Petition for Writ of Certiorari — Home Savings of America, FSB v. Maynard

supreme Court, U.S. 5

FILED

=~,

94 258 Aus 1 0 1994

—=GFRCE- CECE

In The

Supreme Court of the United States

October Term, 1994

e

HOME SAVINGS OF AMERICA, FSB,

Petitioner,

VS.

MARCELLA T. MAYNARD,

Respondent.

¢

Petition For A Writ Of Certiorari

To The Court Of Appeal Of The State Of California,

Second Appellate District

+

PETITION FOR WRIT OF CERTIORARI

¢

Pau. W. Cane, Jr.

Counsel of Record

KATHLEEN L. MCACHRAN

Pau, Hastincs, JANOFSKY &

WALKER

Twenty-third Floor

555 South Flower Street

Los Angeles, California 90071

(213) 683-6000

FRANKLIN R. WurtTZEL

Legal Department

Home Savings of America, FSB

4900 Rivergrade Road

Irwindale, California 91706

(818) 814-7675

Attorneys for Petitioner

Home Savings of America, FSB

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Whether federal law - the Home Owners’ Loan Act

and its implementing regulations —- preempts a federal

thrift employee’s state-law wrongful-discharge claim,

where the claim is based on an alleged implied employ-

ment contract forbidden by federal law.

ii

PARTIES TO THE PROCEEDINGS AND

RULE 29.1 STATEMENT

The only parties to this action are plaintiff/respon-

dent Marcella T. Maynard and defendant/petitioner

Home Savings of America, FSB, a federal savings bank.

Home Savings of America is a wholly-owned subsidiary

of H.F. Ahmanson & Co. There are no subsidiaries of

Home Savings and H.F. Ahmanson (other than wholly-

owned subsidiaries).

iii

TABLE OF CONTENTS

Page

QUESTION PRESENTED. . .... 2.20 ec cc ccc cccccccees i

PARTIES TO THE PROCEEDINGS AND RULE 29.1

EE GNSS CUES CU ee hs eb iesescescsecsnce'es ii

pe so Vv

EE ee ae 1

ESS De a re 1

STATUTORY PROVISIONS INVOLVED............. 2

I i S086 sk eieu con a0 ab dkOosscce cess 2

REASONS FOR GRANTING THE PETITION ....... 6

I. THE RULE ANNOUNCED IN CALIFORNIA

IMPEDES THE U.S. GOVERNMENT’S REGU-

LATORY RESPONSIBILITIES OVER THE

pe 6

A. The Federal Regulations Governing Savings

And Loan Associations Expressly Provide

For Preemption Of State Law............. 7

B. The OTS Regulations Preempt The California

Law Of Implied Employment Contracts ..... 10

1. The OTS regulations specify precisely

what is and what is not an enforceable

employment contract .................. 11

2. California and many other states recog-

nize implied employment contracts that

are unwritten and sometimes even

| Fadvatwewecuae ss 14

3. The federal regulations preempt claims

based on implied employment contracts 17

iv

TABLE OF CONTENTS - Continued

Page

Il. THERE IS A CONFLICT; COURTS OF OTHER

STATES, AND FEDERAL COURTS, HOLD PRE-

EMPTED THE KIND OF CLAIM AT ISSUE

SSS saeaerneren inn ns eee pas 19

SN S50. 0 Snow Wks ad cbansteecndwenzaunes 26

APPENDIX

Opinion of the California Court of Appeal...... App. 1

Order of the California Supreme Court denying

igh just ERATE TET CELT COTE eer App. 6

Vv

TABLE OF AUTHORITIES

Page(s)

CASES

Alegria v. Idaho First Nat’! Bank, 111 Idaho 314, 723

Foe WE REMAN GS 437-44 0Ab oan e extra cewek scans 21

Berry v. American Federal Savings, 730 P.2d 905

(Nie OO a eccdcss sd ceawdnndeckasve. 20

Caterpillar, Inc. v. Williams, 482 U.S. 386 (1987) ...... 25

City Nat'l Bank v. Brown, 599 So. 2d 787 (La. Ct.

App.), cert. denied, 604 So. 2d 999 (La. Sup. Ct.

RPA P ONT ORS ca Pic aca eean ei a cee ur ded oveiien eu cts bax 21

City of New York v. FCC, 486 U.S. 57 (1988) .......... 8

Cohen v. Resolution Trust Corp., No. 90-1065-R(P),

1993 U.S. Dist. LEXIS 7317 (S.D. Cal. May 10,

in Re res ee ee ee et a aeRO 23

Cole v. Carteret Sav. Bank, 224 N.J. Super. 446, 540

File Fe Ws oN aca 5h 16a ee han ees 24

Cox Broadcasting Corp. v. Cohn, 420 U.S. 469 (1975) ..... 2

Crocker v. Resolution Trust Corp., 839 F. Supp. 1291

CE Ea WOME cdc tarrnns anc is cha pamsG fa wG be dacs 23

D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942) .... 23

Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc.,

GFR Se et I oo es hk whee canes 19

Dynan v. Rocky Mountain Fed. Sav. & Loan, 792 P.2d

ae CU, WI Wa ROU eo oie cs css cdcnscsedccnass 21

Fidelity Federal Savings & Loan Association v. de la

Cueshe, S56 US. TAT CIGR2) occ s vncn icc cece cn passim

First Gibraltar Bank v. Morales, 19 F.3d 1032 (5th

i I 6 rh ao tec eee ae ied ese. 7,9

vi

TABLE OF AUTHORITIES - Continued

Page(s)

Foley v. Interactive Data Corp., 47 Cal. 3d 654, 254

oS Es eer re 4, 14, 15

General Dynamics Corp. v. Superior Court, __ Cal.

4th __, __ Cal. Rptr. 2d __, 1994 Cal. LEXIS

See WUE Bs SUI Cs vewe nee eeceneegacadany sieves 15

Gilbert v. Durand Glass Mfg. Co., Inc., 258 N.J.

Suet, SER, GOP AOE GU CIGFE) oss sec sic cence csen. 16

Glendale Federal Savings & Loan Association v. Fox,

459 F. Supp. 903 (C.D. Cal. 1978), cert. denied,

ee Se CS Si ck vg ttawetvass keane docsbasss 9

Gonzales v. MetPath, Inc., 214 Cal. App. 3d 422, 262

Re PE UE CRUE vsncaa anki vascud ened cbekeccses 15

Hali v. Great Western Bank, 231 Cal. App. 3d 713,

se OB. rire rere eee 24

Hawkins v. Peoples Federal Savings & Loan Associa-

tion, 155 Mich. App. 237, 399 N.W.2d 484 (1986) .... 21

Hillsborough County v. Automated Medical Labs, Inc.,

STR ID FEF CRONE: cane eca ce ten cdnwabiseces voenss 6

Honig v. Financial Corp. of America, 6 Cal. App. 4th

SOD, 7 Cah. BO, Oe TEs CIs es vevtcrvesascncess 24

Hrechorovich v. Harbor Hospital Center Inc., 93 Md.

App. 772, 614 A.2d 1021 (1992), cert. denied, 330

Md. 319, 624 A.2d 490 (1993) ................0005. 16

Hunio v. Tishman Construction Corp., 24 Cal. App.

4th 792, 18 Cal. Rptr. 2d 253, hearing granted, 20

oe F 8g eres Sy oper 15

Interstate Circuit, Inc. v. Dallas, 390 U.S. 676 (1968) ..... 2

Vii

TABLE OF AUTHORITIES - Continued

Page(s)

Kaiser v. Dixon, 127 I) Anp. 3d 251, 468 N.E.2d

CCN SAasin. -<UdRd wee Verddbiewsacess. sx. 16

Langley v. FDIC, 484 U.S. 86 (1987).................. 22

Leikvold v. Valley View Community Hospital, 141

Ariz. 544, 688 P.2d 170 (1984)..................... 16

Louisiana Public Serv. Comm'n v. FCC, 476 U.S. 355

on SE PTR RIE SERIE ees a et ea 8

Mers v. Dispatch Printing Co., 39 Ohio App. 3d 99,

Ge ee Se lk cee oe 16

Oki America, Inc. v. Microtech International, Inc., 872

Se a OE ee ieee 15

Paris v. Northeast Savings Ass'n, No. CV 910398144,

1994 Conn. Super. LEXIS 1412 (June 1, 1994)...... 24

Pugh v. See's Candies, Inc., 116 Cal. App. 3d 311,

ae es ee EP se 14

Rush v. FDIC, 747 F. Supp. 575 (N.D. Cal. ee 21

Sargent v. Central Nat'l Bank & Trust Co., 809 P.2d

ROE GP - WI, MOR OED so ctv vecanceccsccuce 21

Sholer v. Security Federal Savings & Loan Associa-

tion, 736 F. Supp. 1083 (D.N.M. 1990)............. 20

St. Martin Evangelical Lutheran Church v. South

Chama, S50 US. 772 (IGGR) oo oo occ cccccccncee 20

Thomka v. Financial Corp. of America, 15 Cal. App.

4th 877, 19 Cal. Rptr. 2d 382 (1993)............... 24

Toussaint v. Blue Cross & Blue Shield of Mich., 408

Mich. 579, 292 N.W.2d 880 (1980)................. 16

Webb v. Superior Court, 225 Cal. App. 3d 990, 275

ee 23

Wing v. JMB Property Mgmt. Corp., 714 P.2d 916

Pee a a 6a ceva iodo Suen ca canc 16

Vii

TABLE OF AUTHORITIES —- Continued

Page(s)

STATUTES AND REGULATORY MATERIALS

OP ee OF I bb os Ss hn hoe ch bs ceded oo néxiene 2

Bee oo donee sc xe anon ch adaxsidcnns passim

Bey ee i 5 5 bain Oc dws Va renee 23

39 Fed. Reg. 28,610 (1974) (codified at § 563.39). .12, 17

47 Fed. Reg. 17471, 17472 (1962) ................065. 12

Se I, Sioa ais gods ETN CUE bse. dae hie 8

ge ee err re ees 12

ee tia sxc nsheekvexetecscansaei cs; passim

Office of Thrift Supervision, Executive Compensation

and Employment Contracts, Y 27,107 (March 5,

ee Se er ee Bee Uh eee ee Ce 13

Ly, ice of Thrift Supervision, Ltr. Rule No. 90/CS-46,

Se MT es oo ovate Oars odd Sear c ek cs 18

TREATISES

Robert L. Stern, Eugene Gressman & Stephen M.

Shapiro, Supreme Court Practice (6th Ed. 1986)...... 2

PETITION FOR A WRIT OF CERTIORARI TO THE

COURT OF APPEAL OF THE STATE OF CALIFORNIA,

SECOND APPELLATE DISTRICT

Petitioner Home Savings of America, FSB, respect-

fully petitions this Court for a writ of certiorari to review

the decision of the Court of Appeal of the State of Califor-

nia, Second Appellate District.

¢

OPINIONS BELOW

The unpublished opinion of the California Court of

Appeal was filed on February 17, 1994, and is reproduced

in the Appendix beginning at page App. 1. The California

Supreme Court denied the discretionary petition for

review in an unpublished order dated May 12, 1994. That

order is reproduced in the Appendix at page App. 6.

¢

JURISDICTION

The judgment of the court of appeal was entered on

February 17, 1994. The timely petition for review to the

California Supreme Court was denied on May 12, 1994.

The instant petition for certiorari is filed within 90 days of

’

that date. Sup. Ct. R. 13.1.1 The jurisdiction of this Court

is invoked under 28 U.S.C. § 1257(a).?

+

STATUTORY PROVISIONS INVOLVED

The applicable statutes and regulations are set forth

beginning at page App. 7 of the Appendix.

o

STATEMENT

This is a straightforward case of preemption. Califor-

nia and some other states recognize “implied” employ-

ment contracts arising from, inter alia, the employee’s

! This Court’s review of the decision of the California Court

of Appeal is permissible under 28 U.S.C. § 1257 because the

California Supreme Court denied discretionary review. E.g.,

Interstate Circuit, Inc. v. Dallas, 390 U.S. 676, 678 n.1 (1968)

(where the state court of last resort denies discretionary review,

the petition to the Supreme Court is permissible from the judg-

ment of the intermediate state court).

? There is a final judgment for purposes of § 1257(a) even

though the California Court of Appeal’s decision remanded the

case for trial on the state-law question presented. A final judg-

ment exists “where the federal issue has been finally decided in

the state courts [even though there are] further proceedings

pending in which the party seeking review [in the Supreme

Court] might prevail on the merits on nonfederal grounds, thus

rendering unnecessary review of the federal issue by [the

Supreme Court], . . . where reversal of the state court on the

federal issue would be preclusive of any further litigation on the

relevant cause of action.” Cox Broadcasting Corp. v. Cohn, 420

U.S. 469, 482-83 (1975), quoted in Robert L. Stern, Eugene Gress-

man & Stephen M. Shapiro, Supreme Court Practice 131 (6th ed.

1986).

length of service and satisfactory job performance. No

formal employment contract — indeed no written docu-

ment at all — is required.

Federal law, however, regulates the operations of

federally chartered thrift institutions. As this Court has

held, federal law controls “” ‘the powers and operations of

every Federal savings and loan association from its cradle

to its corporate grave.’ ” Fidelity Federal Savings & Loan

Association v. de la Cuesta, 458 U.S. 141, 160 (1982) (citation

omitted). Federal law prohibits, for federal thrift

employees, exactly the implied contracts that California

law would recognize. Indeed, federal law prohibits all

employment contracts for federal thrift employees, except

those that are (i) in writing, and (ii) approved by the

thrift’s board of directors. The state law of “implied”

employment contracts thus conflicts with federal law.

In these circumstances, state law must yield. Yet the

California state court in the instant case recognized an

implied employment contract in derogation of federal

law. Because the California court’s decision undermines

an important U.S. government regulatory interest, and

because the California court’s holding conflicts with that

of the courts of other states, this Court should grant

certiorari.

The relevant facts are few, and undisputed. Petitioner

Home Savings is a federal savings bank covered by the

Home Owners’ Loan Act (HOLA), 12 U.S.C. § 1462 et seq.,

and subject to federal regulations promulgated by the Office

of Thrift Supervision (OTS). (App. 2.) Respondent Marcella

T. Maynard, a bank officer, was terminated from her employ-

ment in October 1991. (App. 2.) The termination occurred

after the branch for which Maynard was responsible sus-

tained a $280,000 loss attributable to its failure to adhere to

proper cash-handling procedures. Home Savings’ board of

directors ratified her termination by resolution adopted at its

next meeting, held on October 22, 1991. At no time during

Maynard’s employment with Home Savings did she have a

written, board-approved employment contract. (App. 2.)

Maynard sued on May 15, 1992, alleging that her

termination vio'»ted an “implied contract” that, she said,

guaranteed her employment for the balance of her work-

ing life. The “contract,” Maynard alleged, derived from

her years of service and purportedly competent job per-

formance. She alleged only contract claims;> she did not

allege discrimination, or that Home Savings terminated

her for any other improper motive.4

3 Her complaint alleged, in addition to the implied contract

claim, a claim for breach of an “implied covenant of good faith and

fair dealing.” That claim is, under California law, a subspecies of

contract claim. E.g., Foley v. Interactive Data Corp., 47 Cal. 3d 654,

689-90, 254 Cal. Rptr. 211 (1988) (the covenant of good faith and fair

dealing in the employment context is an “ex contractu obligation,

namely one arising out of the contract itself”).

4 Because only contract-based claims are alleged, this Court

need not decide to what extent, if at all, the OTS regulations

preempt state-law claims other than those for breach of contract.

Home Savings assumes for purposes of this case that different

rules may well apply to persons who are terminated for a reason

offensive to public policy, such as discrimination, for refusing to

commit a crime, or for reporting wrongdoing to appropriate

public officials. The instant case, by contrast, involves no such

claim — only a claim that, by reason of her length of service and

job performance, Maynard somehow had acquired an ephem-

eral implied-contract right.

The trial court granted Home Savings’ motion for

summary judgment, finding that Maynard’s claims were

preempted by federal law. (App. 2.) Maynard timely

appealed.

The California Court of Appeal reversed. It acknowl-

edged that Home Savings is a federal savings institution

chartered under § 5 of the HOLA and subject to OTS

regulations (App. 2); that Maynard never had a board-

approved employment contract (id.); and that, indeed,

Maynard did not have any kind of written employment

contract (id.). The court of appeal nevertheless reversed

the trial court’s award of summary judgment to Home

Savings. The court of appeal based its decision, without

further analysis, on earlier California cases which had

held that federal law does not preempt state implied-

contract law.

The California Supreme Court denied review on May

12, 1994.° This timely petition followed. See supra notes

1-2.

° There is no conflict in the California cases; thus, it was

unremarkable that the California Supreme Court declined to

grant discretionary review. See Cal. Ct. R. 29.2 (citing an intra-

state conflict as a chief reason for granting review). As noted

below, there is a conflict, but the conflict is between the Califor-

nia decisions and those from other states.

REASONS FOR GRANTING THE PETITION

The Court should grant review for two primary rea-

sons. First, the decision undermines an important regula-

tory interest of the United States government. Second, the

instant case and other California cases conflict with those

of other state and federal courts. This Court should grant

review to resolve the conflict.

I. THE RULE ANNOUNCED IN CALIFORNIA

IMPEDES THE U.S. GOVERNMENT’S EXERCISE

OF ITS REGULATORY RESPONSIBILITIES OVER

THE THRIFT INDUSTRY :

Under the Supremacy Clause of the United States

Constitution, federal law of course preempts all conflict-

ing state laws. U.S. Const. art. VI; see, e.g., Hillsborough

County v. Automated Medical Labs, Inc., 471 U.S. 707, 712

(1985). Preemption arises where Congress’ express lan-

guage indicates an intent to supersede state law, or where

the scheme of federal regulation “is so pervasive as to

make reasonable the inference that Congress left no room

for the States to supplement it.” de ia Cuesta, 458 U.S. at

153 (citation omitted). Even where Congress’ intent to

preclude state regulation is neither expressly stated nor

inferred from a pervasive scheme of federal regulations,

state law is preempted to the extent it actually conflicts

with federal law. Id. State law is deemed to be conflicting

with federal law (i) when compliance with both state and

federal law is impossible, or (ii) when state law “ ‘stands

as an obstacle to the accomplishment and execution of the

full purposes and objectives of Congress.’ ” Hillsborough,

471 U.S. at 712 (citation omitted).

In the instant case, preemption obtains. Congress has

exercised its power completely to control the thrift indus-

try. And the state implied-contract law in question con-

flicts directly with federal law.

A. The Federal Regulations Governing Savings

And Loan Associations Expressly Provide For

Preemption Of State Law.

More than 60 years ago, during the Great Depression,

Congress recognized that the financial health of savings

and loan associations was a critical federal interest. To

ensure that these institutions remained financially viable,

Congress enacted the HOLA as a “ ‘radical and compre-

hensive response to the inadequacies of existing state

systems.’ ” de la Cuesta, 458 U.S. at 160 (citation omitted).

The HOLA provided for the creation of a system of

federal savings institutions regulated by a single federal

agency, known today as the OTS. 12 U.S.C. §§ 1462a-1464;

see de la Cuesta, 458 U.S. at 159-60.

OTS regulations preempt state law. In Section 5(a) of

the HOLA, Congress expressly granted the OTS plenary

authority to regulate all aspects of the thrift industry:

© The original federal agency created by the HOLA was the

Federal Home Loan Bank Board (FHLBB). In 1989, Congress

passed the Financial Institutions Reform, Recovery, and Enfor-

cement Act (FIRREA), which amended the HOLA by replacing

the FHLBB with the OTS. See, e.g., First Gibraltar Bank v. Morales,

19 F.3d 1032, 1041 (5th Cir. 1994). This petition will refer to the

OTS and its predecessor collectively as “OTS.”

[The OTS] is authorized, under such regulations

as [it] may prescribe, “to provide for the . . . op-

eration and regulation of . . . Federal savings

associations. ... ”

12 U.S.C. § 1464(a).

The OTS exercised the authority delegated to it under

the HOLA. It promulgated 12 C.FR. § 545.2. The plain

language of this section completely and exclusively con-

trols all aspects of the operation of institutions within the

thrift industry:

The[se] regulations . . . are promulgated pur-

suant to the plenary and exclusive authority of

the [OTS] to regulate all aspects of the operations of

Federal savings associations, as set forth in section

5(a) of the [Home Owners’ Loan] Act [of 1933,

12 U.S.C. 1464]. This exercise of [OTS] authority

is preemptive of any state law purporting to address

the subject of the operations of a Federal savings

association. [Emphasis added.]

The preemptive force of the regulations has been

widely acknowledged. As this Court explained in de la

Cuesta, federal regulations promulgated under the HOLA

have the same preemptive force as federal statutes and

thus preempt all conflicting state laws. 458 U.S. at

162-63.7 The HOLA, the Court noted, reflected Congress’

recognition of “the inadequacies of existing state sys-

tems”; Congress decreed that federal law would control

7 It is well established, of course, that federal regulations

can preempt state law, where a federal agency acts within the

scope of authority delegated by Congress. E.g., City of New York

v. FCC, 486 U.S. 57, 63-64 (1988); Louisiane Public Serv. Comm'n v.

FCC, 476 U.S. 355, 369 (1986).

~ nr ren =

“the powers and operations of every Federal savings and

loan association from its cradle to its corporate grave.” de

la Cuesta, 458 U.S. at 160, 145 (citation omitted); accord,

e.g., Glendale Federal Savings & Loan Association v. Fox, 459

F. Supp. 903, 910 (C.D. Cal. 1978) (when a regulation is

promulgated governing an aspect of the operation of

federal savings associations, “that regulation governs

exclusively and preempts any attempt by a state to regu-

late in that area”), cert. denied, 458 U.S. 1121 (1982).

Just this year, for example, the Court of Appeals for

the Fifth Circuit conducted a detailed review of the pre-

emptive effect of the OTS regulations. First Gibraltar Bank,

FSB v. Morales, 19 F.3d 1032 (5th Cir. 1994), petition for cert.

filed, No. 94-209 (July 28, 1994).8 At issue in that case was

the Texas Homestead law, set forth in the Texas Constitu-

tion. Although Morales is not an employment contract

case, its analysis is instructive. The Texas Homestead law

in some circumstances precluded foreclosure on, or other

creditor resort to, an individual’s personal residence.

Lenders (supported by the OTS as amicus curiae) con-

tended that the Homestead law was preempted by the

HOLA to the extent that the Homestead law prohibited

foreclosures to enforce liens taken in certain mortgage

transactions. Reason: OTS regulations allowed fore-

closure as as a remedy in these circumstances. The Fifth

Circuit applied what it called a “heightened scrutiny” of

8 While the issues in Morales and the instant case are dis-

tinct, they are sufficiently related that the Court should consider

granting certiorari in both cases and arguing them in tandem.

10

the lenders’ preemption claim, because the dispute

involved real property, and “[r]eal property law has been

recognized by the Supreme Court as a matter of special

concern to the states.” Id. at 1039. Yet the court still held

that the OTS had the authority to preempt state law even

in this sensitive area, and had done so through its regula-

tions. Id. at 1049-50 (federal control is necessary so that

the federal government can exercise its responsibility to

assure “financially sound institutions able to supply

financing for home construction and purchase”) (citation

omitted).

Texas contended, however, that federal preemption

applied, if at all, only to measures more palpably related

to maintaining the financial soundness of the thrifts. The

Fifth Circuit rejected the state’s contention, finding that it

was up to the agency, with powers delegated from Con-

gress, to decide to what extent preemption was appropri-

ate. Id. at 1051 (rejecting “an overly narrow interpretation

of Congress’ intent in enacting the HOLA”). Because the

federal regulations made clear that a federal thrift was

entitled to use the remedy of foreclosure, even on a Texas

“homestead,” the Fifth Circuit held preempted the Texas

law.

B. The OTS Regulations Preempt The California

Law Of Implied Employment Contracts.

In the instant case, respondent Maynard claimed an

“implied” employment contract that she would not be

discharged from her job except for proven good cause.

She did not allege a written contract, much less one that

was board-approved. She alleged only that she thought

11

her job was “secure” based on her length of service, her

job performance, and possibly oblique remarks made by

her supervisor. California, like some other states, recog-

nizes implied-in-fact employment contracts of this kind.

The OTS regulations, however, prohibit - and preempt

claims based on - the kind of contract alleged here.

1. The OTS regulations specify precisely what

is and what is not an enforceable employ-

ment contract.

One of Congress’ primary regulatory objectives was

to ensure that thrifts - and the federal regulators that

sometimes have to take them over, at taxpayer expense -

are not saddled with unknown, indeterminate and possi-

bly improvident obligations. Congress and the OTS

sought to make the thrifts’ boards of directors more

accountable for the thrifts’ fiscal health. One aspect of

such accountability, the OTS determined, is that each

thrift’s board should be able to determine the existence

and nature of the institution’s obligations under employ-

ment contracts. Accordingly, the OTS promulgated 12

C.F.R. § 563.39, which specifies that a savings association

is powerless to enter into any employment contracts

which are not (i) in writing, and (ii) approved by the

association’s board of directors.

Section 563.39 of the OTS regulations specifically for-

bids implied-in-fact employment contracts; the regulation

even forbids written contracts that lack board approval:

A savings association may enter into an employ-

ment contract with its officers and other

12

employees only in accordance with the require-

ments of this section. All employment contracts shall

be in writing and shall be approved specifically by an

association's board of directors. . . . Each employ-

ment contract shall provide . . . [t]hat the asso-

ciation’s board of directors may terminate the

officer or employee’s employment at any

ee

12 C.F.R. § 563.39 (emphasis added).

The drafting history of § 563.39 further underscores

the case for preemption. When a predecessor regulation

was adopted in 1974, the key requirement was only that a

contract receive “specific approval of [the thrift’s] board

of directors.” 39 Fed. Reg. 28609, 28610 (1974) (codified at

12 C.F.R. § 545.25-1(a)). Thus, while board approval was

required, there then was no requirement of a writing.

By 1982, however, the regulators had become even

more concerned about the potential abuse inherent in

“long-term employment contracts and fringe benefit con-

tracts for . . . officers.” 47 Fed. Reg. 17471 (1982). The

OTS’s predecessor agency effected a number of changes,

including revising § 563.39(a) to provide that “Ja]ll

employment contracts shall be in writing and shall be

approved specifically by an institution’s board of direc-

tors.” Id. at 17472.

Even under the 1974 version an “implied” contract

was forbidden, since by definition it lacked “specific

[board] approval.” But the express addition of the

requirement of a writing made even more clear that an

implied contract simply is not cognizable.

13

Since 1982, the OTS has established stricter rules

even for written, board-approved contracts. Its current

guidelines require the board of directors of each associa-

tion to review all employment contracts annually;

employment contracts “may only be renewed or extended

upon explicit review and approval by the board of direc-

tors.” OTS Reg. Bull. 27a, Executive Compensation &

Employment Contracts, | 27,107 (March 5, 1993). Plainly,

therefore, the board of directors cannot satisfy this oblig-

ation with respect to ephemeral “implied” employment

contracts; there is nothing to “review” or “approv[e].”

And even written, board-approved contracts are

restricted in duration. The OTS prohibits

[c]ontracts that contain automatic renewals or

extensions of the contract without providing

explicit review and approval by the board of

directors;

and

[cjontracts that provide for an excessive term. As a

general matter, a one-year term is not objection-

able; a term exceeding three years is generally objec-

tionable.

Id. (emphasis added). If a written, board-approved, three-

year contract is condemned, a fortiori so is an “implied”

contract for an employee’s working life, such as that

claimed by Maynard here.

14

2. California and many other states recognize

implied employment contracts that are

unwritten and sometimes even ephemeral.

The most significant development in employment

law over the past decade is the explosion of state-law

wrongful-discharge suits. In almost every state the

“employment at will” doctrine has been eroded by excep-

tions. One of the most common of these exceptions is the

doctrine of implied employment contracts. In many states

an employment contract arises from factors such as

length of service, favorable performance reviews,

employee handbooks, the existence of internal disciplin-

ary-review procedures, and the like. In the seminal Cali-

fornia case, Pugh v. See’s Candies, Inc., 116 Cal. App. 3d

311, 171 Cal. Rptr. 917 (1981), the court explained that “an

implied-in-fact promise for . . . continued employment”

may be inferred from:

the personnel policies or practices of the

employer, the-employee’s longevity of service,

actions or communications by the employer

reflecting assurances of continued employment,

and the practices of the industry in which the

employee is engaged.

Id. at 327 (footnotes omitted). In such cases, the contract

need not be in writing.?

9 Indeed, the statute of frauds - the normal protection

against hard-to-disprove claims of unwritten contractual obli-

gations — has been held inapplicable in such cases. E.g., Foley v.

Interactive Data Corp., 47 Cal. 3d 654, 671-75, 254 Cal. Rptr. 211

(1988) (the statute of frauds does not apply because an implied

contract for permanent employment theoretically could be

15

In California, the existence vel non of an implied

contract usually presents a jury question. E.g., Foley, 47

Cal. 3d at 682 (“plaintiff has pleaded facts which, if

proved, may be sufficient for a jury to find an implied-in-

fact contract limiting defendant’s right to discharge

him”); see General Dynamics Corp. v. Superior Court, No.

5033640, ___ Cal. 4th __, ___ Cal. Rptr. 2d ___, 1994 Cal.

LEXIS 3522, at *1, *53-54 (July 18, 1994) (even an in-house

attorney when discharged can “pursu[e] implied-in-fact

contract . . . causes of action against the employer”; these

claims normally “will not be resolvable at the demurrer

stage”). The consequence is that, in states where implied

employment contracts can arise, an employer may be put

to the risk and expense of defending before juries con-

tract claims in cases where the employer did not know

that any contract existed, much less what its terms were.

Unless such cases are taken out of the hands of the jury,

the jury becomes a “personnel review board” passing on,

after the fact, the wisdom of business judgments made by

private enterprises. Gonzales v. MetPath, Inc., 214 Cal.

App. 3d 422, 428, 262 Cal. Rptr. 654 (1989). As Judge

Kozinski observed — perhaps only partly facetiously -

California law is near the point where one can foresee

lawsuits “for maliciously refusing to return telephone

calls or for adopting a condescending tone in interoffice

memos.” Oki America, Inc. v. Microtech International, Inc.,

872 F.2d 312, 315 (9th Cir. 1989) (Kozinski, J., concurring);

cf. Hunio v. Tishman Construction Corp., 24 Cal. App. 4th

792, 818, 18 Cal. Rptr. 2d 253 (Ortega, J., concurring) (“We

performed within one year — if, for example, the employee chose

to quit or died).

16

seem to be on the verge of guaranteeing [employees] the

right to a ‘nice and easy’ career.”), hearing granted, 20 Cal.

Rptr. 2d 787 (1993).

Although the law of implied employment contracts is

perhaps most developed in California, the phenomenon

is national in scope. Many states recognize the implied

employment contract doctrine, including (for example)

Arizona,!° Colorado,!! Illinois,12 Maryland,!> Michigan,!4

New Jersey,!5 and Ohio.!®

It is true, of course, that —- in general — it is up to each

state to decide for itself whether to foster the prolifera-

tion of state-law implied employment-contract claims.

But where state law conflicts with federal law, state law

must yield.!”7 That is the case here.

10 E.g., Leikvold v. Valley View Community Hosp., 141 Ariz.

544, 688 P.2d 170 (1984).

11 E.g., Wing v. JMB Property Mgmt. Corp., 714 P.2d 916

(Colo. Ct. App. 1985).

_ 12 E.g., Kaiser v. Dixon, 127 Ill. App. 3d 251, 468 N.E. 2d 822

(1984).

13. E.g., Hrechorovich v. Harbor Hosp. Center Inc., 93 Md. App.

772, 614 A.2d 1021 (1992), cert. denied, 330 Md. 319, 624 A.2d 490

(1993).

14 F.g., Toussaint v. Blue Cross & Blue Shield of Mich., 408

Mich. 579, 292 N.W. 2d 880 (1980).

15 E.g., Gilbert v. Durand Glass Mfg. Co., Inc., 258 N.J. Super.

320, 609 A.2d 517 (1992).

16 E.g., Mers v. Dispatch Printing Co., 39 Ohio App. 3d 99,

483 N.E. 2d 150, 153-54 (1985).

17 This is true regardless of the relative interest of the state

in applying its own law: “The relative importance to the State of

its own law is not material when there is a conflict with a valid

17

3. The federal regulations preempt claims

based on implied employment contracts.

Federal law helps assure that thrifts do not enter into

employment contracts that would be unsafe or

unsound.!8 The regulatory device chosen in 12 C.ER.

§ 563.39 was to prohibit implied employment contracts:

indeed, even written contracts are prohibited unless they

are board-approved. In the instant case, Maynard admits

that she never had a written, much less board-approved,

contract. (App. 2.) Maynard’s contract claim rests only on

a series of circumstances and oblique statements that, she

says, taken together gave her reason to believe that her

job was secure. Although in some circumstances Califor-

nia law may recognize such statements as enforceable

contracts, 12 C.F.R. § 563.39 plainly does not.

Indeed, the OTS in a published opinion letter

expressly stated that implied employment contract claims

are preempted. In response to a written inquiry, the OTS

explained that one cannot circumvent the rules by

bypassing the thrift’s board:

federal law, for the Framers of our Constitution provided that

the federal law must prevail.” de la Cuesta, 485 U.S. at 153

(citation omitted).

‘8 The regulatory history indicates that the OTS perceived

the potential risk inherent in employment contracts:

An employment contract would be an unsafe or

unsound practice if it . . . could materially interfere

with the exercise by the members of the board of

directors of their duty or discretion . . . as to the

employment or termination of employment of an offi-

cer or employee of the institution.

39 Fed. Reg. 28,610 (1974).

18

The purpose of the regulation [§ 563.39] is gen-

erally to protect institutions from unsafe and

unsound practices arising in connection with

employment relationships. In order to prevent

circumvention of the intent of this regulation, it

is our belief that its provisions should apply

whe[re] there is [but] a. . . tacit employment con-

tractual relationship. .. .

[W]e are further of the view that the requirement in

Section 12 C.F.R. 563.39(b)(1) that . . . the officer or

employee's employment be terminated “at any time”

would super[s]ede any contrary and conflicting state

law provisions. . .

Ltr. Rul. No. 90/CS-46, United States Office of Thrift

Supervision, 1990 OTS LEXIS 53, at *1-2 (July 3, 1990).19

A hypothetical, suggested by some of the abuses of

the recent savings and loan scandal, helps illustrate the

significant regulatory interest in preemption. Consider

Executive A, a high official of the hypothetical thrift. He

or she enters into oral contracts with cronies, Executives

B through Z, guaranteeing them employment, at lush

salaries and benefits, for their working lives. The con-

tracts never would be approved by the thrift’s outside

directors, so they remain secret pacts. Perhaps the thrift

then fails; or, perhaps, the OTS examiners detect and set

out to clean up earlier unsavory and unsound practices.

Either way, under the California court’s analysis, the

19 Neither the California Court of Appeal panel in the

instant case, nor the state courts that have reached a similar

conclusion, have even cited, much less purported to distin-

guish, the OTS opinion and the other regulatory materials cited

herein.

19

deals are enforceable. In the former case, the taxpayer

foots the bill; even in the latter case, the OTS expends its

limited regulatory resources on a problem that never

should have arisen.

While there is no suggestion of cronyism or self-

dealing in the instant case, it and others like it harbor an

even greater risk to the public. At least in the hypotheti-

cal, the beneficiaries of the contracts could identify an

express oral agreement with a senior officer. Maynard

and others like her make no such claim; Maynard, for

example, has conjured up her “contract” largely out of a

few years of service and a few earlier pats on the back

from relatively low-level supervisors. If Maynard can

claim a job guarantee for her entire working life, so too

could many other thrift employees. Result: a run - of

lawsuits — on the bank.

California is, of course, free in general to decide what

.s and what is not a contract. Where, however (as here),

California contract law places taxpayer-guaranteed insti-

tutions at risk, Congress and the OTS are entitled to

dictate — and they have dictated - a federal rule of law.

Il. THERE IS A CONFLICT; COURTS OF OTHER

STATES, AND FEDERAL COURTS, HOLD PRE-

EMPTED THE KIND OF CLAIM AT ISSUE HERE

Review by this Court is especially important because

state courts and federal courts have reached conflicting

results with respect to the important federal preemption

question presented. E.g., Sup. Ct. R. 10.1(b), (c); Dun &

Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749, 753

20

n.1 (1985); St. Martin Evangelical Lutheran Church v. South

Dakota, 451 U.S. 772, 780 n.10 (1981).

The California Court of Appeal in the instant case

acknowledged that it was departing from the rule

announced by other state courts. The court said: “While

respondent cites this court to several cases from other

jurisdictions which have concluded that [12 C.FR.

§ 563.39] preempts state law. . . . [r]espondent has failed

to persuade us [to follow them].” (App. 2-3.)

Multiple courts have indeed confirmed that § 563.39

preempts state-law implied contract claims. In Sholer v.

Security Federal Savings & Loan Association, 736 F. Supp.

1083 (D.N.M. 1990), for example, a former bank officer

sued a federal savings and loan for breach of an alleged

implied contract of employment. Like Maynard here, the

plaintiff in Sholer lacked a written, board-approved con-

tract. The court granted the bank’s motion for summary

judgment even though New Mexico law (like California

law) recognized oral and even implied employment con-

tracts. The court explained that state law was preempted

because:

The presumption is . . . established [by § 563.39]

that, absent a written employment contract, the

defendant could not have entered into any specific

employment relationship with the plaintiff which

exceeded the scope of an at-will employment

relationship.

Id. at 1085 (emphasis added).

Similarly, in Berry v. American Federal Savings, 730

P.2d 905 (Colo. Ct. App. 1986), a former employee

21

attempted to allege a claim based on an implied employ-

ment contract. Colorado law, like that of California, rec-

ognizes such contracts. But the plaintiff in Berry lacked a

written, board-approved employment contract. The state

trial court therefore granted summary judgment, and the

Colorado Court of Appeals affirmed, based on the pre-

emptive force of § 563.39. Id. at 906-07.

And, in Hawkins v. Peoples Federal Savings & Loan

Association, 155 Mich. App. 237, 399 N.W.2d 484 (1986),

the Michigan court considered the same kind of implied

contract claim now at issue. The thrift invoked preemp-

tion, and the Michigan Court of Appeals agreed, reason-

ing: “The regulation adopted by the [OTS] is authorized

by the [HOLA] and has the same pre-emptive effect on

State law as a federal statute.” 399 N.W.2d at 486; cf.

Dynan v. Rocky Mountain Federal Savings & Loan, 792 P.2d

631, 639 (Wyo. Sup. Ct. 1990) (although “our rules of state

law might justify [plaintiff’s legal position]... , that rule

could not control if in conflict with a provision of the

federal regulations”).2°

Rush v. FDIC, 747 F. Supp. 575 (N.D. Cal. 1990), also

is instructive; it emphasizes that federal preemption

applies even where unfairness results. In Rush, a bank

20 In the analogous context of suits by national bank offi-

cers, many state courts have held that, when the National Bank

Act applies, federal preemption bars state-law wrongful dis-

charge actions. E.g., City Nat'l Bank v. Brown, 599 So. 2d 787, 790

(La. Ct. App.) (preemption by National Bank Act), cert. denied,

604 So. 2d 999 (La. 1992); Sargent v. Central Nat’l Bank & Trust

Co., 809 P.2d 1298, 1303 (Okla. Sup. Ct. 1991) (same); Alegria v.

Idaho First Nat’l Bank, 111 Idaho 314, 723 P.2d 858, 860 (1986)

(same).

22

subject to the OTS regulations had entered into a sever-

ance-pay contract in order to induce plaintiff to remain

with a struggling institution. The commitment — made in

writing by the bank’s CEO, but never ratified by the

board — was to pay one year’s severance pay in the event

that plaintiff's employment was terminated without

cause. One month later, federal regulators took over the

bank and terminated plaintiff’s employment. Under Cali-

fornia law, plaintiff had enforceable, vested rights under

the severance-pay contract. Under 12 C.F.R.

§ 563.39(b)(5), however, plaintiff’s state-law rights were

not enforceable. The court (Weigel, J.) accordingly dis-

missed plaintiff’s otherwise-valid state-law claim. Recog-

nizing that application of state law instead of the federal

regulation would encumber thrifts with “burdensome

obligations such as substantial contracts for severance

pay,” and thus would deny the flexibility required to

manage these institutions, the court held:

Congress has developed a comprehensive

scheme for regulating the savings and loan

industry; thus federal regulations governing the

savings and loan industry preempt attempts by

states to regulate in that field.

Id. at 578 (emphasis added).?!

21 See Crocker v. Resolution Trust Corp., 839 F. Supp. 1291,

1294 (N.D. Ill. 1993) (“federal law governs the issues” in a

contract claim brought by a former savings and loan employee;

“applying [state] law will impede the Congressional intent to

regulate the savings and loan industry”); Cohen v. Resolution

Trust Corp., No. 90-1065-R(P), 1993 U.S. Dist. LEXIS 7317, at *5

(S.D. Cal. May 10, 1993) (federal law controls in suit by a former

savings and loan employee). Cf. Langley v. FDIC, 484 U.S. 86, 91

23

In the instant case, disposing of Maynard’s implied

employment contract claim is even more straightforward.

In Rush, the severance-pay commitment was made at the

highest level, and was not disputed. Here, by contrast,

Maynard alleges only an implied employment contract

arising from the acts and words of lower-level employees.

Maynard would have it that her alleged employment

contract is guaranteed indefinitely, potentially for her

entire working life. But Home Savings’ board was not

informed of, much less asked to approve, such a contract.

Moreover, by definition neither the board nor federal

regulators could determine through due diligence the

existence of the “contract,” since there is no written

record of it.2? Yet under the view of the law adopted by

the California Court of Appeal, there is no way a thrift’s

board or regulators could know which, and how many,

employees potentially could bring employment-contract-

for-life claims. This is simply wrong.?3

(1987) (it is necessary to rely on a bank’s written records)

(emphasis added); Webb v. Superior Court, 225 Cal. App. 3d 990,

995, 275 Cal. Rptr. 581 (1991) (“The doctrine . . . reflects the

equitable principle that losses incurred as a result of unrecorded

arrangements should not fall on deposit insurers. .. . ”).

2 An analogous protective device is the longstanding

D’Oench, Duhme doctrine, under which federal law bars the

enforcement of certain oral and implied-in-fact loan commit-

ments. See generally D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447

(1942) (refusing to enforce, as unknown and unknowable, oral

or implied loan commitments); 12 U.S.C. § 1823(e) (codifying

the doctrine).

23 Employees would not be left without recourse even if state-

law implied-contract claims were held preempted. Employees sim-

ply would know that, to the extent that they desired greater eco-

nomic security in their positions with a federal savings and loan, it

24

Why the California Court of Appeal declined to fol-

low the authority from other states is not clear. While it

purported to rely on prior California cases,74 those earlier

cases and the instant one seemed to reach their conclu-

sions, at least in part, by confusing state-court jurisdiction

with the very different concept of preemption. See App.

4-5, quoting Hall, 231 Cal. App. 3d at 719 (“California

courts ha[ve] jurisdiction to hear matters arising out of

employment contracts with savings associations con-

trolled by the Office of Thrift Supervision. . .. ”)

(emphasis added). This confuses the analysis, of course;

was their obligation to negotiate their contract rights in written

form, and to secure appropriate ratification thereof. While it is true

that, under the federal regulation, employees at all times may be

removed at will, with or without cause, an employee thus removed

would be financially protected to the extent that he or she had a

written, board-approved contract, because such an employee (even

though removed and ineligible for reinstatement) would have a

damages claim under his or her contract. 12 C.ER. § 563.39(b)(1). As

a result, contract rights would be debated in advance, in the open, at

the negotiating table, rather than litigated after the fact in court.

24 Hall v. Great Western Bank, 231 Cal. App. 3d 713, 718, 282

Cal. Rptr. 640 (1991) (no preemption); Honig v. Financial Corp. of

America, 6 Cal. App. 4th 960, 965, 7 Cal. Rptr. 2d 922 (1992)

(same); Thomka v. Financial Corp. of America, 15 Cal. App. 4th 877,

887, 19 Cal. Rptr. 2d 382 (1993) (same). Cases from at least two ~

other states - New Jersey and Connecticut — also have refused to

acknowledge federal preemption of implied employment con-

tract claims. Cole v. Carteret Sav. Bank, 224 N.J. Super. 446, 540

A.2d 923, 925 (1988) (finding no preemption; “the very pro-

mulgation of 12 C.F.R. § 563.39 bespeaks a concern about

employees and their contractual arrangements with the institu-

tion”); Paris v. Northeast Sav. Ass'n, No. CV 910398144, 1994

Conn. Super. LEXIS 1412, at *21 (June 1, 1994) (citing, with

approval, the New Jersey case, Cole). These other cases merely

underscore the need for review to resolve the conflict.

iy Si ei Sa

an

the existence of state-court jurisdiction is distinct from

absence of preemption. State courts certainly have jurisdic-

tion to consider most state-law claims that present pre-

emption issues. However, the existence of concurrent

jurisdiction does not relieve state courts from the obliga-

tion to give supremacy to substantive federal law by

applying the preemption doctrine. E.g., Caterpillar, Inc. v.

Williams, 482 U.S. 386, 392-93 (1987) (that a state-law

claim is preempted does not mean that federal courts have

exclusive, or even removal, jurisdiction over the claim;

federal jurisdiction is unnecessary because state courts

are expected to give primacy, through the preemption

doctrine, to principles of federal law).25 Thus, in the

instant case, the California court correctly found state-

court jurisdiction, but seemed to make an unwarranted

leap to infer from jurisdiction that the preemptive force of

federal law somehow had dissipated.

2° This Court’s review of state-court preemption cases is

also vital for a practical reason: otherwise, state courts’ deter-

minations of federal preemption issues will be determinative.

That is so because the preemption defense is not a proper basis

for removal to federal court, “even if the defense is anticipated

in the plaintiff’s complaint, and . . . both parties concede that the

federal defense is the only question truly at issue.” Caterpillar,

Inc. v. Williams, 482 U.S. at 392 (state-law claim of breach of

employment contract is not removable to federal court, despite

the existence of a federal preemption defense).

Thus, even if this Court for some reason were inclined to

affirm the decision of the California Court of Appeal, the Court

should grant review to resolve the issue. Because state courts

will be the primary forum for the numerous wrongful discharge

and related lawsuits by former employees of federal thrifts,

review by this Court - whatever its ultimate decision - will

serve a vital purpose simply by definitively stating the law.

26

Whatever may have been the thinking of the Califor-

nia court, it by its own admission reached a decision that

flatly conflicts with the decisions of other state and fed-

eral courts. This Court should grant certiorari to resolve

the conflict.

CONCLUSION

The petition for a writ of certiorari should be granted,

possibly in tandem with No. 94-209, Morales v. First

Gibraltar Bank (petition for cert. filed July 28, 1994). In the

alternative, this petition should be held pending disposi-

tion of Morales.

Respectfully submitted.

Pau W. Cane, Jr.

Counsel of Record

KATHLEEN L. MCACHRAN

Paut, Hastincs, JANOFSKY &

WALKER

FRANKLIN R. Wurtzet

Legal Department

Home Savings of America, FSB

Attorneys for Petitioner

Home Savings of America, FSB

DATED: August 10, 1994

App. 1

NOT TO BE PUBLISHED

IN THE COURT OF APPEAL OF THE

STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SEVEN

MARCELLA T. ) B073696

MATINEE, ) (SuperCt.No.

Plaintiff and ; GC7209)

Appellant, (Filed

v. ) Feb. 17, 1994)

HOME SAVINGS OF )

AMERICA, et al.,

Defendants and )

Respondents. )

)

APPEAL from a judgment of the Superior Court of

Los Angeles County. Coleman A. Swart, Judge. Reversed.

Noel Shipman for Plaintiff and Appellant.

Paul, Hastings, Janofsky & Walker and Paul W. Cane,

Jr., for Defendants and Respondents.

Marcella T. Maynard appeals from summary judg-

ment and contends the trial court erred in concluding

federal regulations preempted her claim.

App. 2

STATEMENT OF FACTS AND PROCEDURAL HISTORY

On May 15, 1992, Maynard filed a complaint in supe-

rior court against Home Savings of America (Home Sav-

ings) for breach of an implied in fact employment

contract and breach of the implied covenant of good faith

and fair dealing.

Home Savings filed an answer to the complaint and

thereafter each party filed a motion for summary judg-

ment/summary adjudication. Home Savings’ motion was

brought on the ground that Maynard’s claims were pre-

empted by federal law.

It was undisputed between the parties that Maynard

was vice president of Home Savings when she was termi-

nated on October 10, 1991; during her employment, she

never had a written, Board-approved employment con-

tract; Home Savings is a federal savings association char-

tered under Section 5 of the Home Owners’ Loan Act, 12

United States Code, sections 1461-1470 and subject to

federal regulations promulgated by the Office of Thrift

Supervision.

The trial court granted Home Savings’ motion for

summary judgment finding Maynard’s claims were pre-

empted by 12 Code of Federal Regulations, section

563.39.

DISCUSSION

Maynard’s contention that the trial court erred in

granting summary judgment is well taken. While respon-

dent cites this court to several cases from other jurisdic-

tions which have concluded that 12 Code of Federal

App. 3

Regulations, section 563.39 preempts state law, there are

three California cases on the subject, all from this district

and all conclude the subject regulation does not preempt

California law. Respondent has failed to persuade us that

this court should conclude otherwise and we, therefore,

reverse the summary judgment.

Home Savings is a federal savings association char-

tered under section 5 of the Home Owners’ Loan Act and

subject to regulations promulgated by the Office of Thrift

Supervision. One such regulation is 12 Code of Federal

Regulations, section 563.39, which is entitled “Employ-

ment contracts” and provides in relevant part: “(a) Gen-

eral. A savings association may enter into an employment

contract with its officers and other employees only in

accordance with the requirements of this section. All

employment contracts shall be in writing and shall be

approved specifically by an association’s board of direc-

tors. . . . [¥] (b) Required provisions. Each employment

contract shall provide that: [{] (1). The association’s

board of directors may terminate the officer or

employee’s employment at any time, but any termination

by the association’s board of directors other than termina-

tion for cause, shall not prejudice the officer or

employee’s right to compensation or other benefits under

the contract. The officer or employee shall have no right

to receive compensation or other benefits for any period

after termination for cause. Termination for cause shall

include termination because of the officer or employee’s

personal dishonesty, incompetence, willful misconduct,

breach of fiduciary duty involving personal profit, inten-

tional failure to perform stated duties, willful violation of

any law, rule, or regulation (other than traffic violations

App. 4

or similar offenses) or final cease-and-desist order, or

material breach of any provision of the contract.”

In California, the employment relationship is pre-

sumptively “at will” but provides remedies for employ-

ment termination which contravenes an express or

implied agreement for job security, which stems from a

“pernicious form of discrimination” or which violates

clear, fundamental public policy. (Hall v. Great Western

Bank (1991) 231 Cal.App.3d 713, 718.)

Under the broad preemption principles set forth by

the United States Supreme Court in Fidelity Federal S. & L.

Assn. v. de la Cuesta (1982) 458 U.S. 141 [73 L.Ed.2d 664,

102 S.Ct. 3014] federal statutes and regulations will pre-

empt conflicting state law. A state law is in conflict when

compliance with it is physically impossible in view of the

federal mandate or when state law presents an obstacle to

the accomplishment and execution of the purpose of Con-

gress. (See Cole v. Carteret Sav. Bank (1988) 224 N.J. Super.

446 [540 A.2d 923, 924].)

In 1991, Division Four of this court analyzed relevant

state and federal law and concluded that California law

did not conflict with the provisions of 12 Code of Federal

Regulations, section 563.39. In reaching this conclusion,

this court reasoned that the “regulation specifically and

unambiguously protects an ‘employee’s right to compen-

sation or other benefits under the contract’ in the event

the employee is fired without cause. Thus, the regulation

provides protection to employees which is similar to that

provided under state law where there exists a valid

agreement for job security.” (Hall v. Great Western Bank,

supra, 231 Cal.App.3d at p. 719, fn. omitted.) Division

App. 5

Four noted further that neither the federal law (12 U.S.C.

§ 1464) nor the regulation promulgated pursuant to such

authority (12 C.F.R. § 563.39) contained “dismiss at plea-

sure” language. (Hall v. Great Western Bank, supra, 231

Cal.App.3d at p. 720.)

In 1992, Division Five of this court in Honig v. Finan-

cial Corp. of America (1992) 6 Cal.App.4th 960, 964-965,

agreed with the conclusions in Hall that California courts

had jurisdiction to hear matters arising out of employ-

ment contracts with savings associations controlled by

the Office of Thrift Supervision and that 12 Code of

Federal Regulations, section 563.39 did not preempt Cali-

fornia state law.

Most recently, in 1993, this Division, in Thomka v.

Financial Corp. (1993) 15 Cal.App.4th 877, 885-887, agreed

with the conclusions reached in Hall v. Great Western

Bank, supra, 231 Cal. App.3d at p. 720, and Honig v.

Financial Corp. of America, supra, 6 Cal.App.4th 960. (See

also Cole v. Carteret Sav. Bank, supra, 540 A.2d 923.) Based

on the foregoing, the summary judgment must be

reversed.

DISPOSITION

The judgment is reversed. Appellant shall receive

costs on appeal.

NOT TO BE PUBLISHED

LILLIE, P.J.

We concur:

JOHNSON, J.

WOODS (Fred), J.

App. 6

Second Appellate District, Division Seven,

No. B073696 S038776

IN THE SUPREME COURT OF THE

STATE OF CALIFORNIA

IN BANK

(Filed May 12, 1994)

MARCELLA T. MAYNARD, Appellant

V,

HOME SAVINGS OF AMERICA Et AL., Respondents

Respondents’ petition for review DENIED.

LUCAS

Chief Justice

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App. 7

12 C.E.R. § 545.2 Federal preemption.

The regulations in this part 545 are promulgated

pursuant to the plenary and exclusive authority of the

Office to regulate all aspects of the operations of Federal

savings associations, as set forth in section 5(a) of the Act.

This exercise of the Office’s authority is preemptive of

any state law purporting to address the subject of the

operations of a Federal savings association.

12 C.ER. § 563.39 Employment contracts.

(a) General. A savings association may enter into an

employment contract with its officers and other

employees only in accordance with the requirements of

this section. All employment contracts shall be in writing

and shall be approved specifically by an association’s

board of directors. An association shall not enter into an

employment contract with any of its officers or other

employees if such contract would constitute an unsafe or

unsound practice. The making of such an employment

contract would be an unsafe or unsound practice if such

contract could lead to material financial loss or damage to

the association or could interfere materialiy with the

exercise by the members of its board of directors of their

duty or discretion provided by law, charter, bylaw or

regulation as to the employment or termination of

employment of an officer or employee of the association.

This may occur, depending upon the circumstances of the

case,-where an employment contract provides for an

excessive term.

App. 8

(b) Required provisions. Each employment contract

shall provide that:

(1) The association’s board of directors may termi-

nate the officer or employee’s employment at any time,

but any termination by the association’s board of direc-

tors other than termination for cause, shall not prejudice

the officer or employee’s right to compensation or other

benefits under the contract. The officer or employee shall

have no right to receive compensation or other benefits

for any period after termination for cause. Termination

for cause shall include termination because of the officer

or employee’s personal dishonesty, incompetence, willful

misconduct, breach of fiduciary duty involving personal

profit, intentional failure to perform stated duties, willful

violation of any law, rule, or regulation (other than traffic

violations or similar offenses) or final cease-and-desist

order, or material breach of any provision of the contract.

(2) If the officer or employee is suspended and/or

temporarily prohibited from participating in the conduct

of the association’s affairs by a notice served under sec-

tion 8 (e)(3) or (g)(1) of Federal Deposit Insurance Act (12

U.S.C. 1818 (e)(3) and (g)(1)) the association’s obligations

under the contract shall be suspended as of the date of

service unless stayed by appropriate proceedings. If the

charges in the notice are dismissed, the association may

in its discretion (i) pay the officer or employee all or part

of the compensation withheld while its contract obliga-

tions were suspended, and (ii) reinstate (in whole or in

part) any of its obligations which were suspended.

(3) If the officer or employee is removed and/or

permanently prohibited from participating in the conduct

App. 9

of the association’s affairs by an order issued under sec-

tion 8 (e)(4) or (g)(1) of the Federal Deposit Insurance Act

(12 U.S.C. 1818 (e)(4) or (g)(1)), all obligations of the

association under the contract shall terminate as of the

effective date of the order, but vested rights of the con-

tracting parties shall not be affected.

(4) If the savings association is in default (as

defined in section 3(x)(1) of the Federal Deposit Insur-

ance Act), all obligations under the contract shall termi-

nate as of the date of default, but this paragraph (b)(4)

shall not affect any vested rights of the contracting par-

ties: Provided, that this paragraph (b)(4) need not be

included in any employment contract if prior written

approval is secured from the Director or his or her

designee.

(5) All obligations under the contract shall be termi-

nated, except to the extent determined that continuation

of the contract is necessary of the continued operation of

the association

(i) By the Director or his or her designee, at the time

the Federal Deposit Insurance Corporation or Resolution

Trust Corporation enters into an agreement to provide

assistance to or on behalf of the association under the

authority contained in 13(c) of the Federal Deposit Insur-

ance Act; or

(ii) By the Director or his or her designee, at the

time the Director or his or her designee approves a super-

visory merger to resolve problems related to operation of

the association or when the association is determined by

the Director to be in an unsafe or unsound condition.

App. 10

Any rights of the parties that have already vested, how-

ever, shall not be affected by such action.

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{ 27,107

#RB 27a EXECUTIVE COMPENSATION

AND EMPLOYMENT CONTRACTS

March 5, 1993

Summary: This bulletin provides guidance to regula-

tory personnel for review ot compensation provisions

and clarifies OTS policy regarding unsafe and unsound

practices relating to executive compensation and employ-

ment contracts contained in 12 C.F.R. §§ 563.39 and

563.161. This Bulletin further clarifies a number of issues

that arose in connection with Regulatory Bulletin (RB) 27

and re-emphasizes OTS policy to defer to healthy thrifts’

boards of directors in compensation matters. RB 27, dated

November 8, 1991, is rescinded with the issuance of this

Bulletin.

* * *

The Director of the Office of Thrift Supervision (OTS)

has authority under § 4(a)(1) of the Home Owners’ Loan

Act (HOLA) to provide for the safe and sound operation

of savings associations. Section 8(b)(6) of the Federal

Deposit Insurance Act authorizes each regulatory agency

to take actions to limit the terms of, or to prohibit an

insured depository institution from entering into or mak-

ing payments under, any contracts between an insured

depository institution and an institution-affiliated party

that constitute an unsafe or unsound banking practice.

General policy. The OTS will ordinarily give healthy

institutions deference concerning compensation levels

and compensation arrangements for their directors and

senior executive officers. All MACRO factors, not just

App. 12

capital, will be considered in the review of employment

contracts and other compensation arrangement.

As a general rule, the OTS will defer to the savings

association’s board of directors concerning executive

compensation arrangements, provided the following con-

ditions are met:

e The savings association is not a problem association,

e The compensation arrangements do not present signif-

icant safety or soundness concerns that could lead to

material financial loss or damage to the association,

and [sic]

The OTS requires the board of directors of each asso-

ciation to annually review all employment contracts and

compensation arrangements for senior executive officers

and directors and to document their justification and

approval in the board minutes. Directors who have a

personal interest in the compensation arrangements

should not participate in the deliberations on or vote on

the arrangements. Employment contracts may only be

renewed or extended upon explicit review and approval

by the board of directors.

Prior approval requirement. All problem associa-

tions should submit employment contracts for senior

executive officers and directors to the Regional Director

for prior review. The Regional Director may extend this

requirement to other employees of the savings association

as well. Compensation at problem institutions requires

regulatory scrutiny on a case-by-case basis in order to

balance a problem institution’s need to lower operating

rel NE PGCE ACE ales RES SI OARI RES

App. 13

expenses against the need to provide a higher than nor-

mal level of compensation to attract or retain qualified

management.

Definitions. “Compensation” includes any payment

of money or provision of any other thing of value in

consideration of employment, including, without limita-

tion, base salary, commissions, bonuses, pension and

profit sharing plans, severance payments, retirement,

director or committee fees, fringe benefits, [and] payment

of expense items without accountability or business pur-

pose or that do not meet the IRS requirements for deduct-

ibility by the association. The grant or exercise of stock

options will not ordinarily be considered compensation

unless they are so material in amount or conditioned

upon factors that result in incentives that cause super-

visory concerns.

A “senior executive officer” includes any individual

who exercises significant influence over, or participates in

major policymaking decisions of, a savings association

without regard to title, salary, or compensation. The term

includes but is not limited to the president, chief execu-

tive officer, chief operating officer, chief financial officer,

chief lending officer, chief investment officer, general

counsel, or their functional equivalents.

A “director” is any individual who is a member of

the board of directors of the association or of any subsid-

iary of the association.

An “employment contract” is any agreement,

intended to be legally enforceable that materially affects

the terms and conditions of a person’s employment.

App. 14

A “problem” association is defined as an association

that: (1) has a composite MACRO rating of 4 or 5; (2) is

undercapitalized under prompt corrective action stan-

dards; (3) is subject to a capital directive or a cease and

desist order, a consent order, or a formal written agree-

ment, relating to the safety and soundness or financial

viability of the savings association, unless otherwise

informed in writing by the UTS; or (4) has been notified

in writing by the OTS that it has been designated a

problem association or an association in troubled condi-

tion.

Existing contracts. The OTS will review, comment,

and take appropriate action to correct existing employ-

ment contracts that are deemed to be unsafe or unsound.

The OTS will not generally require changes to pre-

existing contracts in health institutions. Contract provi-

sions, however, that raise significant safety and sound-

ness concerns will be subject to examination comment or

formal enforcement actions until the contract is termi-

nated or modified. The OTS may, on safety and sound-

ness grounds, insist that the board replace unacceptable

managers and use its best efforts to renegotiate employ-

ment contracts that are excessively burdensome on the

institution.

Unsafe or unsound practices. The following guide-

lines are illustrative, not exhaustive, examples of com-

pensation provisions considered unsafe or unsound.

Other compensation provisions may also be objectionable

depending on individual circumstances. These guidelines

are based on safety and soundness concerns that are

especially important for problem associations. Regulators

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App. 15

must use judgment in the application of the guidelines,

taking into account the condition of the institution, the

reason for the provision and the materiality of the provi-

sion.

Regulators should review compensation provisions

in problem associations under these guidelines (1) during

examinations, (2) in conjunction with applications that

contain compensation arrangements, and (3) when

employment contracts and compensation payments are

submitted for review by problem associations.

Compensation arrangements that provide incentives

contrary to the safe and sound operation of the asso-

ciation. For example, compensation based primarily

on short-term operating results may encourage unrea-

sonable risk-taking to achieve short-term profits.

Compensation tied to current operating results should

be closely monitored by the board of directors.

Compensation arrangements that provide for compen-

sation that significantly exceeds compensation paid to

persons with similar responsibilities and duties in

other insured institutions of similar size, in similar

locations, and under similar circumstances, including

health and profitability.

Contracts that contain automatic renewals or exten-

sions of the contract without providing explicit review

and approval by the board of directors.

Contracts that provide for an excessive term. As a

general matter, a one-year term is net objectionable: a

term exceeding three years is generally objectionable.

Total compensation paid out upon the departure of an

employee, regardless of the reason, that exceeds three

App. 16

times the employee’s average annual compensation. !

Total compensation must include payments for the

remaining contract term, if applicable, as well as any

severance payments. Average annual compensation

should be based on the most recent five taxable years.

Contracts that do not adequately reflect or define the

duties and responsibilities of the employee.

Compensation programs (including deferred compen-

sation/retirement/insurance) for independent direc-

tors that are not commensurate with their duties, or

that jeopardize their independence, such as vesting

requirements that would require an independent

director to forfeit previously accrued amounts if they

did not serve for a minimum number of years.

Contracts that are collateralized or otherwise guaran-

teed by the savings association, unless the contract

terms provide that the contract is unenforceable if the

association becomes a problem association, or unless

the contract is approved by the Regional Director.

Guarantees provided solely by the holding company

are permissible.

Contracts that provide for employer reimbursement of

costs incurred by employees seeking to enforce

employment contract terms in the absence of legal

judgment or settlement.

Change-in-control provisions that provide for immedi-

ate vesting, particularly for problem institutions.

Generally, any contract that requires payment upon

the voluntary resignation of the employee will be

examined carefully to determine whether it is unsafe

and unsound.

‘ In the case of termination for cause, however, no Ppay-

ments should be made.

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App. 17

RB 27a does not apply to employment contracts or

other compensation arrangements between a holding

company and a holding company executive. Employment

contracts between a holding company and a thrift execu-

tive are not covered unless such contract or arrangement

is likely to adversely affect the financial or managerial

condition of the association. If applicable, separate con-

tracts should be maintained between a thrift executive

and the association and the thrift executive and the hold-

ing company.

The following “golden parachute” provision should

be included in new and renewed employment contracts:

“Any payments made to the employee pursuant to this

agreement, or otherwise, are subject to and conditioned

upon their compliance with 12 USC § 1828(k) and any

regulations promulgated thereunder.”

App. 18

1990 OTS LEXIS 53 printed in FULL format.

Office of Thrift Supervision

1990 OTS LEXIS 53

July 3, 1990

SUBJECT: [*1] Employment Contracts

90/CS-46

Dear Text Omitted

This is in response to your letter to the Secretary of

the Federal Home Loan Bank Board (“FHLBB”) request-

ing assistance in the interpretation of 12 C.F.R. Sections

545.122 and 563.39. We apologize for the delay in our

response.

Specifically, the two questions that you have asked

are the following:

1. Is it correct that, as to rank and file employees for

whom no written contract exists, the regulations in ques-

tion do not apply?

2. Is the requirement that all such written contracts

be terminable “at any time” intended to abrogate any

state rights which may accompany at-will employment?

Or alternatively, was such a provision merely intended to

preclude contracts of employment for a stated term?

Although we are unaware of the specific facts and

the specific context for which these questions were asked,

we can respond generally to the queries. However, it

should be noted that specific facts, circumstances, or con-

ditions might require different conclusions. n1

mica Licitaiaase tb eeBeen ssi. 22

App. 19

nl It should also be noted that the wording of Section

945.122 that you quote is inaccurate. The current Section

(and the Section at the time of your opinion request)

states: “A Federal association, upon specific approval of

its board of directors, may enter into employment con-

tracts with its officers an other employees in accordance

with Section 563.39 of this Chapter. [*2]

Discussion

The Office of Thrift Supervision (“OTS”), formerly

the FHLBB, generally permits institutions to enter into

employment contracts with their officers and other

employees in accordance with specific regulatory require-

ments. These regulatory requirements are contained in 12

C.F.R. Section 563.39. n2

n2 The section applicable to federal institutions, 12

C.F.R. Section 545.121, specifically permits employment

contracts in accordance with Section 563.39.

In response to your first question, in our view, the

provisions of Section 563.39 would apply to all employees

regardless of whether or not they have actual written

employment contracts. The purpose of the regulation is

generally to protect institutions from unsafe and unsound

practices arising in connection with employment relation-

ships. In order to prevent circumvention of the intent of

this regulation, it is our belief that its provisions should

apply whether there is a written or tacit employment

contractual relationship.

In response to your second question, we are further

of the view that the requirement in Section 12 C.ER.

App. 20

563.39(b)(1) that the termination of the officer or

employee’s employment be terminated [*3] “at any time”

would supercede any contrary and conflicting state law

provisions governing at-will employment. Specifically

stated in the regulation, however, is the exception that,

unless the termination is for cause, the dismissal shall not

prejudice the officer or employee’s right to compensation

or other benefits under the contract. These compensation

and other benefits rights could be provided for under

state law, and the intent of the regulation is not to abro-

gate these specific state rights. Also, in response to the

second part of this question, this particular regulatory

provision does not preclude contracts of employment for

a stated term, although, depending upon the particular

facts and circumstances, supervisory objection may be

taken to provisions of a particular employment contract,

including -objection based upon an excessive term of the

contract. We suggest that you discuss terms of particular

contracts with the OTS supervisory staff responsible for

the particular savings association to which the contract

pertains.

If you have any further questions or comments on

this matter, please contact Valerie J. Lithotomos, Staff

Attorney, Corporate and Securities Division, [*4] at (202)

906-6439.

Very truly yours,

(Signed)

Julie L. Williams

Deputy Chief Counsel