of the Associations were in highly speculative and volatile securities.
70. In connection with this account, the Associations sold assets totalling $ 39.4 million in violation of the Dallas Bank supervisory directive which required approval prior to the sale of assets having a value in excess of $ 250,000. A.R., Vol. II at 330-31.
71. The Court finds that Aubin, who was described by Haralson as a consultant, had pervasive influence over Haralson and the Associations.
72. Haralson testified that four or five of the members of the board of directors worked with Aubin for many years.
73. Richard Moore, one such director, testified that he signed any documents put in front of him by Haralson. The board members did not question the actions of Haralson or Aubin, who attended most board meetings before the Texas Commissioner forbade his attendance. The Court finds that the Board of Directors of the Associations failed to exercise judgment and were, in essence, directors in name only. The annual bonuses paid to Haralson is one dramatic example.
74. Gallaway, the former president of the Associations, testified that the influence of Aubin was pervasive. All major business decisions were cleared with Aubin who had authority to hire and fire personnel and to approve investments for the Associations.
75. Aubin held an indirect pledge of the stock of Mercury which he obtained in connection with what is referred to as the 6400 Southwest Freeway transaction. Aubin was given indemnification by the Associations. That indemnification was broader than that afforded officers and directors of the Associations. He was also given indemnification for specific transactions which he negotiated on behalf of the Associations.
76. A corporation wholly owned and controlled by Haralson executed a $ 60 million promissory note to E.F. Hutton. The note was secured by the pledge of all the stock of Mercury. Aubin made this pledge possible by releasing the indirect pledge he had acquired in the 6400 Southwest Freeway transaction. The note was executed in connection with dealings Aubin had with E.F. Hutton and $ 48 million of margin indebtedness of Aubin.
77. No evidence having been presented by plaintiffs to dispute these transactions, the Court accepts the evidence as credible.
78. The determination of the Bank Board that the assets of Mercury and Milam were less than their obligations to creditors and others is supported by the evidence adduced during trial. It is found as a fact that both Mercury and Milam were insolvent on March 14, 1986.
79. The Court further finds that due to regulatory violations the Associations had substantially dissipated their assets by March 14, 1986. The Bank Board relied on the losses related to the five loans appraised as "Loss." Three specific regulations were violated: 12 CFR §§ 563.17-1(c)(14), 563.17-1(c)(iii), and 563.9-3. The first is a requirement that the association determine the financial condition of the borrower; next, appraisal deficiencies; and third, the limitation on loans to one borrower.
80. The Court finds that the determination of the Bank Board that the Associations were in an unsafe and unsound condition to transact business on March 14, 1986, is clearly and convincingly supported by the evidence.
81. Walter L. Faulk, testifying on behalf of the Bank Board, stated that he was responsible for the supervision of Mercury and Milam as a result of his employment as Supervisory Agent for the Dallas Bank.
82. The Court credits the testimony of Faulk that the actions of the Dallas Bank were designed to assure that Mercury and Milam comply with federal regulations.
83. The Court discredits the allegations and the evidence proffered in support thereof that Faulk's action were designed to prevent Mercury and Milam from meeting their regulatory net worth requirements to facilitate some covert takeover plan.
84. Robert R. Torres, the Examiner-in-Charge, is found to be a credible witness. His experience as an examiner and the manner in which he conducted the examinations here at issue, and his demeanor as a witness cause the Court to credit his testimony with respect to loans, investments appraisals, net worth, Bank Board regulations, and the insolvent condition of Mercury and Milam.
85. John B. Haralson, the individual plaintiff, testified, among other things, that Mercury and Milam were not insolvent and would not have been deemed so if the Dallas Bank had permitted him to sell certain assets.
86. The Court does not credit the testimony of Mr. Haralson for many reasons. Among them are his convenient memory - excellent when questioned by his counsel but poor on cross-examination; his demeanor as a witness; his interest in the outcome of the litigation; his inability to admit the true role of Aubin relative to the Associations; and his clearly - stated animosity towards Torres for which the Court found no support other than his self-serving declarations.
87. The three auditor-experts, Seymour, Hargraves, and German, presented conflicting testimony. Based upon their experience and the other evidence of record - both direct and circumstantial - the Court chooses to credit the testimony of German.
88. The Court finds no credible evidence of record that the Bank Board planned, plotted, or otherwise imposed the conservatorship on Mercury or Milam without just cause.
89. There is insufficient evidence of record for the Court to find that plaintiffs were hampered in their preparation or presentation of this case because of a lack of records or inadequate funds.
CONCLUSIONS OF LAW
This is a civil action arising under federal law pursuant to the provision of Section 5(d)(6)(A) of the HOLA, 12 U.S.C. § 1464(d)(6)(A) and Section 406(c)(1)(B) of the NHA, 12 U.S.C. § 1729(c)(1)(B). Jurisdiction exists and venue is proper by virtue of the provisions of 12 U.S.C. § 1464(d)(6)(A). That section provides in relevant part:
The grounds for the appointment of a conservator or a receiver for an association shall be one or more of the following: (i) insolvency in that the assets of the association are less than its obligations to its creditors and others, including its members; (ii) substantial dissipation of assets or earnings due to any violation or violations of law, rules, or regulations, or to any unsafe or unsound practice or practices; (iii) an unsafe or unsound condition to transact business . . . . The Board shall have exclusive power and jurisdiction to appoint a conservator or receiver.
The Bank Board, an independent federal agency, 12 U.S.C. § 1437, is charged by Congress with the administration of the HOLA, as amended, 12 U.S.C. §§ 1461-70, and Title IV of the NHA, 12 U.S.C. §§ 1724-50. The Bank Board is the operating head of FSLIC, which insures and regulates eligible state and federal savings associations pursuant to Sections 402 and 403 of the NHA, 12 U.S.C. §§ 1725(a), 1726. Congress gave the Bank Board broad authority to regulate insured institutions in order to protect the FSLIC from the risks of business failures. Haralson v. FHLBB, 837 F.2d 1123, 1127 (D.C. Cir. 1988); Woods v. FHLBB, 826 F.2d 1400, 1411 (5th Cir. 1987), cert. denied, 485 U.S. 959, 108 S. Ct. 1221, 99 L. Ed. 2d 422 (1988). If, in the opinion of the Bank Board, a ground for the appointment of a conservator or receiver exists, the Bank Board is authorized to appoint ex parte, and without notice, a conservator or receiver. Section 5(d)(6)(A) of the HOLA, 12 U.S.C. § 1464(d)(6)(A). Once the Bank Board has determined to appoint a conservator or receiver, the procedure for judicial review of that determination is governed solely by Section 5(d)(6)(A) of HOLA, 12 U.S.C. § 1464(d)(6)(A).
The statute directs the reviewing court to ". . . upon the merits dismiss such action or direct the Bank Board to remove such conservator or receiver." 12 U.S.C. § 1464(d)(6)(A). Some courts construing these provisions have felt that review under this statute is limited to the administrative record compiled by the Bank Board and have required the association to prove that the Bank Board's appointment of a conservator or receiver was arbitrary or capricious. Woods, 826 F.2d at 1408-09; Guaranty Savings & Loan Ass'n v. FHLBB, 794 F.2d 1339, 1342 (8th Cir. 1986); San Marino Savings & Loan Ass'n v. FHLBB, 605 F. Supp. 502, 508 (C.D. Cal. 1984); Washington Federal Savings & Loan Ass'n v. FHLBB, 526 F. Supp. 343, 350-54 (N.D. Ohio 1981). Others have suggested that the statute seems to require an exercise of de novo jurisdiction. Telegraph Savings & Loan Ass'n v. FSLIC, 564 F. Supp. 862, 869-70 (N.D. Ill. 1981), aff'd sub nom., Telegraph Savings & Loan Ass'n v. Schilling, 703 F.2d 1019 (7th Cir.), cert. denied, 464 U.S. 992, 104 S. Ct. 484, 78 L. Ed. 2d 681 (1983); see also Fidelity Savings & Loan Ass'n v. FHLBB, 540 F. Supp. 1374, 1377 (N.D. Cal. 1982), reversed, 689 F.2d 803. In Telegraph, after taking this position, the court ultimately decided that to prevail, the association would be required to demonstrate that the financial projections relied upon by the Bank Board were unreasonable. 564 F. Supp. at 874.
Collie v. FHLBB, 642 F. Supp. 1147 (N.D. Ill. 1986), construed the statute to require that the court satisfy itself that the association has had a meaningful opportunity to make a case in opposition to the appointment at some point prior to the appointment. If it did not, the Court should provide that opportunity. Id. at 1152. Under the Collie analysis, the Bank Board bears the initial burden of showing a reasonable factual basis for its conclusion that any one of the statutory grounds existed. If the evidence is conflicting, the Court must determine whether there were facts from which the Bank Board reasonably could have concluded that one or more of the grounds existed. If, upon the Court's review of the administrative record and any facts proffered by plaintiff in an action filed pursuant to 12 U.S.C. § 1464(d)(6)(A), the Court concludes that the Board could reasonably have formed the opinion that one or more of the grounds set forth in 12 U.S.C. § 1464(d)(6)(A) existed, then the Court should dismiss the action brought by the association to remove the conservator or receiver. Collie, 642 F. Supp. at 1152; see also Woods, 826 F.2d at 1406; Biscayne Federal Savings & Loan Ass'n v. FHLBB, 720 F.2d 1499, 1503 (11th Cir. 1983); cert. denied, 467 U.S. 1215, 104 S. Ct. 2656, 81 L. Ed. 2d 363 (1984).
The issue, regardless of process, becomes whether the Bank Board had a reasonable factual basis for its opinion that one or more of the statutory grounds existed for the appointment of a conservator or receiver. Thus, the ultimate question is whether one or more of the statutory grounds existed at the time of the appointment of the conservator or receiver. After careful consideration, the Court concludes that the exercise of discretion by the Bank Board to appoint a conservator or receiver for a federally insured association is a determination reviewable under the arbitrary and capricious standard.
The administrative record was admitted in evidence as in other administrative cases because a reviewing court should start with the record before the agency. Camp v. Pitts, 411 U.S. 138, 142, 36 L. Ed. 2d 106, 93 S. Ct. 1241 (1973). Plaintiffs' assertion that the record is not "an administrative record" because it is not the result of an adversarial "hearing" is not controlling or supported. In this case, the Bank Board properly compiled an administrative record that clearly demonstrates that it gave a fair and reasoned consideration to the relevant factors before determining that all three of the statutory grounds for appointment of a conservator existed. The administrative record constitutes the basis for the Bank Board's action.
The opportunity afforded by Section 5(d)(6)(A) of the HOLA, 12 U.S.C. § 1464(d)(6)(A), to file an action in district court satisfies the constitutional concern occasioned by the lack of an opportunity to be heard prior to the appointment of a conservator or receiver. Fahey v. Mallonee, 332 U.S. 245, 91 L. Ed. 2030, 67 S. Ct. 1552 (1947). After review of the factual basis for the Bank Board's action upon either the administrative record or on the administrative record and the trial record as here, plaintiffs will have had their day in court. Due process requires no more.
A federally-insured association is insolvent if its assets are less than its liabilities to creditors and others, including its members. Based upon the facts found herein, the Bank Board's determination that both Mercury and Milam were insolvent on March 14, 1986, is amply supported in the administrative record and such finding is not arbitrary and capricious. A federally-insured association has suffered a substantial dissipation of assets or earnings due to a violation or violations of law, rules, or regulations or to an unsafe or unsound practice or practices, within the meaning of 12 U.S.C. § 1464(d)(6)(A)(ii), when its assets or earnings have been adversely affected to a significant degree as a result of such a violation or unsound practice. Based upon the facts found herein, the Bank Board's determination that Mercury and Milam had suffered a substantial dissipation as of March 14, 1986, is amply supported in the administrative record and is neither arbitrary nor capricious. An association is in an unsafe and unsound condition to transact business, within the meaning of 12 U.S.C. § 1464(d)(6)(A)(iii), when it is in a weakened financial condition and is controlled by individuals or management who have engaged in a pattern of regulatory violations or unsafe and unsound practices and who are unwilling or unable to conform to applicable rules or regulations, supervisory directives or safe and sound practices. Woods, 826 F.2d at 1410. The Court concludes from the facts found that the repeated insider transactions, the modification and extension or problem loans, and the lack of confidence in the management of the associations all support the determination of the Bank Board that Mercury and Milam were in an unsafe and unsound condition to transact business as of March 14, 1986. The Bank Board's conclusion that an association is in an unsafe and unsound condition to transact business is entitled to great weight. Collie, 642 F. Supp. at 1154; San Marino, 605 F. Supp. at 509.
The Court, based on the Administrative Record and after considering the evidence adduced by plaintiffs and defendants, concludes that there was a reasonable basis in fact for the Bank Board's determinations regarding each of the grounds enumerated in Section 5(d)(6)(A)(i)-(iii) of the HOLA, 12 U.S.C. § 1464(d)(6)(A)(i)-(iii), and that the Bank Board's decision to appoint the FSLIC as conservator for Mercury and Milam was neither arbitrary nor capricious within the meaning of the APA, 5 U.S.C. § 706(2)(A). Viewing the Bank Board's factual determinations, coupled with all the evidence produced during the trial, and reviewing it under the " substantial evidence" standard, the result is identical. Thus, the Court concludes as a matter of law that the Bank Board has met its burden of proof by demonstrating that the statutory grounds to impose a conservator upon the Associations were met.
In view of the foregoing findings of fact and conclusions of law, judgment will be entered dismissing plaintiffs' action as directed by Section 5(d)(6)(A) of the HOLA, 12 U.S.C. § 1464(d)(6)(A).
NORMA HOLLOWAY JOHNSON
UNITED STATES DISTRICT JUDGE
DATE: March 30, 1989
ORDER AND JUDGMENT - March 30, 1989, Filed
This action came on for trial, and the issues having been duly tried, and the Court having rendered its opinion in the accompanying Memorandum Opinion, it is this 30th day of March, 1989,
ORDERED that judgment be, and hereby is, entered in favor of defendants against plaintiffs; and it is further
ORDERED that the claims of the plaintiffs against the defendants be, and hereby are, dismissed with prejudice.
NORMA HOLLOWAY JOHNSON
UNITED STATES DISTRICT JUDGE
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