Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders




FDIC Enforcement Decisions and Orders

ED&O Home | Search Form | Text Search | ED&O Help


{{9-30-91 p.I-31}}
   [8009] In the Matter of Capital Bank of California, Los Angeles, California, Docket No. FDIC-90-82b (12-11-90).

   Board denies Bank's request to appeal an ALJ's denial of a motion to dismiss enforcement action, finding that the petitioner failed to establish both (1) clear error in the ALJ's determination that estoppel is not a defense to an enforcement action, and (2) severe prejudice to the Bank if the appeal is not granted.

   [.1] Practice and Procedure—Interlocutory Appeals—Standard
   For Board to grant special permission to appeal, petitioner must establish clear error on the part of the ALJ and demonstrate the likelihood of severe prejudice if the matter is not immediately decided by the Board.
   [.2] Practice and Procedure—Dismissal of Action—Estoppel Claim
   ALJ's determination that FDIC's acceptance of Bank's resolutions and policy changes (in lieu of taking more stringent regulatory actions) did not create a contract which estops the FDIC from later taking enforcement action is not clear error.
   [.3] Practice and Procedure—Dismissal of Action—Estoppel Claim
   ALJ's determination that estoppel cannot apply against the FDIC in its sovereign capacity is not clear error.
   [.4] Practice and Procedure—Dismissal of Action—Estoppel Claim
   ALJ's determination that the FDIC was acting in its sovereign capacity in entering the agreement which is the subject of the estoppel claim is not clear error.
{{9-30-91 p.I-32}}
In the Matter of

CAPITAL BANK OF CALIFORNIA
LOS ANGELES,CALIFORNIA
(Insured State Nonmember Bank)
DECISION AND ORDER

   This matter arises out of a Notice of Charges and of Hearing ("Notice") issued by the Federal Deposit Insurance Corporation ("FDIC") against Capital Bank of California, Los Angeles, California ("Petitioner" or "the Bank"). The Notice alleges that the Petitioner has engaged in unsafe or unsound banking practices and violations of laws and/or regulations which include, among a host of other charges, the purchase and retention of an excessive amount of subinvestment grade corporate securities. The Bank moved to dismiss the action and James L. Rose, Administrative Law Judge ("ALJ"), denied the motion. The Petitioner subsequently filed its Application to Appeal the Order of James L. Rose, Administrative Law Judge, Denying the Motion to Dismiss of [sic] Respondent, Capital Bank of California ("Application to Appeal the Order of the ALJ"); and for an Order Staying Proceedings. For the reasons set forth below, the Board finds that the Petitioner has not met its burden to establish that it is entitled to an interlocutory appeal. Therefore, the Board denies the Petitioner's Application to Appeal the Order of the ALJ and for a stay of proceedings.

I. BACKGROUND

   On June 18, 1990, the FDIC issued a Notice to the Petitioner, pursuant to section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1). The Notice alleges (1) the purchase and retention of an excessive amount of junk bonds (Notice, ¶3); (2) an excessive volume of low quality assets (Notice, ¶4); (3) high overhead expenses (Notice, ¶5); (4) inadequate liquidity and funds management procedures (Notice, ¶6); (5) an inadequate loan valuation reserve (Notice, ¶7); (6) violation of section 23A of the Federal Reserve Act (Notice, ¶8); (7) inadequate internal routine and controls (Notice, ¶9); and (8) inadequate management (Notice, ¶10). On July 16, 1990, counsel for Petitioner filed a Motion to Dismiss or, in the Alternative, for a More Definite Statement and a Memorandum in Support. Within the time prescribed by section 308.30 of the FDIC Rules of Practice and Procedures ("FDIC Rules"), 12 C.F.R. § 308.30, FDIC Enforcement Counsel filed an opposition and the Petitioner replied. On September 4, 1990, the ALJ issued an Order denying Petitioner's Motion to Dismiss or, in the Alternative, for a More Definite Statement, in its entirety. On September 27, 1990, the Petitioner filed with the Office of the Executive Secretary, its Application to Appeal the Order of the ALJ pursuant to section 308.31(a)(2)(ii) of the FDIC Rules, 12 C.F.R. § 308.31(a)(2)(ii)1

and for a stay of the proceedings in this matter pursuant to section 308.31(c) of the FDIC Rules, 12 C.F.R. § 308.31(c).2

II. DISCUSSION

   [.1] The grant of an interlocutory appeal is an extraordinary action to be taken by the Board only in limited circumstances. 12 C.F.R. § 308.31; FDIC Enf. Dec. 86-41b (August 4, 1987). Pursuant to section 308.31(a)(2)(ii) of the FDIC Rules, 12 C.F.R. § 308.31(a)(2)(ii), the Petitioner must establish clear error on the part of the ALJ and must demonstrate the likelihood of severe prejudice if the matter is not immediately decided by the Board.
   In the instant case, there is no basis for granting Petitioner's application for special permission to appeal. The Petitioner's arguments do not indicate clear error by the ALJ, and the requisite severe prejudice has not been established. Since the Board finds no basis to grant an interlocutory appeal, it


1 Section 308.31(a)(2)(ii) states in pertinent part:
(2) Special permission to appeal a ruling or order will only be granted if (i) the interlocutory appeal involves an important, unresolved issue of general application that should be immediately decided by the Board or (ii) the interlocutory appeal involves clear error below, and the rights of a party are likely to be severely prejudiced if the matter is not immediately decided by the Board.


2 Section 308.31(c) states:
Proceeding not stayed. Interlocutory appeals under this section do not stay proceedings before the administrative law judge. The Board or the administrative law judge may, however, order a stay upon a finding on the record that the party aggrieved by the appealing ruling or order has shown a substantial likelihood of success before the Board on the merits of the interlocutory appeal and that substantial hardship or injustice is likely to result if a stay is not granted, provided that only the Board may grant any stay or series of stays exceeding a total of thirty days.

{{9-30-91 p.I-33}}
is not necessary to resolve the merits of the Petitioner's arguments on the motion to dismiss; it is merely determined that clear error on the part of the ALJ does not exist. Further, Petitioner's arguments regarding the merits of the Notice itself should not be resolved in a factual vacuum, but rather at the conclusion of the administrative proceeding based upon the ALJ's recommended decision and a full administrative record. Petitioner requests an interlocutory appeal on the grounds that the ALJ's Order discloses three clear errors on its face and that the Bank is severely prejudiced. Specifically, Petitioner contends that clear error is demonstrated by the ALJ's findings (as characterized by Petitioner) that: (1) no contract arose between the Bank and the FDIC regarding the Bank's claim of estoppel; (2) the doctrine of estoppel can never apply against the United States government or any of its agencies in their sovereign, as opposed to proprietary, capacity; and (3) the FDIC was acting in a sovereign capacity in entering into the agreement which is the subject of the Bank's estoppel claim.

   A. No Clear Error Occurred.

   1. The ALJ's Determination that No Contract Arose Between the Bank and the FDIC Regarding the Bank's Claim of Estoppel is Not Clear Error.
   Petitioner contends that the FDIC should be estopped from issuing the Notice because an FDIC letter recognizing certain resolutions of the Bank's board of directors and the Petitioner's associated investment policy changes constitute an implied-in-fact "contract" between the FDIC and the Petitioner. The resolutions included provisions for reduction of the Bank's classified assets and subinvestment grade securities, and they also addressed a number of other deficiencies. The Petitioner charges that the FDIC blatantly breached this "contract" due to a decline in market value of the securities and the desire of the FDIC to force the Petitioner to sell the remaining bonds.

   [.2] Clear error is not apparent in the ALJ's determination that no contract exists in the instant case. The FDIC, in a letter dated August 24, 1989, accepted the Petitioner's resolutions and the Bank's letter of August 16, 1989, in lieu of initiating more stringent regulatory action to remedy a number of deficiencies, of which the subinvestment quality securities was but one. The ALJ found that this agreement merely reflected "an administrative determination that certain undertakings by the Bank would remedy specific regulatory concerns" (ALJ's Order at 5) and did not prevent the exercise of the FDIC's regulatory duties, such as the issuance of a cease-and-desist order in the event of the Petitioner's continued financial decline. In fact, the deteriorating condition of the Bank was noted in the Report of Examination of December 31, 1989, which preceded the Notice.3

The ALJ's determination that no contract exists is not clear error.
   2. The ALJ's Determination that the Doctrine of Estoppel Can Never Apply Against the United States Government or any of its Agencies in their Sovereign, as Opposed to Proprietary Capacity, is Not Clear Error.
   [.3] The ALJ found that, in view of the decision in Office of Personnel Management v. Richmond, ____ U.S. ____, 110 S. Ct. 2465 (1990), "the chances of an estoppel argument succeeding in the United States Supreme Court against an agency of the United States Government is remote indeed." ALJ's Order at 4. The ALJ noted that, notwithstanding such holdings by the Supreme Court, some courts of appeals decisions have applied the doctrine of equitable estoppel against actions of the government.
   However, in all those cases the action which was the basis for estoppel was in the government's proprietary function.... Even if estoppel were ever to apply against the government....;it would be against the government in the performance of a proprietary function and then the requirements would be strict and the facts overwhelming.
Id.
   As an alternative holding regarding the application of the doctrine of estoppel, the ALJ held that "even if the FDIC could be


3 Petitioner's reliance on Winstar Corp. and United Federal Savings Bank v. United States, 21 Cl. Ct. 112 (1990) is misplaced. Winstar is factually distinguishable from the present matter. Winstar involved an assisted acquisition of a FSLIC-insured, failed savings and loan. It did not involve a supervisory or regulatory matter. The Winstar Corp. case, now on appeal, does not stand for the proposition that the FDIC can be estopped by a contract from bringing an administrative enforcement action.
{{9-30-91 p.I-34}}estopped based on an act in its regulatory function, the facts here would not support estoppel." Id. The Board does not find the ALJ's holding to be clearly erroneous.
   3. The ALJ's Determination that the FDIC was Acting in a Sovereign Capacity in Entering into the Agreement Which is the Subject of the Bank's Estoppel Claim is Not Clear Error.
   [.4] The ALJ found that, in this case, the FDIC, was acting in a sovereign capacity in entering into the agreement which is the subject of the Bank's estoppel claim. ALJ's Order at 4–5. The exercise of the FDIC's statutory duties as regulator is for the benefit of the public.4

Based on the record available in this proceeding at this time, it appears that the FDIC entered into the agreement in its capacity as regulator and enforcer of the Federal Deposit Insurance Act. 12 U.S.C. § 1811, et seq. Therefore, the Board cannot find that the ALJ's determination that the FDIC was performing a sovereign function in entering into the agreement to be clear error.

   B. No Severe Prejudice Exists.

   Petitioner asserts that its ability to conduct ordinary business is being severely prejudiced on a daily basis due to the enforcement action instituted by the FDIC. It is alleged that the negative implications and adverse publicity in this matter have severely prejudiced the Bank's efforts to raise capital as well as to lease a new branch location in Beverly Hills.
   The Petitioner notes that its probable capital injection will be approximately $3 million rather than the expected amount of $5 million due to the adverse publicity it has suffered. (Petitioner's Application at 16–17). While it is unfortunate if, in fact, the Petitioner is being harmed by adverse publicity, the cause of any such harm is speculative and may well be the result of the Bank's poor financial condition. However, Congress has charged the Board with preventing and correcting unsafe or unsound practices in the banking industry, and a secure, stable banking system is vital to the public interest of this nation. These governmental regulatory concerns must take precedence in this matter. In this context, no severe prejudice exists.

III. CONCLUSION

   Accordingly, the Board denies the Petitioner's Application to Appeal the Order of the ALJ. Petitioner has not met its two-fold burden to establish both clear error and severe prejudice pursuant to section 308.31(a)(2)(ii). Consequently, the request for a stay of proceedings is denied as moot.

ORDER

   IT IS HEREBY ORDERED, pursuant to section 308.31(a)(2) of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.31(a)(2), that the Petitioner's Application to Appeal the Order of the ALJ and for a stay of the proceedings be, and it hereby is, DENIED.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 11th day of December, 1990.

/s/ Hoyle L. Robinson
   Executive Secretary

In the Matter of

CAPITAL BANK OF CALIFORNIA
LOS ANGELES,CALIFORNIA
(Insured State Nonmember Bank)


ORDER

   JAMES L. ROSE, Administrative Law Judge: On July 16, 1990, counsel for the Respondent filed a motion to dismiss or, in the alternative, for a more definite statement and a memorandum in support thereof. Within the time prescribed in the FDIC Rules of Practice and Procedure, Section 308.30, counsel for the FDIC filed a response to which counsel for the Respondent filed a reply. In a telephone conference call between counsel and the undersigned on August 29, 1990, it was agreed that I would consider this matter submitted on the papers filed by each party.
   The Respondent's motion to dismiss is based on four contentions: (1) that the FDIC is estopped from brining this action because the Respondent and the Regional Office of


4 "[I]n its sovereign role, the Government is carrying out its unique governmental functions for the benefit of the whole public." United States v. Georgia-Pacific Company, 421 F.2d 92, 101 (9th Cir. 1970). For instance, it has been held that the collection of duties on imports and the collection of taxes are sovereign functions. See Air-Sea Brokers, Inc. v. United States, 596 F.2d 1008, 1011 and n. 8 (C.C.P.A. 1979). Further, "the United States is not subject to an estoppel which impedes the exercise of the powers of government...." The Deltona Corp. v. Alexander, 682 F.2d 888, 891-92 (11th Cir. 1982), quoting United States v. Florida, 482 F.2d 205, 209 (5th Cir. 1973).
{{9-30-91 p.I-35}}the FDIC entered into an "agreement" with which the Respondent is in compliance and which addresses the allegations in the Notice; (2) that the Respondent has been denied its constitutional right to due process in that the factual allegations in the Notice are based upon knowingly inaccurate data; (3) that the Notice fails to state any cause of action under 12 U.S.C. § 1818(b)(1); and (4) that the Notice was issued without legal authority in that it was signed by somebody other than the Regional Director, to whom the FDIC Board has delegated authority to issue notices pursuant to 12 C.F.R. § 303.9.

1. The estoppel contention

   The essential facts relating to the Respondent's estoppel argument are that in 1989 the FDIC Regional Office sought to require the Bank to cease certain activity and to engage in certain affirmative action and proposed a Memorandum of Understanding (MOU). An MOU is a consent to compliance document used by the FDIC and is the lowest level of consent order.
   As a result of negotiations between counsel for the Bank and representatives of the FDIC, the Bank's Board of Directors passed certain resolutions. These were then transmitted to the FDIC, which agreed to accept the Bank's undertakings "in lieu of a memorandum of understanding." For purposes of this motion the Respondent contends, and I assume, that the Bank has in fact complied with all of the undertakings set forth in its "agreement" with the FDIC. Nevertheless, the FDIC cannot be held estopped from bringing an administrative action.
   Counsel for both parties have cited numerous Circuit Court and Supreme Court cases on the issue of whether or not the government can be estopped from bringing a certain action or make a certain defense. These cases generally fall into two broad categories: whether the action which is the subject of the estoppel argument was in the government's sovereign capacity or was a proprietary function. The second category of cases is whether the basis of the estoppel claim concerns facts (known to the government but unknown to the party seeking estoppel) or questions of law.
   In Heckler v. Community Health Services, 467 U.S. 51, 104 S.Ct. 2218 (1984), the Supreme Court said:
   When the government is unable to enforce the law because the conduct of agents has given rise to estoppel, the interests to the citizenry as a whole in obedience to the rule of law is undermined is for this reason it is well settled that government may not be estopped on same terms as any other litigant.
   And, in that case, the Supreme Court start that whether the government can ever estopped is an open question though the Court at that time was hesitant to say that there are "no cases in which the public interest in insuring that the government can enforce the law free from estoppel might be outweighed by the counterveiling interest of citizens in some minimum standard of decency, honor, and reliability in their dealing with the government."
   More recently in a case before the Supreme Court, an individual sought paymen of disability benefits based upon civil service with the Department of the Navy notwithstanding that he had earnings in excess of those allowed to continue to receive disability. He had claimed that he was erroneously advised by an agent of the government concerning the amount of earnings he might have, and that the government therefore was estopped from asserting its defense. The Supreme Court stated, among other things, "From our earliest cases, we have recognized that equitable estoppel will not lie against the government as against private litigants." Office of Personnel Management v. Richmond, ____ U.S. ____, 110 S.Ct. 2465 (1990) at 2469. The Court went on to discuss a number of its earlier cases and then stated:
   Despite the clarity of these earlier decisions, dicta in our more recent cases have suggested the possibility that there might be some situation in which estoppel against the government could be appropriate.
   And finally, the Court said:
   In sum, courts of appeals have taken our statements as an invitation to search for an appropriate case in which to apply estoppel against the government, yet we have reversed every finding of estoppel that we have reviewed. At 2470.
   However, the Court did not adopt the Solicitor General's contention that there should be a flat rule of no estoppel for any reason under any circumstances against the government. The Court said, "We leave for another day whether an estoppel claim could {{9-30-91 p.I-36}}ever succeed against the government." The Court decided the Richmond case on a more narrow ground because it involved a payment from the Treasury of the United States. However, it is clear from that decision that the chances of an estoppel argument succeeding in the United States Supreme Court against an agency of the United States Government is remote indeed.
   Notwithstanding these holdings of the Supreme Court, there have been a number of Courts of Appeals decisions applying the doctrine of equitable estoppel against actions of the government. However, in all those cases the action which was the basis for estoppel was in the government's proprietary function. For instance, in FDIC v. Harrison, 735 F.2d 408 (11th Cir., 1984), the FDIC's act which led to estoppel involved its capacity as a receiver of a failed bank. As a liquidator of failed banks the FDIC is clearly performing a proprietary function.
   However, the FDIC's capacity as a regulator and enforcer of the National Banking Statutes against state nonmember banks is clearly a sovereign function. Even if estoppel were ever to apply against the government (a questionable conclusion), it would be against the government in the performance of a proprietary function and then the requirements would be strict and the facts overwhelming.
   Finally, even if the FDIC could be estopped based on an act in its regulatory function, the facts here would not support estoppel.
   The Respondent argues that the FDIC agreed it could take certain action in lieu of entering into a more formal memorandum of understanding. The Respondent then argues that their "agreement" is, in effect, a commercial contract with which it is complying. Therefore, the FDIC's action is a breach of the contract and the FDIC should therefore be estopped from bringing this action.
   Clearly the agreement referred to by the Respondent is not a contract. At most it reflects an administrative determination that certain undertakings by the Bank would remedy specific regulatory concerns. By accepting the Board's resolutions, the FDIC certainly did not bind itself never to seek a formal cease and desist order against the Bank involving that particular activity. Nor does this amount to some kind of a settlement agreement of which there has been an accord and satisfaction.
   In sum, I believe it is unlikely that the doctrine of equitable estoppel could ever apply to deny the FDIC from bringing enforcement actions under 12 U.S.C. § 1818(b). However, even if there might be a case in which estoppel would apply, this on the facts is not it.

2. Denial of due process

   The Respondent contends that in the Notice of Charges the FDIC used "knowingly inaccurate financial data" in that the data was obtained from an FDIC examination report which was complied before the Bank's independent auditors had their normal year-end audit, and that the facts contained in the FDIC report were erroneous.
   The Respondent's contention in this regard raises certain fact issues which cannot be accepted as true for purposes of the Respondent's motion to dismiss. These issues necessarily can be resolved only upon the record of an administrative hearing, if they turn out to be material.
   A motion to dismiss is not the proper avenue to argue, or resolve, contested facts.

3. Failure to state facts to support its claim

   The Respondent contends that under 12 U.S.C. § 1818(b)(1), the FDIC is required to plead a "statement of the facts" supporting its claims that the Bank has engaged in unsafe or unsound banking practices or regulatory violations. It argues that the FDIC did not do this, and accordingly the Notice ought to be dismissed.
   A review of the Notice demonstrates the FDIC set forth in some detail the basis, both factual and legal, of its contentions that the Respondent has engaged in unsafe or unsound banking practices and violations of the law.
   I reject the Respondent's contention that the Notice does not give an adequate understanding of the nature of the claims against it.
   In any event, the FDIC Rules of Practice and Procedure provide for extensive pretrial procedures during which the Respondent will be entitled to learn the names of witnesses, the documents to be offered into evidence, and the precise nature of the factual contentions and the issues the FDIC seeks to litigate.
{{9-30-91 p.I-37}}
   Thus, even if the Notice does not precisely inform the Respondent of the allegations brought by the FDIC, the Respondent will have ample opportunity prior to the administrative hearing to review the facts and legal contentions of the FDIC. Thus, this contention is not a basis for dismissal.

4. Improper delegation of authority

   The essence of the Respondent's last basis for dismissal is that the Regional Director's name was signed by somebody other than the Regional Director. Therefore, the Notice was issued by someone who did not have the delegated authority to do so. FDIC counsel responded by stating that the Regional Director's name was signed by Deputy Regional Director Steven K. Scholzen who had sub-delegated authority pursuant to a memorandum dated November 23, 1987, from Director Paul G. Fritts.
   It appears that the Regional Director did not in fact sign the Notice and that someone signed it on his behalf, which Scholzen admits doing. Scholzen signed an affidavit to the effect that he issued the Notice pursuant to authority delegated to him of June 18, 1990. The Respondent argues that this cannot be so because if Scholzen had the authority to sign the Notice, he would have done so in his own name rather than signing the Regional Director's name.
   Though the Respondent's point seems reasonable, it nevertheless appears from the Notice as well as the affidavit of Scholzen that the Notice is regular and was appropriately issued in the normal course of the FDIC's regulatory business. Beyond that, there has been no showing that somehow the Respondent is prejudiced by the fact that the Regional Director did not sign his own name to the Notice. Accordingly, I conclude that this is an insufficient basis to dismiss this action.
   In the alternative to its motion to dismiss, the Respondent also asks for a more definite statement of facts. The Respondent's contention in this regard is essentially the same as its contention that the Notice ought to be dismissed because of a due process lack of notice.
   My review of the Notice indicates that the FDIC has pled this matter with a sufficient particularity, both factually and legally, that the Respondent is on notice as to the contentions of the FDIC.
   Further, as noted above, prior to the hearing in this matter, there will be an opportunity for extensive pre-trial discovery, during which the Respondent will be able to learn any additional facts or legal theories which might help in the preparation of its defense.
   Accordingly, I conclude that an order requiring the FDIC to issue a more definite statement in the particulars requested is not indicated, and the Respondent's request for this will also be denied.
   Inasmuch as I conclude that the Respondent's grounds for dismissal are legally insufficient, pursuant to the FDIC's Rules of Practice and Procedure, 12 C.F.R. § 308.07(b)(7), I hereby issue the following:
   The Respondent's motion to dismiss or, in the alternative, for a more definite statement is denied in its entirety.
   Dated Washington, D.C. September 4, 1990

/s/ James L. Rose

Administrative Law Judge

ED&O Home | Search Form | Text Search | ED&O Help

Last Updated 6/6/2003 legal@fdic.gov