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Lyons Savings and Loan Association v. Westside Bancorporation Inc.

decided: June 5, 1987.

LYONS SAVINGS AND LOAN ASSOCIATION, AN ILLINOIS ASSOCIATION, PLAINTIFF, AND ALABAMA FEDERAL SAVINGS AND LOAN ASSOCIATION, ET AL., INTERVENING PLAINTIFFS-APPELLANTS,
v.
WESTSIDE BANCORPORATION, INC., A DELAWARE CORPORATION, WESTSIDE FEDERAL SAVINGS AND LOAN ASSOCIATION, A WASHINGTON ASSOCIATION, ET AL., DEFENDANTS-APPELLEES



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 85 C 6501 -- James B. Moran, Judge.

Cummings and Flaum, Circuit Judges, and Eschbach, Senior Circuit Judge.

Author: Cummings

CUMMINGS, Circuit Judge

In 1983, Westside Federal Savings & Loan Association made a $35 million loan to Hanalei Development Corp. to finance the construction of condominiums in Hawaii. Westside subsequently sold participation interests in the loan to seven other savings and loan associations while retaining a twenty-percent interest in the loan. Each of the participants advanced their pro rate share of the monies due Hanalei under the loan participation agreement.

Under the terms of the agreement, Westside was designated as the "lead lender" for the loan participants and was authorized to exercise the powers, duties, and responsibilities attendant upon servicing and administering the loan. Paragraph 7 of the agreement gave Westside broad discretion in performing these tasks:

It is agreed that the exclusive right to decide how the loan shall be serviced and what to do and how to do it, when to approve assumptions or similar third party undertakings, when to accelerate the entire balance due on the loan for any reason permissible, when to foreclose or otherwise to acquire the property security and the manner thereof, whether or not to obtain a deficiency judgment, whether or not to bid in at a foreclosure sale and for how much, and how to administer any foreclosed or otherwise acquired real estate or other property, including maintaining, improving, or selling the same, is hereby vested in Seller [Westside], as trustee for all the owners of participation interests hereunder.

As lead lender, Westside held legal title to the loan as trustee for the other participants and was entitled to retain fees for servicing the loan in addition to any default penalties or late charges assessed against Hanalei.

On July 19, 1985, Lyons Savings & Loan Association, of Hinsdale, Illinois, and one of the seven loan participants, filed a complaint against Westside and eight individual principals of Westside in federal district court alleging numerous violations of the federal securities laws and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § § 1961-1968. The basis for the suit was Lyons' charge that Westside had breached the participation agreement by failing to disclose its purchase of an equity interest in the condominiums. Shortly thereafter, on August 30, 1985, the Federal Home Loan Bank Board declared Westside insolvent and pursuant to 12 U.S.C. § 1464(d)(6)(A) appointed the Federal Savings and Loan Insurance Corporation ("FSLIC") as receiver for Westside. The FSLIC was then substituted for Westside as a party to Lyons' action.

On September 25, 1985, six of the other loan participants filed an intervenors' complaint against the FSLIC as receiver for Westside and against the other eight defendants named in the Lyons suit. Their complaint sought a declaration that the intervening loan participants possessed the right to elect a new substitute lead lender, that the lead lender could be elected by the vote of a majority in interest of the participants, and that the new lead lender would have all of the powers, duties and responsibilities previously held by Westside. The intervenors sought no affirmative relief against the FSLIC as receiver or against the receivership estate but, as they concede, granting the declaratory judgment would necessarily mean removing the FSLIC as lead lender.

Pursuant to motion by the FSLIC, the district court dismissed both Lyons' and the intervenors' complaints against the FSLIC as receiver for Westside for lack of subject matter jurisdiction. 636 F. Supp. 576 (N.D. Ill. 1986). Relying on 12 U.S.C. § § 1464(d)(6)(C) and 1729(d), the court held that the claims against Westside set out in both Lyons' and the intervenors' complaints could not be judicially reviewed until after they had first been presented to the FSLIC pursuant to the administrative claims procedure established by the Federal Home Loan Bank Board. The six intervenors have appealed that portion of the district court's order dismissing their complaint.*fn1

I. Statutory Framework

The Federal Home Loan bank Board (the "Bank Board") is the federal authority that regulates and supervises federally insured savings and loan associations to ensure the soundness of their operations for the protection of depositors, creditors, and the general public. See 12 U.S.C. § § 1437, 1464, and 1724-1730g. The Bank Board also operates and directs the FSLIC, which insures the accounts of eligible institutions. See 12 U.S.C. § § 1437, 1725(a)-(c), and 1730(k)(1). When the Bank Board determines that an insured savings and loan association is insolvent, it may appoint the FSLIC as receiver of the institution. See 12 U.S.C. § § 1464(d)(6)(A), 1729(b)-(c). The FSLIC has broad authority to operate the institution, to merge it with another institution, to organize a new institution to take over its assets, to liquidate its assets in an orderly manner, or to make such other disposition of the matter as it deems appropriate. 12 U.S.C. § 1729(b)-(c).

To facilitate the reorganization, operation, or dissolution of a failed institution, judicial review of the FSLIC's actions as receiver is largely prohibited. 12 U.S.C. § 1464(d)(6)(C) provides:

Except as otherwise provided in this subsection, no court may take any action for or toward the removal of any conservator or receiver, or, except at the instance of the Board, restrain or affect the ...


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