Opposition Brief — SHWC, Inc. v. Federal Deposit Insurance

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Urricet OF THE CLERK

No. 91-1441

In the Supreme Court of the United States

OCTOBER TERM, 1991

SHWC, INC., ET AL., PETITIONERS

Vv.

FEDERAL DEPOSIT INSURANCE CORPORATION, ETC.

ON PETITION FOR A WRIT OF CERTIORARI

. TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

KENNETH W. STARR

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 514-2217

ALFRED J.T. BYRNE

General Counsel

JACK D. SMITH

Deputy General Counsel

DOROTHY L. NICHOLS

Associate General Counsel

ANN S. DUROSS

Assistant General Counsel

RICHARD J. OSTERMAN, JR.

Senior Counsel

J. SCOTT WATSON

Senior Attorney

Federal Deposit Insurance Corporation

Washington, D.C. 20429

QUESTION PRESENTED

1. Whether the Federal Deposit Insurance Corporation

properly succeeded the Federal Savings and Loan Insur-

ance Corporation (FSLIC) as receiver for a failed thrift

institution following FSLIC’s abolition.

2. Whether the court of appeals correctly determined

that petitioners’ affirmative defenses and counterclaims

were barred under state law.

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

Bishop v. Wood, 426 U.S. 341 (1976) ........... ccc eee eee eeeee

Bowen v. Massachusetts, 487 U.S. 879 (1988) ................. 8

Brockett v. Spokane Arcades, Inc., 472 U.S. 491 (1985) ..

City of Newport v. Fact Concerts, Inc., 453 U.S. 247

ad ccs uas db uansivunakedvenanocessasedbesdsbsatusesenaenes 6

Coastal Plains Dev. Corp. v. Micrea Inc., 572 S.W.2d 285

ata cae ah oie sun dhebaeudsedeeshaniavesysesente 5, 9

D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942) ...... 4

FDIC v. Bank of America Nat'l Trust & Savings Ass’n,

701 F.2d 831 (9th Cir.), cert. denied, 464 U.S. 935 (1983) 9-10

Minute Maid Corp. v. United Foods, Inc., 291 F.2d 577

(5th Cir.), cert. denied, 368 U.S. 928 (1961).............0.... 9

United States v. Hohri, 482 U.S. 64 (1987) .................00... 8

Virginia v. American Booksellers Ass’n, 484 U.S. 383

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Statutes:

Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq.:

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12 U.S.C. 1821la(a) ..... LL: LN AA SELLE REAP OTN PED ~

12 U.S.C. 1823(e) (1988 & Supp. IT 1990) .........0.0.....

(IIT)

Statutes—Continued:

Federal Deposit Insurance Corporation Improvement Act

of 1991, Pub. L. No. 102-242, § 161(b), 105 Stat. 2285-

ECO Sin. nie el Rccnteipeipiates conserinnnketincidansaisbnchainds

Federal Home Loan Bank Act, ch. 522, § 17, 47 Stat. 736

Ct Meas, UE A IIIIED ‘ensuagthnheavedeuervacsenqvacinessalaiceunciaen

Financial Institutions Reform, Recovery, and Enforce-

ment Act of 1989, Pub. L. No. 101-73, Tit. IV, 103

Stat. 354:

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National Housing Act, ch. 847, § 402, 48 Stat. 1256 (12

U.S.C. 1725 (1988))

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In the Supreme Court of the Giuted States

OCTOBER TERM, 1991

- No. 91-1441

SHWC, INC., ET AL., PETITIONERS

Vv.

FEDERAL DEPOSIT INSURANCE CORPORATION, ETC.

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. 16a-

33a) is reported at 945 F.2d 853. The opinion of the

district court (Pet. App. la-1la) is unreported.

JURISDICTION

The judgment of the court of appeals was entered on

October 23, 1991. A petition for rehearing was denied

on December 6, 1991. Pet. App. 34a-35a. The petition

for a writ of certiorari was filed on March 5, 1992. The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

(1)

STATEMENT

1. On April 18, 1984, petitioner SHWC, Inc. (SHWC)

executed two notes payable to Vernon Savings and

Loan Association (Old Vernon) for principal amounts

of $10 million and $1.25 million. Each note was se-

cured by a separate deed of trust on certain Dallas

property, which SHWC was to develop with the bor-

rowed funds. The notes were guaranteed by petition-

ers Swanson, Heister, and Wilson, and by L.L.

Claycomb. Pet. App. 17a-19a.

As part of the loan transaction, SHWC granted to

Old Vernon a 50% profits interest in the secured

property. The “profits assignment” provided:

No Member or Partner. By its acceptance of this

Profits Assignment, Assignee [Old Vernon] does

not become a member or a partner of or with

Assignor [SHWC]. Consequently, in no event

shall Assignee be liable for any of the debts, obli-

gations or liabilities of Assignor or of its partners

as a result of the execution of this Profits

Assignment and in no event shall Assignee be

liable for any contributions to Assignor. As-

signee’s only interest in Assignor shall be

Assignee’s right to receive interests granted to

Assignee and assigned under this Profit Agree-

ment.

Pet. App. 18a-19a. The loan agreement also contained

a provision stating, in pertinent part:

No Liability of Lender. Lender shall have no

liability, obligation, or responsibility whatsoever

with respect to the construction of Improvements

except to advance the Loan and the Borrower’s

Deposit pursuant to this Loan Agreement.

eee

Id. at 19a. Under the terms of both notes, principal

and accrued interest were due and payable on April 18,

1986. Id. at 20a.

SHWC defaulted on the notes. On December 7, 1986,

Old Vernon filed suit on the notes in Texas state

court against SHWC and the guarantors. During the

pendency of the state court proceedings, Old Vernon

was declared insolvent by the Federal Home Loan

Bank Board (Bank Board),! and the Federal Savings

and Loan Insurance Corporation (FSLIC)? was ap-

pointed receiver. As receiver, FSLIC transferred Old

Vernon’s assets to Vernon Savings and Loan Associ-

ation, FSA (Vernon FSA). Subsequently, the Bank

Board declared Vernon FSA insolvent, and appointed

FSLIC as receiver for Vernon FSA. On December 16,

1987, FSLIC was formally substituted for Vernon

FSA in the state court proceedings and removed the

case to federal court. Following the enactment of

FIRREA and the abolition of FSLIC, the Federal

Deposit Insurance Corporation (FDIC) was

substituted as party plaintiff. Pet. App. 20a.

' The Bank Board was a federal agency created pursuant to

the Federal Home Loan Bank Act, ch. 522, § 17, 47 Stat. 736,

formerly codified at 12 U.S.C. 1437 (1988) (repealed 1989). The

Bank Board was charged with chartering and supervising

savings and loan associations and directing the operations of the

Federal Savings and Loan Insurance Corporation. The Bank

Board was abolished by the Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L.

No. 101-73, § 401, 103 Stat. 354.

* The Federal Savings and Loan Insurance Corporation was

a federal instrumentality created pursuant to the National

Housing Act, ch. 847, § 402, 48 Stat. 1256, formerly codified at

12 U.S.C. 1725 (1988) (repealed 1989), to insure deposit

accounts in savings and loan associations. The FSLIC, like the

Bank Board, was abolished by FIRREA.

2. The FDIC filed a motion for summary judgment

to recover on the notes and guarantees. SHWC raised

affirmative defenses and counterclaims alleging fail-

ure of consideration, usury, fraud, and breach of

contract. The defenses were based on SHWC’s theory

that a partnership existed between Old Vernon and

SHWC. On June 29, 1989, the district court denied

FDIC’s motion because it was unable to determine

the legal relationship between the parties based on

the “profits assignment.” Pet. App. 2la & n.6.

On January 30, 1990, the FDIC filed a second mo-

tion for summary judgment, asserting that SHWC’s

defenses were barred under Texas law, the protec-

tions afforded the FDIC under D’Oench, Duhme &

Co. v. FDIC, 315 U.S. 447 (1942), and the federal

holder-in-due-course doctrine. Pet. App. 21a. The dis-

trict court granted that motion, holding that, under

Texas law, no partnership between SHWC and Old

Vernon existed. The district court concluded that

“[t]he unmistakable intent of the parties * * * was to

create a relationship whereby Old Vernon would pro-

vide loans to SHWC and SHWC would agree to repay

those loans with interest. * * * The loan documents at

issue do not refer to or evidence in any way the

existence of a partnership.” Jd. at 5a. The district

court held that, under Texas law, an expressed inten-

tion of the parties not to create a partnership, coupled

with the absence of a provision for the sharing of

losses, precluded a finding that the parties were

partners. /d. at 5a-6a.3

The district court also rejected SHWC’s usury

claim, holding that the loan documents contained a

* Because of its state law holding, the district court did not

consider whether the D’Oench, Duhme or federal holder-in-due-

course doctrines barred SHWC’s partnership claims.

usury savings clause that, under state law, defeated a

usury claim. Because the notes specified a lawful in-

terest rate, and the usury savings clause demon-

strated a clear intent to avoid any illegal interest

charges, the court concluded that the loans were not

usurious. Pet. App. 10a.

3. The court of appeals affirmed. First, the court

rejected SHWC’s claim that the FDIC did not have

authority to act as successor to FSLIC as receiver

for the failed thrift. The court noted that Section 401

of FIRREA, Pub. L. No. 101-73, Tit. IV, 103 Stat. 354,

which abolished FSLIC (see note 2, supra), provided

that the resolutions creating FSLIC receiverships

were to remain in effect, and that FDIC was autho-

rized by the statute to enforce orders pertaining to

pre-FIRREA receiverships. Pet. App. 25a. The court

also held that Congress clearly intended to grant

FDIC authority to succeed the FSLIC with respect

to receiverships established prior to January 1, 1989.

Finally, the court noted that FIRREA provides that

no lawsuits involving the FSLIC are to abate as a

result of FSLIC’s abolition; FIRREA mandates that

“the appropriate successor to the interests of the

[FSLIC] shall be substituted.” Jbid.

Turning to the merits, the court held that SHWC’s

partnership and usury claims were barred by Texas

state law. Citing Coastal Plains Dev. Corp. v. Mi-

crea, Inc., 572 S.W.2d 285, 288 (Tex. 1978), the court of

appeals held that the “profits assignment” provision

disavowing the existence of a partnership, coupled

with the express provision disavowing the sharing of

losses and liability, precluded a finding of partnership

as a matter of law. Pet. App. 27a. The court of appeals

also held that the “usury savings clauses” in the loan

documents, which reflected the parties’ intention to

abide by the usury laws, defeated SHWC’s usury

claims. Jd. at 29a.4

ARGUMENT

1. Petitioners contend (Pet. 10-16) that in enacting

FIRREA, Congress failed to provide authority for the

FDIC to succeed to receiverships to which the

FSLIC had been appointed prior to January 1, 1989.

That contention is incorrect and, in any event, is of no

continuing importance.

As the court of appeals explained, FIRREA specifi-

cally provides that “the resolutions creating the

receivership[s] for which the FSLIC was receiver

remain in effect” following the abolition of the

FSLIC. Pet. App. 24a. In Section 401(i)(1) of

FIRREA, Pub. L. No. 101-73, Tit. 1V, 103 Stat. 357.

Congress provided that following the enactment of

FIRREA, the Director of the Office of Thrift

Supervision and the Director of the FDIC shali

“identify the regulations and orders which relate to

the conduct of conservatorships and receiverships in

accordance with the allocation of authority between

them under this Act.” In view of this provision, and

others indicating that FIRREA did not intend to

create a “gap” in the continuation of receiverships,

the court of appeals was correct in stating that

FIRREA’s transitional provisions “clearly express

the intent on the part of Congress to grant FDIC

authority to succeed to the FSLIC with respect to

4 The court of appeals also relied on City of Newport v.

Fact Concerts, Inc., 453 U.S. 247 (1981), in finding fhat

SHWC’s usury claim should be rejected because it was punitive

in nature, would have no deterrent effect as applied to the

FDIC, and “would only serve to punish innocent creditors of

the failed institution by diminishing available assets.” Pet. App.

dla.

receiverships appointed prior to January 1, 1989.” Pet.

App. 25a.

In any event, petitioner’s contention that FIRREA

did not authorize the FDIC to succeed to former

F'SLIC receiverships for which FSLIC was appointed

prior to August 9, 1989, is of no future significance. In

Section 161(b) of the Federal Deposit Insurance Cor-

poration Improvement Act of 1991, Congress amended

the Federal Deposit Insurance Act, 12 U.S.C. 1821la

(Supp. II 1990), to state:

le|ffective August 10, 1989, the Corporation shall

succeed the Federal Savings and Loan Insurance

Corporation as conservator or receiver with re-

spect to any depository institution —

(i) the accounts of which were insured

before August 10, 1989 by the Federal

Savings and Loan Insurance Corporation; and

(ii) for which a conservator or receiver

was appointed before January 1, 1989.

Federal Deposit Insurance Corporation Improvement

Act of 1991, Pub. L. No. 102-242, 105 Stat. 2286 (to be

codified at 12 U.S.C. 1821a).5 In light of Congress’s

® The provision states, in full:

(b) CLARIFICATION OF FDIC POWERS IN FSLIC

RESOLUTION FUND CONSERVATORSHIPS AND RECEIVER-

SHIPS. — * * *

* * * * *

“(5) CORPORATION AS CONSERVATOR OR RECEIVER. —

“(A) IN GENERAL. — Effective August 10, 1989,

the Corporation shall succeed the Federal Savings

and Loan Insurance Corporation as conservator or

receiver with respect to any depository institution—

enactment of that provision, there can be no further

dispute that the FDIC is empowered to act as

successor to FSLiC receiverships such as this one.

2. Petitioners contend (Pet. 16-19) that the court

of appeals erred in its application of Texas state law

to the particular loan documents under which it was

held liable to the FDIC in this case. The court’s

analysis of state law does not present an issue

warranting review by this Court,® and petitioners’

claims are also mistaken.

a. Petitioners argue (Pet. 17) that the court applied

a different standard for determining whether a

partnership existed when one of the partners is a

savings and loan association. The court of appeals,

however, applied well-settled Texas state law

“(i) the accounts of which were insured before

August 10, 1989 by the Federal Savings and Loan

Insurance Corporation; and

“(ii) for which a conservator or receiver was

appointed before January 1, 1989.

“(B) RIGHTS, POWERS, AND DUTIES. — When act-

ing as conservator or receiver with respect to any

depository institution described in subparagraph (A),

the Corporation shall have all rights, powers, and

duties that the Corporation otherwise has as

conservator or receiver under this Act.”.

Federal Deposit Insurance Corporation Improvement Act of

1991, Pub. L. No. 102-242, § 161(b), 105 Stat. 2285-2286, amend-

ing 12 U.S.C. 1821a(a) (Supp. II 1990).

6 See Bowen v. Massachusetts, 487 U.S. 879, 908 (1988)

(“We have a settled and firm policy of deferring to regional

courts of appeals in matters that involve the construction of

state law.”); Virginia v. American Booksellers Ass’n, 484 U.S.

383, 395 (1988); United States v. Hohri, 482 U.S. 64 (1987);

Brockett v. Spokane Arcades, Inc., 472 U.S. 491, 499-500

(1985); Bishop v. Wood, 426 U.S. 341, 346 & n.10 (1976).

mrcanbinnnec erence eae amare

establishing the necessary elements of a partnership

agreement. As the court of appeals noted, the Texas

Supreme Court set forth the controlling law in

Coastal Plains Dev. Corp. v. Micrea, Inc., 572 S.W.2d

285, 288 (Tex. 1978), where the court held that an

expressed intent of the parties not to create a joint

venture, coupled with the absence of an agreement to

share losses, precluded a finding of joint venture. Pet.

App. 27a. In this case, several provisions disclaim the

existence of a partnership, and another provision

disclaims liability of Old Vernon except to lend money

to SHWC. The court of appeals properly found that

these provisions clearly demonstrate the intent of the

parties not to become partners.”

b. Petitioners also err in challenging (Pet. 17-18)

the court of appeals’ determination that SHWC’s

usury claim was barred. The court’s holding rests on

the application of Texas state law to the particular

usury savings clause at issue in the loan documents.

It reflects the fact that the parties expressed a clear

intent to avoid a usurious transaction. Rather than

“retrospectively changing” petitioners’ contract

rights (Pet. 17), the court of appeals simply held the

parties to the manifest terms of the agreement.

c. Finally, petitioners err in claiming a conflict

between the court of appeals’ decision and FDIC vy.

Bank of America Nat'l Trust & Savings Ass’n, 701

’ Petitioners’ claim that the court of appeals deviated from

its earlier decision in Minute Maid Corp. v. United Foods, Inc.,

291 F.2d 577 (5th Cir.), cert. denied, 368 U.S. 928 (1961), in

barring SHWC’s partnership claims raises, at most, an intra-

circuit conflict over Texas law, which would not require

review here. In any event, in Minute Maid, unlike in this case,

there were no express provisions disclaiming an agreement to

share in losses or liability or disavowing the existence of a

partnership.

F.2d 831 (9th Cir.), cert. denied, 464 U.S. 935 (1983).

Petitioners apparently contend (Pet. 19) that because

the court of appeals suggested that their usury claim

would be invalid under federal as well as state law,®

the decision conflicts with Bank of America Nat'l

Trust & Savings Ass’n, which petitioners interpret

as holding that state law alone determines the liabil-

ity of FDIC as receiver. The proposition that state

law alone determines the liability of FDIC as receiver

is incorrect, see, e.g., 12 U.S.C. 1823(e) (1988 & Supp.

II 1990), but, in any event, petitioner misstates the

holding of Bank of America Nat'l Trust & Savings

Ass’n. The Ninth Circuit held only that when FDIC

proceeds in its corporate capacity, federal law applies.

701 F.2d at 834.9 There is, therefore, no conflict

between the two cases.

* Applying the rationale of City of Newport, the court of

appeals stated that the FDIC receivership, which was created

to serve the public interest, should not be subject to a punitive

usury statute when it would only serve to punish innocent

creditors of the receivership and, ultimately, innocent taxpay-

ers. Pet. App. 3la.

* The Ninth Circuit noted in passing that the provision in

the Federal Deposit Insurance Act that cases involving the

FDIC shall be deemed to arise under the law of the United

States for purposes of removal has an exception for cases in

which the FDIC is acting “as receiver of a State bank,” Bank

of America Nat'l Trust & Savings Ass'n, 701 F.2d at 834,

citing 12 U.S.C. 1819. That provision is irrelevant in this case

because the FDIC’s removal power is not at issue.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.