ber, amount, or ratio of such loans at the date of the examination is greater than it was at the beginning of such period or if, at the date of the examination, a substantial number and amount of previously delinquent loans are still delinquent or have been eliminated by extension of maturity date, by recasting, or through the real estate owned account.

(3) Failure to follow an aggressive collection policy or to observe recognized standards in determining the ability of borrowers to undertake and to pay their mortgage obligations.

D. Other considerations

While the condition and operations of an institution as measured by the three factors enumerated above would generally be determinative for the purposes of this program, the identification of those matters is not intended as even a suggestion that consideration should not be given to other matters, separately or in context with one or more of the three factors stated.

Among other considerations to which careful attention should be given in connection with the question and a determination as to whether or not test appraisals should be made are these:

(1) The amount, percentage, and trend of real estate owned, and the relationships of book values, the institution's appraisals, and sales prices.

(2) Inventory of completed but unsold houses in the institution's lending area, particularly where the institution is continuing to make speculative construction loans or is subject to the investment pressures described above. (3) The number and amount of speculative construction loans as to which there is a relatively substantial deficiency in funds available for completion of construction.

(4) Use of the association to finance real estate transactions in which any of the institution's directors, officers, employees, or attorneys have a direct or indirect financial interest.

A. Exception

IV. OTHER PROVISIONS

Test appraisals will not be made in the case of any State-chartered insured institution the home office of which is located in a State where the appropriate State department has established and maintains an appraisal procedure acceptable to the Board whereby appraisers on the staff of such State department make test appraisals of real estate security in connection with each regular examination of each such institution; provided that

(1) The results of such appraisals are made known by such State department, in writing, to the Board's supervisory agent for the district in which such State is located; and

(2) Test appraisals may be made by appraisers for the Board in any instance where, in the opinion of the Board, such appraisals are necessary to protect the interests of the Insurance Corporation, other insured institutions, or the public.

B. Timing of test appraisals

As a general rule, a sound selection of institutions as to which test appraisals are to be made must be the product of a careful consideration of current facts and factors. Therefore, in the absence of tangible, substantive evidence that an insured institution is making marginal or excessive loans in a manner and to an extent indicative of need for immediate action, determination as to whether or not test appraisals should be made should be geared to the orderly processes of examination.

C. Selection of appraisers

The Chief Examiner for the Federal home loan bank district in which is located the principal office of an insured institution with respect to which test appraisals of real estate security are made shall select the appraiser, or appraisers, to make such appraisals, unless otherwise instructed by the Board. Before making a final selection, however, the Chief Examiner or his designee (usually the examiner in charge of the examination) should submit to the institution's managing officer the name, or names, of persons contemplated for such selection and, insofar as is feasible, endeavor to select appraisers who do not make appraisals for competing institutions in the community, it being understood that the insured institution shall not exercise a veto power over selection of the appraiser, or appraisers, by the Chief Examiner.

20-602-63-31

D. Selection of properties for test appraisal

Unless otherwise instructed, the examiner in change shall select the properties to be appraised. The properties so selected should be sufficient in number and of such diversity as to type, location, and borrowers as, in the judgment of the examiner in charge, to represent a reasonable cross section of the loans made within the period covered by the examination in connection with which test appraisals are made.

E. Appraisal of occupied properties

If any of the properties selected for test appraisals are occupied, the examiner in charge of the examination shall furnish the managing officer of the institution a list of such properties reasonably in advance of the appraisal of the properties, so that the managing officer may advise the occupant of each such property to the effect that test appraisals are being made in the regular course of examination of the institution, the objective being to minimize disturbance and repercussions insofar as practicable.

Approved by:

DECEMBER 28, 1962.

FEDERAL HOME LOAN BANK BOARD.

HOGAN & HARTSON, Washington, D.C., January 24, 1963.

Re Long Beach Federal Savings & Loan Association-settlement agreement dated February 14, 1962.

FEDERAL HOME LOAN BANK BOARD,

Washington, D.C.

DEAR SIRS: This letter confirms the opinion and views expressed by me on January 14, 1963 to the entire Board as well as to Mr. Clarence S. Smith, Mr. Max Wilfand, and Mr. S. Clifford Browne.

Federal Home Loan Bank Board (the "Board"), Federal Savings and Loan Insurance Corp. (the "Insurance Corporation") and Long Beach Federal Savings & Loan Association ("Long Beach") entered into a settlement agreement dated February 14, 1962 (the "Settlement Agreement").

Under article XV of the settlement agreement the Board, pursuant to section 546.4 of the rules and regulations for the Federal Savings and Loan System, approved a plan, definitely set forth in article XV, for distribution of Long Beach's net surplus, reserves, and undivided profits after payment of its shareholders and creditor liabilities.

Section 546.4, entitled "Voluntary Dissolution," states that the board of directors of any Federal association may propose a plan for dissolution, which may provide for (a) the Insurance Corporation to be appointed receiver; (b) all assets of the association to be transferred to another institution for a sufficient amount of cash to pay all obligations of the association and to retire all outstanding share accounts; (e) the transfer of all assets to another institution in consideration of the payment of all outstanding obligations of the association and the issuance of share accounts or other evidence of interest to the members of the association on a pro rata basis; or (d) dissolution in such other manner as may be proposed by the directors and which to them appears to be to the best interest of all concerned. Section 546.4 then provides for submission of the plan to the Board, and, if approved by the Board, then to the members of the association at a duly called meeting. The plan becomes effective when approved by a majority of the votes cast at such a meeting.

Sections 546.2 and 546.3 of said rules and regulations expressly allow the merger of a State association with a Federal association if the resulting association is a Federal association and if the Board approves.

Long Beach's charter provides that Long Beach has the power "to wind up and dissolve, merge, consolidate, or reorganize in the manner provided by law and rules and regulations made thereunder" (sec. 3); that all holders of share accounts and all borrowers are members, who are entitled to vote by proxy (as well as in person), and that any number of members present at a meeting constitutes a quorum, and a majority of all votes cast determines any question (sec. 4); that each share account member has 1 vote for each $100 or fraction thereof of the participation value of his share account, each borrowing member has 1 vote, and no member may cast more than 50 votes (sec. 4); and that all holders of share accounts shall be entitled to equal distribution of net assets, pro rata to the value of their share accounts, in the event of voluntary or involuntary Benidation, dissolution or winding up of the association (sec. 9).

Long Beach's bylaws provide that notice of each special meeting of members shall state the purpose or purposes and the place and time of meeting, and shall be published in a newspaper once a week for 2 successive calendar weeks prior to the meeting (sec. 3); and that the board of directors has the power to limit share payments which may be accepted (sec. 6).

The officers and directors of Long Beach are now proposing to merge Long Beach into Equitable Savings & Loan Association ("Equitable") in the method described in a draft of proxy statement for a proposed special meeting of the members of Long Beach on January 10, 1963. This proxy statement has attached as exhibit B a copy of the proposed merger agreement to be entered into between Long Beach and Equitable.

The method of handling the liquidation of Long Beach proposed in said proxy statement is hereinafter referred to as the proxy statement plan. The plan of distribution of Long Beach's assets approved under article XV of the settlement agreement is hereinafter referred to as the article XV plan. The page references mentioned below pertain to said draft of proxy statement.

I have been requested to express an opinion whether the proxy statement plan is the same as, or whether it is different from, the article XV plan. If both plans are the same, no further approval by the Board is needed. If the proxy statement plan does not conform to the article XV plan, then under section 546.4 Board approval must be obtained before the proxy statement plan may be submitted to a meeting of Long Beach members for action.

In my opinion, the proxy statement plan does not conform to, and is not the same as, the article XV plan for the following reasons:

1. The proxy statement plan differs from the article XV plan in that the former contemplates a merger of Long Beach with Equitable, and the latter plan contemplates a sale of the major part, but not all, of Long Beach's assets to Equitable. Although mergers and sales often accomplish the same result, they are nevertheless two different methods, and are even treated as such in part 546 of the rules and regulations. In a merger the merging associations combine into one surviving association which by operation of law upon the merger becoming effective receives the assets of the nonsuriving association and assumes its obligations. In a sale the assets of one association are transferred to another association by appropriate instruments of conveyance or assignment, and the tranferee association by money or appropriate instrument pays or delivers a reasonable consideration for such assets.

2. (a) The proxy statement plan contains an express provision to the effect that any dissenting shareholder member of Long Beach has the right to require Long Beach to purchase his dissenting shares for their fair market value as of the day before the vote of the shareholders, "as specified in the corporations code of the State of California, section 4300 et seq." (p. 6, 37); whereas the article XV plan does not include such provision either expressly or by implication.

(b) The sale or other disposition of all or substantially all the property of a California corporation is controlled by sections 3901-3904 of the California General Corporation Law; merger and consolidation of corporations are controlled by sections 4100-4318 of that law. Dissenting shareholders are not given any statutory right of compensation, as under section 4300, in the case of a sale; they are given such a right only in the case of a merger or consolidation. Since the article XV plan provides for a sale of part of the Long Beach assets and not for a merger, section 4300 relating to mergers and consolidations cannot be considered part of that plan.

(c) It could also be argued that section 4300 of the California General Corporation Law, providing for compensation of dissenting shareholders of California corporations in event of merger or consolidation, is not applicable to Long Beach shareholders in this situation because Long Beach is not a corporation formed under the laws of California.

(d) The granting to Long Beach shareholders of rights under said section 4300 et seq. would raise legal questions not desirable and not contemplated for the article XV plan. Section 4300 is intended to have effect in conjunction with the other corporation code sections (4100-4318) dealing with merger "nd consolidation. If section 4300 applies to the plan, it could be contended that these other sections are also part of the plan, and, for example, that under section 4107 the plan must be approved by not less than two-thirds of all outstanding shares entitled to vote (or even two-thirds of all $100 shares) instead of by a majority of the voting shares present at the meeting, or that under section 4123 the right of a Long Beach shareholder to attack the transaction is limited after

approval to an action to determine whether the legal number of votes was favorably cast.

(e) The interpretation of section 4300, if applicable, could result in other problems. That section requires a corporation, if requested, to purchase the shares which the shareholder does not vote in favor of merger. In view of the limitation of each Long Beach shareholder to 50 votes regardless of the size of his share account, various questions would raise concerning the right to or extent of compensation under section 4300 of Long Beach shareholders whose share accounts exceed $5,000.. If a shareholder has a $100,000 share account and casts 50 votes in favor of the plan, would he be entitled to no compensation or complete compensation for the $95,000 in shares apparently not voted; if he casts 40 votes in favor and 10 against or not voted, what is his compensation? These results were not intended for or included in article XV.

3. The article XV plan contemplates the sale to Equitable of only sufficient assets of Long Beach equal in value to the aggregate value of the Long Beach share accounts; whereas the proxy statement plan provides for the acquisition by Equitable of all Long Beach assets.

4. (a) The two plans differ in the manner of distributing the net surplus, reserves, and undivided profits (the "net surplus") in that under the article XV plan assets equal to the net surplus are retained under the control of the Long Beach directors for either (i) conversion "into cash" and distribution to Long Beach shareholders (sec. 2(h) (ii) of art. XV) or (ii) transfer to a trust for the benefit of Long Beach shareholders as well as for security for the performance by Long Beach of its liabilities and duties under the settlement agreement; under the proxy statement plan Equitable acquires such assets immediately and, the Long Beach shareholders are paid off in 584,784 shares of Equitable guarantee stock. Thus, under the article XV plan the Long Beach shareholders rely solely upon Long Beach assets for payment in cash installments, and under the proxy statement plan they rely for payment upon the corporate stock of another business corporation under different management and with different assets and obligations. The aggregate cash value of the distribution to Long Beach shareholders under the article XV plan could differ substantially from that under the proxy statement plan. In order to determine the extent of this difference there should be ascertained (A) the estimated approximate aggregate cash payoff to shareholders under the article XV plan, taking at market value the Long Beach real property and other assets exclusive of loans and computing its loans either at book value or at estimated cash conversion value for distribution under section 2(h) (v) of article XV, and (B) the estimated value of the aggregate payoff to shareholders under the proxy statement plan, giving due regard to the estimated market values at the times of distribution to shareholders or sale by the trust of the 584,784 shares of Equitable stock as well as to their past dividend history and future dividend prospects. The fact that the Equitable stock is assessable under certain conditions should also be given consideration (note 7 on p. 35). The necessity for such a comparative analysis clearly indicates that the two plans are different.

(b) The proposal to permit Long Beach shareholders to sell their Equitable shares to an undisclosed purchaser at $16.50 per share (p. 4) is not part of the article XV plan and serves to emphasize the difference between the two plans. The value to be reecived by Long Beach shareholders under this proposal would not be the same as that received under the article XV plan (except by very remote coincidence), and may or may not be better dependent upon business and market conditions.

(c) The trust to be established under the article XV plan would initially cover remaining Long Beach assets; the trust under the proxy statement plan (pp. 47-59) would initially cover Equitable stock.

(d) Under the article XV plan, Long Beach assets, consisting primarily of real estate loans and cash equal in the aggregate to the net surplus (which should reflect the market value, not cost, of Long Beach's assets other than loans), remain until distributed as security for all Long Beach's liabilities and duties under the settlement agreement. Such assets will still be security for such liabilities and duties even after distribution by transfer to the trust which may be established under section 2(h) (vi) of article XV. Such assets in the amount

of at least $3 million must remain until April 1972 either undistributed or in the trust. The proxy statement plan proposes to substitute for this security (A). the promise of Equitable to be responsible for Long Beach's liabilities under the settlement agreement, and (B) the establishment of a trust initially consisting of 183,000 shares of Equitable stock instead of real estate loans and cash derived from Long Beach equal to the net surplus. Thus, the initial security for Long Beach's obligations under the settlement agreement after Long Beach had ceased to do business is different under each plan.

5. The trust agreement (exhibit C of the proxy statement) proposes a trust which seems to be different from that permitted under article XV. Section 2(h) (vi) of article XV authorizes distribution to Long Beach shareholders to be consummated by transfer to a trust of assets equal in value to the net reserve. Provision for such a trust was made in order to allow an early dissolution of Long Beach and at the same time permit an orderly conversion of Long Beach assets into cash for distribution and yet keep intact for 10 years as security for Long Beach's liabilities under the settlement agreement assets equal in value to $3 million. Section 2(h) (vi) of article XV expressly requires that the trustee or trustees of the trust "shall be subject to all duties and responsibilities customarily imposed upon trustees under the law of California without any limitation of liability for misconduct or negligence." Without purporting to list all differences between the article XV plan trust and the proxy statement plan trust, I am of the opinion that the two proposed trusts differ as follows:

(a) The aricle XV trust is subject to all liabilities and duties of Long Beach under the settlement agreement without the condition imposed by the proposed trust agreement (p. 48) that any claimant first obtain judgment against Equitable and show that Equitable has insufficient assets to satisfy such judgment. (b) The article XV plan makes no provision for substitution of the trust assets by an indemnity bond (pp. 48 and 49).

The

(c) The article XV plan requires that the trustees shall be subject to all duties and responsibilities customarily imposed upon trustees under the law of California without any limitation of liability for misconduct or negligence, and provides for transfer to the trust of assets, which will consist mostly of cash and real estate loans to be converted into cash. The intricate system in the proxy statemen plan trust for voting by beneficiaries, annual meetings, and the board of advisers, which is more suited to an active business than a trust holding property for the benefit or security of the beneficiaries, is not contemplated under the article XV plan and implies that the trustee would have duties and responsibilities other than those imposed upon trustees by the law of California. section of the proposed trust agreement entitled "Trustee Released" (p. 53) is confusing and seems to place authority in the board of advisers. To conform to the article XV plan, it should be made clear that the trustee is independent and that any and all directions of the board of advisers are advisory only, and that such directions do not release the trustee from the duties and responsibilities customarily imposed upon trustees under the law of California or from liability to the beneficiaries. The purported release by beneficiaries (p. 53) would, if effective, actually deprive beneficiaries of legal remedies against the trustee for failure to comply with the standards required by law. The laws of California no doubt make provision for investments by trustees, and it is quite possible that such laws would require the trustee to consider the suitability of the 183,000 shares of Equitable stock as a trustee investment with due regard given to diversification and production of income, perhaps resulting in an early sale of all or part of such shares. This duty imposed upon the trustee could not be restricted by the board of advisers.

(d) The article XV plan requires distribution of all principal and income of the trust within 10 years after the close of the settlement escrow. The section entitled "Duration of the Trust" (p. 54) does not make this clear.

(e) The article XV plan trust does not contemplate that the trustee should receive for loans to the trust interest in excess of that customarily and reasonably received by lenders. Accordingly, the section entitled "Advancement by Trustee" (p. 54) should not fix the interest rate for such loans during the entire term of the trust.

(f) Section 2(h) (vi) of article XV requires the trustee to furnish accountings to the Insurance Corporation. The section entitled "Accounting" (p. 57) does not make provision for this.