Guaranty Savings and Loan Association (Guaranty) appeals from the district court's dismissal of its action to remove a receiver appointed by the Federal Home Loan Bank Board (FHLBB). We find that the district court did not err in dismissing Guaranty's action and accordingly affirm the judgment of the district court.

Guaranty is a federally insured savings and loan association chartered under the laws of the State of Arkansas. Its home office is in Harrison, Arkansas.

On December 5, 1985, the FHLBB appointed the Federal Savings and Loan Insurance Corporation (FSLIC) as receiver for Guaranty. The Board's appointment of a receiver was based on two separate statutory grounds: 1) Guaranty was insolvent, and 2) Guaranty had incurred a substantial dissipation of assets or earnings due to violations of law, rules, or regulations, or due to unsafe or unsound practices. 12 U.S.C. Sec. 1464(d)(6)(A)(i), (ii).

On December 9, 1985, Guaranty filed this action pursuant to 12 U.S.C. Sec. 1464(d)(6)(A), seeking an order requiring the FHLBB to remove the receiver. Guaranty also requested an injunction requiring the FHLBB to maintain the status quo until the removal matter could be decided. The court denied injunctive relief on December 10, 1985.

Between December 11th and 13th, Guaranty presented its case on the merits. On December 13th, after Guaranty rested its case, the FHLBB moved for an involuntary dismissal pursuant to FED.R.CIV.P. 41(b). The district court granted the motion from the bench and later entered an order dismissing the action "by reason of the failure of Guaranty Savings & Loan Association to sustain its burden of proving that the Federal Home Loan Bank Board was arbitrary or capricious in its determination that a receiver should be appointed for Guaranty Savings & Loan Association, based upon the administrative record made before the Board at the time of reaching its decision on December 5, 1985." Order, December 17, 1985.

This court denied Guaranty's motion for a preliminary injunction on January 16, 1986, and expedited Guaranty's appeal on the merits. On appeal, Guaranty makes the following arguments: 1) the receiver should have been removed because the receivership had not been properly approved by the Arkansas Savings and Loan Supervisor, 2) the scope of review applied by the district court was improper, and 3) the district court erred in failing to find that the FHLBB acted arbitrarily or capriciously in appointing a receiver for Guaranty.1

The FHLBB's statutory authority to appoint the FSLIC as receiver for state chartered, federally insured savings and loan associations is contained in 12 U.S.C. Sec. 1729(c). The subparagraph applicable to this case states:

Notwithstanding any provision of the constitution or laws of any State, or of this section, in the event the Federal Home Loan Bank Board determines that any of the grounds specified in section 1464(d)(6)(A)(i), (ii), or (iii) of this title exist with respect to an insured institution, other than a Federal association, the Board shall have exclusive power and jurisdiction to appoint the Corporation as sole conservator or receiver of such institution.

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* * *The authority conferred by this subparagraph shall not be exercised without the written approval of the State official having jurisdiction over the State-chartered insured institution that the grounds specified for such exercise exist.

12 U.S.C. Sec. 1729(c)(1)(B)(i)(I) and (ii)(I) (emphasis added). In sum, the FHLBB cannot impose a receivership under section 1729(c)(1)(B) unless it: 1) determines that one or more of the grounds specified in 12 U.S.C. Sec. 1464(d)(6)(A) exist, and 2) obtains a "written approval" from the proper state official stating that the specified grounds exist.2

In this case, Beverly Bassett, the Arkansas Savings and Loan Supervisor, gave the FHLBB her "written approval" of the Guaranty receivership on December 5, 1985. Guaranty contends that the written approval was defective because Bassett did not comply with two Arkansas statutes: ARK.STAT.ANN. Sec. 67-857 and ARK.STAT.ANN. Sec. 67-1869.

Guaranty's contention is meritless, as neither of these statutes has anything to do with Bassett's authority to give the FHLBB written approval of a receivership pursuant to 12 U.S.C. Sec. 1729(c)(1)(B)(ii)(I). Section 67-857 deals with Bassett's authority to ask the FSLIC to be receiver in a state receiveship, while this case involves a federal receivership. Section 67-1869 is even further off the mark. It deals with Bassett's authority to enforce cease and desist orders by obtaining injunctions, restraining orders, and writs of mandamus in state court.

Guaranty next challenges the scope of review applied by the district court. In the proceedings below, the district court permitted Guaranty to submit a great deal of testimonial and physical evidence. But when the court ruled on the FHLBB's motion to dismiss, it restricted its review to the administrative record made by the FHLBB.3 Also, the court applied the arbitrary or capricious standard of review set forth in the Administrative Procedure Act, 5 U.S.C. Sec. 706(2)(A), and placed the burden of proof on Guaranty.

Guaranty argues that the court should have held a trial de novo and should have required the FHLBB to prove, by a preponderance of the evidence, that the statutory grounds for the appointment of a receiver existed. Guaranty's argument is based on the premise that the phrase "upon the merits", as it is used in 12 U.S.C. Sec. 1464(d)(6)(A), means "trial de novo".

Section 1464(d)(6)(A) provides, in pertinent part, as follows:

In the event * * * [a receiver is appointed], the association may, within thirty days thereafter, bring an action in the United States district court for the judicial district in which the home office of such association is located * * * for an order requiring the Board to remove such * * * receiver, and the court shall upon the merits dismiss such action or direct the Board to remove such * * * receiver. (Emphasis added).

This statute authorizes judicial review of the FHLBB's decision to appoint a receiver but "does not expressly define the scope of judicial review." Alliance Federal Savings and Loan Association v. Federal Home Loan Bank Board, 782 F.2d 490, 493 (5th Cir.1986); Biscayne Federal Savings and Loan Association v. Federal Home Loan Bank Board, 720 F.2d 1499, 1503 (11th Cir.1983). We reject Guaranty's contention that the phrase "upon the merits" implicitly defines the scope of judicial review. To us, the "upon the merits" language of section 1464(d)(6)(A) merely means that the district court's decision to either dismiss the action or remove the appointed receiver should be based upon the merits of the action (i.e., whether statutory grounds for a receivership exist) rather than on procedural or policy oriented grounds.4 In short, the "upon the merits" language of section 1464(d)(6)(A) means just what it says and nothing more.

"[I]n cases where Congress has simply provided for review, without setting forth the standards to be used or the procedures to be followed, [the Supreme] Court has held that consideration is to be confined to the administrative record and that no de novo proceeding may be held." United States v. Carlo Bianchi & Co., 373 U.S. 709, 715, 83 S. Ct. 1409, 1413, 10 L. Ed. 2d 652 (1963).5 This is such a case. Accordingly, we conclude that the district court correctly restricted its review to the administrative record.

We also conclude that the court was correct in applying the arbitrary or capricious standard of the Administrative Procedure Act, 5 U.S.C. Sec. 706(2)(A), and in placing the burden of proof on Guaranty. First, section 1464(d)(6)(A) does not define the type of review to be used in examining the FHLBB's appointment decision. Thus, the court properly looked to the Administrative Procedure Act for guidance on this issue. See, e.g., San Marino Savings and Loan Association v. Federal Home Loan Bank Board, 605 F. Supp. 502, 508 (C.D.Cal.1984) (reviewing the FHLBB's appointment decision under the arbitrary or capricious standard); Washington Federal Savings and Loan Association v Federal Home Loan Bank Board, 526 F. Supp. 343, 350 (N.D.Ohio 1981) (same). Second, Guaranty brought this action challenging the FHLBB's appointment decision. That decision is entitled to a "presumption of regularity." Citizens to Preserve Overton Park v. Volpe, supra, 401 U.S. at 415, 91 S. Ct. at 823. Thus, the burden of proof was properly placed on Guaranty. See, e.g., Telegraph Savings and Loan Association v. Federal Savings and Loan Insurance Corp., 564 F. Supp. 862, 870 (N.D.Ill.1981), aff'd sub. nom Telegraph Savings and Loan Association v. Schilling, 703 F.2d 1019 (7th Cir.), cert. denied, 464 U.S. 992, 104 S. Ct. 484, 78 L. Ed. 2d 681 (1983) (burden of proof is on the association in an action under section 1464(d)(6)(A)).

To determine whether the FHLBB's decision to appoint a receiver was arbitrary or capricious, we "must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. * * * Although this inquiry into the facts is to be searching and careful, the ultimate standard of review is a narrow one. [We are] not empowered to substitute [our] judgment for that of the agency." Citizens to Preserve Overton Park v. Volpe, supra, 401 U.S. at 416, 91 S. Ct. at 823. Reviewing the record in this case, we agree with the district court's conclusion that the FHLBB's decision to appoint a receiver was not arbitrary or capricious.

The administrative record shows that Guaranty has been a "supervisory concern" of the FHLBB since 1983. The underlying problems with the institution were set forth in detail in an FHLBB examination report transmitted to Guaranty on March 9, 1984. The following excerpt summarizes the thrust of the report:

Since total control of the institution was acquired by the Barrett family in December 1981, there has been a complete change in the management philosophy of the institution. The change has led to the "uncontrolled growth" of the institution as a result of the "over solicitation" of savings deposits and the employment of the funds in high risk investments. These abrupt changes in management policies have been implemented without the benefit of formal objectives, plans, policies or the normal system of checks and balances to control and direct operation of the institution.

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Reflected throughout the examination report are comments on the lack of sound management policies in the savings, loans and investment areas of operations.

Joint Exhibit 1, Vol. II at 576.

The "over solicitation of savings deposits" referred to in the above excerpt was based on the fact that total savings increased from $47.6 million in December of 1982 to $279.9 million in October of 1983. Of particular concern was the fact that this growth was obtained primarily through the use of brokered deposits from outside Guaranty's normal market area. In December of 1982, brokered deposits represented 10.6% of Guaranty's total savings; that figure rose to 77.4% by October of 1983.

Of even greater concern was Guaranty's risky lending and investment practices. After the Barrett family assumed control, Guaranty became heavily involved in underwriting large, speculative loans for real estate acquisition, development, and construction projects across the nation. The loans reviewed by the examiners were described as being more like "ventures * * * than mortgage loans" because the "borrowers usually have little or no equity in the project" and "[t]he lender assumes most or all of the risks." Id. at 581. Despite the risks involved in these loans, the facts suggested that Guaranty conducted little or no independent investigation into the borrowers' creditworthiness and that appraisals of the real estate securing the loans were inadequate.

In an FHLBB examination report transmitted to Guaranty on January 31, 1985, the FHLBB examiners expressed continued concern with Guaranty's lending practices. The examiners conducted a thorough review of twenty-four commercial loans totaling $249 million and discovered a number of imprudent practices and documentation deficiencies with respect to the loans.6 Twenty of these loans were found to have one or more characteristics which might qualify the loan as a real estate "investment" rather than a "loan" under generally accepted accounting principles.⁷ And the examiners determined that "[a]s of December 14, 1984, Guaranty's portion of unrecognized losses with respect to seven of these loans, aggregate $13,242,621. This total equal[ed] 96.7% of Guaranty's reported net worth as of November 30, 1984." Joint Exhibit 1, Vol. III at 640.

The FHLBB continued appraising the problem loans after the last examination report was transmitted and the Dallas branch of the FHLBB later directed Guaranty to establish loan loss reserves of $15.7 million on thirteen of the loans. Later, using the "generally accepted accounting principles" (GAAP) approach to loan loss revenues rather than the approach used by its Dallas branch, the FHLBB determined that Guaranty should recognize a loss of $18.6 million on the 13 loans.

By December 5, 1985, Guaranty had established loan loss reserves of only $1.5 million on these loans. When the FHLBB subtracted the difference between the loan loss reserve mandated under GAAP principles ($18.6 million) and the actual loan loss reserve established by Guaranty ($1.5 million) from Guaranty's reported net worth of $15.9 million as of October 31, 1985, it arrived at a negative net worth of almost $1.2 million. Based on this negative net worth figure, and on the substantial dissipation of assets caused by Guaranty's excessive use of brokered deposits and its imprudent loan and investment practices, the FHLBB appointed a receiver for Guaranty.

Guaranty argues that this action was arbitrary or capricious because the FHLBB: 1) should have used a more recent net worth figure to compute Guaranty's solvency, 2) improperly arrived at the loan loss reserve figure of $18.6 million, and 3) had no basis for determining that its allegedly unsafe or unsound savings solicitation and lending practices actually caused a substantial dissipation of assets. The FHLBB responds that: 1) it used the October 31, 1985 net worth figure from Guaranty's October monthly report because the October monthly report was the most recent monthly report available as of December 5, 1985, 2) it properly followed its own regulations and GAAP accounting methods in arriving at the appropriate loan loss reserves for the thirteen loans at issue, and 3) the facts clearly established that Guaranty had engaged in numerous unsound and unsafe practices and that these practices had caused a substantial dissipation of assets. The FHLBB's response to Guaranty's arguments is sound and is supported by the administrative record. We are convinced that the FHLBB did not act arbitrarily or capriciously in appointing a receiver for Guaranty.

Accordingly, we affirm the district court's dismissal of Guaranty's action.