WASHINGTON -- A U.S. Court of Appeals panel has ruled that a North Carolina thrift holding company can't avoid recapitalizing its failed savings and loan subsidiary by declaring bankruptcy.
The decision is a big victory for the Office of Thrift Supervision, which is fighting five to 10 similar bankruptcy filings.
The three-member panel, seated in Richmond, Va., unanimously affirmed the Resolution Trust Corp. and the Office of Thrift Supervision position that Firstcorp Inc. in Raleigh, N.C., must either liquidate itself under Chapter 7 or pay $45 million to recapitalize First Federal Savings and Loan Association of Raleigh, which failed last Dec. 7.
The appeals decision reversed a bankruptcy court decision in First Federal's favor.
In their opinion, the appeals panel wrote that Congress, in the Thrift and Bank Fraud Act of 1990, sought to prevent institution-affiliated parties from using bankruptcy to evade commitments to maintain capital. The judges noted that the provision requires a bank or thrift to "immediately cure any deficiency."
Firstcorp argued that the judges' interpretation was wrong because it is inconsistent with other provisions of the bankruptcy code and that the law cannot be interpreted as requiring a "cure immediately" upon a Chapter 11 filing.
"We find this argument unpersuasive," wrote Judge J. Harvie Wilkinson.
Industry experts said the decision will make it more difficult for S&L holding companies to skirt capital maintenance agreements with the OTS.
"If this case is followed, Chapter 11 is not going to be much of an option," said Lawrence Peitzman, a bankruptcy lawyer with Morrison & Foerster.
Arch E. Lynch, an attorney with the law firm of Poyner & Spruill, which represents Firstcorp, said they are "disappointed" with the decision, and that the S&L is reviewing its options. He said Firstcorp does not have $45 million to make up the capital deficiency at the Raleigh thrift.
Firstcorp acquired the Raleigh S&L in 1985, along with First Federal Savings and Loan Association of Durham, and agreed to keep both of them in capital compliance, according to the court document.
In January 1990, the Raleigh S&L asked the OTS for forbearance because its capital base was shrinking. The request was denied. By March 1990, the S&L was out of capital compliance. Firstcorp didn't infuse capital into the S&L, and by September the holding company's capital obligation was $45 million.
In November, the OTS filed a cease and desist order against Firstcorp, and initiated an administrative proceeding against the holding company for failing to maintain the S&L's capital base. Firstcorp sued to stop the agency from enforcing the cease and desist order and filed for Chapter 11 in bankruptcy court.
On Dec. 7, the OTS appointed the RTC as receiver for the Raleigh S&L.