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In re Parliament Square

filed: May 26, 1992.


Appeal from the United States District Court for the Northern District of California. D.C. CV-89-20391-SMW. Spencer Williams, District Judge, Presiding.

Before: Poole, Reinhardt and Fernandez, Circuit Judges


Parliament Square (hereinafter "Parliament"), a California limited partnership, owned an apartment complex in Texas subject to a first mortgage held by Continental Savings (hereinafter "Continental"). Beginning in December, 1984, the property experienced storm and fire losses totalling approximately $230,000. Although the $230,000 in insurance proceeds on claims for these losses were paid and deposited into a non-interest bearing Continental Bank Account, the money was never used to repair the property. Instead, Continental retained the insurance proceeds for the purpose of applying them toward Parliament's delinquent mortgage.

On September 30, 1985, Parliament and Continental reached an agreement whereby Continental paid itself from the bank account for the delinquent mortgage. However, Continental failed to release the remaining insurance funds in the account for the repair of the property. As a result, Parliament repaired the property at its own expense and was forced to file Chapter 11 Bankruptcy.

Parliament instituted the underlying adversary proceeding against Continental on July 22, 1986. The complaint asserts five claims: (1) avoidance of fraudulent transfer, (2) turnover of property, (3) conversion of insurance proceeds, (4) breach of fiduciary duty, and (5) breach of the implied covenant of good faith and fair dealing. On November, 4, 1986, the bankruptcy court granted Continental the order it sought modifying the automatic stay of § 362 and allowing Continental to foreclose on the property, unless Parliament made adequate protection payments to Continental. Because Parliament was unable to make the payments, Continental foreclosed on the property.

Two years later, on September 26, 1988, the Federal Home Loan Bank Board (hereinafter the "FHLBB" or the "Board") declared Continental insolvent and appointed the Federal Savings and Loan Insurance Corporation (hereinafter "FSLIC") as Continental's receiver. The Board also provided for the organization of a new federal association, Continental Federal. After the organization of Continental Federal, FSLIC transferred substantially all of Continental's assets to Continental Federal in consideration of Continental Federal's assumption of certain Continental liabilities, including depositor claims but excluding unsecured liabilities.

The result of these transfers left Continental with no remaining assets to satisfy general unsecured claims. In addition, neither Continental nor FSLIC retained liability for depositor claims. FSLIC therefore moved the bankruptcy court for dismissal under F.R.C.P. 12(b)(1), 12(b)(6), and 12(c). The bankruptcy court granted FSLIC's motion to dismiss. Parliament timely appealed.

The district court issued an Order on January 19, 1990, in connection with Parliament's appeal, remanding the case back to the bankruptcy court for a determination whether Parliament was a depositor with Continental. Parliament filed a Notice for Modification of Order on January 26, 1990, requesting that the district court expand its Order to include a determination whether Parliament was a secured creditor of Continental.

FSLIC filed its reply on March 27, 1990, and also filed its own Counter Motion for Reconsideration reiterating its allegations that dismissal of Parliament's suit by the bankruptcy court was proper. Continental also requested that the district court's January Order be modified so as to delete its Order to remand and to dismiss Parliament's appeal.

On June 20, 1990, the district court issued its Order granting FSLIC's Motion for Reconsideration and denying Parliament's Motion for Modification, thereby affirming the bankruptcy court's dismissal of the complaint. Parliament timely appeals from the order issued by the district court.

We will examine in three steps whether Parliament's complaint states a claim upon which relief may be granted. First, we will determine whether Parliament's claims as an unsecured creditor of Continental were properly dismissed. Second, we will determine whether Parliament's complaint was properly construed as not including any claims as a secured creditor of Continental. If the answer to the second inquiry is "yes", we will then determine whether the bankruptcy court improperly denied Parliament the opportunity to amend its complaint to include such claims.

1. Were Parliament's unsecured claims properly dismissed?

The purchase and assumption agreement with which the FSLIC transferred all of Continental Savings' assets and liabilities to secured creditors, including depositors, to Continental Federal, expressly stated that Continental Federal would not be liable to Continental Savings' unsecured creditors. Because Continental Savings retained no assets and the FSLIC did not assume liability for those claims, unsecured claims are worthless if the purchase and assumption agreement is valid.

It is clear that the FSLIC had the authority to enter into purchase and assumption agreements such as the one at issue here. See 12 U.S.C. § 1729(f)(2) (repealed by Pub. L. 101-73, § 407 (1989)); Gulley v. Sunbelt Savings, FSB, 902 F.2d 238, 350-51 (5th Cir. 1990), cert. denied, 111 S. Ct. 673 (1991).*fn1 Because the FHLBB had determined that unsecured claims against Continental Savings were worthless because there were insufficient assets to satisfy the higher priority secured claims, the FSLIC was authorized to transfer all of Continental Savings assets to Continental Federal without providing any ...

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