UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 00-20646
In the Matter of: DAVID J. FELT,
Debtor.
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THE OFFICE OF THRIFT SUPERVISION,
Appellee,
VERSUS
DAVID J. FELT,
Appellant.
Appeal from the United States District Court
For the Southern District of Texas
June 21, 2001
Before JOLLY, DeMOSS, and STEWART, Circuit Judges.
DeMOSS, Circuit Judge:
I.
The Office of Thrift Supervision (“OTS”)1 brought this action
as an adversary proceeding in 1993 against Debtor David J. Felt
(“Felt”) in the Bankruptcy Court for the Southern District of
1
OTS, an office within the Department of the Treasury, is the
federal agency with primary responsibility for regulating savings
associations, or “thrifts.”
Texas. OTS sought a declaration that a debt reflected in a prior
district court judgment was non-dischargeable in bankruptcy as
provided by 11 U.S.C. § 523.2 In March 1997, the district court
entered a final judgment declaring a portion of the debt non-
dischargeable, and on appeal, a panel of this Court reversed in
part and remanded. See OTS v. Felt, No. 97-20418 (5th Cir. Mar. 1,
1999) (unpublished) (remanding to the district court for
consideration of any additional evidence Felt was denied the
opportunity to present when the district court granted OTS summary
judgment sua sponte and without giving ten days notice). Following
remand, the district court again entered a final judgment in favor
of OTS, declaring a portion of the debt non-dischargeable. Finding
no reversible error, we affirm.
II. BACKGROUND
A. The Reliance Judgment at Issue:
The following is an abbreviated summary of the facts which
gave rise to the entry of the 1991 judgment, the dischargeability
vel non of which, is the subject of this appeal.
In December 1983, Felt purchased all of the issued and
outstanding stock of Bowie County Savings and Loan Association
(“Bowie”), in New Boston, Texas. Bowie was a state-chartered,
federally insured thrift regulated by the Federal Home Loan Bank
2
The debt at issue is a final judgment (“the Reliance Judgment”)
for $4,271,120 plus interest and costs, entered against Felt in
favor of OTS.
2
Board (“FHLBB”), the federal agency which preceded OTS as the
federal thrift regulator. Felt borrowed nearly $1.5 million for
the purchase of Bowie, part from Texas Investment Bank and the
remainder from American Guaranty, Inc. (“AGI”), which was Felt’s
wholly-owned corporation.
Almost immediately after acquiring Bowie, Felt became the
president, CEO, Chairman of the Board, a director, and sole
stockholder of the institution. Felt also moved the thrift’s home
office to Houston and changed its name to Reliance. Based upon
Felt’s self-dealing and harm to Reliance through the indirect sale
of two loans by AGI (Felt’s company), to a subsidiary of Reliance,
the FHLBB’s enforcement office sought Felt’s consent to entry of an
order removing him as a Reliance director and officer and
prohibiting him from further involvement in the thrift’s affairs.
The FHLBB also sought a consent cease and desist order against
Reliance itself based on regulatory violations.
Though Felt claims he did it just to avoid spending millions
defending against the FHLBB, he consented to sell his 100% interest
in Reliance, and Reliance itself consented to a cease and desist
order. These agreements were memorialized in a Letter of Agreement
Felt executed on August 29, 1986, and a related Memorandum of
Clarification. Felt specifically agreed to either sell his
Reliance stock within six months, subject to FHLBB approval of the
transaction and offering materials, or to transfer his shares to a
trustee. The FHLLB agreed to keep the terms of the agreement
3
confidential, but Felt was not required to do so.
In the meantime, both Reliance and AGI were becoming
financially distressed. Reliance’s audited financial statements
from 1986 showed a net worth of only $96,936, far below regulatory
requirements. Similarly, AGI was insolvent by $614,824 as of
October 1986. Felt personally owed AGI over $2.1 million.
In September 1986, as president of AGI, Felt wrote to several
hundred AGI noteholders describing AGI’s financial health as poor.
Without disclosing his own personal debt to AGI, the letter implied
that AGI could not repay the investors’ notes. But Felt offered
these noteholders an opportunity to “exchange” their notes for
Reliance stock. Specifically, Felt’s letter stated:
[t]o try to solve AGI’s problems by reducing its
debt I will be preparing an offering circular for
my stock in Reliance Savings Association for review
by the Federal Home Loan Bank Board. Once the
review is completed, I plan to offer you the option
of exchanging your AGI note for Reliance Savings
stock.
Felt included with the letter a 72-page “preliminary offering
circular,” which portrayed Reliance’s condition as healthy. That
circular relied upon Reliance’s unaudited financial statements and
announced that as of June 1986, Reliance stakeholder equity
exceeded $1.3 million. The circular also noted that the “exchange”
4
sale of stock would qualify for “push-down” accounting treatment,
so that stockholder’s equity in Reliance would rise to $4.5
million.3
Felt admitted that he acted as the coordinator for the
offering circular and that he reviewed the preliminary circular
before causing it to be sent out. However, that circular failed to
disclose the following: 1) that Reliance was subject to a cease and
desist order; 2) that federal regulators were requiring Felt to
dispose of all of his stock and disassociate himself from Reliance;
and 3) that Specialty Finance Company, another Felt-owned entity,
would finance approximately 33% of the Reliance stock purchases on
favorable terms. Felt’s attorney advised him to make the fullest
disclosure possible in the circular and to obtain FHLBB approval of
the offering circular “as a hedge against claims of failure to
disclose material information or the making of misleading
statements,” but his lawyer never knew about the Letter of
Agreement and Memorandum of Clarification requiring Felt to sell
and disassociate from Reliance. Felt claims that he didn’t
disclose these matters because of the confidentiality clause.
3
Push-down accounting permits an acquired thrift to push down the
value that is paid for the stock to the balance sheet, to the net
worth section. Even though the thrift itself does not receive the
money, the value the new owners pay for the stock establishes a new
basis for the thrift’s assets, liabilities, and equity. The books
show the excess of the purchase price over fair market value as the
intangible asset “goodwill.”
5
On September 23, 1986, Felt’s attorney sent a Form OC
(Offering Circular) for the sale of Reliance stock to the FHLLB for
its review and approval. FHLLB’s legal staff responded to Felt’s
attorney that the circular was materially deficient and that it
could not even be reviewed without audited 1986 financial
statements with the auditors’ opinions. Felt’s lawyer informed
Felt of the FHLBB’s response. Felt contacted Reliance’s outside
auditors (the firm of Peat, Marwick et al.) and requested an
opinion for the offering documents. The auditors, however, refused
“to be associated with the circular at all.” Peat Marwick had been
auditing Reliance’s June 1986 consolidated financial statements and
issued a report explaining that it could not opine that the
statements were in accord with generally accepted accounting
principles because it had not been provided adequate information
from Reliance.
Felt continued with efforts to and did produce a final
offering circular, and that circular was never submitted to the
FHLBB for approval. On December 22, 1986, Felt mailed the
unapproved final offering circular to potential investors. The
final circular contained a disclosure statement to highlight
changes from the preliminary circular, and it informed potential
investors that Felt had now determined that the offering “is not
required to be approved by the FHLBB.” Felt informed the investors
that audited financial reports had been prepared but were not
6
included. Felt also stated in his circular that push-down
accounting was appropriate and that Reliance would have a positive
capital balance of $4.5 million after the sale.
On December 31, 1986, Felt sold all 450,000 shares of his
Reliance stock at $10 per share. Approximately 150 AGI investors
exchanged their notes for about 60% of the Reliance stock. A
second group of five investors paid cash, and the remaining eight
investors purchased roughly 33% of the remaining stock for no money
down with financing from Felt’s Specialty Finance Company, which
held the stock as collateral for the loans.
As promised, Reliance’s initial financial statements after the
sale reflected a net worth of $4.5 million using push-down
accounting to account for the sale of the stock. Peat Marwick
later determined that push-down accounting was not appropriate in
this case under generally accepted accounting principles because
more than 10% of the stock was financed by Specialty Finance, the
seller’s entity, and thus was not at “arm’s length”. FHLBB
analysts also concluded that the transaction was not at arm’s
length because (1) the noteholders already had a business
relationship with Felt and it appeared they were “coerced” into
swapping debt for stock, and (2) AGI was an affiliate of the
seller. Felt conceded in his deposition that he “probably” knew
that 90% and that he “definitely” knew that a high percentage of
his Reliance stock had to be sold at arm’s length to qualify for
push-down accounting. The FHLBB ordered Reliance to reverse the
7
push-down accounting entries; thus, Reliance showed a negative net
worth of $5.6 million. Suffice it to say, Reliance was never able
to recover from such a huge insolvency, and in 1988, the FHLBB
placed the thrift into receivership.
In April 1988, the FHLBB enforcement office commenced a
recision action against Felt, seeking an injunction and an order
requiring Felt to rescind the 1986 sale of Reliance stock, and
alleging that Felt failed to obtain FHLBB approval of the sale in
violation of 12 C.F.R. § 563g.2 and that he used an offering
circular containing material misstatements and omissions in
violation of 12 C.F.R. § 563g.10. On July 24, 1989, the district
court, Judge Lynn Hughes presiding, found Felt liable because he
failed to obtain FHLBB approval for the offering circulars as
required by FHLBB regulations. After a hearing on damages, the
district court ruled that when he sold the Reliance stock, Felt
knew that Reliance would not be eligible to use push-down
accounting and that the stock would be worthless immediately after
the sale. On January 9, 1991, the district court entered the
Reliance Judgment awarding damages in the amount of roughly $4.2
million to OTS “in trust for individuals . . . who purchased
reliance Savings Association stock from David J. Felt during
December, 1986.” Felt appealed, and a prior panel of this Court
summarily affirmed.
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B. Post-Reliance Judgment Facts:
On September 1, 1992, while OTS was still trying to collect on
the Reliance Judgment, Felt filed for bankruptcy under Chapter 11;
the case was later converted to a Chapter 7 case. On June 25,
1993, OTS filed a claim against Felt’s bankruptcy estate for
roughly $6.4 million (the Reliance Judgment plus costs and
interest). In July, OTS filed a complaint for determination of
non-dischargeability in the bankruptcy court, thus commencing this
case as an adversary proceeding under 11 U.S.C. § 523(c)(1). OTS
sought a declaration that the Reliance judgment is not
dischargeable under several subsections of 523, including (a)(4),
which bars the discharge of a debt resulting from “defalcation
while acting in a fiduciary capacity.” The parties filed
dispositive cross motions on the discharge issue. In November
1994, the district court withdrew the reference from the bankruptcy
court and assigned the case to Judge Lee Rosenthal, who on
September 25, 1995, issued an order disposing of various motions
including a motion brought by Felt for a determination that he was
not a fiduciary under §§ 523(a)(4) and (e), or the common law. The
district court ruled that Felt was a fiduciary under § 523(a)(4),
9
the plain language of § 523(e),4 and the common law, and asked that
OTS submit a proposed final judgment or identify unresolved issues.
OTS submitted the following unresolved issues: (1) whether OTS
had standing to pursue the non-dischargeability action; and (2)
whether Felt’s breaches of fiduciary duty reflected a “willful”
neglect of duty as would be required for a finding of defalcation
under § 523(a)(4).
The district court, without further briefing, granted OTS’s
cross-motion for partial summary judgment, dismissing Felt’s
affirmative defense that OTS lacked standing. The court ruled sua
sponte that Felt’s acts were “willful” as a matter of law, and the
district court entered a final judgment on March 31, 1997. Felt
appealed, and a prior panel of this Court “reversed in part,
vacated in part, and remanded in part” as to the district court’s
sua sponte grant of summary judgment on the question of
willfulness. See OTS v. Felt, No. 97-20418 (5th Cir. Mar. 1, 1999)
(unpublished). On remand, OTS moved for summary judgment on the
issue of willfulness, and after full briefing, the district court
granted OTS’s motion on June 29, 2000. From the final judgment
entered thereupon, Felt timely appeals.
4
According to § 523(e), “[a]ny institution-affiliated party of
a depository institution or insured credit union shall be
considered to be acting in a fiduciary capacity with respect to the
purposes of subsection (a)(4) or (11).
10
III. DISCUSSION
A. Whether Felt can relitigate whether he was a fiduciary,
whether he breached his fiduciary duties, and whether OTS
has standing to contest the dischargeability of a debt on
behalf of investors?
As a preliminary matter, OTS argues that certain issues in
this case have been resolved by the prior panel, and that
disposition is the law of the case. Specifically, OTS argues that
our prior panel necessarily had to have decided that Felt had a
fiduciary duty and breached the same to make relevant the
determination of willfulness. Had no such finding been implicitly
made by the prior panel, argues OTS, the issue of willfulness would
have been irrelevant and there would have been no reason to remand.
As OTS argues, the prior panel first accepted and affirmed, albeit
implicitly, the district court’s rulings that Felt was a fiduciary
and that he breached his fiduciary duties.
It is clear from a reading of the prior panel’s opinion that
the only issue explicitly addressed was the district court’s sua
sponte grant of summary judgment on the issue of Felt’s
willfulness. The partial remand by the prior panel also was
explicitly linked to consideration of any additional evidence that
Felt produced “on the issue of willfulness.” Implicit in the prior
panel’s consideration on the issue of willfulness are the
prerequisite findings that Felt had and breached a fiduciary duty
to Reliance and the AGI investors. However, Felt argues that the
only “holding” of the prior panel is with respect to the procedural
11
defect in the district court’s grant of summary judgment sua sponte
on the issue of willfulness.
We find adequate support for OTS’s argument in our own
precedent. The law of the case doctrine applies not only to issues
decided explicitly, but also to everything decided “by necessary
implication.” See Browning v. Navarro, 887 F.2d 553, 556 (5th Cir.
1989). And, though not expressly addressed in an initial appeal,
those matters that were fully briefed to the appellate court and
were necessary predicates to the ability to address the issue or
issues specifically discussed are deemed to have been decided
tacitly or implicitly, and their disposition is law of the case.
In Knotts v. United States, 893 F.2d 758 (5th Cir. 1990), a
personal injury claim under the Federal Tort Claims Act, the
government asserted immunity as a defense. The district court
rejected immunity, found both the government and the plaintiff to
be negligent, and apportioned 100% of the fault to the victim. On
appeal, the government argued the district court’s error in
rejecting immunity. On appeal, this Court did not expressly
address the immunity argument, but went on to vacate the judgment
on other grounds, and it ordered reapportionment of fault. In a
second appeal, the government tried again to raise its immunity
defense, but we held that the immunity defense was foreclosed by
our decision in the prior appeal. See id. at 761. In so doing, we
stated that although not expressly addressed in the prior opinion,
12
the immunity defense was briefed and considered. Id.
Specifically, we stated “by remanding the case with instructions
that the district court apportion fault . . . we indicated, albeit
tacitly, our rejection of the United States’ claim of immunity.”
Id.
Here, the issues of whether Felt was a fiduciary, whether Felt
breached his fiduciary duty, and whether OTS had standing to bring
the non-dischargeability action, were briefed, and are necessary
prerequisites to the relevance of considering the issue of
willfulness. Consequently, we find persuasive the argument that
the district court’s findings on those issues were implicitly
affirmed by the prior panel and are the law of the case. Our
review of Felt’s brief to our prior panel convinces us that those
issues were fully briefed to the prior panel and were, therefore,
implicitly affirmed. Consequently, we conclude that the law of the
case doctrine precludes reconsideration of the issues of Felt’s
fiduciary status, his breach of his fiduciary duties, or OTS’s
standing to pursue this action.
B. Whether the summary judgment evidence established as a
matter of law that Felt willfully engaged in defalcation
in breach of his fiduciary duties?
Here, Felt challenges the merits of the district court’s
conclusion that, based upon the undisputed summary judgment
evidence, Felt’s breaches of his fiduciary duties were willful and,
thus, constituted defalcation under § 523(a)(4). We review a
13
district court’s award of summary judgment de novo, applying the
same standards applicable in the district court. See Sherrod v.
American Airlines, Inc., 132 F.3d 1112, 1119 (5th Cir. 1998). And
we review the summary judgment evidence in the light most favorable
to the non-moving party, in this case Felt. See Melton v. Teachers
Ins. & Annuity Ass’n, 114 F.3d 557, 559 (5th Cir. 1997). Summary
judgment under Rule 56 of the Federal Rules of Civil Procedure is
thus appropriate only 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.
Fed. R. Civ. P. 56(c).
The central issue in this case boils down to whether Felt’s
breaches constitute defalcation for purposes of § 523(a)(4), in
which case, the debt at issue would be non-dischargeable in
bankruptcy. The defalcation determination turns on the issue of
whether Felt’s breaches were “willful.” See Moreno v. Ashworth,
892 F.2d 417, 421 (5th Cir. 1990) (stating that “defalcation is a
willful neglect of duty, even if not accompanied by fraud or
embezzlement”); see also Schwager v. Fallas, 121 F.3d 177, 184, 185
(5th Cir. 1997). This Court has described the “willful neglect” of
fiduciary duty as “essentially a recklessness standard.” Schwager,
121 F.3d at 185. Thus, willfulness is measured objectively by
reference to what a reasonable person in the debtor’s position knew
14
or reasonably should have known. See Roy v. Gravel, 143 B.R. 825,
828 (W.D. La. 1992), aff’d, 983 F.2d 1062 (5th Cir. 1993). The
objective standard charges the debtor with knowledge of the law
without regard to an analysis of his actual intent or motive. Id.
at 828.
i. Duty to Reliance
First, with respect to Felt’s fiduciary duty to Reliance, the
district court concluded that Felt breached his duties to Reliance,
not just in one, but in three ways, each of which independently
supports a finding of defalcation: (1) he willfully failed to
obtain FHLBB approval of his final offering circulars; (2) he
willfully drafted and used circulars that contained material
omissions; and (3) he willfully misrepresented that Reliance would
be able to use push-down accounting to create a positive net worth
after completion of the stock sale. For the reasons noted below
and for substantially the same reasons stated by the district
court, we find that there is no genuine dispute that the evidence
establishes Felt’s “willful” breach of the duty to Reliance.
FHLBB regulations explicitly require that offering circulars
be approved by the FHLBB. See 12 C.F.R. § 563g.2. As noted above,
as a fiduciary, Felt is presumed to know his legal obligations, but
beyond this fact, here, Felt had actual knowledge of the approval
requirement. The Letter of Agreement explicitly put Felt on notice
that in addition to requiring that he divest his interest in the
15
Reliance stock, he was to obtain approval of any offering circular
or supporting materials. His understanding of this fact is also
evidenced by the undisputed fact that he submitted his preliminary
circular to the FHLBB for approval. Despite his knowledge that he
needed approval, Felt nonetheless caused the final offering
circular to be mailed to potential investors without FHLBB
approval.
FHLBB regulations also contain an explicit requirement that
the offeror must make full and truthful disclosures in offering
materials. See 12 C.F.R. § 563g.10. Felt’s attorney testified
that he expressly informed Felt of this duty, and Felt admitted as
much when he stated that he reviewed the offering materials for
“accuracy.” Notwithstanding his understanding of this duty, Felt
falsely wrote that the final offering did not require FHLBB
approval. Additionally, the offering circulars failed to disclose
that Felt was required by the Letter of Agreement to dispose of all
of his Reliance stock, or that Reliance was subject to a cease and
desist order.
Concomitant with the duty not to make material omissions is
the duty not to make material misrepresentations in offering
materials. See 12 C.F.R. § 563g.10. The evidence here reveals,
through his own testimony, that Felt was aware that in order to
qualify for push-down accounting, thus increasing Reliance’s paper
worth, more than 90% of the transactions would have to be “at arm’s
length.” In this case, a substantial majority of the stock sale
16
was not at arm’s length by virtue of the fact that more than 30% of
the stock was financed by Specialty Finance and that Felt acted as
the coordinator for the sales transaction while simultaneously
controlling Reliance, AGI, and Specialty Finance. The record
unambiguously establishes that, at the time he prepared and
distributed the final offering materials, Felt objectively knew or
should have known that the stock sale would not qualify for push-
down accounting and, thus, the stock would instantly be worthless
upon sale. This is probably the most egregious example of Felt’s
willful behavior which qualifies as defalcation within the meaning
of § 523(a)(4).
ii. Duty to AGI Investors
Finally and simply put, with respect to Felt’s duty to the AGI
investors, the record establishes that in addition to the material
misstatements and omissions made to the AGI noteholders (potential
investors), Felt utterly failed to disclose the personal benefits
he would obtain from the transaction. He also failed to disclose
to the potential investors that he personally owed AGI $2.1 million
($1.9 million of which was due the day after the stock sale), which
if paid off would have increased the solvency of AGI. Given the
aforementioned actual and imputed knowledge of his duty to make
full and truthful disclosures in his offering materials, these
misstatements and omissions demonstrate at a very minimum the
recklessness required for a finding of defalcation under
17
§ 523(a)(4).
IV. CONCLUSION
Having conducted a de novo review of this case and having
considered the parties’ respective briefing with the benefit of
oral argument, we find no reversible error. Accordingly, the
judgment of the district court is affirmed for the reasons stated
in the district court’s memorandum and order.
AFFIRMED.
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