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   [5209] In the Matter of First City, Texas—Austin, National Association, et al., Austin, Texas, Docket No. FDIC-92-316kk (12014093).

   Board remands cross-guarantee assessment proceeding to ALJ, ruling that a bank holding company may represent assessed banks on a derivative basis, at its own expense, if the FDIC as receiver of the failed banks declines to challenge the cross-guarantee assessment.

   [.1] Cross-Guarantee Proceedings—Subject of Hearings
   The proper subject of cross-guarantee hearings is the amount of loss to the insurance fund as of the closest appropriate date to the date of the hearing, thus permitting an early hearing while providing an estimate more refined than that
{{2-28-94 p.A-2372}}possible at the initial assessment, and while it is still possible to provide relief if the initial assessment is shown inaccurate.

   [.2] Cross-Guarantee Proceedings—Relief Available
   The only statutory remedy for an incorrect assessment is an adjustment to reflect the actual loss incurred by the insurance fund, based on the most current figures available.

   [.3] Cross-Guarantee Proceedings—Parties
   The right to challenge an assessment belongs to the receiver of a failed institution, but if the receiver fails to challenge or to respond to demands that it do so from holding companies, holding companies may participate and represent failed assessed institutions in a derivative capacity, at their own expense and without recourse against receivers for reimbursement of expenses.

   [.4] Cross-Guarantee Proceedings—Notice—Calculation of Assessment
   The FDIC's notice of assessment, when read as a whole, must provide sufficient information for an outside reader to understand how FDIC calculated the loss.

In the Matter of

FIRST CITY, TEXAS-AUSTIN, NATIONAL ASSOCIATION
AUSTIN, TEXAS, et al.
(Commonly Controlled Insured Depository Institutions)
DECISION AND ORDER
FDIC-92-316kk

I. INTRODUCTION

   This is a challenge to the application of the cross-guarantee statute brought by two holding companies—First City Bancorporation of Texas, Inc., Houston, Texas ("FCBOT"), and FCB Holdings, Inc. ("FCB Holdings") (together, the "Holding Companies")— which owned a group of twenty commonly controlled insured depository institutions. The group consisted of First City, Texas-Houston, National Association, Houston, Texas ("First City-Houston"), and a state bank, First City, Texas-Dallas, Dallas, Texas ("First City-Dallas") (together, the "Triggering Banks"), and eighteen (18) other state and national banks ("Assessed Banks").1 The challenge is brought in the administrative hearing provided for in subsection (3)(B) of the cross-guarantee statute, section 5(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1815(e).
   Upon the failure of the Triggering Banks, assessments of liability were made by the Federal Deposit Insurance Corporation ("FDIC" or "Corporation") against the Assessed Banks for the amount of estimated losses anticipated from the failure of First City-Houston and First City-Dallas. Based on the assessments, each of the Assessed banks was declared insolvent and the FDIC was appointed receiver by the appropriate regulatory authority. The Holding Companies filed an answer and requested a hearing. FDIC Enforcement Counsel opposed the request on the grounds that the Holding Companies lack standing to participate in the administrative hearing. The Administrative Law Judge, Walter J. Alprin ("ALJ"), in a Recommended Decision Upon Default ("Recommended Decision"), held that the Hold-


1 FCBOT is the holding company for First City-Houston. FCB Holdings, Inc. is a wholly owned subsidiary of FCBOT. FDIC Motion to Strike at 2. The Holding Companies own 100 percent of the shares of the Assessed Banks. Answer ¶1. However, the precise structure of the relationship among FCBOT, FCB Holdings, and the Assessed Banks is unclear from the record.
   The Assessed Banks are: First City, Texas-Beaumont, National Association, Beaumont, Texas; First City, Texas-Corpus Christi, Corpus Christi, Texas; First City, Texas-El Paso, National Association, El Paso, Texas; First City, Texas-Midland, National Association, Midland, Texas; First City, Texas-Bryan/College Station, National Association, Bryan, Texas; First City, Texas-Tyler, National Association, Tyler, Texas; First City, Texas-Alice, Alice, Texas; First City, Texas-San Angelo, National Association, San Angelo, Texas; First city, Texas-Lufkin, National Association, Lufkin, Texas; First city, Texas-Orange, National Association, Orange, Texas; First City, Texas-Madisonville, National Association, Madisonville, Texas; First City, Texas-Graham, National Association, Graham, Texas; First City, Texas-Lake Jackson, Lake Jackson, Texas; First City, Texas-Aransas Pass, Aransas Pass, Texas; First City, Texas-Sour Lake, Sour Lake, Texas; First City, Texas-Kountze, Kountze, Texas; First City, Texas-Austin, National Associations, Austin, Texas; and First City, Texas-San Antonio, San Antonio, Texas.
{{2-28-94 p.A-2373}}ing Companies lack standing, citing the decision of the Board of Directors of the FDIC ("Board") in In the Matter of Maine National Bank, 1 P-H FDIC Enf. Dec. ¶5178 (1992).2
   In the Board's review of the record in this case, the Board discovered considerable confusion, as well as lack of agreement, by the participants as to the nature and purpose of the administrative hearing provided in the cross-guarantee statute.3 This is understandable, because the statute is more complex than it first may appear, and the statutory language is sometimes imprecise. The scheme enacted by Congress has a number of significant omissions which result in interpretative difficulties for which the limited legislative history provides little guidance. The Board sets forth in this decision a comprehensive interpretation of the cross-guarantee statute so as to provide a meaningful, fair and practical framework for the statutory hearings on the record concerning cross-guarantee liability, for this and future cases. For the reasons set forth below, the Board does not adopt the Recommended Decision and remands this case to the ALJ for a hearing consistent with this Decision and Order.

II. PROCEDURAL BACKGROUND

   On or about October 30, 1992, the Acting Comptroller of the Currency deemed First City-Houston to be insolvent pursuant to 12 U.S.C. § 191, and appointed the FDIC as receiver. On the same date, the Banking Commissioner for the State of Texas deemed First City-Dallas to be insolvent and appointed the FDIC as receiver of First City-Dallas. The failure of First City-Houston and First City-Dallas triggered the issuance by the FDIC of a Notice of Assessment of Liability, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Notice"), dated October 30, 1992, against the Assessed Banks pursuant to subsection 5(e)(1) of the FDI Act. The Notice assessed anticipated losses totalling $476 million arising out of the failures of First City-Houston and First City-Dallas.4 The Notice directed each Assessed Bank to make immediate payment of an assessed amount that, in each case, was in excess of its capital. Based on the assessments, the Assessed Banks were closed on October 30, 1992, by the Acting Comptroller of the Currency or the Banking Commissioner for the State of Texas, and the FDIC was appointed Receiver of each of these 18 institutions.
   The Notice required that answers and requests for a hearing be filed within twenty (20) days of its receipt; otherwise the assessments would become final and unappealable in accordance with the FDIC's Rules of Practice and Procedure, 12 C.F.R. § 308.167(2)(v). By letter dated November 18, 1992, the Holding Companies demanded that the FDIC as Receiver of each Assessed Bank request a hearing and file answers by the November 19th deadline contesting "the validity of the notice of Assessment."5 The Receivers did not file answers or hearing requests, or otherwise respond to the demand. The Holding Companies then entered appearances "on their own behalf and on behalf of" the Assessed Banks, and moved to dismiss the Notice in a proceeding before the ALJ pursuant to subsection 5(e)(3)(B) of the FDI Act. FDIC Enforcement Counsel moved to strike the answer of the Holding Companies for lack of standing. On January 17, 1993, the ALJ granted FDIC Enforcement Counsel's Motion to Strike the Answer of the Holding Companies, and denied the Holding Companies' Motion to Strike the Notice.
   On January 27, 1993, the FDIC sold the 20 "bridge banks" which had been established by the agency in October to continue the banking services of the Triggering Banks and Assessed Banks. The FDIC announced in a January 27, 1993, press release that, as a result of the larger than expected economic premium, including the acquiring institutions' willingness to absorb certain future


2 Maine National Bank held that the holding company of a failed assessed institution does not have standing to participate in a cross-guarantee hearing because the FDIC as Receiver succeeds to all rights, titles, powers, and privileges of the institution and of its shareholders under 12 U.S.C. § 1821(d)(2)(A), and represents the interests of creditors and shareholders in the winding up and liquidation of the institution's affairs and assets.

3 For this reason, the Board remanded this matter for supplemental briefing.

4 In April 1988, the FDIC gave approximately $970 million of open-bank assistance to the troubled First City System. The assistance agreement provided for a guarantee by FCBOT and each of its subsidiary banks, jointly and severally, for a $100 million obligation due to the FDIC in 1998. The FDIC's loss estimate of $476 million included $44.3 million deemed to be the net present value of the $100 million obligation. R.D. at ¶¶14–15.

5 The Board notes an issue, but does not express an opinion, as to whether a demand one day before the expiration of the twenty-day time period constitutes adequate notice for purposes of establishing a right to derivative standing. The Board need not reach this issue in this case because of the decision set forth herein.
{{2-28-94 p.A-2374}}losses on First City assets, "the agency now estimates that the Bank Insurance Fund will suffer no loss as a result of the First City resolution."6
   Thereafter, the ALJ issued the Recommended Decision. Citing the decision of the Board in Maine National Bank, supra, the ALJ determined that the Holding Companies did not have standing to participate in a subsection 5(e)(3)(B) proceeding; and that since the Receivers for the Assessed Banks had not filed Answers or hearing requests, entry of a default judgment was appropriate. The Holding Companies and FDIC Enforcement Counsel filed Exceptions to the Recommended Decision.7
   Following initial consideration of the record, the Board remanded the case to the ALJ to order supplemental briefing from the parties. Both parties filed timely supplemental briefs and the Recommended Decision is now before the Board for final decision.

III. JOINT MOTION TO STAY
CONSIDERATION BY THE BOARD

   On November 5, 1993, the Board received a Motion filed jointly by FDIC Enforcement Counsel and counsel for the Holding Companies requesting the Board to stay further consideration of this matter up to and including December 3, 1993, in furtherance of ongoing settlement negotiations. At the time the Motion was received, it was clear that the Board's decision would not be issued prior to December 3, 1993, and, therefore, it was not necessary for the Board to act upon the requested stay. As of this date, the parties have not announced any settlement agreement.

IV. THE CROSS-GUARANTEE STATUTE

   Prior to the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"), the FDIC was handicapped in handling failing banks within multi-bank holding company structures such as the First City system which nominally consist of a series of separate banking corporations but which in effect operate with the lead banks functioning as "main offices" and the affiliates as "branches" of the lead banks. Larger banks in such systems often generate most of their loan business and draw much of their funding from smaller affiliated banks through a variety of devices such as long-term deposits in the lead banks or long-term federal funds loans to the lead banks. Good assets of a problem bank can be sold to affiliated banks at less than full value, and bad assets of a healthy bank can be transferred to a problem bank for more than full value. When the FDIC was required to treat each bank in such a system as a separate entity, losses caused by the failure of a problem bank would be borne primarily by the deposit insurance fund, not the banks or holding company that contributed to the loss.
   Recognizing that commonly controlled institutions can operate as a single interrelated entity and directly affect the magnitude of loss, and that banks within a commonly owned system should have to reimburse any loss to the FDIC caused by the failure of one of them, Congress enacted the cross-guarantee provisions as part of the 1989 amendments to the FDI Act contained in FIRREA. The major provisions affecting the issues in this case are summarized below.
   Subsection 5(e)(1)(A) of the FDI Act provides that any insured depository institution shall be liable for "any loss incurred by the Corporation, or any loss which the Corporation reasonably anticipates incurring," in connection with (1) the default [i.e., failure] of a commonly controlled insured depository institution, or (2) any assistance provided by the Corporation to any commonly controlled insured depository institution in danger of default. Subsection 5(e)(1)(B) provides that an insured depository institution shall pay the amount of any liability to the Corporation under subparagraph (A) upon receipt of written notice by the Corporation.
   Subsection 5(e)(2)(A) provides that when an insured depository institution is in default, the Corporation shall, "(i) in good faith, estimate the amount of the loss the Corporation will incur from such default ..."; (ii) estimate the amount of each such


6 Exhibit A to Holding Companies Exceptions to the Recommended Decision. The Holding Companies argue that the quoted language demonstrates that the assessments were grossly inaccurate. However, the quoted language was only a projection and related to consolidated losses for the entire 20 banks of the First City system. It does not separate and deal with losses from the failure of either or both of the Triggering Banks. If ultimately accurate, it demonstrates only that an overall resolution may result in no loss, and that the cross-guarantee provisions can protect the Bank Insurance Fund as intended by Congress.

7 FDIC Enforcement Counsel filed objections that were captioned "Exceptions" with regard to certain aspects of the Holding Company pleadings, but did not except to the holding of the Recommended Decision.
{{2-28-94 p.A-2375}}commonly controlled depository institution's share of such liability; and (iii) advise each commonly controlled depository institution of the Corporation's estimate of the amount of such institution's liability for such losses. Subsection 5(e)(2)(B) provides that the Corporation, after consultation with the appropriate Federal banking agency and the appropriate State chartering agency, shall (i) on a case-by-case basis establish the procedures and schedule under which any insured depository institution shall reimburse the Corporation for such institution's liability under subsection 5(e)(1); or (ii) require immediate payment of the amount of such institution's liability under subsection 5(e)(1).
   Subsection 5(e)(2)(D) provides that if the amount of compensation estimated by and paid to the Corporation is greater than the actual loss incurred by the Corporation, the Corporation shall reimburse each such commonly controlled depository institution its pro rata share of any overpayment. If the amount of compensation estimated by and paid to the Corporation is less than the actual loss incurred by the Corporation, the Corporation shall redetermine in its discretion the liability of each such commonly controlled depository institution to the Corporation and shall require payment of any additional liability.
   Subsection 5(e)(3)(A) provides that actions of the Corporation shall be reviewable pursuant to chapter 7 of Title 5, the Judicial review provisions of the Administrative Procedure Act (the "APA"), 5 U.S.C. § 551, et seq.
   Subsection 5(e)(3)(B) provides that the Corporation shall prescribe regulations and establish administrative procedures which provide for a hearing on the record for the review of—
       (i) the amount of any loss incurred by the Corporation in connection with any insured depository institution;
       (ii) the liability of individual commonly controlled depository institutions for the amount of such loss; and
       (iii) the schedule of payments to be made by such commonly controlled depository institutions.

V. POSITIONS OF THE HOLDING
COMPANIES

   The major positions asserted by the Holding Companies can be summarized as follows:
   (1) The Holding Companies have standing to participate in the subsection 5(e)(3)(B) proceeding because (a) as "parties whose rights have been directly and adversely affected by agency action," they have a right to protect those interests under the APA; and (b) they should be allowed to represent the failed Assessed Banks on a derivative basis because the FDIC as Receiver has failed to fulfill its obligation to protect the Assessed Banks and shareholders with respect to the assessments. The "obvious, irreconcilable conflict between the position of the FDIC as assessor and FDIC as Receiver should be itself reasonable grounds to justify the [Holding Companies'] not having to rely on FDIC Receivers to protect its interests." They argue that the failure of the Receivers to challenge the assessments is evidence of this conflict.
   (2) The subjects of the hearing should be: (a) to measure the assessment and the estimated loss against the best and most current information available at the time of the hearing to determine FDIC's reasonableness and good faith in formulating its initial estimate. It is argued that the FDIC's initial estimate has proven to be grossly inaccurate and hence not reasonable or in good faith when made.8 (b) Whether the Notice was invalid and should be stricken. The Holding Companies argue that the Notice should be stricken because (i) it does not contain a statement of the method by which the loss was calculated, and (ii) it contains an order to pay rather than a "proposed order,' both in violation of the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.167(b)(iii) and (iv). (c) Whether the FDIC should have delayed the payment schedule to allow the sale of 13 banks by the Holding Companies, which the Holding Companies allege they were on the verge of consummating on October 30, 1992, when the assessments were made, under the "schedule of payments" language of subsection (e)(3)(B)(iii). It is argued that the FDIC should have delayed making the assessments.


8 Later determined inaccuracy of the initial estimate in and of itself does not make that estimate unreasonable or in bad faith at the time issued. See n.11, infra.
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   (3) The proper relief to be granted is to rescind or reform the Notice, and to restore the Assessed Banks and the Holding Companies to their respective positions prior to the erroneous or invalid Notice. It is argued that, given the fact that the Assessed Banks have been sold to third parties, the proper relief is to reimburse the Holding Companies for the "going concern value" of the Assessed Banks.9

VI. POSITIONS OF FDIC
ENFORCEMENT COUNSEL

   The major positions of FDIC Enforcement Counsel can be summarized as follows:
   (1) An assessed institution or the receiver of a failed assessed institution is the only proper party to participate in a proceeding pursuant to subsection 5(e)(3) of the FDI Act. A decision not to defend a cross-guarantee assessment is fully within the discretion of a receiver where it believes the challenge to be unfounded. Here, the Receivers had no reason to believe that the Notice was unreasonable or otherwise not in good faith and therefore no reason to believe that a challenge would permit an adjustment to provide a distribution to the Holding Companies. Such decision by the Receivers was not a breach of fiduciary duty or negligence, as alleged by the Holding Companies, but a reasonable and appropriate decision made in the Receivers' discretion.
   (2) The Notice is valid. It contains a sufficient description of the method of calculation of the initial estimate of loss. The term "order" rather than "proposed order" is consistent with the provisions of the statute.
   (3) The subject of the hearing in this case should be only the amount of the assessments—an analysis and review of "the nature of the bill"—including the reasonableness and good faith of the initial estimate based on facts and circumstances as they existed at the time the estimate was made.
   (4) The relief that can be granted is limited to that provided in subsection 5(e)(2)(D) of the cross-guarantee statute—if the compensation estimated by and paid to the Corporation is greater or smaller than the actual loss incurred by the Corporation, the Corporation shall or may, as appropriate, make reimbursement or require additional payment, as appropriate.

VII. DISCUSSION

A. The Proper Subjects of Cross-Guarantee Hearings

   The cross-guarantee statute in subsection 5(e)(3)(B) provides for a hearing on the record for the review of (i) the amount of any loss incurred by the Corporation in connection with any insured depository institution; (ii) the liability of individual commonly controlled depository institutions for the amount of such loss; and (iii) the schedule of payments to be made by such commonly controlled depository institutions.
   The Board has previously noted the limited nature of the hearing provided by the statute. As the Board stated in Maine National Bank, supra:

    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.
In the Matter of Maine National Bank, 1 P-H FDIC Enf. Dec. ¶5178 at A-1989 (1992). The Board held in that case that the issue of why the FDIC demanded immediate payment, rather than providing for a payment schedule, is not subject to determination at a hearing pursuant to subsection 5(e)(3)(B). The Board confirms that holding here.10
   The only subject-of-hearing provision in question here is subsection 5(e)(3)(i), "the amount of any loss incurred by the Corpo-

9 The Holding Companies also assert the unconstitutionality of the provisions of 12 U.S.C. § 1815(e) in that they "deprive [the Holding Companies], their creditors and shareholders of (i) property without due process of law, (ii) property without just compensation, and (iii) equal protection of the laws" in violation of the Fifth Amendment of the Constitution. All participants agreed not to address these Constitutional issues in this forum. These issues, among others, are raised in a complaint filed by the Holding Companies in the United States Bankruptcy Court for the Northern District of Texas.

10 The Board also held in Maine National Bank, supra, that whether to require immediate payment of an assessment is a question committed to the discretion of the FDIC. 1 P-H FDIC Enf. Dec. ¶5178 at A-1980 (1992). Likewise, whether to allow delayed payments in a particular situation is a question committed to agency discretion and is not a subject for hearing under subsection 5(e)(3)(B)(iii), "Schedule of Payments." The only issue for determination under subsection 5(e)(3)(B), when the FDIC has provided for a schedule of payments, is the appropriateness of the schedule.
{{2-28-94 p.A-2377}}ration in connection with" the failure of the Triggering Banks. Read literally, this provision calls for a hearing on the amount of actual loss incurred by the FDIC in connection with the failure of a bank or banks. However, in almost all circumstances, the amount of actual loss will not be determined until wind-up of the receivership of the failed institution which triggered the assessment, generally several years after the assessment is made. Such an interpretation of the provision to delay a hearing until actual loss is known could arguably raise questions of fairness and due process, especially, in the Board's view, in cases where an assessed institution remains open. Moreover, this interpretation would lead to the anomaly of a different time frame for determination of the subsection 5(e)(3)(B)(i) (amount of the loss) issue from the subsections 5(e)(3)(B)(ii) (liability of a particular commonly controlled institution) and (iii) (schedule of payments) issues. Clearly, the latter two issues can and should be heard and determined promptly after the issuance of a notice of assessment.
   The Holding Companies and FDIC Enforcement Counsel have both suggested that the subsection 5(e)(3)(B)(i) hearing issue is, or should include, the reasonableness and good faith of the FDIC's initial loss estimates for the assessments. This argument is based on the language of subsections other than that which precisely control the subject of the hearing. Specifically, they point to subsection 5(e)(1) that liability is for "any loss which the Corporation reasonably anticipates incurring," and subsection 5(e)(2)(i) that in determining the amount of compensation, the Corporation shall "in good faith, estimate the amount of the loss the Corporation will incur. . . ." The Board disagrees for several independent reasons.
   First, having the hearing focus on the initial estimate is inconsistent with both the text and the structure of the specific provisions defining the scope of the hearing, as well as that of the entire cross-guarantee statutory scheme. Subsection 5(e)(3)(B)(i) refers to a hearing on the "amount of any loss" and makes no mention whatsoever of the "initial estimate" or the "reasonableness" or "good faith" of the initial estimate. Had Congress wanted to make the "amount . . . estimated by . . . the Corporation" the subject of the hearing it could have said so expressly, since the phrase is used in subsection 5(e)(2)(D), immediately preceding that which defines the contours of the hearing. Moreover, Congress has specifically addressed the issue of a remedy for errors in the initial estimate. Subsection 5(e)(2)(D) provides for adjustments for overpayments or underpayments based on the estimate being higher or lower than the actual loss. This express and carefully crafted discussion of the estimate outside of the subsection defining the nature and scope of the hearing only further underscores the conclusion that the initial estimate is not the subject of the hearing.11 The approach which is both practical and appropriate to all cases and circumstances is to determine an updated loss figure and amend the assessment accordingly. See section VII. B, infra.
   Secondly, the Board is of the view that the initial estimate constitutes action committed to agency discretion by law and hence is not reviewable, under section 701(a) of the APA. FDIC v. Bank of Coushatta, 930 F.2d 1122 (5th Cir.), cert. denied, 112 S. Ct. 170 (1991); Transohio Savings Bank v. OTS, No. 90-1678 (D.D.C. 1991, Aug. 1, 1991); United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320 (6th Cir. 1993); American Bank v. Clarke, 933 F.2d 899 (10 Cir. 1991). These cases establish two circumstances in which courts have found agency action to be not reviewable under section 701(a). First, where a statute provides no clear guidelines for a court to follow in reviewing the action (FDIC v. Bank of Coushatta, supra), and second, where the very nature of the agency action implies that review would not be appropriate (American Bank v. Clarke, supra), the agency action has been deemed to be committed to agency discretion by law.
   Here, as in the cited cases, there are no statutory guidelines for review. For example, the statute does not specify the methodology to be used in estimating anticipated losses from the failure of a bank or banks,

11 Even if one were to hold a hearing on the reasonableness and good faith of the initial estimate, it would be wholly illogical to base such review on any events or circumstances subsequent to the time the initial estimate was made, as the Holding Companies have suggested. Such an approach would be worse than inappropriate second-guessing; it would be the imposition of a standard of prescience which in the Board's view would be as unique as it would be unfair. The cross-guarantee statute, of course, contemplates that the original estimate will require revision.
{{2-28-94 p.A-2378}}and therefore the methodology must be determined by the agency in its discretion. More importantly, the process of determining cross-guarantee assessments involves sensitive policy judgments as well as complex projections of future values, earnings and losses, which usually must be made very promptly. This is precisely the type of agency action which courts have held to be of a nature not appropriate for review. The analogy of the agency action here in that of the Comptroller of the Currency's decision in American Bank v. Clarke, supra, is compelling. There the Comptroller closed a bank because of insolvency. The bank immediately sought judicial review. The Court of Appeals for the Tenth Circuit held that there was no jurisdiction to review because the Comptroller's insolvency determinations were committed to agency discretion by law. The court noted that the exception is not limited only to cases where there are no standards to apply. Rather, the nature of the agency action must also be considered in deciding whether review is appropriate. The Tenth Circuit conceded that there arguably are standards for insolvency. But the court cautioned that review by a court would be a lengthy and complex process involving inappropriate second-guessing of the Comptroller's need to act promptly to close an insolvent bank. Although the cross-guarantee statute in subsection 5(e)(1)(C) allows a two-year period following default for notice of assessment, as a practical matter assessments of commonly controlled depository institutions must often be considered and determined in the same immediate time frame as the decision to declare the triggering bank insolvent.12 Moreover, the estimate of loss based on future events is more complex and judgmental than determining present insolvency.
   For more than fifty years the FDIC has been in the business of resolving failed insured banks and has determined the loss experience of those failed institutions. In recent years, it has had more experience in this than anyone would have wanted. In the Board's view, it is this broad and unique experience, as well as the very nature of the agency action involved, that prompted Congress to commit to the Corporation's discretion the initial estimate of loss upon which the cross-guarantee assessment is based. See American Bank of Clarke, 933 F.2d at 901-02.

   [.1] Taken together, these considerations lead the Board to conclude that the proper subject of a subsection 5(e)(3)(B)(i) hearing is the current loss figure, determined as of the closest appropriate date to the date of the hearing, set by the ALJ ("Loss Date"). The current loss figure as the subject of the hearing is the most compatible with the rest of the cross-guarantee statute: (1) it concerns the amount of loss; (2) it allows the hearing to take place promptly after assessment, thus avoiding the need to resolve any due process and fairness problems that would be raised by awaiting the final loss figure; (3) it provides a remedy—adjustment of the assessment to the current loss figure—that can provide real relief, as discussed in section VII.B, infra; (4) it is compatible with the statutory remedy, since it allows for adjustment of the compensation estimated by and paid to the Corporation, as provided in subsection 5(e)(2)(D); and (5) it will involve a more refined estimate of losses than the initial estimate because, generally speaking, the triggering bank or banks will have been sold under purchase and assistance agreements. There will also be some actual experience in dealing with both assets and liabilities of the triggering bank, making valuation thereof less problematic. Hence, it is a much more appropriate subject of administrative and judicial review.
   This is in fact the approach taken by the Board in Maine National Bank, supra. That case involved an interlocutory appeal on the question of whether the Trustee in Bankruptcy of a holding company of the triggering and assessed institutions had standing to participate in the hearing on the record. The Receiver of the assessed institution had declined to request a hearing following demand by the Trustee, deeming a challenge to be without merit. On appeal, a determining issue was whether a challenge by the Receiver could have amended the assessment to the extent that the Trustee would receive a distribution. In deciding that issue, the Board first remanded the case for updated information concerning the extent of


12 The FDIC must immediately determine the risk that the estimated cross-guarantee liability of the commonly controlled institutions may cause such institutions to become undercapitalized or insolvent and/or cause a run on the institutions or otherwise increase the risk of loss to the Bank Insurance Fund. If any such risk is determined to be significant, the FDIC may well in its discretion make immediate assessments which will result in immediate closing of the assessed institutions in order to minimize loss to the Bank Insurance Fund.
{{2-28-94 p.A-2379}}losses to be incurred by the FDIC. The Board found that:
    as a result of a significant change in circumstances, the estimated loss on gross assets provided by the TAPA review is not the critical number today. Indeed, the very basis for determining loss resulting from [the triggering bank's] failure has been modified by the purchase and assumption agreement . . .
In the Matter of Maine National Bank, 1 P-H FDIC Enf. Dec. ¶5178 at A-1988 (1992). On the basis of more current information, the Board adopted a revised estimate of loss and concluded that the possibility of reducing losses to the assessed bank's equity was almost zero.13
   Finally, the Board notes that by this Decision and Order it has not restricted the ability of the FDIC to revise a loss estimate, and hence an assessment, whenever it deems it appropriate in its discretion to do so in the administration of the cross-guarantee provisions. Such revisions can be made either before or after a hearing on the record in the particular case.14

B. Available Relief in Cross-Guarantee Proceedings

   The only remedy provided in the statute is found in section 5(e)(2)(D), entitled "Adjustments of estimated payment," which requires or allows, as appropriate, adjustments if the amount of compensation estimated by and paid to the Corporation is greater or less, as appropriate, than the actual loss incurred. As discussed above, the board is reluctant to delay a statutorily required hearing until actual loss is determined. For the same reason, the Board is reluctant to delay relief until "the actual loss incurred" has been determined.

   [.2] As the Holding Companies concede, the board has considerable discretion in crafting a remedy under this statutory scheme. Here, however, the Board concludes that specific guidance and insight is contained in the carefully crafted remedy provided by Congress. Recognizing the FDIC's need to act quickly on the basis of estimated figures, Congress provided for retroactive adjustments of loss estimates and payments. Similarly, the Board concludes that under the statute the only remedy which should be available after a hearing is the provision of a new, more current loss figure. Clearly, it is consistent with the statutory remedy to adjust for any underpayment or overpayment based upon a current loss figure determined at the hearing on the record. The appropriateness of this interim remedy, which is wholly consistent with the statutory scheme, further supports the choice of the current loss figure as the appropriate subject of the hearing on the record provided by the statute.
   It is anticipated that a hearing pursuant to subsection 5(e)(3)(B)(i) will involve relatively straightforward identification of the losses incurred to date by the triggering institution, and projected future losses, and will result in adjustments to the original loss estimate and assessment, as may be appropriate. In most cases, enough time will have elapsed between the Notice and the hearing to result in changed circumstances affecting the initial estimate.15 In cases where an assessed institution remains open, an interim adjustment to the assessment may well afford significant relief by reducing the liabilities of or allowing reimbursement to the assessed institution. Where the assessed institution is in receivership, such an adjustment may lead to an interim distribution to shareholders in an appropriate situation.16 Such a distribution is, of course, within the discretion of the institution's receiver, and the Board does not here intend to upset or modify the separate statutory scheme which governs receiverships. See 12 U.S.C. § 1821.
   The Board rejects the suggestions of the Holding Companies that other types of relief might be granted in this case. After due con-


13 The Holding Companies here agreed with the Board's approach in Maine National Bank, stating that, "[i]f anything, this case presents a significantly more compelling situation than the Maine National Bank matter for an interim adjustment to the assessment." Holding Companies' Reply to FDIC Enforcement Counsel's Exceptions to the Recommended Decision, p.4.

14 Given the present posture of this matter, and in the interests of administrative efficiency, FDIC/Corporate may consider it appropriate now to issue a more current loss figure and revised assessments.

15 In the instant case over a year has passed since the initial estimate was made and as the pleadings reveal, significant changes in the estimate are likely because of events subsequent to the issuance of the Notice.

16 Where the assessed institution is in receivership, however, a claim to an interim adjustment belongs to the receivership, not the failed institution's shareholders.
{{2-28-94 p.A-2380}}sideration, the Board concludes, in light of the language of the statute, and in view of the Congressional purpose giving priority to protection of the Bank Insurance Fund over the assets of institutions under common control with a failed institution, that other forms of relief, including damages, were not intended by Congress and are not appropriate.

C. Proper Parties to a Cross-Guarantee Proceeding.

   The Holding Companies demanded that the Receivers of the Assessed Banks file answers and request a hearing in this matter, then sought to answer "on their own behalf and on behalf of" the Assessed Banks. They argue that (1) the Receivers have an "irreconcilable conflict of interest" which would prevent them from adequately contesting the actions of the FDIC or the constitutionality of the statute and regulations; (2) neither the statute nor the legislative history show Congressional intention to exclude entities whose rights and interests have been directly and adversely affected by an assessment; and (3) the failure of the Receivers to contest the Notice, especially in light of the asserted failure of the Notice to comply with the FDIC Rules of Practice and Procedure, indicates bad faith or breach of trust on the part of the Receivers; hence, by analogy to corporate derivative actions, the Holding Companies are entitled to challenge on behalf of the Assessed Banks.
   FDIC Enforcement Counsel argues that (1) the statute imposes no liability on holding companies of commonly controlled institutions and likewise does not accord them the status of parties to the hearing on the record; (2) by statute, a receiver for an assessed bank 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); and (3) by analogy to corporate derivative actions, the Receivers' failure to comply with the request to defend is insufficient to give the Holding Companies derivative standing; rather, they must prove that the Receivers are personally involved or interested in a way calculated to impair their exercise of business judgment on behalf of the Assessed Banks, or which reflects bad faith or breach or trust, citing Landy v. Federal Deposit Insurance Corporation, 486 F.2d 139 (3rd Cir. 1973).
   Finally, both parties cite the Board's decision in Maine National Bank, supra. The Board there held that the Trustee in Bankruptcy of the holding company of the triggering and assessed banks had neither direct nor derivative standing to participate in the hearing on the record on the cross-guarantee assessment. The Holding Companies point to two differences in circumstance between Maine National Bank and this case: in the former, the Receiver of the Assessed Bank reviewed the Trustee's demand and declined to challenge the assessment, while, in this case, the Receivers neither responded to the demand nor challenged the assessment. In Maine National Bank, the Board stated that the Receiver's failure to challenge:

    may be improper if he could have challenged the assessment to such a degree that the Trustee would receive a distribution. Unless the Receiver had reason to believe that such a calculation and corresponding distribution were possible, the Board sees no reason why the Receiver should have filed...an answer on behalf of the receivership.
In the Matter of Maine National Bank, 1 P-H FDIC Enf. Dec. ¶5178 at A-1987 (1992). This case, assert the Holding Companies, is one in which the Receivers had reason to so believe.
   The Board notes that Congress has specifically delineated the proper parties to a cross-guarantee hearing. The statute expressly mentions the assessed institution. Against the background of this specific legislative expression, the Board is unable to discern any Congressional intent to provide further standing to failed assessed bank shareholders to participate in their own right in hearings on the record in cross-guarantee cases. The statute specifically singles out the assessed institution(s); holding companies or shareholders are nowhere given any role to play. This interpretation is fully consistent with 12 U.S.C. § 1821(d), the statutory provision by which the FDIC is appointed receiver of failed depository institutions, and the elaborate statutory scheme governing receiverships. Moreover, the Board's view that holding companies and other shareholders should be denied standing is supported by decisional authority.
   In Block v. Community Nutrition Institute, 467 U.S. 340 (1980), consumers sought to challenge the Secretary of Agriculture's decision adopting a milk marketing order. The Supreme Court held that the consumers had no standing to challenge agency action. The statute expressly provided for parties other
{{2-28-94 p.A-2381}}than consumers to both participate in the regulatory process and seek judicial review. The Court noted that the regulation of agricultural products is a complex, technical undertaking; that the restriction of the administrative remedy to other parties strongly suggests that Congress intended a similar restriction of judicial review; and that allowing consumers to sue the Secretary "would severely disrupt this complex and delicate administrative scheme." 467 U.S. at 349. The circumstances here are very similar. The cross-guarantee process is extremely complex and demands a delicate balancing of interests. Congress has provided for participation in the administrative process by the assessed institution, but has defined no separate role for shareholders, creditors, or vendors of the institution.
   In enacting the cross-guarantee provisions, Congress intended to subordinate the equity interests of assessed banks to the interests of the Bank Insurance Fund. Focusing on the intended recipient of statutory protection, the Supreme Court recently held, in Air Courier Conf. v. American Postal Workers Union, 111 S. Ct. 913, 915 (1991), that the Postal Workers Union, although its members had been injured, had no standing to challenge the Postal Service's rulemaking permitting private couriers to engage in international remailing, because the statute at issue was not intended to protect postal employment, but rather to provide necessary revenues for the Postal Service. After careful review, the Board affirms its holding in Maine National Bank, supra, that holding companies of failed assessed institutions have no standing to participate on their own behalf in hearings on the record in cross-guarantee assessments.

   [.3] With respect to so-called "derivative" standing, the Board reiterates its holding in Maine National Bank, supra, that the right to challenge an assessment belongs to the receiver of a failed assessed institution, and that the mere assertion of a conflict of interest between the FDIC as receiver and the FDIC as assessor clearly inherent in the statutory scheme established by the Congress is insufficient to overcome the presumption of the propriety of agency action and Congressional recognition of the FDIC's dual function. Landy v. Federal Deposit Insurance Corporation, supra; FCC v. Schreiber, 381 U.S. 279, 296 (1965; Fahey v. Mallonee, 332 U.S. 245, 256 (1947).
   However, the Receivers in this matter neither challenged the assessment nor responded to the demand of the Holding Companies. The cross-guarantee statute provides for a hearing on the record. For that reason alone, the Board will not deny holding companies the right to participate on a derivative basis if receivers fail or refuse to challenge assessments or to determine on a case-by-case basis whether a challenge is worthwhile.17
   The Receivers of the Assessed Banks may well have taken the position, later expressed in their letter to the Holding Companies dated March 23, 1993,18 that they had no reason to believe that the Notice was unreasonable or not in good faith and hence no reason to believe that a challenge to the assessments would result in an adjustment that would provide a distribution to the Holding Companies. If that is the case, the Receivers should reassess their determination in accordance with the holdings in this Decision as to the proper subject matter of the hearing.
   On the other hand, it may be that the FDIC Division of Depositor and Asset Services ("DAS"), which fulfills the functions of FDIC as receiver, determined as a matter of general policy that challenges to cross-guarantee assessments on behalf of failed assessed institutions are not worthwhile and a poor use of receiver resources to the detriment of creditors of the failed institution. Such a position, based upon a determination that adjustments to assessments against failed institutions will not usually result in distributions to shareholders, and that if in a particular case such a distribution might be possible, an appropriate revision of the assessment(s) can be issued by FDIC/Corporate, would certainly be reasonable. If such is the case, however, the Board will allow holding companies to participate and represent failed assessed institu-


17 The Board recognizes that, in this case, a hearing on the record will likely result in significant adjustments to the assessments. However, the Board makes no finding that the Receivers' failure to answer in this case was improper. There is no evidence in the record that, under the Maine National Bank standard, the Receivers would have reason to believe at the time the assessments were made that they could challenge the assessments to such a degree that the Holding Companies would receive a distribution. Moreover, that question is not a proper subject of the hearing on the record. See section VII.A, supra.

18 See Exhibit A to FDIC Enforcement Counsel's Exceptions to the Order of Default and Recommended Decision and Response to Holding Companies' Exceptions.
{{2-28-94 p.A-2382}}tions in a derivative capacity, at their own expense and without recourse against receivers for reimbursement of expenses in connection with such representation.19
   Hence, the receiver of a failed assessed institution which does not intend to file an answer and request a hearing on behalf of the institution is obligated to inform the holding company that the receiver has no objection to the holding company representing the interests of the failed institution in a derivative capacity, in the hearing provided for in subsection 5(e)(3)(B), provided that the holding company agrees that it must do so at its own expense and without recourse against the receiver of the assessed institution for reimbursement of expenses.20

VIII. REMAND OF THIS CASE

   The Board will reopen the record and remand this matter to the ALJ for further proceedings in accordance with the Decision and Order. The Board makes the following additional determinations with respect to such further proceedings.

A. Notice of Assessment.

   The Holding Companies have argued that the Notice is "invalid" because it fails to contain a "statement of the method by which the estimated loss was calculated."21 FDIC Enforcement Counsel responded that the Notice does contain such a statement, in that paragraph 13 thereof contains figures that "constitute the basis for the calculations used to determine the FDIC's estimated loss resulting from the default" of the Triggering Banks. FDIC Enforcement Counsel's response included the filing of an Affidavit of Robert H. Hartheimer, Associate Director, Division of Resolutions, FDIC, who was personally involved in the initial loss calculations ("Hartheimer Affidavit").22
   The FDIC Rules of Practice and Procedure, 12 C.F.R. Part 308 Subpart O, Liability of Commonly Controlled Depository Institutions, provides in part as follows with respect to the contents of the Notice of Assessment:

       The Notice of Assessment of Liability shall set forth:
         (i) The basis for the FDIC's jurisdiction over the proceeding;
         (ii) A statement of the Corporation's good faith estimate of the amount of loss it has incurred or anticipates incurring;
         (iii) A statement of the method by which the estimated loss was calculated
      . . .
12 C.F.R. § 308.167(a)(1).

   [.4] The purpose of the "statement of the method by which the estimated loss was calculated" is to disclose sufficient information concerning the financial data, assumptions, and methodologies employed by the agency. This information may be relevant to the issue of the current loss figure and may assist a reader in assessing whether a hearing on the current loss figure is appropriate and worthwhile. The Board is of the view that the Notice in this case, as supplemented by the Hartheimer Affidavit, does not constitute a sufficient disclosure. For example, the Notice as supplemented states that an estimate of loss on a liquidation basis was based on an Asset Valuation Review ("AVR") but does not describe the adjustments to asset values in the AVR, how such adjustments were calculated, how the adjustments were used to calculate loss on a liquidation basis, or the amount of the loss so calculated. The Notice as supplemented also states that the savings over liquidations that the FDIC might reasonably expect from the sale of the banks was applied to the estimate of loss on a liquidation basis, without indicating the expected savings or how they were calculated. Reference is made to "the FDIC's standard analysis used when faced with the imminent failure of a large bank or banking system," without describing that analysis. There is no numerical summary of


19 Such intervention shall be subject to the right of the receiver of the failed assessed institution to apply for permission to take over the representation of such institution in the cross-guarantee proceeding, upon a showing of good cause and with provision for reimbursement of the holding company's expenses, if appropriate.

20 This Decision only provides derivative standing to a holding company which is the direct shareholder of an assessed institution. Thus, if FCBOT is not a direct shareholder of an Assessed bank herein, it may not participate on its own behalf or on a derivative basis.

21 The Holding Companies also seek to have the Notice stricken because it contains an "Order to Pay" rather than a "Proposed Order" as described by 12 C.F.R. § 308.167(b)(1)(v). This is an attempt to elevate form over substance. The Board is of the view that the status of the Order derives from the statute and the regulations regardless of how it is styled.

22 Exhibit to FDIC Enforcement Counsel's Response to Holding Companies' Motion to Strike the Notice of Assessment.
{{2-28-94 p.A-2383}}the result of the calculations. While any one of these omissions may be appropriate in this case (and the Board is not here specifying that any particular format or any specific information must be used or included in every case), it is evident that the Notice as supplemented, when read as a whole, does not contain sufficient information for an outside reader to understand how the loss was calculated. Hence, the Board will order that, upon remand, FDIC Enforcement Counsel amend the Notice to set forth an adequate statement of the method by which the estimated loss was calculated.23

B. Schedule on Remand.

   The FDIC shall issue an amended Notice within twenty (20) days of service of this Decision and Order. The Receivers shall have twenty (20) days after service of the amended Notice to answer and request a hearing or inform the Holding Companies in writing whether the Holding Companies may represent the interests of one or more Assessed Banks. The Holding Companies shall have twenty (20) days after service of written permission to represent, if granted, to file an Answer to such amended Notice and a Request for Hearing.24
   If a hearing is requested, the ALJ will set a hearing date and a Loss Date.25

ORDER

   Upon consideration of the entire record in this proceeding, IT IS HEREBY ORDERED, that:
   1. The record in this proceeding is reopened.
   2. This matter is remanded to the ALJ for further proceedings in accordance herewith.
   3. FDIC Enforcement Counsel shall issue an amended Notice in accordance with this Decision and Order within twenty (20) days after service of this Order.
   4. Within twenty (20) days after service of the amended Notice, the Receivers shall either file an answer on behalf of each Assessed Bank and request a hearing, or notify its holding company in writing that the Receiver has determined that the assessment against the Assessed Bank should not be challenged, or that the Receiver has no objection to its holding company representing that Assessed Bank on a derivative basis to challenge the assessment.
   5. Within twenty (20) days after service of written notice that the Receiver does not object to its holding company representing an Assessed Bank on a derivative basis, the holding company may file an answer and request a hearing pursuant to subsection 5(e)(3)(B) in its derivative capacity on behalf of the Assessed Bank, provided that it does so at its own expense and without recourse against the FDIC as Receiver of the Assessed Bank for reimbursement of such expenses.
   6. In accordance with 12 C.F.R. § 308.167(b)(2)(v), failure of the holding company to request a hearing with respect to an Assessed Bank shall render the amended Notice a final and unappealable order as to the Assessed Bank.
   7. If a hearing is requested on behalf of one or more Assessed Banks, the ALJ shall establish as the Loss Date a date as of which the estimate of loss will be determined, and hold a hearing in accordance with the FDIC Rules of Practice and Procedure to determine the current estimate of loss incurred by the FDIC as of the Loss Date in accordance with this Decision and Order.
   8. Following the hearing, the ALJ shall issue for submission to the Board a recommended decision which determines the current estimate of loss as of the Loss Date and recommends, if appropriate, modification of the assessments.


23 The Holding Companies moved to strike the Notice on the grounds, among others, that it did not set forth a statement of the method by which the estimated loss was calculated. See the Holding Companies' Motion to Strike Notice of Assessment of Liability, dated December 11, 1992. The Board does not agree that "striking" the Notice is appropriate or required. Courts have rules that administrative complaints, like civil pleadings, may be amended liberally. See, e.g., Soule Glass & Glazing Co., 652 F.2d 1055 at 1074 (1st Cir. 1981); Usery v. Marquette Cement Mfg. Co., 568 F.2d 902, 906 (2d Cir. 1977). Thus, the appropriate remedy here is to require that the Notice be amended to include a suitable disclosure.

24 While this expanded time period in which to answer and request a hearing may not be necessary in this case, the Board considers the total of 40 days to be a more appropriate period for determination by a receive and/or a holding company of the desirability of challenging a cross-guarantee assessment. The Board intends in the near future to review the Rules of Practice and Procedure relating to cross-guarantee hearings to ensure consistency with this Decision and Order.

25 In making rulings as to the relevancy of evidence, whether as part of discovery or the hearing itself, the ALJ is reminded that the Board will only consider evidence related to this Loss Date estimate.
{{2-28-94 p.A-2384}}
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute the serve copies of this Decision and Order on FDIC Enforcement Counsel, the Receivers, the Holding Companies, the ALJ, the Banking Commissioner for the State of Texas, and the Comptroller of the Currency.
   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 by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 14th day of December, 1993.
   /s/ Robert E. Feldman
   Deputy Executive Secretary

________________________________________

RECOMMENDED DECISION

In the Matter of
First City, Texas-Austin, National Association
Austin, Texas, et al.
(Commonly Controlled Insured Depository Institutions)
Docket No. FDIC-92-316kk

ORDER OF DEFAULT, AND
RECOMMENDED

DECISION AND ORDER BY CONSENT

(Issued February 20, 1993 for Service
February 22, 1993)

   On January 17, 1993 the undersigned issued on Order striking the "Answer" to the Notice of Assessment of Liability. As a result of that ruling Respondents were in default of answer, and on February 9, 1993, FDIC Enforcement counsel filed a Motion for Recommended Decision. In order to comply with Rule 19(c)(1) of the Uniform Rules of Practice and Procedure, 12 C.F.R. 308.19(c)(1), the undersigned accepts this as a motion for an order of default as well as motion for recommended decision and order by consent.
   On the basis of the resulting default in answering the Notice of Assessment of Liability, a finding is here entered that no good cause has been shown for said default1 and pursuant to the Rule cited above, the undersigned grants the motions, and submits the Recommended Decision, with Order of Assessment by Consent, attached hereto and made a part hereof.
   SO ORDERED.
   /s/ Walter J. Alprin
   Administrative Law Judge
   Office of Financial Institution Adjudication

In the Matter of
FIRST CITY, TEXAS-AUSTIN, NATIONAL ASSOCIATION
AUSTIN, TEXAS, et al.
(Commonly Controlled Insured Depository Institutions)
Docket No. FDIC-92-316kk

RECOMMENDED DECISION UPON
DEFAULT

(Issued February 20, 1993 for Service
February 22, 1993)

   On or about October 30, 1992, the Comptroller of the Currency deemed First City, Texas-Houston, National Association, Houston, Texas ("First City-Houston") to be insolvent pursuant to 12 U.S.C. § 191, and appointed the Federal Deposit Insurance Corporation ("FDIC") as receiver of these banks.
   On or about October 30, 1992, the Banking Commissioner for the State of Texas deemed First City, Texas-Dallas, Dallas, Texas ("First City-Dallas"), to be insolvent and appointed the FDIC as receiver of First City-Dallas.
   Thereafter, First City-Houston and First City-Dallas (collectively, "Banks") were closed and the FDIC has incurred or reasonably anticipates incurring loss in connection with the insolvency and receivership of the Banks.
   The following named institutions, referred to as "Liable Institutions," to wit First City, Texas-Beaumont, National Association, Beaumont, Texas ("Liable Institution 1"); First City, Texas-Corpus Christi, Corpus Christi, Texas ("Liable Institution 2"); First City, Texas-El Paso, National Association,


1 As a result of the FDIC acting as receiver for the insolvent depository institutions and as a regulator initiating this action, the FDIC appears herein as both the moving party and the party responsible for answering. The dual role of the FDIC in this instance as both enforcement counsel and respondent, is approved by case law cited in the Order Striking Answer, but hardly resembles the traditional setting in which adverse interests are best represented in an adversarial manner. Consideration of the propriety of prior Board decisions is not within the jurisdiction of the undersigned, but this notation is deemed appropriate.
{{2-28-94 p.A-2385}}El Paso, Texas ("Liable Institution 3"); First City, Texas-Midland, National Association, Midland, Texas ("Liable Institution 4"); First City, Texas-Bryan/College Station, National Association, Bryan, Texas ("Liable Institution 5"); First City, Texas-Tyler, National Association, Tyler, Texas ("Liable Institution 6"); First City, Texas-Alice, Alice, Texas ("Liable Institution 7"); First City, Texas-San Angelo, National Association, San Angelo, Texas ("Liable Institution 8"); First City, Texas-Lufkin, National Association, Lufkin, Texas ("Liable Institution 9"); First City, Texas-Orange, National Association, Orange Texas ("Liable Institution 10"); First City, Texas-Madisonville, National Association, Madisonville, Texas ("Liable Institution 11"); First City, Texas-Graham, National Association, Graham, Texas ("Liable Institution 12"); First City, Texas-Lake Jackson, Lake Jackson, Texas ("Liable Institution 13"); First City, Texas-Aransas Pass, Aransas Pass, Texas ("Liable Institution 14"); First City, Texas-Sour Lake, Sour Lake, Texas ("Liable Institution 15"); First City, Texas-Kountze, Kountze, Texas ("Liable Institution 16"); First City, Texas-Austin, National Association, Austin, Texas ("Liable Institution 17"); and First City, Texas-San Antonio, San Antonio, Texas ("Liable Institution 18") ("collectively, "Liable Institutions," or in the singular "Liable Institution"), are commonly controlled depository institutions, as defined in section 5(e)(9) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1815(e)(9).
   As a result of the above, on October 30, 1992 the FDIC issued a NOTICE OF ASSESSMENT OF LIABILITY, FINDINGS OF FACT AND CONCLUSIONS OF LAW, ORDER TO PAY, AND NOTICE OF HEARING ("NOTICE OF ASSESSMENT") against the Liable Institutions. Upon failure to file an answer thereto, and no good cause having been found and an Order of Default having been entered, the following Findings of Fact and Conclusions of Law are entered:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

   1. One of the two Banks (First City-Houston) was a national banking association doing business under the laws of the United States, having its principal place of business in Houston. First City-Houston was, at all times pertinent to this proceeding, an insured national bank subject to certain applicable sections of the Act, 12 U.S.C. §§ 1811-1831t, certain applicable rules and regulations of the FDIC, 12 C.F.R. Chapter III, and the National Bank Act, 12 U.S.C. § 1-216d.
   2. The second Bank, First City-Dallas, was a State banking association doing business under the laws of the State of Texas, having its principal place of business in Dallas, Texas. First City-Dallas was, at all time pertinent to this proceeding, an insured State nonmember bank subject to the Act, 12 U.S.C. §§ 1811-1831t, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Texas.
   3. Liable Institution 2 and Liable Institution 16 are State banking associations doing business under the laws of the State of Texas, having their principal places of business in Corpus Christi and Kountze, Texas, respectively. They are, and were at all times pertinent to this proceeding, insured State member banks, subject to certain applicable sections of the Act, 12 U.S.C. §§ 1811-1831t, certain applicable rules and regulations of the FDIC, 12 C.F.R. Chapter III, the Federal Reserve Act, 12 U.S.C. §§ 221–522, and the laws of the State of Texas.
   4. Liable Institution 7, Liable Institution 13, Liable Institution 14, and Liable Institution 15 are State banking associations doing business under the laws of the State of Texas, having their principal places of business in Alice, Lake Jackson, Aransas Pass, and Sour Lake, respectively. They are, and were at all times pertinent to this proceeding, insured State nonmember banks subject to the Act, 12 U.S.C. §§ 1811-1831t, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Texas.
   5. The remaining Liable Institutions are national banking associations doing business under the laws of the United States, having their principal places of business in Beaumont, El Paso, Midland, Bryan, Tyler, San Angelo, Lufkin, Orange, Madisonville, San Antonio, Austin and Graham, Texas, respectively. These institutions are, and were at all times pertinent to this proceeding, insured national banks subject to certain applicable sections of the Act, 12 U.S.C. §§ 1811-1831t, certain applicable rules and regulations of the FDIC, 12 C.F.R. Chapter III, and the National Bank Act, 12 U.S.C. §§ 1-216d.
   6. At all times pertinent to this proceed-
{{2-28-94 p.A-2386}}ing, the Banks and the Liable Institutions were each "insured depository institutions" as defined in section 3(c)(2) of the Act, 12 U.S.C. § 1813(c)(2).
   7. At all times pertinent to this proceeding, the Banks were wholly-owned subsidiaries of First City Bancorporation of Texas, Houston, Texas, a multi-bank holding company which also owns 100 percent of each of the other Liable Institutions. Therefore, the Liable Institutions and the Banks were "commonly controlled" insured depository institutions as defined in section 5(e)(9) of the Act, 12 U.S.C. § 1815(e)(9).
   8. The FDIC has jurisdiction over the Banks, the Liable Institutions, and the subject matter of this proceeding.
   9. On or about October 30, 1992, the Comptroller of the Currency deemed First City-Houston to be insolvent pursuant to 12 U.S.C. § 191, and appointed the FDIC as receiver for this bank. Thereafter, this banks were closed.
   10. On or about October 30, 1992, the Banking Commissioner for the State of Texas deemed First City-Dallas to be insolvent and appointed the FDIC as receiver of this bank. Thereafter, this bank was closed.
   11. By virtue of the insolvency and receivership of the Banks, the Banks were in "default" as that term is defined in section 3(x)(1) of the Act, 12 U.S.C. § 1813(x)(1).
   12. In its capacity as receiver of the Banks, the FDIC transferred certain of the assets of the Banks to an acquiring institution in return for the assumption by the bridge bank of the Banks' deposits and certain other liabilities ("Purchase and Assumption/Loan Purchase Transaction").
   13. As of June 30, 1992:

       a. Total deposits of the Banks equalled $3,962,741,000.
       b. The book value of the Banks' assets totalled $4,356,836,000.
       c. Total liabilities totalled $ 4,299,953.
       d. Total loans of the Banks equalled $ 2,658,730,000.
   14. On or about April 19, 1988, an assistance agreement was entered into among and between the FDIC, First City Bancorporation of Texas, Inc., it subsidiaries, A. Robert Abboud, and Donaldson, Lufkin and Jenrette Securities Corporation ("Assistance Agreement"). FDIC provided assistance to First City Bancorporation of Texas, Inc. because it was determined that First City Bancorporation of Texas, Inc. was in danger of default pursuant to 12 U.S.C. § 1813(x)(2). The amount of the assistance included a guarantee of $100 million to be paid by First City Bancorporation of Texas, Inc. and its commonly controlled insured depository institutions, jointly and severally, to the FDIC.
   15. Pursuant to Article 2 of the Assistance Agreement, the Liable Institutions are jointly and severally liable for the net present value of the $100 million guarantee or $44.3 million.
   16. Pursuant to the default of the Banks described in paragraphs 9 and 10, and the calculations of potential loss to the FDIC described in paragraph 13, the loss incurred, or likely to be incurred, by the FDIC is estimated to be in the amount of $ 432,600,000.
   17. As a result of their relationship to the Banks as described in paragraphs 6 and 7, and pursuant to the provisions of section 5(e)(1)(A)(i) of the Act, 12 U.S.C. § 1815(e)(1)(A)(i), which provides that any insured depository institution shall be liable for any loss incurred by the FDIC, or any loss which the FDIC reasonably anticipates incurring in connection with the default of a commonly controlled insured depository institution and the assistance provided by the FDIC as described in paragraphs 14 and 15, the Liable Institutions are liable to the FDIC in the amount of $553,486,000 for the loss incurred or anticipated by the FDIC in connection with the default of the Banks.
   18. Pursuant to section 5(e)(2)(A)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(A)(ii), the share of liability of Liable Institution 1 is estimated by the FDIC to be $78,585,000; the share of liability of Liable Institution 2 is estimated to be $72,830,000; the share of liability of Liable Institution 3 is estimated to be $53,966,000; the share of liability of Liable Institution 4 is estimated to be $43,574,000; the share of liability of Liable Institution 5 is estimated to be $43,674,000; the share of liability of Liable Institution 6 is estimated to be $36,228,000; the share of liability of Liable Institution 7 is estimated to be $19,321,000; the share of liability of Liable Institution 8 is estimated to be $20,502,000; the share of liability of Liable Institution 9 is estimated to be $20,676,000; the share of liability of Liable Institution 10 is estimated to be $19,129,000; the share of liability of Liable Institution 11 is estimated to be $16,836,000; the share of liability of Liable Institution 12 is estimated to be
{{2-28-94 p.A-2387}}$15,414,000; the share of liability of Liable Institution 13 is estimated to be $15,818,000; the share of liability of Liable Institution 14 is estimated to be $7,894,000; the share of liability of Liable Institution 15 is estimated to be $8,682,000; the share the liability of Liable Institution 16 is estimated to be $8,095,000; the share of liability of Liable Institution 17 is estimated to be $32,582,000; and the share of liability of Liable Institution 18 is estimated to be $25,819,000. In addition, in the event that any Liable Institution shall be closed by the Comptroller of the Currency or by the Banking Commissioner for the State of Texas, the amount of the assessment against any such closed Liable Institution is assessed against the remaining Liable Institutions, pursuant to the provisions of section 5(e) of the Act, 12 U.S.C. § 1815(e).
   In view of the above, it is hereby recommended that an Order, in the nature of the Order attached hereto and made a part hereof, be entered by the Board of Directors.
   /s/ Walter J. Alprin
   Administrative Law Judge
   Office of Financial Institution Adjudication

RECOMMENDED ORDER ON CONSENT AFTER DEFAULT

In the Matter of

First City, Texas-Austin, National Association
Austin, Texas
and
First City, Texas-Beaumont, National Association
Beaumont, Texas
and
First City, Texas-Corpus Christi
Corpus Christi, Texas
and
First City, Texas-El Paso, National Association
El Paso, Texas
and
First City, Texas-Midland, National Association
Midland, Texas
and
First City, Texas-Bryan/College Station, National Association
Bryan, Texas
and
First City, Texas-Tyler National Association
Tyler, Texas
and
First City, Texas-Alice
Alice, Texas
and
First City, Texas-San Angelo, National Association
San Angelo, Texas
and
First City, Texas-Lufkin, National Association
Lufkin, Texas
and
First City, Texas-Orange, National Association
Orange, Texas
and
First City, Texas-Madisonville, National Association
Madisonville, Texas
and
First City, Texas-Graham, National Association
Graham, Texas
and
First City, Texas-Lake Jackson
Lake Jackson, Texas
and
First City, Texas-Aransas Pass
Aransas Pass, Texas
and
First City, Texas-San Antonio, National Association
San Antonio, Texas
and
First City, Texas-Sour Lake
Sour Lake, Texas
and
First City, Texas-Kountze
Kountze, Texas
(Insured Depository Institutions)
Related to
First City, Texas-Houston, National Association
Houston, Texas
and
First City, Texas-Dallas
Dallas, Texas
(Commonly Controlled Insured Depository Institutions)

{{2-28-94 p.A-2388}}
NOTICE OF ASSESSMENT
OF LIABILITY, FINDINGS OF FACT
AND CONCLUSIONS OF LAW,
ORDER TO PAY, AND NOTICE OF
HEARING

FDIC-92-kk

   The Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") having considered the entire record in this proceeding including the Notice of Assessment and Order of Default in answering, finds that pursuant to 12 U.S.C. § 1815(e), each of the above insured depository institution shall be liable for (1) any loss incurred by the Corporation in connection with the default of a commonly controlled insured depository institution, or (2) any assistance provided by the Corporation to any commonly controlled insured depository institution in danger of default, as hereinafter set forth.

ORDER TO PAY

   After consideration of the foregoing and such other matters as justice may require, it is:
   ORDERED, that by reason of the factors set forth in the attached Notice of Assessment, the amount of $78,585,000 is hereby assessed against First City, Texas-Beaumont, National Association, Beaumont, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $78,585,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $72,830,000 is hereby assessed against First City, Texas-Corpus Christi, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $72,830,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $53,966,000 is hereby assessed against First City, Texas-El Paso, National Association, El Paso, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $53,966,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $43,574,000 is hereby assessed against First City, Texas-Midland, National Association, Midland, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $43,574,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $43,674,000 is hereby assessed against First City, Texas-Bryan/College Station, National Association, Bryan, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $43,674,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $36,228,000 is hereby assessed against First City, Texas-Tyler, National Association, Tyler, Texas, pursuant to Section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $36,228,000 by said Institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $19,321,000 is hereby assessed against First City, Texas-Alice, Alice, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $19,321,000 by said institution.
   IT IS FURTHER ORDERED, that by rea-
{{2-28-94 p.A-2389}}son of the factors set forth in the Notice, the amount of $20,502,000 is hereby assessed against First City, Texas-San Angelo, National Association, San Angelo, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $20,502,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $20,676,000 is hereby assessed against First City, Texas-Lufkin, National Association, Lufkin, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $20,676,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $19,129,000 is hereby assessed against First City, Texas-Orange, National Association, Orange, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $19,129,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $16,836,000 is hereby assessed against First City, Texas-Madisonville, National Association, Madisonville, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $16,836,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $15,414,000 is hereby assessed against First City, Texas-Graham, National Association, Graham, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $15,414,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $15,818,000 is hereby assessed against First City, Texas-Lake Jackson, Lake Jackson, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $15,818,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $7,894,000 is hereby assessed against First City, Texas-Aransas Pass, Aransas Pass, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $7,894,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $8,682,000 is hereby assessed against First City, Texas-Sour Lake, Sour Lake, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $8,682,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $8,095,000 is hereby assessed against First City, Texas-Kountze, Kountze, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $8,095,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $32,582,000 is hereby assessed against First City, Texas-Austin, National Association, Austin, Texas, pursuant to sec-
{{2-28-94 p.A-2390}}tion 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $32,582,000 by said institution.
   IT IS FURTHER ORDERED, that by reason of the factors set forth in the Notice, the amount of $25,819,000 is hereby assessed against First City, Texas-San Antonio, National Association, San Antonio, Texas, pursuant to section 5(e)(2)(A) of the Act, 12 U.S.C. § 1815(e)(2)(A), is due and payable immediately, pursuant to the provisions of section 5(e)(2)(B)(ii) of the Act, 12 U.S.C. § 1815(e)(2)(B)(ii), and may be satisfied by the direct payment, in cash, to the FDIC of the sum of $25,819,000 by said institution.
   IT IS FURTHER ORDERED, that, in addition, in the event that any of said institutions shall be closed, the amount of the assessment against such closed institution is assessed against the remaining said institutions, pursuant to the provisions of section 5(e) of the Act, 12 U.S.C. § 1815(e).
   SO ORDERED.
   /s/ Hoyle L. Robinson
   Executive Secretary

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