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GAUBERT v. GRAY

August 27, 1990

THOMAS M. GAUBERT, Plaintiff,
v.
EDWIN GRAY, et al., Defendants



The opinion of the court was delivered by: SPORKIN

 STANLEY SPORKIN, UNITED STATES DISTRICT JUDGE

 This matter is before the Court on defendants' Motion to Dismiss. After having reviewed defendants' motion, plaintiff's response thereto, and after having heard oral argument from the parties, this Court is prepared to rule on the Motion.

 I. BACKGROUND

 Plaintiff, formerly the largest single shareholder of Independent American Savings Association ("IASA"), a savings and loan located in Irving, Texas, initiated this action against officials of the Federal Home Loan Bank Board ("FHLBB"), the Federal Savings & Loan Insurance Corporation ("FSLIC"), and the Federal Home Loan Bank of Dallas, Texas ("FHLB-D") alleging constitutional and common law torts. Plaintiff is seeking $ 76 million in compensatory damages and $ 100 million in punitive damages.

 The defendants all of whom are being sued in their individual capacities, *fn1" include Edwin Gray, then-Chairman of the Bank of the Bank Board; Shannon Fairbanks, Chief of Staff and Executive Director; Norman Raiden, General Counsel; William Black, an Associate General Counsel and Deputy Director of FSLIC; William J. Schilling, Director of the Bank Board's Office of Examinations and Supervision; Rosemary Stewart, Director of the Office of Enforcement; Stephen Hershkowitz and Karen Bruton, both staff members in the Office of Enforcement; Louis V. Roy, Senior Vice President and Senior Supervisory Agent at the FHLB-D; Robert S. Bonchak, Vice President and Director of Supervision at FHLB-D; and Allen Dermody, Vice President and Director of Corporate Affairs at FHLB-D. Plaintiff also is suing certain yet to be identified Doe defendants.

 Plaintiff's complaint sets forth the following factual background: *fn2"

 In 1984, Investex Savings of Tyler, Texas ("Investex"), a FSLIC insured S & L, faced the possibility of financial collapse. FHLBB and Federal Home Loan Bank of Dallas ("FHLB-D") officials estimated that the failure of Investex would result in a $ 40 to $ 50 million loss to the FSLIC. Complaint para. 28. The officials with oversight responsibility for Investex set out to find a "a non-FSLIC-assisted solution" to the S & L's financial problems, i.e. a solution that would protect the assets of Investex depositors while not requiring the FSLIC to bailout the S & L. Id. P 29. One possibility the officials at the FHLB-D considered was merging Investex with another S & L. The primary candidate for such a merger was Independent American Savings Association ("IASA"), a FSLIC-insured thrift located in Irving, Texas. *fn3" Id. P 30.

 The controlling interest in IASA was held by Thomas Gaubert. Id. P 1. Mr. Gaubert had previously worked with FHLB-D officials in an attempt to rescue another failing Texas S & L and had expressed interest in participating in other S & L mergers. Id. PP 16-25; see also Transcript of Motion to Dismiss Hearing, Nov. 16, 1988 ("Transcript") at 17-18. *fn4"

 After an analysis of a possible Investex - IASA merger, the FHLB-D officials determined that IASA would have to grow if it was to successfully acquire and then support Investex. Complaint, para. 31. In particular, FHLB-D officials were concerned with IASA's ability to absorb Investex's losses. FHLB-D officials concluded that the growth could be accomplished if IASA purchased a number of branches of United Savings of Houston ("United"). Id. In September of 1984, based at least in part on the FHLB-D analysis and the information provided to IASA by FHLB-D, plaintiff concluded that the merger would succeed. Accordingly, IASA made an application for the acquisition of Investex and United. Complaint paras. 31-32; see also Transcript at 18.

 During the same time period and in connection with plaintiff's application to acquire Investex and United, Robert Salter, an analyst at FHLB-D, reviewed the merger proposal. It was Mr. Salter's conclusion that IASA could not absorb the losses of Investex and that the merger would not be advisable. Salter recommended to defendants Roy, Dermody and Bonchak that the IASA application be denied. Id. P 44. Further, Salter told William O. Churchill, who is not a party to this action, that the acquisition would result in the collapse of IASA. Salter's superiors, defendant's Roy and Dermody, did not follow Salter's suggestion. Neither Roy nor Dermody advised the plaintiff of Salter's analysis or their decision to reject it. Id. P 45.

 Defendant Roy discussed Salter's views with defendants Raiden, Schilling, Stewart and others. These defendants understood the risks involved, namely that the IASA-Investex merger might fail and oblige the FSLIC to incur a multi-million dollar loss. In an attempt to avoid this eventuality, defendants Raiden and Schilling directed Roy "to require Gaubert to guarantee the net worth of IASA . . . ." Id. P 46. Although requiring a guarantee is not the practice of the FHLBB, Defendant Roy erroneously indicated to plaintiff Gaubert that it was routine. Id. at P 48. Plaintiff agreed to the guarantee. Id. at P 49.

 About the same time the Investex and United acquisitions were being processed, certain of the defendants became aware of plaintiff's involvement in a loan transaction with an Iowa S & L. Id. at P 33. Apparently, the FHLBB Office of Enforcement intended to commence a formal investigation into the activities of the plaintiff in relation to the Iowa S & L. See Transcript at 23-26. In fact, Bonchak, Roy and other FHLBB officials had already recommended that plaintiff be removed permanently from IASA and the thrift industry. Complaint para. 41. This recommendation was not revealed to plaintiff. Id. P 42-43.

 Although several of the defendants believed the investigation should go forward, there was general agreement that an attempt should be made to prevent any investigation or FHLBB action from interfering with the acquisition of Investex. Of particular concern was the fact that a formal investigation of plaintiff or removal of plaintiff from the industry would scuttle the Investex acquisition. Complaint para. 34; see also Transcript at 24.

 In order to assure the successful completion of IASA's acquisition of Investex, "defendant Roy initiated and defendants Raiden, Schilling, Bonchak, Hershkowitz and Stewart . . . approved the creation of an unprecedented procedure." Complaint para. 35. Defendants Roy, Bonchak, Dermody and Hershkowitz suggested that "Gaubert temporarily remove himself from the day-to-day operations of IASA while the agency conducted an expeditious investigation of Gaubert's dealings with [the Iowa S&L]." Id. P 36. This arrangement came to be known as the "neutralization agreement" and was adopted in lieu of initiating a formal investigation or removal proceeding. Id. P 36-37.

 Unlike a formal proceeding, the neutralization agreement did not require that plaintiff be formally presented with specific charges; it did not place a burden upon the agency to prove grounds existed for removal; it did not afford the plaintiff a right to confront the evidence against him or to offer evidence of his own; and, it did not result in a final decision that could be reviewed by the agency and, ultimately, by a federal court. Id. P 37. Instead, Gaubert voluntarily removed himself from the operations of IASA. And, the defendants agreed that any investigation would be conducted expeditiously and the scope of the investigation would be limited to Gaubert's dealings with the Iowa S & L. Further, defendants agreed that if no wrongdoing came to light, the neutralization agreement would be terminated. Authority to terminate the agreement was vested solely with defendant Roy of FHLB-D. Id. PP 38-40.

 Plaintiff agreed to the neutralization agreement. Plaintiff also agreed to guarantee the net worth of IASA for the term of that agreement. Id. P 49. *fn5" The neutralization agreement was executed on December 18, 1984; the acquisition of the United branches occurred by the close of 1984; and the Investex - IASA merger closed in 1985. Id. P 50. However, once the neutralization agreement was executed, the defendants failed to honor its terms. In particular, defendants Raiden, Stewart, Bruton, and Roy failed to aggressively pursue the investigation so as to ensure that the process would proceed expeditiously. As a result of these delays, the "temporary" neutralization agreement was transformed into "a permanent removal of Gaubert from the thrift industry." Id. at PP 51-55.

 In the summer of 1985, defendants Bruton and Roy advised FHLBB officials that the investigation of the Iowa thrift did not uncover sufficient grounds for seeking the removal of Gaubert from the industry. Defendant Roy also advised Mr. Gaubert of this fact. Despite this conclusion, the defendants chose not to terminate the neutralization agreement. Instead, they decided to expand the scope of their investigation of Gaubert. Id. P 56. Such an expansion had the effect of permanently removing Gaubert from the management of IASA. Id. P 57.

 When Gaubert learned that the initial investigation had revealed no wrongdoing, he requested that defendant Roy terminate the agreement. Roy, although he acknowledged that there was no basis to institute formal removal procedures, refused to terminate the agreement. The basis for this refusal was that Roy had been instructed by defendant Stewart not to terminate the neutralization agreement. Id. PP 59-61.

 Even though the expanded investigation of Gaubert did not produce any evidence of wrongdoing, defendants Stewart, Bruton, Raiden, Roy, and others decided to pressure Gaubert into voluntarily removing himself from the thrift industry. Stewart advised Gaubert that she was convinced that he had violated the law and that he would continue to be investigated until she chose to initiate a formal removal proceeding. Defendants Stewart, Bruton, and Roy communicated to Gaubert that the only way for him to avoid an expansive investigation would be for him to voluntarily remove himself from the thrift industry. During this same time, bank board examiners began visiting officials at other savings and loans and advised them that Gaubert was the subject of an investigation. Id. PP 62-63. In December 1985, Gaubert signed an agreement to voluntarily remove himself permanently from IASA and any other FSLIC insured institution.

 Gaubert's removal from the management of IASA had a significant detrimental impact on the S & L's financial condition. Although the Investex merger resulted in a four-fold growth of IASA (from $ 300 million to $ 1.2 billion), the merger itself was not financially sound and the inability of Gaubert to be involved in the organizations management led to instability. Recognizing IASA'a problems, the FHLBB set out to find replacement officers and directors soon after Gaubert voluntarily and permanently removed himself from the picture. A management team was assembled but their efforts proved fruitless and in the summer of 1986 they announced that IASA was insolvent having a negative net worth of over $ 400 million. Id. PP 66-72.

 In the spring of 1986, plaintiff Gaubert learned for the first time that an internal FHLB-D analysis concluded that IASA would not be able to absorb the Investex losses. Gaubert made inquiries with the defendants to determine what they knew about this information. In addition, in the summer and fall of 1986, Gaubert brought his concerns about the Investex merger, the neutralization agreement, and change in IASA management to the attention of defendants Gray and Fairbanks. Gray and Fairbanks ...


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