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RUSH v. FDIC

October 4, 1990

WILLARD H. RUSH, Plaintiff,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, a corporate instrumentality of the United States of America, as Manager of the Federal Savings and Loan Insurance Corporation Resolution Fund; FEDERAL DEPOSIT INSURANCE CORPORATION, a corporate instrumentality of the United States of America, as Receiver for CENTENNIAL SAVINGS AND LOAN ASSOCIATION; JEFFRY G. LOCKE; ANTHONY C. LA SCALA; and GREAT WESTERN BANK, Defendants



The opinion of the court was delivered by: WEIGEL

 STANLEY A. WEIGEL, UNITED STATES DISTRICT JUDGE

 Plaintiff's suit is bottomed on a contract with Centennial Savings & Loan ("Centennial") that guaranteed him one year's salary if Centennial terminated him without cause. The amount of that salary was $ 105,000. Based upon that contract, plaintiff sues the Federal Deposit Insurance Corporation in its corporate capacity ("FDIC Corporate") and the Federal Deposit Insurance Corporation as Receiver for Centennial ("FDIC Receiver") for three claims: (1) breach of contract; (2) failure to provide benefits under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §§ 1001 et seq.; and (3) deprivation of property without due process of law, in violation of the fifth amendment. *fn1" Plaintiff also sues Jeffry Locke, Special Representative for the Federal Savings & Loan Corporation as Receiver ("FSLIC Receiver"), for deprivation of property without due process of law, pursuant to Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, 403 U.S. 388, 29 L. Ed. 2d 619, 91 S. Ct. 1999 (1971). *fn2"

 By March 16, 1987, rumors circulated that Centennial's liquidation was imminent. Plaintiff alleges that on that day he entered into a written severance agreement with defendant Anthony La Scala, Chief Executive Officer of Centennial, which guaranteed plaintiff one year's salary in the event that his employment was terminated by Centennial for any reason other than "for cause."

 On April 24, 1987, the FHLBB declared Centennial insolvent and appointed the FSLIC as receiver for Centennial for the purpose of liquidating its assets. Further, the FHLBB announced the termination of all outstanding employment contracts with Centennial, pursuant to 12 C.F.R. § 563.39. *fn3" Defendant Locke, as Special Representative for FSLIC Receiver, notified plaintiff that all employment contracts, including his severance agreement, were terminated by "operation of law" as a result of the FHLBB's declaration of Centennial's insolvency and its appointment of the receiver. On October 26, 1989, following plaintiff's repeated requests for an administrative determination on his claim for his one year's salary of $ 105,000, defendant FDIC Receiver sent plaintiff a Receiver's Determination disallowing the claim.

 Defendants FDIC Receiver, FDIC Corporate, and Locke move to dismiss the claims against them. In addition, defendants FDIC Corporate and FDIC Receiver move to strike plaintiff's prayer for prejudgment interest and punitive damages against them.

 I. Breach of Contract (Count I)

 Defendants FDIC Corporate and FDIC Receiver move to dismiss plaintiff's breach of contract claim for failure to state a claim. Their motion must be sustained. Under 12 C.F.R. § 563.39(b)(5), all obligations under employment contracts between an FSLIC insured institution and its employees are terminated by operation of law when the FHLBB determines that the institution is in an unsafe or unsound condition. The regulation provides in relevant part:

 
All obligations under the [employment] contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution . . . (ii) . . . when the association is determined by the [Federal Home Loan Bank] Board to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.

 Id. The regulation requires that each employment contract contain a term that states this provision of law. 12 C.F.R. § 563(b). If not included, the provision is nonetheless read into an employment contract as an implied term. Wilde v. First Federal Savings & Loan Ass'n of Wilmette, 134 Ill. App. 3d 722, 480 N.E.2d 1236, 1239, 89 Ill. Dec. 493 (1985).

 Under Section 563.39(b)(5), rights that have vested prior to the regulation's triggering events are not terminated. The FDIC defendants claim that plaintiff's right to severance pay was not vested; hence termination occurred automatically, pursuant to Section 563.39(b)(5). Plaintiff, on the other hand, contends that the severance agreement vested when formed. Defendants' claim is valid.

  The first question the Court confronts is which law to apply in determining whether the severance agreement had vested prior to the FHLBB declaring Centennial insolvent. Plaintiff urges the Court to apply California law, which he claims supports his argument that the severance agreement vested when formed, one month before his employment was terminated pursuant to Section 563.39(b)(5). *fn4" Defendants argue that federal law governs the vesting question. Although there is a paucity of case law on this issue, defendant has the better argument. Congress has developed a comprehensive scheme for regulating the savings and loan industry; thus federal regulations governing the savings and loan industry preempt attempts by states to regulate in that field. Sholer v. Security Federal Savings & Loan Ass'n, 736 F. Supp. 1083, 1085 (D.N.M. 1990). "Federal common law rather than state law has been invoked in cases involving FSLIC's rights and obligations." Federal Savings & Loan Insurance Corp. v. Quinn, 711 F. Supp. 366 (N.D. Ohio 1989). Accordingly, this Court will apply federal common law.

 Only two published decisions have considered the question of when vesting occurs under Section 563.39. See, e.g., Quinn, 711 F. Supp. 366; Wilde, 134 Ill. App. 3d 722, 480 N.E.2d 1236, 89 Ill. Dec. 493. The plaintiffs in both cases sued for severance benefits under contracts terminated pursuant to Section 563.39, alleging that their rights under the contracts had vested before termination. As in the instant case, the contracts had provided for benefits if termination occurred without cause. Both courts found that the plaintiff's rights had not vested, but were terminated by operation of law. In Wilde, the court reasoned that "termination without cause" was a condition precedent to vesting of the agreement. Since plaintiff's contract expired by operation of law prior to the actual termination of his employment, vesting could not have taken place. Wilde, 480 N.E.2d at 1242. In Quinn, the court resorted to federal common law involving ERISA to determine the definition of vesting. Under ERISA, the term "vested" has been defined to mean an ...


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