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March 30, 1989

JOHN B. HARALSON, et al., Plaintiffs,

Norma Holloway Johnson

The opinion of the court was delivered by: JOHNSON

This case involves the appointment by the Federal Home Loan Bank Board ("the Bank Board") of the Federal Savings and Loan Insurance Corporation ("FSLIC") as conservator for Mercury Savings Association of Texas ("Mercury") and Ben Milam Savings & Loan Association ("Milam").

 Mercury and Milam are Texas-chartered stock savings and loan associations located in Wichita Falls and Cameron, Texas, respectively, with corporate headquarters in Houston. The deposits of Mercury and Milam are insured by FSLIC pursuant to Section 403 of the National Housing Act, ("NHA"), as amended, 12 U.S.C. § 1726 (1982). Mercury and Milam are subject to the regulatory and supervisory authority of the FSLIC and the Bank Board. See 12 U.S.C. §§ 1461 et seq.

 On March 14, 1986, the Bank Board determined that Mercury and Milam (the Associations) were insolvent, had suffered a substantial dissipation of assets as a result of violations of banking regulations and unsafe and unsound practices by management, and were in an unsafe and unsound condition to transact business within the meaning of Section 5(d)(6)(A)(i)-(iii) of the Home Owner's Loan Act of 1933, as amended, 12 U.S.C. § 1464(d)(6)(A) (1982) (the "HOLA"). Pursuant to Section 406(c)(1)(B) of the NHA, 12 U.S.C. § 1729(c)(1)(B), the Bank Board, with the written approval of the Commissioner of the Texas Savings and Loan Department, appointed FSLIC the sole conservator of the Associations.

 Plaintiffs filed suit on March 16, 1986, seeking removal of the conservator and interim injunctive relief pursuant to 12 U.S.C. § 5(d)(6)(A), which permits an institution which has been placed in conservatorship or receivership by the Bank Board to bring an action within thirty days for an order removing the conservator or receiver. Id.

 Their motion for a temporary restraining order was denied. After a hearing on their motion for a preliminary injunction but prior to the ruling thereon, plaintiffs voluntarily dismissed the action and thereafter filed actions in the U.S. District Court for the Western District of Texas, Waco Division, Haralson v. FHLBB, Civil No. W-86-CA-53 (W.D. Tex. 1986), and the U.S. District Court for the Northern District of Texas, Wichita Falls Division, Haralson v. FHLBB, Civil No. CA-7-86-34 (N.D. Tex. 1986). Claims in both of the Texas cases alleging breach of contract against the Commissioner of the Texas Savings and Loan Department were dismissed. Shortly thereafter, the cases were transferred to this court, pursuant to 28 U.S.C. § 1404(a), and were later consolidated.

 Defendants were granted summary judgment on all counts of the complaints except one. The sole issue remaining was whether the statutory grounds that permit the Bank Board to appoint FSLIC as conservator for Mercury and Milam were met.

 This issue proceeded to trial and after a full hearing, the Court received and evaluated the testimony of the witnesses, reviewed the exhibits admitted in evidence, and heard the argument of counsel. After careful consideration of all the evidence of record, the Court makes the following findings of fact and conclusions of law.


 1. In January 1983, plaintiff J.B. Haralson acquired 100 percent of the stock of Mercury and 90 percent of the stock of Milam. Haralson served as the chief executive officer, chairman of the board, and a director of both Associations. The Associations have identical directors and share many other senior management officials.

 2. When acquired, the Associations reported combined assets of approximately $ 122 million. During 1983, the assets of the Associations increased by almost 500 percent to $ 686 million. This rapid growth continued throughout 1984 and 1985 so that by December 1985 the combined assets of the Associations were over $ 1 billion.

 3. This growth was funded by large dollar certificates of deposit. The funds were invested in many different assets by the Associations, including significant investment in loans to developers to acquire, develop, and construct various real estate projects, particularly in 1984. A.R., Vol. IV Tab 23B at 01427.

 4. A Cease and Desist Order was issued by the Texas Savings and Loan Department on September 19, 1984, enjoining both Mercury and Milam from violating both state and federal statutes and regulations and from engaging in unsafe and unsound practices. A.R., Vol. I Tab 4A.

 5. On September 25, 1984, the Associations, J.B. Haralson, and the other directors of Mercury and Milam entered into Supervisory Agreements with the Texas Commissioner. A.R., Vol. I Tabs 4B and 4C. The Supervisory Agreements required, among other things, that Haralson divest himself of all ownership in the Associations, and that the Associations terminate all relationships with George J. Aubin, whom the Texas Commissioner found to be a "controlling person" of each Association within the meaning of § 561.28 of the Federal Regulations.

 6. Haralson retained E.F. Hutton and Company, Inc., to assist in finding a buyer for the stock of the Associations.

 7. E.F. Hutton retained Peat Marwick, Mitchell and Co. to perform a review of the Associations and their subsidiaries in connection with E. F. Hutton's evaluation of the common stock of the Associations.

 8. In June 1985, an examination of the Associations was commenced by the Division of Examination of the Federal Home Loan Bank of Dallas (Dallas Bank). This examination continued through March 14, 1986, the date the conservator was appointed.

 9. Three interim reports of the Examiner-In-Charge revealed that the financial condition of the Associations was declining and that the lending practices and procedures which prompted concern were continuing. A.R., Vol. II Tabs 7A, 7B, and 7C.

 10. Robert Torres, the Bank Board Examiner-in-Charge of the Associations, was the Bank Board District Appraiser and the designee of the principal Texas Supervisory Agent. He determined that the Associations carried assets on their books that had certain inherent weaknesses. Due to these weaknesses, it was determined that collection in full was unlikely.

 11. Application of the Classification of Assets Regulations, 12 C.F.R. 561.16c, 571.1a and 563.17-2(6), by the Bank Board required that the Associations establish specific loss reserves against certain loans.

 12. Five assets were classified by the Bank Board as "Loss" under the Classification of Assets regulations. These assets were known as the Falcon's Lair, L'Atriums, Oates Crossing, Valley Ridge, and Westchase loans. Fifteen assets were classified as "Doubtful". A.R., Vol. III Tab 13A-13T.

 13. The District Appraiser received appraisals on March 14, 1986, from independent appraisers of the five "loss" properties.

 14. The five loans for which appraisals were received were written down to the extent that the book value recorded by the Associations exceeded the appraisal value obtained by the Bank Board. As a result, Mercury was required to reduce its net worth by $ 13,482,730 and Milam was required to reduce its net worth by $ 11,766,122.

 15. The fifteen "doubtful" loans were written down by fifty percent of their reported book value. As a result, Mercury and Milam were required to reduce their respective net worth by $ 19,143,618 and $ 19,202,920.

 16. Among other things, this write-down was based on the fact that it was determined by the District Appraiser and his staff that the Associations relied on appraisals of the value of the underlying property securing the loans that failed to conform with Bank Board appraisal guideline R-41b or contained demonstrably incorrect assumptions. A.R. Vol. II Tabs 7A - 7C.

 17. The reclassification of assets of Mercury resulted in a total reduction of its net worth by $ 32,626,348.

 18. The reclassification of assets of Milam resulted in a total reduction of its net worth by $ 30,969,042.

 19. As of January 31, 1986, Mercury had on its books an investment of over $ 5 million in Gulf Coast Savings, a savings and loan association of which Mercury had purchased all the outstanding stock. It was determined by the Bank Board that Gulf Coast had been losing money continuously since its acquisition by Mercury in June 1984 and in fact had reported to the Bank Board that its net worth as of January 31, 1986, was negative $ 18 million, A.R., Vol. 4 Tab 16.

 20. The Examiner-in-Charge of Mercury determined that Mercury incurred an equity loss of $ 2,264,206 which it failed to report as required by 12 C.F.R. § 563c.12. Id.

 21. The insolvency of Gulf Coast required Mercury to establish a specific reserve in the amount of Mercury's remaining investment in Gulf Coast.

 22. Mercury's investment in Gulf Coast was overvalued on its books by a total of $ 5,082,366 and the book value of the asset therefore had to be adjusted to $ 0. Id.

 23. Plaintiffs' accounting expert, John Seymour of Greenstein, Logan & Co. ("Greenstein"), the auditors for the Associations, testified that he agreed with the initial adjustment of $ 2,264,206 with respect to Gulf Coast but disputed the appropriateness of the remaining write-down. The Court chooses not to accept his opinion.

 25. The total required reductions in net worth resulted in a net worth of negative $ 28,173,527 for Mercury and of negative $ 27,403,832 for Milam.

 26. A study of the Mercury and Milam loan portfolios were prepared for the Federal Home Loan Bank of Dallas by the accounting firm Grant Thornton & Co. ("Grant Thornton") beginning in November 1985.

 27. J. Randolph German, a certified public accountant, was the partner in charge of the Grant Thornton study. He testified that the work within the study had been done in accordance with Generally Accepted Accounting Principles ...

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