Before: Edwards, Chief Judge, Silberman, Circuit Judge, and Buckley, Senior Circuit Judge.
FOR THE DISTRICT OF COLUMBIA CIRCUIT
On Petition for Review of an Order of the United States Office of Thrift Supervision
Opinion for the Court filed by Circuit Judge Silberman.
Donald Kaplan petitions for review of an Office of Thrift Supervision (OTS) order holding him in violation of his duties as a director of a savings and loan in connection with a vote he cast as a director of the savings and loan's parent. We conclude that OTS' order lacks substantial evidence, and so grant the petition.
The American Savings & Loan Association (the S&L) is a state-chartered thrift once held by the now-defunct Enstar Group. In early 1990, pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), which required thrifts to divest themselves of their high-yield corporate debt securities, the S&L sold its junk-bond portfolio to Enstar, which purchased it through a subsidiary. Under FIRREA, the S&L could sell the portfolio to its holding company, so long as OTS both "approved the transaction" and "at all times" found "acceptable" the collateral securing the note with which the holding company purchased the bonds. 12 U.S.C. Section(s) 1831e(e)(2)(F)(i), (3)(A) (1988 & Supp. V 1993). With the approval of OTS, then, Enstar purchased the portfolio with a note secured by the junk bonds themselves as well as by the stock of another Enstar subsidiary, Western Reserve (a life insurance company). The note Enstar used to purchase the junk bonds was not its only debt to the S&L, but it was by far its largest.
On June 8, 1990, the Enstar board of directors convened to discuss a number of topics. Kaplan, formerly chief economist at the Federal Home Loan Bank Board and a member of both the S&L and Enstar boards, participated in the meeting. Although the precise content of that meeting is the subject of some dispute, it is clear that Grassgreen reported on the credit difficulties of Enstar's clothing subsidiary, Enstar Specialty Retail, Inc. (Retail). It seems that Retail had had a somewhat disappointing previous year, and its bank had refused to extend its credit line, leaving it in need of cash with which to finance the upcoming back-to-school and holiday seasons. The board therefore discussed methods by which Enstar could internally finance Retail's credit needs. Grassgreen's idea was to sell off some of the junk-bond portfolio acquired from the S&L and loan the proceeds to Retail. Those bonds, as well as the Western Reserve stock, it will be recalled, were serving as collateral on the S&L's note. It was thus apparent to the board that before it could sell Western Reserve or loan to Retail the proceeds of the sale of some portion of the junk bonds, it needed to pledge additional collateral to the pool. In this context, the Enstar board adopted the following resolution:
BE IT RESOLVED that, it appearing to be in the best interests of [Enstar] to assure the availability of sufficient collateral under the Collateral Pledge Agreement by and between [Enstar] and [the S&L] ... the Chairman of [Enstar] is hereby authorized to pledge 100% of the common stock of [Retail] as additional collateral for the Promissory Note....
The terms of the collateral pledge agreement between the S&L and Enstar were such that Grassgreen's supposed plan to substitute Retail stock for cash in the collateral pool could not (at least, not legally) be effectuated without two critical approvals. First, no asset could be substituted for another in the collateral pool unless its valuation had been approved by OTS. Enstar could pledge Retail stock to the pool, but that pledge would not allow other collateral to be withdrawn under the terms of the agreement until and unless OTS valued that stock. And second, no collateral could be withdrawn from the pool without the S&L's approval. Thus, even if Enstar obtained OTS approval of a valuation of Retail stock, it would still have to get the S&L's approval before withdrawing any particular excess collateral from the pool.
At the board meeting, Kaplan himself pointed out that OTS would have to approve any valuation of Retail's stock prior to its being used to substitute for other collateral that Enstar wished to pull out of the pool. Kaplan did not, however, bring up the requirement of the S&L's approval, nor did he or anyone else tell the full S&L board of what had transpired at the Enstar board meeting. Three of the S&L's six board members (Grassgreen, Kaplan, and the S&L's chairman and chief executive officer, Harris Friedman) sat on both boards and thus knew full well what the Enstar board had discussed. A fourth S&L board member also sat on Enstar's board, and although he missed the June 8 meeting, he presumably had access to the minutes, which reflected the pledge of Retail stock (but not the extent of Grassgreen's plan).
Rather than seeking the approval of OTS and the S&L board, and without informing any of Enstar's or the S&L's outside directors, on June 15, Grassgreen pledged the Retail stock to the collateral pool. Then, on June 22, Friedman authorized Enstar to withdraw $29 million from the collateral pool. That withdrawal was followed, on August 10 and September 7, by two more withdrawals totaling more than $9 million. Unfortunately for all involved, Retail encountered major problems in late 1990, its stock becoming virtually worthless as collateral for the S&L note. ...