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OLYMPIC FED. S&L ASSN. v. DIRECTOR

March 21, 1990

OLYMPIC FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff,
v.
DIRECTOR, OFFICE OF THRIFT SUPERVISION, et al., Defendants


Royce C. Lamberth, United States District Judge.


The opinion of the court was delivered by: LAMBERTH

ROYCE C. LAMBERTH, UNITED STATES DISTRICT JUDGE

 Plaintiff Olympic Federal Savings & Loan Association ("Olympic") filed a motion on March 6, 1990, requesting that the court issue a temporary restraining order ("TRO") and a preliminary injunction ("PI") enjoining the Director of the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC") from appointing a conservator or receiver for Olympic. Plaintiff argues the following in support of its motion: first, that both M. Danny Wall, the previous Director of OTS, and Salvatore R. Martoche, the current Acting Director of OTS, were unconstitutionally appointed and therefore have no legal authority to appoint a conservator or receiver; second, that the regulations issued by OTS changing the capital requirements for savings and loans ("S & Ls") were issued in violation of the Administrative Procedure Act's notice and comment requirements and therefore cannot serve as the basis for appointing a conservator or receiver; and third, that the grounds for appointing a conservator or receiver do not exist until the FDIC has reviewed and acted upon Olympic's request for assistance. The court need not address Olympic's second and third arguments at this time because, for the reasons discussed herein, the strong likelihood that Olympic will succeed on the merits of its Appointments Clause challenge alone entitles Olympic to the limited injunction it requests.

 I. Factual Background.

 In the late 1970's and early 1980's, the thrift industry was undergoing a crisis of unprecedented magnitude. High interest rates forced most thrifts to pay out more in interest on deposits than they earned on their portfolio of long-term, fixed-rate mortgages. This interest rate spread drove many thrifts into insolvency. Memorandum of Law in Support of Plaintiff's Motion for a Temporary Restraining Order and a Preliminary Injunction (filed Mar. 6, 1990) ("Plaintiff's Initial Memorandum"); see also Defendant FDIC's Memorandum in Opposition to Plaintiff's Motion for a Temporary Restraining Order at 2, 4-5 (filed Mar. 6, 1990) ("FDIC's TRO Opposition").

 The thrift industry was regulated at the time by the Federal Home Loan Bank Board ("FHLBB") and its insurance arm, the Federal Savings and Loan Insurance Corporation ("FSLIC"). Faced with a large number of failing thrift institutions, the FSLIC and FHLBB recognized that the FSLIC insurance fund would quickly be exhausted if the government continued to provide financial assistance to all troubled thrifts. Plaintiff's Initial Memorandum at 3; see also FDIC's TRO Opposition at 5. In mid-1981, the FSLIC and FHLBB therefore revised their policies and practices to prevent, or at least forestall, the exhaustion of the FSLIC insurance fund. Plaintiff's Initial Memorandum at 3. They began inducing and arranging supervisory mergers by providing assistance in the form of an intangible asset -- "supervisory goodwill" -- rather than in the form of cash. Id.

 This was accomplished by allowing thrifts to account for mergers using the "purchase method" of accounting. Id. Under this method, the book value of the assets and liabilities of an acquired thrift were adjusted ("marked to market") to their fair market value at the time of the acquisition. Id. at 4. The excess in the cost of the acquisition (including any liabilities assumed by the acquirer) over the fair market value of the acquired assets was then separately recorded on the acquiring thrift's books as "goodwill" -- an intangible, non-earning asset subject to amortization on a straight-line basis over as many as 40 years. Id. FHLBB's regulations governing the minimum capital requirements for FSLIC-insured thrifts allowed thrifts to include "supervisory goodwill" in capital. Id. at 4-5.

 Olympic is the product of a number of mergers consummated between 1982 and 1984. Id. at 7-13. Olympic booked more than $ 160 million in supervisory goodwill as a result of these mergers. Id. at 13. After the mergers had been completed, Olympic's tangible capital level was a negative $ 140 million, or negative 25.75 percent of total assets. Id. at 14. Since 1984, Olympic has amortized more than $ 43 million of its supervisory goodwill. Id.

 The thrift industry's problems did not disappear when interest rates began declining in late 1982. Indeed, when President Bush took office in January of 1989 the S & L industry remained in a "crisis" situation. President Bush made the S & L crisis a top priority of his new administration. FDIC's TRO Opposition at 5. He submitted to Congress a bill proposing a major restructuring of the way in which the federal government regulates the savings and loan industry. The bill was approved by Congress and on August 9, 1989, President Bush signed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") into law. Plaintiff's Initial Memorandum at 15.

 FIRREA provides that the Director of OTS shall be appointed by the President, by and with the advice and consent of the Senate, for a term of five years. FIRREA § 301, 103 Stat. 278. FIRREA also provides that vacancies in the office of Director which occur before the expiration of a term shall be filled by the President, by and with the advice and consent of the Senate. Id. However, FIRREA contains a "grandfather" clause pursuant to which the Chairman of the FHLBB on the date of FIRREA's enactment was statutorily appointed OTS' first Director. Id. By operation of this provision, M. Danny Wall became OTS' first Director. Plaintiff's Initial Memorandum at 16.

 Under Mr. Wall's leadership, OTS promulgated new capital regulations in accordance with FIRREA's provisions. Id. at 19; FDIC's TRO Opposition at 8-9. The new capital regulations permit thrifts to include "supervisory goodwill" only to meet "risk-based" capital requirements and only in accordance with a phase-out schedule set forth in FIRREA. Plaintiff's Initial Memorandum at 20.

 Olympic does not comply with the new capital requirements. Id. at 23. It is currently operating subject to a number of business restrictions imposed by OTS. Id. at 24. Moreover, because Olympic does not meet the new capital requirements, the Director has statutory authority to take over the thrift by appointing a conservator or receiver and, if necessary, to direct that person to liquidate the thrift. Id.

 Recognizing the threat to its continued operations and believing that various statutory, constitutional and other grounds existed upon which it could challenge OTS' acts, Olympic filed its complaint in this case on March 1, 1990. Among other things, Olympic alleged that M. Danny Wall, then Director of OTS, had been unconstitutionally appointed. Complaint, at para. 61. Contemporaneously with filing its complaint, Olympic advised counsel for defendants that it intended to challenge the constitutionality of Mr. Wall's appointment. Supplemental Memorandum of Law in Support of Plaintiff's Motion for a Preliminary Injunction, at 2 (filed Mar. 9, 1990) ("Plaintiff's Supplemental Memorandum"). On March 5, 1990, Mr. Wall ceased to be Director of OTS and the President appointed Salvatore Martoche Acting Director of OTS pursuant to the Vacancies Act, 5 U.S.C. §§ 3345-49. OTS' TRO Opposition at 9.

 On March 6, 1990, after OTS had refused to assure Olympic that it would not appoint a receiver or conservator and had refused to agree to provide Olympic with notice of its intent to appoint a receiver or conservator, Olympic filed its motion for a TRO and for a PI. Plaintiff's Supplemental Memorandum at 2. Defendants argued in opposition that plaintiff's Appointments Clause challenge had been mooted by Mr. Wall's resignation and that, in any event, plaintiff was not entitled to the extraordinary relief it requested. At oral argument on its motion for a TRO, Olympic countered by arguing that Salvatore Martoche's designation as Acting Director under the Vacancies Act was improper, and that therefore Mr. Wall's resignation had not mooted its Appointments Clause claim. After considering the briefs filed on behalf of all parties and hearing oral argument on Olympic's motion, the court granted Olympic's request and enjoined the Acting Director of OTS from appointing a receiver or conservator for Olympic for ten days, unless he first provided the court and plaintiff's attorney with six hours' notice of his intent to appoint a receiver or conservator. On March 13, after further briefing by the parties, the court heard oral argument on Olympic's motion for a preliminary injunction. For the reasons discussed herein, and pursuant to an order issued this date, the court now grants Olympic's motion for a preliminary injunction prohibiting the Acting Director of OTS or any officer at OTS from appointing a receiver or conservator for Olympic until a new Director of OTS has been nominated by the President and confirmed by the Senate.

 II. Analysis.

 A. Ripeness, Standing, and Jurisdiction.

 Before the court can reach the merits of Olympic's claim, it must decide whether Olympic's claim is ripe, whether Olympic has standing to challenge the appointments of Mr. Wall and Mr. Martoche, and whether FIRREA precludes this court from hearing Olympic's case.

 1. Ripeness.

 Defendant OTS asserts that the Acting Director has not made any decision to appoint a receiver or conservator for Olympic. Indeed, according to OTS it is possible that the Director will never decide to appoint a receiver or conservator for Olympic. As a result, OTS contends, Olympic's challenge is premature. *fn1"

 The court can not reasonably conclude that plaintiff's harm is not sufficiently imminent and concrete to make its claim ripe. "Both the fitness of the issues for judicial decision and the hardship to the parties of withholding court consideration" show that this case merits immediate review. Abbott Laboratories v. Gardner, 387 U.S. 136, 149 87 S. Ct. 1507, 18 L. Ed. 2d 681 (1967). On the claim currently before the court, Olympic does not challenge a regulation which may never be applied to it or ask the court to intervene in the Director's substantive decision whether or not to appoint a receiver or conservator for Olympic. *fn2" Rather, Olympic challenges the Acting Director's constitutional authority to act as Director and asks the court to enjoin him from taking a specific and apparently imminent act. The disagreement over Mr. Martoche's legal status is not "abstract," but focuses on legal issues which are clear and events which have already taken place. Cf. Abbott Laboratories, 387 U.S. at 148-49 (Supreme Court found case was ripe for adjudication because it presented a purely legal issue and because no further administrative proceedings were contemplated). In addition, plaintiff would suffer serious hardship if this court refused to hear its claim. OTS has made clear that -- absent an injunction -- at any moment and with no notice to either plaintiff or to the court it may appoint a receiver or conservator, instruct him or her to take control of Olympic's operations, and perhaps begin liquidating the thrift. Once a receiver or conservator is appointed, this court's power to enjoin the receiver or conservator's actions or to remedy any injury to Olympic would be severely restricted. See FIRREA § 301, 103 Stat. 292 (restricting court's authority to enjoin acts of receiver or conservator); Andrade v. Lauer, 729 F.2d 1475, 1496-97 (D.C.Cir. 1984) (de facto officer doctrine limits court's ability to undo prior acts). In light of these facts, the court concludes that Olympic's claim is ripe for judicial consideration. *fn3"

 2. Standing.

 Defendant FDIC next argues that Olympic lacks standing for two reasons: first, that Olympic lacks Article III standing because its injury -- if one exists -- will not be redressed by a decision that OTS' two Directors were unconstitutionally appointed; and second, that Olympic lacks prudential standing because it is not within the zone of interests that Congress intended a private party to assert.

 a. Article III Standing.

 In order to establish standing to challenge a particular act or policy, a litigant must "'show that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant,' and that the injury 'fairly can be traced to the challenged action' and 'is likely to be redressed by a favorable decision.'" Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472, 102 S. Ct. 752, 70 L. Ed. 2d 700 (1982) (citations omitted); Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 38, 41, 96 S. Ct. 1917, 48 L. Ed. 2d 450 (1976).

 According to the FDIC, Olympic fails to satisfy this test because plaintiff's injury, if any exists, is not likely to be redressed by a favorable decision on its constitutional claim. Defendant FDIC's Memorandum in Opposition to Plaintiff's Motion for a Preliminary Injunction at 3 (filed Mar. 13, 1990) ("FDIC's PI Opposition"). Defendant alleges that plaintiff's ultimate difficulty is its failure to meet legislatively mandated capital standards which must be imposed by whomever is at the head of OTS. Id. Defendant contends that "plaintiff's grievance, at bottom, is a fundamental quarrel with Congress' strict mandate of minimum thrift capital," and that "challenges to the specific officer entrusted to implement that mandate beg the question of the source of plaintiff's ultimate injury -- the United States Congress." Id. at 4. The FDIC concludes that because resolution of the Appointments Clause issue will not affect Olympic's failure to meet the capital requirements or relieve it from the threat of government intervention, Olympic lacks Article III standing.

 Defendant's argument ignores a critical element of plaintiff's claim. In the end, plaintiff clearly hopes to avoid having a conservator or receiver appointed for it. However, this is not all plaintiff seeks. Part of plaintiff's claim is that, under the Constitution and laws of the United States, it is subject to regulation only by individuals with legal authority to act. If this court attempted to appoint a conservator or receiver pursuant to FIRREA, plaintiff clearly could complain that this court has no authority to take such action, for even if grounds for appointment exist, this court simply has no right to exercise the Director's appointment power. This is the essence of plaintiff's constitutional claim: because Mr. Martoche was not properly appointed, he has no more right to exercise the Director's appointment powers than this court does. And this is the injury which a finding for plaintiff on its constitutional claim would redress: the injury which any citizen suffers when its government acts unconstitutionally against it. Even if a receiver or conservator ultimately is appointed, success on on plaintiff's constitutional claim would protect its right to demand that those who act against it on behalf of the government do so both lawfully and constitutionally. See Andrade, 729 F.2d at 1496 (in many procedural due process cases, graveman of complaint is that government must act in accord with due process principles when it takes action against citizens even if conformance may not change substantive outcome).

 The FDIC's argument is flawed for a second reason. According to defendant, it does not really matter who is in the office of Director: Congress has mandated minimum capital requirements, Olympic fails to meet those requirements, and therefore any person acting as Director is equally likely to appoint a conservator or receiver for Olympic. This argument asks the court to assume that both FIRREA's grant of discretion to the Director and the protections conferred by the Constitution are meaningless, for although both affect the process by which the outcome is reached, neither affects the ultimate outcome. The court can not and will not accept this proposition. The court can not accept it because the court is bound by the Court of Appeals' decision in Andrade, 729 F.2d at 1495-96, which explicitly rejects the claim that one cannot maintain an Appointments Clause challenge unless one can show that, had the Constitution's requirements been followed, the outcome would have been different. The court will not accept it because the court absolutely rejects the proposition that the procedural protections conferred by various statutes and by the Constitution are nothing more than hollow gestures at the appearance of democracy. The Appointments Clause subjects the selection process to public scrutiny, thereby affecting who takes office, how they perceive their function, and how they exercise their powers. See Andrade, 729 F.2d at 1495 and n. 35 (Appointments Clause gives Congress some control over Executive Branch, within framework of system of checks and balances).

 In light of the foregoing, the court concludes that a favorable decision on plaintiff's constitutional question will redress at least one of plaintiff's threatened injuries. The court therefore finds that plaintiff has Article III standing.

 b. Prudential Standing.

 Defendant FDIC also claims that this court should refuse to hear plaintiff's case on "prudential standing" grounds because plaintiff has not demonstrated that it is within the zone of interests that Congress intended a private party to assert. FDIC's PI Opposition at 4-8. It states that "Congress could not logically have intended to allow a private party to have standing to assure anything more than that the officer who acts in its regard acts with the independent authority of the Executive Branch and with prior concurrence of the Senate for this position." Id. at 5. The court rejects this claim as well.

 The Vacancies Act makes clear that Congress is concerned with more than ensuring that only confirmed officers act on behalf of the government. The Vacancies Act allows only confirmed officers to be designated as acting officials; however, it also places strict time limits on the life of a Vacancies Act designation. If the government were correct and the Vacancies Act sought only to assure that acting officers had undergone a confirmation process, presumably Congress would have written a much more generous time limit into the Vacancies Act.

 The government also claims that only legislators should be granted standing to challenge unconstitutional appointments. FDIC's PI Opposition at 7. This argument ignores the Constitution's basic purpose. Although the Senate clearly has a strong interest in protecting its role in the confirmation process, the Constitution was not written to protect the interests of the Senate, the Congress, the President, or any other branch or division of government. The Constitution and its system of checks and balances was written to protect the people. The restrictions it placed upon the branches' exercise of power were not designed to ensure the branches' interest in equal power, but to ensure that citizens would not find themselves governed by a single branch which had swept all the government's power into its domain. Thus, entities which will be directly harmed by unconstitutional appointments clearly fall within the zone of interests which the Appointments Clause and the entire system of checks and balances was designed to protect. *fn4" These entities are routinely permitted to challenge unconstitutional appointments. See Bowsher v. Synar, 478 U.S. 714, 721, 106 S. Ct. 3181, 92 L. Ed. 2d 583 (1986) (Union members who would not receive scheduled increase in benefits have standing to challenge Balanced Budget and Emergency Deficit Control Act of 1985 on ground that it includes unconstitutional appointment ...


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