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October 13, 1992



The opinion of the court was delivered by: PIERRE N. LEVAL



 This case challenges the repudiation by the Resolution Trust Fund Corporation ("RTC"), as conservator of Franklin Savings Association ("Franklin"), of an indenture and bonds issued thereunder by Franklin. Plaintiff IBJ Schroder is the indenture trustee (the "Trustee") for the bondholders. The Trustee, joined by plaintiff-intervenor-bondholders (the "Bondholders"), *fn1" allege that (1) the RTC's repudiation of the indenture and the bonds is void as inconsistent with the standards of the governing statute, and unauthorized by RTC, (2) repudiation violates the Fifth Amendment substantive due process, procedural due process and takings clauses, and (3) in the event that the indenture and the bonds were lawfully repudiated, the damages to which the Bondholders are entitled differs from that offered by RTC. The Trustee also seeks an award of fees and expenses due under the indenture, including counsel fees incurred in this litigation.

 Initially, the parties made cross-motions for summary judgment. The parties then withdrew the motions for summary judgment and instead stipulated to the submission of a written record for final trial on the merits.


 On December 1, 1984, pursuant to a bond indenture (the "Indenture") between Franklin and Schroder as trustee for the bondholders, Franklin issued a series of bonds in the aggregate principal amount due on maturity of $ 2.9 billion (the "Bonds"). The Bonds are zero coupon bonds. This means that the issuer does not pay interest at any time prior to maturity; the only payment made by the issuer is the payment at maturity of the principal amount; thus the interest obligation incurred by the issuer is a function of the discount from face amount at which the Bonds were initially sold. When this discount is factored by the period of time from subscription to maturity, it can be expressed in terms of "yield-to-maturity." The payment of the principal amount at maturity will represent the reimbursement of the amount borrowed through the subscription at the time of issuance, plus a single payment representing all interest obligation accrued through the life of the Bonds.

 The Bonds were issued in three series with terms of 30, 35, and 40 years, and thus come due on December 12, 2014, December 12, 2019 and December 12, 2024. The yield to maturity for these three maturity dates based on the subscription prices is respectively 11.75%, 11.375% and 11%.

 The intervening Bondholders are state pension funds, insurance companies, and investment advisors. They own in the aggregate over 70% of the Bonds. They purchased their bonds in open secondary market transactions rather than at the initial offering.

 Pursuant to the Indenture, the Bonds are secured by collateral furnished to the Trustee by Franklin consisting of cash and certificates issued by Federal Home Loan Mortgage Corporation, the Federal National Mortgage Corporation and the Government National Mortgage Association (the "Eligible Collateral"). The Indenture provides that the Trustee holds a first perfected security interest in the Eligible Collateral, for the benefit of all bondholders, in order to secure the payment of the Bonds at maturity. The Trustee also holds a junior security interest in the Eligible Collateral to secure payment for its services.

 Because the value of the Eligible Collateral varies with the rise and fall of interest rates, the Trustee is required by the Indenture to value the Eligible Collateral each week to ensure that it is at least equal to the "Required Collateral Coverage." "Required Collateral Coverage" is defined as an amount of Eligible Collateral such that the sum of the market value of the Eligible Collateral (discounted by approximately 30%) equals the "Collateral Base." *fn2" The "Collateral Base" is defined as the purchase price of "Eligible Zero Coupon Securities" sufficient to pay the principal amount of the outstanding bonds at their respective maturities. "Eligible Zero Coupon Securities" are defined as U.S. Treasury securities and similar obligations of agencies and instrumentalities of the United States.

 The Indenture specifies remedies designed to guarantee that the Bonds will be paid in full at their maturities even if the financial status of Franklin deteriorates. Among these are the remedies specified in Section 604 of the Indenture. The Trustee pursues the Section 604 remedies upon the happening of certain triggering events such as Franklin's failure to demonstrate its financial health in regulatory filings with the United States Office of Thrift Supervision ("OTS"). *fn3" If Franklin submits a report to OTS disclosing that it fails to meet regulatory net worth requirements, the Trustee is obligated to liquidate the Eligible Collateral and to purchase Eligible Zero Coupon Securities in an amount sufficient to pay the principal amount of the outstanding bonds at their respective maturities. If after the expiration of 90 days Franklin fails to submit another regulatory report to OTS stating that it is in compliance with regulatory capital requirements the Trustee is obligated to "defease" the Bonds. To effectuate defeasance, the Eligible Zero Coupon Securities are transferred to Defeasance Trusts held by the Trustee for the benefit of the Bondholders. Simultaneously, all substantial rights and obligations of Franklin under the Bonds and the Indenture terminate.

 On February 16, 1990, OTS effectively terminated Franklin's status as a private institution by appointing RTC as Conservator of Franklin. Although the appointment of a conservator is an event constituting a default under the Indenture, the Indenture provides that the Trustee shall not pursue remedies available in the event of a default if that remedy has been objected to in writing by the conservator. By letter, RTC specifically instructed the Trustee not to pursue any remedies available to the Trustee under the Indenture in the event of a default (such as the appointment of a conservator).

 In the letter, the RTC also took the position that it had the right as conservator to object to any exercise by the Trustee of the Section 604 collateral exchange and defeasance provisions that would be in effect should Franklin report its failure to meet minimum regulatory capital requirements to OTS. Accordingly, RTC advised the Trustee that it objected to the Trustee exercising Section 604 rights in the event that the conservator submitted regulatory reports to the OTS evidencing Franklin's failure to meet minimum capital requirements. RTC also advised the Trustee that the RTC would hold the Trustee strictly liable for any losses or damages incurred by Trustee as a result of the Trustee for taking any action objected to by RTC.

 Among the powers available to the RTC under the FIRREA statute is the power to repudiate or disaffirm contracts of an institution under receivership or conservatorship. 12 U.S.C. ยง 1821(e)(1). From the time of its appointment as conservator, the RTC entertained the prospect of repudiating the Bonds. The RTC believed that by repudiating the Bonds it could save very large amounts (approximately $ 200 million) for the institution and could immediately obtain from the Trustee large amounts otherwise required to be held by the Trustee as Eligible Collateral securing the performance of the Bonds. The RTC decided, however, to delay repudiation primarily because of a lawsuit challenging the lawfulness of the conservatorship; the RTC reasoned that if its conservatorship were terminated by a court and the institution were returned to its powers, prior repudiation could bring the owners gigantic windfall profits resulting from the disaffirmance.

 Several times during February and early March of 1990, RTC conferred with certain Bondholders regarding the future of the Bonds and the Indenture, but the parties reached no resolution. On March 6, 1990, RTC and the Trustee entered into a Standstill Agreement under which, among other things, RTC agreed that it would not demand the return of the Eligible Collateral without giving the Trustee 15 day prior written notice. RTC further agreed that it would not disaffirm or repudiate the Bonds or Indenture without giving 10 days prior written notice to the Trustee.

 On April 10, 1990, Franklin, through its conservator the RTC, filed a Form 8-K with the OTS disclosing that it was not in compliance with the regulatory minimum capital requirements promulgated by the OTS pursuant to FIRREA. By the terms of the Indenture, this event triggered the Trustee's obligation to liquidate the Eligible Collateral and purchase Eligible Zero Coupon Securities pursuant to Section 604 of the Indenture. *fn4"

 On April 10, 1990, the RTC announced a Statement of Policy concerning the repudiation of collateralized borrowings of institutions that had come under its conservatorship. The Statement announced that repudiations would occur within 60 days after the RTC's appointment, failing which the terms of the contract would be enforceable throughout the term of the receivership. As to damages payable by the RTC upon repudiation, the Statement announced that they would be limited to principal ...

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