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Ensign Financial Corp. v. FDIC
Citations: 785 F. Supp. 391; 1992 U.S. Dist. LEXIS 8162; 1992 WL 35558Docket: 90 CIV 5692 (KC)
Court: District Court, S.D. New York; February 19, 1992; Federal District Court
The case involves plaintiffs Ensign Financial Corporation and Hamilton Holding Company against multiple defendants, including the Federal Deposit Insurance Corporation (FDIC) and T. Timothy Ryan, Jr., Director of the Office of Thrift Supervision (OTS). The court is addressing a motion to dismiss the complaint, granting it in part and denying it in part. Plaintiff Hamilton Holding Company fully owns Ensign Financial Corporation, which in turn owns 100% of Ensign Bank, FSB. Ensign Bank was established in 1983 to acquire two insolvent savings and loan associations through an Assistance Agreement with the Federal Savings and Loan Insurance Corporation (FSLIC) and resolutions from the Federal Home Loan Bank Board (FHLBB). Before August 1989, the FSLIC insured deposits and was overseen by the FHLBB, which regulated federally chartered savings and loan associations. The passage of the Financial Institutions Reform and Recovery Act (FIRREA) in August 1989 abolished the FSLIC and designated the FDIC as its successor, while also dissolving the FHLBB and establishing the OTS as its successor. T. Timothy Ryan, Jr. is identified as the director of the OTS. During the late 1970s and 1980s, the savings and loan industry faced a financial crisis. To avoid significant costs associated with liquidating insolvent institutions, the FSLIC, with FHLBB approval and new powers from the Garn-St. Germain Depository Institutions Act of 1982, initiated a program encouraging private entrepreneurs to acquire failing thrifts. A key element of this program was the concept of "supervisory goodwill," which allowed acquiring thrifts to use goodwill as a substitute for cash assistance. Under the purchase method of accounting, the assets and liabilities of the acquired thrifts were adjusted to fair market value, with any negative net worth balanced by goodwill, which could be amortized over time to meet federal capital requirements. Plaintiffs, under the FSLIC program, acquired three insolvent thrift institutions through two Assistance Agreements. In 1983, they established Ensign Bank and entered an Assistance Agreement to take over Washington Federal Savings and Loan Association and Community Federal Savings and Loan Association, which had a combined negative net worth of $171 million. The FHLBB determined that the cost of this acquisition for the FSLIC was significantly lower than liquidation costs. The FSLIC contributed $7.4 million in cash, an $18 million note, and an indemnity commitment of up to $12 million. A key incentive for plaintiffs was the promise that the FHLBB would recognize $171 million in goodwill from the acquisition for regulatory purposes, allowing amortization over 35 years. The FSLIC committed to ensuring that any regulatory computations would adhere to GAAP standards, modified by agreements made at the time of the acquisition. This included a forbearance agreement allowing the amortization of supervisory goodwill over 35 years using the straight-line method. In exchange, plaintiffs contributed $5 million in cash, a $6 million promissory note, and stock valued at $11 million. In 1987, Hamilton substituted the stock for a $15.2 million promissory note. The plaintiffs also agreed to assume the insolvent thrifts' liabilities and maintain specified net worth levels. Hamilton conditioned its participation on the acceptance and amortization of goodwill by the FSLIC and FHLBB; without these assurances, the agreement would not have proceeded. In 1987, a second Assistance Agreement was formed to take over Fort Lee Savings and Loan Association, which had a negative net worth of $32 million. The FSLIC contributed $12 million, with the primary incentive being the promise of $20 million in supervisory goodwill and amortization over 25 years. Plaintiffs conditioned their bid for Fort Lee on these assurances, emphasizing that without them, the thrift would have been deemed insolvent and the acquisition would not have occurred. From 1983 until FIRREA's enactment in 1989, the FSLIC and FHLBB acknowledged their obligation to accept goodwill for regulatory purposes, which plaintiffs and Ensign Bank adhered to despite the financial burden of amortizing goodwill. Ensign Bank was profitable enough to repay nearly $5 million on an $18 million FSLIC note, yet plaintiffs did not receive any income from the bank. FIRREA introduced new capital standards phasing out goodwill, leading the OTS to repudiate prior commitments by the FSLIC and FHLBB. Consequently, Ensign Bank transitioned from regulatory compliance to noncompliance under the new standards. Plaintiffs allege that OTS did not exercise its discretionary authority under FIRREA to grant exceptions for Ensign Bank and rejected a proposed capital plan that included a $100 million asset infusion contingent on resolving claims related to the repudiated promises. This inaction led to severe lending restrictions and a rapid decline in the bank's financial health. Despite ongoing negotiations with the FDIC to revitalize Ensign Bank, it was seized by OTS on August 31, 1990, without prior notice, effectively nullifying the agreement between plaintiffs and the regulatory agencies. On September 4, 1990, plaintiffs Hamilton and Ensign Financial filed a lawsuit against the FDIC, Ensign Bank, and OTS, asserting five counts. Count I claims OTS exceeded its authority by prohibiting the use of supervisory goodwill, constituting a due process violation under the Fifth Amendment. Count II alleges a lack of consideration for plaintiffs' bargain and frustration of the contract's purpose. Count III asserts a breach of contract by the defendants. Count IV alleges that the refusal of the OTS director to acknowledge supervisory goodwill and financial assistance under the 1983 and 1987 Assistance Agreements constitutes an inequitable repudiation of promises from the FHLBB and FSLIC that led plaintiffs to enter these agreements. Count V claims that by excluding these elements from federal capital requirement calculations, the OTS director has unlawfully taken contract rights in violation of the Fifth Amendment. Plaintiffs seek to rescind the 1983 and 1987 Assistance Agreements, restore all benefits conferred, and declare the $3 million outstanding on a $6 million note and $13.4 million of a $15.2 million note unenforceable. They also request additional relief, including costs and reasonable attorneys' fees. Jurisdiction over the OTS is discussed, highlighting that the federal government is generally immune from lawsuits unless immunity is waived. The Tucker Act provides a waiver allowing contract claims against the government over $10,000 to be heard in the Claims Court, which has exclusive jurisdiction unless Congress grants other courts authority. The Administrative Procedure Act also waives sovereign immunity, allowing judicial review for individuals aggrieved by agency actions, and permits the United States to be named as a defendant. However, it specifies that any orders against the U.S. must identify responsible federal officers and does not alter existing limitations on judicial review or the court's dismissal authority. Defendants argue that plaintiffs' claim against the government is a contract claim, thus only viable in the Claims Court. However, not all contract claims against the government fall exclusively under Claims Court jurisdiction. The Tucker Act does not prevent district courts from issuing declaratory judgments regarding contract rights against the United States. In this instance, plaintiffs seek rescission and declaratory relief related to the Office of Thrift Supervision's (OTS) non-compliance with forbearance agreements, which grants the court jurisdiction under the Administrative Procedure Act (APA) and federal question jurisdiction (28 U.S.C.A. § 1331). Plaintiffs' request for equitable relief, rather than specific performance or monetary damages, is supported by precedent allowing disappointed bidders to challenge government contract awards in district court under the APA. Congress has waived OTS's sovereign immunity under 12 U.S.C.A. § 1464(d)(1)(A), allowing suits in the district court where the savings association's home office is located. Defendants contest jurisdiction, noting that the named plaintiffs are based outside this court's jurisdiction, but because OTS has seized the Ensign Bank, it is nominally a party. Regarding jurisdiction over the Federal Deposit Insurance Corporation (FDIC), Congress has waived the FDIC's sovereign immunity (12 U.S.C.A. § 1819(a) Fourth), explicitly allowing it to be sued in any court. This statute provides district courts with jurisdiction to rescind contracts and grant declaratory relief against the FDIC, supporting plaintiffs' claims for rescission and restitution. Defendants argue that plaintiffs’ suit, although not naming the United States as a defendant, effectively targets the United States for monetary relief since any judgment against the FDIC will be paid from the FSLIC resolution fund, which can be replenished by the U.S. Treasury. They assert that this creates a jurisdictional issue because the United States has not waived its sovereign immunity. However, this argument is critiqued for undermining the "sue and be sued" clause in 12 U.S.C.A. 1819(a) Fourth, which allows the FDIC to be sued. The Second Circuit's ruling in C.H. Sanders Co. v. BHAP Housing Development Fund, Inc. is cited to support the notion that as long as the U.S. is not the immediate source of funds for a judgment, a suit against an agency is not considered a suit against the U.S. Thus, the court concludes that it has jurisdiction over plaintiffs' claims against the FDIC. Turning to the merits, plaintiffs assert in Count I that FIRREA does not permit defendants to void forbearance agreements and, if it does, such actions would violate the Fifth Amendment due process rights by constituting a taking of property. Defendants counter by claiming FIRREA not only allows but mandates the abrogation of these agreements, citing the law's provisions that phase out the use of supervisory goodwill as an asset over three years and require its exclusion from capital requirements. Defendants assert that because Congress outlined specific circumstances under which thrifts could be exempted from FIRREA's enhanced capital requirements, it implies that the capital requirements should apply universally to all other cases, relying on the legal principle expressio unius est exclusio alterius. They cite 12 U.S.C. 1464(s) and (t) to argue that FIRREA mandates the abrogation of forbearance agreements, emphasizing the Director's authority to enforce capital requirements and to treat any failure to maintain adequate capital as unsafe. Additionally, the legislative history of FIRREA reveals support for the view that the act would eliminate such agreements, including proposed amendments aimed at softening the impact on banks with forbearance agreements. In contrast, plaintiffs contend that statutory interpretation principles dictate that FIRREA should not be construed to invalidate existing contractual obligations unless explicitly stated, arguing that FIRREA does not clearly abrogate the forbearance agreements. They further claim these agreements are protected as "obligations" and "resolutions" under FIRREA's sections 401(g) and (h). However, the conclusion drawn is that, based on the statutory language and legislative history, Congress intended for FIRREA to abrogate the forbearance agreements. Sections 401(g) and (h) stipulate that existing rights, duties, and obligations related to the Federal Home Loan Bank Board (FHLBB) remain unaffected by the enactment of the Act on August 9, 1989. Specifically, rights that arose under the Federal Home Loan Bank Act, the Home Owners' Loan Act of 1933, or other relevant laws before the Act’s enactment are preserved. Additionally, all orders, resolutions, determinations, and regulations in effect as of the Act's effective date will continue until modified or terminated by the appropriate regulatory bodies or courts. The interpretation of these sections has been challenged in court, with plaintiffs citing various district court decisions to support their view. However, these decisions have either been explicitly or implicitly overruled by subsequent circuit court rulings, including notable cases such as Franklin Federal Savings Bank and Guaranty Financial Services, which reversed earlier judgments regarding the application of Section 401(g) and its limitations. Defendants argue that Section 401(g) was designed solely to safeguard the agreements made by the Federal Savings and Loan Insurance Corporation (FSLIC) and the FHLBB from termination due to the agencies' dissolution. This interpretation has been upheld by at least three circuit courts, which reasoned that Section 401(g) specifically addresses the impact of subsection (a) related to the abolition of the agencies, suggesting that if Congress intended to protect all contracts from the effects of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), it should have articulated that intention more clearly. Section 401(g) lacks clear congressional intent regarding the phase-out of supervisory goodwill and new capital standards. The plaintiffs' alleged injury is not directly linked to subsection (a); rather, it stems from the new capital standards rather than the abolition of the Bank Board and FSLIC. A savings provision regarding the validity of rights and obligations does not apply to the plaintiffs' situation. The Eleventh Circuit concurs that 401(g) and its related provisions do not prevent the termination of forbearance agreements. FIRREA not only allows but requires the defendants to terminate these agreements. Regarding due process claims, even if the termination of forbearance agreements constitutes a Fifth Amendment taking, it does not violate due process. There exists a forum, such as the Claims Court under the Tucker Act, for parties to assert their claims. FIRREA does not indicate an intention to withdraw jurisdiction from this court. Legislative actions that adjust economic burdens have a presumption of constitutionality, placing the burden on the complaining party to prove arbitrary and irrational acts. FIRREA was enacted to protect investors and stabilize the thrift industry, and plaintiffs have not shown that its enactment was irrational or arbitrary. Consequently, the due process claim is dismissed. Count II of the complaint asserts that the contracts are frustrated, resulting in a failure of consideration that necessitates rescission. Plaintiffs argue that the enactment of FIRREA made contract performance impossible, a concept not originally included in their complaint. The Second Circuit defines frustration of purpose as a situation where unforeseen events materially affect one party's consideration, allowing for rescission if performance becomes valueless. However, plaintiffs do not claim both parties can perform; instead, they argue that defendants' refusal to honor forbearance agreements prevents them from fulfilling their contractual obligations to revive three insolvent thrifts. Consequently, the situation aligns more with the doctrine of impossibility, which applies when an intervening event prevents performance. For impossibility to apply, the contract must not allocate the risk of such events to either party, and discharging obligations should reflect the parties' original intent. In this case, FIRREA prohibits defendants from fulfilling their part of the agreement, and the forbearance agreements do not allocate risk for legal changes. Therefore, it raises the question of how the risk of statutory changes is typically assigned. Case law supports that when a government agency is involved, it is presumed that neither party intends to assume the risk of the agency losing its authority. When a promisor enters a contract, it is reasonable to assume they believe rescission and restitution are the best remedies if performance becomes impossible. Therefore, the plaintiffs' argument of impossibility presents a valid claim for relief, leading to the decision not to dismiss count II of their complaint. Additionally, count II sufficiently asserts a claim based on failure of consideration, as defined by Professor Williston, which occurs when a party fails to receive the agreed exchange for their performance without fault. This failure entitles the disappointed party to rescind the contract, regardless of the underlying reasons, whether fraud, mistake, impossibility, or willful breach. In this case, the plaintiffs were promised that supervisory goodwill would be counted as an asset in their capital calculations for taking over three failing thrifts. However, the requirements imposed by the Office of Thrift Supervision (OTS) under FIRREA prevent the defendants from fulfilling this promise. The defendants invoke Connolly v. Pension Benefit Guaranty Corp. to argue that the plaintiffs should bear the consequences of changed law in a regulated field. However, this case is not analogous, as Connolly involved legislation aimed at preventing employers from withdrawing from pension plans, reflecting Congress' explicit intent. In contrast, the abrogation of the forbearance agreements under FIRREA does not indicate any Congressional policy against rescinding the contract or providing declaratory relief. The defendants also assert that the plaintiffs' contract claims are barred by the Sovereign Acts Doctrine, which limits the liability of the U.S. as a contracting party to the same extent as any other defendant. This doctrine suggests that while sovereign actions may harm private contractors, it does not confer any benefits to those contractors from the U.S. being a defendant. In Horowitz v. United States, the court addressed the application of the Sovereign Acts Doctrine, which protects the government from liability when its laws render a contract's performance more costly for the other party. The case referred to Tony Downs Foods Co. v. United States, where the government was not held liable for losses incurred due to an Executive Order. However, the Doctrine allows courts to excuse private parties from contract performance if a government action makes it impossible. In Wah Chang Corp. v. United States, a private party was justified in ceasing operations when their factory was condemned, although their breach of contract claim was barred by the Doctrine. The court noted that a private party could rescind a contract without penalty under similar circumstances, allowing plaintiffs to seek rescission and declaratory relief without being barred by the Doctrine. Count II of the plaintiffs' complaint was deemed valid and allowed to proceed, whereas Count III, claiming breach of contract due to FIRREA making performance impossible, was dismissed based on the Sovereign Acts Doctrine. Count IV involved plaintiffs arguing that defendants were estopped from terminating forbearance agreements; however, they clarified that their complaint only sought equitable grounds for rescission rather than asserting a claim of promissory estoppel against the government. Count IV of the plaintiffs' complaint is dismissed due to a lack of legal support for the equitable claim, which is insufficient to warrant relief. Count V is also dismissed; it alleges that defendants unlawfully took the plaintiffs' contract rights by not honoring forbearance agreements, which the court did not uphold based on prior reasoning. The court grants the defendants' motion to dismiss in part and denies it in part, allowing the plaintiffs to proceed with Count II while dismissing Counts I, III, IV, and V. Additional notes clarify that the plaintiffs’ potential monetary relief through rescission does not classify their claim as a suit for money damages under the Administrative Procedure Act (APA). The distinction between actions for damages and equitable relief is emphasized, referencing relevant case law. The court also notes jurisdiction over Ensign Bank and discusses the FDIC's payment obligations under specific conditions, indicating that the resolution fund's availability impacts the FDIC's capacity to satisfy judgments. Lastly, FIRREA's exceptions to uniformity requirements for thrifts not meeting capital standards are acknowledged. The director of the Office of Thrift Supervision (OTS) can grant exemptions to banks; however, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) imposes strict limitations on asset growth that hinder the OTS's ability to honor forbearance agreements with thrifts. Under FIRREA, particularly 12 U.S.C.A. 1467a, Congress exempted thrifts with pre-approved capital restoration plans from enhanced capital requirements, but plaintiffs do not claim this exemption applies to them. Although the OTS director can set minimum capital levels for thrifts, this must align with stringent requirements outlined in subsection (t), which further complicates the OTS's capacity to fulfill forbearance agreements with the plaintiffs. The court in Carteret emphasized that legislative history cannot override the necessity for clear and unequivocal elimination of contractual rights, though it did not cite case law supporting this assertion. The defendants seek a double standard that permits them to evade obligations while imposing liabilities on the plaintiffs. The court rejects the notion that the agreements intended such inequity. Furthermore, even if count IV were interpreted as asserting equitable estoppel against the defendants, it would fail to state a claim since estoppel against a government agency requires evidence of serious misconduct which the plaintiffs have not alleged. Consequently, an equitable estoppel claim cannot succeed in this instance.