The Supreme Court has let stand a decision crippling efforts to recover money from investors who broke agreements to pump their own funds into failed thrifts.
The justices, without comment, refused to consider the Office of Thrift Supervision's appeal in United States v. Rapaport.
Banking attorneys praised the court's decision, saying it should permanently kill the OTS' effort to recoup hundreds of millions of dollars by enforcing net-worth agreements. These deals, which investors had to agree to in order to acquire a thrift in the 1980s, require purchasers of thrifts to use their own funds to maintain the institution's capital levels.
"This is good news," said Ronald Glancz, a partner at the Washington law firm Venable, Baetjer, Howard & Civiletti. "It means the OTS can't come back under these net-worth agreements and recover extraordinary amounts of money."
The Supreme Court's Jan. 16 decision means the interpretation of the U.S. Court of Appeals for the District of Columbia becomes the law of the land, said Frank Eisenhart of the Dechert, Price & Rhoads law firm.
That D.C. court ruled last year that the OTS had abused its power by ordering Robert D. Rapaport to pay millions of dollars to meet his obligation under a net-worth agreement.
The court said the OTS could move only against those thrift owners who recklessly disregarded the law or personally profited by signing the net- worth deal. Those are high hurdles for the agency to clear.
Mr. Eisenhart, who represented Mr. Rapaport in the case, said the decision will force the OTS to pursue these claims as breach-of-contract disputes. That will be tough, he said. Other courts already have found that the net-worth agreements are not binding contracts.
The case began when Mr. Rapaport signed a net-worth agreement in March 1985 after purchasing 70% of Great Life Savings Association of Palm Beach, Fla.
The agreement required him to maintain the thrift's capital levels for five years. The thrift, however, became undercapitalized in September 1989.
The OTS told Mr. Rapaport in November 1989 to infuse $106,000 into the thrift to rebuild its capital base. Mr. Rapaport, however, refused to pay. He told the agency on Nov. 30, 1989, that he didn't have the money.
Great Life's capital base continued to deteriorate, creating a $980,000 shortfall by December 1989. Mr. Rapaport still refused to pump money into the thrift.
The capital deficiency forced the OTS to place the thrift into receivership in 1990. It filed an administrative action against Mr. Rapaport seeking $1.4 million.
