FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, AS RECEIVER OF EMPIRE SAVINGS AND LOAN ASSOCIATION, PETITIONER V. GLEN RIDGE I CONDOMINIUMS, LTD., ET AL. No. 88-659 In the Supreme Court of the United States October Term, 1988 The Solicitor General, on behalf of the Federal Savings and Loan Insurance Corporation (FSLIC), petitions the Court for a writ of certiorari to review the judgment of the Court of Appeals of Texas, Fifth Supreme Judicial District, in this case. Petition for a Writ of Certiorari to the Court of Appeals of Texas, Fifth Supreme Judicial District PARTIES TO THE PROCEEDING The petitioner in this case is Federal Savings and Loan Insurance Corporation, as receiver for Empire Savings and Loan Association of Mesquite, Texas. The respondents are Glen Ridge I Condominiums, Ltd.; Glen Ridge III Condominiums, Ltd.; Glen Cove I Condominiums, Ltd.; MCID, Inc.; Woodlake Village Condominiums, Ltd.; No Blue, Inc.; Paint Creek Condominiums, Ltd.; Sunwood Condominiums, Ltd.; RGDD, Inc.; Trailwood Condominiums, Ltd.; Sunbelt Developers, Inc.; Sun Place Condominiums, Ltd.; I.C. Dann, Inc.; Meadow Ridge Condominiums, Ltd.; Olympic Star Developers, Inc.; Westview Condominiums, Ltd.; LBN, Inc.; Country Meadows I Condominiums, Ltd.; Smith and Ames Construction, Inc.; Metro East Condominiums, Ltd.; W.L. Smith; Billy Ames; J. Fred Jones; Castle Glen IVB Condominiums, Ltd.; Buckshu, Inc.; The Landing Condominiums, Ltd.; SSBC, Inc.; Meadowland Condominiums, Ltd.; Betway, Inc.; Windstream Condominiums, Ltd.; Shukell, Inc.; Hidden Ridge Condominiums, Ltd.; Shugart Infarction, Inc.; Bayport Condominiums, Ltd.; Fox Ridge Condominiums, Ltd.; Lessons, Inc.; Woodglen Condominiums, Ltd.; Country Place Condominiums, Ltd.; George Hicks & Associates, Inc.; D.L. McKellar Enterprises, Inc.; D.L. McKellar Enterprizes, Inc.; LaPrada Terrace Condominiums, Ltd.; Arbor Glen Condominiums, Ltd.; Yorkcrest Condominiums, Ltd.; Statewide Service Corporation; Robert Wellenberger, Substitute Trustee; John Kinghorn, Substitute Trustee; and John W. Sears, Substitute Trustee. TABLE OF CONTENTS Questions presented Parties to the proceeding Opinions below Jurisdiction Constitutional provisions and statutes involved Statement Discussion Conclusion OPINIONS BELOW The opinion of the Supreme Court of Texas (App., infra, 34a-39a) is reported at 750 S.W.2d 757. The opinion of the court of appeals (App., infra, 1a-33a) is reported at 734 S.W.2d 374. The judgment of the district court is unreported. JURISDICTION The court of appeals entered its judgment and opinion on December 30, 1986 (App., infra, 43a). On June 25, 1987, the court of appeals filed a supplemental opinion and denied the FSLIC's motion for rehearing (App., infra, 1a, 45a), and on July 28, 1987, the court of appeals overruled the last timely filed motion for rehearing (App., infra, 48a). On March 30, 1988, the Supreme Court of Texas denied the FSLIC's application for a writ of error (App., infra, 34a, 49a-50a), and, on June 22, 1988, the Supreme Court of Texas denied respondents' motion for rehearing (App., infra, 51a-52a). On September 13, 1988, Justice White extended the time for filing this petition for a writ of certiorari to and including October 20, 1988. This Court's jurisdiction is invoked under 28 U.S.C. 1257(3). CONSTITUTIONAL PROVISIONS AND STATUTES INVOLVED Article III of the United States Constitution provides: The judicial Power of the United States, shall be vested in one Supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish. The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated Times, receive for their Services a Compensation, which shall not be diminished during their Continuance in Office. Section 5(d)(6)(C) of the Home Owners' Loan Act of 1933, 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 (Federal Home Loan Bank) Board, restrain or affect the exercise of powers or functions of a conservator or receiver. Section 5(d)(11) of the Home Owners' Loan Act of 1933, 12 U.S.C. 1464(d)(11), provides: The Board shall have power to make rules and regulations for the reorganization, consolidation, liquidation, and dissolution of associations, for the merger of associations with associations or with any institutions the accounts of which are insured by the Federal Savings and Loan Insurance Corporation, for associations in conservatorship and receivership, and for the conduct of conservatorships and receiverships; and the Board may, by regulation or otherwise, provide for the exercise of functions by members, directors, or officers of an association during conservatorship and receivership. Section 406(d) of the National Housing Act, 12 U.S.C. 1729(d), provides: In connection with the liquidation of insured institutions, the (Federal Savings and Loan Insurance) Corporation shall have power to carry on the business of and to collect all obligations to the insured institutions, to settle, compromise, or release claims in favor of or against the insured institutions, and to do all other things that may be necessary in connection therewith, subject only to the regulation of the Federal Home Loan Bank Board, or, in cases where the Corporation has been appointed conservator, receiver, or legal custodian solely by a public authority having jurisdiction over the matter other than said Board, subject only to the regulation of such public authority. QUESTIONS PRESENTED 1. Whether claims against an insolvent federally-insured savings and loan association that has been placed in receivership must be presented in the first instance to the receiver in accordance with the Federal Home Loan Bank Board's regulations. 2. Whether requiring creditors of insolvent federally-insured savings and loan associations to exhaust their remedies under the Bank Board's regulations before seeking judicial enforcement of their claims violates Article III of the Constitution. STATEMENT This case arises from the Federal Home Loan Bank Board's appointment of the FSLIC as receiver for Empire Savings and Loan Association of Mesquite, Texas (Empire), a state-chartered and federally-insured savings and loan institution. The FSLIC seeks review of a Texas court of appeals' decision allowing respondents to bring suit against the FSLIC and the failed institution in state court without first presenting their claims to the FSLIC, as receiver, in accordance with the Bank Board's regulations. 1. On March 14, 1984, the Bank Board declared Empire insolvent based on its determination that Empire's obligations to its creditors exceeded its assets, that Empire had incurred substantial dissipation of assets due to violations of law, rules, and regulations, and to unsafe or unsound practices, and that Empire was in an unsafe or unsound condition to transact business. See 12 U.S.C. 1729(c); 12 U.S.C. (& Supp. IV) 1464(d)(6)(A). The Texas Savings and Loan Commissioner concurred in that determination, and the Bank Board, pursuant to 12 U.S.C. 1729(c), appointed the FSLIC as receiver for Empire and directed the FSLIC to conduct the thrift's orderly liquidation in accordance with applicable federal law. See App., infra, 2a, 35a. Upon its appointment as receiver, the FSLIC, pursuant to its congressional mandate and the Bank Board's direction, immediately began to marshal Empire's assets, including proceeds from unpaid and overdue loans, to pay the association's outstanding obligations. Empire had loaned respondents and other borrowers hundreds of millions of dollars to fund the purchase of land and the construction of condominium projects. As partial consideration for these loans and as security for repayment, respondents and the other borrowers had granted Empire first mortgage liens to Empire under deeds of trust. Respondents' loans were in default and the FSLIC commenced nonjudicial foreclosure proceedings in accordance with the trust deeds. See App., infra, 2a, 35a. Respondents countered with state court civil actions against the FSLIC, the failed institution, and the trustees on the deeds of trust, which were consolidated in the 101st Judicial District Court of Dallas County, Texas. Respondents alleged causes of action for breach of contract, fraud, violations of state usury laws, violations of state and federal securities laws, cancellation or rescission of loan agreements, promissory notes, and deeds of trust, temporary injunctions to bar foreclosure on real property, unlawful foreclosure, and disparagement of title. They sought damages exceeding $27 million dollars, punitive damages, costs of court, attorney's fees, and prejudgment and postjudgment interest. See App., infra, 2a, 35a. The trial court initially issued temporary injunctions forbidding the FSLIC as receiver from conducting nonjudicial foreclosure sales of respondents' property. The FSLIC then submitted a motion and plea urging, among other matters, that Section 5(d)(6)(C) of the Home Owners' Loan Act, which provides that "no court may * * * except at the instance of the (Bank) Board, restrain or affect the exercise of powers or functions of a * * * receiver" (12 U.S.C. 1464(d)(6)(C)), prohibited the injunctions and required respondents to exhaust the Bank Board's administrative remedies prior to seeking judicial redress. On August 5, 1985, the trial court sustained the FSLIC's motion and plea, dissolved the temporary injunctions, and dismissed respondents' suits (App., infra, 41a-42a). The FSLIC subsequently foreclosed on respondents' real property. 2. Respondents sought review from the Court of Appeals of Texas urging, among other arguments, that Section 5(d)(6)(C) "violates the constitutional scheme of separated powers to the extent that it vests exclusive power in an administrative agency to adjudicate rights created by state common law without the consent of the litigants and subject only to appellate review under the federal Administrative Procedure Act" (App., infra, 2a). The court of appeals ultimately agreed, stating (id. at 25a): We hold that the grant of jurisdiction to FSLIC to adjudicate (respondents') state law claims is unconstitutional because it violates article III of the Constitution of the United States. See also App., infra, 32a. The court specifically rejected the FSLIC's submission that respondents were required to exhaust the Bank Board's administrative process for the presentation and resolution of claims against failed associations (id. at 11a, 32a). The court of appeals affirmed the district court's dismissal of the causes of action based on the federal securities laws and those based on state law theories of disparagement of title and unlawful foreclosure (id. at 25a). However, the court reversed the district court's dismissal of the remaining causes of action and remanded the case for trial (ibid.). 3. The FSLIC applied to the Supreme Court of Texas for a writ of error, which that court denied on March 30, 1988. In denying the writ, the court issued an opinion stating (App., infra, 37a): We neither approve nor disapprove the holding of the court of appeals that the exercise of adjudicatory power by the FSLIC as receiver violates Article III of the United States Constitution. The court of appeals erroneously reached the Article III issue because it determined the FSLIC as receiver has adjudicatory power. Neither the "powers or functions" language in Section 1464(d)(6)(C) nor the "all things that may be necessary" provision in Section 1729(d) includes the power to adjudicate claims. The Texas Supreme Court observed (id. at 38a) that the federal courts of appeals are presently divided on the question whether claims against a failed thrift institution must be presented in the first instance to the FSLIC as receiver in accordance with the Bank Board's regulations, citing Coit Independence Joint Venture v. FirstSouth, F.A., 829 F.2d 563 (5th Cir. 1987), cert. granted, No. 87-996 (Mar. 7, 1988), and Morrison-Knudsen Co. v. CHG Int'l, Inc., 811 F.2d 1209 (9th Cir. 1987), petition for cert. pending sub nom. FSLIC v. Stevenson Assocs., No. 87-451 (filed Sept. 17, 1987). The Texas Supreme Court suggested that "the Ninth Circuit's analysis represents the better reasoned interpretation of the statutory language and legislative history pertaining to FSLIC's powers as a receiver" (App., infra, 38a). /*/ DISCUSSION The government submits that claims against an insolvent federally-insured savings and loan association must be presented in the first instance to the FSLIC, as receiver, in accordance with the Bank Board's regulations. The Texas court of appeals rejected that submission in this case, concluding that respondents had no obligation to exhaust the Bank Board's claims procedure (App., infra, 11a, 32a). That issue, which has divided the federal courts of appeals, is presently before the Court in Coit Independence Joint Venture v. FSLIC, No. 87-996, which is scheduled for argument on November 1, 1988. The petition in this case should therefore be held for disposition in light of the Court's decision in Coit. The Texas court of appeals further held (App., infra, 25a) that Section 5(d)(6)(C) of the Home Owners' Loan Act, 12 U.S.C. 1464(d)(6)(C), and Section 406(d) of the National Housing Act, 12 U.S.C. 1729(d), are unconstitutional under Article III of the United States Constitution. That issue also has been raised in Coit, and the government has urged that the issue is not properly presented in that context. Given the Texas Supreme Court's express (albeit advisory) opinion that the Texas court of appeals erred in reaching the constitutional issue (App., infra, 39a), the lower court's ruling should have little -- if any -- precedential value. But since the Texas Supreme Court declined to correct the ruling through the grant of the FSLIC's writ of error, the government has raised the constitutional issue in its petition for a writ of certiorari. We suggest that this Court's ruling in Coit will determine the appropriate resolution of that issue as well. CONCLUSION The petition for a writ of certiorari should be held and disposed of as appropriate in light of the Court's decision in Coit Independence Joint Venture v. FSLIC, No. 87-996. Respectfully submitted. CHARLES FRIED Solicitor General JORDAN LUKE General Counsel Federal Home Loan Bank Board OCTOBER 1988 /*/ Although the Texas Supreme Court's denial of the FSLIC's application for a writ of error was accompanied by an opinion, it nevertheless amounted to a denial of discretionary review. Accordingly, a petition for a writ of certiorari would issue to the court of appeals. See American Ry. Express Co. v. Levee, 263 U.S. 19, 20-21 (1923). The state court's ruling that Section 5(d)(6)(C) is unconstitutional would be reviewable by appeal pursuant to 28 U.S.C. 1257(1). We have elected to proceed in this case, however, by petition for a writ of certiorari pursuant to 28 U.S.C. 1257(3). APPENDIX