WASHINGTON - A federal appeals court last week made it harder for the Office of Thrift Supervision to enforce capital infusion agreements made by buyers of troubled thrifts .
The U.S. Court of Appeals for the District of Columbia said July 11 that the agency cannot compel compliance unless it shows that the buyer has been "unjustly enriched."
The decision takes Robert D. Rapaport off the hook for a $1.9 million capital deficiency that caused Great Life Savings Association of Sunrise, Fla., to fail in 1990.
Before 1990, regulators required every purchaser of a thrift to guarantee that the institution would always be fully capitalized - even if that meant providing a fresh infusion of cash.
OTS officials declined to comment on the decision, other than to say any decision that imperils its ability to recoup funds increases the burden on the taxpayer.
In a related case, the same court ruled that the OTS could freeze - but not seize - the assets of New Jersey's Cityfed Financial Corp., even though regulators took over its thrift unit in 1989.
The judges said Cityfed, as the holding company, made a commitment to infuse capital as needed into City Federal Savings Bank of New Jersey. It violated that contract when it refused to use any of its $12.9 million in assets to plug a $118 million regulatory capital shortfall at the thrift.
The court rejected the company's argument that the OTS lost jurisdiction once City Federal failed. Rather, it said the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 gives the OTS broad powers to attack holding companies and thrifts.
"It makes no sense that Congress would have required the agency to choose between risking the financial well-being of the institution and using FIRREA's carefully considered statutory enforcement process to recover from those responsible for the institution's downfall," the court said.
Banking attorneys said the CityFed decision boosts the OTS' leverage in capital infusion cases because it can prevent the holding company from paying attorney fees.
But, they said the Rapaport decision makes it harder for the OTS to prevail against those defendants who insist on going to court.
"We lost the first battle but the war is not over," said Frank J. Eisenhart, a partner at Dechert, Price & Rhoads, who represented the defendants in both cases. "All this means is the assets will be frozen until the final adjudication of the case, and Rapaport makes it far more likely the final adjudication will go our way."
Former OTS Deputy General Counsel V. Gerard Comizio, now a partner at Thacher, Proffitt & Wood, said the individual cases aren't as important today because the OTS stopped using capital maintenance requirements.
But, he said the cases should remind the industry that the OTS has broad authority over thrifts and their holding companies. "Those are still pretty important messages," he said.