Mitchell Investment Co., Plaintiff-appellant, v. Federal Savings and Loan Insurance Corporation, Defendant-appellee, 741 F.2d 107 (6th Cir. 1984)

In 1977 Mitchell Investment Company purchased one million dollars worth of a special class of preferred stock issued by the financially troubled Telegraph Savings & Loan Association pursuant to a subscription agreement which provided that Mitchell Investment could require redemption of the stock at the purchase price if Telegraph Savings, or any successor or assign thereof, sold substantially all of Telegraph Savings' assets. In 1980 Telegraph Savings was declared insolvent and the Federal Savings & Loan Insurance Corporation (FSLIC), acting as receiver, sold substantially all of Telegraph Savings' assets to another financial institution. The question presented is whether Mitchell Investment's right to require redemption of the stock is enforceable and, if so, against whom and under what procedure.

Telegraph Savings is a state chartered savings and loan association organized under the laws of Illinois. In 1977 Telegraph Savings was experiencing financial difficulty and Mitchell Investment, plaintiff below, entered into negotiations for the purpose of investing in the troubled institution. The negotiations led to a subscription agreement that required Telegraph Savings to issue and Mitchell Investment to purchase 1,000 shares of "Permanent Preferred Shares Series 1" at a price of $1,000 per share.

Mindful of Telegraph Savings' precarious situation and the risks inherent in holding permanent reserve stock,¹  Mitchell Investment sought to protect itself in the event Telegraph Savings became insolvent. To this end, the subscription agreement provides that if the corporation sells substantially all of its assets "any holder of Preferred Shares Series 1 may at his option require the redemption of all or any part of his Preferred Shares Series 1." Joint Appendix at 97. The agreement further provides that redemption of this stock "shall be subject to such requirements as may be imposed from time to time by statute or regulation, whether state or federal" and that all redemption payments "are made subject to such restrictions as state and federal regulatory authorities may impose acting pursuant to statutes and regulations from time to time in effect." Id. at 97-98.

The attempt by Mitchell Investment to keep Telegraph Savings afloat was unsuccessful: in 1980 the FSLIC concluded that Telegraph Savings' financial condition prevented it from conducting its normal business; the Illinois Commissioner of Savings and Loan Associations issued a custody order; the Federal Home Loan Bank Board appointed the FSLIC as receiver; the FSLIC sold substantially all of the operating assets and associated liabilities of Telegraph Savings to another savings and loan association; and the remainder of Telegraph Savings assets and liabilities were transferred to the FSLIC in its corporate capacity. See Telegraph Savings and Loan Association v. Schilling, 703 F.2d 1019 (7th Cir.) (upholding takeover and sale of Telegraph Savings), cert. denied, --- U.S. ----, 104 S. Ct. 341, 78 L. Ed. 2d 681 (1983).

Promptly after the takeover, Mitchell Investment notified the FSLIC of its intent to exercise its contractual right to require redemption of its permanent reserve shares. The FSLIC refused to honor the request and Mitchell Investment filed suit against the FSLIC in its corporate capacity alleging breach of contract and unjust enrichment. Mitchell Investment's theory is that its contractual right is among the residual liabilities ultimately transferred by the FSLIC in its capacity as receiver to the FSLIC in its corporate capacity.²  Mitchell Investment expressly eschews reliance on any procedure that would permit it to present its claim to the FSLIC in its capacity as receiver, maintaining instead that it may proceed directly against the FSLIC in its corporate capacity as the successor to or assign of Telegraph Savings' contractual responsibilities to Mitchell Investment.

In the District Court the FSLIC argued there was no proof that it assumed this contractual obligation and that, in any event, the claim must be presented to the FSLIC in its capacity as receiver. The District Court, in an unpublished opinion, held that the FSLIC in its corporate capacity did not assume the contractual obligation of Telegraph Savings to Mitchell Investment, and thus granted the FSLIC's motion for summary judgment. Mitchell Investment Co. v. Federal Savings and Loan Insurance Co., No. C-2-81-661 (S.D. Ohio May 24, 1983). This appeal followed.

During the course of this appeal, this Court directed the parties to address the enforceability of the redemption agreement under Illinois law, which both parties agree controls.³  Upon consideration of the supplemental briefs filed by the parties, we conclude that Mitchell Investment has failed to prove compliance with state statutory procedures governing retirement of permanent reserve capital. We thus affirm the District Court, albeit on grounds not relied on by that Court.

The Illinois Savings and Loan Act⁴  establishes a procedure for redeeming the permanent reserve capital of a savings and loan association, including a requirement that the Illinois Commissioner of Savings and Loan Associations (Commissioner) approve of the proposed redemption.⁵  Mitchell Investment concedes that Telegraph Savings is governed by the Act.⁶  The record contains no evidence that Telegraph Savings complied with the statutory procedure for retiring or redeeming the permanent reserve shares held by Mitchell Investment. Since the subscription agreement provides that the redemption payments are subject to restrictions imposed by state statutes, securing the approval of the Commissioner is in the nature of a condition precedent to the obligation of Telegraph Savings, or its successor or assign, to redeem the stock. Absent proof of compliance with this condition precedent, the Court is precluded from reaching the issue of the FSLIC's alleged breach or unjust enrichment. If the FSLIC has any contractual obligation--a question we do not reach--that obligation would arise only after the Commissioner approves the redemption plan. See RESTATEMENT (SECOND) OF CONTRACTS Sec. 225(1) (1981) (performance of a duty subject to a condition cannot become due unless the condition occurs or non-occurrence is excused). The positive law of Illinois cannot be abrogated by private contract.

The FSLIC argues that the redemption agreement is unenforceable under the Illinois Business Corporation Act,⁷  which provides in part that " [n]o purchase of [a corporation's] own shares shall be made at a time when the corporation is insolvent or when such purchase would render the corporation insolvent."⁸  In a related proceeding concerning the propriety of the takeover of Telegraph Savings, the Seventh Circuit Court of Appeals affirmed a finding that at the time of the takeover Telegraph Savings was insolvent. See Telegraph Savings, 703 F.2d at 1027-29. Such a finding is not part of the record in this case, however, because the parties did not see this as an issue in the District Court. Absent evidence of insolvency in this record, the Court will pretermit resolution of this issue.⁹ IV.

For the reasons stated above, the judgment of the District Court is affirmed, but without prejudice to Mitchell Investment to bring another action after complying, if possible, with the Illinois statutory procedure for redemption of the permanent reserve shares.¹⁰