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United Western Bank v. Office of Comptroller of Currency

United States District Court, District of Columbia

March 5, 2013


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Andrew L. Sandler, Samuel John Buffone, Liana R. Prieto, Buckleysandler LLP, Kirby D. BehreLawrence Kaplan, Paul Hastings LLP, Michael R. Williams Buckleysandler LLP, Washington, DC, Theodore J. Abariotes, United Western Bancorp, Inc., Denver, CO, for Plaintiff.

Christopher A. Sterbenz, Gregory F. Taylor, Office of The Comptroller of The Currency, Washington, DC, for Defendants.



The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (" FIRREA" ) grants the Director of the Office of Thrift Supervision (" OTS" or " the agency" ) " exclusive power and jurisdiction" to appoint a receiver or conservator for a savings association " if the Director determines, in the Director's discretion, that 1 or more of the grounds specified in section 1821(c)(5) of this title exists." 12 U.S.C. § 1464(d)(2)(A)-(B) (2006) (amended July 21, 2011). Although the agency's decision to appoint a receiver is highly discretionary, it is not immune from judicial review. In the event of the appointment of a receiver, " the association may, within 30 days thereafter, bring an action ... in the United States District Court for the District of Columbia, for an order requiring the Director to remove such conservator or receiver." Id. § 1464(d)(2)(B).

In this case, plaintiff United Western Bank (" the Bank" or " the association" ) asks the Court to set aside the January 21, 2011 decision by the Acting Director of OTS to appoint the Federal Deposit Insurance Corporation (" FDIC" ) as receiver for the Bank. Compl. [Dkt. # 1] ¶ 1; see also United Western Bank's Mot. for Summ. J. (" Pl.'s Mot." ) [Dkt. # 99] at 1. The Bank has moved for summary judgment contending that OTS's appointment decision should be overturned because it " was arbitrary, capricious, an abuse of discretion, and not in accordance with FIRREA's requirements." See Mem. in Supp. of Pl.'s

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Mot. for Summ. J. (" Pl.'s Mem." ) [Dkt. # 99] at 2.

Defendants— the Office of the Comptroller of the Currency (" OCC" ) and Thomas Curry, Comptroller of the Currency— oppose the motion, and they have filed their own cross-motion for summary judgment. They assert that placing the Bank into receivership was a proper exercise of discretion under the FIRREA because the Acting Director's decision was based on three independent statutory grounds and supported by the administrative record. Defs.' Mem. in Supp. of their Mot. for Summ. J. and in Opp. to Pl.'s Mot. for Summ. J. (" Defs.' Mem." ) [Dkt. # 111] at 1, 9. Because the Court finds that the Bank has failed to show that OTS's decision was arbitrary or capricious, the Court will deny the Bank's motion and grant defendants' cross-motion.

The Bank contends that it was not " necessary" for the agency to take the drastic step of placing the Bank into receivership on the date that the Acting Director issued his decision. Tr. [Dkt. # 112] 26:8-12. But that is not the proper inquiry. The law does not invite the Court to make its own judgment about whether it would have been feasible, appropriate, or even preferable, for the agency to wait; the sole question presented by this case is whether the agency action was unreasonable.

In forcefully worded pleadings, the Bank passionately insists that the agency's attitude took a " sudden" and inexplicable turn in December of 2011, and that the regulators surprised the bank with unrealistic deadlines and unnecessary requirements. Pl.'s Mem. at 36-37; Reply in Supp. of Pl.'s Mot. for Summ. J. (" Pl.'s Reply" ) [Dkt. # 106] at 5. But any change in the regulators' approach was prompted by the seismic changes in the nation's economy, and more particularly, by the ongoing and significant deterioration of the Bank's financial condition. The review of the administrative record in its entirety reveals that the agency's decision was the culmination of a steady progression and not, as the Bank would have the Court conclude, a sudden wrenching of gears. In early to mid-2009, the Bank had begun to suffer substantial losses, and the agency began voicing concerns about the adequacy of the Bank's capitalization, its reliance on institutional investors, its liquidity, and its investment in mortgage-backed securities. The same concerns that led to the receivership were the focus of a 2009 Report of Examination, a Memorandum of Understanding between the Bank and the agency entered into in December of 2009, a January 2010 examination, and even a cease and desist order agreed to by the Bank in June of 2010. The Bank emphasizes that the record is devoid of evidence of criminal activity or malfeasance on the part of the Bank's managers, and the Court has little doubt that they sincerely believed in their ability to save the institution until the moment the door was closed. But the absence of those factors cannot alter the result compelled by the review of the record under the deferential standard the Court is required to apply.


United Western Bank is a federally chartered savings association under 12 U.S.C. § 1464(a)(2) that was wholly owned by United Western Bancorp, Inc. (" the holding company" ) at all times relevant to this case. Administrative Record (" AR" ) 11. With primary operations in Colorado, the Bank originated construction, land, commercial real estate, and non-mortgage commercial loans, maintained a large portfolio of non-agency mortgage-backed securities, and relied on institutional custodial deposits as its primary source of funding.[1]

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AR 11, 23. The Bank's largest institutional depositors were: Equity Trust Company (" ETC" ), Matrix Settlement and Clearing Services, LLC (" MSCS" ), Legent Clearing, and Lincoln Trust Company (" LTC" ). AR 32.

During the relevant period, the Office of Thrift Supervision was the primary regulator for savings associations, and as such, was responsible for their " examination, safe and sound operation, and regulation." 12 U.S.C. § 1463(a)(1) (2006) (amended July 21, 2011); [2] see also 12 C.F.R. § 563.170(a) (requiring OTS to periodically examine savings associations). During its examinations, OTS evaluated the financial health of savings associations using a variety of metrics. The agency rated the associations' Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk (" CAMELS" ) on a scale of one to five with one being the best rating. See AR 22 n.1, 100. Banks received a separate rating for each of the CAMELS categories as well as a composite CAMELS rating reflecting the bank's overall condition. See, e.g., United Western Bank 2007 Report of Examination, AR 55. In addition to the CAMELS rating, OTS also classified the adequacy of a bank's capital according to the Federal Deposit Insurance Corporation Improvement Act of 1991 (the " FDICIA" ), a portion of which was later codified at 12 U.S.C. § 1831 o , and is commonly known as the Prompt Corrective Action (" PCA" ) statute. The PCA divides bank capital levels into five different categories, ranging from " well capitalized" to " critically undercapitalized." 12 U.S.C. § 1831 o (b)(1). Negative ratings under these metrics can expose a bank to certain statutorily mandated regulatory responses.

The administrative record in this case confirms that prior to early 2009, the Bank enjoyed " an unbroken 16 years of profitability" and correspondingly high CAMELS and PCA capital ratings. AR 1474. As a result of the global financial crisis, the Bank's earnings, asset quality, and capital ratios deteriorated, and one of its largest sources of liquidity began withdrawing its funds. AR 11-12, 2475. The Bank based its hope for survival on the consummation of a highly contingent private sector recapitalization plan. AR 972-1091. The plan depended upon the agency's agreement to lift certain requirements it had previously imposed, AR 1185-90, but the agency declined to do so, AR 4. Ultimately, the agency determined that there were three statutory grounds supporting placing the Bank into receivership. AR 5-7; see also Recommendation for Appointment of the Federal Deposit Insurance Corporation (FDIC) as Receiver for United Western Bank, (" S-Memo" ), AR 21-44. Based on this recommendation, on January 21, 2011, the Acting Director of OTS appointed the FDIC as a receiver for the Bank pursuant to 12 U.S.C. § 1464(d)(2)(A). AR 2-8.

The chronology of the events that led to the imposition of the receivership is as follows:

I. October 2007 OTS Examination

Between October 2007 and January 2008, OTS conducted a comprehensive

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risk-focused examination of the Bank's operations during the fifteen-month period ending on June 30, 2007. AR 51-52, 55. The 2007 Report of Examination (" 2007 ROE" ) was overall positive. In the report, the OTS examiners concluded that the Bank's asset quality, earnings, and liquidity sources were satisfactory, and they gave the Bank a CAMELS composite rating of 2, which meant that the Bank was " fundamentally sound[,] ... stable and ... capable of withstanding business fluctuations." AR 56-57, 60, 100. The report also noted that as of June 30, 2007, approximately 73% of the Bank's total deposits were attributable to four institutional depositors. AR 81. Although the agency cautioned that the Bank " continue[d] to face risk from its concentration in institutional deposits," it tempered this statement by concluding that the Bank's continued efforts to increase its retail deposits and its " contractual agreements with some of the largest of these depositors help[ed] protect the institution's liquidity position." AR 57. Additionally, the OTS examiners stated that although the Bank was " well capitalized" under PCA standards, it had to " remain cognizant" of its concentration in institutional deposits and " continue to maintain a prudent level of capital above the ‘ well capitalized’ standards." [3] AR 56.

II. March 2009 OTS Examination

OTS's next examination of the Bank occurred during the financial crisis; it began on March 30, 2009, and covered the twenty-six month period ending in mid-September 2009. AR 130-31, 134. As the 2009 Report of Examination explained, " the review period saw unprecedented declines in real estate markets, a changing economic environment, and dislocation in capital markets." AR 135. These poor and uncertain market conditions adversely impacted certain aspects of the Bank's operations. AR 135. The report specified that the Bank's " asset quality ha[d] deteriorated" due, in part, to losses on its mortgage-backed securities, and its earnings had declined due to a $4.1 million write-down on two mortgage-backed securities. AR 135-36. The OTS examiners added that any further deterioration of the Bank's mortgage-backed securities portfolio presented additional risks to its earnings. AR 136.

The examiners also noted that their concerns about the Bank's liquidity sources and capital levels had escalated due to the Bank's deteriorating condition.

Capital: The report concluded that the Bank's capital— which had declined to just above the " well capitalized" PCA level— was " less than satisfactory" because it did not fully support the Bank's risk profile. AR 141. Specifically, the OTS examiners warned that " capital levels remain a concern due to risks posed by the bank's remaining non-agency MBS portfolio and negative asset quality trends." AR 142-43. According to the report, the Bank's management was aware of the need to bolster the capital position and was pursuing various options to maintain a prudent level of capital above the PCA " well capitalized" standard. AR 135, 143.
Liquidity: The report also stated that the agency's " [l]iquidity risk concerns ha[d] been elevated" due to the Bank's continued overreliance on

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institutional deposits. AR 136. As of March 31, 2009, institutional deposits represented 86.9% of the Bank's total deposits. AR 160. A third of these depositors could withdraw their deposits at any time because they had no contractual agreements with the Bank. AR 161. The remaining two-thirds had contractual agreements with the Bank that allowed them to withdraw their funds in a variety of circumstances, including a decline of the Bank's capital to below " well capitalized" levels. AR 161. OTS then concluded that the " termination of one or more of the larger institutional deposit relationships could place UWB in a precarious liquidity position, as it may not be able to find replacement funding on reasonable terms." AR 161.

In light of the problems and risks uncovered in the examination, OTS downgraded the Bank to a CAMELS composite rating of 3, which meant that the Bank had " a combination of weaknesses that may range from moderate to severe" and required " more than normal supervision." AR 100, 134.

As part of the 2009 ROE, the agency also required the Bank to take remedial actions: (1) to increase core and total risk-based capital ratios from 9.07% and 10.17% to at least 8.0 and 12.0% by December 31, 2009; (2) to " [d]evelop a revised comprehensive concentration policy that sets limits ... for the bank's funding sources, including exposures to institutional depositors" ; and (3) to " [p]rovide a Liquidity Contingency Plan that contains specific board strategies for ensuring that the Bank maintains adequate short-term and long-term liquidity to withstand any anticipated or extraordinary demand against its funding base." AR 139-40.

After the issuance of the March 2009 ROE, the Bank's financial condition worsened; it lost a total of over $69 million during the year, and its capital ratios continued to decline. AR 865-66, 2475-76. As a result of the Bank's losses and declining capital, on December 10, 2009, OTS and the Bank signed a Memorandum of Understanding (" MOU" ) in which the Bank again pledged to fulfill the remedial measures set forth in the 2009ROE. AR 220-34. Specifically, the Bank agreed to raise its capital ratio levels to 12% and 8% by June 30, 2010, AR 220, and to develop a liquidity contingency plan that " specifically address[ed] deposit concentrations and plans to reduce or manage such concentrations," AR 223-24.

III. January 2010 OTS Examination

As the financial crisis raged on, the Bank reported a loss of $21.02 million for the quarter ending on March 31, 2010. AR 865-66. In April of 2010, OTS sent a letter to the Bank summarizing the results of the agency's January 2010 limited examination of the Bank. AR 267-69. In the letter, the agency expressed serious concerns about the Bank's capital levels and its continued concentration in institutional deposits. AR 267-69.[4]

Capital: In the letter, the agency explained that the Bank's capital rating had " been downgraded given current risks to capital posed by the bank's worsening asset quality trends, the potential impact of future [write-downs] from the bank's remaining relatively large portfolio of below investment grade MBS, and

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deteriorating earnings." AR 267. Additionally, the agency explained that revised calculations performed by the Bank during the January 2010 field visit required the Bank to take an $18 million write-down for the 2009 year-end, which reduced the Bank's total risk-based and core capital ratios to 10.07% and 7.68% respectively. AR 267-68. Although these capital levels were still above the " well capitalized" PCA standard, they were below the levels required by the MOU and the agency expressed concern that the Bank may not be able to meet and maintain the capital levels required by the MOU by the June 30, 2010 deadline. AR 268.
Liquidity: The agency also stated that " liquidity risk at UWB ha[d] increased and [was] of heightened concern" because of the " Bank's significant concentration in institutional deposits." AR 267. The letter explained that this concentration was particularly problematic because the FDIC was reviewing whether these deposits were " brokered." [5] If the FDIC concluded that the institutional deposits were all brokered, the Bank would not be able to accept or renew any such brokered deposits without a waiver from the FDIC once the Bank was officially deemed " Adequately Capitalized." AR 267. The letter then noted that the agency had already informed the Bank that it would be deemed " adequately capitalized" in the near term,[6] and directed the Bank to " consider all strategic alternatives available, including the possible sale, merger, or self-liquidation of United Western, to prevent the potential failure of the institution due to insufficient liquidity." AR 267, 269.

OTS's concerns about the " brokered" status of the institutional deposits materialized on May 24, 2010. On that day, the FDIC notified the Bank that it had concluded that seven of the Bank's institutional depositors, including ETC— the Bank's largest depositor— were " deposit brokers" and that the Bank's " adequately capitalized" status precluded it from accepting, renewing, or rolling over any brokered deposits without a waiver from the FDIC. AR 369-80. In response, the Bank filed a request for a waiver from the FDIC on June 10, 2010, AR 690, and it modified its depositor contracts in an attempt to place them within an exception to the " brokered deposit" designation, AR 1558. On June 22, 2010, OTS sent a letter to the Bank stating that in light of the uncertainty as to whether the FDIC would grant a waiver and the Bank's failure to demonstrate its ability to replace the institutional deposits in the near future, the Bank could " face a severe liquidity crisis in the near future that would threaten the viability of the institution." AR 549. Based on this determination, the agency informed the Bank that its liquidity rating had been downgraded to 5, the lowest possible rating. AR 549.

IV. June 2010 Cease and Desist Order

Three days later on June 25, 2010, the Bank and its holding company consented

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to the issuance of a formal Cease and Desist Order from OTS. AR 553-94. The order set forth OTS's determination that the Bank had " engaged in unsafe or unsound banking practices that resulted in deteriorating asset quality, ineffective risk management practices, inadequate oversight and supervision of the lending function, and inadequate liquidity planning at the [Bank]." AR 569. The Bank did not admit or deny OTS's findings, but it agreed to comply with a number of legally binding requirements: to " meet and maintain" total risk-based and core capital ratios of 12% and 8% by June 30, 2010; and to refrain from increasing its total assets beyond a certain level without prior approval from the OTS Regional Director. AR 554, 562, 569. Although the capital ratio requirements had been in place since the March 2009 OTS Report of Examination, the Bank made several requests for an extension of time to meet the requirements. OTS denied all of these requests. AR 671.

V. The Bank Attempts to Recapitalize

A. Legent Purchase and Recapitalization Transaction

In mid- to late 2010, the Bank and its holding company proposed two transactions in an attempt to alleviate OTS's concerns about the stability of the Bank's institutional deposits and its capital ratios. First, on July 27, 2010, the Bank formally notified OTS of its intent to acquire Legent, one of its institutional depositors. AR 2551. By absorbing Legent as an operating subsidiary, the Bank hoped to obviate any concerns regarding the stability or status of Legent's deposits. AR 2552. After determining that the proposed transaction raised " significant issues of policy," OTS transferred the acquisition application to its office in D.C. for additional review on November 4, 2010. AR 3008.

Second, the Bank's holding company developed a plan to raise approximately $200 million from private investors, $102.5 million of which would be contributed as capital to the Bank (" Recapitalization Transaction" ). AR 972-1091, 1111. On October 28, 2010, the holding company entered into an investment agreement (" Investment Agreement" ) with Oak Hill Anchor Investor, Lovell Minnick Anchor Investor, and Legent/Duques Anchor Investor (together " Anchor Investors" ). AR 980. Pursuant to the Investment Agreement, the Anchor Investors agreed to contribute $103 million to the Recapitalization Transaction if, prior to or contemporaneous with the closing of the proposed investment transaction: (1) the holding company raised an additional $97 to $102 million from other private investors; (2) OTS waived certain conditions of the Bank's June 2010 Cease and Desist Order including the " meet and maintain" requirement; (3) OTS approved the Bank's application to acquire Legent; and (4) OTS approved the Bank's business plan. AR 980-85. In a November 29, 2010 letter, the Bank informed OTS that the Anchor Investors were willing to waive a number of the closing conditions but that they still insisted on these four requirements. AR 1185-90.

The first nail in the Recapitalization Transaction's coffin came on December 3, 2010, when OTS notified the Bank of its refusal to remove the " meet and maintain" requirement. AR 1192-93. To make matters worse, in another letter on the same day, OTS also directed the Bank to take an additional write-down on certain mortgage-backed securities for the quarter ending September 30, 2010. AR 2092-93. This additional loss reduced the Bank's total risk-based capital ratio to 7.8%, which meant that the Bank had ...

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