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FDIC Enforcement Decisions and Orders

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   [5169] In the Matter of Richard A. Palmer, Leon F. Zuckerman, and Keck, Mahin & Cate, First Pacific Bank, Beverly Hills, California, Docket No. FDIC-90-156c&b(9-17-91).

   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 Officers—Duties and Responsibilities—Insolvency

   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 Orders—Remedies—Restitution

   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 Officers—Insolvency—Constructive 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] Restitution—Law Firm—FDIC 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
RICHARD A. PALMER,
LEON F. ZUCKERMAN, and
KECK, MAHIN & CATE
and FIRST PACIFIC BANK
BEVERLY HILLS, CALIFORNIA
(In Receivership)

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 ("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


1 The other individual Respondents listed in the Notice were: Janice J. France, Berrien E. Moore, Ada P. Sands, Leonard S. Sands, Leo D. Kaplan, M.D., Michael A. Zugsmith, Jose M. Anotado, Joyce B. Desveaux, Daniel S. Geiger, Robert G. Jacobsen, and Donna R. Watson. The Board of Directors ("Board") of the FDIC issued a Decision and Order on February 5, 1991, dismissing from this proceeding without prejudice, for good cause should Respondents Anotado, Desveaux, Geiger, Jacobsen, and Watson. On April 11, 1991, pursuant to delegated authority, the San Francisco Regional Director (Supervision), terminated the Notice issued against Respondents Leo D. Kaplan, M.D., and Michael A. Zugsmith. By Decision and Order of July 16, 1991, the Board denied summary judgment motions and remanded for a full hearing on the merits the portion of this proceeding concerning Respondents France, Moore, L. Sands, & A. Sands. These Respondents have also requested that the Board reconsider its July 16, 1991 Decision and Order.

2 Regarding the status of these law firm Respondents, on April 11, 1991, the San Francisco Regional Office (Supervision), terminated the Notice issued against Ronald D. Jaman, Esq. By Decision and Order of July 16, 1991 the Board denied summary judgment motions and remanded for a full hearing on the merits the portion of this proceeding concerning Crowley & Cuneo and the law firm of Christensen, White, Miller, Fink, & Jacobs.
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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 ("State").
   The Keck firm, Bank president Richard A. Palmer, and senior vice-president Leon F. Zuckerman 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.
   Only Respondents Richard A. Palmer, Leon F. Zuckerman, and the Keck firm are before the Board at this juncture. The administrative hearing on the issues of whether these Respondents engaged in an unsafe or unsound practice by prepaying or accepting prepayment of the legal fees for Richard A. Palmer and Leon F. Zuckerman, and if so, whether restitution is appropriate, was held March 4 through 5, 1991, in Los Angeles, California.
   The Administrative Law Judge ("ALJ") issued a Recommended Decision May 23, 1991, finding that Respondent Palmer engaged in an unsafe or unsound banking practice by authorizing or participating in the authorization of $55,000.00 for the prepayment of legal fees for himself and Leon F. Zuckerman after receiving notice that the Bank was in an insolvent condition.3 The ALJ recommended that Richard A. Palmer make restitution of $30,000.00 to the FDIC, representing the amount transferred for his benefit to the Keck firm. The ALJ recommended that the actions against Leon F. Zuckerman and Keck, Mahin & Cate be dismissed since they lacked notice of the regulators' communication that the Bank was in an insolvent condition, and thus, did not knowingly engage in an unsafe or unsound banking practice. Enforcement Counsel filed exceptions to the ALJ's Recommended Decision.
   The Board is in substantial agreement with the ALJ's Recommended Decision but is troubled by several aspects of the record here, including the incomplete and conflicting evidence that was left unexplored or unex-

3 Citations in this decision shall be as follows:
Recommended Decision —"R.D. at____."
Transcript —"Trans. at ____."
Exhibits —"Ex. ____."
Exceptions —"Excp. at ____."
Stipulations —"Stips. No. ____."
(Next page is A-1809.)
{{11-30-91 p.A-1809}}plained. The Board agrees that Respondent Richard A. Palmer engaged in an unsafe or unsound practice by advancing Bank funds to prepay his own and Mr. Zuckerman's legal expenses after receiving notice that the State and FDIC had found the Bank to be in an insolvent condition. The Board further agrees that Respondent Palmer should make restitution for the amount paid for his benefit. The Board also agrees with the ALJ that the evidence in this record fails to support the conclusion that Leon F. Zuckerman had notice of the Bank's insolvency at the time Bank funds were improperly transferred or that he was responsible for or participated in the transfer. The Board, therefore, must conclude that he did not engage in an unsafe or unsound practice. Similarly, on the basis of the evidence (or rather the lack of evidence) in this record, the Board also must conclude that the Keck firm did not "knowingly or recklessly participate" in an unsafe or unsound practice in accepting the retainer payments.

II. STATEMENT OF THE CASE

   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 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 11, 1990, the FDIC held a meeting with the Bank, at which time the examiner put those present on notice that in his opinion the Bank was insolvent. Richard A. Palmer, president of the Bank, was present at the meeting, along with the other directors named in the Notice. Neither Respondent Leon F. Zuckerman nor a representative of the Keck firm was in attendance. The next day, 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 situation.4 Respondent Palmer and certain other directors and officers of the Bank were present at the July 12, 1990 meeting. Leon F. Zuckerman and representatives of the Keck firm were not present at the July 12, 1990, meeting.
   Immediately thereafter, beginning on July 13, 1990, and continuing until the Bank closed on August 10, 1990, the Bank responded to a series of invoices from four law firms for the prepayment for future legal services to be provided by the firms. Two of those invoices for prepayment are currently before the Board.
   After the FDIC discovered these prepayment transactions through its monitoring activities, the Notice was issued charging two types of unsafe or unsound banking practices. Only the first practice—the prepayment of the legal fees for two Bank officials with funds of the insolvent Bank—is before the Board at this time.5 Respondents allegedly caused $55,000 to be removed from the Bank and transferred to the Respondent Keck firm for the purpose of establishing a selfinsurance fund to protect president Richard A. Palmer and senior vice president Leon F. Zuckerman. These transfers of depositors' funds, to the detriment of other bona fide creditors, are alleged to have occurred after


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 of July 23, 1990 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. Ex. 9.

5 The second practice, the payment of legal fees on behalf of the Bank to challenge the regulators, was before the Board in its July 16, 1991 Decision. In that decision, the Board denied Motions for Summary Judgment and remanded the case concerning individual Respondents France, Moore, A. Sands, and L. Sands and Crowley & Cuneo and Christensen, White, Miller, Fink & Jacobs to the ALJ.
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Respondents were on notice that the FDIC and the State considered the Bank to be insolvent. 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 since the transfers were specifically designated to defend or prepay the legal defense expenses of Richard A. Palmer and Leon F. Zuckerman. It is alleged that this action constituted 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 DECISION

   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.
   Next, the ALJ considered the question of whether Respondent Richard A. Palmer, who was president of the Bank and a member of its board of directors, engaged in an unsafe or unsound banking practice. He concluded that, under In re Hoffman, 1990 F.D.I.C. Enf. Dec. (P-H) ¶5140 at A-1594, aff'd sub nom. Hoffman v. FDIC, 912 F.2d 1172 (9th Cir. 1990), once directors or officers are on notice that the bank regulators consider the institution to be insolvent, it is an unsafe or unsound practice to expend bank funds for their own benefit to the detriment of bona fide creditors and depositors.
   The ALJ concluded that Respondent Palmer, as president of the Bank, was an institution-affiliated party of the Bank, and that he personally benefited from the $30,000 prepayment of his legal expenses.6 The ALJ also found that Richard A. Palmer had actual notice since he attended both of the meetings, when first the FDIC, and then the State, indicated that the Bank was in an insolvent condition.
   Accordingly, the ALJ concluded that Respondent Palmer engaged in an unsafe or unsound banking practice when he authorized or participated in authorizing the transfer of funds, in part for his own benefit, to the Keck firm. He further reasoned that Respondent Palmer was unjustly enriched in the amount of the benefit received, $30,000, and therefore, should reimburse the Bank's successor for this amount. R.D. at 4.
   The ALJ also found that Richard A. Palmer committed an unsafe or unsound practice by authorizing or participating in the authorization of the $25,000 prepaid legal fees for Respondent Zuckerman. However, the ALJ declined to find Respondent Palmer liable for this amount because he did not derive any direct or indirect benefit from participating in the transfer of $25,000. R.D. at 5.7
   Regarding Respondent Leon F. Zuckerman, senior vice-president construction loan manager, the ALJ first noted that he did not attend the meetings with the FDIC and the State on July 11 and 12, 1990. While Leon F. Zuckerman did not testify, the ALJ credited the uncontroverted testimony of defense witness Berardo, who was an attorney with the Keck firm that represented Respondent Zuckerman. Mr. Berardo testified that Respondent Zuckerman was not a member of the decision-making management group within the Bank, since his field of responsibility encompassed only certain real estate loans. The ALJ also was persuaded by the logic of Respondents' argument that the inner circle of a bank's management might well restrict news of its imminent closure in order to continue operations and prevent wholesale desertion of front-line employees, such as Respondent Zuckerman. The ALJ rejected Enforcement Counsel's argument that Respondent Zuckerman should be deemed to have constructive notice of the Bank's condition because of his position in the Bank. The ALJ concluded that there was no evidence that Respondent Zuckerman either caused or benefited from the $25,000 transfer to the Keck firm after he had received actual or


6 An institution-affiliated party is defined in 12 U.S.C. § 1813(u), as "any director, officer, employee, or controlling stockholder ... of ... an insured depository institution...."

7 The ALJ also discussed whether Palmer was liable for legal fees paid to two Respondent law firms not before the Board at this time. R.D. at 4–5. On the basis of this record, the Board is unable to address this issue. Therefore, the Board does not adopt the ALJ's findings and takes no position regarding these other Respondent law firms or Respondent Palmer's involvement in the issues related to those firms.
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constructive notice of the Bank's insolvent condition.8 The ALJ found that Zuckerman did not engage in the unsafe or unsound practice alleged by Enforcement Counsel and declined to recommend restitution of $25,000.
   Regarding the Keck firm, the ALJ considered, but rejected, Enforcement Counsel's argument that the law firm engaged in an unsafe or unsound practice or breach of fiduciary duty when it accepted these two transfers of Bank funds, at a time when it should have been aware of the Bank's insolvent condition. The ALJ's conclusion was based on his belief that Enforcement Counsel failed to offer sufficient evidence in support of its position to meet the minimum burden of proof, and, therefore, the weight of the evidence of record required a contrary conclusion.9
   The ALJ found that the testimony at the hearing established that Respondent Zuckerman only sought representation from the Keck firm concerning certain real estate loans and a shareholders lawsuit. Testimony supporting the conclusion that Respondent Zuckerman's discussions were limited to real estate loans and a potential shareholder lawsuit was unrebutted.
   Given the apparently limited nature of the consultations by Respondents Palmer and Zuckerman with the Keck firm, the ALJ reasoned that the Keck firm was not under a duty to inquire into the Bank's financial condition before accepting the retainers. He concluded that the Keck firm had not knowingly or recklessly participated in an unsafe or unsound practice, was not an "institution-affiliated" party as defined in 12 U.S.C. § 1813(u) (4), and that restitution was not appropriate.10

IV. DISCUSSION

A. Respondent Richard A. Palmer

   [.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.
   Respondent Palmer had actual notice of the regulators' communications concerning the insolvent condition of the Bank. In the face of such knowledge, he engaged in an unsafe or unsound practice by participating in, or authorizing, the transfer of legal fees by the insolvent bank to benefit himself and Respondent Zuckerman. The determination of whether restitution is proper and the appropriate amount turns on the correct interpretation of section 8(b) (6), 12 U.S.C. § 1818(b) (6).11 The statute specifically au-


8 The Board is puzzled by the ALJ's finding that Respondent Zuckerman did not benefit from the transfer of funds. Regardless of whether or when he received notice of the Bank's condition, Respondent Zuckerman benefited from the Bank's payment to the Keck firm to represent him. The Board can only conclude that the ALJ's statement to the contrary was a mistake. Consequently, while the Board generally concurs with the ALJ's conclusions regarding Respondent Zuckerman, the Board does not adopt this conclusion that he did not benefit from the payment.

9 The ALJ found that the Keck firm was not represented at the meetings on July 11 and 12, 1990, and was not aware of the State's July 23 letter until this proceeding commenced. R.D. at 7. He also found, while Respondent Palmer discussed with the Keck firm certain financial matters concerning the Bank, including the Bank's need to raise capital, he did not disclose that the FDIC and the State had found the Bank to be in an insolvent condition. R.D. at 7. However, the Board disagrees that the Keck firm was not on notice of the regulators' communication until this proceeding commenced. Exhibit 38, the unsigned Bank's board minutes from an August 3, 1990, meeting indicates that the State's July 23 letter was discussed and that two representatives of the Keck firm were present. The meeting took place the day after the Bank prepaid $25,000 in legal fees on behalf of Leon F. Zuckerman. Witness Berardo, a partner in the Keck firm also confirmed that representatives of the firm attended the July 3 meeting. Accordingly, at least as of August 3, 1990, the Keck firm had actual or constructive notice that the Bank was insolvent.

10 See footnote 5, supra, for the definition of institution-affiliated party.

11 12 U.S.C. § 1818(b) (6) provides:
(6) AFFIRMATIVE ACTION TO CORRECT CONDITIONS RESULTING FROM VIOLATIONS OR PRACTICES. —The authority to issue an order under this subsection and subsection (c) of this section which requires an insured depository institution or any institution-affiliated party to take affirmative action to correct or remedy any conditions resulting from any violation or practice with respect to which such order is issued includes the authority to require such depository institution or such party to—
   (A) make restitution or provide reimbursement, indemnification, or guarantee against loss if—
       (i) such depository institution or such party was unjustly enriched in connection with such violation or practice; or
       (ii) the violation or practice involved a reckless disregard for the law or any applicable Regulations or prior order of the appropriate Federal banking agency;
{{11-30-91 p.A-1812}}thorizes an order requiring a party to make restitution or reimbursement to remedy any "condition resulting from any violation or practice." Here the resulting condition is that the Bank's assets have been reduced by $55,000 without a directly corresponding reduction in its liabilities. Therefore, the natural remedy is to require restitution or reimbursement of the amount of those lost assets. The Board concludes that it was, in part, the intent of Congress in enacting this provision into law to permit the bank regulatory agencies to order a return of lost assets to a bank or to require reimbursement for such lost assets.12
   Having determined that Respondent Palmer engaged in an unsafe or unsound practice under section 8(b), the next inquiry under the statute is whether Respondent Palmer was "unjustly enriched" in connection with such violation or practice or the violation or practice involved "reckless disregard for the law or any applicable regulation or prior order. . .." The unsafe or unsound practice involved the authorization and improper transfer of $55,000 in Bank funds, in part for his own direct benefit. The Board, therefore, finds that Respondent Palmer was unjustly enriched in connection with this practice to the extent that funds were transferred for his benefit, and restitutions is appropriate.

      [.2] The next question relates to the proper amount of such restitution. The statute permits a remedy for the condition resulting from the practice—in 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

B. Respondent Leon F. Zuckerman

   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


12The legislative history of this provision clarifies that restitution to correct the resulting conditions means restitution of the resulting loss. The House Report on this provision of FIRREA states:
    This provision (section 902 of FIRREA) amends the banking agencies' cease and desist ("C&D") authority in several ways. First, it clarifies the agencies' authority to issue an order requiring persons and institutions to take affirmative action to correct mandated disposition of loans or assets, restrictions on growth, or rescission of agreements or contracts. The agencies would be empowered to order restitution or reimbursement in a C&D order, but only to recover for those losses resulting from serious misconduct. (emphasis added).

H.R. Rep. No. 101-54, Part 1, 101st Cong. 1st Sess. 392 (1989); See also Senate Report at 135 Cong. Rec. S 6927 (daily ed. June 19, 1989).

13The bifurcation of this enforcement proceeding has resulted in excluding from this aspect of the proceeding other Respondents that may have some responsibility for the payments at issue here. Specifically, the Board is concerned that there may be some legal basis upon which directors Janice J. France, Berrien E. Moore, Leonard S. Sands, and Ada P. Sands may bear at least partial responsibility for the $55,000 loss at issue in this case. Directors are jointly and severally liable for certain improper acts in the State of California. Cal. Corp. Code §316 (West 1991). The official duties of these directors suggest that they, too, were responsible for, or directly approved, the improper transfers of the funds of the insolvent Bank.

14Under the ALJ's interpretation, a bank director or officer on notice of the institution's insolvent condition and impending closure could transfer an unlimited amount of depositor's funds to prepay legal expenses or indemnify other officers or directors. If the bank official did not prepay his own legal expenses, under the ALJ's interpretation, he could not be required to make restitution.

15See n. 11, supra.
{{11-30-91 p.A-1813}}evidence in this record concerning Respondent Zuckerman's duties is insufficient to establish that he was a member of the decision making management group which monitored the Bank's overall financial condition and its daily activities.16Due to the limited scope of Respondent Zuckerman's duties, the ALJ declined to charge him with constructive notice of the insolvent condition of the Bank.

   [.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.
   Respondent Zuckerman did not testify at the hearing. From this, Enforcement Counsel argues that an adverse inference can be drawn, citing Hoffman at A-1494; Baxter v. Palmigano, 425 U.S. 308 (1976); Farace v. Independent Fire Ins. Co., 699 F.2d 204, 209-11 (5th Cir. 1983). Unfortunately, the record as to Respondent Zuckerman knowledge and responsibilities is less than clear. However, the Board finds no basis for such an adverse inference on those facts that are available in this record. An adverse inference may ordinarily be drawn only if proper circumstances exist. For example, the Board has adopted an adverse inference as to ability to pay a civil money penalty where a respondent was obligated to produce information as to his assets and income but failed to do so. In the matter of Joseph A. Dazzio, FDIC-87-71k, 2 P-H FDIC Enf. Dec. ¶5157, A-1584 (1990)
   The Board is aware that the factual weaknesses in the record could be viewed as permitting one who should otherwise be aware or have knowledge to use a shield of ignorance to escape personal liability. The Board does not endorse, nor does public policy favor, the use of intentional ignorance to escape liability. Therefore, the Board cautions that attempts to remove the funds of an insolvent bank for the personal benefit of directors, officers, or shareholders will be carefully scrutinized in all future situations involving such practices.

C. Respondent Keck, Mahin & Cate

   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


16Defense witness Berardo testified that Leon F. Zuckerman was "brought in to restructure loans and was in fact the construction loan manager who was primarily responsible for closing [the] so-called brick loans;" Zuckerman "was a line officer. . . he was concerned only about some brick loans and concerned about a limited portion of the assets." Trans. at 202–206. While the Board has some concerns as to the trustworthiness of such hearsay testimony, no evidence to the contrary was presented.

17A "principal" officer of a financial institution may be charged with constructive notice if he or she is responsible for monitoring a bank's overall financial condition and its daily activities. This factual determination will be dispositive regardless of: (1) the bank officer's title; (2) whether the officer has officially or unofficially assumed the monitoring duties and (3); whether or not the officer is diligent in performing his duties. See Hoye v. Meek, 795 F.2d 893, 896 (10th Cir. 1986) "[D]irectors and officers are charged with knowledge of those things which it is their duty to know and ignorance is not a basis for escaping liability."

18The record here does indicate that Enforcement Counsel had a good faith belief that Respondent Zuckerman, as a senior vice president of the Bank, was responsible for overseeing and monitoring the daily financial activities of the Bank.

19 The Board recognizes that it is somewhat unusual for a bank to pay the legal fees of an officer who is not in the bank's decision-making management group. The record before the Board is silent as to why the Bank undertook this obligation.
{{11-30-91 p.A-1814}}conclusion on the fact that the evidence in the record is insufficient to find that the Keck firm either had actual or constructive notice of the insolvent condition of the Bank until after it received the funds. Enforcement Counsel argues in its exceptions that liability should be found under the theory of constructive notice. Excp. at 32–34.20
   The Board is troubled by several aspects of this proceeding as it relates to the Keck Firm. Since the Bank and its officers and directors were on notice that the Bank was insolvent, the disbursement of funds to establish prepaid retainers was improper. These improper payments can in one sense be considered to have unjustly enriched the Keck firm. Therefore, it seems that the Keck firm should be required to return the funds improperly paid to it. However, section 8(b) (6) provides the Board with only limited authority to compel restitution.

   [.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.
   The Board must reject Enforcement Counsel's exception to the existence of constructive notice to the Keck firm, although it agrees in theory that there may be circumstances that would give rise to a finding of constructive notice. Without repeating the evidence to ALJ found credible regarding the limited scope of discussions between the Keck firm and their clients, Richard A. Palmer and Leon F. Zuckerman, the Board concludes that the evidence does no support a finding of constructive notice as of the dates the retainers were received by the Keck firm.21
   Finally, the record is clear that on August 3, 1990, the Keck firm attended the Bank's board meetings where the regulators' communications were discussed. At that point in time, it is reasonable to conclude that the Keck firm was on notice as to the insolvency of the Bank. However, the parties did not present evidence on the issue of whether once actual notice was received it was an unsafe or unsound practice for the Keck firm to retain any unexpended funds of the insol-


20Enforcement Counsel relies on the following facts to establish constructive notice: The Keck firm's client, Richard A. Palmer had been advised of the Bank's insolvent condition; the Keck firm was aware that Richard A. Palmer had been threatened with a civil money penalties action by the Board of Governors of the Federal Reserve System; the firm knew Richard A. Palmer had been served and Leon F. Zuckerman was a potential defendant in a shareholder derivative action in State court; the firm had discussions in late July, 1990, about changing the FDIC's classifications of Bank assets; August 3, 1990, the day after the retainer was paid on behalf of Leon F. Zuckerman, a member of the Keck firm attended a board meeting in which the issue of challenging the regulators was discussed. Tr. at 125; Tr. at 225 and 226; FDIC Ex. 38.
   Enforcement Counsel asserts that under the facts, the Keck firm should have inquired into and investigated the financial condition of the Bank which advanced funds for its retainers. Excp. at 34–35. Enforcement Counsel argues that a reasonably prudent firm under similar circumstances would have inquired into the financial condition of the Bank. Since the Keck firm failed to inquire, Enforcement Counsel argues that it should be charged with constructive notice of what the inquiry would have disclosed. See Amjems, Inc. v. F.R. Orr Const. Co., Inc., 617 F. Supp. 273 (D.C. Fla. 1985).

21The ALJ also found that the Keck firm had no duty to inquire into the Bank's financial condition before accepting the Bank's retainer checks. R.D. at 7. Under some circumstances, a duty to inquire as to the condition of the Bank could arise. Therefore, the Board cannot agree categorically with this conclusion. However, the evidence in this record is insufficient to establish the existence of a duty to inquire on the part of the Keck firm. Under appropriate circumstances, however, the Board will not hesitate to find the existence of a duty to inquire and constructive knowledge of a bank's financial condition.
{{11-30-91 p.A-1815}}vent Bank. Therefore, a restitution order directed to the Keck firm is not an available remedy under section 8(b) (6).22

V. Remedy

   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 cease-and-desist action against Respondents Leon F. Zuckerman and Keck, Mahin & Cate is dismissed for the reasons set forth herein.

ORDER TO CEASE AND DESIST

   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.
   Accordingly, IT IS HEREBY ORDERED, that Respondent Richard A. Palmer take immediate affirmative action as follows:
   1. Respondent Palmer shall immediately make restitution to or reimburse the FDIC as receiver for First Pacific Bank in the amount of $55,000.
   2. The charges against Leon F. Zuckerman and the law firm of Keck, Mahin & Cate which appear in the Notice of Charges and on Hearing issued August 10, 1990, are dismissed.
   The provisions of this Order shall remain effective and enforceable except to the extent that, and until such time as any provisions of this Order shall have been modified, terminated, suspended, or set aside in writing by the Board.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 17th day of September, 1991.

/s/s Hoyle L. Robinson
Executive Secretary

___________________________________________
RECOMMENDED DECISION

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.
   A hearing was held before me in Los Angeles, California on March 4 and 5, 1991.2At the conclusion of the hearing, I offerred the parties an opportunity to argue their respective positions orally, instead of undertaking the timeconsuming and expensive process of filing a second set of findings, conclusions and briefs.3After Petitioner asserted its rights to make duplicative filings, I announced a tentative decision from the bench. Initial post-hearing briefs, together with proposed findings of fact and conclusions of law, were submitted by Petitioner and Respondents under due date of April 29,


22However, to the extent that retainer funds were not used prior to notice of the insolvent condition of the Bank on August 3, the Keck firm may be holding unused funds in a constructive' trust for the benefit of the receiver for the Bank and be obligated to return such funds to the receiver.

1The Notice initially named 20 respondents. Five individual respondents were dismissed in a Decision issued November 5, 1990, two individual respondents and a law firm reached a settlement agreement with Petitioner on March 4, 1991 and were dismissed on April 11, 1991, and Decisions issued March 19 and 23, 1991 in response to motions for summary disposition resulted in the further dismissal of four individuals and two law firms.

2The unopposred transcript corrections proposed by Petitioner are hereby adopted.

3Prior to the commencement of the hearing, the parties filed briefs, as well as proposed findings of fact and conclusions of law.
{{11-30-91 p.A-1816}}1991, and reply briefs were submitted on May 14, 1991.

DISCUSSION

   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
   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 "institution-affiliated party" from whom restitution is sought received unjust enrichment or (b) such party violated or acted in reckless disregard of a "law," "regulation" or "prior order" issued by a Federal banking agency.
   It is an unsafe or unsound banking practice for a bank officer or director to benefit from a transfer of the bank's assets after being informed of a state or federal regulator's "findings of insolvency and an intention to close" the bank. In re Hoffman, 1990 F.D.I.C. Enf. Dec. (P-H) ¶5140 at A-1594, on appeal, Hoffman v. FDIC, 912 F.2d 1172 (9th Cir. 1990).8A bank's officers and directors have a fiduciary duty "to act to preserve assets for the protection of the depositors and other creditors, rather than expend assets for their own benefit, no matter how prudent those expenditures may be in another context." In re Hoffman, supra. This duty attaches at the moment findings of insolvency and imminent closure are communicated to an officer or director, and the ultimate accuracy of such findings appears to be immaterial. It can hardly be thought to be prudent banking practice to ignore a regulator's informed expertise concerning a bank's viability. This does not mean, however, that a bank is unable to challenge such findings by its regulators. Indeed, the only recognized exception to the prohibition of an asset transfer in anticipation of insolvency and closure relates to the propriety of expending assets in order to engage a law firm to challenge state or federal regulators. The FDIC's Board of Directors has held that such an expenditure does not constitute an unsafe or unsound banking practice.9In re Hoffman, supra at A-1493.

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-


4The parties so stipulated.

5The parties so stipulated. Petitionerr's allegation on brief of a "$105,000 total payment to the Crowley and Christensen firms appears to be without support. The Bank made two additional transfers of assets, as to which Petitioner's post-hearing brief requested neither findings nor conclusions, the second ordering paragraph of my March 28, 1991 Order provided that a "[f]ailure to propose a finding or conclusion in this brief shall be deemed a waiver of the right to do so . . . ." Accordingly, I find that Petitioner has waived the right to further litigate any matters pertaining to the two transfers to the law offices of Ronald D. Jaman.

6This finding is based on the Bank's uncontested documentation of these payments. Pursuant to my prehearing Order of October 18, 1990. Petitioner has waived any right to contest this finding. See Federal Deposit Insurance Corporation's Proposed Findings of Fact and Conclusions of Law, Paragraphs 41 and 43.

7This finding is based on the Keck firm's July 13 and 24, 1990 retainer letters.

8Petitioner's citations of In re Hoffman in support of the positions taken in its post-hearing pleadings repeatedly ignore a fact discussed at length during the hearing: the respondents in that case were explicitly found to have received notice of regulatory findings of insolvency and imminent closure before they made the asset transfers there at issue.

9I do not believe that the Board of Directors intended to hold that it is a safe and sound practice to engage counsel to challenge a bank's regulators but that it is unsafe and unsound to pay the fees charged by those attorneys. Accordingly, I reject Petitioner's argument to that effect.
{{11-30-91 p.A-1817}}tified of the findings of a regulatory agency that the Bank was insolvent and faced imminent closure.10
   The first communication of regulatory findings to the Bank took place during a July 11, 1990 meeting between the Bank's Board of Directors, including Palmer,11and representatives of the FDIC.12At that meeting, one of Petitioner's examiners stated that, as a result of assets classified13during an April 30, 1990 bank examination, the Bank was insolvent.14The following day, a meeting was held between the Bank's attorneys, its Board of Directors (including Palmer) and representatives of Petitioner and the State. Representatives of the State announced that the Bank was in "critical condition" and indicated that the State would be forced to take "extreme action against the Bank" in the absence of a prompt capital infusion, merger or acquisition.15Although the State's representatives apparently avoided any use of the terms "insolvent" or "closure" during the July 12 meeting, Palmer understood that he was being notified that the Bank would be closed unless it could remedy its financial condition within "a very short time."16I therefore find that Palmer accepted the benefit of the $30,000 transfer to the Keck firm after he had received notice from the Bank's regulators of their findings of insolvency and imminent closure. Accordingly, I conclude that he engaged in an unsafe or unsound banking practice and was unjustly enriched thereby, as alleged by Petitioner. For the foregoing reasons, I conclude that Palmer is individually liable for the restitution of $30,000 to Petitioner, which is the Bank's undisputed successor-in-interest.17
   Petitioner contends that Palmer is also liable to repay the transfers of $25,000 to the Crowley firm and $50,000 to the Christensen firm.18Given the undisputed purpose of those transfers, they cannot be, as a matter of law, unsafe or unsound practices. In re Hoffman, supra. Because Petitioner has failed to demonstrate that there is a condition resulting from an unsafe or unsound practice or a statutory violation19which should be remedied, restitution and reimbursement are inappropriate. See 12 U.S.C. §1818(b) (6).
   Finally, Petitioner has requested an order holding Palmer liable for restitution of the $25,000 transferred to the Keck firm to prepay Zuckerman's legal expenses. While Palmer approved the August 2, 1991 transfer20after notification of regulatory find-
10An employer's retention of an attorney to represent an employee concerning matters arising from his employment would be completely proper under most circumstances, even in the absence of the kind of written indemnification agreement present in this case. As indicated above, the vice here lies not in the purpose of the payment but in the fact that it was allegedly made after receipt of notice of findings of insolvency and imminent closure. See In re Hoffman, supra at A-1494.

11I assume that Petitioner's failure to request a finding that Palmer attended this meeting was the result of an oversight, rather than an intentional waiver. See note 5, supra.

12Although Petitioner's examiner conferred with members of the Bank's management concerning various assets between April 30 and the exit interview on July 11, he admitted that the asset classifications which resulted in a finding of insolvency were not completely "firmed up" until July 10. There is no evidence that he or any other regulatory representative communicated a finding of insolvency to the Bank prior to July 11.

13Although a number of these classifications were contested by Respondents and others, their validity is immaterial and was not litigated in this proceeding. The existence of an unsafe or unsound practice in this case turns on receipt of notice of regulatory findings, not on whether those findings were accurate or thought to be accurate.

14The credited testimony of Petitioners' examiner to this effect is supported by Palmer's admission.

15The statements made at the July 12 meeting were credibly chronicled in the State's July 23, 1990 letter to the Bank's Board of Directors and were admitted, in substance, by Palmer in response to questions from the bench.

16In response to questions from the bench, Palmer candidly admitted that the Bank would have to be closed unless it could secure additional capital, be merged or be sold. His professed belief that the Bank could avoid closure is immaterial to the question of whether he received notice of the regulatory findings.

17The parties stipulated successorship.

18In addition, Petitioner requests findings and conclusions concerning the Crowley and Christensen firms premised on the assumption that the transfers to those two firms constituted unsafe or unsound practices. That assumption was explicitly rejected in my Decision in this docket issued March 19, 1991, which is appended hereto as Appendix A and incorporated in this discussion by reference. In any event, the severance of the two firms prior to the commencement of the evidentiary hearing and their resulting inability to defend themselves against Petitioner's allegations requires rejection of Petitioner's requested findings and conclusions on due process grounds. For the foregoing reasons. Petitioner's requests are denied.

19Petitioner's contention that a statutory violation has occurred appears to be based on the contention that the Act explicitly prohibits unsafe and unsound practices, so that any such practice becomes a statutory violation. Accepting Petitioner's contention arguendo, the absence in this instance of an unsafe or unsound practice eliminates any possibility of a statutory violation.

20This finding is based on the Bank's documentation of the transfer.
{{11-30-91 p.A-1818}}ings of insolvency and imminent closure, there is no evidence that he directly or indirectly benefited therefrom. For the reasons set forth in my March 22, 1991 Decision in this docket,21I conclude that Palmer's unsafe or unsound practice does not constitute the violation or reckless disregard of a law, regulation or prior order, as those terms are used in Section 1818(b) (6) of the Act. I therefore conclude that Palmer's restitution of the $25,000 is inappropriate and that this aspect of the relief sought by Petitioner cannot be granted.

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.
   Zuckerman did not attend the meetings on July 11 or 12,23there is no evidence that he saw or was apprised of the State's July 23, 1990 letter to the Bank's Board of Directors and his conversations with Petitioner's examiner took place long before the FDIC was in a position to arrive at a finding that the Bank was insolvent.24Petitioner does not request a finding that Zuckerman received notification of the regulators' findings of insolvency and imminent closure,25and the record is bare of evidence which would support such a finding. Instead, Petitioner argues, in effect, that an officer of a bank is constructively aware of any significant fact affecting the bank. This argument somewhat resembles the position that one should infer the existence of knowledge in order to meet the requirement of scienter in a criminal prosecution. Zuckerman was not a member of the decision-making management group which controlled the Bank's affairs, and his field of responsibility encompassed only a limited portion of the Bank's assets.26In short, there was no reason to believe that he was a member of the inner circle who were aware of the pronouncements of Petitioner and the State. Indeed, it is not inconceivable that a financial institution would seek to attempt to restrict circulation of any reports concerning the imminence of its demise in order to prevent wholesale desertion by the front-line employees, such as Zuckerman, necessary to its continued operation over the immediate term. For the foregoing reasons, I decline to make inference requested by Petitioner.27Instead, I find that there is no evidence that Zuckerman either caused or benefited from the $25,000 transfer to the Keck firm after he had received actual or constructive notice28from the Bank's regulators that the Bank was insolvent and about to be closed. Accordingly, I conclude that Zuckerman did not engage in the unsafe or unsound practice alleged by Petitioner and that restitution of the $25,000 is, therefore, inappropriate.
   There is no evidence that Zuckerman (1) participated in any way in approving or otherwise causing the $30,000 transfer to the Keck firm which benefited Palmer or (2) directly or indirectly benefited in any way from that transfer. I therefore conclude that he cannot be held to be individually liable for restitution of that sum pursuant to Section 1818(b) (6) of the Act. As discussed above, the transfers to the Crowley and Christensen firms do not constitute unsafe or unsound practices and do not provide a legal or factual basis for requiring restitution by Zuckerman.

C. Respondent Keck firm

   In order to secure restitution from the Keck firm pursuant to Section 1818(b) (6) of the


21That Decision, which addresses the apparently identical argument by Petitioner, is appended hereto as Appendix B and incorporated in this discussion by reference.

22There is no evidence that Zuckerman approved or caused the $25,000 transfer to the Keck firm.

23Petitioner's witnesses credibly so testified.

24See note 12, supra.

25I therefore find that Petitioner has waived the right to request such a finding. See note 5, supra.

26Zuckerman's attorney credibly so testified without controversion.

27Petitioner contends that I should draw an adverse inference from Zuckerman's failure to testify in this proceeding. Because Petitioner completely failed to meet its burden of proof on the issue of notice and based on the facts set out in text, I find such an inference wholly inappropriate.

28Petitioner argues that Zuckerman had a "heightened fiduciary duty" which required him to be aware of the Bank's precarious condition. The In re Hoffman decision eschewed this subjective test in favor of the objective standard of whether notice of regulatory findings was given and received.
{{11-30-91 p.A-1819}}Act, Petitioner must demonstrate that the firm was an "institution-affiliated party." As relevant, that term is defined in Section 1813(u) (4) of the Act, 12 U.S.C. §1813(u) (4), as follows:
    [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.

   Petitioner's arguments that the Keck firm's conduct involved a "violation," "breach" or "practice" are based on a single set of alleged facts: the firm accepted two transfers of funds from the Bank at a time when the firm was or should have been aware that the Bank had been notified of regulatory findings of insolvency and imminent closure.29Again, Petitioner failed to offer evidence in support of its position, and the overwhelming weight of the evidence requires a contrary conclusion. The Keck firm was not represented at the meetings on July 11 and 12,30and there is no evidence that the firm was aware of the State's July 23 letter until this proceeding commenced. While Palmer discussed certain financial matters concerning the Bank, including the Bank's need to raise capital, with representatives of the Keck firm, there is no evidence that these discussions disclosed the fact that the Bank had been found to be insolvent by the FDIC.31Similarly, there is not a scintilla of evidence that Palmer informed the firm that the Bank's Board of Directors had been notified of the State's finding of imminent closure.32Finally, the record establishes that Zuckerman sought representation from the Keck firm with respect to the Bank's "brick loans," and Zuckerman's discussions with representatives of the firm were limited to these loans and to a potential shareholder lawsuit.33There is no evidence that Zuckerman was aware, or informed the firm, of the regulatory findings of insolvency or imminent closure. Given the specific and limited matters concerning which the Keck firm represented Palmer and Zuckerman,34I find that the firm had no duty to inquire into the Bank's financial condition before accepting the Bank's retainer checks. For the foregoing reasons, I conclude that Petitioner did not demonstrate that the conduct of the Keck firm constituted a knowing or reckless violation,35breach or practice, within the meaning of Section 1813(u) (4) of the Act. Because Petitioner failed to establish that the Keck firm was an "institution-affiliated party,"36I must further conclude that restitution by it cannot be ordered under Section 1818(b) (6).37

FINDINGS OF FACT38

   1. As relevant to this proceeding, the bank was a corporation existing and doing business under the laws of California, having its


29Although this matter was discussed in some detail at the hearing, Petitioner did not request a finding of fact embodying any significant portion of the alleged facts set forth above. Accordingly, I find that Petitioner has waived the right to request such a finding. See note 5, supra.

30Petitioner's witnesses so testified.

31Palmer's attorney credibly testified without controversion that he had "no knowledge" during July 1990 of the bank's financial condition.

32Indeed, Palmer, whom I found to be an exceptionally candid witness, testified without controversion that he never mentioned the Bank's possible closure during his discussions with the Keck firm.

33Zuckerman's attorney credibly so testified without controversion.

34None of these matters would have caused a "reasonably prudent person" to inquire as to the existence of regulatory findings of insolvency or imminent closure.

35The Keck firm correctly contends that the Notice does not allege that the firm violated a law or regulation, and Petitioner's failure to request a conclusion to this effect constitutes a waiver. See note 5, supra.

36Petitioner argues that a Federal District Court has impliedly held the Keck firm to be an "institution-affiliated party." The non-specific denial of a temporary restraining order does not constitute a ruling on the merits and has no binding or precedential effect in this proceeding.

37Petitioner also makes a plea for equitable relief based on the theory of a "constructive trust." Absent proof of wrongdoing, that plea cannot be entertained. In any event, such a plea clearly does not meet the requirements of Section 1818(b) (6) of the Act and is being made in the wrong forum. Finally, the plea as it relates to the Crowley and Christensen firm is untimely and must be rejected for the reasons set forth in note 18, supra.

38Findings and conclusions not set forth below or treated in the foregoing discussion are found to be moot in light of the findings and conclusions which have been adopted, to be immaterial to the matters properly before me or to be statements of general principle which lack probative value absent any allegation of a specific factual context.
{{11-30-91 p.A-1820}}principal place of business in Beverly Hills, California.
   2. As relevant to this proceeding, the Bank was not a member of the Federal Reserve System but was insured by the FDIC.
   3. As relevant to this proceeding, Palmer was an officer of the Bank and a member of its Board of Directors.
   4. As relevant to this proceeding, Zuckerman was an officer of the Bank.
   5. On July 11, 1990, Palmer received notice of the FDIC's finding that the Bank was insolvent.
   6. On July 12, 1990, Palmer received notice of the State's finding that the Bank could be closed in the immediate future.
   7. There is no evidence that, on or before August 2, 1990, either Zuckerman or the Keck firm received actual or constructive notice of the regulators' findings of insolvency or imminent closure.
   8. The Bank transferred $30,000 to the Keck firm on July 13, 1990 to prepay legal services on behalf of Palmer, and Palmer personally benefited from this payment.
   9. The Bank transferred $25,000 to the Keck firm on August 2, 1990 to prepay legal services on behalf of Zuckerman, and Zuckerman personally benefited from this payment.
   10. The Bank transferred $25,000 to the Crowley firm and $50,000 to the Christensen firm on August 6, 1990 to prepay legal services for the Bank on matters related to the State.

CONCLUSIONS OF LAW

   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.
   2. The FDIC has jurisdiction over Respondents and the subject matter of this proceeding.
   3. The FDIC has authority to issue a cease and desist order against Respondents pursuant to Section 8(b) of the Act.
   4. Petitioner's burden of proof is one of a preponderance of the evidence.
   5. The FDIC is the successor-in-interest of the Bank.
   6. Palmer and Zuckerman were shown to be "institution-affiliated parties" within the meaning of Section 1813(u) (1) of the Act.
   7. The Bank's transfers of $25,000 to the Crowley firm and $50,000 to the Christensen firm were neither violations of law nor unsafe or unsound banking practices.
   8. Neither Palmer, Zuckerman nor the Keck firm are personally liable for restitution of the assets transferred by the Bank to the Crowley and Christensen firms.
   9. Palmer was shown to have engaged in unsafe or unsound banking practices by (a) accepting the benefit of the Bank's transfer of $30,000 to the Keck firm after he had received notice of regulatory findings of the Bank's insolvency and imminent closure and (b) approving the Bank's transfer of $25,000 to the Keck firm after he had received notice of regulatory findings of the Bank's insolvency and imminent closure.
   10. Palmer was unjustly enriched by the Bank's transfer of $30,000 to the Keck firm.
   11. Palmer is personally liable for restitution of the $30,000 which the Bank transferred to the Keck firm.
   12. Palmer was not shown to have been unjustly enriched by or to have acted in reckless disregard of a law, regulation or prior order in connection with his approval of the Bank's transfer of $25,000 to the Keck firm.
   13. Palmer is not personally liable for restitution of the $25,000 transferred to the Keck firm by the Bank.
   14. Zuckerman was not shown to have engaged in a statutory violation or an unsafe or unsound practice in connection with the Bank's transfers of $30,000 or $25,000 to the Keck firm.
   15. Zuckerman is not personally liable for restitution of the $55,000 transferred to the Keck firm by the Bank.
   16. The Keck firm was not shown to have knowingly or recklessly participated in a violation of law or regulation, a breach of fiduciary duty or an unsafe or unsound banking practice in connection with the Bank's transfers of $30,000 or $25,000 to the firm.
   17. The Keck firm was not shown to be an "institution-affiliated party" within the meaning of Section 1813(u) (4) of the Act.
   18. The Keck firm is not personally liable for restitution of the $55,000 transferred to the firm by the Bank.
   Based on the foregoing findings of fact and conclusions of law, and upon my rulings during the hearing, I hereby make the following recommended:
{{5-31-92 p.A-1821}}

ORDER39

   IT IS HEREBY ORDERED that:
   1. Within 30 days from the date of service of this Order, Respondent Richard A. Palmer shall return to the Federal Deposit Insurance Corporation, as the receiver of the First Pacific Bank, the sum of $30,000 which was transferred on July 13, 1991 by the Bank to the law firm of Keck, Mahin & Cate on behalf of Respondent Palmer.
   2. The remaining charges against Richard A. Palmer, Leon Zuckerman and the law firm of Keck, Mahin & Cate which appear in the Notice of Charges and of Hearing issued August 10, 1990 are dismissed.
   Done at Rosslyn, Virginia, this 23rd day of May, 1991.

/s/s Steven M. Charno
Administrative Law Judge


39Petitioner did not seek prohibitive relieve in the proposed order which it filed on April 29, 1991. Accordingly, none will be ordered.

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