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FDIC Enforcement Decisions and Orders

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   [5166A] In the Matter of Janice J. France, Berrien E. Moore, Ada P. Sands, Leonard S. Sands, Crowley & Cuneo, and Christensen, White, Miller, Fink & Jacobs, First Pacific Bank, Beverly Hills, California, Docket No. FDIC-90-156c&b (7-16-91).

   Board rejects ALJ's recommended decision, denies motions for summary judgment, and remands case to ALJ for a hearing to determine (1) whether transfer of funds, in contemplation of the Bank's insolvency, to law firms for representation of Bank officers and directors constituted unsafe or unsound practices, (2) whether the law firms were institution-affiliated parties, and (3) whether restitution is appropriate. (For subsequent orders in this matter, see ¶5169, ¶9004A and ¶9007.)

{{4-30-92 p.A-1766.1}}
   [.1] Unsafe or Unsound Practices—Insolvency—Outside Counsel
   The act of engaging counsel to challenge state regulatory action is not per se an unsafe or unsound banking practice, but may be, depending on factual circumstances surrounding the transaction.

   [.2] Unsafe or Unsound Practices—Insolvency—Relevant Factors
   Factors relevant to determination of whether insolvent bank engaged in unsafe or unsound banking practice by engaging outside counsel include the size of the retainer in relation to the institution, the existence of a retainer agreement, timing of the expense, and the scope of services actually performed.

   [.3] Institution-Affiliated Parties—Outside Counsel
   A finding of outside counsel's institution-affiliated status will be dependent upon the determination of whether payment of retainer constituted an unsafe or unsound banking practice.

   [.4] Directors and Officers—Restitution
   Determination of whether unjust enrichment occurred, and what restitution is appropriate, is dependent on a finding that officers committed an unsafe or unsound banking practice.

In the Matter of
JANICE J. FRANCE,
BERRIEN E. MOORE,
ADA P. SANDS,
LEONARD S. SANDS,
CROWLEY & CUNEO,
and CHRISTENSEN, WHITE, MILLER, FINK & JACOBS
and FIRST PACIFIC BANK
BEVERLY HILLS, CALIFORNIA
(IN RECEIVERSHIP)
DECISION AND REMAND ORDER
FDIC-90-156c&b

I. INTRODUCTION

   The Federal Deposit Insurance Corporation ("FDIC"), initiated this action on August 10, 1990, pursuant to sections 8(b) and 8(c) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §§ 1818(b) and (c), by issuing to First Pacific Bank, Beverly Hills, California ("Bank"), and certain individual Respondents, including Janice J. France, Berrien E. Moore, Ada P. Sands, and Leonard S. Sands, a Findings of Fact and Conclusions of Law, a Temporary Order to Cease and Desist, and a Notice of Charges and of Hearing ("Notice").1 The Notice also named four law firms as Respondents: Keck, Mahin & Cate; Ronald D. Jaman, Esq.; Crowley & Cuneo; and Christensen, White, Miller, Fink & Jacobs. The Notice alleged that a total of $180,000 had been transferred from the Bank to the law firms with knowledge that the FDIC considered the Bank to be in an insolvent condition and subject to imminent closure by the California State Banking Department.
   The law firm of Keck, Mahin & Cate and certain individual Respondents challenged the Temporary Order to Cease and Desist by petitioning the United States District Court for the Central District of California, Los Angeles, for a Temporary Restraining Order. The Court denied the request for a Temporary Restraining Order at a hearing on September 25, 1990.
   A prehearing conference in this administrative proceeding was held in Los Angeles, California on October 18, 1990.
   On December 5, 1990, Respondent Janice J. France filed a Motion for Summary Judgment. Enforcement Counsel filed an Opposition on December 14, 1990. On December 19, 1990, Berrien E. Moore filed a Notice of Joinder to Respondent France's Motion for Summary Judgment. On December 21, 1990, Leonard S. Sands and Ada P. Sands filed a Notice of Joinder to Respondent France's Motion for Summary Judg-


1 The other individual Respondents listed in the Notice were: Leo D. Kaplan, M.D., Richard A. ("Tony") Palmer, Michael A. Zugsmith, Jose M. Anotado, Joyce B. Desveaux, Daniel S. Geiger, Robert G. Jacobsen, Donna R. Watson, and Leon Zuckerman. The Board of Directors ("Board") of the FDIC issued a Decision and Order on February 5, 1991, dismissing without prejudice, for good cause shown, Respondents Anotado, Desveaux, Geiger, Jacobsen, and Watson from this proceeding.
{{4-30-92 p.A-1766.2}}ment. Enforcement Counsel filed Motions to Strike the Notices on December 26, 1990. On February 6, 1991, Administrative Law Judge Steven M. Charno ("ALJ") issued an Order denying the FDIC's Motion to Strike and set a hearing for Monday, March 4, 1991, to hear argument on the Motions for Summary Judgment.
   On February 14, 1991, Respondent Crowley & Cuneo filed a Motion for Summary Judgment. The same day, Respondent Christensen, White, Miller, Fink & Jacobs filed a Notice of Joinder and Incorporation to the Crowley & Cuneo Motion for Summary Judgment (jointly "Respondent law firms"). Enforcement Counsel filed its Opposition on February 25, 1991. Accordingly, this Decision concerns only the issue of whether the Summary Judgment Motions should be granted on behalf of the law firms of Crowley & Cuneo and Christensen, White, Miller, Fink & Jacobs and four individual Respondents, Janice J. France, Berrien E. Moore, and Ada P. and Leonard S. Sands (the "individual Respondents" or "Respondent former bank officials").2
   On March 4, 1991, oral argument was heard on both of the Motions for Summary Judgment. The ALJ recommended that both be granted. The ALJ issued two brief decisions: the Recommended Decision dated March 19, 1991, concerning the two Respondent law firms, Crowley & Cuneo and Christensen, White, Miller, Fink & Jacobs, and the Recommended Decision dated March 22, 1991, concerning individual Respondents Janice J. France, Berrien E. Moore, Leonard S. Sands, and Ada P. Sands. Enforcement Counsel filed exceptions to each of the ALJ's Recommended Decisions.3
   The Board concludes that the Motions for Summary Judgment should be denied and this matter remanded for the reasons set forth herein, to determine whether the transfer at issue constitute an unsafe or unsound banking practice and whether restitution is appropriate.

II. STATEMENT OF THE CASE

   The individual Respondents seek summary judgment on the ground that there are no genuine issues of triable fact. They assert that, under In the Matter of Harold A. Hoffman, et. al. and Alaska Continental Bank, 1990 FDIC Enf. Dec. (P-H) ¶5140, aff'd on appeal, Hoffman v. FDIC, 912 F.2d 1172 (9th Cir. 1990) ("Hoffman"), engaging a law firm to challenge the regulators is not an unsafe or unsound practice. Id. at A-1493. Further, they assert that, as a matter of law, neither of the two requirements for restitution set forth in 12 U.S.C. §§ 1818(b)(6)(A)(i) and (ii) are met. Respondent law firms seek summary judgment on the ground that there are no genuine issues of triable fact under Hoffman, since the prepayments of the retainers at issue are proper as a matter of law. Further, Respondent law firms assert that they are not institution-affiliated parties.
   Under section 8(b) of the FDI Act, if, in the opinion of the FDIC, after notice and opportunity for hearing, an insured depository institution or institution-affiliated party is engaging or has engaged, or the FDIC has reasonable cause to believe that the bank or party is about to engage in an unsafe or unsound practice, then the FDIC may issue an order to cease and desist. The order may require that affirmative action be taken to correct the conditions resulting from the practice. Restitution or reimbursement may be ordered if: (1) the depository institution or institution-affiliated party was unjustly enriched in connection with any violation or practice; or (2) the violation or practice involved a reckless disregard for the law or any applicable regulations or a prior order of the regulators. 12 U.S.C. §§ 1818(b)(6)(A)(i) and (ii).
   The FDIC examined the Bank as of April 30, 1990, and the preliminary findings of that examination were discussed with the management of the Bank throughout May and June. On July 12, 1990, a meeting was held at the California State Banking Department's Los Angeles office. At the meeting, all present were advised by the State of the Bank's insolvent condition and that the regulators were prepared to take "extreme action" unless the Bank promptly corrected its


2 Not before the Board at this time are the remaining three individual Respondents in this enforcement proceeding: Richard A. ("Tony") Palmer, Robert G. Jacobsen and Leon Zuckerman; and the remaining two Respondent law firms Keck, Mahin & Cate and Ronald D. Jaman, Esquire. Further, on April 11, 1991, pursuant to delegated authority, the San Francisco Regional Director (Supervision), terminated the Notice issued against the law offices of Ronald D. Jaman, and Leo D. Kaplan, M.D., and Michael A. Zugsmith.

3 The parties filed certain other papers responding to the exceptions which the Board declines to consider. 12 C.F.R. § 308.41(c).
{{4-30-92 p.A-1766.3}}situation.4 Respondents France, Moore, and Leonard S. and Ada P. Sands were present at the July 12, 1990 meeting. Two members of Respondent Crowley & Cuneo (Arthur J. Crowley and Sarah J. Hoover) and two members of Respondent Christensen, White, Miller, Fink & Jacobs (Christine BurdickBell and Barry Fink) were present at the July 12, 1990, meeting.5
   Immediately thereafter, beginning on July 13, 1990, and until the Bank closed on August 10, 1990, the Bank and its management, including each of the individual Respondents as directors and officers of the Bank, and the Respondent law firms participated in a series of transfers of depositors' funds, two of which are the subject of this enforcement proceeding. Joint Stipulations, Nos. 33–38.
   After the FDIC discovered these transactions through its monitoring activities, the Notice was issued charging two types of unsafe and unsound banking practices. Only the second practice is before the Board in the Motions for Summary Judgment.6 According to Enforcement Counsel, Respondents participated in or caused $75,000 to be removed from the Bank and transferred to Respondent law firms for the purpose of prepaying legal fees for representation in future matters involving the State Banking Department.7 These transfers of depositors' funds, allegedly to the detriment of other bona fide creditors, are alleged to have occurred after Respondents were on notice that the State Banking Department considered the Bank to be in an insolvent condition. Enforcement Counsel asserts that the transfer of these funds in contemplation of the Bank's insolvency and on the eve of its closing is a form of self-dealing, a breach of the Respondents' legal and fiduciary duties, and an unsafe or unsound banking practice for which the Respondents should be required to make restitution or reimbursement.

III. The ALJ'S RECOMMENDED DECISIONS

   With respect to the Respondent law firms, the ALJ's March 19, 1991, Recommended Decision ("R.D."), first determined whether there was any dispute concerning the purpose of the legal fees. Enforcement Counsel admit that the allegedly improper payments to the Respondent law firms on August 6, 1990 in the amounts of $25,000 and $50,000, were retainers for matters relating to the State Department of Banking. R.D. of 3-19-91 at 3–4. The ALJ found that these law firms were engaged throughout July and August 1990 in representing and defending the Bank, including participation in filing at least one lawsuit against the State Department of Banking on behalf of the Bank immediately after the funds were received. R.D. of 3-19-91 at 4.
   The ALJ determined that there is no legitimate dispute regarding the purpose of the two August 6, 1990 payments.8 The ALJ


4 Specifically, the State also advised the Bank that its allowance for loan losses was exhausted and that total shareholder equity was at a deficit of $1,565,000. A follow up letter states:
       As we discussed at the meeting of July 12, 1990, the Bank is in critical condition. We wish to repeat the notice given to the Bank at the meeting that we may take extreme action unless it promptly corrects the situation by increasing its capital or by merging with or selling its business to another depository institution.

5 Other members of the Bank's management and board of directors were also present. Joint Stipulations, No. 12.

6 The first unsafe or unsound practice alleged by Enforcement Counsel consisted of Respondents causing or participating in causing $105,000 to be removed from the Bank and transferred to Respondents Keck, Mahin & Cate and Ronald D. Jaman Esq. for the purpose of establishing a self-insurance legal fund to protect certain directors and officers from lawsuits arising from their activities at the Bank.

7 Specifically, Enforcement Counsel alleges that on August 6, 1990, a check in the amount of $25,000 was issued by the Bank to Respondent Crowley & Cuneo. The check indicated that it was a "prepaid expense/retainer fee re: State Banking Department." The $25,000 payment was made pursuant to an August 6, 1990, invoice submitted by Respondent Crowley & Cuneo which indicated that it was with regard to "state banking department retainer." There were no billings from Respondent Crowley & Cuneo which accompanied the invoice.
   Also on August 6, 1990, a check in the amount of $50,000 was issued by the Bank to Respondent Christensen, White, Miller, Fink & Jacobs. The check indicated that it was a "prepaid expense re: retainer for August services re: state banking matters and capitalization of bank." The $50,000 payment was made pursuant to an August 6, 1990, invoice submitted by Respondent Christensen, White, Miller, Fink & Jacobs which indicated that it was with regard to "retainer for August services re: state banking matters and capitalization of Bank." There were no billings from Respondent Christensen, White, Miller, Fink & Jacobs which accompanied the invoice. The Bank was closed four days later, on August 10, 1990.

8 Prior to the March 4, 1991 hearing, Enforcement Counsel insisted that the payments were for matters relating to the law firms' efforts to keep the Bank open. However, at the hearing, Enforcement Counsel attempted to modify its position on this issue. Enforcement Counsel stated "...we feel, indirect evidence in the form of the (Continued)

{{4-30-92 p.A-1766.4}}observed at the hearing that Enforcement Counsel did not present any direct evidence to show that the funds were not used for any purpose other than to challenge the Bank's regulators. Accordingly, the ALJ found no triable issue of material fact concerning the purpose of the two payments at issue.
   The next issue the ALJ analyzed concerned the application of Hoffman.9 In both of his Recommended Decisions, the ALJ found that the reasoning and authority set forth in Hoffman was controlling and dispositive. In Hoffman, the Board stated that "engaging a law firm to challenge the State Banking Authority or the FDIC does not constitute an unsafe or unsound banking practice." Id. at A-1493. R.D. of 3-19-91 at 5. Reasoning that Enforcement Counsel was unable to distinguish the instant case from Hoffman, the ALJ concluded that the Respondent law firms did not participate in an unsafe or unsound banking practice by retaining and compensating the law firms. R.D. of 3-19-91 at 5. The ALJ also concluded that since the Respondent law firms had not engaged in any unsafe or unsound practices, they were not institution-affiliated parties.10 Accordingly, the ALJ recommended that Summary Judgment in favor of the Respondent law firms be granted and the Notice dismissed.
   Regarding the Respondent former bank officials, the ALJ applied the Hoffman analysis and concluded that these Respondents had not engaged in an unsafe or unsound banking practice. R.D. of 3-22-91 at 3. On the issue of unjust enrichment, the ALJ stated that it is difficult to conceive of circumstances in which it would not be to the benefit of management to prevail in a controversy with the Bank's regulators. R.D. of 3-22-91 at 3. The ALJ observed that Enforcement Counsel's argument that retaining counsel is an unsafe or unsound practice would prohibit a bank's management from ever contesting actions by the regulators, which could deny constitutionally protected rights. R.D. of 3-22-91 at 3. Finally, the ALJ concluded that Enforcement Counsel had failed to assert legally sufficient allegations concerning commission of an unsafe or unsound practice and of unjust enrichment of the Respondent former bank officials, and thus, the Motion for Summary Judgment should be granted and the Notice dismissed. R.D. of 3-22-91 at 3.

IV. DISCUSSION

A. The Application of Hoffman to the Instant Facts
   In Hoffman, the Board considered the question of whether certain expenditures made after an institution was on notice that it was insolvent were acceptable business expenses.11 Hoffman at A-1492-93. Noting that under the right set of circumstances certain post-insolvency, pre-closure expenses could be proper, the Board explained that this type of case involves a "determination of Respondent's actual motive for taking the action at issue," Hoffman at A-1491. Next, the Board opined that what may be an acceptable business practice in one context may very well be an unsafe or unsound banking practice in another. The FDI Act does not enumerate unsafe or unsound banking practices, but leaves the regulatory agencies to make a determination on a case by case basis.12 However, as the U.S. Court of Ap-


8 Continued: billings submitted by the respective law firms which may indicate that some, most or all of the funds...may have been used for past services rendered by the firm to the bank on perhaps other matters not related to defending the bank." R.D. of 3-19-91 at 4, citing Transcript ("Tr.") at 28. The ALJ did not permit Enforcement Counsel to modify this aspect of his case because of an earlier ruling (to comprehensively disclose theories, etc., well in advance) designed to avoid a "trial by surprise." R.D. of 3-19-91 at 5. Because Enforcement Counsel had used this ruling to its advantage against other Respondents and had possession of the billings since October 1990, the ALJ concluded that allowing the Enforcement Counsel to make this previously undisclosed modification of its case would be grossly unfair.

9 In the Matter of Harold A. Hoffman, et. al., 1990 FDIC Enf. Dec. (P-H) ¶5140, aff'd, Hoffman v. FDIC, 912 F.2d 1172 (9th Cir. 1990).

10 An institution-affiliated party is defined as: [A]ny independent contractor (including any attorney, appraiser or accountant) who knowingly or recklessly participates in—
    (A) any violation of any law or regulation; (B) any breach of fiduciary duty; or (C) any unsafe or unsound practice, which caused or is likely to cause more than a minimal financial loss to, or significant adverse effect on, the insured depository institution. 12 U.S.C. § 1813(u)(4).

11 In Hoffman there was factual dispute as to whether the bank was aware that it was insolvent prior to making the expenditures at issue. In this case, although Respondents do not concede that the Bank was insolvent, there is apparently no factual dispute about notice—the individual Respondents and the Respondent law firms were informed of the Bank's insolvent condition by the State on July 12, 1990.

12 See Statement of the Chairman of the Federal Home Loan Bank Board, John E. Horne, Financial Institutions (Continued)

{{4-30-92 p.A-1766.5}}peals for the Ninth Circuit stated in the appeal of Hoffman:

       ...an unsafe or unsound practice is one "`which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds'" and that it is a practice which has a "reasonably direct effect on an association's financial soundness."13
   In the Hoffman Board Decision, the Board stated that "once findings of insolvency and an intention to close a bank have been communicated to a bank, it is no longer `business as usual.'" Id. at A-1494. At that juncture, the fiduciary responsibilities of the officers and directors and other professionals require that they act to preserve assets for the protection of the depositors, other creditors and the Bank Insurance Fund. Accordingly, once a bank is on notice that it is determined to be in an insolvent condition, fiduciary responsibilities become more focused, in recognition of the changed circumstances at the institution.
   During the uncertain period before an insolvent institution is closed or acquired, the public interest mandates that its management prudently exercise its fiduciary responsibilities to protect the institution's assets. There is an inherent conflict in this situation. A challenge to the determination of insolvency may ultimately preserve the continued existence of a bank, but during the pendency of such challenge it will further dissipate the bank's remaining assets. The Board is mindful of the dilemma this presents to a bank's management. However, once a bank is informed that it is in a critical condition of impending insolvency, the public interest in preserving assets is paramount. Each expenditure by an insolvent institution by definition is not from capital or reserves, but from the depositors' funds. Thus, each dollar expended for any purpose will have a direct impact on the resources available to pay depositors and bona fide creditors and ultimately may affect the Bank Insurance Fund. As the Board stated in Hoffman:
       Respondents may wish to debate the issue of insolvency for as long as possible; however, the public interest is not furthered by such activities. The statutory and regulatory scheme under which banks are supervised has as its focus the protection of the public interest and the deposit insurance fund. The interests of the public and the fund require that the board not risk permitting potential wrongdoers to "raid the safe" until their assertions of solvency are proven to have been wrong. Hoffman at A-1494.
   The Board concludes that, once a bank is on notice that it is considered to be in an insolvent condition, fiduciary responsibilities require that management and advising professionals place a priority on preserving the institution's remaining assets.14 Fiduciary duties are not static—they must take into consideration, and adjust to, the changes transpiring at an institution.15
   In Hoffman, the Board was faced with a series of post-insolvency pre-closure expenses, one of which was $100,000 to a law firm to challenge the regulatory action and establish a self-insurance fund for certain directors. Hoffman at A-1493. The record in Hoffman did not permit an allocation of the cost between the two purposes. The Board found that:
       Notwithstanding the timing of the arrangement, the absence of a written retainer agreement, and the absence of independence of counsel, engaging a law firm to challenge the State Banking Authority or the FDIC does not constitute an unsafe or unsound banking practice. Hoffman at A-1493.

   [.1] The act of engaging a law firm to challenge the regulatory action is not per se an unsafe and unsound banking practice.

12 Continued: Supervisory and Insurance Act of 1966: Hearing on S. 3158 before the House Comm. on Banking and Currency. 89th Cong., 2d Sess. 49–50 (1966).

13 Hoffman v. FDIC, F.2d 1172, 1174 (9th Cir. 1990) (citing Gulf Fed. Sav. & Loan Ass'n v. Federal Home Loan Bank Bd., 651 F.2d 259, 264 (5th Cir. 1981), cert. denied, 458 U.S. 1121, 102 S. Ct. 3509, 73 L.Ed.2d 1383 (1982)).

14 Accordingly, attorneys contemplating an insolvency challenge must carefully and independently determine that there is a valid factual basis for challenging the regulatory action prior to undertaking such representation.

15 These fiduciary duties are shared by management, outside consultants and independent contractors. Obviously, this places a heavy burden on those dealing with the Bank during this uncertain period to properly justify expenditures.
{{4-30-92 p.A-1766.6}}Whether engagement of a law firm and payment of an advance retainer fee is an unsafe or unsound banking practice is dependent upon the factual circumstances surrounding the transaction. Hoffman was not intended to and does not mean that an insolvent bank's engagement of a law firm may never constitute an unsafe or unsound practice. An insolvent institution may commit an unsafe or unsound banking practice, for example, if it retains a law firm to challenge the regulatory action, but the fees expended are excessive in relation to the size of the institution or the actual work performed.16 Further, if the motive for the regulatory challenge were merely delay with no reasonable factual or legal basis for challenging the determination of insolvency, then the expenditure would also be unsafe or unsound.

   [.2] A reasonable standard must be utilized to determine whether an unsafe or unsound banking practice has occurred when an insolvent institution expends legal fees prior to closure. Factors relevant to the analysis include, but are not limited to, the size of the retainer in relation to the institution, the existence of a retainer agreement, timing of the expense, and scope of the services actually performed. Analysis of these factors in light of the fiduciary duties attendant to an insolvent institution, as discussed above, must be made to determine whether it was an unsafe or unsound banking practice.
   In Hoffman, Enforcement Counsel met its burden of proving that the expenditures to the law firm were improper. The burden then shifted to respondents to show that the nature and amount of the certain expenditures were not improper. The respondents in Hoffman failed to meet this burden. Hoffman at A-1493. Accordingly, the entire expenditure was deemed improper and reimbursement ordered to the extent unjust enrichment had occurred. Hoffman at A-1493.

   [.3] The record before the Board in the present action contains allegations which suggest that the retainers at issue were utilized, at least in part, for proper purposes. However, the timing of the payments does raise some question as to their propriety. An advance retainer fee which the law firm charges against or draws down as services are performed may be appropriate. Even in this situation, the Board would have expected the bank and the Respondent law firms to have maintained proper records of the services performed and return to the receiver any unused portion of the retainer in the event the bank is closed. On this record, the Board declines to make any determination regarding the propriety of the legal fees at issue since the record does not contain sufficient supporting documentation.17 The Board also declines to determine whether the Respondent law firms are or were institution-affiliated parties of the Bank within the meaning of 12 U.S.C. § 1813(u)(4).18 Under the statute, a finding of institution-affiliated status will be dependent upon the determination of whether the transfers at issue constituted a breach of fiduciary duties or an unsafe or unsound practice.

   [.4] Similarly, with regard to the individual Respondents, the determination of the separate issue of whether or not unjust enrichment occurred must follow the finding of whether or not these Respondent former bank officials committed an unsafe or unsound practice. These findings cannot be made on the record before us. Further analysis is needed, given the considerations addressed in this Decision to determine whether the expenditures were proper or whether an unsafe or unsound practice has occured.

IV. REMEDY

   In accordance with the Board's analysis and discussion of the Hoffman decision, the Motions for Summary Judgement are denied, and these matters are remanded for a hearing on the merits to determine whether the transfers at issue constituted unsafe or unsound practices, whether the Respondent law firms are institution-affiliated parties, and whether restitution is appropriate in light of the factors and considerations set forth in Hoffman and in this Decision.

ORDER

   The Board, having reviewed the record and the applicable law, hereby orders that the Motions for Summary Judgement are denied and hereby remands these matters to the ALJ for a hearing on the merits.


16 Similarly, an unsafe or unsound practice could occur if the alleged legal fees for challenging the regulatory action were, in fact, expended for another purpose.

17 The Board notes that, while the burden of proof is on Enforcement Counsel to show that the fees were not for a proper purpose, where, as here, the Respondents are in the best position to establish the services performed for the Bank, the burden on Enforcement Counsel is small.

18 12 U.S.C. § 1813(u)(4) is set forth in footnote 10, supra at 9.
{{4-30-92 p.A-1766.7}}
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 16th day of July, 1991.
   /s/ Hoyle L. Robinson
   Executive Secretary

__________________________________
RECOMMENDED DECISION

In the Matter of
Janice J. France, et al., and
First Pacific Bank
Beverly Hills, California
(Insured Nonmember State Bank)

Steven M. Charno, Administrative Law Judge:

   By Motion filed February 15, 1991, Respondent Crowley & Cuneo (Respondent Crowley) seeks an Order recommending a grant of summary judgement in its favor. By Notice of Joinder and Incorporation filed February 15, 1991, Respondent Christensen, White, Miller, Fink & Jacobs (Respondent Christensen) also seeks an Order recommending a grant of summary judgment in its favor. The opposition briefs to both motions were filed on February 26, 1991. At a March 4, 1991 hearing on the subject motions, pursuant to my inherent authority to conduct this proceeding and without objection having been made by any party, I granted the joinder of Respondent Christensen. Thereafter, oral argument was heard. My decision on the motion is made in the context of the following procedural history.
   On August 10, 1990, Petitioner Federal Deposit Insurance Corporation (Petitioner) issued a Notice of Charges and of Hearing (Notice), Findings of Fact and Conclusions of Law and a Temporary Order to Cease and Desist against Respondents Crowley and Christensen, among others. The basis for the proceedings against two respondents was explicitly set forth in Petitioner's pleadings. Paragraph 20(f) of the Notice provided that "on or about August 6, 1990, the [First Pacific] Bank...advanced the sum of $25,000 to Respondent Crowley & Cuneo as a retainer for any future matters related to the California State Banking Department." Paragraph 20(g) of the Notice provided that "on or about August 6, 1990, the [First Pacific] Bank...advanced the sum of $50,000 to Respondent Christensen, White, Miller, Fink & Jacobs as a retainer for any future matters related to the California State Banking Department." These payments were alleged to constitute unsafe and unsound banking practices within the meaning of Section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b). It is undisputed that the California State Banking Department (Department) was First Pacific Bank's primary regulator and, at the time the payments at issue were made, was engaged in substantial regulatory activity with respect to First Pacific Bank (Bank). The Bank was closed by the Department on August 10, 1990.
   A prehearing conference was held in this proceeding on October 18, 1990 in Los Angeles, California. At that conference, I ordered that:
   1. On or before October 22, 1990, the parties were to produce documents responsive to the discovery requests made in this proceeding.
   2. On or before December 7, 1990, the parties were to file and exchange witness lists, which were to include a short narrative description of the testimony of each witness and reference the paragraph(s) in the Notice as to which the witness would testify.
   3. On or before December 7, 1990, the parties were to exchange their prenumbered documentary exhibits, and Petitioner's exhibits were to include an indexed set of all statutory and regulatory authority upon which it intended to rely.
   4. The failure to specify a witness or the subject of a witness's testimony on a party's witness list would preclude the admission of such evidence as part of that party's case in chief.
   5. The failure to include a document in a party's documentary submission would preclude the admission of such evidence as part of that party's case in chief.
   6. On January 4, 1991, the parties were to file their proposed findings of fact and conclusions of law and Petitioner was to file the proposed Order that it sought in this proceeding. These findings were explicitly ordered to be sufficiently comprehensive and detailed so as to permit them to be used as a basis for the decision in this proceeding and to ensure that the highest degree of due process and fair play took place.
   7. On or before February 1, 1991, the parties were to file briefs which stated
{{4-30-92 p.A-1766.8}}whether the filing party agreed or disagreed with each of the findings and conclusions proposed by the opposing party or parties and, with respect to each disputed finding, the filing party was to comprehensively state the nature and extent of its disagreement and identify and describe with particularly the evidence and relevant legal authority which supported its position.
   8. During the week of February 25, 1991, counsel for the parties were to meet, formulate and execute stipulations which embodied all factual and legal matters shown to be undisputed by the findings of fact, conclusions of law and briefs previously filed.
   9. The hearing in this case was scheduled to commence on March 4, 1991 in Los Angeles, California.
   Document production by Petitioner and Respondents Crowley and Christensen occurred as scheduled in October 1990. Respondents Crowley and Christensen subsequently exchanged their respective witness lists and prenumbered exhibits with Petitioner on or about December 7, 1990. Another Respondent, Keck, Mahin & Cate (Respondent Keck), failed to tender its prenumbered exhibits to Petitioner by the ordered deadline.
   On or about January 4, 1991, Petitioner filed its proposed findings of fact and conclusions of law. Paragraph 41 of that pleading stated, in pertinent part: "The $25,000 sum advanced to Respondent law firm of Christensen, White, Miller, Fink & Jacobs ...represented prepayment of legal services as a retainer for matters related to the California State Banking Department and capitalization of the Bank..."
   On or about January 29, 1991, Petitioner filed a motion to compel Respondent Keck to exchange its exhibits with Petitioner or, in the alternative, for an order excluding the offer of any documentary evidence by that Respondent. On February 13, 1990, I issued an Order barring the introduction of documentary evidence by Respondent Keck.
   On March 4, 1991, the parties submitted their Joint Factual, Legal and Evidentiary Stipulations ("Joint Stipulation") to me.
   During the March 4, 1991 hearing on the merits which followed the severance of Respondents Crowley and Christensen from the proceeding. Petitioner several times sought and was granted the exclusion of testimony offered by Respondent Keck on the ground of surprise because such testimony had not previously been identified in accordance with my October 18, 1990 Order.
   Having reviewed the full pleading record before me, including without limitation the Notice, the Answers filed by Respondents Crowley and Christensen, the parties' proposed findings of fact and conclusions of law, their prehearing briefs, the Joint Stipulation, and the instant motions, oppositions to motions and reply brief of the parties; and having heard and considered extensive oral argument on March 4, 1991, I hereby make the following:

FINDINGS OF FACT

   Neither Respondent Crowley nor Respondent Christensen engaged in any unsafe or unsound banking practice, nor is either Respondent an institution-affiliated party as that term is defined in 28 U.S.C. § 1813(u)(4).
   Petitioner has consistently maintained throughout the course of this proceeding that the allegedly improper payments to the Respondents on August 6, 1990 in the sums of $25,000 and $50,000, respectively, were retainers for matters relating to the Department.1 Petitioner also admits that the Department was the Bank's primary regulator and that both law firms, throughout July and August 1990, were engaged in representing and defending the Bank with respect to the Department's regulatory actions, including the filing of at least one lawsuit against the Department on behalf of the Bank immediately after the subject funds were received.2
   There is no legitimate dispute on the record before me as to the purpose of the two August 6, 1990 payments at issue in this proceeding. Prior to the March 4, 1991 hearing on the summary judgment motion, Petitioner insisted that the payments were for matters relating to the Bank's primary regulator and to the Respondent law firms' efforts to keep the Bank open.3 Indeed, Petitioner confirmed during the hearing that its prior position had been that "the purposes of


1 See, e.g., Notice, Paragraphs 20(f) and 20(g); Federal Deposit Insurance Corporation's Proposed Findings of Fact and Conclusions of Law, Paragraphs 41 and 43.

2 See, e.g., Joint Stipulation, Paragraphs 15–18, 20–22 and 27–32.

3 Nor does any evidence specifically relied upon by Petitioner in opposition to the instant motion raise any triable issue of material fact as to the purpose of the payments at issue. Both the cancelled check and the invoice regarding the payment to Respondent Crowley, for example, reflect that they are "Re: State Banking Department." (Continued)

{{4-30-92 p.A-1766.9}}the transfers to the Crowley firm and the Christensen firm were to represent the bank against the state regulators."4
   After extensive questions concerning Petitioner's theory of the case had been posed during the hearing, Petitioner attempted to deviate from its long-held position that the payments to these law firms were for services in connection with the Bank's regulators. Petitioner then indicated that, while it did "not have any direct evidence to show that the funds were not used for anything but that purpose [i.e., to challenge the Bank's regulators]," it purported to have "...we fell, indirect evidence in the form of the billings submitted by the respective law firms which may indicate the some, most or all of the funds...may have been used for past services rendered by the firm to the bank on perhaps other matters not related to defending the bank."5 When asked to provide more information concerning this contention, Petitioner conceded that it had only "begun that review, that process" and that it would not be able to make a specific allegation until at least 24 hours after a hearing on the merits had commenced.6 Three considerations require me to reject Petitioner's March 4, 1991 attempt to modify the theory of its case.
   First, I made it clear to all of the parties at the October 18, 1990 prehearing conference that this proceeding would not be a "trial by surprise."7 Each party was therefore required to lay out, comprehensively and in detail, its theories, contentions, evidence and authorities well before the March 4, 1991 hearing date. Manifestly and by its own admission, Petitioner failed to comply with these requirements as they related to its new theory.
   Second, Petitioner sought and obtained an exclusionary order and multiple exclusionary rulings against another party, Respondent Keck, for failing to abide by my October 18, 1990 Order. After petitioner has invoked my prehearing Order and the preclusionary remedy set forth in 12 C.F.R. § 308.07(b), it would be grossly unfair not to hold Petitioner to the same standards. Hence, I find that Petitioner has waived any right it may have had to modify its theory and its evidentiary presentation.
   Third, Petitioner has acknowledged that the sole basis for its new approach was some "indirect evidence in the form of the billings submitted to us by the two law firms."8 Those billings have been in the Petitioner's possession since the October 22, 1990 production of documents, at the very latest. No justification is possible (nor was one offered by Petitioner) for waiting until the first day of the hearing to invoke these long-held documents in order to proffer a fundamental change in the theory of its case.9
   For the foregoing reasons, I find that there is no triable issue of material fact concerning the purpose of the two payments here at issue. I further find that the two payments were shown to have been made by the Bank in order to obtain legal services required to challenge the state banking authority. With this basic premise clearly established, I find the reasoning and authority set forth In the Matter of Harold A. Hoffman, Joseph L. Hayes and Alaska Continental Bank, 1990 F.D.I.C. Enf. Dec. (P-H) ¶5140, on appeal, Hoffman v. Federal Deposit Insurance Corporation, 912 F.2d 1172 (9th Cir. 1990), to be controlling and dispositive. In that case, the Board of Directors of the FDIC specifically found that "engaging a law firm to challenge the State Banking Authority or the FDIC does not constitute an unsafe or unsound banking practice," notwithstanding the timing of the arrangement. Supra at A-1493. Petitioner has not cited, nor have I found, any contrary controlling authority or any reasonable basis for distinguishing the facts in the instant matter from the facts and logic of In re Hoffman, supra. Indeed, Petitioner itself has consistently relied on that opinion in its pleadings in this proceeding.


3 Continued: Moreover, as Petitioner has admitted, the Bank was entitled by statute to challenge the actions of the Department, which the Bank did by utilizing the legal services of Respondents Crowley and Christensen. Cal. Financial Code § 3101 (Deerings 1990); Joint Stipulation Findings of Fact, Paragraph 29–32; and Joint Stipulation Conclusions of Law, Paragraph 5.

4 Transcript of March 4, 1991 hearing on summary judgment motions (Hearing Transcript) at page 27.

5 Hearing Transcript at page 28. (Emphasis supplied.)

6 Hearing Transcript at pages 38–39.

7 Transcript of October 18, 1990 prehearing conference at page 56.

8 Hearing Transcript at page 33.

9 See In re Hoffman, 1990 F.D.I.C. Enf. Dec. (P-H) ¶5140 at A-1493 (exclusion of evidence which was not provided to opposing counsel in a timely manner).
{{4-30-92 p.A-1766.10}}Therefore, both facts and law mandate the conclusion that the payments to these two law firms could not have been unsafe or unsound banking practices. I therefore conclude that Respondents Crowley and Christensen did not participate in unsafe or unsound banking practices.
   I further conclude that neither Respondent Crowley nor Respondent Christensen is or was an institution-affiliated party of the Bank within the meaning of 12 U.S.C. § 1813(u)(4). That statutory provision defines an institution-affiliated party as:
       [A]ny independent contractor (including any attorney, appraiser or accountant) who knowingly or recklessly participates in—
         (A) any violation of any law or regulation;
         (B) any breach of fiduciary duty; or
         (C) any unsafe or unsound practice,
    which caused or is likely to cause more than a minimal financial loss to, or significant adverse effect on, the insured depository institution.
As discussed above, the payment of fees by a bank to its legal counsel for the purpose of challenging regulatory action is neither improper nor an unsafe or unsound banking practice. In re Hoffman, supra. Because the payments by the Bank to Respondents Crowley and Christensen were for such purpose, Respondents cannot be deemed institution-affiliated parties pursuant to the requirements of either Subsections (B) or (C) of the statutory definition. In addition, Petitioner FDIC failed to identify any law, regulation or prior order which was violated or recklessly disregarded by either Respondent.10 Accordingly, Respondents are not institution-affiliated parties within the meaning of Subsection (A) of the definition. Thus, there is no disputed issue of material fact as to whether Respondent Crowley or Respondent Christensen is an instituted-affiliated party within the meaning of 12 U.S.C. § 1813(u) (4).
   Because the Motion for Recommendation to Grant Summary Judgment brought by Respondents Crowley and Christensen is, in effect, "dispositive" within the meaning of Section 308.07(b)(7) of the FDIC's Rules of Practice, 12 C.F.R. § 308.07(b)(7)1, I hereby issue the following recommended:

ORDER

   1. Summary Judgment on all issues in favor of Respondent Crowley & Cuneo is granted on the Notice of Charges and of Hearing, and the Notice is dismissed as to said Respondent.
   2. Summary Judgment on all issues in favor of Respondent Christensen, White, Miller, Fink & Jacobs is granted on the Notice of Charges and of Hearing, and the Notice is dismissed as to said Respondent.
   Done at Rosslyn, Virginia, this 19th of March, 1991.
   /s/ Steven M. Charno
   Administrative Law Judge

_________________________________
RECOMMENDED DECISION

In the Matter of
Janice J. France, et al., and
First Pacific Bank
Beverly Hills, California
(Insured Nonmember State Bank)

Steven M. Charno, Administrative Law Judge:

   This proceeding was initiated by the Federal Deposit Insurance Corporation (Petitioner) upon the issuance of a Notice of Charges and of Hearing (Notice) dated August 10, 1990. By Motion for Recommendation to Grant a Summary Judgment dated December 5, 1990, Respondent Janice J. France (Respondent France) moved for summary judgment on the basis that this case contains no triable issue of material fact. Petitioner filed a December 14, 1990 memorandum of points and authorities in opposition to Respondent France's motion for summary judgment. Respondent France filed a December 19, 1990 Reply to the FDIC's Memorandum of Points and Authorities. By Notice of Joinder of Respondent Berrien E. Moore (Respondent Moore) dated December 19, 1990 and Notice of Joinder and Re-


10 I reject the argument advanced by Petitioner at the hearing to the effect that the statute which was allegedly violated or recklessly disregarded by Respondents was Section 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b)(1). That section is merely an enabling provision which confers certain powers upon the FDIC and could not, under any circumstances, have been violated by any Respondent in this case. Even if that provision were concluded to affirmatively prohibit unsafe or unsound banking practices as sometimes contended by Petitioner, the absence of any such practice in this case would preclude a finding that Section 8(b)(1) had been violated.
{{4-30-92 p.A-1766.11}}
spondents Leonard S. Sands (Respondent Leonard) and Ada P. Sands (Respondent Ada) dated December 21, 1990, Respondents Moore, Leonard and Ada sought to join in Respondent France's Motion for Summary Judgment. On December 27, 1990, Petitioner filed motions to strike Respondents' joinder submissions and memoranda in support of the motions to strike.
   By Order of February 6, 1991: (a) I denied Petitioner's motions to strike and permitted Respondents Moore, Leonard and Ada to join in Respondent France's summary judgment motion in order to promote administrative efficiency by eliminating the necessity for redundant filings; (b) I ordered Petitioner to file a further brief on the issues raised by the summary judgment motion; and (c) I set a hearing for March 4, 1991 in order to receive evidence and further argument on the motion for summary judgment. On February 22, 1991, Petitioner timely filed the ordered brief.
   After extensive oral argument on March 4, 1991 and careful review of all pleadings filed in this matter, I hereby make the following:

FINDINGS OF FACT

   The following facts are undisputed:
   (a) On July 13, 1990, the First Pacific Bank (Bank) paid $30,000 to the law firm of Keck, Mahin & Cate.1
   (b) On August 2, 1990, the Bank paid $25,000 to the law firm of Keck, Mahin & Keck.2
   (c) On August 7, 1990, the Bank made two payments of $25,000 to the law offices of Ronald D. Jaman.3
   (d) On August 6, 1990, the Bank paid $25,000 to the law firm of Crowley & Cuneo.4
   (e) On August 6, 1990, the Bank paid $50,000 to the law firm of Christensen, White, Miller, Find & Jacobs.5
   (f) The $25,000 sum advanced to Crowley & Cuneo represented prepayment of legal services as a retainer for matters relating to the California State Banking Department.6
   (g) The $50,000 sum advanced to Christensen, White, Miller, Fink & Jacobs represented prepayment of legal services as a retainer for matters relating to the California State Banking Department.7
   (h) Respondents did not directly obtain any of the funds enumerated in paragraphs (a) through (e).8
   In this action for restitution or reimbursement under Petitioner's cease and desist powers, the controlling statutory provision is Section 1818(b)(6) of the Federal Deposit Insurance Act (Act), 12 U.S.C. § 1818(b)(6). That section provides that a condition resulting from a statutory violation or an unsafe or unsound banking practice may be redressed by restitution or reimbursement if one of two conditions is met: (a) the party of whom restitution is demanded received unjust enrichment or (b) such party violated or acted in reckless disregard of a "law," a "regulation" or a "prior order" issued by the appropriate Federal banking agency.
   Petitioner argues that Respondents were indirectly unjustly enriched as a result of the transfers from the Bank to the law firms of Crowley & Cuneo and Christensen, White, Miller, Fink & Jacobs, because such transfers would tend to prolong the existence of the Respondents' respective positions at the Bank or would safeguard the value of the Bank stock owned by Respondents. This argument must be rejected. First, such transfers are specifically allowed by controlling and dispositive precedent. In the Matter of Harold A. Hoffman, Joseph L. Hayes and Alaska Continental Bank, 1990 F.D.I.C. Enf. Ed. (P-H) ¶5140 at A-1493, on appeal, Hoffman v. Federal Deposit Insurance Corporation, 912 F.2d (9th Cir. 1990), the Board of Directors of the FDIC specifically found that "engaging a law firm to challenge the State Banking Authority or the FDIC does not constitute an unsafe and unsound banking practice." Second, it is difficult to conceive of circumstances in which it would not be to the benefit of a bank's management to


1 Joint Factual Legal and Evidentiary Stipulations, Findings of Fact (Stipulations), Paragraph 33.

2 Stipulations, Paragraph 34.

3 Stipulations, Paragraphs 35 and 36.

4 Stipulations, Paragraph 37.

5 Stipulations, Paragraph 38.

6 Petitioner's Proposed Findings of Fact and Conclusions of Law (Petitioner's Findings), Paragraph 41.

7 Petitioner's Findings, Paragraph 43.

8 Stipulations, Paragraph 4.
{{4-30-92 p.A-1766.12}}prevail in a controversy with the bank's regulators. Accordingly, adoption of Petitioner's argument would effectively prohibit a bank's management from ever contesting any action by the bank's regulators. Such an outcome would impermissibly deprive both bank and management of Constitutionally protected rights. I therefore find that Petitioner made no legally sufficient allegations concerning unjust enrichment.
   With respect to the alternative statutory precondition for restitution, Petitioner contends that engaging in an unsafe and unsound practice is a violation or a reckless disregard of a "law" or "regulation."9 (For purposes of discussing the instant motion, I shall assume that the transfers of funds to the law firm of Keck, Mahin & Cate and the law offices of Ronald D. Jaman could be shown to be unsafe or unsound banking practices.) Petitioner's argument must be rejected for three reasons. First, Petitioner's contention is in conflict with the plain meaning of the explicit language of Section 1818(b)(6). The common definitions of "law" and "regulation" simply do not include "unsafe or unsound banking practice." This omission is not the product of an inadvertent legislative oversight. Perusal of the contemporaneous language of Section 1813(u)(4) of the Act, 12 U.S.C. § 1813(u) (4) demonstrates that, when Congress wished to add the concept of "unsafe or unsound practice" to those of "law" and "regulation," it did so explicitly.
   The second reason why the argument must be rejected turns on Petitioner's identification of the specific law and regulation purportedly violated by Respondents. Petitioner contends that engaging in an unsafe or unsound banking practice violates Section 1818(b)(1) of the Act, 12 U.S.C. § 1818(b)(1), and Section 337.11 of the FDIC's Rules and Regulations, 12 C.F.R. § 337.11. This statutory provision is nothing more than enabling legislation which permits Petitioner to issue cease and desist orders once the relevant requirements for such orders have been met; the provision does not prohibit any kind of conduct and, therefore, cannot have been violated or recklessly disregarded. Section 337.11 of Petitioner's Regulations was promulgated in implementation of Section 1818(b)(1) of the Act and is subject to the same analysis.
   Finally, I believe that Petitioner's argument must be rejected because there is no authority for the proposition that engaging in an unsafe or unsound banking practice (of the type I have assumed, arguendo, could be proven in this proceeding) constitutes the "reckless disregard" of law or regulation envisioned by the framers of Section 1818(b) (6). This is a case of first impression under that Section, and a review of the legislative history detailed on brief by Petitioner10 requires me to conclude that Congress equated "reckless disregard" with unjust enrichment or with the violation of an explicit statutory provision. This conclusion is based on the repeated assurances during Congressional hearings that only "serious" conduct would be cognizable under Section 1818(b)(6) and on the examples given during those hearings of what constituted "serious" conduct. At no point in the legislative history is there support for the view that an unsafe or unsound practice, which did not bring about unjust enrichment or result in a violation of law, regulation or order, would constitute "reckless disregard," as that term is used in Section 1818(b)(6).11
   For the foregoing reasons, I conclude as a matter of law that Respondents were not unjustly enriched by the transfers at issue and that they did not violate or act in reckless disregard of any law, regulation or FDIC order. Good cause having been shown, there is ample basis to grant Respondents' summary judgment motion.
   Because a motion for summary judgment is, in effect, "dispositive" within the meaning of Section 308.07(b)(7) of the FDIC's Rules of Practice, 12 C.F.R. § 308.07(b)(7), I hereby issue the following recommended:


9 It is uncontested that Respondents have not violated or acted in reckless disregard of a prior FDIC order.

10 See, Brief of the Federal Deposit Corporation dated February 20, 1991 at Exhibits A through D, citing, 135 Cong. Rec. S2379, S2392-94 (daily ed. Mar. 8, 1989), 135 Cong. Rec. S6907, S6927 (daily ed. June 19, 1989), S.R. No. 101-54, Part 1, 101st Cong., 1st Sess. 392 (1989) and 135 Cong. Rec. H4972, H4992 (daily ed. Aug. 3, 1989).

11 del Junco v. Conover, 682 F.2d 1338 (9th Cir. 1982), cert. denied, 459 U.S. 1146 (1983), which was rendered before Section 1818(b)(6) was enacted, allowed restitution in a situation involving an almost deliberate violation of an explicit statutory prohibition. Accordingly, I conclude that del Junco does not support Petitioner's position at the hearing.
{{6-30-92 p.A-1766.13}}
ORDER

   Summary judgment on all issues in favor of Respondents Janice J. France, Berrien E. Moore, Leonard S. Sands and Ada P. Sands is granted, and the Notice in this proceeding is dismissed with prejudice in so far as it relates to each of the Respondents.
   Done at Rosslyn, Virginia, this 22nd of March, 1991.
   /s/ Steven M. Charno
   Administrative Law Judge

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