ABA Banking Journal
The American Bankers Association and the Missouri Bankers Association have filed a friend-of-the-court brief in a Missouri case in which two mutual thrift depositors claim that they are entitled to a distribution of their thrift’s capital at the time the bank merged into another institution. ABA and MBA strongly oppose the plaintiffs’ claims, arguing that they have no enforceable ownership interest in the bank.
In the case of Chase v. First Federal Bank of Kansas City, the plaintiffs seek a windfall payout of the surplus of Inter-State Federal Savings & Loan Association of Kansas City, Mo., that was accumulated in the bank and invested in the community since 1889. The dispute arose when Inter-State merged with First Federal Bank of Kansas City in 2015. The plaintiffs, who were depositors in Inter-State, filed a lawsuit alleging that the merger was inequitable given the alleged $25 million “capital disparity” between the two institutions.
First Federal argued that depositor plaintiffs have no enforceable “ownership” interest in Inter-State or call on capital, and the case should accordingly be tossed. In support of First Federal, the associations’ brief laid out the history and benefits of the community based charter, the benefits and safety provided by capital, and the detrimental impact that plaintiffs’ position would have on mutual banks.
The associations pointed out that the mutual form of ownership is almost as old as the nation itself and that these first savings banks were started as philanthropies. In essence, the early mutual charters were replete with references to benefits for savers of all means. The brief explained that this community spirit still rings true today, as mutuals have a strong attachment to the communities they serve.
Furthermore, the brief argued that adequate capital is fundamental to safe and sound banking, particularly because the FDIC encourages banks to maintain capital well above the minimum thresholds. Yet, according to the associations, the plaintiffs’ position would not allow directors to steer their bank on a sound and prudent path with careful and systematic retention of earnings over long periods of time. The associations stressed that mutuals must hold accumulated capital well above the existing capital standards to cushion against losses.
The associations concluded that if plaintiffs are allowed to raid a mutual bank’s capital, then the bank will be placed in an untenable position between Scylla and Charybdis: the financial regulators who determine whether the bank is safe and sound and the bank depositors sweeping capital out of the bank. In other words, plaintiffs’ position threatens the economic viability of the bank and starves it of the financial capital needed to serve its community.
In a separate brief, the OCC argued that the plaintiffs’ demand to a mandatory distribution of retained earnings contravenes OCC supervisory policy that, as a matter of safety and soundness, strongly favors retention of capital as a cushion against losses. Additionally, the OCC argued that members of mutual savings banks have no equity interest in the bank’s retained earnings under federal case law and agency interpretation.
The amicus briefs send a strong message that the court should reject the plaintiffs’ opportunistic position to assure safe and sound mutual banks that serve their communities today and will continue to do so in the future. For more information contacts ABA’s Dawn Causey or Andrew Doersam.