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HARALSON v. FHLBB

January 13, 1987

John B. HARALSON, et al., Plaintiffs,
v.
FEDERAL HOME LOAN BANK BOARD, et al., Defendants



The opinion of the court was delivered by: JOHNSON

 NORMA HOLLOWAY JOHNSON, District Judge.

 Plaintiffs in this action are the Mercury Savings Association of Texas, the Ben Milam Savings and Loan Association *fn1" ("Mercury", "Milam", or collectively "the Associations"), and John B. Haralson, who owns 100 percent of the outstanding stock of both associations. Defendants are the Federal Home Loan Bank Board ("FHLBB" or the "Bank Board" or the "Board") and the Federal Savings and Loan Insurance Corporation ("FSLIC"). *fn2" Plaintiffs' complaint contains five separate counts all of which arise from the FHLBB's appointment of a conservator for the Associations.

 Count 2 -- Breach of Contract

 Count 2 of the complaint alleges a claim for breach of contract against the federal defendants, the FHLBB and FSLIC. Presently before the Court is defendants' motion for summary judgment on Count 2, Count 4, Count 5, and Count 6, and plaintiffs' cross motion for summary judgment. *fn3" For the reasons explained below, defendants' motion for summary judgment has been granted, and plaintiffs' cross motion for summary judgment denied as to Count 2, Count 4, Count 5, and Count 6.

 The facts relating to Count 2 are not disputed. Both parties have moved for summary judgment, therefore indicating that summary judgment is appropriate and that there are no material facts in dispute. The events which led to the appointment of a conservator are quite lengthy and detailed. As those factual events are fully set out in the voluminous pleadings and exhibits submitted by the parties, this Court will not attempt to repeat any but those crucial to an understanding of the legal issues involved here.

 On January 29, 1986, the Bank Board served on the Associations a Notice of Charges and Hearing ("Notice") and a Temporary Cease and Desist Order ("Temporary CD"). The Notice listed numerous violations of the Bank Board's regulations and the accompanying Temporary CD placed immediate operating restrictions on the Associations. The Temporary CD prevented the Associations from engaging in future practices that were similar to the past violations described in the Notice. Plaintiffs filed a complete and timely answer to these charges. Plaintiffs also prepared to exercise their statutory right to immediate judicial review of the Temporary CD.

 Instead, on February 7, 1986, after negotiations between the Bank Board and counsel for the Associations, the Bank Board and FSLIC entered into a written contract with the Associations, formalized in two documents entitled the Interim Undertaking ("Undertaking") and the Stipulation Regarding Interim Undertaking ("Stipulation"). It is the construction of that contract which is now at issue.

 Like the Temporary CD, the Undertaking basically restricted the type and size of loans the Associations were allowed to make, required specific documentation for making new loans and funding advances on existing loans, and limited the payment of compensation, fees and bonuses to officers, directors and employees of the Associations. The Undertaking also restricted the Associations from engaging in transactions with certain specified parties. Affirmative obligations were placed on the Associations to furnish certain information to the Bank Board, to review loan files to ensure that all necessary documentation existed with respect to certain transaction, and to review compensation levels of officers and directors of the Associations.

 A comparison of the Undertaking with the Temporary CD reveals that the Undertaking is closely modeled after the Temporary CD. In several instances, however, the restrictions of the Undertaking are significantly more lenient than those in the Temporary CD. (For example, the Temporary CD required a written business plan that included maximum dollar volume of growth in savings capital on a monthly basis, while the Undertaking required it only on a quarterly basis.) Overall, the Undertaking is less restrictive than the Temporary CD in areas such as directors and officers compensation, reporting requirements, lending practices, and the Associations' freedom to deal with certain specified persons.

 The Associations had a statutory right under the Home Owners' Loan Act of 1933, 12 U.S.C. § 1464(d)(6)(A) (1982), to judicial review of the imposition of the Temporary CD. This was a significant difference from the Associations' rights pursuant to the Undertaking. As part of the Stipulation, the parties agreed to "waive the right to seek judicial review of the issuance of the Undertaking under the provisions of the NHA [National Housing Act] or other applicable law." Stipulation Para. 6.

 A means of enforcement of the Undertaking was also provided for in the Stipulation. It was agreed that an injunction "is the exclusive remedy for violations by the Associations of the Undertaking." Stipulation Para. 5. The parties agreed to be bound by the provisions of the Undertaking in exchange for which the Temporary CD would be withdrawn.

 Under the Stipulation, Haralson was afforded an administrative hearing. This was the same hearing that was provided for in the Notice. At the administrative hearing the Associations would have the opportunity to confront the charges asserted by the Bank Board against the Associations. That hearing was scheduled for March 17, 1986. As late as March 13, 1986, the Bank Board advised Haralson of its intention to proceed to the administrative hearing.

 The next day, on March 14, 1986, the Bank Board met and by formal resolution consumated its decision to impose a conservatorship on the Associations. The Bank Board staff referred the Bank Board to the materials in the administrative record which demonstrated that statutory grounds to appoint a conservator were met, in that the Associations were insolvent, and had suffered a substantial dissipation of assets due to regulatory violations and unsafe and unsound practices. The Resolutions the Bank Board adopted that day expressly suspended the Undertaking. The administrative hearing scheduled for March 17, 1986, was not held.

 The Undertaking and the Stipulation are silent with respect to the Bank Board's power to appoint a conservator. Neither document makes any reference to any of the statutory grounds for appointment of a conservator. The only expression in the documents relating to the Bank Board's enforcement power is in paragraph 5 mentioned above, which provided for injunctive relief for violations of the Undertaking. There is no indication, however, that the Bank Board relied on, or was informed of, any violations of the Undertaking in connection with its decision to appoint a conservator. No such violation has been asserted by the Bank Board.

 In his complaint, Haralson alleges that the Bank Board breached its contract with the Associations "[by] appointing a conservator rather than proceeding in accordance with § 407(f)(3), for alleged actions subject to the Stipulation Regarding Interim Undertaking. . . ." *fn4" Complaint at 19 (emphasis added). The contract is construed by Haralson to contain a limitation on the Bank Board's enforcement powers prior to an adjudication of the charges set out in the Notice at the scheduled administrative hearing.

 In Haralson's memorandum, however, his argument is significantly different. There, Haralson alleges that "by suspending the Interim Undertaking and cancelling the administrative hearing, the defendants breached the terms of the Stipulation." Plaintiffs' Opposition to Defendants' Motion for Partial Summary Judgment at 8-9. Haralson no longer contends that the imposition of a conservator was based on a violation of the Undertaking, as he did in his complaint, where he refers to "actions subject to the Stipulation".

 The Bank Board agrees that an injunction would have been the sole remedy for a violation of the terms of the Undertaking, but the Board maintains that their decision to appoint a conservator was not based on a violation of the Undertaking. Rather, it was based on a finding that three separate statutory grounds for appointment of a conservator (insolvency, dissipation of assets, and unsafe and unsound conditions) existed. As construed by the Board, the contract does not impose any restriction on the Bank Board's pre-existing power to appoint a conservator where the appointment is based on the independent existence of the grounds enumerated in the statute.

 The question before this Court then, is whether the parties contractually agreed that the Bank Board would relinquish its statutory authority to impose a conservatorship, on any and all grounds whatsoever, until the conclusion of the administrative hearing provided for by the contract. If no such promise was made by the Bank Board, there could have been no breach.

 "The judicial task in construing a contract is to give effect to the mutual intentions of the parties." NRM Corp. v. Hercules Inc., 244 U.S. App. D.C. 356, 758 F.2d 676, 681 (D.C. Cir. 1985) (footnote omitted). See also Deauville Corp. v. Federated Department Stores, 756 F.2d 1183 (5th Cir.1985). Intent is considered from an objective standard and is evidenced from the words of the contract itself. The subjective intent of the parties is not controlling.

 Both parties concede that the language of this contract is unambiguous. "Where the language of a contract is clear and unambiguous on its face, a court will assume that the meaning ordinarily ascribed to those words reflects the intentions of the parties." NRM Corp., at 681. Accordingly, there is no need for this Court to look ...


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