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FDIC Enforcement Decisions and Orders |
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FDIC Board grants special permission to appeal on an issue of first impression under the cross-guarantee provisions of FDI Act Section 5(e); rejects ALJ's recommendation and finds holding company's trustee in bankruptcy lacks standing to intervene in the proceeding between FDIC as receiver of an insolvent institution and FDIC as issuer of a cross-guarantee assessment notice against insolvent bank's affiliated institution; and orders the affiliate bank to pay estimated loss of insolvent bank. (The motions to dismiss were granted in part and denied in part by the United States District Court for the District of Massachusetts, 825 F.supp. 384.)
[.1] Practice and ProcedureInterlocutory AppealStandard
[.2] Bank InsolvencyCross-GuaranteeStanding of Holding CompanyStatutory Scheme
[.3] Bank InsolvencyCross-GuaranteeStanding of Holding CompanyInterest of Shareholders
[.4] Bank InsolvencyCross-GuaranteeStanding of Holding CompanyConflict of Interest
[.5] Bank InsolvencyCross-GuaranteeStanding of Holding CompanyTrustee's Derivative Claim
[.6] Bank InsolvencyCross-GuaranteeScope of Hearing
[.7] Bank InsolvencyCross-GuaranteeCalculation of Loss
[.8] Bank InsolvencyCross-GuaranteeFDIC Authority to Assess
Neither section 5(e) nor the Administrative Procedures Act provides a right for the Trustee to participate in cross-guarantee proceedings; participation of an "interested person" is completely within the discretion of the agency.
In the Matter of
{{6-30-92 p.A-1980}}
This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") upon FDIC Enforcement Counsel's Application for Special Permission to Appeal and for Stay of Proceedings ("Application for Special Permission to Appeal") of the Recommended Decision of Administrative Law Judge James L. Rose ("ALJ"). The Recommended Decision granted permission to the Trustee in Bankruptcy ("Trustee") of Bank of New England Corporation, Boston, Massachusetts ("BNEC"), to enter an answer in the above- captioned assessment proceeding under the cross-guarantee provisions of section 5(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1815(e) ("cross-guarantee provisions").
On January 6, 1991, the Office of the Comptroller of the Currency ("Comptroller") declared the Bank of New England, National Association, Boston, Massachusetts ("BNE"), insolvent and appointed the FDIC receiver for BNE, as required by statute. On the same date, invoking the cross- guarantee provisions, the FDIC in its corporate capacity served BNE's affiliate, Maine National Bank, Portland, Maine ("MNB"), a commonly controlled insured depository institution within the definition of section 5(e) of the FDI Act, with a Notice of Assessment of Liability, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Assessment Notice"), based on loss experienced or an estimate of loss anticipated by the FDIC as a result of the failure of BNE. MNB was assessed a $1,015,900,000 cross-guarantee liability by the FDIC. MNB informed the FDIC that it was unable to pay the assessment which was due and owing to the FDIC. As a result, the Comptroller declared MNB insolvent. The Comptroller closed MNB and appointed the FDIC as receiver for MNB ("Receiver"). Shortly thereafter, BNEC, the common holding company of BNE and MNB, declared bankruptcy and the Trustee was appointed for BNEC.
[.1] The grant of an interlocutory appeal such as the one requested here is an extraordinary action warranted only when the Board's standards have been met. The decision to grant or deny an interlocutory appeal, however, is within the sole discretion of the Board. 12 C.F.R. § 308.31.
A. FDIC Enforcement Counsel's Position
FDIC Enforcement Counsel contends that neither BNEC nor the Trustee is a proper party to this administrative proceeding because (1) section 5(e) of the FDI Act limits participation in the cross-guarantee procedures to depository institutions; and (2) the Receiver, which "stand[s] in the shoes of MNB" by statute, is charged by law with the representation of the interests of the shareholders of MNB. Standing alone, the Receiver's refusal to file the answer requested by the Trustee or otherwise to contest the cross-guarantee liability is not a sufficient basis to permit the Trustee to contest the action. Moreover, argues FDIC Enforcement Counsel, the Trustee's action is really a "back-door" challenge to the closing of MNB by the Comptroller, and such a challenge cannot be heard in this restricted administrative proceeding. Finally, FDIC Enforcement Counsel points out that assuming, arguendo, the truth of the Trustee's allegations that the amount of loss assessed by the FDIC should be reduced by the amount of uninsured deposits, MNB would still have been insolvent as a result of the FDIC's (reduced) assessment, and the Trustee would be in no different position than he is currently.
B. The Trustee's Position
The Trustee claims that he is a proper party because the FDIC as Receiver has refused to defend the assessment action and, in any event, could not effectively defend due to the inherent conflict of interest between the FDIC's responsibilities as Receiver and as issuer of the Assessment Notice. The Trustee claims the right to proceed through a shareholder derivative action, as well as by an independent action as a shareholder whose interest and injury is separate from that of BNEC. He asserts that, without his participation, there can be no challenge
C. The Recommended Decision
The ALJ denied Enforcement Counsel's Motion to Strike the Trustee's Answer because he found that "[i]f accepted, the FDIC's contention would result in a grant of absolute authority to the FDIC in assessment order actions which render the target banks insolvent, precluding them from having these actions aired in an administrative adjudication." R. D. at 3. He stated his assumption that a "Receiver would never challenge a cross-guarantee assessment." R. D. at 5. On his findings that the insolvency of MNB was caused by the FDIC's cross-guarantee assessment, and that MNB would not have been closed by the Comptroller absent the assessment of liability, the ALJ determined that the Trustee was a proper party to intervene because it had a substantial interest in the proceeding which would be impaired by his exclusion. R. D. at 12, 4, 5, and 8. Therefore, the ALJ did not address the Trustee's derivative claims. The ALJ concluded that:
A. The Trustee Does Not Have Standing
The ALJ determined that the Administrative Procedure Act ("APA") requires a hearing in which the Trustee, as an "interested person" within the meaning of the FDIC's Rules of Practice and Procedure ("FDIC Rules") should be permitted to participate. The Board disagrees, and has determined that neither the APA nor the FDIC Rules create a right of participation by the Trustee. At best, his participation would be discretionary.
1. The Statutory Scheme
[.2] Section 1815(e), added to the FDI Act by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), was intended to give the FDIC a source of protection in light of the anticipated strains on the insurance fund. It is designed to ensure that the deposit insurance fund does not suffer disproportionate losses in situations where assets that could be used to offset bank-failure costs are held in commonly controlled depository institutions. The language of the statute is clear and specific, and limits participants in a cross-guarantee assessment to depository institutions:
2. Receiver Represents the Shareholders
[.3] Once a receiver for a national bank is appointed, the receiver succeeds to "all rights, titles, powers, privileges of the insured depository institution and of any stockholder, member, account holder, depositor, officer or director of such institution." 12 U.S.C. § 1821(d)(2)(A).5 Despite this unambiguous language, the Trustee argues that he should be allowed to defend these proceedings as the representative of the shareholder of MNB, and states that his interests are not adequately represented by the Receiver.
3. The Conflict of Interest
[.4] The Trustee seems to argue that in drafting the legislation, Congress only contemplated that the cross-guarantee assessment would be issued against an open institution, which would be able to defend itself in an assessment proceeding. The Trustee implies, and the ALJ agreed, that Congress never intended this provision to operate against an institution in receivership, especially where the FDIC is appointed the receiver, putting the FDIC on both sides of the assessment proceeding.
4. Trustee's Direct Standing
The Trustee asserts an independent cause of action on behalf of BNEC based on the alleged injury to BNEC resulting from the FDIC's assessment, whose alleged purpose was to "render MNB insolvent so that the FDIC could take over the bank and sell its
5. Trustee's Derivative Claims
[.5] As his primary argument, the Trustee asserts that because the FDIC "is on both sides of the assessment, the only way to challenge the FDIC's action is through a shareholder derivative suit." Trustee's Opposition at 4 n.3. By analogy to shareholder derivative actions, he asserts his right to defend against the assessment where the Receiver has failed to do so.11 The law governing derivative actions has been raised by the Trustee. Therefore, the Board will assume a right to a derivative claim for purposes of this decision, but will address the issue only insofar as is necessary to find that under governing principles of law, the Trustee's claim would be insufficient and subject to dismissal.
B. The Trustee's Challenges Have No Merit
The Board has determined that the Trustee does not have standing to participate in these proceedings. Ordinarily, consideration of this matter would conclude at this point. However, because of the unique posture of this case, and because resolution of this limited administrative matter has been protracted, the Board exercised its discretion to request supplementation of the record. It did so in the interests of administrative efficiency and economy in order to consider a full record on the limited issue in contest, and reach a decision on the merits. The Board has considered the evidence and arguments of FDIC Enforcement Counsel and the Trustee. With the exception of the amount of the estimate of loss, there are no factual disputes regarding the key issues.15 Essentially the Trustee raises legal issues which can be disposed of now. With regard to the amount of the loss estimate, the Board concludes that, even conceding the Trustee's argument for the sake of discussion, his challenge is meritless.
1. The Trustee Had Adequate Opportunity to Respond
FDIC Enforcement Counsel had an opportunity to submit to the Board additional information addressing the amount of the loss, and the Trustee had an opportunity to respond to the submission of FDIC Enforcement Counsel. Thus, even if the Trustee had standing, he has been provided the opportunity to be heard which he seeks.16
2. The Scope of the Hearing
[.6] The administrative hearing under section 5(e) of the FDI Act, 12 U.S.C. § 1815(e), is limited by its terms to three issues: (1) the amount of any loss incurred by the FDIC in connection with an insured depository institution; (2) the liability of commonly controlled depository institutions for the amount of such loss; and (3) the schedule of payments to be made by such commonly controlled depository institution. The Trustee implies that the hearing may address additional issues, but he reads the statute incorrectly. The language of the statute is clear. There is no reason to go beyond the plain language of the statute. Congress could have provided for a broader hearing had it simply ended section 5(e)(3)(B) after requiring a hearing on the record. Instead, it consciously limited the scope of the hearing by setting forth the three items which are subject to review at a hearing on the record.
3. The Trustee's Calculation of Loss Does Not Alter His Liability
[.7] It is clear from the pleadings that the only issue for hearing is the amount of the loss incurred by the FDIC, which was the basis for the assessment. The Trustee asserts that "more than" $300 million of uninsured deposits were improperly paid. He alleges that the FDIC decided to protect uninsured depositors of BNE by agreeing to insure all deposits in excess of the statutory maximum contained in 12 U.S.C. § 1821(a), and other creditors including foreign depositors. Thus, asserts the Trustee, the FDIC inappropriately increased the anticipated loss to the FDIC and the assessment against MNB.18 Answer ¶2124. As discussed below, the record before the Board plainly does not support the Trustee's assertion.
4. The FDIC's Actions Were Not
The Trustee states that the affidavits "do not even purport to address [his] claim that the assessment of MNB was arbitrary and capricious." Trustee's Resp. at 2. The Board disagrees and finds that the affidavits and the accompanying exhibits provide substantial evidence of the rational basis for the assessment. In addition, as discussed previously, the Board finds that the decision to assess MNB rather than a sister institution, and the decision to demand immediate payment have been left by statute to the sole discretion of the FDIC. Given that the Trustee has admitted the statutory prerequisites to cross-guarantee liability and that the record contains substantial evidence supporting the loss assessment, there can be no valid claim that the assessment was arbitrary or capricious.
5. The Revised Loss Estimate
Congress recognized the preliminary nature of the loss calculations upon which an assessment may be based, and provided in the statute for adjustments to the amount of loss. 12 U.S.C. § 1815(e)(2)(D). The supplemental information provided to the Board indicates the wisdom of this statutory scheme. Mr. Kitchen, who is responsible for the accounting and reporting of the liquidation of the BNE receivership, states in his affidavit that there has been a reduction in the amount of estimated loss because a portion of the original loss estimate may be recovered.20 The current revised loss estimate is $501 million. Kitchen Affidavit ¶8. This number may be revised again.21 Moreover, Congress has provided a mechanism by which the FDIC can reimburse MNB for the amount of the assessment MNB has paid to the FDIC in excess of the actual loss the FDIC ultimately suffers from BNE's default.
6. The Trustee's Additional Arguments
[.8] The Trustee makes two additional arguments. First, the Trustee asserts that the FDIC has no jurisdiction to make the assessment. Answer ¶¶21 and 29. This is incorrect. Section 5(e) of the FDI Act is a clear jurisdictional mandate for the assessment action taken. Not only is the FDIC given full discretion to make the assessment, but also it may take such actions, upon the default of a commonly controlled institution, without regard to any factor other than the actual or reasonably anticipated losses incurred in connection with the failure of such commonly controlled depository institution. Thus, the assertions of the Trustee's Answer that the assessment liabilities "are not incurred by MNB voluntarily or in the ordinary course of the operations of MNB", or that they "do not represent and are not based upon preexisting obligations of the MNB to BNEC or BNE," are irrelevant. Answer ¶¶26 and 27.
[.9] The ALJ determined that the APA requires a hearing in which the Trustee, as an "interested person" within the meaning of the FDIC regulations should be permitted to participate. The Board is unable to find any authority for this conclusion. On the contrary, neither the APA nor the FDIC Rules create a right of participation by the Trustee. At best, his participation would be discretionary, and the Bank has determined there is no persuasive justification for the Trustee's intervention.
The Board has fully examined the record and finds nothing contained in it to require or justify participation of the Trustee in this assessment proceeding. Accordingly, the Board finds it appropriate to issue an order GRANTING Enforcement Counsel's Application for Special Permission to Appeal and STRIKING the Answer of John L. Whitlock, Trustee in Bankruptcy for Bank of New England Corporation. The Board further finds the revised amount of estimated loss to be due and owing and ORDERS payment of that amount.
Upon consideration of the entire record in this case
In the Matter of
On the other hand, a "hearing on the record" outside the purview of the APA would not be much of a safeguard for the affected parties. Such would not afford the protection the APA was designed to give. For instance, without an APA hearing here, parties fundamentally affected by the assessment order would have no forum in which to it test its validity. Thus it is a fundamental principle of administrative law that the words, "hearing on the record" in an agency's enabling act means a hearing under 5 U.S.C. §§ 554, 556 and 557. "The APA thus provides in clear terms that when a statute requires a hearing with a determination on the record, § 556 applies, and §556 clearly requires trial procedures." (Original emphasis.) 2 K. Davis, Administrative Law Treaties § 10.7, p. 333 (2d ed. 1979). Among other cases, Professor Davis cites United States v. Florida East Coast Railway Co., 410 U.S. 224, 234 (1973) where the Court distinguished between "hearing" and "hearing on the record" and concluded that only by use of the latter language did Congress mean to invoke formal APA proceedings. See, United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 757 (1972): "Sections 556 and 557 need be applied only where the agency statute, in addition to providing a hearing, prescribes explicitly that it be `on the record.'" See also, Railroad Com'n. of Texas v. United States, 765 F.2d 221 (1985).
The FDIC also argues that the Trustee has failed to demonstrate that the disposition of the action may impair his ability to protect the interests with which he is charged. The FDIC argues that the statute provides for review by the appropriate United States Court of Appeals via an appeal from any FDIC decision in this action. However, counsel also admits that the Trustee would not have standing to appeal since he would not have been a party to this action. Such is a tacit admission that this proceeding provides the only forum where the FDIC's assessment can be tested. Thus, the Trustee must be permitted to intervene in this action.
Further, the Trustee's interests will not be fully and adequately represented absent his intervention because if his answer is struck, the action is in default. Though the FDIC asserts that in a default it need only put on prima facie evidence of the three statutory factors, the rules provide that failure to answer "shall render the assessment ... final and unappealable." In either event, the Trustee's interests cannot be adequately protected absent being allowed to litigate the FDIC's allegations. No defenses would be litigated and the FDIC would not be required to establish the validity of its assessment by a preponderance of the credible evidence.
Allowing the Trustee to intervene will not delay this proceeding or otherwise unfairly prejudice the FDIC. Nor will it impair the ability of the Bank to perform its obligations under the statute. The Trustee has already filed an answer and the action can proceed to hearing. The Trustee's intervention will only have the effect of requiring the FDIC to demonstrate the validity of its assessment by a preponderance of the credible evidence. This cannot be deemed "unfair prejudice" to the FDIC's interest since that is only what is required by both the APA and section 1815(e)(3).
The Trustee's additional argument that it is a proper party under a stockholder derivative theory need not be considered.
The FDIC's motion to strike is denied and the Trustee's motion to intervene is granted.
Dated: July 8, 1991
Upon consideration of the motion of FDIC to strike the Answer, and Trustee Ben Branch's response thereto, it is hereby ORDERED: |
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Last Updated 6/6/2003 | legal@fdic.gov |