1OTS, an office within the Department of the Treasury, is the

federal agency with primary responsibility for regulating savings

associations, or “thrifts.” 

UNITED STATES COURT OF APPEALS

For the Fifth Circuit

No. 00-20646

In the Matter of: DAVID J. FELT,

Debtor.

-------------------------------------------------

THE OFFICE OF THRIFT SUPERVISION,

Appellee,

VERSUS

DAVID J. FELT,

Appellant.

Appeal from the United States District Court

For the Southern District of Texas

June 21, 2001

Before JOLLY, DeMOSS, and STEWART, Circuit Judges.

DeMOSS, Circuit Judge:

I.

The Office of Thrift Supervision (“OTS”)1 brought this action

as an adversary proceeding in 1993 against Debtor David J. Felt

(“Felt”) in the Bankruptcy Court for the Southern District of
2The debt at issue is a final judgment (“the Reliance Judgment”)

for $4,271,120 plus interest and costs, entered against Felt in

favor of OTS. 

2

Texas. OTS sought a declaration that a debt reflected in a prior

district court judgment was non-dischargeable in bankruptcy as

provided by 11 U.S.C. § 523.2 In March 1997, the district court

entered a final judgment declaring a portion of the debt nondischargeable, and on appeal, a panel of this Court reversed in

part and remanded. See OTS v. Felt, No. 97-20418 (5th Cir. Mar. 1,

1999) (unpublished) (remanding to the district court for

consideration of any additional evidence Felt was denied the

opportunity to present when the district court granted OTS summary

judgment sua sponte and without giving ten days notice). Following

remand, the district court again entered a final judgment in favor

of OTS, declaring a portion of the debt non-dischargeable. Finding

no reversible error, we affirm.

II. BACKGROUND

A. The Reliance Judgment at Issue:

The following is an abbreviated summary of the facts which

gave rise to the entry of the 1991 judgment, the dischargeability

vel non of which, is the subject of this appeal. 

In December 1983, Felt purchased all of the issued and

outstanding stock of Bowie County Savings and Loan Association

(“Bowie”), in New Boston, Texas. Bowie was a state-chartered,

federally insured thrift regulated by the Federal Home Loan Bank
3

Board (“FHLBB”), the federal agency which preceded OTS as the

federal thrift regulator. Felt borrowed nearly $1.5 million for

the purchase of Bowie, part from Texas Investment Bank and the

remainder from American Guaranty, Inc. (“AGI”), which was Felt’s

wholly-owned corporation. 

Almost immediately after acquiring Bowie, Felt became the

president, CEO, Chairman of the Board, a director, and sole

stockholder of the institution. Felt also moved the thrift’s home

office to Houston and changed its name to Reliance. Based upon

Felt’s self-dealing and harm to Reliance through the indirect sale

of two loans by AGI (Felt’s company), to a subsidiary of Reliance,

the FHLBB’s enforcement office sought Felt’s consent to entry of an

order removing him as a Reliance director and officer and

prohibiting him from further involvement in the thrift’s affairs.

The FHLBB also sought a consent cease and desist order against

Reliance itself based on regulatory violations.

Though Felt claims he did it just to avoid spending millions

defending against the FHLBB, he consented to sell his 100% interest

in Reliance, and Reliance itself consented to a cease and desist

order. These agreements were memorialized in a Letter of Agreement

Felt executed on August 29, 1986, and a related Memorandum of

Clarification. Felt specifically agreed to either sell his

Reliance stock within six months, subject to FHLBB approval of the

transaction and offering materials, or to transfer his shares to a

trustee. The FHLLB agreed to keep the terms of the agreement
4

confidential, but Felt was not required to do so.

In the meantime, both Reliance and AGI were becoming

financially distressed. Reliance’s audited financial statements

from 1986 showed a net worth of only $96,936, far below regulatory

requirements. Similarly, AGI was insolvent by $614,824 as of

October 1986. Felt personally owed AGI over $2.1 million.

In September 1986, as president of AGI, Felt wrote to several

hundred AGI noteholders describing AGI’s financial health as poor.

Without disclosing his own personal debt to AGI, the letter implied

that AGI could not repay the investors’ notes. But Felt offered

these noteholders an opportunity to “exchange” their notes for

Reliance stock. Specifically, Felt’s letter stated:

[t]o try to solve AGI’s problems by reducing its

debt I will be preparing an offering circular for

my stock in Reliance Savings Association for review

by the Federal Home Loan Bank Board. Once the

review is completed, I plan to offer you the option

of exchanging your AGI note for Reliance Savings

stock.

Felt included with the letter a 72-page “preliminary offering

circular,” which portrayed Reliance’s condition as healthy. That

circular relied upon Reliance’s unaudited financial statements and

announced that as of June 1986, Reliance stakeholder equity

exceeded $1.3 million. The circular also noted that the “exchange”
3Push-down accounting permits an acquired thrift to push down the

value that is paid for the stock to the balance sheet, to the net

worth section. Even though the thrift itself does not receive the

money, the value the new owners pay for the stock establishes a new

basis for the thrift’s assets, liabilities, and equity. The books

show the excess of the purchase price over fair market value as the

intangible asset “goodwill.”

5

sale of stock would qualify for “push-down” accounting treatment,

so that stockholder’s equity in Reliance would rise to $4.5

million.3 

Felt admitted that he acted as the coordinator for the

offering circular and that he reviewed the preliminary circular

before causing it to be sent out. However, that circular failed to

disclose the following: 1) that Reliance was subject to a cease and

desist order; 2) that federal regulators were requiring Felt to

dispose of all of his stock and disassociate himself from Reliance;

and 3) that Specialty Finance Company, another Felt-owned entity,

would finance approximately 33% of the Reliance stock purchases on

favorable terms. Felt’s attorney advised him to make the fullest

disclosure possible in the circular and to obtain FHLBB approval of

the offering circular “as a hedge against claims of failure to

disclose material information or the making of misleading

statements,” but his lawyer never knew about the Letter of

Agreement and Memorandum of Clarification requiring Felt to sell

and disassociate from Reliance. Felt claims that he didn’t

disclose these matters because of the confidentiality clause.
6

On September 23, 1986, Felt’s attorney sent a Form OC

(Offering Circular) for the sale of Reliance stock to the FHLLB for

its review and approval. FHLLB’s legal staff responded to Felt’s

attorney that the circular was materially deficient and that it

could not even be reviewed without audited 1986 financial

statements with the auditors’ opinions. Felt’s lawyer informed

Felt of the FHLBB’s response. Felt contacted Reliance’s outside

auditors (the firm of Peat, Marwick et al.) and requested an

opinion for the offering documents. The auditors, however, refused

“to be associated with the circular at all.” Peat Marwick had been

auditing Reliance’s June 1986 consolidated financial statements and

issued a report explaining that it could not opine that the

statements were in accord with generally accepted accounting

principles because it had not been provided adequate information

from Reliance.

Felt continued with efforts to and did produce a final

offering circular, and that circular was never submitted to the

FHLBB for approval. On December 22, 1986, Felt mailed the

unapproved final offering circular to potential investors. The

final circular contained a disclosure statement to highlight

changes from the preliminary circular, and it informed potential

investors that Felt had now determined that the offering “is not

required to be approved by the FHLBB.” Felt informed the investors

that audited financial reports had been prepared but were not
7

included. Felt also stated in his circular that push-down

accounting was appropriate and that Reliance would have a positive

capital balance of $4.5 million after the sale.

On December 31, 1986, Felt sold all 450,000 shares of his

Reliance stock at $10 per share. Approximately 150 AGI investors

exchanged their notes for about 60% of the Reliance stock. A

second group of five investors paid cash, and the remaining eight

investors purchased roughly 33% of the remaining stock for no money

down with financing from Felt’s Specialty Finance Company, which

held the stock as collateral for the loans. 

As promised, Reliance’s initial financial statements after the

sale reflected a net worth of $4.5 million using push-down

accounting to account for the sale of the stock. Peat Marwick

later determined that push-down accounting was not appropriate in

this case under generally accepted accounting principles because

more than 10% of the stock was financed by Specialty Finance, the

seller’s entity, and thus was not at “arm’s length”. FHLBB

analysts also concluded that the transaction was not at arm’s

length because (1) the noteholders already had a business

relationship with Felt and it appeared they were “coerced” into

swapping debt for stock, and (2) AGI was an affiliate of the

seller. Felt conceded in his deposition that he “probably” knew

that 90% and that he “definitely” knew that a high percentage of

his Reliance stock had to be sold at arm’s length to qualify for

push-down accounting. The FHLBB ordered Reliance to reverse the
8

push-down accounting entries; thus, Reliance showed a negative net

worth of $5.6 million. Suffice it to say, Reliance was never able

to recover from such a huge insolvency, and in 1988, the FHLBB

placed the thrift into receivership.

In April 1988, the FHLBB enforcement office commenced a

recision action against Felt, seeking an injunction and an order

requiring Felt to rescind the 1986 sale of Reliance stock, and

alleging that Felt failed to obtain FHLBB approval of the sale in

violation of 12 C.F.R. § 563g.2 and that he used an offering

circular containing material misstatements and omissions in

violation of 12 C.F.R. § 563g.10. On July 24, 1989, the district

court, Judge Lynn Hughes presiding, found Felt liable because he

failed to obtain FHLBB approval for the offering circulars as

required by FHLBB regulations. After a hearing on damages, the

district court ruled that when he sold the Reliance stock, Felt

knew that Reliance would not be eligible to use push-down

accounting and that the stock would be worthless immediately after

the sale. On January 9, 1991, the district court entered the

Reliance Judgment awarding damages in the amount of roughly $4.2

million to OTS “in trust for individuals . . . who purchased

reliance Savings Association stock from David J. Felt during

December, 1986.” Felt appealed, and a prior panel of this Court

summarily affirmed.
9

B. Post-Reliance Judgment Facts:

On September 1, 1992, while OTS was still trying to collect on

the Reliance Judgment, Felt filed for bankruptcy under Chapter 11;

the case was later converted to a Chapter 7 case. On June 25,

1993, OTS filed a claim against Felt’s bankruptcy estate for

roughly $6.4 million (the Reliance Judgment plus costs and

interest). In July, OTS filed a complaint for determination of

non-dischargeability in the bankruptcy court, thus commencing this

case as an adversary proceeding under 11 U.S.C. § 523(c)(1). OTS

sought a declaration that the Reliance judgment is not

dischargeable under several subsections of 523, including (a)(4),

which bars the discharge of a debt resulting from “defalcation

while acting in a fiduciary capacity.” The parties filed

dispositive cross motions on the discharge issue. In November

1994, the district court withdrew the reference from the bankruptcy

court and assigned the case to Judge Lee Rosenthal, who on

September 25, 1995, issued an order disposing of various motions

including a motion brought by Felt for a determination that he was

not a fiduciary under §§ 523(a)(4) and (e), or the common law. The

district court ruled that Felt was a fiduciary under § 523(a)(4),
4According to § 523(e), “[a]ny institution-affiliated party of

a depository institution or insured credit union shall be

considered to be acting in a fiduciary capacity with respect to the

purposes of subsection (a)(4) or (11). 

10

the plain language of § 523(e),4 and the common law, and asked that

OTS submit a proposed final judgment or identify unresolved issues.

OTS submitted the following unresolved issues: (1) whether OTS

had standing to pursue the non-dischargeability action; and (2)

whether Felt’s breaches of fiduciary duty reflected a “willful”

neglect of duty as would be required for a finding of defalcation

under § 523(a)(4).

The district court, without further briefing, granted OTS’s

cross-motion for partial summary judgment, dismissing Felt’s

affirmative defense that OTS lacked standing. The court ruled sua

sponte that Felt’s acts were “willful” as a matter of law, and the

district court entered a final judgment on March 31, 1997. Felt

appealed, and a prior panel of this Court “reversed in part,

vacated in part, and remanded in part” as to the district court’s

sua sponte grant of summary judgment on the question of

willfulness. See OTS v. Felt, No. 97-20418 (5th Cir. Mar. 1, 1999)

(unpublished). On remand, OTS moved for summary judgment on the

issue of willfulness, and after full briefing, the district court

granted OTS’s motion on June 29, 2000. From the final judgment

entered thereupon, Felt timely appeals.
11

III. DISCUSSION

A. Whether Felt can relitigate whether he was a fiduciary,

whether he breached his fiduciary duties, and whether OTS

has standing to contest the dischargeability of a debt on

behalf of investors?

As a preliminary matter, OTS argues that certain issues in

this case have been resolved by the prior panel, and that

disposition is the law of the case. Specifically, OTS argues that

our prior panel necessarily had to have decided that Felt had a

fiduciary duty and breached the same to make relevant the

determination of willfulness. Had no such finding been implicitly

made by the prior panel, argues OTS, the issue of willfulness would

have been irrelevant and there would have been no reason to remand.

As OTS argues, the prior panel first accepted and affirmed, albeit

implicitly, the district court’s rulings that Felt was a fiduciary

and that he breached his fiduciary duties. 

It is clear from a reading of the prior panel’s opinion that

the only issue explicitly addressed was the district court’s sua

sponte grant of summary judgment on the issue of Felt’s

willfulness. The partial remand by the prior panel also was

explicitly linked to consideration of any additional evidence that

Felt produced “on the issue of willfulness.” Implicit in the prior

panel’s consideration on the issue of willfulness are the

prerequisite findings that Felt had and breached a fiduciary duty

to Reliance and the AGI investors. However, Felt argues that the

only “holding” of the prior panel is with respect to the procedural
12

defect in the district court’s grant of summary judgment sua sponte

on the issue of willfulness.

We find adequate support for OTS’s argument in our own

precedent. The law of the case doctrine applies not only to issues

decided explicitly, but also to everything decided “by necessary

implication.” See Browning v. Navarro, 887 F.2d 553, 556 (5th Cir.

1989). And, though not expressly addressed in an initial appeal,

those matters that were fully briefed to the appellate court and

were necessary predicates to the ability to address the issue or

issues specifically discussed are deemed to have been decided

tacitly or implicitly, and their disposition is law of the case.

In Knotts v. United States, 893 F.2d 758 (5th Cir. 1990), a

personal injury claim under the Federal Tort Claims Act, the

government asserted immunity as a defense. The district court

rejected immunity, found both the government and the plaintiff to

be negligent, and apportioned 100% of the fault to the victim. On

appeal, the government argued the district court’s error in

rejecting immunity. On appeal, this Court did not expressly

address the immunity argument, but went on to vacate the judgment

on other grounds, and it ordered reapportionment of fault. In a

second appeal, the government tried again to raise its immunity

defense, but we held that the immunity defense was foreclosed by

our decision in the prior appeal. See id. at 761. In so doing, we

stated that although not expressly addressed in the prior opinion,
13

the immunity defense was briefed and considered. Id.

Specifically, we stated “by remanding the case with instructions

that the district court apportion fault . . . we indicated, albeit

tacitly, our rejection of the United States’ claim of immunity.”

Id. 

Here, the issues of whether Felt was a fiduciary, whether Felt

breached his fiduciary duty, and whether OTS had standing to bring

the non-dischargeability action, were briefed, and are necessary

prerequisites to the relevance of considering the issue of

willfulness. Consequently, we find persuasive the argument that

the district court’s findings on those issues were implicitly

affirmed by the prior panel and are the law of the case. Our

review of Felt’s brief to our prior panel convinces us that those

issues were fully briefed to the prior panel and were, therefore,

implicitly affirmed. Consequently, we conclude that the law of the

case doctrine precludes reconsideration of the issues of Felt’s

fiduciary status, his breach of his fiduciary duties, or OTS’s

standing to pursue this action.

B. Whether the summary judgment evidence established as a

matter of law that Felt willfully engaged in defalcation

in breach of his fiduciary duties?

Here, Felt challenges the merits of the district court’s

conclusion that, based upon the undisputed summary judgment

evidence, Felt’s breaches of his fiduciary duties were willful and,

thus, constituted defalcation under § 523(a)(4). We review a
14

district court’s award of summary judgment de novo, applying the

same standards applicable in the district court. See Sherrod v.

American Airlines, Inc., 132 F.3d 1112, 1119 (5th Cir. 1998). And

we review the summary judgment evidence in the light most favorable

to the non-moving party, in this case Felt. See Melton v. Teachers

Ins. & Annuity Ass’n, 114 F.3d 557, 559 (5th Cir. 1997). Summary

judgment under Rule 56 of the Federal Rules of Civil Procedure is

thus appropriate only if

. . . the pleadings, depositions, answers to

interrogatories, and admissions on file, together

with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the

moving party is entitled to judgment as a matter of

law.

Fed. R. Civ. P. 56(c).

The central issue in this case boils down to whether Felt’s

breaches constitute defalcation for purposes of § 523(a)(4), in

which case, the debt at issue would be non-dischargeable in

bankruptcy. The defalcation determination turns on the issue of

whether Felt’s breaches were “willful.” See Moreno v. Ashworth,

892 F.2d 417, 421 (5th Cir. 1990) (stating that “defalcation is a

willful neglect of duty, even if not accompanied by fraud or

embezzlement”); see also Schwager v. Fallas, 121 F.3d 177, 184, 185

(5th Cir. 1997). This Court has described the “willful neglect” of

fiduciary duty as “essentially a recklessness standard.” Schwager,

121 F.3d at 185. Thus, willfulness is measured objectively by

reference to what a reasonable person in the debtor’s position knew
15

or reasonably should have known. See Roy v. Gravel, 143 B.R. 825,

828 (W.D. La. 1992), aff’d, 983 F.2d 1062 (5th Cir. 1993). The

objective standard charges the debtor with knowledge of the law

without regard to an analysis of his actual intent or motive. Id.

at 828.

i. Duty to Reliance

First, with respect to Felt’s fiduciary duty to Reliance, the

district court concluded that Felt breached his duties to Reliance,

not just in one, but in three ways, each of which independently

supports a finding of defalcation: (1) he willfully failed to

obtain FHLBB approval of his final offering circulars; (2) he

willfully drafted and used circulars that contained material

omissions; and (3) he willfully misrepresented that Reliance would

be able to use push-down accounting to create a positive net worth

after completion of the stock sale. For the reasons noted below

and for substantially the same reasons stated by the district

court, we find that there is no genuine dispute that the evidence

establishes Felt’s “willful” breach of the duty to Reliance.

FHLBB regulations explicitly require that offering circulars

be approved by the FHLBB. See 12 C.F.R. § 563g.2. As noted above,

as a fiduciary, Felt is presumed to know his legal obligations, but

beyond this fact, here, Felt had actual knowledge of the approval

requirement. The Letter of Agreement explicitly put Felt on notice

that in addition to requiring that he divest his interest in the
16

Reliance stock, he was to obtain approval of any offering circular

or supporting materials. His understanding of this fact is also

evidenced by the undisputed fact that he submitted his preliminary

circular to the FHLBB for approval. Despite his knowledge that he

needed approval, Felt nonetheless caused the final offering

circular to be mailed to potential investors without FHLBB

approval.

FHLBB regulations also contain an explicit requirement that

the offeror must make full and truthful disclosures in offering

materials. See 12 C.F.R. § 563g.10. Felt’s attorney testified

that he expressly informed Felt of this duty, and Felt admitted as

much when he stated that he reviewed the offering materials for

“accuracy.” Notwithstanding his understanding of this duty, Felt

falsely wrote that the final offering did not require FHLBB

approval. Additionally, the offering circulars failed to disclose

that Felt was required by the Letter of Agreement to dispose of all

of his Reliance stock, or that Reliance was subject to a cease and

desist order. 

Concomitant with the duty not to make material omissions is

the duty not to make material misrepresentations in offering

materials. See 12 C.F.R. § 563g.10. The evidence here reveals,

through his own testimony, that Felt was aware that in order to

qualify for push-down accounting, thus increasing Reliance’s paper

worth, more than 90% of the transactions would have to be “at arm’s

length.” In this case, a substantial majority of the stock sale
17

was not at arm’s length by virtue of the fact that more than 30% of

the stock was financed by Specialty Finance and that Felt acted as

the coordinator for the sales transaction while simultaneously

controlling Reliance, AGI, and Specialty Finance. The record

unambiguously establishes that, at the time he prepared and

distributed the final offering materials, Felt objectively knew or

should have known that the stock sale would not qualify for pushdown accounting and, thus, the stock would instantly be worthless

upon sale. This is probably the most egregious example of Felt’s

willful behavior which qualifies as defalcation within the meaning

of § 523(a)(4).

ii. Duty to AGI Investors

Finally and simply put, with respect to Felt’s duty to the AGI

investors, the record establishes that in addition to the material

misstatements and omissions made to the AGI noteholders (potential

investors), Felt utterly failed to disclose the personal benefits

he would obtain from the transaction. He also failed to disclose

to the potential investors that he personally owed AGI $2.1 million

($1.9 million of which was due the day after the stock sale), which

if paid off would have increased the solvency of AGI. Given the

aforementioned actual and imputed knowledge of his duty to make

full and truthful disclosures in his offering materials, these

misstatements and omissions demonstrate at a very minimum the

recklessness required for a finding of defalcation under
18

§ 523(a)(4).

IV. CONCLUSION

Having conducted a de novo review of this case and having

considered the parties’ respective briefing with the benefit of

oral argument, we find no reversible error. Accordingly, the

judgment of the district court is affirmed for the reasons stated

in the district court’s memorandum and order.

AFFIRMED.