Opinion ID: 547464
Heading Depth: 2
Heading Rank: 1

Heading: Bank Board's Denial of Charter Federal's Conversion Application

Text: 38 Title 12 of the United States Code, section 1725(j)(2) (1989), states that any aggrieved person may obtain review of a final action of the Federal Home Loan Bank Board ... which ... disapproves a plan of conversion ... by complying with the provisions of subsection (k) of section 1730a of this title.... Section 1730a(k) provides: 39 Any party aggrieved by an order ... may obtain a review of such order by filing in the court of appeals of the United States for the circuit in which the principal office of such party is located, ... within thirty days after the date of service of such order, a written petition praying that the order ... be modified, terminated, or set aside.... Upon the filing of such petition, such court shall have jurisdiction, which upon the filing of the record [by the Bank Board] shall be exclusive, to affirm, modify, terminate or set aside, in whole or in part, the order.... 40 The Bank Board's denial of Charter Federal's conversion application was a final action, 82 and Charter Federal complied with the requirements of 12 U.S.C. Sec. 1730a(k). The Eleventh Circuit Court of Appeals is the circuit in which Charter Federal's principal office is located. The Bank Board's order denying Charter Federal's conversion application was published in the Federal Register on August 11, 1989, and Charter Federal filed its petition for review within thirty days of publication, on September 11, 1989. Therefore, we have jurisdiction to review the Bank Board's denial of Charter Federal's application.
41 Our review of the Bank Board's final decision to deny Charter Federal's conversion application is governed by the Administrative Procedure Act, 5 U.S.C. Sec. 701 et seq. 83 The Administrative Procedure Act requires that the reviewing court hold unlawful and set aside agency action, findings, and conclusions found to be--arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. 5 U.S.C. Sec. 706(2)(A). This deferential standard presumes the validity of the agency action and limits the reviewing court to a determination of whether the agency has 'considered the relevant factors and articulated a rational connection between the facts found and the choices made.'  Manasota--88, Inc. v. Thomas, 799 F.2d 687, 691 (11th Cir.1986) (quoting Baltimore Gas & Electric Co. v. Natural Resources Defense Council, Inc., 462 U.S. 87, 105, 103 S.Ct. 2246, 2256, 76 L.Ed.2d 437 (1983)). This standard reinforces the integral role the Bank Board plays in the conversion process.
42 By regulation, the Bank Board has determined that no voluntary conversion application will be approved unless, at a minimum, the converting association is insolvent under GAAP and the Bank Board is convinced that the proposed conversion is in the best interests of and does not present the potential for injury to the converting association, its members or the FSLIC. After examining Charter Federal's conversion application, the amendments to its conversion plan, and all of the supporting documents, the Bank Board concluded that Charter Federal did not meet either of these eligibility requirements. Consequently, the Bank Board denied Charter Federal's conversion application. 43
44 Although the Bank Board concedes that Charter Federal is technically GAAP insolvent, the Bank Board determined that Charter Federal did not meet the voluntary conversion insolvency criterion. 84 The Bank Board found Charter Federal's technical GAAP insolvency to be artificial, not an accurate reflection of Charter Federal's net worth, and purposely maintained by the insiders to qualify for a voluntary conversion. 85 After examining the true value of Charter Federal's Freddie Mac stock, the Bank Board concluded that upon liquidation Charter Federal would have significant realizable net equity. 86 Accordingly, the Bank Board decided that it was appropriate to consider unrealized Freddie Mac stock gains when determining whether Charter Federal was insolvent. 87 Due to these unrealized gains, the Bank Board found that Charter Federal was not insolvent for voluntary conversion purposes. 88 45 Charter Federal claims to be GAAP insolvent in accordance with the voluntary conversion eligibility requirement, and turns to the language of the Bank Board's regulations for support. These regulations provide that a converting association is GAAP insolvent when its liabilities exceed its assets, as calculated under generally accepted accounting principles on a going concern basis.... 12 C.F.R. Sec. 563b.24(a) (1989). 46 We agree with Charter Federal that it does meet the voluntary conversion requirement of GAAP insolvency. According to the plain meaning of the words of the Bank Board-drafted regulation, Charter Federal is GAAP insolvent. The regulation does not require insolvency on a liquidation basis; it refers to a going concern basis. Neither does the regulation mention any situations in which departure from GAAP for insolvency determinations would be appropriate. Charter Federal's liabilities do exceed its assets, calculated according to GAAP on a going concern basis. Therefore, we set aside the Bank Board's finding of Charter Federal's solvency because [t]he failure of an agency to comply with its own regulations constitutes arbitrary and capricious conduct. Simmons v. Block, 782 F.2d 1545, 1550 (11th Cir.1986). In making this determination, we do not consider whether the drafters intended to exclude artificially maintained GAAP insolvency because where the language selected by the drafters is clear and unequivocal, the courts are bound to give effect to the plain meaning of the chosen words and no duty of interpretation arises. KCMC, Inc. v. FCC, 600 F.2d 546, 549 (5th Cir.1979). 89 47
48 Although GAAP insolvent, Charter Federal may not undergo a voluntary conversion unless it persuades the Bank Board that its proposed conversion transaction taken as a whole is in the best interests of and does not present the potential for injury to, the converting institution, its depositors and the FSLIC. 12 C.F.R. Sec. 563b.26(b)(3) (1989). The Bank Board has determined that Charter Federal's proposed conversion does not meet this standard. This determination is based on three Bank Board findings: 1) the proposed conversion would not infuse appropriate capital into Charter Federal; 2) the conversion insiders would reap tremendous windfall profits; and 3) the proposed conversion plan discourages Charter Federal members from becoming shareholders in the converted association. After a thorough examination of the administrative record and for the reasons discussed below, we agree with the Bank Board, and hold that the Bank Board acted within its discretion in concluding that the proposed conversion would not be in the best interests of and does present the potential for injury to Charter Federal, its members and the FSLIC. 49 Charter Federal's final plan of conversion provided for the sale of 150,000 shares of common stock in the converted association, at a price of $50 per share, for an aggregate price of $7.5 million. This $7.5 million figure was not based on an appraisal of Charter Federal's market value. Charter Federal has unrealized gains, resulting from the market value of its Freddie Mac stock, of more than $50 million, which are not reflected in this $7.5 million price. Therefore, Charter Federal would be selling more than $50 million of assets for only $7.5 million. This transaction would obviously not be in the best interests of the association, its members or the FSLIC, but only in the best interests of those who purchased large amounts of Charter Federal stock, i.e., the insiders. 50 The Bank Board believes that a standard conversion, rather than the proposed voluntary conversion, would infuse a great deal more than $7.5 million into Charter Federal. 90 The aggregate price of conversion stock in a standard conversion reflects the actual value of the converting association, based on an independent appraisal, and would, therefore, take into account the market value of Charter Federal's Freddie Mac stock. This greater infusion of capital would clearly benefit Charter Federal, its members and the FSLIC. 51 Charter Federal claims that it was advised by investment banking firms that a standard conversion would not be a viable option. However, as pointed out by the Bank Board, this investment firm analysis was conducted long before the filing of the final amendment to the conversion plan, and does not reflect the later appreciation of Freddie Mac stock. 91 The Bank Board also expressed its belief that a standard conversion would be feasible for Charter Federal. 92 On this issue, we respectfully defer to the Bank Board's judgment, and suggest to Charter Federal that a standard conversion, under the guidance of the Bank Board, might be appropriate. A properly conducted standard conversion would ensure that Charter Federal receives full value for its stock, and would preclude the insider windfall profits that were the Bank Board's second major concern with Charter Federal's proposed conversion. 93 52 Charter Federal's plan of conversion, as finally amended, provides for distribution of the converted association's shares. Under the plan, the insiders are entitled to at least 35% of the shares, and are not subject to the 7,500 shares (5% of the total offered) per person limit imposed on the members. As stated above, Charter Federal has an intrinsic value of more than $50 million, which will be purchased, according to this plan, for only $7.5 million. Therefore, the insiders will be entitled to at least 35% of this tremendous gain, and, in light of the fact that the plan discourages member participation, as will be discussed infra, probably a great deal more. There appears to be no reason why the insiders are entitled to purchase so many of the association's shares and to receive such a large windfall, especially since Charter Federal, not the insiders, has been paying all of the costs associated with the proposed conversion. 94 Through this plan of conversion, the insiders have guaranteed themselves the right to a tremendous windfall. 53 The insiders claim that they do not intend to strip Charter Federal of its assets, namely the true value of the Freddie Mac stock. However, the insiders collectively are to purchase at least 52,500 shares, at a cost of $2,625,000. 95 To pay for their shares, each insider has arranged for a bank to finance 100% of his or her share purchase. The insiders will be paying for their shares with borrowed money, putting up no money of their own. After examining the financial statements submitted by the insiders, we agree with the Bank Board that these insiders probably could not afford to repay or even carry this debt unless they received substantial dividends or other such payments from Charter Federal. This places a tremendous burden on Charter Federal, and could weaken its financial condition to the detriment of Charter Federal, its members and the FSLIC. Again, the insiders alone would benefit. 54 Charter Federal's initial plan of conversion provided that the insiders were to be the sole purchasers of Charter Federal stock. After this was negatively reviewed by the Bank Board, Charter Federal amended its plan to allow its members to purchase up to 65% of the shares. However, no member would be allowed to purchase more than 7500 shares, i.e., 5% of the total offering, and many restrictions were placed on member subscriptions. Each member had to subscribe for a minimum of 10 shares, for an aggregate purchase price of $500, which had to be paid in cash. No provisions were made to allow members to withdraw this money from their accounts at Charter Federal without incurring early withdrawal penalties. The offer was only to be open for 20 calendar days, during which time members had to read the offering circular, assimilate its information, accurately complete and return the subscription agreement, and come up with at least $500 cash. 96 55 These conditions illustrate that not only did the conversion plan place a limit on the amount of shares for which any one member could subscribe, but it also attempted to limit the total amount of member purchases. The reason for this is obvious: if the members of Charter Federal did not subscribe for their full allotment of 65% of Charter Federal shares, the remaining shares would be available for the insiders to purchase. This would, of course, increase the insiders' windfall profits as well as their control over Charter Federal. 56 It is evident why the Bank Board concluded that Charter Federal's proposed voluntary conversion would not be in the best interests of and does present the potential for injury to Charter Federal, its members and the FSLIC. 97 If the Bank Board had approved the voluntary conversion, Charter Federal would have received only $7.5 million in exchange for assets worth more than $50 million, and faced the likely post-conversion depletion of its assets. Charter Federal's members would not have received their fair share of the profits from the proposed conversion and the likely sale of Freddie Mac stock. The risk that Charter Federal would be in need of the FSLIC's assistance would also be increased. 57 All conversions are within the discretion of the Bank Board, and 58 the Bank Board [has] comprehensive authority over the conversions of federally-chartered insured savings and loan associations to the end that such transactions are accomplished in such a manner that protects the federal interest and those of the association, its depositors, investors and borrowers, and prevents any individual or group from obtaining a windfall.... 59 Craft v. Florida Federal Savings & Loan Ass'n, 786 F.2d 1546, 1551 (11th Cir.1986). Because voluntary conversions are allowed to take place without the approval of the converting association's members, the Bank Board places them under even greater scrutiny to protect against insider windfalls. In this case, the Bank Board used this authority wisely and protected the welfare of Charter Federal, its members and the FSLIC. Particularly in light of the recent history of the thrift industry, the Bank Board's exercise of discretion appears sound. 60