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ANONYMOOUS v. FDIC

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA


October 10, 1985

ANONYMOUS, Plaintiff,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant

The opinion of the court was delivered by: GREENE

MEMORANDUM

 This case involves the authority of the Federal Deposit Insurance Corporation (FDIC) (1) to prohibit a bank officer, who may have participated in the making of imprudent loans, from working for any federally insured bank in the United States without prior permission from the FDIC, and (2) to take such action at the initiation of administrative procedures designed to determine the bank officer's culpability rather than at their conclusion.

 I

 Plaintiff is a banker who holds positions in several small banks in the southeastern United States. He served as the President of Bank in from March 10, 1981 to November 9, 1982, and as a director of that bank from March 10, 1981 to January 24, 1984, and from July 10, 1984 to July 19, 1985. Until the actions taken by the FDIC which are the subject of this lawsuit, he also served as a director of the Bank of in the Bank in and Bank in .

 In March of 1985, the FDIC, which is responsible for monitoring federally insured banks, and empowered to detect, prevent, and remedy violations of federal banking laws and unsafe banking practices, *fn1" commenced an examination of the Bank. The examination revealed a number of loans of allegedly "inferior quality," and according to the FDIC examiners, a check of the bank records revealed that plaintiff was associated in various degrees with the major portion of these problem loans. *fn2"

 Following this examination of Bank, the FDIC served a notice on plaintiff on August 5, 1985, advising him that, pursuant to 12 U.S.C. § 1818(e)(1) and (2), it was initiating administrative procedures to remove him from office at and to prohibit him from any future participation in any other federally insured bank. Further, under 12 U.S.C. § 1818(e)(4), *fn3" the FDIC issued an interim suspension order removing plaintiff from office and prohibiting him from further banking participation forthwith pending resolution of the administrative removal proceedings. *fn4"

 Plaintiff thereupon brought this action, petitioning the Court to set aside or stay the FDIC's interim suspension order, in accordance with 12 U.S.C. § 1818(f) -- a specific provision granting authority to the courts to stay FDIC interim suspension orders. *fn5"

 After a hearing and consideration of the papers submitted by the parties, the Court, on August 22, 1985, 617 F. Supp. 509, granted plaintiff's motion for a temporary stay and remanded the interim suspension order to the FDIC for reconsideration in light of the Court's Memorandum Order. Specifically, the Court prohibited the FDIC temporarily from acting against plaintiff under the broad terms of the August 5 suspension order, without prejudice, however, to the agency's issuance of new interim suspension orders on a bank-by-bank basis based upon an agency determination that the order was necessary to protect the particular bank. The Court noted in its Memorandum that a remand was necessary because the FDIC order did not contain a reasoned explanation of the factors justifying plaintiff's suspension from participation in the affairs of any federally insured bank, and that this precluded the Court from conducting a meaningful review of the agency decision. The Memorandum further explained that the suspension order also failed to provide any explanation as to the reasons for the drastic measure of an immediate suspension order as distinguished from some other, lesser measure, such as a cease-and-desist order under section 1818(c)(1) *fn6" or an order under section 1818(e)(1) or (e)(2) (which would have effected plaintiff's removal following the completion of the administrative proceedings).

 The apparent lack of criteria to guide the agency's discretion in choosing between emergency suspension orders issued at the initiation of administrative proceedings, and ordinary orders issued following the administrative process, led the Court to suggest that the FDIC promulgate some standards to guide agency officials in that regard, and incidentally thereby also to provide the courts with an adequate basis for review. *fn7"

 Upon remand, the FDIC reconsidered and rescinded the August 5 order, replacing it on September 9, 1985 with an Amended Order of Suspension. *fn8" The Amended Order contains two basic provisions: (1) it prohibits plaintiff from further participation in the affairs of both the and the banks pending the outcome of the administrative proceedings; and (2) it requires plaintiff to secure prior written approval before serving or acting as a director, officer, or employee of any federally insured bank or voting for a director of any such bank.

 On September 16, 1985, plaintiff petitioned the Court for a stay of the Amended Order, challenging it on the same grounds as asserted against the original order, as failing to provide an adequate legal and factual rationale for the blanket prohibition and, more broadly, as exceeding the agency's statutory authority. *fn9"

 The FDIC opposed plaintiff's request for the stay, claiming that it had reconsidered plaintiff's suspension in accordance with the Court's Memorandum Order and had issued a narrower suspension order justified under the circumstances. The FDIC further claimed full authority under the statutory scheme to issue broad, industry-wide orders.

 II

 It is clear that the Amended Order, like the FDIC's original order, amounts to a blanket order barring plaintiff's participation in all federally insured banks pending the outcome of the administrative proceedings, *fn10" in that it suspends plaintiff from all banks unless and until he receives prior written permission. The issue whether this kind of blanket restriction is within the statutory authority of the FDIC requires an examination of the statutory scheme in 12 U.S.C. § 1818(e)-(f) which governs the suspension and removal of bank officials. *fn11"

 The FDIC is charged with monitoring the safety and soundness of federally insured banks and is clothed with broad authority to accomplish that goal. First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680 (5th Cir. 1983). Among its other regulatory powers, the agency is empowered to take action against individual bank officers and directors whose unsafe or illegal actions harm or threaten to harm federally insured banks. See 12 U.S.C. § 1818 et seq. To enable it to guard against the unsound, unsafe, or fraudulent practices of individual bank officers and directors, the FDIC has the authority to invoke a variety of sanctions against suspect individuals, including temporary and permanent cease-and-desist orders as well as the types of interim and permanent suspension orders at issue in this case.

 The two provisions specifically governing the suspension or removal of directors and officers are subsections (e)(1) and (e)(2) of section 1818, title 12 of the U.S. Code. Subsection (e)(1) provides:

 

(e)(1) Whenever, in the opinion of the appropriate Federal banking agency, any director or officer of an insured bank has committed any violation of law, rule, or regulation or of a cease-and-desist order which has become final, or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has committed or engaged in any act, omission, or practice which constitutes a breach of his fiduciary duty as such director or officer, and the agency determines that the bank has suffered or will probably suffer substantial financial loss or other damage or that the interests of its depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty or that the director or officer has received financial gain by reason of such violation or practice or breach of fiduciary duty, and that such violation or practice or breach of fiduciary duty is one involving personal dishonesty on the part of such director or officer, or one which demonstrates a willful or continuing disregard for the safety or soundness of the bank, the agency may serve upon such director or officer a written notice of its intention to remove him from office (emphasis added).

 It is clear from the language of this provision that the statute grants authority to the FDIC to remove a bank officer for misconduct or mismanagement related to his tenure as an official for that particular bank. *fn12" Thus, if an individual has mismanaged Bank A, he may be suspended or removed as an officer from Bank A. But there is nothing in subsection (e)(1) to grant power to the FDIC to remove an officer or director from Banks B, C, and D for misconduct at Bank A: the provision speaks only in terms of misconduct "in connection with the bank" for which the individual serves as an officer or director. Thus, the language of subsection (e)(1) does not, on its face, support the provision in the FDIC's amended order which restricts plaintiff's activities in all other banks as a result of alleged misconduct at .

 12 U.S.C. § 1818(e)(2) reaches further than (e)(1), reading:

 

(2) Whenever, in the opinion of the appropriate Federal banking agency, any director or officer of an insured bank, by conduct or practice with respect to another insured bank or other business institution which resulted in substantial financial loss or other damage, has evidenced either his personal dishonesty or a willful or continuing disregard for its safety and soundness, and, in addition, has evidenced his unfitness to continue as a director or officer and, whenever, in the opinion of the appropriate Federal banking agency, any other person participating in the conduct of the affairs of an insured bank, by conduct or practice with respect to such bank or other insured bank or other business institution which resulted in substantial financial loss or other damage, has evidenced either his personal dishonesty or a willful or continuing disregard for its safety and soundness, and, in addition, has evidenced his unfitness to participate in the conduct of the affairs of such insured bank, the agency may serve upon such director, officer, or other person a written notice of its intention to remove him from office or to prohibit his further participation in any manner in the conduct of the affairs of the bank (emphasis added).

 Insofar as here relevant, *fn13" the (e)(2) provision allows the FDIC to remove an officer or director of an insured bank from his position in that bank as a result of that individual's misconduct "with respect to another insured bank or other business institution." 12 U.S.C. § 1818(e)(2). Thus, under this provision of (e)(2), in contrast to (e)(1), a bank officer serving at Bank A may be removed or suspended from Bank A because of misconduct he or she engaged in some respect at Bank B or C or even at Business D. *fn14" However, this broader suspension power is carefully limited; it may be exercised only if the other requirements for removal as set forth in (e)(2) are satisfied.

 These requirements include, inter alia, a finding by the FDIC of personal dishonesty or a willful or continuing disregard for a bank's safety and soundness, and in addition, a finding that the misconduct evidences the individual's "unfitness to continue as a director or officer" of the second bank. It is clear from this congressional scheme that the statute contemplates a bank-by-bank analysis of the individual's misconduct by the FDIC, and the relationship of that misconduct to his fitness to serve in a particular insured bank. In other words, both (e)(1) and (e)(2) anticipate removal and suspension from individual banks based upon the appropriate designated findings: the statutory language of both provisions unambiguously speaks in terms of removal from "the bank," not "any" bank or "all" banks.

 An examination of the legislative history supports this reading of section 1818. The removal and suspension provisions of the statute were incorporated into the Federal Deposit Insurance Corporation Act in 1966 to "strengthen the regulatory and supervisory authority of Federal agencies over insured banks." S. Rept. No. 1482, 89th Cong., 2d Sess., 1. As the Senate Report accompanying the Act makes clear, however, section 1818(e) attempts to balance the federal agency's interest in protecting insured banks with "the interests of insured banks . . . and their officials in receiving fair treatment from the Government, and in receiving a reasonable degree of protection from government actions which might at times, for one reason or another, generate into arbitrary, capricious and overbearing tactics." Id. The Senate Committee was well aware of the potentially destructive ramifications of granting the FDIC the power to remove or suspend bank officers, *fn15" writing in the Committee Report that "the power to suspend or remove an officer or director of a bank or savings and loan association is an extraordinary power, which can do great harm to the individual affected and to his institution and to the financial system as a whole. It must be strictly limited and carefully guarded." Id. at 8 (emphasis added). *fn16" In response to these concerns, the Senate Committee incorporated into section 1818 both the subsection (f) stay provision invoked by the plaintiff here, as well as a narrow and careful delineation of the circumstances under which an individual may be suspended or removed from office in order to protect the interests of individuals subject to suspension orders. S. Rept. at 8. *fn17"

 Thus, both a reading of the statutory language and an examination of the legislative history indicate that Congress intended that the FDIC's power to remove or suspend bank officers be carefully limited. Congress accomplished these objectives by imposing limitations on the use of suspension power in the statutory provisions, and further, by ensuring that any exercise of the suspension power could be reviewed by the judiciary.

 The FDIC's claim that Congress intended to confer upon the agency virtually unlimited power to remove or suspend officers and directors is inconsistent with this reading of the statute. *fn18" In attempting to provide the Court with authority for its suspension of plaintiff, the FDIC does not point to subsections (e)(1) or (e)(2), or indeed, to any other specific provision in the Federal Deposit Insurance Corporation Act. Instead, the FDIC claims it derives authority to issue a blanket suspension against plaintiff, restricting his participation in "any bank," from the generally recognized principle that "once the bank regulatory agency has found a violation . . . [it] may, within [its] allowable discretion, fashion relief in such a form to prevent future abuses." *fn19" Defendant's Opposition to Plaintiff's Petition to Set Aside or Stay Amended Order at 25, citing Federal Trade Commission v. Mandel Brothers, Inc., 359 U.S. 385, 392-93, 79 S. Ct. 818, 3 L. Ed. 2d 893 (1959).

  The FDIC's reliance on this principle is flawed in the present context. As the quotation from Mandel Brothers makes clear, agency power is limited to the exercise of "allowable discretion." Suspending an individual from all banks in a blanket order goes plainly beyond the "allowable discretion" granted to the FDIC to act on a bank-by-bank basis by sections 1818(e)(1) and (e)(2).

 Congress purposefully limited the use of suspension and removal power to certain types of circumstances, well aware of the dangers of granting unfettered discretion to the FDIC to wield such potentially devastating power. It did not grant to the FDIC unlimited suspension powers; to the contrary, it carefully limited the exercise of the agency's authority. In such circumstances, reliance upon general principles and powers will not do. *fn20" See Fox v. Reich & Tang, Inc., 692 F.2d 250, 255 (2d Cir. 1982); see also, Zenith Radio Corp. v. Matsushita Electric Industrial Co., 505 F. Supp. 1190, 1255 (E.D. Pa. 1980). In light of the specific provisions in the statute that narrowly govern the FDIC's use of suspension power, Congress cannot possibly have intended that the FDIC also be empowered to exercise a broad blanket suspension power derived from only the agency's general enforcement powers without any limitation on its use.

 As the FDIC recognizes, the principle of wide FDIC discretion in fashioning relief applies only "once the regulatory agency has found a violation or unsafe practice." Here, the agency has made no such finding: it is barring plaintiff from all banks at the very outset of the administrative process. The statute itself, of course, makes a distinction between what the agency is empowered to do on an emergency interim basis and what it is empowered to do following an administrative proceeding to ascertain the facts and merits of an alleged impropriety. *fn21" At a minimum, the agency may not issue a blanket, nationwide order where only interim conclusions have been reached, especially given the serious hardship of a suspension from office upon an individual and the length of time an interim suspension is likely to be in effect. *fn22"

 Finally, the FDIC attempts to justify its amended order on the basis that it needs the power to suspend individuals on a blanket basis if it is to fulfill its responsibility to protect insured banks. 12 U.S.C. § 1818(j) does empower the FDIC to do just that -- to issue a suspension order identical to the one handed down here, but only after there has been a determination of misconduct on the merits and a final order has been issued. Additionally, Congress has granted to the FDIC in section 1818(e)(1) and (e)(2) the power to suspend dangerous individuals from an unlimited number of banks -- it simply requires that the suspension be on a bank-by-bank, individualized basis. *fn23"

  The Court finds that the portion of the FDIC's amended order requiring plaintiff to obtain prior written approval before voting for a director, or serving or acting as a director, officer or employee of any bank, exceeds the agency's statutory authority *fn24" and is void.

 III

 The FDIC clearly had the power to suspend plaintiff from the Bank pursuant to subsection (e)(1) and from the Bank under subsection (e)(2). Accordingly, the Court's review of the order pursuant to 12 U.S.C. § 1818(j) with respect to these banks consists only of an analysis of the appropriateness of issuing a section 1818(e)(4) interim suspension order.

 Section 1818(e)(4) permits the FDIC immediately to suspend or remove individuals subject to subsequent administrative removal proceedings under section 1818(e)(1) and (e)(2), during the pendency of the administrative proceedings and prior to a decision on the merits of the removal. *fn25" The only guidance the statute offers for the appropriate invocation of the interim suspension provision is that it may be issued "if [the appropriate federal banking agency] deems it necessary for the protection of the bank or the interests of its depositors." 12 U.S.C. § 1818(e)(4). *fn26"

 The Amended Order prohibits plaintiff from further participation in any manner in the conduct of the affairs of and banks, suspending him effective immediately from office as a director, officer, or participant in the conduct of the affairs of the bank, pending completion of the administrative removal hearings.

 These suspensions are based upon an examination of Bank conducted in March and April of 1985. According to the FDIC's Amended Notice of Intention to Remove from Office, plaintiff was responsible for three unsafe and unsound banking practices with respect to several loan transactions made by Bank. Plaintiff vigorously denies his involvement in the loans, and argues that the FDIC's affidavits are insufficient to support the allegations.

 The (e)(4) provisions (in combination with the (e)(1) and (e)(2) provisions) establish a stringent set of requirements which must be satisfied before the agency may take the extreme measure of suspending or removing an officer or director of an insured bank on an interim basis pending administrative proceedings. Indeed, the Court issued its August 22 stay, at least in part, because of the FDIC's failure to provide any basis for determining how and on what basis it had exercised its discretion in issuing the (e)(4) order *fn27" or on what basis it would do so in any other case.

  The Amended Order does not significantly fill that vacuum. The statement of reasons for the suspension accompanying the Amended Order is substantially identical to the statement of reasons accompanying the first order. *fn28" The only other new material offered in support of the Amended Order consisted of an affidavit submitted by a FDIC official and an "opinion," in which the FDIC attempts to rebut claims made by plaintiff regarding his role in two other banks, and . Neither the affidavit nor the opinion nor any other material submitted by the FDIC explains why the alleged misconduct at even if it did occur, warrants interim suspension.

 Section 1818(e)(4) requires more than a simple finding that unsafe or unsound practices have occurred; in addition, the interim suspension must be "necessary for the protection of the bank and its depositors." The furthest extent the FDIC had gone to establish that factor is a simple repetition of the statutory language to the effect that the FDIC "has deemed it necessary for the protection of Bank and Bank and the interests of their depositors that responded be suspended from office . . ." Amended Order at 2. Even after a request from the Court for more detailed reasons for the agency action, the FDIC still fails adequately to explain why, on the facts of this case, plaintiff's alleged misconduct at seriously threatens the safety of and banks pending the completion of the administrative proceedings.

 Even accepting the FDIC version of the facts, plaintiff was involved in two or three troubled loans, and then only in a tangential way. *fn29" There is no allegation of dishonesty, habitually disastrous banking practices, or any other type of misconduct that might indicate that plaintiff will constitute a serious threat to those two banks pending resolution of the administrative action. The FDIC delayed until August 1985 to institute the removal proceedings even though it had discovered problem loans in March of this year. This delay casts serious doubt on the agency claim that now, when the FDIC has finally bestirred itself, plaintiff's immediate removal is necessary for the protection of those banks (especially since plaintiff has not even participated in the affairs of since his resignation from that bank's Board of Directors in July 1985).

 Thus, even assuming that the FDIC has established a colorable claim that plaintiff was involved in some of the problem loans at the Court finds that the practices at issue here do not rise to the standard imposed in subsection (e)(4) for an interim suspension action.

 IV

 In addition to finding that the FDIC has not satisfied the requirements of (e)(4) in issuing the interim amended order, the Court finds that the plaintiff likewise prevails on the other prerequisites for preliminary relief. *fn30" The severe and permanent potential injury to plaintiff's business reputation as a result of a 9 to 12 month interim suspension, *fn31" together with economic hardship caused by the destruction of plaintiff's banking career, clearly constitute irreparable injury. In contrast, it would be disingenuous for the FDIC to claim severe or immediate injury to the public if plaintiff is allowed to remain in office, given their own delay from March to August in instituting any action against plaintiff. *fn32"

 For the reasons stated herein, the Court will grant the plaintiff's motion for a preliminary injunction.


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