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December 22, 1993

THE EMPLOYEES' RETIREMENT SYSTEM OF ALABAMA, et al., Plaintiffs, and IBJ SCHRODER BANK & TRUST COMPANY, as Trustee, Plaintiff-Intervenor,


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

Findings of Fact and Conclusions of Law


 This case presents a number of important questions of first impression under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The Resolution Trust Corporation ("RTC") took over Franklin Savings Association ("Franklin"). Exercising its powers under FIRREA, the RTC acted to repudiate three series of secured zero coupon bonds issued by Franklin and to pay compensation to the bondholders limited to the "accreted value" of the bonds. The Trustee for the bondholders as well as a large percentage of the holders of the bonds challenged the action in this court. In October 1992, this court held that the RTC official who purported to repudiate the bonds lacked the authority to do so and that the repudiation was therefore void. Meanwhile, officials at the RTC who did have such authority repudiated the bonds a second time and also ratified the original repudiation. After the second repudiation and roughly contemporaneously with the ratification, the Trustee defeased the bonds in accordance with the terms of the indenture so as to cause liquidation of the collateral. The holders of a majority of the bonds (the "Bondholders"), joined by the Trustee, then brought this action against the RTC, seeking a declaratory judgment that the RTC has no rights in the defeasance collateral and that this collateral should be distributed to the bondholders in accordance with the indenture. *fn1" The RTC cross-claimed, asking for a declaratory judgment that the bonds had been validly repudiated, that the bondholders damages are governed by FIRREA, that the proper damages are the "accreted value" of the bonds, as described in an RTC release of April 10, 1990, and that the collateral held by the Trustee in excess of these damages is the property of the RTC.

 The parties stipulated to the submission of a written record for final trial on the merits. The court finds in favor of the RTC on all the disputed issues, except the proper measure of damages.


 A. The Bonds and the Indenture

 On December 1, 1984, pursuant to a bond indenture (the "Indenture") between Franklin and plaintiff-intervenor IBJ Schroder Bank & Trust Company as trustee for the bondholders, Franklin issued three series of bonds with maturities of 30, 35 and 40 years, having an aggregate face value of $ 2.9 billion (the "Bonds"). These Bonds, and the Indenture governing them, were the focus of the earlier action, IBJ Schroder Bank & Trust Co. v. RTC, 90 Civ. 2736 (PNL) ("Franklin I"), and are described extensively in my decision on the merits in that case, 803 F. Supp. 878, 879-81 (S.D.N.Y. 1992), familiarity with which is assumed. I will describe the relevant background more briefly here.

 The Bonds are zero coupon bonds. This means that the issuer makes no interest payments; at maturity the issuer pays the face amount of the bonds. The Bonds are sold in the initial offering at a discount from face value, which represents the issuer's interest cost for the borrowing. The initial offering was priced so that the yields-to-maturity of the 30, 35 and 40 year bonds were 11.75%, 11.375%, and 11%, respectively.

 After the initial offering, the Bonds traded in the secondary markets. The plaintiff Bondholders are state pension funds, insurance companies and investment advisors who hold approximately 78% of the Bonds, all purchased in open secondary market transactions. Because prevailing interest rates dropped substantially in the years following issuance, the Bonds traded in the secondary markets at prices representing lower yields to maturity, or relatively higher prices than if interest rates had remained constant.

  Under the Indenture, the Bonds were unusually well-secured by collateral (the "Eligible Collateral"), consisting of cash and certificates issued by the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association, deposited by Franklin with the Trustee. In order to secure the payment of the Bonds at maturity, the Trustee holds a first perfected security interest in the Eligible Collateral for the benefit of the Bondholders. *fn2" The Indenture requires the Trustee to value the Eligible Collateral each week to ensure that its market value, discounted by thirty percent, equals the cost of purchasing "Eligible Zero Coupon Securities" sufficient to pay the principal amount of the outstanding Bonds at their respective maturities. *fn3" This mechanism ensures that the Bonds are always over-collateralized.

 The Indenture provides remedies to guarantee that the Bonds will be paid in full at their maturities even if the financial status of Franklin deteriorates. If Franklin fails to satisfy capital requirements in regulatory filings with the United States Office of Thrift Supervision ("OTS"), the Trustee is obligated to liquidate the Eligible Collateral and purchase Eligible Zero Coupon Securities in an amount sufficient to pay the face amount of the Bonds at their maturities. If after another ninety days Franklin fails to submit another regulatory report to OTS stating that it is in compliance with regulatory capital requirements, the Trustee must "defease" the bonds by transferring the Eligible Zero Coupon Securities to Defeasance Trusts held by the Trustee for the benefit of the Bondholders. At that point, all substantial rights and obligations of Franklin under the Bonds and the Indenture terminate. The excess security would be returned to Franklin.

 B. The RTC's Original Repudiation

 On February 16, 1990, the OTS appointed the RTC as conservator of Franklin, effectively terminating Franklin's status as a private institution. On April 10, 1990, Franklin, though the RTC as conservator, disclosed in a filing with the OTS that it was not in compliance with the applicable regulatory minimum capital requirements. Under the Indenture, this triggered the Trustee's obligation to liquidate the Eligible Collateral and purchase Eligible Zero Coupon Securities. During this period, the RTC instructed the Trustee not to pursue any potential remedies under the Indenture, including defeasance.

 Under FIRREA, as described in more detail below, the RTC has the right to repudiate certain obligations of insolvent institutions and to pay prescribed damages. On April 10, 1990, the RTC issued a Policy Statement concerning the repudiation of, and payment of interest on, direct collateralized borrowings of a savings association after the RTC appointment as receiver or conservator. The Statement provided that repudiations of such obligations, which under FIRREA must occur within a "reasonable period following" the RTC's appointment as conservator or receiver, 12 U.S.C. § 1821(e)(2), would occur within sixty (60) days of the appointment (failing which the terms of the contract at issue would be enforceable through the term of the receivership). In addition, the Statement announced that damages payable by the RTC upon receivership would be limited to principal owed plus imputed interest; in the case of zero coupon bonds, this means the RTC would pay "accreted value," which is the issue price plus interest ("to the date of redemption or payment") reflected in the initial offering price as the "yield to maturity."

 On June 8, 1990, the RTC notified the Trustee that the RTC had disaffirmed and repudiated the Bonds and Indenture; the RTC directed the Trustee to refrain from taking any action pursuant to the remedial provisions of the Indenture. The RTC believed that by repudiating the Bonds it could save approximately $ 200 million for the institution and also immediately obtain from the Trustee very substantial funds that the Trustee would otherwise have been required to hold as collateral. *fn4" On July 25, 1990, the RTC announced that August 8, 1990 would be the payment date for the Bonds; no interest or accreted value would be recognized after that date.

 C. Earlier Litigation, the Re-Repudiation, and the Ratification

 In the earlier action, the Trustee and the Bondholders challenged the RTC's actions and policies, alleging that (1) the RTC's repudiation was void because (a) inconsistent with the standards of the governing statute and (b) unauthorized by the RTC, (2) repudiation violated the 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 the RTC. After trial on a submitted record, I concluded that the RTC had made the determinations required by statute and that the repudiation was neither arbitrary nor capricious nor untimely. 803 F. Supp. at 883-84. However, my opinion also concluded that William Roelle, the RTC's Director of Resolutions and Operations, who performed the repudiation, lacked the authority to repudiate the Bonds on behalf of the RTC under the RTC's applicable by-laws. Accordingly, I held that the RTC did not effectively repudiate the Bonds. My Opinion and Order was issued October 13, 1992; judgment was granted to the Trustee and the Bondholders on October 20, 1992 and was entered on October 21, 1992.

 The issue of Roelle's authority had become a focus of the litigation in the spring of 1992, and the trial record was briefly reopened at that time for further evidence on that issue. Apparently in light of the uncertainly concerning the validity of Roelle's actions, the RTC took remedial action while the case was sub judice. On July 16, 1992, the OTS issued Order No. 92-319, directing a "pass-through receivership" of Franklin. OTS chartered a new federal mutual savings association, Franklin Federal Savings Association ("Franklin Federal"), which was then placed in conservatorship with the RTC as conservator. Through a "purchase and assumption agreement" ("P&A Agreement"), dated July 17, 1992, all of the assets and all of the secured deposits and liabilities of Franklin were passed to Franklin Federal. On September 11, 1992, the RTC held a meeting at which Roelle again made the determination to repudiate the Bonds. Under the RTC's new delegations, Roelle now possessed the authority to make such a decision where he had the concurrence of the Senior Vice President and General Counsel (who was Richard Aboussie) Accordingly, Roelle and Aboussie both signed a Senior Vice-President Decisional Memorandum approving the repudiation of the Bonds, which was to be effective only if this court found the original repudiation invalid. On September 14, 1992, the RTC notified the Trustee of the conditional re-repudiation.

 This court then issued its decision invalidating the June 1990 repudiation, and entered judgment on October 21, 1992. The next day, October 22, 1992, Albert Casey, the Chief Executive Officer of the RTC, held a special meeting and, by CEO Resolution No. 92-CEO-15, ratified the June 8, 1990 repudiation. The resolution stated that Casey concluded that Roelle's repudiation decision "was correct for the reasons set forth by Mr. Roelle" and that Casey "hereby ratifies" Roelle's decision of June 8, 1990 "and such ratification is hereby made retroactive and effective as of the date of the original repudiation." Based on this ratification, the RTC moved for relief from the judgment, seeking to reopen the case and receive new findings of fact and conclusions of law or, in the alternative, a new trial. In an Opinion and Order dated July 22, 1993, I denied the motion.

 Meanwhile, because the Trustee believed (based on my October 13, 1992 decision and its perception that the September 1992 re-repudiation was ineffective) that the Indenture was still in effect, the Trustee began on October 21, 1992 to exchange the Eligible Collateral securing the Bonds and defease the Bonds in accordance with the terms of the Indenture. The defeasance process was completed on October 23, 1992. However, because the RTC claimed rights to the assets of the defeasance trusts, the Trustee did not distribute those assets in accordance with the Bondholders' instructions. *fn5" As noted above, on October 22, the RTC ratified the June 8, 1990 repudiation of the Bonds.

 On November 20, 1992, the Bondholders brought this action.


 The right of the RTC to repudiate obligations as conservator or receiver of an insolvent institution is set out in Section 212(e) of FIRREA, codified at 12 U.S.C. § 1821(e). *fn6" Section 1821(e)(1) provides that the RTC, as conservator or receiver or an insolvent institution,

may disaffirm or repudiate any contract or lease --
(A) to which such institution is a party;
(B) the performance of which the conservator or receiver, in the conservator's or receiver's discretion, determines to be burdensome; and
(C) the disaffirmance or repudiation of which the conservator or receiver determines, in the conservator's or receiver's discretion, will promote the orderly administration of the institution's affairs.

 Such repudiation must occur within a "reasonable period following" the RTC's appointment as receiver or conservator, § 1821(e)(2), and, as noted, the RTC itself has interpreted this provision to ...

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