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FDIC Enforcement Decisions and Orders

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   [8004] Docket No. FDIC-88-8b (6-7-88).

   Request for Special Permission to Appeal granted. The FDIC Board of Directors granted this motion so that it could set forth its views regarding the scope of prehearing discovery.

In the Matter of
* * * BANK
* * *
(Insured State Nonmember Bank)
DECISION AND ORDER GRANTING
REQUEST FOR SPECIAL
PERMISSION TO APPEAL

DECISION

A. Facts

   On January 29, 1988, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing ("Notice") in this proceeding, pursuant to section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), alleging that * * * Bank * * * ("Respondent" or "Bank") had engaged in certain unsafe and unsound banking practices and violations of law and regulation, and seeking imposition of an order requiring Respondent to cease and desist from such practices and violations and to take affirmative action to correct the conditions resulting from such practices and violations. Respondent filed its Answer to the charges contained in the Notice on February 9, 1988.
   The Administrative Law Judge ("ALJ") appointed to hear this case issued a Prehearing Order on March 21, 1988, which ordered, inter alia, that prehearing discovery requests must be filed and served by March 29, 1988; that responses and oppositions must be filed and served by April 8, 1988; and that the hearing would commence on June 20, 1988. Pursuant to this order, Respondent filed a Request for Production of Documents and More Definite Statement and Requests for Admissions (collectively, "Discovery Requests") on March 28, 1988.
   On April 7, 1988, FDIC enforcement counsel filed a response to the Respondent's Discovery Requests ("FDIC's Response"). FDIC enforcement counsel objected to most of Respondent's Discovery Requests contending that they were, in fact, in the nature of contention interrogatories and requests for admissions, neither of which are provided for in the FDIC's Rules, and/or called for information or documents which are otherwise not subject to discovery on the basis of the attorney work product doctrine or attorney-client privilege. Enforce- {{4-1-90 p.I-14}}ment counsel did produce or offer to make available for inspection and copying, pursuant to section 308.08 of the FDIC's Rules those documents which were specifically requested by Respondents.*
   During a telephone conference call with the parties on April 15, 1988, the ALJ made the following oral rulings on Respondent's Request for More Definite Statement and the FDIC's Response:
   (a) With respect to the hazardous lending and lax collection practices alleged in paragraphs 4(a) through 4(f) of the Notice, the FDIC is ordered to identify individually those specific loans in Respondent's loan portfolio reviewed by the FDIC's examination team during the July 31, 1987 examination of the Bank which the FDIC contends evidence each alleged hazardous lending or lax collection practice.
   (b) The FDIC is ordered to identify each and every unsafe or unsound banking practice which resulted in an inadequate level of capital protection for the Bank, as alleged in paragraph 6 of the Notice.
   (c) The FDIC is ordered to identify each and every unsafe or unsound practice which resulted in the Bank's inadequate allowance for loan and lease losses, as alleged in paragraph 7 of the Notice. The FDIC is also ordered to identify the level of the allowance for loan and lease losses that would be adequate for the Bank.
   (d) The FDIC is ordered to identify individually those loans alleged in paragraph 8 of the Notice to be seriously delinquent but still listed by the Bank as assets earning interest, and to specify the amount of the overstatement of earnings and capital resulting from this practice.
   (e) The FDIC is ordered to identify each and every unsafe or unsound practice which resulted in inadequate earnings for the Bank, as alleged in paragraph 9 of the Notice. The FDIC also is ordered to specify the amount of the overstatement of the Bank's earnings for calendar years 1984 through 1986, and for January 1 through July 31, 1987, as alleged in paragraph 9 of the Notice. The FDIC is further ordered to specify the portions of the Bank's Reports of Condition and Income that were inaccurate, as alleged in paragraph 9 of the Notice.
   (f) The FDIC is ordered to specify the amounts of excessive dividends paid by the Bank, as alleged in paragraph 10 of the Notice, and the amounts by which such dividends are considered to be excessive.
   (g) The FDIC is ordered to identify individually those specific loans evidencing deficient loan documentation and/or credit information, as alleged in paragraph 13 of the Notice, and to specify whether each such deficiency was present at origination of the loan, at renewal, or both.
   (h) With respect to the allegations in paragraph 14 of the Notice, the FDIC is ordered to specify the amount of capital believed required for the Bank to be considered in compliance with section 325.3 of the FDIC's Rules and Regulations.
   (i) The FDIC is ordered to identify the policies and practices engaged in by management of the Bank which were detrimental to the Bank and jeopardized the safety of the Bank's deposits, as alleged in paragraph 15 of the Notice.
   (j) The FDIC is ordered to identify the practices or violations which support the allegation contained in paragraph 16 of the notice that the Bank's board of directors has failed to provide adequate supervision and direction over the officers of the Bank.
   (k) The FDIC is ordered to specify whether the Bank still requires an equity capital injection of $825,000, as sought in the cease and desist order proposed by the FDIC.
   In addition, the FDIC was ordered to respond to paragraphs 1(a), 1(c) through 1(g), and 1(k) of Respondent's Requests for Admissions. Specifically, in connection with the proposed cease and desist order, the FDIC was ordered to admit or deny the following, and explain:
   1(a) As of July 31, 1987 the bank's Board of Directors did meet at least monthly and did follow a written agenda.
   1(c) The bank's current loan loss reserve is adequate.
   1(d) The bank's current equity capital ratio is adequate.


* In its Discovery Requests, Respondent requested that the FDIC: "Produce reports of examination, reports of visitation, or any written reports generated as a result of an on premises review of the Bank and prepared by the FDIC from January 1, 1982 until the present time." Respondent's Discovery Requests, paragraph XII. In response, the FDIC originally produced the July 31, 1987 Report of Examination of the Respondent Bank, on which the instant proceeding is premised, but objected to production of the other reports requested on the grounds of relevancy. FDIC Response, paragraph XII. However, the FDIC has since withdrawn this objection and produced the other reports requested. Thus, this objection is not part of the instant Request for Special Permission to Appeal.
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   1(e) Provision 3 of the Order does not require any director of the bank to use his or her own personal funds to increase the bank's capital in compliance with this order. Accordingly, the FDIC could not utilize an enforcement action in Federal District Court and/or civil money penalties to require any director to recapitalize the bank with his or her own personal funds.
   1(f) Provision 4 of the Order requires the bank to maintain a loan loss reserve believed to be adequate by the Board of Directors of the bank. The Regional Director of the FDIC does not have a veto over the determination made by the Board of Directors. (Emphasis in original text.)
   1(g) The bank's current written loan policy is adequate for purposes of the Order.
   1(k) Paragraph 1 of the Order does not authorize the Regional Director to require the termination of any officer, director or employee of the bank, nor does this paragraph authorize the Regional Director of the FDIC to veto the employment of any new officer, director or employee.
   FDIC enforcement counsel took exception to the rulings of the ALJ and, pursuant to section 308.12(e) of the FDIC's Rules, filed a request for special permission to appeal those rulings ("FDIC's Request for Appeal") on May 16, 1988. On May 23, 1988, Respondent filed an opposition to the FDIC's request for appeal ("Respondent's Opposition").

B. Discussion

   Section 308.12(e) of the FDIC's Rules provides, in pertinent part:

    Rulings of an administrative law judge or the Executive Secretary on any motion may not be appealed to the Board of Directors prior to its consideration of the administrative law judge's recommended decision, findings and conclusions, except by special permission of the Board. Such rulings shall be considered by the Board in reviewing the record. Requests to the Board for special permission to appeal from such rulings shall be filed promptly in writing, and shall briefly state the grounds for the request...[emphasis added].
Respondent's Opposition does not argue that FDIC enforcement counsel failed to comply with the procedural requirements governing permissive interim appeals under section 308.12(e). Therefore, the Board will not address that issue. However, Respondent does contend that special permission to appeal should be denied because the ALJ had the authority to issue the discover order pursuant to the FDIC's Rules, the Administrative Procedures Act, 5 U.S.C. § 554, and judicial precedent, and thus, his order should stand.
   Under section 308.12(e), it is within the Board's sole discretion to determine whether to grant special permission to appeal an interim order, and that discretion is rarely exercised. The Board is keenly aware of and concerned about the potentially disruptive effects of such a decision to exercise its discretion to grant an appeal on the swift, orderly, and efficient processing of these administrative actions and is reluctant to interfere with the discretion of the administrative law judges in handling enforcement cases. For these reasons, the Board has chosen to exercise its discretion only in situations that involve important questions of law or policy with respect to relevant statutes or regulations. The Board believes this matter does involve important questions as to the permissible type and scope of discovery in FDIC administrative enforcement proceedings.
   The expansive scope of the ALJ's April 15 discovery Order presents a case of first impression to this Board. Defining the type and scope of permissible discovery in FDIC administrative enforcement proceedings is essential to the proper interpretation and implementation of FDIC's regulations generally. The Board has therefore decided to take this opportunity to review and clarify its views with respect to such discovery and thereby grants FDIC enforcement counsel's request for special permission to appeal the ALJ's discovery order. The Board is cognizant of the impending hearing date and for that reason is issuing this order granting the request for special permission to appeal. Given the importance of the issues presented in this appeal, the Board will issue a decision on the merits of the appeal at such time as it has had an adequate opportunity to review and consider the record in this proceeding.
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ORDER

   For the reasons set forth above, it is hereby ORDERED that enforcement counsel's request for special permission to appeal the April 15, 1988 discovery ruling of the Administrative Law Judge in this proceeding, pursuant to section 308.12(e) of the FDIC's Rules and Regulations is GRANTED.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 7th day of June, 1988.
   Hoyle L. Robinson
   Executive Secretary
   (SEAL)

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