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HANSEN SAV. BANK v. OFF. OF THRIFT SUPERV.

January 31, 1991

HANSEN SAVINGS BANK, ET AL., PLAINTIFFS,
v.
OFFICE OF THRIFT SUPERVISION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Rodriguez, District Judge.

AMENDED MEMORANDUM OPINION AND ORDER

This case is before this court on plaintiffs Hansen Savings Bank, SLA (HSBSLA), Hansen Bancorp, Inc. (Bancorp), Elmer and Eileen Hansen's (the Hansens) request for declaratory and injunctive relief against the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). For the reasons stated below, plaintiffs' request for a preliminary injunction is granted.

I. BACKGROUND

A. The Supervisory Merger

This is yet another suit which has its genesis from the savings and loans crisis of the 1980's. In 1987, the Federal Savings and Loan Insurance Corporation (FSLIC) took control of First Federal Savings and Loan Association (First Federal), a failing thrift located in Hammonton, New Jersey. After assuming control, FSLIC put First Federal up for sale. The ultimate result of First Federal's sale is what the industry terms a "supervisory merger."

The Hansens owned a controlling interest in Raritan Valley Savings and Loan Association (Raritan) in East Brunswick, New Jersey and Hansen Savings Bank in Palm Beach, Florida. The Hansens submitted a bid to merge Raritan with First Federal.*fn1 After lengthy negotiations, the government accepted the Hansens' bid on May 25, 1988.

B. The Merger Terms

The Hansens contributed $1,000,000 in capital to HSBSLA. They also agreed that HSBSLA would carry $50,000,000 in First Federal non-earning assets until these assets could be disposed of appropriately. HSBSLA would bear the burden of disposing of these assets; HSBSLA also would absorb the first $5,000,000 of losses incurred on certain First Federal assets.

The plaintiffs argue that the government contractually agreed to do specific things to make this supervisory merger successful. First, FSLIC would indemnify HSBSLA for "losses incurred as a result of undisclosed liabilities and [would] guarantee the liquidation value of certain [First Federal] assets." Plaintiffs' Verified Complaint ¶ 28 at 11. Second, FSLIC agreed to contribute $62,000,000 to eliminate part of First Federal's deficit. Third, FSLIC and the Federal Home Loan Bank Board (FHLBB) agreed to give HSBSLA a period of time to "eliminate the remainder of [First Federal's] deficit." Id. ¶ 28 at 12. This third "concession" by the government entailed the FHLBB agreement that HSBSLA would carry "supervisory goodwill for all regulatory capital purposes (with no five-year limitation), and that it would permit supervisory goodwill to be amortized over twenty-five years on a straight-line basis." Id. ¶ 29 at 12.

This third "promise" by the government is at the core of this dispute. Plaintiffs argue that the government entered into a contractual obligation to forbear from doing certain things for a period of time and now the government is reneging on its promise.

C. Plaintiffs' Alleged Contractual Rights

Plaintiffs contend that they have contractual forbearances included in the Assistance Agreement concerning the First Federal supervisory merger which are enforceable against the government. Plaintiffs argue that three documents, the May 24, 1988 Assistance Agreement (the Agreement), Federal Home Loan Bank Board Resolution No. 88-406 of May 24, 1988 (FHLBB Resolution) and the May 25, 1988 letter from the FHLBB to Raritan President Joseph Paparatto concerning regulatory forbearances (FHLBB Forbearance Letter), are to be read together to create the contractual forbearances involved in this dispute. The pertinent sections of each of the documents are outlined below.

1. Accounting Principles

a. The Agreement

At section 17, the Agreement provides that generally accepted accounting principles shall govern, "except that where such principles conflict with terms of this Agreement, applicable regulations of the [FHLBB or FSLIC], or any resolution or action of the [FHLBB] approving, or adopted concurrently with, this Agreement, then this Agreement, such regulations, or such resolution or action shall govern." Plaintiffs argue that it is apparent that this Agreement was intended to be read in conjunction with other actions of FHLBB or FSLIC which occurred contemporaneously with the execution of the Agreement. The FHLBB issued a resolution on May 24, 1988 and a letter on May 25, 1988.

b. FHLBB Resolution

In the May 24, 1988 FHLBB Resolution, the government provided that

  (a) the use of Push-down accounting may be used to
  reflect the acquisition of Hammonton on the books
  of . . . Raritan subsequent to its merger and on
  the consolidated books of [Bancorp]; and
  (b) the value of any unidentifiable intangible
  assets resulting from accounting for the Merger in
  accordance with the purchase method may be
  amortized . . . over a period not to exceed 25
  years by the straight line method from the
  Effective Date . . .

Thus, the FHLBB Resolution gave HSBSLA the ability to carry the First Federal deficit on its books as an intangible asset, i.e., supervisory goodwill, to be amortized over a twenty-five year period on a straight-line basis. Under section 17 of the Agreement, this provision would govern HSBSLA's accounting scheme. See supra at I.C.1.a. The FHLBB Resolution does not limit the purposes for which HSBSLA can carry supervisory goodwill on its books.

2. Plaintiffs' Alleged Regulatory Forbearances

a. The Agreement

Section 16(b) of the Agreement provides that regulatory capital should be maintained pursuant to the current regulations or its successors, "except to the extent that the [FHLBB] has agreed . . . to forbear from enforcement of such regulations."

b. The FHLBB Resolution

The FHLBB Resolution provides that "the Secretary . . . is authorized and directed to send a letter to Raritan concerning forbearances by the [FHLBB] and the FSLIC with respect to certain regulatory requirements in the form, or substantially in the form, of a letter."

c. The FHLBB Forbearance Letter

In a letter dated May 24, 1988, the FHLBB stated that it would forbear from enforcing the capital standard regulations promulgated ...


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