USCA1 Opinion
March 19, 1993
UNITED STATES COURT OF APPEALS
For The First Circuit
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No. 92-2104
EDWARD McANDREWS, AS TRUSTEE OF
IYANOUGH REALTY TRUST,
Plaintiff, Appellant,
v.
FLEET BANK OF MASSACHUSETTS, N.A., ET AL.,
Defendants, Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
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Before
Selya, Circuit Judge,
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Campbell, Senior Circuit Judge,
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and Cyr, Circuit Judge.
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Edward R. Wiest, with whom Edward D. Tarlow and Tarlow,
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Breed, Hart, Murphy & Rodgers, P.C. were on brief, for appellant.
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Leonard G. Learner and Hutchins, Wheeler & Dittmar, P.C. on
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brief for appellee Fleet Bank of Massachusetts, N.A.
S. Alyssa Roberts, Attorney, with whom Ann S. DuRoss,
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Assistant General Counsel, and Richard J. Osterman, Jr., Senior
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Counsel, were on brief, for appellee Federal Deposit Insurance
Corporation.
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March 19, 1993
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SELYA, Circuit Judge. A property owner appeals from a
SELYA, Circuit Judge.
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ruling that keeps intact a bank's lease notwithstanding both the
bank's failure and a clause in the lease ostensibly permitting
the landlord to opt out upon the tenant's insolvency. Because
enforcing the lease despite the termination-upon-insolvency
clause comports with the provisions of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L.
No. 101-73, 103 Stat. 183 (codified as amended in scattered
sections of 12 U.S.C.), and because such enforcement constitutes
neither a retroactive application of the newly enacted statute
nor an unconstitutional taking of appellant's property, we affirm
the judgment below.
I. BACKGROUND
I. BACKGROUND
In 1986, plaintiff-appellant Edward McAndrews, in his
capacity as trustee of the Iyanough Realty Trust, purchased real
estate situated at 375 Iyanough Road, Hyannis, Massachusetts (the
Hyannis property). At the time, the premises were under lease to
Merchants Bank & Trust Company of Cape Cod. The lease, executed
in 1969, provided for a 20-year term with a 20-year renewal
option. After appellant acquired the Hyannis property, the Bank
of New England (BNE) merged with Merchants Bank and seasonably
exercised the option.
Subsequently, Congress enacted FIRREA, thus providing a
mechanism to deal with financially distressed banks in a manner
that preserves their going concern value and enhances the
prospects of orderly administration during troubled times.
2
FIRREA includes
a provision allowing the Federal Deposit Insurance Corporation
(FDIC), as receiver, to enforce contracts previously entered into
by failed banks notwithstanding contractual provisions designed
to guard against exactly that eventuality. See 12 U.S.C.
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1821(e)(12)(A) (Supp. III 1991).1 This section has particular
pertinence in the present situation since the Hyannis lease
contains a termination-upon-insolvency clause (which we shall
call an ipso facto clause) permitting the lessor to abrogate the
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lease if any regulatory authority, such as the FDIC, takes over
the tenant bank.2
FIRREA was effective on the date of its enactment,
viz., August 9, 1989. See Demars v. First Serv. Bank for Sav.,
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1The statute provides in relevant part that the FDIC, qua
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receiver,
may enforce any contract . . . entered into
by the depository institution notwithstanding
any provision of the contract providing for
termination, default, acceleration, or
exercise of rights upon, or solely by reason
of, insolvency or the appointment of a
conservator or receiver.
12 U.S.C. 1821(e)(12)(A).
2The ipso facto clause is embodied in section 6.1 of the
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lease. It states:
If . . . the Lessee is closed or taken over
by the banking authority of the Commonwealth
of Massachusetts or other bank supervisory
authority, . . . the Lessor lawfully may
immediately or at any time thereafter and
without demand or notice, enter upon the
premises or any part thereof in the name of
the whole, and repossess the same . . . and
expel the Lessee . . . .
3
907 F.2d 1237, 1238-39 (1st Cir. 1990). Seventeen months
thereafter, BNE failed. The FDIC was appointed as receiver on
January 6, 1991. It organized a so-called bridge bank, see 12
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U.S.C. 1821(n)(1)(A) (Supp. III 1991), named it New Bank of New
England (NBNE), and assigned the leasehold interest in the
Hyannis property to it. See 12 U.S.C. 1821(n)(3)(A) (Supp. III
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1991). When appellant, relying on the lease's terms, served NBNE
with a notice to quit, the bank stood fast, asserting that FIRREA
rendered the ipso facto clause unenforceable.
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Appellant then sought a declaration of rights in
federal district court, naming NBNE and FDIC as defendants.3 He
argued that section 1821(e)(12)(A) should only be applied to
leases executed after FIRREA's effective date. In appellant's
view, applying the statute to a preexisting lease containing an
ipso facto clause effectively nullifies the clause, therefore
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constituting an improper retroactive application of the statute;
and, moreover, effects a taking without compensation in violation
of the Fifth Amendment.
The district court rejected these twin asseverations
and granted summary judgment in defendants' favor. See McAndrews
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v. New Bank of New England, 796 F. Supp. 613, 616 (D. Mass.
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1992). McAndrews appeals.
II. RETROACTIVE APPLICATION
II. RETROACTIVE APPLICATION
It is a settled rule that courts should not apply
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3In July 1991, Fleet Bank of Massachusetts purchased NBNE's
leasehold interest in the Hyannis property. Fleet has replaced
NBNE as a defendant and appellee.
4
statutes retroactively when doing so would significantly impair
existing substantive rights and, thus, disappoint legitimate
expectations. See, e.g., Bradley v. Richmond Sch. Bd., 416 U.S.
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696, 711 (1974); FDIC v. Longley I Realty Trust, ___ F.2d ___,
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___ (1st Cir. 1993) [No. 92-1770, slip op. at 5]; C.E.K. Indus.
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Mechanical Contractors, Inc. v. NLRB, 921 F.2d 350, 358 n.7 (1st
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Cir. 1990); cf. American Trucking Ass'ns v. Smith, 110 S. Ct.
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2323, 2338 (1990) (explaining retroactivity principles in respect
to judge-made law). In the instant case, appellant posits that
applying section 1821(e)(12)(A) to trump a preexisting escape
clause must be considered a retroactive application of FIRREA
and, as such, improper. We do not agree.
The determination of whether a statute's application in
a particular situation is prospective or retroactive depends upon
whether the conduct that allegedly triggers the statute's
application occurs before or after the law's effective date.
Hence, a statute's application is usually deemed prospective when
it implicates conduct occurring on or after the effective date.
See Cox v. Hart, 260 U.S. 427, 434-35 (1922); EPA v. New Orleans
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Pub. Serv., Inc., 826 F.2d 361, 365 (5th Cir. 1987); see also
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Allied Corp. v. Acme Solvents Reclaiming, Inc., 691 F. Supp.
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1100, 1110 (N.D. Ill. 1988); King v. Mordowanec, 46 F.R.D. 474,
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482 (D.R.I. 1969). Even when the later-occurring circumstance
depends upon the existence of a prior fact, that interdependence,
without more, will not transform an otherwise prospective
application into a retroactive one. See New York Cent. & Hudson
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5
River R.R. Co. v. United States (No. 2), 212 U.S. 500, 505-06
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(1909) (holding that a statute prohibiting rebates could validly
be applied to a rebate paid after the act's effective date with
respect to property transported before the act's effective date);
Gonsalves v. Flynn, 981 F.2d 45, 48-49 (1st Cir. 1992) (holding
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that an amendment to a tolling provision operates prospectively
when it bars a suit filed after its enactment, even if the claim
accrued before the law changed). Phrased another way, a statute
does not operate retroactively simply because its application
requires some reference to antecedent facts. See Cox, 260 U.S.
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at 435; see also New Orleans Pub. Serv., 826 F.2d at 365 ("A law
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is not made retroactive because it alters the existing
classification of a thing.").
This means, of course, that a statute may modify the
legal effect of a present status or alter a preexisting
relationship without running up against the retroactivity hurdle.
The key lies in how the law interacts with the facts. So long as
a neoteric law determines status solely for the purpose of future
matters, its application is deemed prospective. See New Orleans
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Pub. Serv., 826 F.2d at 365.
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Employing these first principles, FIRREA's reach in
this case cannot be deemed retroactive. Signing a lease
containing an ipso facto clause does not in itself unleash
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section 1821(e)(12)(A). Only subsequent events can pull the
trigger. Here, for example, FIRREA was brought into play through
a collocation of circumstances, all occurring well after the
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law's effective date: the tenant's insolvency, the FDIC's
appointment as receiver, and the landlord's attempt to utilize
the lease's escape hatch. It follows that, because the conduct
triggering the statute's application occurred long after FIRREA's
enactment, using section 1821(e) to trump the ipso facto clause
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constitutes a prospective use of the statute regardless of when
the lease was executed.4 Any other result would twist FIRREA's
structure, do violence to its clear language, and needlessly
frustrate Congress's intent to "deal expeditiously with failed
financial institutions." H.R. Conf. Rep. No. 101-222, 101st
Cong., 1st Sess. (1989), reprinted in 1989 U.S.C.C.A.N. 432.
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After all, if courts were to construe FIRREA so as to shield from
its grasp all claims arising from contracts formed before
FIRREA's enactment, Congress's efforts to protect the public from
existing and anticipated bank failures would be hamstrung.
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4In attempting to buttress its claim of retroactivity,
appellant relies on United States v. Security Indus. Bank, 459
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U.S. 70 (1982), and Hodel v. Irving, 481 U.S. 704 (1987). Both
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cases are inapposite. Security Bank stands for the proposition
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that an attempted invalidation of liens perfected prior to
passage of the Bankruptcy Reform Act constituted a retroactive
application of the Act. 459 U.S. at 78-79. That situation would
be analogous to, say, an FDIC attempt to undo a landlord's pre-
FIRREA eviction of an insolvent bank tenant. That is not the
case at bar.
Hodel involved a statute forbidding certain
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testamentary transfers. As applied, the statute operated to
extinguish devises originating with individuals who died after
the act's effective date. See 481 U.S. at 709. Significantly,
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the question of whether, as a matter of statutory construction,
the act must be deemed to operate retroactively when it
implicates wills drawn before the effective date was a non-issue.
Rather, the court examined whether the property regulation as
applied constituted an unconstitutional taking under the Fifth
Amendment. See id. at 713-18.
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7
Our conclusion that the district court's use of section
1821(e) did not constitute a retroactive application is fortified
by three other pieces of supporting data. The first is the
opinion in Hawke Assocs. v. City Fed. Sav. Bank, 787 F. Supp. 423
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(D.N.J. 1991). To all intents and purposes, Hawke is squarely on
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point. There, the court applied section 1821(e)(12)(A) to render
unenforceable a lease termination clause similar to the one at
issue here. See id. at 426-27. While the parties in Hawke
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signed the lease nearly two years before FIRREA's enactment, the
tenant entered receivership four months after the statute's
effective date.5 See id. at 424.
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Second, we find instructive the caselaw construing
section 365(e)(1) of the Bankruptcy Code, 11 U.S.C. 365(e)(1)
(1988). Courts have consistently held that section 365, an
enactment which renders termination-upon-insolvency clauses
unenforceable in bankruptcy, applies to leases predating the
Code. See, e.g., Matter of Triangle Lab., Inc., 663 F.2d 463,
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467 (3d Cir. 1981) (observing that 365(e)(1) controls "leases .
. . executed prior to the effective date of the Code" when "the
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event which trigger[s] the bankruptcy termination clause occur[s]
after the effective date of the Code"); In Re Sapolin Paints,
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5There are other decisions to like effect. In Longley I
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Realty Trust, ___ F.2d at ___ [slip op. at 8], this court applied
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a FIRREA provision codified at 12 U.S.C. 1823(e) to nullify an
alleged oral agreement originating before the Act's effective
date. In RTC v. Southern Union Co., No. MO-91-CA-120 (W.D. Tex.
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July 7, 1992), the Resolution Trust Corporation successfully
invoked, inter alia, section 1821(e)(12)(A) to enforce a
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repurchase agreement that predated FIRREA.
8
Inc., 5 B.R. 412, 414-17 (Bankr. E.D.N.Y. 1980) (nullifying a
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termination-upon-bankruptcy clause in a lease that predated the
Code where the lessee's insolvency occurred after the Code's
effective date). We think the analogy between the concinnous use
of Code section 365(e)(1) and FIRREA section 1821(e)(1)(A) is a
powerful one.
Third, we take some modest comfort in the awareness
that a variety of FIRREA provisions, albeit provisions of an
essentially procedural nature, have been held to affect claims
arising out of contracts entered into prior to FIRREA's
enactment. See, e.g., Demars, 907 F.2d at 1239 (applying
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FIRREA's grant of federal jurisdiction to cases pending at the
time of enactment); In Re Resolution Trust Corp., 888 F.2d 57, 58
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(8th Cir. 1989) (same); Triland Holdings & Co. v. Sunbelt Serv.
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Corp., 884 F.2d 205, 207 (5th Cir. 1989) (same); see also United
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Bank v. First Republic Bank Waco, 758 F. Supp. 1166, 1168 (W.D.
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Tex. 1991) (applying FIRREA's administrative claims process to
cases pending on FIRREA's effective date).
For these reasons, we reject appellant's principal
assignment of error, concluding that, by construing section 1821
to trump the lease's preexisting ipso facto clause, the district
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court carried out a proper prospective application of the
statute.
III. THE TAKINGS CLAUSE
III. THE TAKINGS CLAUSE
We move now to appellant's fallback position. He
asserts that applying FIRREA to thwart a preexisting termination-
9
upon-insolvency clause violates the Fifth Amendment.6 On this
point, appellant argues that his inability to abort the lease and
repossess the property notwithstanding the tenant bank's failure
destroys his right to the use and enjoyment of the leased
premises, thereby effecting an unconstitutional taking without
compensation analogous to those arising from various proscribed
physical invasions. See, e.g., Lucas v. South Carolina Coastal
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Council, 112 S. Ct. 2886, 2893 (1992); Loretto v. Teleprompter
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Manhattan CATV Corp., 458 U.S. 419, 435-38 (1982). We test this
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proposition.
The concept of a "taking" within the meaning of the
Fifth Amendment defies precise definition.7 Indeed, the Supreme
Court has "eschewed the development of any set formula" for
determining which property-right infringements constitute
compensable takings, relying "instead on ad hoc, factual
inquiries into the circumstances of each particular case."
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6The Fifth Amendment states in part that:
No person shall . . . be deprived of
life, liberty, or property, without due
process of law; nor shall private property be
taken for public use, without just
compensation.
U.S. Const. amend. V.
7Withal, the court has identified two discrete categories of
regulatory takings that, if left uncompensated, constitute
unconstitutional takings per se. These categories, which need no
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"case-specific inquiry into the public interest advanced in
support of the restraint," are (1) permanent physical invasions
and (2) regulations which "den[y] all economically beneficial or
productive use of land." Lucas, 112 S. Ct. at 2893. The
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restriction at issue in this case falls into neither category.
10
Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224
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(1986). Three factors that rank paramount in this inquiry are
(1) the regulation's "economic impact" on the property owner, (2)
the extent to which the regulation interferes with "distinct
investment-backed expectations," and (3) the "character" of the
interference, that is, whether the governmental action is more
akin to a physical invasion or to a necessary readjustment of
economic benefits and burdens. Penn Cent. Transp. Co. v. New
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York City, 438 U.S. 104, 124 (1978); accord Connolly, 475 U.S. at
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225; Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1005 (1984).
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This trichotomous test compels the conclusion that the alleged
infringement here in no way constitutes a compensable taking.
We first assess the severity of the economic impact.
The hallmark of an unconstitutional taking is, of course, the
denial of the "economically viable use of [an owner's] land."
Agins v. City of Tiburon, 447 U.S. 255, 260 (1980). Thus, an
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infringement that leaves virtually the whole of the owner's
possessory rights intact does not constitute a taking. See,
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e.g., Penn Cent., 438 U.S. at 130-31; Gilbert v. City of
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Cambridge, 932 F.2d 51, 56 (1st Cir.) (rejecting takings argument
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where the regulation in question "preserve[d] an economically
viable property use to landlords"), cert. denied, 112 S. Ct. 192
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(1991). Put another way, "where an owner possesses a full
`bundle' of property rights, the destruction of one `strand' of
the bundle is not a taking, because the aggregate must be viewed
in its entirety." Andrus v. Allard, 444 U.S. 51, 65-66 (1979).
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The economic regulation involved here deprives
appellant only of his right to terminate the lease upon the
FDIC's appointment as receiver. He still enjoys all other
common-law rights particular to lessors; all other provisions in
the lease, including those that allow appellant to terminate the
lease for, say, breach of the agreement to pay rent in a timely
fashion or breach of the covenant to maintain the premises in
good order, remain in full force. FIRREA's application, then,
can hardly be said to deprive appellant of anything remotely
resembling his entire bundle of rights.
What is more, the present tenant, as FDIC's assignee,
is not a free rider. It must use the premises only for the
purposes permitted in the lease, abide by the lease's covenants,
and pay the rent and other emoluments stipulated in the lease.
Thus, the only economic harm that befalls appellant from a
frustration of the ipso facto clause is whatever anticipatory
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harm may stem from his lost opportunity to re-rent the Hyannis
property at a potentially more lucrative rate. Such a "loss"
does not weigh heavily in the constitutional balance. See id. at
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66 (observing that "the interest in anticipated gains has
traditionally been viewed as less compelling than other property-
related interests"). In the circumstances of this case,
extinguishing appellant's preexisting right to terminate the
lease upon the bank tenant's failure creates only a minimal
impairment of appellant's overall rights in the Hyannis property.
The second significant factor in determining whether a
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regulation constitutes a Fifth Amendment taking implicates the
extent of the interference with investment-backed expectations.
The inquiry into this factor further undermines appellant's
position.
Although prudent landlords pepper leases with a myriad
of provisions designed to guard against worst-case contingencies,
landlords nevertheless lease property in the expectation that
they will receive the agreed-upon rent, not in the hope that
adverse contingencies will materialize and bring contractual
safeguards into play. Moreover, considering the pervasive
regulation that has long characterized the banking industry, see,
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e.g., Fahey v. Mallonee, 332 U.S. 245, 250 (1947) ("Banking is
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one of the longest regulated and most closely supervised of
public callings."), no reasonable landlord would anticipate that
every provision in a long-term bank lease will remain unaffected
by subsequent changes in federal law. Those who deal with firms
in regulated industries must expect that their dealings will from
time to time be affected by statutory and regulatory changes.
See Connolly, 475 U.S. at 227.
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Given that the reasonable expectation to which a
landlord is entitled is an uninterrupted stream of rent at the
contract rate, not the future exercise of a termination-upon-
insolvency clause, FIRREA cannot be viewed as interfering with a
vested property interest, the usurpation of which would require
compensation. See Penn Cent., 438 U.S. at 124-25 (observing that
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13
government actions, even those which "cause[] economic harm,"
cannot be considered takings when they do not "interfere with
interests that [are] sufficiently bound up with the reasonable
expectations of the claimant to constitute `property' for Fifth
Amendment purposes"). In the last analysis, FIRREA leaves
appellant firmly in possession of the essence of that for which
he bargained: a fixed rent for a fixed period.
Turning to the third factor, we do not think that the
governmental action here at issue resembles a physical invasion.
The government, through FIRREA, is not appropriating appellant's
property for its own use. Rather, it is altering the future
operation of landlords' and tenants' preexisting contractual
rights in order to stem the disruption of banking services within
communities, lessen the costs of bank liquidation, and restore
public confidence in the nation's banking system. In short,
FIRREA's role here is to reallocate economic pluses and minuses
in what we find to be an apt illustration of the aphorism that
"Congress routinely creates burdens for some that directly
benefit others." Connolly, 475 U.S. at 223. There is nothing
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wrong per se with such expressions of legislative will or with
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the readjustments that they produce.
In a nutshell, the character of the governmental action
strongly favors the appellees' position. The mere fact that
future obeisance to the newly enacted law might cause a property
owner, as in this case, to forgo an opportunity for gain is no
more than a necessary consequence of FIRREA's regulatory regime.
14
Hence, if there is an invasion of a property right at all, it is
a tiny invasion of a lambent right, arising "from a public
program that adjusts the benefits and burdens of economic life to
promote the common good," id. at 225, and, as such, does not
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constitute a taking. See id.; accord Andrus, 444 U.S. at 65;
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Penn Cent., 438 U.S. at 124; Usery v. Turner Elkhorn Mining Co.,
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428 U.S. 1, 15-16 (1976); Pennsylvania Coal Co. v. Mahon, 260
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U.S. 393, 413 (1922).
We need go no further. Here, the three integers
composing the applicable equation unanimously suggest rejection
of appellant's Takings Clause argument. We heed that counsel.
IV. CONCLUSION
IV. CONCLUSION
To recapitulate, applying section 1821(e)(12)(A) to
trump the ipso facto clause in the Hyannis lease is a prospective
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application of FIRREA and, thus, lawful. Furthermore, the
resulting impairment of the landlord's right to terminate the
lease upon the tenant bank's failure does not infract the Takings
Clause. The judgment of the district court must, therefore, be
Affirmed.
Affirmed.
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15