Horizon Mutual Savings Bank, Formerly Bellingham First Federal Savings and Loan Association v. Federal Savings & Loan Insurance Corporation, an Agency of the United States Government

Citations: 674 F.2d 1312; 1982 U.S. App. LEXIS 19927Docket: 81-3029

Court: Court of Appeals for the First Circuit; April 20, 1982; Federal Appellate Court

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Horizon Mutual Savings Bank (Horizon) appealed a summary judgment favoring the Federal Savings and Loan Insurance Corporation (FSLIC) regarding the timing and calculation of a refund related to the termination of its insurance. Horizon ended its insurance with FSLIC on November 9, 1979, but received its pro rata share of the secondary reserve fund only on January 10, 1980. FSLIC interpreted its regulations to conclude that Horizon was not entitled to any "return" on its reserve funds for the year 1979, as the return had not been credited to the fund before Horizon's termination. The district court upheld FSLIC's decision, finding it rational.

Horizon argued that 12 C.F.R. 563.16-2(a) mandated FSLIC to pay a return on any funds not disbursed by December 31 of the terminating year. This regulation stipulates that FSLIC must credit a return on the secondary reserve at the end of each calendar year based on the average daily balances of insured institutions. However, because the return for 1979 had not been credited at the time of Horizon's termination, it did not receive any return on its share. The appeal was affirmed by the Ninth Circuit, validating FSLIC's rationale and the district court's findings.

Exhaustion of an insured institution's pro rata share of the secondary reserve allows the institution to receive credit for the period between the use of that share to pay a portion of its annual insurance premium and the preceding December 31. Insured institutions entitled to this credit will receive it in cash promptly after the Corporation determines the amount. If an institution's insurance is terminated before the end of the calendar year and its pro rata share is paid from the secondary reserve, the institution will not receive a return on that share for that year. Subparagraph (1) outlines the annual crediting and apportionment of returns, while subparagraph (2) addresses partial crediting for institutions that exhaust their shares during the year due to normal premium payments. Horizon argues that the clause "except as otherwise provided in this section" in subparagraph (1) implies its provisions are subordinate to subparagraph (3), which prohibits returns when insurance is terminated and the pro rata share is paid out before year-end. Horizon asserts that it should receive a return since its funds remained in the reserve after it terminated coverage in November. FSLIC counters that subparagraph (3) merely prohibits returns in specific circumstances and does not create a duty to pay returns. FSLIC further argues that Horizon, having canceled its coverage before year-end, was no longer considered an "insured institution" and thus ineligible for year-end returns. FSLIC clarifies that the "except as otherwise provided" clause in subparagraph (1) refers only to subparagraph (2), which mandates return crediting, not to subparagraph (3), which does not provide for any crediting.

FSLIC's interpretation of its regulation aligns with the D.C. Circuit's ruling in North New York Savings Bank v. FSLIC, which established that section 1727(e) restricts interest payments to year-end based on shares in the secondary reserve fund. Horizon's interpretation suggests that an institution only needs to keep funds in the reserve until December 31, not maintain FSLIC insurance, but the court noted the common practice of requiring policyholders to hold their insured status as of a specific date to receive returns. Horizon argues that FSLIC's regulation, established after North New York withdrew its funds, should necessitate a return to Horizon, yet FSLIC has historically denied returns to those terminating insurance before year-end. The court supports FSLIC's practice as consistent with Congressional intent. Horizon challenges FSLIC's interpretation, referencing Espinoza v. Farah Manufacturing, which highlighted that courts may not defer to an agency's interpretation when it is clearly erroneous. However, Espinoza dealt with a misapplication of guidelines rather than a regulatory construction issue. In contrast, Hart v. McLucas illustrates a situation where an agency's misinterpretation of its own regulation warranted no judicial deference. The Ford Motor Credit Co. v. Milhollin case emphasizes that courts should defer to an agency's regulatory interpretation unless it is demonstrably irrational.

FSLIC's interpretation of its regulation is afforded great deference, even more so than interpretations of statutes. The court does not require FSLIC's construction to be the only reasonable interpretation, nor the one it would have initially reached. The regulation in question is poorly drafted, particularly subparagraph (1), which lacks clarity about the conditions under which interest can be paid to non-insured institutions. Subparagraph (3) fails to clarify the ambiguity and instead adds confusion. While FSLIC interprets subparagraph (3) as detailing conditions for prohibiting returns, this could mislead reasonable readers into thinking returns might be allowed under unspecified conditions. However, the court finds FSLIC's interpretation rational and more aligned with normal practices than that of Horizon, rejecting Horizon's argument that subparagraph (1) should also reference subparagraph (3). Additionally, Horizon did not base its termination of insurance on its understanding of the regulation, negating any notice issue. Given the broad discretion granted to FSLIC and its historical practice regarding crediting returns, the court concludes that FSLIC's interpretation is neither clearly contrary to the regulation's meaning nor demonstrably irrational. The regulation's poor drafting highlights the need for FSLIC to revise and clarify the language. The court ultimately affirms the decision.

12 U.S.C. 1727(e) mandates the Corporation to credit a return on the secondary reserve balances at the end of each calendar year, calculated based on the average annual return from investments in U.S. obligations. The secondary reserve is designated for covering the Corporation's losses, but only when other available accounts are insufficient. Rights to an institution's share of the secondary reserve are not assignable or transferable, except as allowed by the Corporation in specific circumstances such as mergers or asset transfers. Additionally, subparagraph (2) allows institutions that deplete their secondary reserve to receive partial credits on annual returns for the period their funds were in the reserve, as outlined in 12 U.S.C. 1727(g), which anticipates the reserve's eventual exhaustion due to premium payments.