Opinion ID: 211711
Heading Depth: 2
Heading Rank: 2

Heading: The SoCal Transaction

Text: 7 In 1986, the Individual Plaintiffs 1 responded to the government's solicitation of purchasers for the failing Southern California Savings and Loan Association (Old Southern). SoCal I, 52 Fed.Cl. at 545. The Individual Plaintiffs proposed to form and personally capitalize a holding company to be named SoCal Holdings, Inc. (SCH). Id. SCH would in turn purchase Old Southern and form a new savings and loan association. Id. Upon government approval, the new association, a wholly-owned subsidiary of SCH named Southern California Federal Savings and Loan Association (SoCal), would acquire all the assets and liabilities of Old Southern. Id. at 546. The government approved the acquisition proposal and, on April 30, 1987, a series of agreements were entered into to complete the transaction. 8 Three of those agreements/documents are most relevant to the current litigation. The Assistance Agreement was the primary document governing the transaction and it was entered into by SCH, as the acquirer of Old Southern, SoCal, and FSLIC. In conjunction with the execution of the Assistance Agreement, the FHLBB issued a Forbearance Letter addressed to Preston Martin as Chairman of the Board and Chief Executive Officer of SCH. The Forbearance Letter included the FHLBB's promise that SoCal could depart from GAAP in accounting for its capital credits and its supervisory goodwill. Finally, the Regulatory Capital Maintenance Agreement (RCMA) was entered into by SCH, the Individual Plaintiffs, SoCal, and the FSLIC. Section 1 of the RCMA required SCH to maintain the regulatory capital of SoCal at the level specified by the applicable regulations and stated that the FSLIC capital credit would be includable as capital in order to meet that requirement. The RCMA also obligated the Individual Plaintiffs to guarantee the performance of [SHC] and [SoCal] under § 1, provided that ... the personal obligations of the [Individual Plaintiffs] under said guarantees shall not exceed $5,000,000 in the aggregate. Execution of the RCMA was an express condition to FSLIC's obligations under the Assistance Agreement. 9 By 1989, SoCal's financial situation had improved greatly. SoCal II, 57 Fed.Cl. at 607. Its MACRO/CAMEL rating 2 had moved from a 4 to a 3. Id. Despite a tightening of the market, a decline in mortgage originations, and increased competition from other California thrifts, SoCal had grown from approximately $900 million at the time of the acquisition by SCH to approximately $2.3 billion by 1989. Id. 10 With the changes in capital requirements wrought by FIRREA, SoCal became a troubled institution. Id. at 608. After FIRREA took effect, SoCal's capital ratio dropped to 1.45%, substantially below its regulatory capital requirement, and its MACRO/CAMEL rating was dropped to a 4. Id. at 609. The Court of Federal Claims found that the drop in SoCal's regulatory capital negatively affected SoCal's retail and wholesale customer base, its long-term strategic plans, and its cost of acquiring operation capital. Id. at 610. 11 In an effort to comply with FIRREA, SoCal disposed of assets, which meant that it required less capital as a percentage of assets. Id. at 612. The thrift could not shrink fast enough, however, so it was forced to raise additional capital to become compliant. Id. In 1992, SCH issued $48 million in senior debt to Arbur, Inc. and two new investors. Id. at 614. In addition to receiving interest payments, Arbur and the new investors received shares of a newly-created Class A common stock and the original common stock, which previously had no class designation, was converted to Class B common stock. Id. The effect of the 1992 recapitalization was to dilute the ownership of the Individual Plaintiffs from 100% of the common stock before the transaction to 51.36% after the transaction. Id. The 1992 recapitalization brought SoCal into compliance under the FIRREA capital standards and raised its MACRO/CAMEL rating to a 3. Id. at 615. Following the consummation of this transaction, the government terminated the RCMA. Id. By November 1994, SoCal was again on the brink of failure, having been assigned a MACRO/CAMEL rating of 5. Id. at 616. The Court of Federal Claims found that SoCal's troubles were principally caused by FIRREA, in part because of the increasingly stringent capital requirements imposed as the act went fully into effect. Id. at 615. A second recapitalization was executed in June 1995, with the 1992 capital providers as the sole participating entities. Id. at 617. The senior notes issued in 1992 were returned to SCH and contributed to the capital of SoCal. Id. Additionally, the two outside investors from 1992 purchased $10 million in new debt, with an increasing interest rate. Id. SCH also issued a $2 million senior note to Arbur, Inc. Id. In equity, SCH cancelled for no consideration the original shares issued to the Individual Plaintiffs and exchanged the preferred stock issued in 1992 for common stock. Id. Finally, SCH issued three new series of preferred stock to the 1992 investors, of which all three series required quarterly dividend payments. Id. For the equity, SCH received $48.5 million. Id. As a result of this transaction, the ownership interest originally bargained for by the Individual Plaintiffs was extinguished. Id. 12 After the 1995 recapitalization, the health of SoCal gradually improved. The Court of Federal Claims found that as of December 31, 1996, [t]he effects of the Government's breach had thus been mitigated by the considerable efforts of the Institutional and Individual Plaintiffs and, of course, by the infusion of approximately $100 million in tangible capital. SoCal was finally out of the very deep hole it had been in for years. Id. at 618. 13