Banking and Finance Law Daily Members of savings and loan association had no ownership interest in surplus
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Thursday, August 8, 2019

Members of savings and loan association had no ownership interest in surplus

By Nicole D. Prysby, J.D.

Members of a savings and loan association had no ownership interest in the excess capital of the association, which was merged into another institution. The association’s charter did not provide an absolute right to a share of the surplus.

Members of a savings and loan association had no ownership interest in the association’s surplus funds, and, therefore, when the association merged with another entity, the association directors had no duty to distribute the surplus, held the federal Eighth Circuit Court of Appeals. The association’s charter stated that its surplus funds "may" be distributed, which is not sufficient to give the members a right to the funds. With no ownership interest in the surplus, the plaintiffs failed to state a claim against the association’s directors for breach of fiduciary duty (based on their allegations that the directors failed to fully evaluate the merger and should have distributed the surplus). Their claim for breach of fiduciary duty premised on a right to vote on the merger was also dismissed because, absent a right to receive surplus distributions when the associations merged, they pleaded no damages (Chase v. First Federal Bank of Kansas City, Aug. 7, 2019, Gruender, R.).

Backdrop. The plaintiffs were members of Inter-State Federal Savings and Loan Association of Kansas City, a mutual savings and loan association that merged with and was absorbed by First Federal Bank of Kansas City. The plaintiffs alleged that Inter-State’s merger with First Federal was inequitable because Inter-State had $25 million more than First Federal in excess capital and that surplus should have been distributed to Inter-State’s members instead of becoming part of the merged entity. They also alleged that decision to merge should have been decided by a vote of Inter-State’s members and not by its directors. They brought claims for breach of fiduciary duty, unjust enrichment, and conversion.

The district court determined that the plaintiffs failed to plead a claim for breach of fiduciary duty. Inter-State’s members had no ownership interest in the surplus and therefore the directors had no duty to distribute the surplus; members lost nothing of value when the associations merged, thereby suffering no damages. It also concluded that Inter-State’s charter did not give the members a right to vote on the merger. Finally, the district court held that because Inter-State’s members had no ownership interest in its $25 million surplus, they could not state claims against First Federal for unjust enrichment and conversion. The plaintiffs appealed.

Eighth Circuit’s decision. The Eighth Circuit agreed with the district court that the plaintiffs had no ownership interest in Inter-State’s surplus. A mutual association’s surplus is a reserve against losses and a repository of undivided earnings distributed as interest. Although members might realize a gain in the event of a solvent liquidation, that possibility is remote. Inter-State’s charter contained language allowing it to distribute surplus funds, but that language was common on standard charter forms between 1953 and 1983, and no court has concluded that members of a mutual association with that provision in its charter have an ownership interest in its surplus.

Even ignoring that precedent, the plaintiffs would still not have an ownership interest in the $25 million surplus because the provision states that the board "may" distribute a surplus, which does not provide an absolute right to the plaintiffs to a share of that surplus. With no ownership interest in the surplus, the plaintiffs failed to state a claim against First Federal or Inter-State’s directors. Their claim for breach of fiduciary duty premised on a right to vote on the merger was also properly dismissed because, absent a right to receive surplus distributions when the associations merged, they pleaded no damages.

The case is No. 18-1764.

Attorneys: John Fisher Edgar (Edgar Law Firm LLC) for Steven Chase. Charles W. German (German May PC) for First Federal Bank of Kansas City.

Companies: First Federal Bank of Kansas City; Inter-State Federal Savings and Loan Association of Kansas City

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