Opinion
Civil Action No. SA-94-CA-0934
September 12, 1997
REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE
TO: Orlando L. Garcia United States District Judge
Pursuant to the order of referral in the above-styled and numbered cause of action to the undersigned United States Magistrate Judge and consistent with the authority vested in United States Magistrate Judges under the provisions of 28 U.S.C. § 636(b)(1)(B) and rule 1(d) of the Local Rules for the Assignment of Duties to United States Magistrates, effective January 1, 1994, in the Western District of Texas, the following report is submitted for your review and consideration.
I. JURISDICTION
Jurisdiction is noted under section 501(1) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, 12 U.S.C. § 1821(d)(6)-(A)("FIRREA").
II. STATEMENT OF FACTS
The following facts, which are viewed in the light most favorable to plaintiffs, are taken verbatim from the Fifth Circuit's opinion in this case:
The plaintiffs worked as executive officers at San Antonio Savings Association. As executive officers, they participated in a supplemental executive retirement plan, the assets of which were placed in an umbrella trust. The assets in the trust were to be used to pay retirement benefits to executive officers. However, the trust assets could also be used to pay creditors if the bank became insolvent.
San Antonio Savings Association began having financial difficulties in the late 1980's. It was placed in conservatorship in February 1989, and was then placed in receivership in July 1989. The Resolution Trust Corporation [FN1] ("RTC") reconstituted San Antonio Savings Association by chartering San Antonio Savings Association, FA on July 13, 1989. San Antonio Savings Association, FA was placed in RTC receivership in March 1990.
FN1. In accordance with 12 U.S.C. § 1441a (m)(1), the RTC apparently ceased operations on December 31, 1995. Its statutory successor is the Federal Deposit Insurance Corporation ("FDIC"). Therefore, we have substituted the FDIC for the RTC in the caption of this case.
Each time the RTC reconstituted what was San Antonio Savings Association, it asked plaintiffs to continue working as executives for the institution. Plaintiffs claim that in February 1990, during a meeting with RTC officials, an RTC accounting specialist told them that they would be paid in full for working for the institution.
In December 1991, the RTC notified plaintiffs that they had until February 27, 1992 to file proofs of claims for their retirement plan benefits. The notices sent to plaintiffs stated that the supplemental executive retirement plan was a "non-qualified plan;" that is, participants in the plan would remain unsecured general creditors of San Antonio Savings Association, FA.
Plaintiffs filed proofs of claims with the RTC on February 25, 1992. Plaintiffs contend that the RTC lost some of their proofs of claims, and that the RTC extended the time in which it had to consider their claims by writing them a letter asking them to refile the claims. [FN2] The RTC took no action on plaintiffs claims until March 22, 1993, when it issued "Receiver's Certificates" allowing plaintiffs' claims in full. The Receiver's Certificates did not mention the claims' priority. However, the cover letter that accompanied the Receivers s Certificates stated that "payment of depositor claims receive a preference. . . . All claims of the depositors must be paid in their entirety before any payment can be made on the claims of the general trade creditors."
FN2. The plaintiffs were unable to produce this letter, but claim that they would have been able to produce it had the district court allowed them to conduct discovery on the issue.
After receiving the Receiver's Certificates, plaintiffs attempted to determine whether their claims would be paid in full; that is, whether the retirement plan trust's assets were greater than the sum of the claims made against the institution. RTC officials gave plaintiffs information that led them to believe that there were only approximately $100,000 in claims against the trust, compared to trust assets of several million dollars. Thus, based on the information provided by RTC officials, plaintiffs believed that their claims would be paid in full.
On January 3, 1994, after hearing nothing from the RTC for over five months, plaintiff Robert Cuyler ("Cuyler") called the Dallas RTC office to obtain current information on the status of plaintiffs' claims. Marty Smith, who worked at the Dallas RTC office, told Cuyler that the RTC no longer had a record of San Antonio Savings Association, FA because the institution had been sold to Bank of America. Later in January, an RTC official named Mr. Crone informed Cuyler that the RTC, as receiver, was still selling San Antonio Savings Association, FA assets, and that he would relay any additional information to Cuyler as soon as he obtained it.
Cuyler again called Crone in February. During this call, Crone promised to get Cuyler a list of the creditors ahead of plaintiffs' claims, and the amount of those creditors' claims. After two more conversations with Crone during the next month, Crone told Cuyler on March 2, 1994 that, after the RTC was paid, there would be forty-one million dollars available for future dividends. Crone also told Cuyler that he would find out how much of this forty-one million would be available to pay plaintiffs' claims.
On March 16, 1994, Cuyler called Crone again, and Crone offered Cuyler a list of creditors that showed only $100,000 in claims that were superior to plaintiffs' claims. A half hour later, Crone called Cuyler and told him that there was $1.039 billion still owed to the RTC, and that there was not enough money to pay the RTC in full. For the first time in four years, the RTC told the plaintiffs that their claims would not be paid. Crone stated that he did not know the source of the previous information he gave to Cuyler that led plaintiffs to believe that their claims would be paid in full.
After learning that the RTC was not going to pay their claims, plaintiffs filed new proofs of claims on March 21, 1994. These claims were slightly different than the original claims; they were described as "failure to pay receivership certificate on Supplemental Executive Retirement Plan." Two weeks later, on April 4, 1994, the RTC sent plaintiffs letters informing them that their claims would "not be considered." The letter also provided that the RTC's decision not to consider the new claims was neither an acceptance nor a denial of the claims.
On November 15, 1994, plaintiffs filed suit against the RTC. The RTC moved to dismiss plaintiffs' claims on March 17, 1995 arguing, inter alia, that the statute of limitations had run because plaintiffs did not timely seek judicial review of the RTC's classification of their claims as those of unsecured general creditors.
On May 30, 1995, the RTC filed its response to the plaintiffs' reply to their motion to dismiss. In its response, the RTC for the first time argued that the plaintiffs' claims were barred on October 22, 1992, 60 days after the expiration of 180 days from the date on which plaintiffs filed their original proof of claims. This time period could only be extended by a written agreement, and the RTC contended that no written agreement existed.
In response to the RTC's new argument, plaintiffs contended that the RTC had, by letter, extended the 180 day period in which it was to have considered plaintiffs' first proofs of claims when it asked plaintiffs to refile their proofs of claims. Plaintiffs also requested a continuance under Federal Rule of Civil Procedure 56(f) so that they could conduct discovery and obtain a copy of this written extension.
The district court denied plaintiffs' request for a continuance, and granted the RTC's motion to dismiss on the ground that plaintiffs failed to file suit within the 180/60 day period set out in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The plaintiffs appeal from that dismissal.McAllister v. Federal Deposit Ins. Corp., 87 F.3d 762, 763-64. The Fifth Circuit then reversed and remanded the case finding that plaintiffs' claims were timely because the running of the 60 day period was tolled by the RTC's misrepresentations under the doctrine of equitable estoppel. Id. Additional facts will be developed in this Report and Recommendation as needed.
Following remand, the District Court allowed the parties time to conduct discovery and eventually the parties filed cross-motions for summary judgment. (Docket nos. 38 and 47). The Court will also consider the FDIC's motion to strike declarations (Docket no. 43).
III. ISSUES
1. Whether plaintiffs' claims were timely filed?
2. Whether plaintiffs' claims are entitled to a priority as an expense of liquidation?
3. Whether plaintiffs claims have been correctly classified as general unsecured creditors?
IV. SUMMARY JUDGMENT STANDARD
The standard to be applied in deciding a motion for summary judgment is set forth in Federal Rule of Civil Procedure 56, which provides in pertinent part as follows:
The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
See Fields v. City of South Houston, Texas, 922 F.2d at 1187; Lavespere v. Niagara Machine Tool Works, Inc., 910 F.2d at 177-78; Lodge Hall Music, Inc. v. Waco Wrangler Club, Inc., 831 F.2d 77, 79 (5th Cir. 1987).
The movant on a summary judgment motion bears the initial burden of providing the court with a legal basis for its motion and identifying those portions of the record which it alleges demonstrate the absence of a genuine issue of material fact. The burden then shifts to the party opposing the motion to present affirmative evidence in order to defeat a properly supported motion for summary judgment. All evidence and inferences drawn from that evidence must be viewed in the light favorable to the party resisting the motion for summary judgment. Thus, summary judgment motions permit the Court to resolve lawsuits without the necessity of trials if there is no genuine dispute as to any material facts and the moving party is entitled to judgment as a matter of law.
Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986).
Hibernia Nat'l Bank v. Carner, 997 F.2d 94, 97 (5th Cir. 1993).
See Fields, 922 F.2d at 1187; Lavespere, 910 F.2d at 177-78; Lodge Hall Music, Inc., 831 F.2d at 79.
V. ARGUMENTS AND CONCLUSIONS OF LAW
Plaintiffs argue that they are entitled to summary judgment on the basis that (i) it has already been established as a matter of law, under the law of case doctrine, that the RTC misled plaintiffs with promises of payment in full; (ii) plaintiffs' retirement benefits are expenses of liquidation and (iii) plaintiffs' claims are secured by, or constitute a lien on the assets of the SASAFA. The FDIC, in contrast, argues that plaintiffs claims are untimely, which it contends deprives the Court of jurisdiction, and, even if the claims are timely, plaintiffs have been correctly classified as general unsecured creditors.I. Timeliness of Lawsuit
At the threshold, the Court will address the FDIC's argument concerning jurisdiction. This argument is essentially a rehashing of the issue that went to the Fifth Circuit and was resolved against the FDIC. As explained by the Fifth Circuit, it is well settled that in seeking judicial review, the plaintiffs must have exhausted their administrative remedies under FIRREA before filing suit. 12 U.S.C. § 1821(d). Under Section 1821(d), plaintiffs must first file a claim with the RTC, then the RTC has 180 days to allow or disallow the claim. 12 U.S.C. § 1821 (d)(5)(A)(i). The 180 day period may only be extended by a written agreement. 12 U.S.C. § 1821(d)(5)(A)(ii). Then the claimant must file a lawsuit within 60 days of the earlier of (1) the end of the 180 day period; or (2) the date of any notice of disallowance of the claim. 12 U.S.C. § 1821(d)(6).
Specifically, the FDIC contends that (i) plaintiffs filed their initial claims on February 25, 1992; (ii) the RTC took no action on the claims during the subsequent 180 days; (iii) plaintiffs made no attempt to seek administrative or judicial review of their claims during the next 60 days, ending October 23, 1992; and (iv) this lawsuit seeks to enforce payment of the original claims, thus the claim is untimely filed. The FDIC also points out that the 180 day review period, found in 12 U.S.C. § 1821 (d)(5)(A)(ii), may only be extended by a written agreement. The plaintiffs alleged on the appeal that they had been unable to locate the written extension because they did not have time to do discovery. The Fifth Circuit remanded the case to allow the plaintiffs time to complete such discovery. However, according to the FDIC, following remand, the parties engaged in extensive discovery, including depositions, and were unable to locate any such written extension agreement.
The Fifth Circuit found the Court had subject matter jurisdiction on two basis: (1) there was a written agreement to extend the 180/60 day time period to file the claims; or (2) within the 180/60 day time period, the RTC orally informed plaintiffs that their claims would be allowed. McAllister, 87 F.3d at 762-65. The first ground is no longer feasible since plaintiffs never located a document extending the deadline even though they were given ample opportunity to do discovery. In their summary judgment response, plaintiffs claim that they have never received all of the FDIC's documents. However, if plaintiffs seriously contend that the FDIC withheld documents, their remedy would have been to file a motion to compel production, which plaintiffs elected not to pursue. Thus, only the second basis, which was an oral allowance of the claims, would render the lawsuit timely.
Plaintiffs produced evidence that on September 10, 1992, before the October 23, 1992 deadline, plaintiffs were orally informed by John Osborn that the FDIC/RTC would pay their claims. (See plaintiff's opposition to motion for summary judgment, page 8). According to the Fifth Circuit, this oral allowance of the claims triggered the 60 day period to file this lawsuit. Id. at 767. Thus, suit had to filed within 60 days of September 10, 1992, which was the date the claims were allowed. Suit was not filed until November 15, 1994, which would have technically rendered it untimely.
However, the Fifth Circuit held under the doctrine of equitable estoppel, the FDIC is estopped from asserting a limitations defense because it induced plaintiffs into waiting to file suit.Id. at 767. Plaintiff's produced evidence that on March 24, 1993, the RTC/FDIC's verbal allowance of their claims was memorialized in the receivership certificates presented by the RTC/FDIC to plaintiffs. According to the Fifth Circuit, these assurances induced plaintiffs into waiting to file suit, thus, limitations is tolled. Id. Therefore, the Court finds that plaintiffs timely filed this lawsuit and the Court has jurisdiction over the matter.
II. Whether Trust Payments are Considered an Expense of Liquidation
As a preliminary argument, although not entirely clear, plaintiffs appear to argue that under the law of the case doctrine, this Court is bound to find that RTC made misrepresentations to plaintiffs and that because of the misrepresentations, plaintiffs are entitled to the highest priority as an expense of liquidation. (Plaintiffs' motion for summary judgment, page 13). Logically, the law of the case doctrine only applies to the issues decided on appeal, not to other issues that may have been presented but left unanswered.Conway v. Chemical Leaman Tank Lines, Inc., 644 F.2d 1059, 1062 (5th Cir. 1981). The issue of whether plaintiffs are entitled to a priority as an expense of liquidation was not decided in the prior appeal and, therefore, the law of the case doctrine is inapplicable. Thus, the issue will be broached at this juncture.
Plaintiffs claim that they are entitled to preferential treatment because their pension claims should be classified as an expense of liquidation. Plaintiffs contend that the SASAFA recruited them to continue with reorganization with the promise of their retirement benefits. Plaintiffs contend that James Forrestal, SASAFA's managing agent, took steps to "encourage" plaintiffs to stay at SASAFA. For example, Forrestal transferred the SERP and Umbrella Trust from SASA to SASAFA and obtained consent of each participant in the plan to the transfer, including plaintiffs. Furthermore, on September 21, 1989, Forrestal, signed a document labeled "Adoption by San Antonio Savings Association, F.A. of the Supplemental Executive Retirement Plan, The Executive Deferred Compensation Plan and the Umbrella Trust." Forrestal also signed an amendment to the San Antonio Savings Association executive Deferred Compensation Plan designating the employer as SASAFA. Later, on September 27, 1989, Forrestal wrote to Pacific Mutual Insurance authorizing an automatic premium loan of approximately $2.9 million to keep the policies in effect.
Plaintiffs also submitted a letter from Forrestal to Solcher indicating that despite two salary reductions, the RTC would still pay plaintiffs their SERP benefits. McAllister also indicted that he was the first one to be contacted by Gerald Ford of First Gibraltar who indicated an interest in acquiring the SASA deposit base and wanted to know if McAllister would stay on to assist with the transition. Mcllhister also testified that he stayed on as Chairman of the Board of San Antonio Federal Savings Bank ("SAFSB"), a wholly owned stock subsidiary which became an asset of the receivership. McAllister allegedly helped the RTC manage SAFSB for a period of two and a half years, without any salary, because he was assured payment of his pension benefits. In early 1991, the RTC asked McAllister if he could put together a group to acquire SAFSB. McAllister incurred out-of-pocket expenses of approximately $57,000. between January and October 1991 putting the bid together and McAllister continued to serve as Chairman of the Board at every meeting of SAFSB. And although the RTC's initial liquidation model showed that it would not receive anything for SASFB, McAllister developed a plan whereby the RTC received $25 million upon liquidation of the institution. These facts, according to plaintiffs, demonstrate that their pension plans should be treated as an expense of liquidation.
In support of their argument, plaintiffs cite only one case:FSLIC v. Quinn, 922 F.2d 1251, 1257 (6th Cir. 1991). Quinn held that the severance benefits of officers recruited by FSLIC to prepare an insolvent thrift for acquisition were negotiated as critical components of their employment contracts, thus, triggering a regulatory exception to the automatic termination of those contractual obligations. Id.
Plaintiffs also offered the affidavit of retired Bankruptcy Judge Joseph C. Elliot who opined that the pension plans should be treated as expenses of litigation:
The affidavit recites that Judge Elliot served as a United States Bankruptcy Judge in the Western District of Texas from 1975 to 1986.
An "expense of liquidation" is defined as an expenditure reasonably necessary to maintain or marshall the assets of an insolvent institution. Given the RTC's need to retain senior management to maintain the value of SASAFA, the employment of plaintiffs by the RTC/FDIC after the takeover is a classic example of an "expense of liquidation."
In my experience and in the cases that have come before me, when an insolvent employer retains senior management, their pension claims are not immediately paid on a weekly or monthly basis. Rather, in such a situation, the employee's pension claims are generally paid when the employee is no longer in the service of the employer. Here, the fact that the receiver did not pay the Plaintiffs their pension benefits during their employment with SASFA is entirely consistent with the ordinary custom and practice of handling of pension claims in insolvency.
(plaintiff's motion for summary judgment, declaration of Joseph C. Elliot).
In opposition, the FDIC moved to strike Joseph Elliot's declaration claiming (i) Judge Elliot only opined that the "employment" of plaintiffs is an expense of liquidation, rather than the SERP claims; (ii) plaintiffs were paid salaries for their "employment" with the SASA and SASAFA conservatorships; (iii) plaintiffs were never employed by the SASAFA receivership; and (iv) Judge Elliot states that it is customary for a "pension claim" to be paid after the employee no longer works for the employer, but he makes no mention of the SERP or other supplemental unfunded plans. Furthermore, the FDIC points out that bankruptcy law is not instructive on the expense of liquidation issue because it does not apply to financial institutions such as the FDIC.
Similarly, the FDIC argues that while plaintiffs SERF claims are pre-receivership claims, their right to actually claim payment under the SERF did not arise until they terminated their employment with SASAFA on March 9, 1990. The FDIC notes that none of the plantiffs had made a request for payment of those benefits in connection with early retirement and none had yet reached the "early retirement" age of 55 as required by the SERF. Thus, the FDIC argues, where a right to payment does not mature until an employee's termination, it cannot give rise to an administrative claim.
In the alternative, the FDIC argues that even the Bankruptcy Code and case law defeat plaintiffs' suggestion that their SERP claims are "expenses of liquidation" or "administrative expenses." Section 503(b), of the Bankruptcy Code, defines "administrative expenses" as "the actual, necessary costs and expenses of preserving the estate, including wages, salaries or commissions for services rendered after the commencement of the case." Thus, the FDIC argues that a claim will be treated as an administrative expense under bankruptcy law only if (a) it arises from a transaction with the debtor in possession and (b) is beneficial to the debtor in possession in the operation of business. According to the FDIC, special "perks," unlike wages, will not be afforded an administrative expense priority even if the employee works for the debtor post-petition.
Section 503 states as follows:
§ 503 Allowance of administrative expenses
(a) An entity may timely file a request for payment of an administrative expense, or may tardily file such request if permitted by the court for cause.
(b) After notice and a hearing, there shall be allowed, administrative expenses, other than claims allowed under section 502(f) of this title, including —
(1)(A) the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case;
(B) any tax —
(i) incurred by the estate, except a tax of a kind specified in section 507(a)(8) of this title; or
(ii) attributable to an excessive allowance of a tentative carry back adjustment that the estate received, whether the taxable year to which such adjustment relates ended before or after the commencement of the case; and
(C) any fine, penalty, or reduction in credit relating to a tax of a kind specified in subparagraph (B) of this paragraph;
(2) compensation and reimbursement awarded under section 330(a) of this title;
(3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by —
(A) a creditor that files a petition under section 303 of this title;
(B) a creditor that recovers, after the court's approval, for the benefit of the estate any property transferred or concealed by the debtor;
(C) a creditor in connection with the prosecution of a criminal offense relating to the case or to the business or property of the debtor;
(D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title;
(E) a custodian superseded under section 543 of this title, and compensation for the services of such custodian; or
(F) a member of a committee appointed under section 1102 of this title, if such expenses are incurred in the performance of the duties of such committee;
(4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant;
(5) reasonable compensation for services rendered by an indenture trustee in making a substantial contribution in a case under chapter 9 or 11 of this title, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title; and
(6) the fees and mileage payable under chapter 119 of title 28.11 U.S.C. § 503.
The FDIC also contends that McAllister's work for an entirely separate entity, the SAFSB rather than SASAFA, is irrelevant and there may have been other indirect benefits or compensation that McAllister received as a result of the SAFSB sale. The FDIC also points out that even if SASAFA had assumed the SERP and the Trust (which the FDIC contests) this would not impact the outcome because the FDIC would have merely assumed an unsecured future obligation.
Before addressing these arguments, the Court finds it necessary to rule on the defendant's motion to strike the affivit of Judge Elliot. Defendant argues the affidavit is irrelevant and should be stricken. The Court finds the affidavit is appropriate expert testimony and is admissible for summary judgment purposes. The motion to strike is therefore DENIED. However, the Court recognizes that the Federal Bankruptcy Code specifically excludes banks, saving and loan associations, and other financial institutions from its definition of debtors eligible to seek protection under the Bankruptcy Code. 11 U.S.C. § 109. Thus, the affidavit carries little weight.
Turning next to the issue of whether the SERF payments should be considered an expense of liquidation, the Court notes that although plaintiffs have made a novel argument, their theory is contrary to a consistent line of cases addressing SERFs and Rabbi trusts in bank liquidations that hold the trust funds are available to general creditors in the event of insolvency.Westport Bank Trust Co. v. Geraghty, 90 F.3d 661, 669 (2d Cir. 1996); RTC v. MacKenzie, 60 F.3d 972, 978 (2d Cir. 1995); Goodman v. RTC, 7 F.3d 1123, 1129-30 (4th Cir. 1993); Cortina v. Sovran Bank, 927 F. Supp. 439 (S.D.Fla. 1994). It is also important to keep in mind that the retirement plans in issue wereunfunded and a noncontributory. The trust agreements were set up as "grantor" or "rabbi" trusts where the initial payment to these trust is not taxable to the employee, and income generated by the trusts is taxable to the employer rather than the employee. 26 U.S.C. § 671. The employer then pays whatever taxes are due on any income generated by the trust and all post-tax income accrues to the trust for the employee's benefit.Mackenzie, 60 F.3d at 974. By using this method, the employee defers individual tax liability on his allocated share of the trust assets while trust income accrues. Id. However, the trust assets are at all times the property of the employer and remain available to the employer's general creditors in the event of insolvency. Id.
The plans were unfunded because the assets were available to SASA's general creditors. See Goodman, 7 F.3d at 1128.
Section 671 of the Internal Revenue Code specifically provides, in part, that when it is specified in subpart E (section 671-679) that a person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of that person those items of income, deductions, and taxable income and credits against tax of the trust which are attributable to that portion of trust to the extent that such items would be taken into account under chapter 1 in computing taxable income or credits against the tax of an individual. Priv. Ltr. Rul. 8113079 (December 31, 1980). Thus, plaintiffs received tax benefits by not being considered owners of the trust corpus.
Additionally, and perhaps even more persuasively, it is important to note that plaintiffs should have been well aware, by the express language of the trust, that in the event of insolvency, the trust funds would be used to pay creditors. The initial and supplemental trust agreements, in the instant case, expressly state that the assets are subject to the claims of creditors:
The purpose of this trust is to give Plan participants greater security by placing assets in trust for use only to pay benefits or, if the Company becomes insolvent, to pay creditors. The trust is intended to be a grantor trust, the income of which is taxable to the Company. No contribution to or income of the trust is to be taxable to Plan participants until benefits are distributed to them.
This trust shall continue in effect until all the assets of the trust fund are exhausted through distribution of benefits to participants, payment to general creditors in the event of insolvency, payment of fees and expenses of the Trustee . . .
5.02 Insolvency Administration
5.02-1 During Insolvency Administration, the Trustee shall hold the trust fund for the benefit of the general creditors of the Company and make payments only in accordance with 5.02-2. The Trustee shall continue the investment of the trust fund in accordance with 2.02.
5.02-2
(SASA Umbrella Trust, pages 5, 34, plaintiff's motion for summary judgment, exhibit 3).
10.1 Unsecured General Creditor. Benefits to be provided under this Plan are unfunded obligations of the Employer. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of Employer, nor shall they be beneficiaries of, or have any rights, claims or interest in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by Employer ("Policies"). Such Policies or other assets of Employer shall not be held under any trust except a grantor trust established by Employer, for the benefit of Participants, their Beneficiaries, heirs, successors, or assigns, or be considered in any way as collateral security for the fulfilling of the obligations of Employer under this plan.
(Supplemental Executive Retirement Plan, page 12, plaintiff's motion for summary judgment, exhibit I). Therefore, plaintiffs are not entitled to any type of preference in distribution of trust funds.
Similarly, the plaintiffs' argument based on FSLIC v. Quinn is unpersuasive. The Quinn decision addressed the rejection, by a failed thrift, of employment contracts that contained severance-employment benefits. FSLIC v. Qiunn, 922 F.2d at 1251. However, the SERF plan at issue in the instant case expressly states that it is not a contract of employment. (Supplemental Executive Retirement Plan, page 12, plaintiffs motion for summary judgment, exhibit 1, Section 10.4). Furthermore, the severance benefits at issue in Qiunn were in the nature of a one-year salary liquidated damages provision as compared to the long-term SERF benefits at issue here. Therefore, the Court finds the Quinn case to be distinguishable.
922 F.2d 1251 (6th Cir. 1991).
III. Plaintiffs as General Unsecured Creditors
Next plaintiffs argue that they are either (i) secured creditors or (ii) entitled to the second highest preference as secured creditors because their claims constitute a lien on the assets of SASAFA. In support of this argument, plaintiffs cite the Texas Savings and Loan Act Article 852a. TEX. REV. CIV. STAT. ANN. art. 852a, § 809(g)(2) (Vernon Supp. 1997). Specifically, plaintiffs argue that the FDIC was contractually barred from using trust assets to pay depositors before plaintiffs because the Plan stated "[t]he purpose of this trust is to give Plan participants greater security by placing assets in trust for use only to pay benefits or, if the Company becomes insolvent, to pay creditors."
In addition, plaintiffs argue that life insurance policies were placed in a spendthrift trust to assure payment to plan participants like plaintiffs. Plaintiffs quote the following language of the trust in support of this contention: "[t]he purpose of this trust is to give Plan participants greater security by placing assets in trust." Thus, plaintiffs argue their claims are secured by, or constitute a lien on, the assets of SASAFA.
The FDIC, on the other hand, argues plaintiffs are not secured creditors. The FDIC notes that the Paragraph 10.1 of the SERP is entitled "General Unsecured Creditor," and provides that "Such policies or other assets of Employer shall not be . . . considered in any way as collateral security for the fulfilling of the obligations of Employer under this plan." The Court will address plaintiffs' classification as general unsecured creditors and follow with a discussion of the application of the Texas Savings and Loan Act.
The Court finds plaintiffs' argument that they have a lien on SASAFA's assets or the trust assets because life insurance contracts were placed in the trust is without merit. Section 10.1 of the SERF specifically states that the participants do not have any interest in the insurance policies and that they are not collateral security for fulfilling of the obligations of the employer under the Plan:
10.1 Unsecured General Creditor. Benefits to be provided under this Plan are unfunded obligations of the Employer. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of Employer, nor shall they be beneficiaries of, or have any rights, claims or interest in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by Employer ("Policies"). Such Policies or other assets of Employer shall not be held under any trust except a grantor trust established by Employer, for the benefit of Participants, their Beneficiaries, heirs, successors, or assigns, or be considered in any way as collateral security for the fulfilling of the obligations of Employer under this plan.
(Supplemental Executive Retirement Plan, page 12, plaintiff's motion for summary judgment, exhibit 1) (Emphasis added). Such language expressly precludes plaintiffs from holding any lien or security interest in the trust assets and, in particular, in the insurance policies. See Goodman, 7 F.3d at 1127 (holding recipient of guarantor trust receives only company's unsecured promise to pay benefits and has no rights against assets other than rights of general unsecured creditor of the company). Therefore, the Court is not persuaded that plaintiffs have a security interest or a lien in the trust assets.
In conjunction with the security-interest argument, plaintiffs claim that they are entitled to a priority above the claims of depositors. Both parties appear to agree that the Texas Savings and Loan Act governs the priorities in this case. Under this statute, priorities are as follows:
The Court has not been provided sufficient information to ascertain whether Article 852a, Section 809(g)(2) governs this case because the statute recites that it applies to Savings and Loan Associations which are defined as "an association whose primary purpose is to promote thrift and home financing and whose principal activity is the lending to its members of money accumulated in savings accounts of its members on the security of first liens on homes and other improved real estate." TEX. REV. CIV. STAT. ANN. art. 852a, § 1.03(2) (Vernon Supp. 1997). Neither party has provided any proof that SASA or SASAFA meet this definition. However, the Court will accept the parties representations that the statute is applicable.
(g) On liquidation of an association, claims for payment shall have the following priority:
(1) obligations incurred by the commissioner or the liquidating agent, fees and assessments due to the department, and expenses of liquidation, all of which may be covered by the proper reserve of funds;
(2) claims of creditors having an approved claim as set forth in this section, to the extent that such claims are secured by, or constitute a lien on, the assets or property of the association;
(3) the claims of depositors having an approved claim against the general liquidating account of the association;
(4) claims of general creditors having an approved claim as set forth in this section, and the unsecured portion of any creditor obligation described in Subdivision (3);
(5) claims otherwise proper that were not filed within the time prescribed by this section;
(6) approved claims of subordinated creditors; and
(7) claims of shareholders of the association.
TEX. REV. CIV. STAT. ANN, art. 852a § 8.09(g) (Vernon Supp. 1997) (Emphasis added). As discussed above, under the language of the Plan, plaintiffs were general unsecured creditors. As such, plaintiffs would fall under subsection (4) which places them below the claims of depositors. Therefore, they were correctly given a priority below depositors.
In summary, the Court finds plaintiffs are not entitled to a priority as an expense of liquidation and have been correctly prioritized below SASAFA depositors. The Fourth Circuit succinctly described the situation as follows:
[The trust recipients] are really asking for a preference over other creditors; unfortunately, the recipients of grantor or "rabbi" trusts are unsecured creditors, who took the risks of being subject to the claims of general creditors for the benefits of favorable tax treatment — a gamble which failed to pay off in this case.Goodman, 7 F.3d at 1129. Therefore, the Court finds that defendant's motion for summary judgment should be GRANTED and plaintiffs' motion for summary judgment should be DENIED.
VI. RECOMMENDATION
Therefore the Court finds that the FDIC's motion for summary judgment (docket no. 38) should be GRANTED and plaintiffs' motion for summary judgment should be DENIED.
VII. INSTRUCTIONS FOR SERVICE AND NOTICE OF RIGHT TO OBJECT/APPEAL
The United States District Clerk shall serve a copy of this Memorandum and Recommendation on each and every party either (1) by certified mail, return receipt requested, or (2) by facsimile if authorization to do so is on file with the Clerk. Pursuant to Title 28 U.S.C. § 636(b)(1) and Rule 72(b), Fed.R.Civ.P., any party who desires to object to this report must serve and file written objections to the Memorandum and Recommendation within 10 days after being served with a copy unless this time period is modified by the district court. A party filing objections must specifically identify those findings, conclusions or recommendations to which objections are being made and the basis for such objections; the district court need not consider frivolous, conclusive or general objections. Such party shall file the objections with the clerk of the court, and serve the objections on all other parties and the magistrate judge . A party's failure to file written objections to the proposed findings, conclusions and recommendations contained in this report shall bar the party from a de novo determination by the district court. See Thomas v. Arn, 474 U.S. 140, 150; 106 S.Ct. 466, 472; 88 L.Ed.2d 435 (1985). Additionally, any failure to file written objections to the proposed findings, conclusions and recommendations contained in this Memorandum and Recommendation within 10 days after being served with a copy shall bar the aggrieved party, except upon grounds of plain error, from attacking on appeal the unobjected-to proposed factual findings and legal conclusions accepted by the district court. Douglass v. United Services Automobile Ass'n, 79 F.3d 1415, 1428 (5th Cir. 1996).