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FDIC Enforcement Decisions and Orders |
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FDIC orders restitution by bank officer of legal fees prepaid on behalf of himself and another officer after he had notice that regulators considered the institution insolvent. Proceedings against law firm and other officer dismissed as FDIC finds evidence insufficient to prove that they had notice of bank's insolvency.
[.1] Directors and OfficersDuties and ResponsibilitiesInsolvency
Once officers or directors are on notice that regulators consider the institution to be insolvent, it is their duty to preserve assets for depositors and creditors; prepayment of their own legal fees from bank funds is an unsafe or unsound banking practice.
[.2] Cease and Desist OrdersRemediesRestitution
The remedy for the unsafe or unsound practice of prepaying officers' legal fees is reimbursement of the entire amount paid, not just the amount directly benefiting officer who authorized payment.
[.3] Directors and OfficersInsolvencyConstructive Notice.
Officer whose ordinary responsibility was limited to real estate and construction loans, and who was not involved in monitoring the Bank's overall financial condition and daily activities, is found not to have constructive notice of the Bank's impending insolvency.
[.4] RestitutionLaw FirmFDIC Authority to Order
Where there is insufficient evidence to establish that law firm knowingly or recklessly participated in the unsafe or unsound practice at the time it received retainers, the firm does not meet the definition of "institution-affiliated party" and thus is not subject to an order of restitution.
In the Matter of
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 ("FDIC Act"), 12 U.S.C. §§ 1818(b) and (c), by issuing to First Pacific Bank, Beverly Hills, California ("Bank"), and certain individual Respondents, including Richard A. Palmer and Leon F. Zuckerman, Findings of Fact and Conclusions of Law, Temporary Order to Cease and Desist, and Notice of Charges and of Hearing ("Notice").1 The Notice also named four law firms as Respondents: Keck, Mahin & Cate (the "Keck firm"); Ronald D. Jaman, Esq.; Crowley & Cuneo; and Christensen, White Miller, Fink & Jacobs.2 The Notice alleged that a total of $180,000 had been transferred
Under section 8(b) of the FDI Act, if, in the opinion of the appropriate federal banking agency, after notice and opportunity for hearing, an insured depository institution or institution-affiliated party is engaging, or has engaged in, 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 ALJ's Recommended Decision of May 23, 1991, first states that it is undisputed that the Bank made the following transfers of assets: (1) $30,000 to the Keck firm on July 13, 1990; and (2) $25,000 to the Keck firm on August 2, 1990. The ALJ found that the $30,000 and $25,000 transfers to the Keck firm were prepayments for legal services on behalf of Respondents Palmer and Zuckerman, respectively.
[.1] The Hoffman case establishes the principle that once directors or officers are on notice that bank regulators consider the institution to be insolvent, the practice of prepaying, inter alia, directors' or officers' legal fees from the insolvent bank's remaining funds is an unsafe or unsound practice.
[.2] The next question relates to the proper amount of such restitution. The statute permits a remedy for the condition resulting from the practicein this case fees paid by the Bank to the Keck firm reduced the assets of the Bank and the proper remedy is the recovery of the assets or reimbursement for the value of such assets. Therefore, the Board concludes that the proper remedy under the facts in this case is to order Respondent Palmer to make restitution to, or to reimburse, the receiver in the amount of $55,000.13While the ALJ reached a different conclusion and ordered reimbursement of only the amount that directly benefited Respondent Palmer, the Board believe this was based upon an incorrect interpretation of section 8(b) (6), 12 U.S.C. §1818(b) (6). Under his reading of the statute, the amount of restitution available from a given respondent is limited to the actual dollar amount of that respondent's unjust enrichment.14This restriction or limitation is not contained in the plain words of the statute, nor does it comport with the legislative history.15
Respondent Zuckerman was the Bank's senior vice president-construction loan manager and also served on three unspecified committees of the Bank. Trans. at 235. While the record here does support some contact between Respondent Zuckerman and FDIC examiners regarding certain real estate loans, it does not establish that he had knowledge of the insolvent condition of the Bank. For example, he did not attend either of the meetings with the FDIC or the State Banking Department concerning the insolvent condition of the Bank and there is no evidence that he was privy to documents or correspondence to or from the FDIC of the State dealing with the Bank's condition. The ALJ found, and the Board agrees, that the
[.3] In some circumstances it may be permissible to ascribe constructive notice of a bank's financial condition to certain officers of the bank who are ordinarily in a position to be aware or whose duties necessarily involve such knowledge.17However, constructive notice requires evidence that the individual was in a position to have such knowledge and is a presumption that may be rebutted by affirmative evidence establishing the contrary. Ordinarily, an executive officer such as Respondent Zuckerman would be presumed to be part of the management group with knowledge of the Bank's position.18In the present case, however, we see no basis for finding constructivenotice on the part of Respondent Zuckerman. Here the evidence, albeit somewhat questionable in character and certainly less than dispositive, places Respondent Zuckerman in a position of limited responsibility, outside the management group responsible for monitoring the Bank's overall financial condition and its daily activities.19Accordingly, the evidence does not support a finding of constructive notice as to the Bank's insolvency, or that Respondent Zuckerman participated in or was responsible for the unsafe or unsound practice of prepaying legal fees on his behalf.
The ALJ concluded that the Keck firm cannot be required to make restitution of the $55,000 in retainers paid by the Bank because the firm did not knowingly or recklessly participate in an unsafe or unsound banking practice at the time it accepted the retainers. The ALJ based this
[.4] The fact that the Keck firm became aware on August 3, 1989, the day after it received the $25,000 retainer for Leon F. Zuckerman, that the Bank had been found to be insolvent is also troubling. Had the payments from the Bank been received after the Keck firm became aware or should have known of the Bank's insolvent condition, there is little doubt that the Keck firm could be required to make restitution. Upon such noticed, the Keck firm would be deemed to hold any funds of the insolvent bank in its possession in a constructive trust, and would be legally obligated to return such funds, including any unspent portions of the retainer, to the receiver. Under those circumstances, the Keck firm would be required to look to its clients, Respondents Palmer and Zuckerman, for payment for its services. To the extent that Messrs. Palmer and Zuckerman would have a claim against the bank for payment for such legal fees, they would be required to file a proper claim with the receiver, like any other creditor, and to share the assets of the Bank on a pro rata basis. However, on the basis of the present record, there is insufficient evidence to establish that the Keck firm knowingly or recklessly participated in an unsafe or unsound banking practice at the time the retainers were received. It, therefore, does not meet the definitional requirements of an "institution-affiliated party" and restitution is not an available remedy under the statute.
In accordance with the Board's findings herein, Respondent Richard A. Palmer engaged in an unsafe or unsound banking practice by which he was unjustly enriched and which resulted in the Bank improperly disbursing $55,000 to the Keck firm. Accordingly, Respondent Richard A. Palmer shall make restitution or reimbursement to the receiver of the $55,000 improperly removed from the Bank.
The Board of Directors of the FDIC, having considered the record and the applicable law finds and concludes that, as set forth in this Decision, that Respondent Richard A. Palmer has engaged in an unsafe or unsound banking practice within the meaning of section 8(b) of the FDI Act.
/s/s Hoyle L. Robinson
STEVEN M. CHARNO, Administrative Law Judge:
On August 10, 1990, the Federal Deposit Insurance Corporation ("Petitioner" or "FDIC") issued a Notice of Charges and of Hearing ("Notice") which alleged that (1) the individual Respondents Richard A. Palmer and Leon Zuckerman had engaged in the unsafe or unsound banking practice of transferring certain of the assets of First Pacific Bank ("Bank") in anticipation of the Bank's insolvency and closure in preference to the Bank's depositors and credittors and (2) the Respondent Keck, Mahin & Cate ("Keck firm") had engaged in an unsafe or unsound banking practice by receiving a transfer of the Bank's assets at a time when the Keck firm knew that the transfer was being made in anticipation of the Bank's insolvency and closure in preference to the Bank's depositors and creditors.1The Notice sought Respondents' restitution of the assets allegedly preferentially transferred in anticipation of insolvency and closure. Respondents' Answer denied the commission of any unsafe or unsound practices and contested petitioner's request for restitution.
It is uncontested that, at all times relevant hereto, (1) Palmer was President of the Bank and a member of its Board of Directors and Executive Committee and (2) Zuckerman was the Senior Vice President-Construction Loan Manager at the Bank.4It is undisputed that the Bank made the following transfers of assets: (1) $30,000 to the Keck firm on July 13, 1990; (2) $25,000 to the Keck firm on August 2, 1990; (3) $25,000 to the law firm of Crowley & Cuneo ("Crowley firm") on August 6, 1990; and (4) $50,000 to the law firm of Christensen, White, Miller, Fink & Jacobs ("Christensen firm") on August 6, 1990.5The sums advanced to the Crowley and Christensen firms represented prepayment for legal services on matters relating to the California State Banking Department ("State").6The $30,000 and $25,000 transfers to the Keck firm represented prepayments for legal services on behalf of Respondents Palmer and Zuckerman, respectively.7
A. Respondent Palmer
Because Palmer was an admitted officer and director of the Bank, I conclude that he was an "institution-affiliated party" within the meaning of Section 1813(u) (1) of the Act, 12 U.S.C. §1813(u) (1). Since he unquestionably benefited personally from the $30,000 prepayment of his legal expenses, it only remains to be determined whether Palmer accepted that benefit after being no-
B. Respondent Zuckerman
Because Zuckerman was an admitted officer of the Bank, I conclude that he was an "institution-affiliated party" within the meaning of Section 1813(u) (1) of the Act. Since Zuckerman clearly benefited from the $25,000 prepayment of his legal expenses,22it only remains to be determined whether he accepted that benefit after being notified of regulatory findings that the Bank was insolvent and faced imminent closure.
C. Respondent Keck firm
In order to secure restitution from the Keck firm pursuant to Section 1818(b) (6) of the
1. As relevant to this proceeding, the bank was a corporation existing and doing business under the laws of California, having its
1. As relevant to this proceeding, the Bank has been and is subject to the Act, the Rules and Regulations of the FDIC, 12 C.F.R Ch. III, and the laws of California.
IT IS HEREBY ORDERED that:
/s/s Steven M. Charno |
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Last Updated 9/10/2003 | legal@fdic.gov |