Steven Chase, On Behalf of Himself and All Others; Shawn Penner, On Behalf of Himself and All Others Plaintiffs - Appellants
First Federal Bank of Kansas City; Richard T. Merker; Helen Skradski; Benjamin J. Fries; William W. Hutton; James R. Jarrett Defendants - Appellees Office of the Comptroller of the Currency; American Bankers Association; Missouri Bankers Association Amici on Behalf of Appellee(s)
Submitted: June 12, 2019
from United States District Court for the Western District of
Missouri - Kansas City
GRUENDER, STRAS, and KOBES, Circuit Judges.
GRUENDER, Circuit Judge.
Steven Chase and Shawn Penner appeal the district
court's dismissal of their putative class action
lawsuit against First Federal Bank of Kansas City
("First Federal") and former directors of
Inter-State Federal Savings and Loan Association of Kansas
City ("Inter-State"). We affirm.
Federal is a federally chartered mutual savings and loan
association that merged with and then absorbed Inter-State,
another mutual savings and loan association, in 2016.
Federally chartered mutual savings and loan associations
provide their members (i.e., depositors) with a
federally insured rate of interest. York v. Fed. Home
Loan Bank Bd., 624 F.2d 495, 500 (4th Cir. 1980). Though
members "are the legal 'owners' of a mutual
savings and loan association, their interest is essentially
that of creditors of the association and only secondarily as
equity owners." Id. at 499-500. "They
cannot sell what they 'own', and if they withdraw
savings they receive only the nominal value of the account
rather than a portion of the mutual's net worth, which is
valuable to them only to the extent it permits the bank to
pay higher interest." Ordower v. Office of Thrift
Supervision, 999 F.2d 1183, 1185 (7th Cir. 1993).
and Penner were members of Inter-State and seek to represent
Inter-State's other pre-merger members in their putative
class action lawsuit. They claim that Inter-State's
merger with First Federal was inequitable because Inter-State
had $25 million more than First Federal in excess capital.
That $25 million surplus, they allege, should have been
distributed to Inter-State's members instead of becoming
part of the merged entity. They also claim that
Inter-State's decision to merge with First Federal should
have been decided by a vote of Inter-State's members and
not by its directors.
and Penner's Amended Complaint has three counts. Count I
alleges that the defendant directors breached their fiduciary
duties to Inter-State's members by not fully evaluating
the merger, not ensuring that the $25 million surplus was
distributed to Inter-State's members, not calling for a
vote of all Inter-State's members to approve the merger,
not adhering to Inter-State's charter, and approving the
merger. Count II alleges that First Federal was unjustly
enriched when it retained Inter-State's $25 million
surplus. Likewise, Count III alleges conversion against First
Federal for taking control of Inter-State's surplus.
district court determined that Chase and Penner failed to
plead a claim for breach of fiduciary duty. It reasoned that
Inter-State's members had no ownership interest in the
surplus and therefore that (1) the directors had no duty to
distribute the surplus, and (2) 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. For these reasons, the district
court granted the defendants' motion to dismiss.
See Fed. R. Civ. P. 12(b)(6). Chase and Penner
review de novo the grant of a motion to dismiss for
failure to state a claim. Hughes v. City of Cedar
Rapids, 840 F.3d 987, 994 (8th Cir. 2016). The district
court performed a choice-of-law analysis and determined that
Kansas law applies, which the parties do not dispute. Under
Kansas law, "[t]he nature, construction, and legal
effect of a written instrument are questions of law."
State ex rel. Sec'y of Soc. & Rehab. Servs. v.
Jackson, 822 P.2d 1033, 1037 (Kan. 1991). Thus, to
determine whether Chase and Penner stated a claim, we will
interpret and apply Inter-State's charter.
district court correctly concluded that Inter-State's
members did not have an ownership interest in its surplus.
This conclusion is consistent with long-standing Supreme
Court precedent and the language of Inter-State's
charter. In Society for Savings v. Bowers, for
example, the Supreme Court explained that the surplus of a
mutual association is "primarily a reserve against
losses and secondarily a repository of undivided
earnings." 349 U.S. 143, 150 (1955). When the
association is solvent, members receive a return on the
surplus "as an element of the interest paid on their
deposits." Id. Members also may have the
opportunity to realize a gain in the "unlikely event of
a solvent liquidation," but that possibility
"hardly rises to the level of an expectancy."
Id. "It stretches the imagination very far to
attribute any real value to such a remote contingency, and
when coupled with the fact that it represents nothing which
the depositor can readily transfer, any theoretical value
reduces almost to the vanishing point." Id.
Supreme Court later relied on Bowers in Paulsen
v. Commissioner, 469 U.S. 131, 139 (1985), and its
reasoning has been followed by federal and state courts ever
since, see, e.g., Reschini v. First Fed. Sav.
& Loan Ass'n of Ind., 46 F.3d 246, 257 (3d Cir.
1995) (noting the "insubstantial nature of the ownership
interests held by depositor-members of a mutual savings
association"); Ordower, 999 F.2d at 1187
("A depositor's interest in a mutual [savings and
loan] is a liquidation preference, not a transferable
property right."); Lovell v. One Bancorp, 614
A.2d 56, 67 (Me. 1992) ("The depositors in a mutual
institution have no legal title to the surplus of the
institution and do not share in any risk of loss since their
deposits are insured."). The law is therefore
well-settled that members of a mutual association do not have
an ownership interest in its surplus.
Chase and Penner claim that Inter-State's charter is
unique and that its language conveys to its members an
interest in its $25 million surplus. They rely on the
following provision of Inter-State's charter:
As of June 30 and December 31 of each year, after payment or
provision for payment of all expenses, credits to general
reserves and such credits to surplus as the board of
directors may determine, and provision for bonus on savings
accounts as authorized by regulations made by the Federal
Home Loan Bank Board, the board of directors of the
association shall cause the remainder of the net earnings of
the association for the 6 months' period to be
distributed promptly on its savings accounts, ratably, as
declared by the board of directors, to the withdrawal value
thereof; in lieu of or in addition to such net earnings,