver
for a solvent association (with a positive net worth of
$12 million) on the basis of information before the Board
that the association lacked sufficient funds or credit to
meet its obligations, coming due in March of 1980, to
purchase over $80 million of new securities. The Board
rested its decision to appoint a receiver on two grounds
listed in 51464: (1) an unsafe and unsound condition to
transact business, and (2) substantial dissipation of assets
due to violations of law or regulations and to unsafe or
unsound practices. Both grounds admittedly require a
more subjective determination by the Board as to an
institution's condition than does a finding of statutory
App. 11
insolvency. In its action under §1464, the association
claimed that the Board was misinformed concerning
the “true condition of the institution on March 18,
1980” (the date of the receiver's appointment) and thus
that the statutory requirements for Board intervention
were not satisfied. That court did state that it had
examined “whether the Board abused its discretion in
reaching its opinion that a receiver should be appointed.”
Id. at 353-54. However, such a statement cannot be
read to sanction de novo judicial review. Rather, the
statement is attributable to the nature of the central
issue throughout the trial: whether there were facts
before the Board, when it acted, on which the Board
could reasonably have concluded that “a” statutory
ground existed for the appointment of a receiver. The
abuse of discretion standard referred to in Washington
Federal therefore focuses on whether the facts before
the Board supported one or more of the §1464 statutory
grounds for intervention relied upon. It does not, as
plaintiffs contend, sanction the second-guessing of Board
judgment once such statutory grounds have been satisfied.
While the court in Washington Federal correctly observed
that the Board does not have the “absolute power to
decide whether a ground exists for appointing a receiver,”
id. at 353, the court also held that Iflaetors are only
relevant if they may be subsumed under ‘one or more’
grounds that form the basis of the Bank Board's ‘opinion’
to order a receivership.” Id. at 354.
Under the facts of our case, no such inquiry need
be made, as the parties have stipulated to the existence
of a statutory ground — insolvency — sufficient to sustain
the appointment of a receiver on April 6, 1983. At this
point judicial inquiry ends!
App. 12
2.
B. THE LESS DRASTIC REMEDY CLAIM
In a cross-appeal, the plaintiffs-appellees urge this
court to reverse the district court’s holding as to Count
III of the complaint. In Count III the plaintiff contends
that the Board, in view of the protracted negotiations
between Biscayne and its staff and the absence of any
exigent circumstances surrounding Biscayne’s financial
straits, should have undertaken a less drastic remedy
than receivership for Biscayne. The trial court rejected
this contention and entered judgment for the defendants
on Count III. We sustain the trial court’s ruling, although
our rationale is somewhat different. As we emphasized
above, there is nothing in the statute at issue here
which authorizes a court to second-guess the Board's
choice of action as to a failing savings and loan association
once the requirements of §172%b) and, by incorporation,
§1464, have been met with regard to that association.
The discretion available under this legislation has
been delegated to the Board, not the courts.
We are also aware that there are claims still pending
in the district court brought by the plaintiffs-appellees
against the individuals involved in this suit under Bivens
theories. See Bivens u Six Unknown Federal Narcotics
Agents, 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619
(1971). See also Carlson v. Green, 446 U.S. 14, 100 S.Ct.
1468, 64 L.Ed.2d 15 (1980); Davis u Passman, 442 US.
228, 99 S.Ct. 2264, 60 L.Ed.2d 846 (1979). As to those
claims, the issue of “outrageous conduct” by the FHLBB
staff may be relevant. However, this decision does not
affect those claims and we make no rulings as to the
merits of such.”
App. 13
CONCLUSION
Finding that the district court had no authority to
disrupt the appointment of, or limit the authority of,
the FSLIC as receiver for Biscayne once a statutory
ground for receivership has been found to exist, we
REVERSE and VACATE both orders of the district
court. We direct that the district court enter judgment
in favor of defendants as to Count II. We AFFIRM the
court’s ruling as to Count III.
App. 14
FOOTNOTES
The relevant facts are recited in shortened form due to the
nature of the case, the fact that it deserves preferential treatment,
and because the issues in our opinion are primarily straightforward.
Biscayne's book value net worth, rounded to the nearest
$10,000, was as follows during the relevant period:
Month Net Worth
July 1981 $ 31,850,000
August 1981 29,590,000
September 1981 26,550,000
October 1981 23,820,000
November 1981 20,570,000
December 1981 16,770,000
January 1982 11,780,000
February 1982 8,890,000
March 1982 8,310,000
April 1982 4,990,000
May 1982 900,000
June 1982 690,000
July 1982 (3,933,520)
August 1982 (8,676,277)
September 1982 (12,443,346)
October 1982 (16,813,043)
November 1982 (19,856,031)
December 1982 (22,496,612)
January 1983 (24,713,900)
February 1983 (27,387,061)
March 1983 (29,103,258)
The parties stipulated during an initial hearing in April 1983
that Biscayne was insolvent within the statutory definition as of
the date of the Board's action. See Trial Transcript at 27-28, 91-92,
98.
App. 15
‘The court denied the motion due to the plaintiffs’ failure to
make “a sufficient showing of substantial threat or irrevocable
injury.” See April 12, 1983 Order.
The plaintiffs-appellees’ complaint at trial contained nine
counts. Counts I through V named the FHLBB, the FSLIC and the
FHLBB officers in their official capacities. Counts VI through IX
named the individuals in their individual capacities under a Bivens
theory. See Bivens v. Six Unknown Federal Narcotics Agents, 403
U.S. 388, 91 S. Ct. 1999, 29 L.Ed.2d 619 (1971). The court bifurcated
Counts I through V from Counts VI through IX. The district
court's opinion on appeal here addresses only Counts I through V.
The district court also found for defendants-appellants as to
Counts I, IV and V. Under Count I, plaintiffs concede that Biscayne
was statutorily insolvent, but assert that the Board is estopped
from asserting insolvency as a basis for the appointment of a
receiver in that the Board’s conduct caused the insolvency. The
trial court found that neither the Board nor its staff were guilty of
conduct causing the insolvency and that estoppel was not applicable
to this governmental function. Under Count IV, plaintiffs assert
that the Board's ex parte appointment of a receiver violated
Biscayne's due process rights. In Count V,. plaintiffs claim that
their equal protection rights were violated by the Board's action
in placing Biscayne under receivership while not taking such
action with regard to other similarly situated institutions. Both
theories were rejected by the trial court. None of these rulings is
challenged.
"September 9, 1983 Order at 102, 106.
The other grounds listed in the statute include: (ii) substantial
dissipation of assets or earnings due to any violation or violations
of law, rules, or regulations, or to any unsafe or unsound practice
or practices; (iii) an unsafe or unsound condition to transact business;
(iv) willful violation of a cease-and-desist order which hat become
final; (v) concealment of books, papers, records, or assets of the
association or refusal to submit books, papers, records, or affairs
of the association for inspection to any examiner or to any lawful
agent of the Board. 12 U.S.C. §1464(dX6KAXiiHv).
App. 16
»Home Owners’ Loan Act of 1933, ch. 64, §1, 48 Stat. 128.
“See supra note 3.
"The powers of the Board in instances of default by a state
savings and loan institution are delineated in 12 U.S.C. §172%c)
(2) (1982). Section 172%b), which establishes the Board's powers on
default of federal S & L's and is thus dispositive here, grants
even greater discretion to the Board than the section at issue in
Telegraph.
The findings of the trial court as to the conduct of certain
staff members are shocking. Our ruling today should not be
interpreted as approving or condoning in any way such actions, if
supported by the record, by representatives of governmental
agencies. What we hold is that such questionable conduct will not
and cannot support the relief ordered by the district court. These
issues simply have no relevancy in determining whether or not
statutory grounds existed for the Board's appointment of FSLIC
as receiver or to the power of the receiver to carry out its
responsibilities.
App. 17
APPENDIX B(1)
FILED SEP 9 1983
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 83-815-CIV-EPS
BISCAYNE FEDERAL SAVINGS
& LOAN ASSOCIATION, and
KAUFMAN & BROAD, INC.,
Plaintiffs,
u
FEDERAL HOME LOAN BANK BOARD, RICHARD
T. PRATT, EDWARD GRAY, JAMIE JACKSON,
THOMAS P. VARTANIAN, D. JAMES CROFT,
FEDERAL SAVINGS & LOAN INSURANCE
CORPORATION, H. BRENT BEESLEY, NEW
BISCAYNE FEDERAL SAVINGS & LOAN
ASSOCIATION OF MIAMI, STANLEY
WARRANCH, CHARLES T. BABCOCK, IR.,
KENNETH KAMBERG, R. BRUCE RICKS and
RAY M. SHAW,
Defendants.
MEMORANDUM OPINION
App. 18
INTRODUCTION
In a closed meeting held on April 6, 1983, the
Federal Home Loan Bank Board (FHLBB) adopted two
resolutions which form the basis of Plaintiffs’ complaint
in this case. FHLBB Resolution 83-184 rejected Plaintiffs’
recapitalization proposal designed to infuse new capital
into the financially troubled Biscayne Federal Savings
and Loan Association (Biscayne). FHLBB Resolution
83-185, adopted a short time thereafter, placed Biscayne
in receivership under the control of the Federal Savings
and Loan Insurance Corporation (FSLIC).'
Within an hour of the promulgation of the FHLBB
resolutions, FSLIC officials entered each of Biscayne's
34 branch offices, assumed control of the Association,
ousted several of Biscayne’s senior officers and transferred
Biscayne's assets to the newly formed New Biscayne
Federal Savings and Loan Association (New Biscayne)“
Within three hours of the FHLBB’s actions, Biscayne
and its principal shareholder, Kaufman and Broad, Inc.
(KB), filed the complaint in this action accompanied by
a motion for a temporary restraining order.’ Plaintiffs
prayed for the return of the Association to their control.
An immediate hearing was set that evening.
The parties’ characterization on April 6 of the
drove Biscayne to its knees and caused it to become
statutorily insolvent.
Defendants contended that Plaintiffs’ histrionics
obscured the truth and the simple legal issues before
the Court. Defendants averred that although they were
under no compunction to negotiate with Plaintiffs, they
indulged Biscayne and KB with endless months of
negotiations in an effort to solve Biscayne's financial
woes. Defendants contend that with Biscayne approaching
$30 million negative net worth and insisting that the
FHLBB bail out the Association with the infusion of
public funds, the FHLBB had no alternative save
appointing a receiver. The appointment of a receiver,
Defendants argued, was authorized by statute to protect
the depositors and the public confidence. Such
appointment, Defendants asserted, was one of the risks
of doing business with FHLBB and receiving insurance
from FSLIC.
The Court denied Plaintiffs’ motion for a temporary
restraining order on April 6, 1983. Piscayne Federal
Savings and Loan Association, et al u Federal Home
Loan Bank Board, et al, 561 F.Supp. 1046 (S.D. Fla.
1983), appeal docketed, No. 83-5432 (11th Cir. June 6,
1983). In compliance with the statutory mandate that
this cause be heard on an expedited basis and in
recognition that the public interest necessitated a rapid
resolution, the Court ordered the immediate
commencement of discovery and it scheduled opening
arguments in the trial within three weeks.‘
In denying the motion for a temporary
restraining
order, the Court invoked the All Writs Act, 28 U.S.C.
§1651, and instructed Defendants not to undertake any
App. 20
—
actions in the management of New Biscayne that could
drastically alter the financial or organizational structure
of Biscayne. Aware that the All Writs Act should not
be invoked to circumvent the requirements for a
temporary restraining order pursuant to Rule 65(b),
Fed. R. Civ. P., the Court felt that the complete
transformation of Biscayne during the pendency of the
trial could result in a hollow victory for the Plaintiffs
should they ultimately prevail. A complete dissipation
of assets would effectively deny the Court jurisdiction
over the res—the Association and its assets—in this
proceeding and prevent the Court from restoring the
Association to the Plaintiffs. 561 F.Supp. at 1049-50.
See also Florida Medical Association u U.S. Department
of Health, Education and Welfare, 601 F.2d 199 (5th
Cir. 1979).
The short amount of time allotted for discovery
placed a great strain on the parties as well as on the
Court. The parties conducted numerous depositions in
Miami, Washington, D.C., and New York. As many as
50,000 pages of documents were exchanged. The efforts
of the parties and their response to this Court’s demands
cannot go without comment. The filing of the complaint
through closing arguments after trial consumed a period
of only 63 days. This could not have occurred without
the full cooperation of the two outstanding law firms
and trial counsel for both parties.
The FHLBB based the appointment of a receiver
on its powers delineated in 12 U.S.C. §1464(dX6XA).'
The FHLBB cited subsections (i) and (iii) as grounds for
the appointment.“ These subsections allow for appointment
of a receiver for the following reasons:
App. 21
(i) insolvency in that the assets of the association
are less than its obligations to its creditors
and others, including its members;
(iii) an unsafe or unsound condition to transact
business.
12 U.S.C. §1464(dX6XAMXi) and (iii).
Plaintiffs’ second amended complaint contains nine
counts. Counts I through V name the FHLBB, the
FSLIC and FHLBB officials in their official capacities.
Counts VI through IX name the individuals in their
individual capacity under a Bivens claim. See Bivens u
Siz Unknown Federal Narcotics Agents, 403 U.S. 388
(1971). See also Davis u Passman, 442 U.S. 223 (1979);
Carlson u Green, 446 U.S. 14 (1980).
The Court bifurcated Counts I through V from
Counts VI through IX. This opinion concerns Counts I
through V.
Counts I through V allege the following:
Count I: Biscayne was statutorily insolvent
pursuant to §1464(dX6XAXi); however, the FHLBB
is estopped from asserting insolvency as a
basis for the appointment because “defendants,
singly and in concert”, created that insolvency.
Biscayne was not in an unsafe and unsound
condition pursuant to §1464(dX6\AMiii).
Count II: The FHLBB’s appointment of a
receiver constituted “an abuse of discretion”,
App. 22
was “arbitrary and capricious, contrary to prior
representations” and “not warranted by the
facts and circumstances”.
Count III: In view of the sixteen (16) month
history of negotiations between the
FHLBB/FSLIC and plaintiffs, in view of the
absence of any exigent circumstances suggesting
that Biscayne Federal was in danger of imminent
financial collapse or that the public interest in
the integrity of a financial institution required
such action, and in view of contrary
representations by defendants, the ez parte
appointment of a receiver for Biscayne Federal
was an abuse of discretion.
Count IV: Defendants’ assertions that
Biscayne’s shareholders had no property interest
and that the appointment of a receiver was
undertaken to extinguish the cloud of
shareholders’ interest in Biscayne rendered
the ex parte appointment of the receiver a
breach of Plaintiffs’ due process rights under
the Fifth Amendment.
Count V: The defendants have engaged in
unequal treatment of similarly situated savings
and loan associations who are admittedly
insolvent. The defendants’ imposition of a
receivership over insolvent Biscayne Federal
while choosing not to impose a receivership
over similarly situated savings and loan
associations constitutes unequal treatment under
the law in violation of the guarantees of the
Fifth Amendment.
App. 23
Plaintiffs concluded:
WHEREFORE, because defendants’ actions as
alleged in Counts I, II. III. IV and V in appointing
a receiver for Biscayne ex parte were improper,
unwarranted, an abuse of discretion, and in
violation of the Fifth Amendment, applicable
federal statutes and regulations promulgated
thereunder, plaintiffs request that this Court
enter an Order removing the receiver, restoring
the status quo and requiring FHLBB/FSLIC
to agree to a plan that would resolve Biscayne
Federal's net worth and solvency problems.
Plaintiffs also request that this court grant
whatever other relief it deems just and proper
including, but not limited to, an award of
attorneys’ fees.
ISSUES BEFORE THE COURT
Plaintiffs assert that this case presents two issues
for resolution: 1) whether one of the statutory criteria
for the appointment of a receiver existed on April 6;
and 2) whether, upon the finding that a statutory criterion
existed, the FHLBB’s decision to appoint a receiver
was “proper”.
Defendants responded to each amended complaint
with a motion to dismiss. The Court reserved ruling on
the dismissal motions. Responsive pleadings were filed.
Defendants dispute Plaintiffs’ formulation of the
triable issues before the Court. They contend that the
only reviewable issue for the Court is whether one of
App. 24
the statutory criteria existed on April 6. Defendants
argue that once the Court is satisfied that the FHLBB’s
decision finding the existence of one of the criteria was
not an abuse of discretion, Plaintiffs’ cause must fail.
Defendants contend that the FHLBB’s decision to
appoint a receiver, once one of the criteria is met, is an
exercise of its discretion which is beyond the permissible
scope of judicial scrutiny. See Vermont Yankee Nuclear
Power Corp. u Natural Resources Defense Council, 435
U.S. 519, 558 (1977). They assert that the FHLBB cannot
be estopped from asserting insolvency as a basis for
the appointment of a receiver, regardless of the extent
of the alleged egregious behavior.
Defendants argue that the issue of Biscayne’s unsafe
and unsound condition need not be reached since Biscayne
has stipulated to its statutory insolvency as of April 6.
This stipulation, they argue vehemently, mandates
dismissal of the case. Defendants presented no evidence
to rebut Plaintiffs’ contention that Biscayne was not in
an unsound or unsafe condition on April 6, 1983.
Defendants argue that Plaintiffs’ constitutional claims
(Counts IV and V) have been foreclosed by previous
rulings and are not properly triable in a §1464(d\X6XA)
action.
The Court was initially inclined to accept Defendants’
representation that the only triable issue was whether
one of the statutory criteria was met. Defendants find
support for their proposition in at least one other District
Court opinion. See Telegraph Savings and Loan
Association v. Federal Savings and Loan Insurance
Corporation, No. 80 C 2792 (N.D. Ill. June 9, 1981)
App. 25
(memorandum opinion) at 8-9, affirmed, Telegraph Savings
and Loan Association v. Schilling, 703 F.2d 1019 (7th
Cir. 1983). But see Washington Federal Savings and
Loan Association v. Federal Home Loan Bank Board,
526 F.Supp. 353, 535-54 (N.D. Ohio 1981).’ It appears,
however, that the Court in Telegraph Savings was not
confronted with accusations that the Board had engaged
in outrageous behavior.
In another District Court case where Plaintiffs
made serious allegations concerning the FHLBB’s
behavior, the court framed the triable issues along the
lines proposed by the Plaintiffs in the present action.
Fidelity Savings and Loan Association u Federal Home
Loan Bank Board, 540 F.Supp. 1374 (N.D. Cal. 1982),
reversed on other grounds, 689 F. 2d 803 (9th Cir. 1982),
cert. denied. U.S., 103 S.Ct. 1893, (1983).* The
court stated:
This court is not to substitute itself for the
Federal Home Loan Bank Board in the decision
to exercise its jurisdiction, if it is present.
Rather, once the court determines that the
three statutory prerequisites have been satisfied,
it will not disturb the decision of the Board to
exercise its jurisdiction unless there has been
an abuse of discretion in the exercise of that
power.
Therefore the issues before this court are (1)
whether, when looking at all the evidence that
was available to the Board and that information
subsequently discovered, the three statutory
prerequisites were satisfied, and (2) whether
App. 26
the Boards exercise of jurisdiction constituted
an abuse of discretion.
540 F.Supp. at 1378. (Emphasis added).
The Court believes that it is compelled to look
beyond the issue of whether one of the statutory criteria
has been met when the allegations indicate that the
agency may have acted in an outrageous manner and in
contravention of its statutory purpose. Regardless of
whether the statutory prerequisites have been met,
the doctrine of agency discretion may not be used to
insulate the Board from judicial scrutiny when serious
agency abuses offend decency. The Court ordered this
action to address itself to whether one of the statutory
criteria had been met and whether the FHLBB properly
exercised its discretion when it appointed the receiver.
The Court does not agree with Defendants’ argument
that Plaintiffs’ constitutional claims (Claims IV and V)
are not cognizable in a §1464(dX6XA) action. The Court
believes that §1464(dX6XA) should not be read in a
vacuum or apart from other applicable standards of
review under the Administrative Procedure Act where
such standards dovetail with the statute and where
the legislative history does not evince a Congressional
intent to preclude the Court from making such an
inquiry. See Johnson u Robinson, 415 U.S. 361 (1974).
Accordingly, the constitutional issues were addressed
by the parties pursuant to 5 U.S.C. §706(2\B).’ See
Unity Savings Association u Federal Savings and Loan
Association, No. 82 C 1763 (N.D. Ill. May 31, 1983)
(memorandum opinion) at 3-4.
App. 27
The opinion that follows constitutes the Court's
findings of fact and conclusions of law as required by
Rule 52(a), Federal Rules of Civil Procedure.
SCOPE OF REVIEW
Prior to discussing the facts of this case, the Court
shall address the scope of its review. This issue was
raised by the Court sua sponte at the commencement
of this action. The parties agreed that the Court’s duty
was to make a review of the administrative record to
see if the agency abused its discretion. Having framed
the two issues for review, the Court allowed the Plaintiffs
to present additional evidence. The parties did not
discuss the scope of review issue during closing
arguments.
In the text of their final brief, Plaintiffs argue that
the Court should undertake a de novo review and utilize
a greater weight of the evidence test to determine if
the agency acted properly. However, in the conclusion
of their brief and in the complaint itself Plaintiffs urge
the Court to find that the Defendants abused their
discretion. The abuse of discretion standard would be
the standard utilized for a review on the record; it
would not be the applicable standard for a de novo
review.”
Defendants do not state in their final brief what
the scope of review should be. Given Defendants’
articulation that the standard to be applied is “abuse of
discretion” and their arguments to this Court, they
advocate a review on the record.
App. 28
Several courts have addressed the issue of the
scope of review in a §1464(dX6XA) proceeding. While
this Court is not examining this issue on a clean slate,
it is apparent that the writing already committed to
slate is contradictory. Compare Fidelity Savings, 540
F.Supp. at 1378 with Telegraph Savings, No. 80 C 2792
(N.D. Ill. June 9, 1981) at 7-10 and Washington Federal,
526 F.Supp. at 350-354. At least one court which advocated
a review on the record struggled with the problem of
obtaining a complete record for judicial review.
Washington Federal, 526 F.Supp. at 350-354."
The problems with assembling a complete
administrative record for review are occasioned in great
part by the organizational structure of the FHLBB.
Under the organizational scheme, the Chairman assumes
a dual role in considering matters involved in the present
action. He acts in a quasi-judicial role with the two
other Board members in deciding how to interpret
agency policy and regulations, when to invoke the FHLBB
authority to appoint a receiver, and whether a particular
proposal should be accepted in light of agency policy.
In his other role, the Chairman effectively acts as
the Chief Executive Officer. He guides and advises the
staff during its negotiations with a particular association
prior to the submission of a proposal to the full Board
for consideration. It was the performance in these dual
roles by Chairman Pratt that is the crux of Plaintiffs’
case.
Plaintiffs argued that in guiding the staff, the
Chairman received information upon which he ultimately
decided the fate of KB's proposals and of Biscayne. It is
clear from the testimony in this case that Chairman
Pratt, generally considered a forceful Chairman, conferred
on a number of occasions with the senior staff regarding
KB’s proposals and Biscayne's situation. The contents
of these conversations were not included in the
administrative record originally offered to the Court
by the Defendants on April 6.
On inquiry from the Court, the Defendants agreed
on several occasions that all information given to the
Board concerning the Biscayne situation should be
considered the basis for the Board's decisions. Defendants
agreed that the contents of the conversations should
be included in the record.
The Court considered how to obtain the contents
of these discussions. Plaintiffs noticed the depositions
of FHLBB staff members as well as members of the
Board. Defendants moved for a protective order as to
the Board members. The Court initially allowed only
the depositions of the staff members. Plaintiffs were
allowed to inquire into the history of the negotiations
between the parties and into what they communicated
to the Board members.
The Court allowed Plaintiffs to depose the Board
members and inquire as to what the staff communicated
to them when it became evident that senior staff members
had held several important conversations with Pratt
concerning this matter.”
Sentient that the mental processes of the decision
makers is above inquiry, the Court felt that Plaintiffs
should be given an opportunity to substantiate their
claims that the Board and staff had been involved in
the worst form of double dealing and outrageous behavior.
App. 30
:
‘
4
+
22
2
a. » he aa
But see United States u Morgan, 304 US. 1, 18 (1938),
313 U.S. 999, 1004 (1941); Davis u Braswell Motor Freight
Lines, 363 F.2d 600, 604-605 (5th Cir. 1966). Since there
exists no articulated Board policy or rules concerning
what kind of proposals are approved by the Board or
when a receiver will be appointed, the only way for the
Plaintiffs to compare what the staff represented to
them as being Board policy and what in fact was Board
policy was to depose the Board members. Plaintiffs
withdrew their notice of Chairman Pratt’s deposition
when Defendants announced that he would testify at
trial.
The Court notes that the District Judge in
Washington Federal allowed the Plaintiffs to submit
testimony refuting statements made by staff members
at the Board meetings and allowed Plaintiffs to inquire
of staff members as to what they communicated to the
Board members at the briefing sessions and to the
contents of the communications. Washington Federal,
526 F.Supp. at 350-352, 354. In essence, the court expanded
the initial record and supplemented it with live testimony
concerning the communications and the factual
underpinnings of the Board's decision.
Regardless of how the scope of review is
characterized in Washington Federal or in the present
case, the procedures followed are similar. Defendants
assumed the initial burden of producing the record
which included depositions of staff and Board members.
Plaintiffs presented their witnesses and Defendants
presented witnesses to rebut Plaintiffs’ claims. Both of
the parties had the chance to examine all of the significant
players in the negotiating and decision-making process.”
App. 31
MA. ot
Having considered all of the evidence, the Court
does not feel that the issue of the proper standard of
review need be reached. Under either the greater weight
of the evidence standard or the abuse of discretion as
to at least Count II, Plaintiffs must prevail.
THE PARTIES
Defendant Federal Home Loan Bank Board (FHLBB)
is a federal agency organized pursuant to the Federal
Home Loan Bank Act, 12 U.S.C. §§1422 et seg. The
agency has supervisory authority over federally chartered
savings and loan associations pursuant to the Home
Owners’ Loan Act of 1933, 12 U.S.C. §§1461 et seg. The
adoption of final resolutions by the FHLBB is accomplished
by the vote of the three Board members. The members
of the Board at the time the FHLBB adopted the two
resolutions being attacked by Plaintiffs were Richard
T. Pratt (Pratt), Edwin J. Gray (Gray) and Jamie Jackson
(Jackson). Pratt served as Chairman of the FHLBB.
Defendant Federal Savings and Loan Insurance
Corporation (FSLIC) is a federal agency organized
pursuant to Title IV of the National Housing Act, as
amended, 12 U.S.C. §§1724-1730(f). FSLIC insures the
accounts of eligible state savings and loan associations,
various savings banks and all federal savings and loan
associations. 12 U.S.C. §§1724-1730(f). FSLIC operates
under the direction of the FHLBB. 12 U.S.C. §1725i(a);
12 U.S.C. §1437(b); Reorganization Plan No. 3 of 1947.
When the FHLBB appoints a receiver for a federally
chartered savings and loan association, it must appoint
FSLIC. 12 U.S.C. §§1462, and 1464(dX6XD).
App. 32
Plaintiff Biscayne Federal Savings and Loan
Association (Biscayne) which operated 34 branches in
South Florida was organized in 1956 and chartered
that same year by the FHLBB. Its charter expressly
provided that it was subject to “all lawful and applicable
rules, regulations, and orders of the Federal Home
Loan Bank Board.” By virtue of its status as a federally
chartered association, Biscayne has enjoyed the benefits
of FSLIC insurance since its inception in 1956. In 1976
Biscayne converted from a mutual to a stock association
with the FHLBB approval.
In 1980 Biscayne’s management defeated a takeover
bid by Empire Gas Corporation by persuading Plaintiff
Kaufman and Broad, Inc. (KB) to acquire control of
Biscayne; KB acted as a “white knight” in the parlance
of corporate acquisition litigators. KB purchased
approximately 25% of Biscayne’s outstanding stock.
As part of its agreement with Biscayne, KB also acquired a
seven-year option to tender for any and all of the
remaining shares of Biscayne stock.
The FHLBB approved KB's acquisition of a
controlling interest in Biscayne pursuant to FHLBB
Board Resolution No. 80-673. The FHLBB placed several
conditions on the acquisition. Plaintiffs do not challenge
the authority of the FHLBB to impose those conditions;
Plaintiffs do not deny that they are bound by the
conditions therein imposed. Two of the conditions state,
in essence, that KB will maintain Biscayne’s net worth
at no less than the minimum regulatory level from the
time it acquires 50% or more of Biscayne’s stock, and
that Biscayne may not pay dividends in any particular
year in excess of 50% of Biscayne's net income.
App. 33
Plaintiff Kaufman and Broad is a publicly traded
corporation based in Los Angeles and founded in 1957
with interests in various businesses including home
building, insurance and mortgage banking. Mr. Eli Broad
is its founder, President and majority stockholder. KB
has consolidated assets in excess of $1 billion and total
capital of $270 million. Since 1980, KB has owned
approximately 25% of Biscayne’s outstanding stock of
approximately 1.9 million shares and is Biscayne's largest
shareholder.“
Mr. H. Brent Beesley (Beesley) was at all times
relevant hereto the director of the Office of FSLIC at
the Bank Board. Mr. Thomas P. Vartanian (Vartanian)
was at all times relevant hereto General Counsel to the
Bank Board and director of the Office of General Counsel
(OGC). Mr. D. James Croft (Croft) is director of the
Office of Examinations and Supervision (OES) at the
Bank Board.“
Defendants Stanley Warranch, Charles I. Babcock,
Jr., Kenneth Kamberg, R. Bruce Ricks and Ray M.
Shaw are the directors of New Biscayne and were
joined by this Court’s Order for purposes of placing
them on notice of the Court’s decree issued pursuant to
the All Writs Act. Biscayne Federal Savings and Loan
Association, et al u Federal Home Loan Bank Board,
et al, No. 83-815-CIV-EPS (S.D. Fla. May 6, 1983, nunc
pro tunc, April 29, 1983) (“Order on Matters Presented
to the Court at Trial on April 29, 1983”)."
ECONOMIC OVERVIEW
The savings and loan industry operated at a profit
for decades. Savings and loan associations (S&L’s) accepted
App. 34
savers’ deposits, paying interest at low rates which
were fixed by the federal government. These deposits
were then reinvested primarily in single family home
mortgages. The long-term interest rates on these
mortgages were slightly higher than the short-term
interest rates paid to depositors, thereby allowing S&L’s
to realize a profit. By fixing the rate which could be
paid to depositors, the government was able to indirectly
control the interest rates charged by S&L’s on home
mortgages; this guaranteed the continued infusion of
funds into America’s housing industry.
The viability of this system was based upon the
existence of stable interest rates. Since the income of
any given S&L was essentially fixed based on its portfolio
of long-term mortgages, its financial health was dependent
on its ability to stabilize its costs, i.e., the interest paid
to depositors. The ability to stabilize costs was easily
achieved through the 1960's as the interest rate paid to
depositors remained fixed by the government and
competitive with market rates.
The popularity of money market funds and other
liquid investments increased as interest rates rose in
the late 1970's. Investors transferred money from S&L
passbook accounts to money market funds. It became
increasingly difficult for S&L's to extend new loans.
S&L’s looked elsewhere to find funds to support loans
to which they had already been committed. They were
forced to borrow these funds at high current market
rates.
In seeking to assist the troubled S&L industry,
Congress authorized S&L’s as of July 1, 1978 to issue
deposit instruments which paid interest at a level higher
App. 35
than the passbook rate. Interest on these six-month
money market certificates was payable at a rate of
14% above the rate on six-month US. Treasury securities.
The initial effect of money market certificates was
positive as the interest rate being paid on these certificates
remained lower than the rates of the S&Ls’ combined
investment portfolio. As the United States’ economy
began to experience a period of high and wildly gyrating
interest rates, the effect of the certificates was less
promising.
For most of the period from the beginning of 1981
to the middle of 1982, S&L depositors with low-paying
passbook accounts transferred large amounts of their
funds to S&L money market certificates. While S&L’s
were forced to pay these high rates to their depositors
on the certificates, their source of income was the
mortgage portfolio made up of long-term loans fixed at
relatively low levels. S&L’s with older portfolios
containing mortgages executed long before the sudden
rise in interest rates were hurt most severely since
they received the lowest interest payments.
In 1981 and 1982, it is estimated that 85% of the
S&L’s were losing money. The S&L industry was suffering
losses at dramatic rates. Plaintiffs’ expert witness opined
that from July 1981 to February 1983, on the basis of
fair market value, there was “no question” that the
entire S&L industry had no net worth. Chairman Pratt
agreed that the negative net worth of the industry
reached a low point of $50 to $150 billion in 1982 and
termed this time as a “holocaust” for savings and loan
institutions. Industry conditions created an unprecedented
App. 36
workload for the FHLBB in its efforts to maintain
supervision over many troubled institutions.
In late 1982 and and 1983, interest rates again
subsided dramatically. This had an immediate effect on
the short-term profitability of the industry as more
savings and loans began to realize a positive “spread”.
The spread is the difference between the average return
on their assets and the average cost of their deposits.
More recently (February 1983), the industry as a whole
has experienced an infusion of one billion dollars of
new capital.
BISCAYNE’S FINANCIAL CONDITION
During the 1980-81 fiscal year, Biscayne first began
to experience a negative spread; its cost of borrowing
money in the form of money market certificates, passbook
accounts and other sources exceeded the return it realized
from its loan and investment portfolio by .34%. During
the 1981-82 fiscal year, the negative spread fell to -1.54%.
This figure represented a loss in that single fiscal year
of approximately $30 million.
Biscayne exhibited a negative annualized spread
from at least June 1981 until December 1982. It regained
a positive spread as of March 31, 1983; the spread was
positive .64%. Plaintiffs’ expert opined that absent a
rise in interest rates, the positive spread should become
larger. If interest rates were to rise, however, there is
no indication that Biscayne would have been insulated
from a further precipitous decline in net worth or that
its spread would remain positive. From July 1981 through
April 6, 1983, Biscayne’s net worth steadily decreased.”
App. 37
4
7 — * 41 . 2 Ast: at ee ae & Ade
By the end of July 1982, Biscayne Federal registered
a negative net worth on a book value basis of $ 8.93
million. Its liabilities exceeded its assets as reflected
on the institution’s balance sheet.
Biscayne’s negative net worth continued to plummet.
Between July 1, 1982 and February 28, 1983 Biscayne’s
net worth decreased approximately $3.5 million per
month.” The parties do not dispute that by April 6,
1983 Biscayne had a book value negative net worth of
approximately $30 million. Despite a positive net spread
and the fact that the industry was continuing to show a
recovery, Biscayne continued to lose money. Defendants
projected that even if interest rates were to remain
relatively lower than they had been in the 1982-83
period, Biscayne would not reach a positive net worth
for another eight years and it would not become profitable
for another three years.
Plaintiffs claim and Defendants do not dispute
that Biscayne did not suffer from a liquidity crisis and
that it had a present ability to meet depositor demand
for funds and other obligations as they became due.
Plaintiffs’ expert as well as the report completed by
Wertheim and Company for the Bidders’ Package issued
by the FHLBB after April 6, 1983, indicates that net
worth is principally a book entry and not necessarily a
true characterization of the daily operation of the
institution, its ability to generate profits or its true
financial condition.
Plaintiffs argue that the primary inquiry in assessing
the financial condition of an institution is the liquidity
of the institution. Plaintiffs, however, do not argue
that insolvency as it is used in 12 U.S.C. §1464(dX6XA)
App. 38
means lack of liquidity. They agree that it refers to
negative book value net worth.” They also concede
that under this statutory scheme, Biscayne was
approximately $30 million insolvent.
What is set forth hereafter chronicles a series of
negotiations aimed at solving an inevitable problem of
insolvency if no feasible solution could be arrived at.
Biscayne, through KB and its principal stockholder Eli
Broad, made every effort to save Biscayne from
receivership while watching it go from $24 million in
the black to $30 million in the red.
THE FACTS
BISCAYNE—POSITIVE NET WORTH 23.82 MILLION
On October 26, 1981, Ronald Kabot (Kabot), KB’s
Senior Vice President, wrote a memorandum to Eli
Broad (Broad), KB’s Chairman of the Board, Chief
Executive Officer and largest shareholder. In this
memorandum Kabot noted that, Biscayne's net loss
could easily approach $30 million for its fiscal year
ending June 30, 1982“. He suggested that KB sell its
option to purchase outstanding shares of Biscayne while
it was still worth something. He concluded: “I'm beginning
to favor disposing of our option if the price gets us our
money out. It would give us more flexibility to ‘strike
again’ from a position of strength when FSLIC may
even be more desperate than now.”
App. 39
THE NEGOTIATION PROCESS: PHASE I
BISCAYNE—POSITIVE NET WORTH 20.37 MILLION
In the late fall of 1981, one of KB’s Washington,
D.C. attorneys, George Christopher (Christopher), had
lunch with Beesley, Director of FSLIC. Christopher
enumerated Biscayne’s problems to Beesley and talked
“about the possibility of trying to put together some
kind of a plan that would allow us to deal with these
problems without having to go through the disruption
inherent in a receivership involving a publicly traded
company.” Beesley told Christopher that he was “not
particuiarly optimistic” about the possibility of saving
the existing shareholders’ interest in Biscayne. Beesley
stated that he was willing to work with KB and its
counsel to try to find a way to assist Biscayne with a
view toward creating a model for dealing with other
failed stock associations.
Broad and Kabot met with Beesley on a number of
occasions starting on December 14, 1981 to discuss
possible FSLIC assistance to Biscayne.
In preparation for the December 14, 1981 meeting,
Kabot wrote a memorandum to Broad based on the
earlier conversations between Christopher and Beesley.
The memorandum stated, in pertinent part:
3. For purposes of review, I am listing below
the key points from the Beasley [sic] Christopher
meeting(s) which I believe should affect our
thinking most significantly in preparing our
proposal to FSLIC:
App. 40
(a) Beasley's [sic] two major conditions to do
a deal:
(1) Some new hard $$ must be put into Biscayne
by other than FSLIC and the ‘old’ capital must
be subordinate to everything
(2) For FSLIC to agree to assistance, there
must be new management
(b) Other Beasley [sic] concerns:
(1) Should FSLIC actually have to provide
assistance, he wants to be repaid and be in a
preferred or pari passu position
(2) Would like all shareholders to have the
opportunity to participate in putting new capital
into Biscayne
(3) He wants to honor FSLIC’s rule of not
talking to outsiders without talking with
management; he would like K&B to tell BFS
[Biscayne Federal Savings] management and
Christopher agreed tothis;... .
(c) Some other Beasley [sic] thoughts to
consider:
(1) He wants only to assist Biscayne so it
may survive and be salvaged vs our thought
of making it a very strong Florida S&L able to
absorb other weak ones
(2) He wants a model to use for a stock company
*
<4
8 —
App. 41
(3) He will shop any deal proposed with
K&B...
(4) He would prefer to do a deal with existing
shareholders
(5) He would like to avoid a fight with a
listed company
(6) He asked if $10 million was all that K&B
was willing to contribute (in response to a
Christopher comment)
(7) Thinks shareholders should contribute 1-2%
of assets.
5. Time appears to be of the essence; in every
conversation I’ve had with Christopher, he
conveys a sense of urgency which he has been
made to feel from Beasley [sic].
The December 14 meeting was attende by Beesley
and several members from the FSL7° ff including
Gene Hall and Bernard MeK opher, Robert
Wittie, a member of Christovier s law firm, Kabot,
Broad and Don Kaplan, a financial analyst, represented
KB.
The proposal presented by KB at the December 14
meeting provided that Biscayne would issue subordinated
preferred stock and that FSLIC would infuse a quantity
of money which would ultimately be repaid without
interest. The proposal modeled after what KB
understood to be a recently accepted proposal by the
FHLBB for another troubled savings and loan
App. 42
association.” KB’s understanding of the other proposal
was based on what it had read in the Wall Street
Journal. Beesley rejected this proposal and stated
emphatically that any FSLIC assistance would have to
be repaid with interest. He stated that FSLIC was not
going to make any more deals along the lines of the one
referred to in the Wall Street Journal.
BISCAYNE — POSITIVE NET WORTH 16.77 MILLION
A second meeting was held in Washington on January
14, 1982, between Mr. Beesley and representatives of
KB. The parties agreed upon a set of parameters
acceptable to FSLIC for a new capital infusion proposal.
BISCAYNE — POSITIVE NET WORTH 11.78 MILLION
On February 2nd KB submitted a revised
recapitalization proposal consistent with the agreed
parameters. This involved a preferred stock offering,
certain financial commitments by KB to assure that at
least $10 million of preferred stock would be sold and a
form of FSLIC aid known as “spread assistance.“ The
spread assistance would be repaid by Biscayne Federal
with compounded interest. To support the feasibility of
its proposal, KB engaged an economic consulting firm
to perform financial simulations. The summaries of the
simulations were forwarded to Beesley.
Kabot testified that at the February 4th meeting,
Beesley told him that “the world has changed again” in
Beesley suggested that KB submit a revised proposal
utilizing a purchase accounting method and other “market-
to-market”* accounting techniques utilizing income capital
certificates.”
On February 25, 1982 Biscayne issued a news release
which stated in pertinent part:
Continuation of the Association's losses at
current levels will exhaust the Association's
net worth in the near future. Once the
Association’s net worth is exhausted, the FSLIC
is likely to take action to protect depositors
which could result in the total loss of stockholder
capital investment in the institution. The FHLBB
has recently expressed to the Association its
concern with respect to the situation and has
called the Association’s attention to the FHLBB’s
power to act.
Exhaustion of the Association’s net worth can
be averted only through a substantial capital
infusion from private investors, which in all
probability would need to be coupled with FSLIC
assistance. Biscayne Federal is actively seeking
such additional capital. However, there can be
no assurance that third parties can be induced
to make such substantial investment or that
FSLIC would grant the required assistance
and approve any proposed capital infusion or
that such infusion would result in the
preservation of existing shareholder capital
investment.
*Petitioners’ note: Should be “mark-to-market” in lieu of market
to-market.”
App. 44
n ~~ a
In February 1982, the Bank Board staff proposed
that Biscayne’s Board adopt a resolution consenting to
merging Biscayne with a strong association. Biscayne's
Board of Directors was reluctant to adopt such a resolution
due to, among other things, the disclosure requirements
of the Securities Act of 1934. During March and early
April 1982, officials at the Atlanta Federal Home Loan
Bank informally shopped“ Biscayne by making telephone
inquiries of thirteen savings and loan associations to
determine their interest in merging with Biscayne.
None indicated an interest in a merger in the absence
of substantial FSLIC assistance.
BISCAYNE—POSITIVE NET WORTH 8.89 MILLION
On March 15, 1982, Broad and Kabot joined Beesley
and his wife for dinner in Park City, Utah. At dinner,
the parties discussed the outline of a recapitalization
plan for Biscayne. On March 17th Broad wrote a letter
to Beesley setting forth the outline of a proposal which
he characterized as “our mutual general understanding.”
He stated in part:
We agreed that our general understanding is
subject to you and your staff's review of the
‘numbers’ and a satisfactory definitive
agreement. We are pleased that [FHLBB]
Chairman Pratt is in conceptual agreement.
Under the Park City formula, as understood by
amount representing Biscayne Federal's estimated losses
for the 12 months following the closing of the
transaction.“
In accordance with Beesley's wishes, as expressed
in the parties’ earlier discussions, the transaction would
be accounted for using purchase accounting. Since the
ICC’s would have had to be repaid upon Biscayne's
achievement of a specified level of income, the FSLIC
assistance under the Park City proposal was considered
to be repayable assistance.
Beesley believed that the recapitalization proposal
outlined in Broad’s March 17th letter did not conform
to what was discussed at the Park City dinner meeting.
He testified that he was “totally taken back” by Broad’s
reference to Chairman Pratt since “to my knowledge
that was never discussed and certainly I don’t believe
that Chairman Pratt had any idea at that point in time
what the discussions were.” (Emphasis added). Kabot
testified that Beesley stated that he thought the proposal
“would be acceptable”. As to that matter, there was no
indication that Beesley represented that Pratt would
agree to the proposal or that Beesley was authorized
to say that the Board would adopt it. He did not,
however, write a letter to Broad to correct Broad's
misunderstanding. Beesley explained that he received
scores of letters each day and generally delegated
responsibility for replies to his subordinates. Beesley
orally advised representatives of KB of the
misunderstanding sometime prior to April 8th but not
before KB and Board staff members had spent a significant
amount of time working on the details of the proposed
transaction and after KB had incurred expenses to
retain investment banking advisors.
App. 46
BISCAYNE—POSITIVE NET WORTH 8.31 MILLION
On April 19, 1982, Broad, Kabot and Wittie met
with Beesley, Vartanian and Hall to discuss the Biscayne
recapitalization proposal. Vartanian's contemporaneous
notes record that Broad stated during the meeting
that “J understand FSLIC is not here to give money
away to stockholders.” (Emphasis added). KB's attorneys
were directed by the Bank Board staff to modify the
documents to provide for a formula basis for the infusion
of new shareholder capital and the income capital
certificates. On April 21, Kabot wrote a letter to Albert
Pallot, Biscayne’s founder and then Board Chairman
and Chief Executive Officer, in which he summarized
the April 19 meeting. He stated that KB had no assurance
that FSLIC would accept the proposal because FSLIC
“anticipates receiving at least two other proposals from
other parties and that FSLIC must proceed to enter
into the arrangement that is the most cost effective to
the FSLIC fund.”
BISCAYNE—POSITIVE NET WORTH 4.99 MILLION
By early May 1982, attorneys for KB and FSLIC
had incorporated the KB proposal into a draft that
contemplated purchase of Income Capital Certificates
(ICC’s) by FSLIC from Biscayne. KB believed that the
negotiations had been completed. However, the FHLBB
staff sent the draft agreements to outside legal counsel
for a general review. The outside counsel retained the
investment banking firm of Lehman Brothers to assist
in the evaluation. Counsel reported on May 18 that the
proposed agreement raised “substantial fairness questions
and reporting concerns regarding Biscayne’s common
stockholders” as well as “the substantial prospect of
App. 47
‘strike’ or injunctive litigation which could stop this
deal before it is ever consumated.”
In late May 1982, Kabot, Christopher and Wittie
met with Beesley and members of his staff. After stating
that he had conceptual problems regarding the KB
proposal, Beesley was persuaded by Kabot to proceed
with the drafting of the proposal. Beesley added that
his staff would assume responsibility for redrafting
the proposal and incorporating FSLIC’s concerns.
BISCAYNE—POSITIVE NET WORTH 0.90 MILLION
The staff attorneys delivered a revised draft to
Wittie on June 4. On June 15 Christopher and Wittie
responded in a lengthy letter wherein they complained
that the staff's redraft gave FSLIC increased control
over Biscayne and made FSLIC's capital infusion
conditional. Counsel specified item-by-item their criticisms
of the staff's redraft.
BISCAYNE—POSITIVE NET WORTH 0.69 MILLION
On July 2, 1982 FHLBB attorney Hal Levi sent to
Wittie a letter stating that redrafts of the proposed
agreements containing “a number of accommodations
made as a result of your letter and our meetings” had
been sent to KB's counsel the previous day. Levi also
stated that Biscayne’s deteriorating financial condition
made it imperative that KB respond as soon as possible
to determine whether the transaction would be
consumated. Plaintiffs did not tender a redraft to Levi.
On July 12 Biscayne announced that it had entered
into an agreement in principle with City Federal Savings
App. 48
and Loan Association of Elizabeth, New Jersey to sell
City Federal six of its thirty-four branches. Biscayne
further claimed that it would recognize a $38 million
gain from the transaction.
On July 15, Broad, Kabot, Christopher and Wittie
met with Beesley, Hall, Levi and Bernie McKee (McKee)
to discuss the recapitalization proposal. The parties
could not reach an agreement; they agreed, however,
that the proposed branch sale to City Federal would
generate the required capital. The parties agreed to
hold the original proposal in abeyance. There was no
further activity with respect to KB’s first proposal
after the middle of July 1982.
In their closing arguments, Plaintiffs stated that
they did not ascribe any wrongdoing to the FHLBB for
their conduct during this first phase of negotiations.
THE NEGOTIATION PROCESS: PHASE II
BISCAYNE—ZERO NET WORTH
After the July 15 meeting, the parties turned their
attention to KB's new proposal based on the branch
sale. Before KB began negotiations with the FHLBB
concerning the branch sale proposal involving City Federal
Savings & Loan Association, KB rescinded the proposal
and presented another branch sale proposal. The new
proposal entered into in principle on August 9 involved
Biscayne and California Federal Savings and Loan
Association (Cal Fed).
App. 4
BISCAYNE—NEGATIVE NET WORTH—3.93 MILLION
The Biscayne/Cal Fed agreement provided that:
(a) Cal Fed would pay Biscayne approximately $1.7
million for the assets of the eight branches; (b) Cal Fed
would assume responsibility for payment of principal
and interest on the deposits at those branches; and (c)
Biscayne would give Cal Fed a mortgage-backed bond
in consideration for its agreement to assume those
deposits. The amount of the bond was to be determined
by multiplying the amount of liabilities assumed by
.8634146. The bond was to carry a fixed interest rate
calculated by increasing the average aggregate cost of
the deposits assumed by Cal Fed on the date the deal
was consummated by 5%. Had the transaction been
consummated on August 9, 1982—the date of the Cal
Fed/Biscayne agreement Cal Fed would have assumed
$410 million in deposits, which then had an average
aggregate cost of 12.8%, in exchange for a mortgage-
backed bond issued by Biscayne in the amount of $354
million ($410 million x .8634 = about $354 million)
carrying a fixed interest rate of 17.8% (128% + 5%
= 17.8%). The agreement gave Biscayne the right to
prepay the bond at any time but imposed a 20% call
premium if the bond were prepaid at any time within
the first ten years. The bond could be prepaid as
mortgages backing it were prepaid.
Had the transaction been consummated on August
9, 1982, Biscayne would have had to pay Cal Fed $63
million in interest ($354 million x 17.8%) in exchange
for Cal Fed's assumption of the obligation to pay about
$52.5 million interest on the deposits it assumed ($410
million x 12.8%). Biscayne's net annual payout to Cal
Fed would have been approximately $10.5 million ($63
App. 50
million — $52.5 million). While consummation of the
transaction would have saved Biscayne the cost of
operating the eight branches (approximately $3.7 million
per year), Biscayne would stil] have had to make a net
annual payout to Cal Fed over the life of the bond; $6.8
million would have been paid during the first year
alone assuming interest rates remained at August 1982
levels. If interest rates and the corresponding cost of
the deposits decreased, the amount of Biscayne's net
annual payout to Cal Fed would increase accordingly.
Biscayne's net annual payout would have been less if,
as Kabot asserted, a substantial portion of the underlying
mortgages were prepaid.
Biscayne's management, on Beesleys earlier
suggestion to utilize purchase accounting techniques,
sought to account for the transaction by recording a
paper profit of $56 million which would thereby restore
facially the association's balance sheet to a positive net
worth position. Biscayne’s management proposed to:
(a) account for the branch sale transaction as if it had
occurred on August 9, 1982, the date of its agreement
with Cal Fed; (b) record the transaction as the exchange
of a $410 million liability—the deposits in the eight
branches for a $354 million liability the mortgage-
backed bond; and (c) thereby record an instantaneous
decrease in its liabilities of $56 million with a resultant
instantaneous increase in its net worth of $56 million.
Plaintiffs argue that by booking a $56 million profit,
Biscayne would have been free to implement its new
business plan. As part of its plan, Biscayne proposed to
engage in mortgage banking which involved the sale of
mortgages to investors at a profit while retaining the
mortgage servicing rights. Part of this plan was to
aggressively seek to refinance the mortgages underlying
the bond to Cal Fed. Plaintiffs assert that Biscayne had
experienced considerable success refinancing mortgages
with the Fannie Mae Program. If interest rates were
to drop, a rise in housing sales could be expected bringing
about greater prepayment of the underlying mortgages.
Plaintiffs’ scenario had projected a complete prepayment
of the principal balance on the mortgage-backed bond
within five years.
BISCAYNE—NEGATIVE NET WORTH—8.68 MILLION
Effective September 1, 1982, Kabot replaced Pallot
as Chairman of the Board and Chief Executive Officer
of Biscayne. KB's representation on the ten member
Biscayne Board of Directors increased to six.
On September 14, 1982, Cal Fed filed an application
with the FHLBB’s designated supervisory Agent at
the Federal Home Loan Bank of San Francisco for
approval of the branch sale transaction. The Supervisory
Agent sent the application to the FHLBB’s Office of
Examinations and Supervision (OES) for action pursuant
to an OES directive that all Federal Home Loan Bank
inter-district branch sale transactions be sent to
Washington for final approval. The Washington office
wanted to examine the effect of the transaction on
both the purchaser and the seller. The Cal Fed/Biscayne
transaction was the first interdistrict branch sale to be
examined by OES.
A copy of Cal Fed's application was sent to Robert
Cohrs, the Supervisory Agent at the Federal Home
Loan Bank of Atlanta who had primary responsibility
App. 52
for Biscayne. On September 22, 1982, Cohrs sent a
letter to George Murphy, a Washington lawyer whose
firm represented both Cal Fed and Biscayne in the
transaction, requesting certain information. Mr. Cohrs
stated:
Due to the financial condition of Biscayne
Federal, this application is being submitted
to the Federal Home Loan Bank Board for
consideration. Accordingly, we must have
sufficient documentation to determine that
the sale is in the best interests of Biscayne
Federal and the Federal Savings and Loan
Insurance Corporation.
We are continuing to review the application
from Biscayne Federal's point of view and
will advise you if any additional information
is deemed necessary.
BISCAYNE—NEGATIVE NET WORTH - 1244 MILLION
Biscayne filed an application to issue securities on
October 7 with the Atlanta office of the FHLBB. On
October 14 Mr. Cohrs disapproved Biscayne's application.”
Biscayne’s application to issue the mortgage-backed
bond went to OES in Washington for reconsideration
and final disposition.
By October, the OES staff had identified five basic
concerns with the branch sale proposal:
(1) whether Biscayne was disposing of its best
branches:
App. 53
(2) whether it was proper to account for the
transaction as if it had been consummated on
August 9;
(3) whether the 17.8% interest rate was a
fair market value as of August 9;
(4) since the transaction constituted, in
substance, a loan of $354 million from Cal Fed
to Biscayne, and since a loan of that size violated
the loans-to-one-borrower restriction in 12 C.F.R.
§563.9-3, whether Cal Fed’s compliance with
that regulation should be waived in order to
permit it to consummate the transaction;
(5) whether the transaction would insure the
long-term viability of Biscayne.
On October 15, Atlanta supervisory Agent Cohrs
sent a memorandum to Mark Rundle, an OES Regional
Director whose region encompasses Florida,
recommending against the branch sale. Cohrs'
recommendation was based in large part on what he
felt was an unrealistic accounting method for the rate
for the mortgage-backed note proposed by Biscayne;
the very method that Beesley had earlier suggested
could be employed. While acknowledging the reports
submitted by Shearson/American Express and Deloitte,
Haskins & Sells by Biscayne in support of the fairness
of the proposed transaction and the proposed accounting
methods, Cohrs believed that the accounting treatment
and the rate advocated by the others did not realistically
reflect Biscayne’s financial condition. Although Cohrs
voiced such an objection, no effort was made at that
App. 54
time to secure advice from an outside source to evaluate
the reports submitted.
Kabot, acting as Chairman and Chief Executive
Officer of Biscayne, and other Biscayne representatives,
met with Croft and his staff on October 28 to discuss
the proposed Cal Fed branch sale and OES concerns.
After that meeting the staff resolved concern (1) by
concluding that Biscayne was not disposing of its best
branches. The staff felt that concern (4)— the loans-to-
one-borrower restrietion — would not be a problem if
the other concerns could be resolved. Concerns (2), (3)
and (5) somewhat interrelated, remained open; viz., the
date and rate of the transaction and the viability of the
institution. As will be noted infra, Biscayne* conceded
that concerns (2) and (3) and also the basis for the claim
of viability (McGuirk Report) proved to be totally
erroneous.
BISCAYNE—NEGATIVE NET WORTH —16.81 MILLION
On November 5, T.F. Sharkey, the FHLBB
supervisory agent in San Francisco, recommended
approval of the branch sale transaction based on his
review of the effect on Cal Fed.
On November 9, Croft called Kabot. He told Kabot
that if the branch sale application were to go before
the Board at that time, he would recommend against it.
Kabot requested an opportunity to present additional
information in support of the application before Croft
made his recommendation.
*Petitioners’ note: Should be “FHLBB” in lieu of “Biscayne.”
App. 55
BISCAYNE—NEGATIVE NET WORTH —19.86 MILLION
On December 10, Biscayne provided the FHLBB a
concurring opinion from Merrill Lynch that 17.8% was
a fair market price for the bond. OES staff accountants
questioned whether the 17.8% rate was a fair market
rate as of August 9. They also took the position that
under Generally Accepted Accounting Principles (GAAP)
the transaction should be accounted for as of the date
it was consummated, not the August 9 agreement date.
OES retained First Boston Corporation to assist it in
evaluating the proposed transaction. On December 22,
First Boston opined (a) that as of August 9, 1982 the
fair market interest rate on the proposed $354 million
mortgage-backed bond would range between 17.25%
and 17.75%; (b) that the 17.8% rate was “close enough
to this range to qualify as an appropriate rate”; and (c)
that as of December 21, 1982, the appropriate interest
rate on the proposed mortgage-backed bond would be
13.73% to 14.23%. OES staff accountants concluded
that the transaction should be accounted for as of the
date it was consummated and, therefore, Biscayne’s
accounting gain should be no greater than $23.5 million.
Plaintiffs complain that the FHLBB was dilatory
in requesting First Boston to render an opinion two
and one-half months after the Cal Fed application was
submitted. They state that the request should not have
been made since Biscayne had already submitted an
opinion from Shearson/American Express. To the extent
that these allegations might relate to Plaintiffs’ count
alleging violation of equa! protection, they will be
subsumed in the Court's treatment of that count. Although
the Court believes that the FHLBB cannot be chastised
App. 56
for being prudent, the delay precipitated by these actions
further placed Biscayne at the mercy of the FHLBB.
As for the viability issue, Biscayne’s ten-year forecast
showed that it would realize a total gain of $96.4 million.
Croft instead asked the Qualitative* Analysis Division
(QAD) of the Office of FSLIC to run its own ten-year
forecast using the standard FSLIC interest rate scenario.
It should be noted that this procedure by itself was
irregular. QAD was not under the supervision of Croft.
There is no evidence that Croft had ever before used
this division to assist him in his duties and responsibilities.
Croft never questioned the results of QAD’s analysis
nor was an attempt made to understand KB's projections;
no effort was made to determine why QAD’s results
differed so radically from those of Biscayne; even after
KB requested a méeting for that purpose.
On December 29 Edward McGuirk, Director of
Ab, reported to Croft the results of QAD’s projections.
The first forecast, which assumed no branch sale, showed
Biscayne becoming profitable in the third year and
regaining solvency in year eight. The second forecast,
which assumed the occurrence of the branch sale, showed
Biscayne regaining solvency immediately (by virtue of
the recognition of a $56 million accounting gain) but
returning to insolvency in the second year, and remaining
insolvent beyond year ten. MeGuirk's third forecast,
which assumed consumation of the branch sale, recognition
of a $56 million accounting gain and implementation of
Biscayne's business plan, showed Biscayne immediately
returning to solvency but losing money throughout the
ten-year period, returning to insolvency in the second
year and ending the decade with $508 million negative
net worth.
*Petitioners’ note: Should be “Quantitative” in lieu of “Qualitative.”
App. 57
The GAD analysis was based, in MeGuirk's own
words, on a “clearly mistaken assumption” which yielded
“meaningless results”. It yielded devastating results
to Biscayne because it formed the basis of the opinions
of Croft and Beesley. Plaintiffs argue that QAD’s incorrect
analysis provided the basis for Croft's determination
that the branch sale transaction would not result in
Biscayne being a viable institution.
Plaintiffs allege and Defendants do not dispute
that the unreliability of the Bank Board's projection is
reflected in QAD’s failure to comprehend the prepayment
provisions of the mortgage-backed bond, as discussed
above, and in QAD’s failure to understand the mortgage
backing* business.” The Defendants do not seriously
challenge Plaintiffs’ assertion that Croft and Beesley
relied, to a large extent, on the QAD analysis in
determining that Biscayne would not be viable under
the branch sale proposal. The evidence indicates that
Beesley believed this as early as November 29.
On December 23, 1982, Croft was contacted by
Bernard Carl, a lawyer representing KB. The purpose
of the phone call was to threaten litigation if the branch
sale proposal were turned down. Mr. Carl requested a
further meeting with the staff.
BISCAYNE—NEGATIVE NET WORTH —22.50 MILLION
On January 5, 1983, a meeting was held to discuss
the branch sale transaction. The meeting was attended
by Croft, Beesley, Vartanian, Kabot and Carl. Other
representatives for the Plaintiffs were also present.
*Petitioners’ note: Should be “banking” in lieu of “backing.”
App. 58
|
2 1 1 q 7 ێ *
5
There is some diserepaney as to what was said at
the meeting though both parties agree that the discussion
centered on improving the branch sale proposal so that
it would be more acceptable to the staff. Croft indicated
that the staff would “likely” recommend to the Board
that it reject the transaction as it was presently
structured. The parties agree that Croft indicated that
in order to garner the staff recommendation, the deal
would have to provide for an infusion of “hard” capital
and the adoption of the accounting method preferred
by the staff.
The facts indicate, and Plaintiffs do not dispute,
that the Plaintiffs understood the nature of the accounting
method advocated by the staff. There is no indication
that the staff was obscuring this element of the criteria.
As to the other criterion, the amount of capital to be
infused, the parties differed slightly. The expressed
concern of the staff based on the QAD analysis and the
framework for the discussion was that Biscayne become
viable. Croft’s notes ‘indicate that he stated that the
staff was looking for the infusion of enough money to
bring the net worth of Biscayne to 1% of its assets.
One per cent represented approximately $18 million.
Croft stated at trial that the one percent figure did not
represent a certain goal but rather was a figure pulled
from “out of the air” and it seemed to be in line with
“emerging Board policy”. Kabot's notes state that Croft
indicated that the target figure was ½ to 1%, which
amounts to $9-$18 million with the lower amount possibly
requiring a “keep well” provision.
Kabot's notes also indicate that Beesley was
concerned about the need to have a quick resolution of
the Biscayne matter with Biscayne approaching $20
App. 59
million in negative net worth. Beesley's desire for a
“quick” resolution of the Biscayne matter belies the
fact that the staff had spent an inordinate amount of
time processing this proposal. From August 9, 1982 to
January 5, 1983, Biscayne went from a mere $3.93
million negative net worth to the very substantial sum
of $22.50 million negative net worth. Throughout this
period of time, Biscayne did not seek one cent of FSLIC
money as part of that proposal. Beesley also indicated
that FSLIC would assist Biscayne if Biscayne met the
minimum standards under the Garn-St. Germain bill.”
Beesley also indicated that unless KB and Biscayne
were willing to come up with a proposal designed to
infuse hard capital into the institution, the FHLBB
would solicit bids for Biscayne from prospective interested
buyers. Kabot stated that KB would return on January
14 with a revised proposal which would attempt to
meet the staff concern for capital infusion.
4 Kabot’s notes of the January 5 meeting, embodied
in a letter addressed to Broad, indicate that Plaintiffs
had a general idea of what the staff concerns were at
the January 5 meeting and how those concerns should
be addressed by the Plaintiffs at the January 14 meeting.
Several staff members, including Vartanian, Croft
and Beesley, briefed Chairman Pratt on January 10.
The purpose of the briefing was twofold: to bring the
Chairman up to date on the latest meeting with KB
representatives and to secure some indication from
Pratt as to what direction the staff should take in the
negotiations with the Plaintiffs. Croft’s notes indicate
that Pratt believed that Plaintiff's accounting method
was “outlandish” but that he “would not object to the
branch sale if it were a cash sale and/or if it were
App. 60
accounted for properly.” (Emphasis added). Apparently,
Beesley neglected to inform Chairman Pratt that the
“outlandish” accounting method was first suggested
by Beesley. Croft's notes also indicate that he felt that
if the branch sale were turned down, Biscayne would
be required to publish this information. Pratt indicated
that this would lead to the shareholders being “wiped
out” by market forces rather than by the Board through
the appointment of a receiver.
Plaintiffs believe that the last statement and the
indication that Croft should contact Frank Dorer of the
OES staff to have examiners ready to move into Biscayne
on relatively short notice indicated that by early January
“the defendants were focusing attention on ways to
eliminate the shareholders’ interest either by establishing
a receiver or otherwise.”
Although the Court believes that neither the notes
of the briefing nor the circumstances surrounding the
briefing necessarily indicate that the Defendants were
acting out of a bad motive ascribed to them by Plaintiffs,
it is again another link in the chain of circumstances
that must be considered. The January 10 briefing did
provide a chance for the staff to update the situation
for Pratt and to find out whether they were negotiating
under the proper assumptions. It is also, however, an
example of the Chairman being called upon to function
in his dual role of Board Chairman and Chief Executive
Officer of FHLBB. As long as those roles do not become
intertwined to the detriment of an institution being
regulated by FHLBB, this Court has no concern.
intent is being carried out. When, however,
as in this case, information is not only communicated to
the Chairman but he in turn gives directives to his
App. 61
. 0
il
* ‘ * 5
ers nenn
staff to be relayed to the otherwise uninformed
representatives of a failing institution, such words become
the gospel of the Chairman of the Board and the
institution's sole source of guidance.
A meeting was held on January 14 for the purpose
of having KB present a revised proposal in accordance
with the guidelines outlined at the January 5 meeting.
Beesley, Croft and Hayes attended the meeting for the
FHLBB while Broad, Kabot, Christopher and Wittie
represented KB.
According to Croft's testimony, the meeting began
with Broad wanting to know why the FHLBB approved
another branch sale he had read about in the Wall
Street Journal and not approved the proposed Biscayne
sale. Croft said he was not aware of any such deal.
Christopher, who had not been present at the January
5 meeting, stated that the staff had agreed at the
January 5 meeting to recommend the branch sale if KB
would infuse $9 million. Croft and Beesley informed
him that he mischaracterized the staff statement.
However, they did not explain how it had been
mischaracterized. The staff did not state how KB might
modify the proposal to meet the staff's concerns even
though KB requested such information. One hundred
and fifty-eight days had now elapsed and FHLBB still
had Biscayne shadow boxing in its own lightless bank
vault.
THE NEGOTIATION PROCESS: PHASE III
Broad then presented an alternative to the branch
sale proposal. The alternative proposal contained three
elements: (1) KB would inject capital equivalent to 2%
App. 62
of its assets or approximately $38 million; (2) FSLIC
would inject sufficient capital to bring Biscayne's net
worth to zero or approximately $25 million for which it
would not be repaid and (3) KB would sell to Biscayne
certain housing and mortgage banking subsidies at fair
market value which was estimated to be $220 million.
Beesley immediately objected to the third element.
He felt that it was not an “arm’s length” deal since
some of the same people were on both sides of the
transaction. He also felt that $220 million should not be
taken away from what he believed was a “failing
institution.” There was not the least implication to the
Plaintiffs at that time or at any subsequent time prior
to the branch sale proposal expiring on March 4, 1983,
that nonrepayability was an issue in the negotiations.
Beesley inquired as to whether KB would consider
modifying its proposal to include only elements (1) and
(2). After a brief caucus, KB stated that it would proceed
under elements (1) and (2) and some form of element (3)
which would not involve taking out any cash, imposing
any liabilities or violating any rules.
Beesley stated that January 14 was intended to be
“D-Day” and that he wanted a precise proposal within
three days from KB. Beesley also stated that it was a
“close call” as to whether elements (1) and (2) would
“fly alone”. Broad inquired whether KB could return
with the branch sale proposal if the new alternative
proposal were to fail. Beesley responded that KB should
come back with both proposals within three days. Beesley
stated that upon receiving KB's proposal, the staff
would respond within three days.
App. 63
On January 17, Christopher wrote a letter to Beesley
and Croft which outlined KB’s proposal. The bulk of
the letter addressed itself principally to the new capital
infusion proposal. Christopher also stated that it was
prepared to meet the staff's criteria for supplementing
the branch sale proposal.
Christopher started the letter by stating that KB
would delete element (3) from the January 14 proposal
as requested by Beesley. Christopher then outlined the
modified proposal to include the following: Element (2)
would remain the same; i.e., FSLIC would inject $25
million into Biscayne on a nonrepayable basis. Element
(1), KB’s injection of $38 million worth of capital, would
be accomplished by having KB transfer its mortgage
banking company, International Mortgage Company
(IMC) to Biscayne. IMC was valued at approximately
$18 million though the parties agreed to have it
independently appraised. KB would inject, in cash, into
Biscayne the difference between $38 million and the
appraised value of IMC. Ten million dollars of the payment
was to be made when the deal was consummated, and
the remainder was to be paid at the end of one year.
Christopher's letter stated further that KB
contemplated that if the Board considered and approved
the matter at its next scheduled meeting and if KB
could get shareholder approval at its upcoming meeting,
the goal would be to sign the agreement within eight
days of the date of the letter.
App. 64
The next to last paragraph of the letter states in
pertinent part that:
The above transaction has been proposed in
lieu of the branch sale transaction because of
its understanding that the branch sale
transaction is not favored by the Bank Board
staff.
The letter continues:
We understand, however, the Bank Board staff
would be persuaded to recommend the branch
transaction provided the gain is accounted for
in a manner satisfactory to the staff and KB
agrees to a capital infusion of $9 million. I
have been further authorized to advise you
that if the above $38,000,000 capital infusion
plan is unsatisfactory, then KB is prepared to
make the required infusion of $9 million in
cash. We understand Biscayne would agree to
an accounting of the transaction in a manner
satisfactory to the Bank Board.
The following and last paragraph states:
We are prepared to meet with you at your
earliest convenience to discuss the above and
to finalize agreements for a capital infusion
program acceptable to you.
The facts indicate that Beesley met with Pratt at
some point after receipt of the January 17 letter but
before January 19. Beesley presented the January 17
infusion proposal to Pratt. According to Beesley and
App. 65
Pratt, Beesley expressed misgivings about the infusion
of FSLIC monies on a nonrepayable basis to a stock-
owned institution. Both expressed concern about the
size of the failing institution, and commented on how it
would reflect on FHLBB if it failed. The Chairman
wanted to get Biscayne’s best deal to the Board for
consideration and resolution. Although Beesley expressed
reservations to the Chairman regarding the issue of
nonrepayability, it is clear that Beesley never informed
Pratt that he could not recommend a proposal eontaining
that element. Pratt never indicated that he could not
accept such an element as part of the proposal.
On January 19, the parties held another meeting.
The meeting was attended by Beesley, Hall, Hayes and
Christopher. At that time Gene Hall was Director of
the Problem and Rehabilitative Division of FSLIC and
reported directly to Beesley. Beesley commenced the
meeting by saying that he had discussed Christopher's
January 17 letter with Pratt.
Christopher, who did not testify at trial, stated in
his deposition that Beesley then told him to tell Broad
that “it’s Christmas in January.” Christopher also stated
at deposition that Beesley said that he would recommend
the proposal to the Bank Board.
Beesley recalls saying: [The Chairman wants us
to try to put some kind of an agreement involving
these principles in writing and to hammer out the details
and send it up for consideration.” Beesley also stated
that he did not tell Christopher that he would recommend
against the proposal. Beesley further stated that he
was “surprised that the Chairman was willing to go
forward in terms of putting together a document which
App. 66
on its face appeared to have significant policy violations;”
i. e., that Biscayne would not have to repay FSLIC for
FSLIC’s $25 million capital contribution.
Plaintiffs point to Hall’s testimony in support of
Christopher’s assertion that Beesley stated that he
would support the proposal. Plaintiffs stated on several
occasions during the trial that Hall, although a defense
witness, was completely credible and candid. Upon hearing
Beesley's presentation, Hall stormed out of the room.
Plaintiffs maintain that Hall reacted in response to
Beesley’s assertion or indication that Beesley would
recommend the proposal. Having reviewed the transcript
of Hall’s deposition and his trial testimony, including
the portions cited by the Plaintiffs, the Court finds
that no other implication can be placed on Hall’s conduct
than that asserted by the Plaintiffs. Hall believed that
Beesley said that he would recommend that the Board
approve the proposal. Hall said that although he did
not recollect very well what was said, he was upset
that Beesley would present and Pratt would consider a
plan calling for the nonrepayable contribution by FSLIC
of $25 million.
Plaintiffs believe that the issue of whether or not
Beesley and other staff members would recommend
the proposal is vital because, as several witnesses have
testified to, the Board very rarely, if ever, rejected the
recommendation of the staff. While the Board has on
occasion modified a staff recommendation which favored
a particular matter, the Board has never, in the memory
of all of the witnesses who testified, approved of a
matter that the staff presented without a recommendation
or with a negative recommendation. Plaintiffs believe
that since Beesley told them that he would recommend
App. 67
a proposal, he was in effect telling them that it would
be approved, particularly, since he had just come from
a meeting with Pratt and had communicated this fact
to the Plaintiffs. Plaintiffs believe that since Beesley
later recommended against the proposal to the Board,
he had misled the Plaintiffs at the January 19 meeting
into believing that he supported the proposal. No different
conclusion can be reached by this Court. Plaintiffs claim
that what occurred from January 19 to April 6 was a
charade because Beesley knew all along that he would
not recommend the proposal and consequently, that
the proposal would be turned down by the Board.
The Court feels that Christopher's impression that
Beesley said that he would recommend the proposal
was based on a reasonable interpretation of what Beesley
stated. Hall believed that Beesley was favoring the
proposal; he was surprised on March 17 when the staff
directors would not recommend the proposal to the
Board. Christmas in January” indicates that Pratt
would entertain the proposal and that negotiations should
proceed along the paths outlined.
Beesley testified that:
In January I had no idea what the Board's
ultimate decision was going to be. I was opposed
philosophically to that one point, and perhaps
to other aspects of it. But in the broader picture, I
think that deal has a realistic possibility of
ultimately being approved.
Such testimony belies the Defendants’ contention
that the Plaintiffs were not misled. Beesley's testimony
clearly indicates his absolute opposition to the
App. 68
nonrepayability feature of the proposal. He never
communicated this opposition to the Plaintiffs. He was
authorized by Chairman Pratt to communicate the fact
that the proposal was presented to him and was not
unacceptable on its face. The clear and unequivocal
implication to the Plaintiffs was: forget the branch sale
proposal; if the third proposal is otherwise acceptable,
the nonrepayability feature will not be a problem for
either the staff to recommend or for the Board to
approve.
Christopher also indicated to the staff at the January
19 meeting that if the capital plan went forward, then
the branch sale application would not be pursued and it
would be withdrawn by the Plaintiffs.
The goal of the parties was to get the proposal to
the Board for a vote by January 28.
After Beesley exited the meeting, the staff and
KB personnel discussed the terms of the recapitalization
proposal. Defendants assert and Plaintiffs do not rebut
that Christopher introduced a change into element (1)
of the proposal by stating that the $20 million in cash
to be infused by KB would be given in exchange for
interest bearing subordinated debentures to be issued
by KB’s insurance subsidy. Christopher also wanted to
place a $25 million ceiling on KB's “keep well” provision.
A January 21 memorandum from Hayes to the
three staff directors summarized the proposal as Beesley
had outlined it and with the changes sought by
Christopher. The staff opposed, inter alia, the use of
subordinated debt. Hayes also stated that “from a
conservative legal point of view” Biscayne should be
App. 69
shopped. On January 24, Vartanian noted his agreement
with Hayes’ position and also felt that the recapitalization
proposal was “a terrible mistake”. He believed that
issuing ICC’s would be better than having FSLIC give
a nonrepayable contribution. The memo also suggested
that the staff not issue a letter to Christopher detailing
the conditions in which a branch sale would be approved.
Vartanian noted his concurrence with Hayes’ suggestion.
Hayes testified that this suggestion was based on the
idea that the Board policy was still emerging.
On January 21, KB’s attorneys sent the bank staff
a draft agreement which modified the nature of the
element (1). KB now proposed that KB and Biscayne
could authorize KB to take back subordinated debt to
cover all or any portion of its proposed $38 million
infusion into Biscayne.
By this time Croft, who as head of the Office of
Examinations and Supervision (OES) had primary
responsibility for the processing of the branch sale
proposal, laid aside the proposal. Croft testified that,
having expressed his views at the January 5th meeting
about the dubious possibility of the branch sale attaining
staff approval, having attended the January 24 meeting
and having read the January 17 letter from Christopher,
he was under the impression that KB was interested in
pursuing the recapitalization proposal. He understood
that the branch sale was to be held in abeyance pending
the processing of the recapitalization proposal. Croft
testified that after January 14 he was only tangentially
involved in the Biscayne case. There is no evidence
indicating that he had any involvement with the
recapitalization proposal at this time.
App. 70
Plaintiffs suggest that the staff was stalling on the
branch sale because the agreement on the branch sale
between Cal Fed and Biscayne was due to expire on
January 31, 1983. Plaintiffs allege that Defendants wanted
the branch sale to die of its own expiration rather than
have the Board reject it and face a lawsuit which had
been threatened by Mr. Carl at the January 5 meeting.
They cite Hayes’ recommendation in his January 21
memorandum in which he specifically referred to the
expiration date and opined that no guidelines be furnished
to KB. The Court reaches the same conclusion. The
staff's decision not to provide KB with guidelines for
the branch sale after it had shifted its negotiating
position from January 5 and the January 21 memo lead
the Court to no plausible alternative explanations. The
staff, particularly the staff directors, wanted the branch
sale to expire without having to be accountable for its
demise.
In a subsequent conversation in late January,
Plaintiffs notified the staff that the expiration date for
the branch sale had been extended to March 4. Plaintiffs
indicated that the branch sale was to be held in abeyance;
this was based on their mistaken assumption that Beesley
was going to recommend the recapitalization proposal.
At the end of February, Wittie called Rundle and stated
that KB was interested in reviving the branch sale and
having it go to the Board for resolution. Rundle did not
convey the contents of the conversation to any of the
staff directors.
On January 28, Hayes sent a revised draft agreement
to KB’s attorneys. In the cover letter, Hayes explained
the difficulties the staff was having with KB's latest
modification. Mr. Hayes stated in part:
App. 71
George Christopher's letter of January 17 (to
part of which Dr. Croft is replying separately
in order to correct the errors in its next to last
paragraph) stated that $38 million would be
infused into Biscayne by KB “in a manner
satisfactory to the FSLIC”. After Mr. Beesley
indicated the FSLIC assistance might be
approved on the basis of the first paragraph of
that letter, George Christopher then
communicated KB’s desire to receive
subordinated debt for approximately $20 million
of the infusion; and your draft indicates that
KB wishes to decide upon the apportionment
of stock and securities received without
restriction. In view of the words used in the
first paragraph of George Christopher's letter
of January 17, a lot of people here assumed
that the infusion would be represented only
by nonwithdrawable stock, and it is possible
that anything other than nonwithdrawable stock
will be unacceptable.
BISCAYNE—NEGATIVE NET WORTH —24.71 MILLION
The parties met on February 2, 1983, but failed to
resolve their differences. On February 7, a meeting
was held with Pratt, Beesley, Croft, Vartanian, Board
Member Jackson and Executive Staff Director J.
Buchanan. The purpose of the meeting was for the
staff to outline the basic elements of the third proposal
and to get some direction from the Board members as
to how the staff should conduct its negotations as to
the general outline of elements (1) and (2). Several staff
members brought up their doubts about the
nonrepayability aspect of element (2) on the ground
App. 72
that it violated Board policy to provide FSLIC funds
for the benefit of shareholders of a publicly traded
corporation. The staff members also felt that Biscayne
should be shopped to see if it was the least costly way
for the FHLBB to address the problem.” The evidence
indicates that Pratt instructed the staff to continue to
negotiate and stated that he would consider the proposal
even though it contained some deviations from traditional
Board policy. None of this was ever conveyed to the
Plaintiffs.
On February 7, Broad sent another letter to Beesley
and Croft. It appears that this letter arrived sometime
after the February 7 meeting referenced above.
The February 7 letter proposed a rights offering
of “units” to all Biscayne shareholders - one unit offered
per share held. Each unit was to consist of (a) 40 shares
of common stock having a par value of $1, and (b) a $40
subordinated debenture having a 15-year term and
bearing an interest rate between 12% and 131%. KB
would agree to purchase $38 million worth of units in
exchange for IMC (KB’s international mortgages
subsidiary) and cash. KB would also obtain a firm standby
commitment from an underwriter to purchase up to
$50 million worth of units less the amount subscribed
by shareholders other than KB. FSLIC was to contribute
$25 million on a nonrepayable basis. The proposal was
designed to raise at least $88 million in additional capital.
If it were fully subscribed to, as much as $144 million
could be raised.
App. 79
At the end of the letter, Broad again reiterated:
If the above arrangements are not satisfactory
KB would once again request that the branch
sale transaction before the Bank Board be
approved. (Emphasis added).
KB obtained a letter of intent dated February 16,
1983, from the investment banking firm of Drexel
Burnham Lambert. This letter contained a nonbinding
agreement to underwrite a $50 million portion of KB’s
proposed rights offering subject to eight conditions.
The first condition was FSLIC’s agreement to contribute
$25 million to Biscayne. Broad testified that investment
bankers had told him that the success of the rights
offering was predicated upon FSLIC bringing Biscayne's
net worth up to zero on a nonrepayable basis.
The parties continued to meet and exchange
comments concerning the proposal for the balance of
February and the beginning of March. During February,
four main points of difference surfaced concerning the
third proposal: (1) the price of the stock to be issued to
KB; (2) KB’s desire to obtain warrants entitling it to
purchase at any time over a period of five years over
$200,000 in additional units at the original asking price
of $80 per unit; (3) KB’s desire to have the Bank Board
waive the dividend restriction and keep well“
requirements which were imposed upon Biscayne and
KB when the Board approved KB's acquisition of a
controlling interest in Biscayne in 1980; and (4) the
affiliated transaction issue. Repayability to FSLIC was
not an issue.
App. 74
On February 25, Clem Dinsmore, the staff attorney
principally assigned to draft the KB proposal, wrote
the following to Wittie:
You and your client should be aware that Bank
Board staff do not subscribe to certain terms
and conditions of the Agreement, as revised,
e.g. Section 8.1, which the staff understands
are not negotiable by your client pending Bank
Board consideration of the Agreement. The
staff will comment on these provisions, when
the Agreement is submitted to the Board.
According to Dinsmore, one of the terms not
subscribed was Section 8.1, which refers to the “keep
well” provision. Dinsmore did not specify what other
sections the staff disfavored and made no mention of
the nonrepayability aspect.
BISCAYNE—NEGATIVE NET WORTH—27.39 MILLION
The evidence indicated that during a meeting held
on March 4, the parties resolved the first point by
agreeing that the stock would be lettered; i.e., it would
be restricted. Point 2 was subject to a fairness opinion
and, as Pratt testified to, this was an issue which he
knew KB would waive if necessary. For all intents and
purposes it was solved as was point 4.
Although the evidence is unclear as to whether
the parties discussed point 3 at the March 4 meeting, it
is clear that the matter was discussed soon thereafter.
On March 7, Wittie sent Hayes a letter formally
advising him that Cal Fed had terminated the branch
App. 75
sale agreement as of March 4. Enclosed with the letter
was a copy issued that day of a press release by KB
which indicated that discussions between the FHLBB
and KB were at an “advanced stage” concerning the
recapitalization proposal but that “[t]here can be no
assurance that the capital infusion agreement will be
reached or consummated.” Wittie and Hayes had discussed
the wording of this release the previous day.
On March 10, Wittie wrote to Dinsmore that Drexel,
Burnham and Lambert, the underwriter for the proposed
stock issue by KB, would not enter into a firm
underwriting commitment if the Board would not waive
the restriction limiting Biscayne's dividends to 50% of
net earnings.
On March 14 written contracts embodying the KB
proposal had been drawn up and circulated among the
staff. The initial recommendation drawn up by the
lower level staff members was in favor of the proposal.
Plaintiff states that this indicates that the lower staff
members were laboring under the same assumptions
as was KB; that being, that the Board was prepared to
approve the proposal.
On March 15, Dinsmore and Hayes called Wittie.
They advised Wittie that the three Office Directors —
Beesley, Croft and Vartanian— were strongly opposed
to waiver of the dividend restriction. Dinsmore asked
whether KB would be willing to delete that condition.
Wittie asked if the Office Directors would recommend
the proposal if KB gave up that condition. For the first
time in two months of negotiations, it was indicated
that there would not be any recommendation by the
App. 76
Office Directors to the Board with respect to the KB
proposal.
On March 16, Wittie called Hayes. He told Hayes
that there were three things the Board could do:
You could say yes, accept the proposal. The
Board could say no, reject the proposal or yes,
but. It could say yes, but we want this or that
changed. And we, Kaufman & Broad, would
obviously have to deal with a ‘yes but’ and
respond to it. In other words, I was not in a
position to tell them that we would give up on
this point, but if the Board was going to come
back and say it would be approved if it were
not for that point, then we would respond.
The facts indicate that by this date that Christopher
and Wittie had been told and knew that (a) members of
the staff had substantial problems with the KB proposal
that was going to the Board on March 17, including, for
the first time, the nonrepayability aspect of FSLIC's
$25 million contribution; (b) that the Office Directors
were against waiver of the dividend restriction; (c) that
the Office Directors would not recommend in favor of
the proposal; and (d) that the staff intended to comment
on the objectionable provisions when the proposal was
submitted to the Board.
A closed meeting was held on March 17 to consider
the KB proposal and other matters as well. KB attorneys
were advised that the meeting would occur sometime
before that date.
App. 77
On the morning of March 17 the staff directors,
Beesley, Vartanian and Croft met and agreed that they
opposed the non-repayability aspect of the proposal.
They agreed to offer no recommendation to the Board.
The evidence indicated that not only did the staff
members not offer a recommendation at the meeting
but they also expressed their uniform reservations
about the nonrepayability aspect. Vartanian spoke first
about his concerns with the proposals. Among the
concerns mentioned by Vartanian were the inability of
the Board to get an accurate estimate of the value of
the institution and the cost of the proposed deal in the
absence of shopping the deal and receiving bids for
Biscayne. Vartanian stated that shopping would be the
best way for the Board to determine whether or not
the proposal was the least costly deal. Vartanian also
noted that he felt that the proposal had changed from
the time that it was originally presented to the staff on
January 14 (although the differences bgtween had been
resolved); and that it called for a government underwriting
of a public stock offering. He was also concerned with
whether Biscayne could raise the money it needed in
the market for the stock offering. Beesley echoed
Vartanian’s concerns and doubts about the proposal.
The kindest description of the Chairman’s reaction
to the staff position was “surprise” that the staff had
not recommended the proposal. He was also concerned
that they had not considered the alternatives should
the Board decide to turn down the proposal.
The meeting went on the record briefly for 19
minutes for a factual presentation of the circumstances
App. 78
surrounding the proposal and for a short discussion of
the financial condition of Biscayne.
The Plaintiffs argue that the actions taken by the
staff and the Office Directors from March 18 to the
date of the Board resolutions turning down the proposal
and installing a receiver were all done to prepare the
record for administrative review. According to the
Plaintiffs, the decisions to reject the proposal and appoint
the receiver were made for all intents and purposes on
March 17. They dispute both Pratt’s testimony that he
didn’t decide until April 6 and the admission that in
late March Board member Jackson told Beesley that
he still had “hard questions to ask” about Biscayne. It
is apparent that “the die was cast” on March 17 because
there would be no recommendation supporting the
proposal. The remaining question concerned alternatives.
On March 22 the staff prepared a memo in which it
analyzed the four alternatives from which it thought
the Board could choose in deciding on the future of
Biscayne and the recapitalization proposal. The four
alternatives presented were:
(1) Making a counteroffer to KB, which if
accepted within a brief, specified time period
the Bank Board would approve;
(2) Rejecting the proposal, ordering the
suspension of all trading in Biscayne’s stock
pending dissemination of the disclosure of the
Bank Board's action, and shopping Biscayne,
with the result that the appointment of a
conservator or receiver is deferred so long as
Biscayne cooperates with the FSLIC by allowing
App. 79
7
access to its books and records and its financial
condition does not seriously deteriorate;
(3) Appointing a conservator for Biscayne
pending the completion of FSLIC’s shopping
of Biscayne and the negotiation of a long term
soluticn and deferring the appointment of a
receiver until it is necessary to deliver Biscayne,
provided that Biscayne's staff cooperates with
the conservator; or
(4) Appointing a receiver for the purpose of
Biscayne’s liquidation, immediately transferring
Biscayne’s assets and liabilities to a newly-
chartered Federal mutual association, and
operating the new mutual under FSLIC-selected
directors and management pending the
completion of FSLIC’s shopping of Biscayne
and negotiation of a long term solution.
Later that same day a meeting was held with
various staff members including Hayes, Croft, Dorer,
Roy, Buchanan and Lois Jacobs who served as assistant
to Board member Jackson. The four alternatives
mentioned above were discussed. The evidence indicates
that the consensus of the meeting was that alternative
(2) one of the least drastic measures, should be
recommended to the Board.
Following the meeting, Buchanan briefed Pratt
what had been discussed. Later the same day Pratt
interrupted a telephone conversation in which Hayes
was discussing the staff meeting with Vartanian. Pratt
indicated that option (2) was unrealistic and impractical.
Pratt went on to say that under option (2) the possibility
App. 80
of a run was more likely. He also stated that if litigation
resulted while the institution was still in the hands of
the management, it could frustrate the shopping of the
institution were the Board to decide that such shopping
would be needed. Vartanian echoed Pratt’s concerns
and agreed with the conclusion. This connection
underscores Plaintiffs’ contention that Pratt acted in a
dual capacity. In the conversation he was speaking as
the Chief Executive Officer on a matter that he allegedly
was going to study in a quasi-judicial capacity as Chairman
of the Board on April 6, 1983.
During the week of March 21, the staff met with
various members of the law firm retained by the FHLBB.
Part of the conversation concerned the advantages and
disadvantages of the various options available to the
Board.
Plaintiffs maintain that the sessions with the outside
counsel were held for the purpose of “constructing an
administrative record for administrative purposes while
keeping the real motivations and actions of the staff off
the record and unavailable for the review of this Court
. . ..” Plaintiffs also believe that the real motivation of
the staff, if not the Board itself, is evidenced in a staff
memo drawn up on March 23 by OES. Hayes said that
this memo was not circulated. Ann Loikow, who works
directly under Mr. Hayes, testified that the staff had
used the memorandum dated March 23, 1983, as a
discussion document during at least one meeting. Mr.
Roy also recalls a meeting at which the staff discussed
“the options paper OGC (Office of General Counsel) had
drafted.”
App. 81
Plaintiffs refer to a passage in the March 23
memorandum in which there is a discussion concerning
litigation strategy. It says:
If KB or Biscayne is expected to challenge the
FSLIC’s actions on Biscayne, the FSLIC is in
a better litigation position if it has already
taken control of the association through the
appointment of a conservator or receiver. In
this respect, the FSLIC is in the best position
if it has appointed a receiver who has already
transferred Biscayne's assets and liabilities to
a new association because it is much more
difficult for a court to unscramble that
transaction than to remove a conservator from
possession of Biscayne.
Plaintiffs also point to another passage in the
_ memorandum which discusses the comparative
advantages of option (3) (appointing a conservator) and
option (4) (appointing a receiver) as opposed to the
other options. The memorandum states:
Each exposes the Bank Board to the risk that
a court may find that the Bank Board has acted
unreasonably under the circumstances. The
only ground for the appointment of a conservator
or receiver is Biscayne's insolvency, which has
existed since July, 1982. While the Board's
staff has considered several branch sales and
KB's recapitalization proposal during the
intervening months, the Bank Board's delay
in decisive action on Biseayne's insolvency
creates a need to explain what circumstances
make the appointment necessary now. The
App. 82
litigation posture of the Bank Board would be
stronger if it was able to point to circumstances
in addition to Biscayne’s insolvency. The
advantage of Option Two is that it defers
appointment of a conservator or receiver until
those circumstances more clearly exist. However,
it is possible that the suspension in trading of
Biscayne’s stock would trigger the kind of change
in circumstances that would necessitate the
immediate appointment of a conservator of
receiver.
The memorandum concludes with a recommendation
based on the merits of each option. The memorandum
states:
We have considered the advantages and
disadvantages of each option and recommend
that the Bank Board exercise Option Four,
based on the following considerations:
(1) Option One is not likely to produce an
agreement with KB because KB has stated its
unwillingness to negotiate substantial changes
in its current proposal.
(2) Option Two is unrealistic in its assumption
that KB and Biscayne will cooperate with the
FSLIC. Biscayne previously has refused the
FSLIC’s requests for a merger consent
resolution. The reasons given for that refusal
are likely to be given again to justify a refusal
by Biscayne to disclose its books and records
to potential bidders. KB will have no reason to
cooperate with the FSLIC after the Board has
rejected KB's proposal.
App. 83
(3) Option Three presents managerial problems
that might result in a reluctant and
compromising dependence of the conservator
on Biscayne's senior staff. Option Three also
might trigger litigation challenging the
conservatorship and the powers of the
conservator which could complicate and delay
the Bank Board's appointment of a receiver.
(4) Option Four avoids the risk that some of
Biscayne’s existing stockholders or other market
participants might be able to profit at the
expense of an uninformed investor. By requiring
all Biscayne shareholders to realize their gain
or loss at the same moment in time, Option
Four prevents any possibility of subsequent
trading on unshared information that hasn't
been fully disseminated, which could allow the
knowing speculator a profit at the expense of
the unknowing small investor.
There is no question in the Court’s mind, regardless
of the testimony of the Board members, that by March
23 what was left for determination on April 6 was
which alternative to adopt and that Chairman Pratt
had rejected alternatives 1 and 2. The decision on the
KB Proposal was a fait accompli.
Between March 25 and April 6, 1983, a series of
communications and conferences were held between
the staff of FHLBB and the representatives of KB.
Some of these communications took the form of letters
from Vartanian to Christopher dated March 25 and
April 1; a letter from Broad delivered by Christopher
to Vartanian, the original of which was intended for
App. 84
Chairman Pratt; and Christopher's reply to Vartanian's
letter (April 5) and a meeting held on April 1 between
Beesley, Vartanian and Broad in Los Angeles, California.
In addition to these communications, meetings were
held between the staff and Board members of the FHLBB.
On March 31, there was likewise a meeting held in the
General Counsel's office between Vartanian, Hayes,
Gunther and Dinsmore.
Plaintiffs characterize the letters received from
Vartanian and the meeting between Beasley, Vartanian
and Broad as nothing more than a last minute effort to
establish an administrative record. They assert that
although Vartanian's letter purported to be interested
in receiving KB’s last offer, the only reason it was
written was to show an offer was submitted for final
action. Although there was reference to the dividend
restriction issue, it is apparent that the overriding
issue continued to be nonrepayability. The nonrepayable
aspect was one of the two reasons upon which the
Board rejected the proposal. Board Resolution 83-184
stated in pertinent part:
The proposed agreements (“proposal”) are
unsatisfactory in that, among other reasons
(1) the proposal contemplates and would permit
present stockholders of Biscayne substantially
to salvage, recover or profit from their
investment in Biscayne prior to and without
the FSLIC’s cash contribution being repaid in
whole or part contrary to established and
uniform Board policy, and (2) it cannot now be
ascertained whether, and is doubtful that, of all
solutions that are or may be available to the
FSLIC, the proposal represents a solution to
App. 85
Biscayne’s supervisory difficulties that has the
least cost and risk to FSLIC.
The second criteria, the need to shop the proposal, was
never discussed by the staff with KB from the time the
branch sale was propesed in August, 1982 until April 6.
It is clear that both parties were negotiating under the
clear dictate by Pratt to bring the proposal to the
Board for final approval.
Plaintiffs view the meeting of March 31 with
Vartanian and his staff as evidence of improper behavior.
Plaintiffs state that the Board wanted to posture” the
KB proposal as its last and best offer to create a record
rather than dealing forthrightly with KB’s proposal.
The participants in that meeting had the responsibility
of advising the Board relative to the legal ramifications
of whatever course of conduct was ultimately decided
upon. Merely because they met to discuss the alternative
of formulating such advice and to fulfill their responsibility
to the Board cannot be viewed by the Court as
demonstrating either improper behavior or an improper
motive.
The fact remains, however, that the record clearly
establishes in the Court’s view that from March 17
until April 6 it was only a question of what alternative
would be recommended by the staff to the Board. As
previously noted on March 22, the Chief Executive
Officer of FHLBB clearly directed the staff to delete
from favorable consideration alternatives 1 and 2 to
strictly limit its consideration to items 3 and 4.
As will be more fully discussed in the portion of
this opinion devoted to Count II, the facts as they
App. 86
unfolded subsequent to March 17 are only pertinent to
the extent that they ultimately resulted in the Board
adopting Resolutions 83-184 and 83-185. The latter
resolution called for the appointment of a receiver on
the ground that [“(1) the Association is insolvent in
that its assets are less than its obligations to its creditors
and others, including its withdrawable accountholders
and (2) the Association is in an unsafe and unsound
condition to transact business.
As to the second ground for the resolution, this
Court has clearly enunciated its finding that the record
is devoid of any evidence either before this Court or
before the Board to support such finding. The Defendants
chose not to rebut Plaintiffs’ argument that Biscayne
was not in an unsafe and unsound condition.
COUNT I—ESTOPPEL
Plaintiffs assert in Count I of the complaint that
the FHLBB is estopped from appointing a receiver on
the grounds that Biscayne was insolvent. Plaintiffs
argue that the FHLBB “created” the insolvency and
that the “entire course of dealing was affirmatively
misleading”.
Prior to discussing the merits of the estoppel claim,
the Court shall narrow the issue presented. While
Plaintiffs’ complaint alleges that Defendants “created”
Plaintiffs’ insolvency, Plaintiffs stated at closing argument
that they did not ascribe any misbehavior or untoward
conduct to the Defendants during the first phase of the
negotiations. The first phase of negotiations ended with
the presentation of the first branch sale proposal to the
App. 87
staff in July 1982. The second phase of negotiations did
not begin until, at the earliest, the end of August when
the staff was notified of Biscayne's new agreement
with Cal Fed. By the end of July 1982, Biscayne had a
negative net worth of $3.93 million; its negative net
worth at the end of August 1982 was $8.68 million.
It is clear that the FHLBB did not create Biscayne's
insolvency. Therefore, the estoppel issue concerns whether
the Defendant's conduct misled the Plaintiffs into not
undertaking some action to regain solvency.
The issue of whether the government can be estopped
has been presented to the Supreme Court on several
occasions. The Supreme Court has never held that the
Government can be estopped or explained what type of
behavior would engender an explication of the parameters
of the estoppel doctrine.
In the earliest case in which the Supreme Court
considered this issue, the Court held that the Government
could not be estopped on account of the erroneous
information given by a representative of the federally
owned crop insurance corporation to a wheat grower.
The grower was told that his crop would be insured by
the federal corporation. Based on this information he
did not seek an alternative way to insure his crop.
When the grower sought compensation under the federal
insurance program for his destroyed crop, he was told
that the regulations did not provide for insurance for
his crop. Federal Crop Insurance Corp. v. Merrill, 332
U.S. 380, 382 (1947).
App. 88
The Court heid that the Government could not be
estopped from denying insurance. The Court reasoned
that despite not having actual knowledge of the regulation,
the grower had “legal notice” of the rules and regulations
of the insurance fund. Merrill 332 U.S. at 385. [The
ignorance of such a restriction, either by the respondents
or the Corporation agent, would be immaterial and
recovery could not be had against the Corporation for
loss of such reseeded wheat.” Merrill, 332 U.S. at 384.
In Montana u Kennedy, 366 U.S. 308 (1961), petitioner
argued that the Government should be estopped from
denying him citizenship because had it not been for the
erroneous information given to his mother by an American
consular officer, he would have been qualified for
citizenship under the applicable statute. The Court
held that it did not have to reach the issue of estoppel
because the consular officer's action “falls short of
misconduct such as might prevent the United States
from relying on petitioner's foreign birth.“ Montana,
366 U.S. at 314-15. The Court intimated that the consular
officer's statement may have been “well meant advice”
and not an affirmative statement. Montana, 366 U.S. at
314.
In INS V/ Hibi, 414 U.S. 5 (1973) (per curiam), the
Court held that the Government's failure to publicize
the rights to naturalization or to have a representative in
the Phillipines advising eligible applicants could not
estop the government from denying citizenship. Filipino
petitioner claimed that had he been advised of his
eligibility, he would have applied and been eligible for
citizenship. Hibi, 414 U.S. at 8-9.
App. 89
In Hibi, the Court noted that in Montana “the
issue of whether ‘affirmative misconduct’ on the part
of the Government might estop it from denying citizenship
was left open.” Hibt 414 U.S. at 8. The Court did not
reach this issue in Hibi because “no conduct of the sort
there adverted to was involved here.” Hibi, 414 U.S. at
8.
In its most recent decision in which the issue was
raised the Court said:
This Court has never decided what type of
conduct by a Government employee will estop
the Government from insisting upon compliance
with valid regulations governing the distribution
of welfare benefits. In two cases involving
denial of citizenship, the Court declined to
decide whether even “affirmative misconduct”
would estop the Government from denying
citizenship, for in neither case was “affirmative
misconduct” involved.
Schweiker u Hansen, 450 U.S. 785, 789 (1981) (per
curiam).
In Hansen a Social Security Administration (SSA)
field representative erroneously told a potential applicant
that she was not eligible for certain benefits. The
statement was incorrect and in contravention of the
directives of the SSA claims manual used by the field
representatives. On the representative's advice, the
potential applicant did not file an application though
she would have been entitled to benefits. Hansen, 450
U.S. at 786.
App. 90
In reversing the Circuit Court decision, the Court
stated that the representative's “errors falll] far short’
of conduct which could raise a serious question whether
petitioner is estopped from insisting upon compliance
with the valid regulation.” Hansen, 450 U.S. at 790
[quoting Montana u Kennedy, 366 U.S. 308, 314 (1961)
The Court noted that “at worst, [the representative's]
conduct did not cause [the applicant] to take action, cf.
Federal Crop Insurance Corp. v. Merrill, supra, or fail
to take action, cf. Montana v. Kennedy, supra, that [the
applicant] could not correct at any time.” Hansen, 450
USS. at 789.”
In the absence of a Supreme Court directive rejecting
the contention that the Government can be estopped
under all circumstances, several Circuit Courts have
developed their own law on this issue. See United
States u Ruby Company, 588 F.2d 697 (9th Cir. 1978);
Massaglia u CIR, 286 F.2d 258 (10th Cir. 1961).”
In discussing this issue the Fifth and Eleventh
Circuits have distinguished between governmental action
taken in a “proprietary” manner and action taken in a
“sovereign” manner.” The Fifth Circuit has stated:
Whether the defense of estoppel may be asserted
against the United States in actions instituted
by it depends upon whether such actions arise
out of transactions entered into in its proprietory
capacity or contract relationships, or whether
the actions arise out of the exercise of its
powers of government. The United States is
not subject to an estoppel which impedes the
exercise of the powers of government, and is
not estopped to deny the validity of a transaction
App. 91
or agreement which the law does not sanction.
Nor does an estoppel arise through an act or
representation made by an officer or agent
without authority to act for the government
in the premises.
United States u Florida, 482 F.2d 205, 209 (5th Cir.
1973).
The Fifth and Eleventh Circuits have never estopped
the Government from acting in its sovereign manner.
See Deltona Corporation v. Alexander, 682 F.2d 888
(11th Cir. 1982); Hicks u Harris, 606 F.2d 65 (5th Cir.
1979); United States u Florida, 482 F.2d 205 (5th Cir.
1973).* The Eleventh Circuit has acknowledged that
the Ninth Circuit has estopped the Government upon a
showing that the Government engaged in “affirmative
misconduct”. See, Deltona, 682 F.2d at 891 n.4, 892 n.6.
In Deltona, the Court stated that it did not have to
decide whether the “affirmative misconduct” exception
would apply because “none of the alleged conduct rises
to the level of ‘affirmative misconduct’ ”. Deltona, 682
F.2d at 892. In deciding whether affirmative misconduct
was evidenced, the Court noted that “silence, acquiescence,
or even negligence fall far short of ‘affirmative
misconduct’ . Deltona, 682 F.2d at 892 n.6.
Although the Hansen and Deltona decisions indicate
an awareness that the “affirmative misconduct” doctrine
has gained a measure of recognition, the Court does
not believe, as Plaintiffs argue, that the doctrine is the
law of this Circuit. This Court is of the view that
neither Hansen or Deltona have altered the previous
pronouncements of the Fifth Circuit that estoppel cannot
be applied against the Government when it is acting in
its sovereign capacity.
App. 92
Plaintiffs do not deny that the FHLBB was acting
in its sovereign power in its dealing with KB. The
Court believes that under the broad view of sovereign
action utilized by the Fifth and Eleventh Circuits, the
FHLBB was acting within its sovereign power.”
Accordingly and on that basis, the Court believes that
Plaintiffs’ estoppel argument is without merit.
COUNT III LEAST DRASTIC REMEDY
Plaintiff contends in Count III of the complaint
that the Board abused its discretion in appointing a
receiver when there existed a less drastic remedy.
Plaintiff bases its argument on the congressional history
of §1464(dX6XA) as amended in 1966 and its understanding
of the holding in Fahey v. Mallonee, 332 U.S. 245 (1947).
Statutory construction “must begin with the language
of the statute itself,” Dawson Chemical Co. u Rohm &
Haas Co., 448 U.S. 176, 187 (1980). In interpreting a
statute, the Court must give effect to its plain meaning.
Albright v. United States, 631 F.2d 915, 918 (D.C. Cir.
1980). When the terms of the statute are unambiguous,
judicial inquiry is complete absent a clearly expressed
legislative intent to the contrary. Rubin u United States,
449 U.S. 424, 430 (1981); Consumer Product Safety
Commission u GTE Sylvania, Inc., 447 U.S. 102, 108
(1980).
Plaintiffs contend that the Board should use cease
and desist orders as a less drastic remedy. The relevant
statutory language indicates that cease and desist orders
or the suspension of an officer concern situations where
the Board has reason to believe that the association is
about to engage in an unsafe or unsound practice or
violation of the law or an agency regulation. See 12
App. 93
U.S.C. §1464(dX6XA). There is no indication in 12 U.S.C.
§1464(d) et seg. that the FHLBB must consider whether
there are available remedies less drastic than the
appointment of a receiver nor does the statute mention
any such less drastic remedies. There is no indication
that the cease and desist order or the suspension of an
officer is available or has any applicability when the
Board is considering the future of an association which
is not. engaging in unsound or illegal acts but which
nonetheless is insolvent.
The Court feels that the unambiguous language of
§1464(d) et seg. is that the Board may exercise its
discretion to appoint a receiver if one of the statutory
criteria is met without having to consider whether less
drastic remedies exist. The Court believes that Plaintiff's
argument would create a conflict between 514640 -A)
and §1464(dX6XA) by impinging on the Board's discretion
to appoint a receiver if one of the statutory criteria
under §1464(dX6XA) is met and there is no showing of
an abuse of discretion. Plaintiffs’ interpretation would
not allow the Board to exercise such discretion if a
lesser drastic remedy existed. There is no such limitation
placed on the Board under §1464(dX6XA). In declining
to accept Plaintiffs’ interpretation of the statute based
on the terms of the statute itself, the Court notes that
statutory provisions, whenever possible, should be
construed as to be consistent and not contradictory
with each other. See Montgomery Charter Service v.
Washington Metropolitan Area Transit Commission,
325 F.2d 230, 234 (D.C. Cir. 1963).
Having determined that the language of the statute
is unambiguous, the Court must determine whether
App. 94
ie 7
the language is contrary to the clear legislative intent.
See Rubin u United States, 449 U.S. at 430.
Plaintiff relies on a couple of passages from the
Senate Report of the Financial Institutions Supervisory
Act of 1966 to support its contention that the FHLBB
may only appoint a receiver when there exist no less
drastic remedies. Plaintiffs rely principally on the following
excerpts:
The only immediately effective remedy available
to the Board is to take custody of a Federal
association under section 5(d\2) of the Home
Owner’s Loan Act. Such action is, of course, a
drastic remedy and is employed only as a last
resort. But where management is uncooperative,
it is the only means by which the Board may
minimize losses by putting an immediate stop
to violations of law or improper practices.
Present law provides no other protection against
increased losses caused by the continuation of
such violations or practices while time-consuming
enforcement proceedings are in progress.
1966 U.S. Code Cong. & Ad. News, S.Rep. No. 1482,
89th Cong., 2d Sess. 3537-38 (1966) (emphasis added).
In the light of the new enforcement powers
provided by the bill, the committee would expect
the Board to appoint a conservator or receiver
only in cases where it judged that the exercise
of the lesser intermediate remedies would not
adequately protect the interests of the public
or of the savings account holders of the
association or of the Federal Savings and Loan
Insurance Corporation.
App. 95
Id. at 3545 (emphasis added).
The Court believes that there is nothing in the
two quotes cited by the Plaintiffs or anywhere else in
the legislative history that would contradict the plain
meaning of the statute. While the language cited above
states that the committee “would expect the Board to
appoint a . . receiver only in cases where it judged
that the exercise of the lesser intermediate remedies
would not adequately protect ...” the committee
stops short of saying that it will require the Board to
make such a determination or finding prior to the
appointment of a receiver.
The Senate Committee which authored the above-
quoted language considered and rejected proposals which
would have incorporated into §1464(d\6XA), as a condition
precedent to the appointment of a conservator or receiver,
a provision that the Board first find that use of its
cease and desist powers would not provide an effective
remedy. For example, the National League of Insured
Savings Associations proposed that §1464(d\6XA), provide,
inter alia, that:
If the Board finds in writing that a ground for
the appointment of a conservator or receiver
as herein provided exists that cannot be
adequately remedied by proceedings toward
issuance of a cease and desist order, the Board
is authorized to petition a judge of the United
States district court for the judicial district in
which the home office of the Association is
located to appoint ex parte and without notice
a conservator or receiver for the Association.
App. 96
ie
Financial Institutions Supervisory Act of 1966. Hearings
on S. 3158 before a Subcommittee of the Senate Committee
on Banking and Currency, 89th Cong., 2d Sess. 324
(1966) (emphasis added).
And the California Savings and Loan League proposed
that subsection (6XA) provide, inter alia:
If the Board finds that a ground for the
appointment of a conservator or receiver as
herein provided exists, and the issuance and
enforcement of one or more cease-and-desist
orders would not protect the public interest
or the interests of the Association or its savings
account holders or creditors, the Board is
authorized to appoint ex parte and without
notice a conservator or receiver for the
Association.
Id. at 352 (emphasis added).
The Committee rejected both proposals, choosing
not to impose any such precondition on the Board’s
power to appoint a receiver.
The purpose of the Financial Institutions Supervisory
Act of 1966, Pub.L.No. 89-695, 80 Stat. 1028 (1966), was
“to strengthen the regulatory and supervisory authority
of Federal agencies over insured banks and insured
savings and loan associations“. . . 1966 U.S. Code Cong.
& Ad. News, S. Rep. No. 1482, 89th Cong., 2d Sess.
3532 (1966). The general statement at the beginning of
the Senate Report indicates that the purpose of the
App. 97
bill was to give several banking agencies, including the
Federal Home Loan Bank Board:
Authority to issue cease-and-desist orders or
suspension or removal orders subject to
standards and procedures designed to protect
both the institutions involved, and their officials
and depositors, savers and others interested in
the sound and effective operation of the financial
institutions. These powers would be granted,
as intermediate powers short of conservatorship
or withdrawal of insurance, in order to prevent
violations of law or regulation and unsafe and
unsound practices which otherwise might
adversely affect the Nation's financial
institutions, with resulting harmful consequences
to the growth and development of the Nation's
economy.
1966 U.S. Code Cong. & Ad. News at 3533.
It is clear from the Senate report that the main
concern of Congress was to provide the FHLBB with a
means of preventing “violations of law or regulations
and unsafe and unsound practices”, 1966 U.S. Code
Cong. & Ad. News at 3533. Congress was not addressing
possible remedies for insolvent associations. Congress
felt that the FHLBB had been handicapped in dealing
with these practices and that the Board’s available
remedies were either too lenient or too drastic. The
intermediate remedies which Congress devised for
handling unsafe practices or violations of law were the
power to issue a cease and desist order or to suspend
or remove an officer of the association. These are the
App. 98
“lesser intermediate remedies” referred to in page
3545 of the Senate report quoted above.
There is no indication that Congress considered
the use of these “lesser intermediate remedies” with
respect to insolvent associations. Even if the Board
were obligated to consider one of the lesser drastic
remedies, the Court does not fathom how the Board
could demand that an institution cease and desist from
being insolvent.
Plaintiffs further argue that the two quotes cited
above stand for the proposition that even if cease and
desist or suspension orders are not appropriate, the
Board should never impose a receiver unless no less
drastic remedies exist. Plaintiffs do not state what the
“lesser intermediate remedies” are though they believe
that one alternative is “working with management where
management is cooperative.” Plaintiffs also suggest
that since the legislative history indicates that the
Board need not make a specific finding that no less
drastic remedy exists, the Court should somehow decide
whether a less drastic remedy existed. The Court finds
no statutory, legislative or logical support for this
contention and believes that it contravenes the purpose
of establishing an agency whose function is to utilize
its expertise to supervise the savings and loan
association.“ The administrative agency is not obligated
to devise a less drastic remedy or agree to assist
management of an insolvent institution. The burden of
choosing a less drastic remedy certainly does not rest
with the Court.
Plaintiffs’ second ground for arguing that the Board
must choose the least drastic remedy is based on its
understanding of Fahey u Mallonee, 382 U.S. 245 (1947).
App. 99
In Fahey, the FHLBB appointed a conservator for
a solvent association on the basis “that the Association
was conducting its affairs in an unlawful, unauthorized
and unsafe manner, that its management was unfit and
unsafe, that it was pursuing a course injurious to and
jeopardizing the interests of its members, creditors
and the public.” Fahey, 332 U.S. at 247. At the time of
the Fahey decision, §1464(d) did not delineate the grounds
upon which a receiver could be appointed. Congress
authorized the FHLBB to adopt its own regulations
setting forth the grounds for such an appointment. The
grounds for the appointment of a receiver pursuant to
the FHLBB’s regulations were substantially identical
to the grounds presently set forth in §1464(dX6XA).
Compare Fahey, 332 U.S. at 250 n.1 with 12 U.S.C.
§1464(dX6XA).
In Fahey the District Court removed the conservator
on the basis that the statute which did not spell out the
grounds for the appointment of a receiver constituted
an unconstitutional delegation of the “legislative functions
to the supervising authority without adequate standards
of action or guides to policy.” Fahey, 332 U.S. at 249.
The District Court relied on Panama Refining Co. u
Ryan, 293 U.S. 388 (1935) and Schechter Poultry
Corporation u United States, 295 U.S. 495 (1935).
Reversing the District Court, the Supreme Court
stated:
The Board adopted rules and regulations
governing appointment of conservators. They
provided the grounds upon which a conservator
might be named, and they are the usual and
conventional grounds found in most state and
App. 100
federal banking statutes. They are sufficiently
explicit, against the background of custom, to
be adequate for proper administration and for
judicial review if there should be a proper
occasion for it.
Fahey, 332 U.S. at 252-53 (emphasis added).
Plaintiffs argue that the above-quoted language
and one other passage from Fahey stands for the
proposition that “well defined practices” and “well known
and generally acceptable standards” constitute “the
background of custom” which is found in the common
law of receivership.” One of these generally accepted
standards under common law is that a receiver should
be appointed only in the absence of less drastic remedy.”
The Court believes that Plaintiffs’ argument is
unsupported by the holding in Fahey Justice Jackson's
opinion is a refutation of the contention that Congress
unconstitutionally delegated its responsibility to the
Board. In upholding the delegation to the Board, Justice
Jackson stated that the regulations outlining the
appointment of a receiver were sufficiently explicit
“against the background of custom” to withstand a
constitutional challenge. The Supreme Court reasoned
that the standards established by the Board were within
the defined parameters for such appointment under
other banking statutes; the various grounds for the
appointment of a receiver were “sufficiently explicit”
because they are the usual and ordinary grounds found
in most state and federal banking statutes.” Fahey, 332
U.S. at 253. Insolvency was one of these grounds.
App. 101
As applied to the facts of the present case, the
holding in Fahey supports the proposition that insolvency
had been a usual and ordinary ground for the appointment
of a receiver under established banking law; the Board's
determination that insolvency should be one of the
grounds was explicit enough to render constitutional
Congress’ delegation to the Board.
This Court finds that Fahey does not impose an
obligation upon the Board to apply common law standards
when deciding whether or not to appoint a receiver.
The Court believes that the FHLBB’s power to appoint
a receiver for an insolvent institution pursuant to a
constitutionally valid criteria presents a different situation
than a court’s appointment of a receiver pursuant to its
equity powers under common law.”
COUNT IV—DUE PROCESS
Count IV of the complaint charges that the Board's
ex parte appointment of a receiver violated Biscayne's
due process rights. Plaintiff does not argue that the ex
parte procedure outlined in 12 U.S.C. §1464(dX6XA) is
facially unconstitutional. Biscayne argues that the ex
parte procedure may only be invoked upon a showing
of an “emergency situation” and since there was no
showing of an emergency situation in the present case,
the statute was unconstitutionally applied. In their
complaint, Plaintiffs’ argument concerning the “emergency
situation” was in Count III. In their final briefs, it
appears that Plaintiffs present this argument under
the rubric of due process contained in Count IV. The
Court feels that the discussion of whether the Board
must demonstrate that an emergency situation exists
App. 102
is an integral part of Plaintiffs’ other due process
arguments and it will, therefore, be discussed under
Count IV.
Plaintiffs’ argument that an emergency must exist
before the FHLBB may appoint a receiver is predicated
on Fuentes u Shevin, 407 U.S. 67 (1972) and Fahey u
Mallonee, 332 U.S. 245 (1947). The summary procedure
set forth in §1464(dX6XA) which allows the appointment
of a receiver “ex parte and without notice” does not
transgress the procedural due process requirements of
the Fifth Amendment. Fahey u Mallonee, 332 U.S. 245
(1947). At the time Fahey was decided, §1464(d) did not
provide for ex parte appointment of conservators without
notice to the affected association; however, the FHLBB’s
own regulations so provided. In Fahey, the Supreme
Court held that the ex parte procedure set forth in the
Board's regulations was constitutional. The Court stated:
It is complained that these regulations provide
for hearing after the conservator takes
possession instead of before. This is a drastic
procedure. But the delicate nature of the
institution and the impossibility of preserving
credit during an investigation has made it an
almost invariable custom to apply supervisory
authority in a summary manner. It is a heavy
responsibility to be exercised with
disinterestedness and restraint, but in the light
of the history and customs of banking we cannot
say it is unconstitutional.
Fahey, 332 U.S. at 253-54.
App. 103
The case for the constitutionality of the summary
procedure employed by the FHLBB in this action is
arguably stronger that it was in Fahey. In 1954, after
Fahey was decided, Congress amended §1464(d) to
specifically and expressly authorize the Board to appoint
“ex parte and without notice” a conservator or receiver
for an insolvent association.
The Supreme Court had cited Fahey on several
occasions in support of the proposition that an ex parte
appointment is constitutional in emergency situations.
See Fuentes u Shevin, 407 U.S. 67, 92 n.26 (1972);
Parratt v. Taylor, 451 U.S. 527, 538-39 (1981), and Hodel
u Virginia Surface Mining & Reclamation Ass'n. 452
U.S. 264, 299-300 (1981).
Pla
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