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


{{4-30-92 p.I-41}}
   [8011] In the Matter of Paul C. Hufnagle, Franklin State Bank, Franklin, Minnesota, Docket No. FDIC-91-62e (1-7-92).

   Board reverses ALJ ruling that claim preclusion bars admission of evidence used in a prior cease and desist action, and remands with instructions to consider all factual allegations set forth in the removal notice.

   [.1] Practice and Procedure—Interlocutory Appeals—Standards
   The issue of whether claim preclusion bars the admission of evidence in a removal action of specific transactions which were also the subject of an earlier cease and desist action involves an important unresolved question of law and policy, and is therefore appropriate for consideration on an interlocutory appeal.
   [.2] Claim Preclusion—Res Judicata—Presumption
   While there is a general presumption that claim preclusion applies in administrative proceedings, the presumption is overcome if its application would be inconsistent with Congress's intent in enacting a particular statute.
   [.3] Claim Preclusion—Exceptions—Statutory Scheme
   Relitigation of an issue is not precluded, even between the original parties, when there is a convincing need for a new determination because of the potential impact on the public interest or on persons not parties to the original action, as is the case in a removal action where the remedy is designed to protect depositors and the deposit insurance fund.
   [.4] Claim Preclusion—Exceptions—Statutory Scheme
   The statutory scheme of enforcement actions of graduated severity would be frustrated if the FDIC were required to fully investigate and join in a cease and desist action all possible legal theories which might arise in a later removal action.
   [.5] Claim Preclusion—Exception—Public Policy
   Public policy favors presentation of all bases for a removal action, even those previously at issue in a cease and desist proceeding, before a trier of fact so that a decision can be rendered on a complete factual record.

In the Matter of
PAUL C. HUFNAGLE,individually,
and as an executive officer,
director, person participating
in the conduct of the affairs and
an institution affiliated party of
FRANKLIN STATE BANK
FRANKLIN,MINNESOTA
(Insured State Nonmember Bank)
DECISION AND ORDER
ON INTERLOCUTORY APPEAL

FDIC-91-62e

I. INTRODUCTION

   The Federal Deposit Insurance Corporation ("FDIC") initiated this removal action on April 18, 1991, pursuant to section (e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e). The Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Removal Notice") named Paul C. Hufnagle ("Respondent"), an executive officer and director of Franklin State Bank, Franklin, Minnesota ("Bank").1

The Removal Notice alleged that Respondent had engaged in a series of transactions which violated Regulation O, 12 C.F.R. Part 215, by exceeding the lending limit applicable to executive officers or their affiliates. Other allegations in the Removal Notice concern transactions made on preferential terms, which involved more than the normal risk of repayment or had other features unfavorable to the Bank.2

The Removal Notice also contains allegations of self-dealing or other unsafe or unsound prac-


1 Paul C. Hufnagle was chairman of the board of directors and president of the Bank between March 16, 1987 and August 28, 1989. The Removal Notice concerns conduct during this period.

2 Regulation O is applicable to the Bank pursuant to Section 18(j)(2) of the FDI Act, 12 U.S.C. § 1828(j)(2) and section 337.3(a) of the FDIC's Rules and Regulations, 12 C.F.R. § 337.3(a). The lending limit of Regulation (Continued)


{{4-30-92 p.I-42}}tices including inappropriate use of campaign funds on deposit at the Bank and certain improper income tax remittances. Several of the specific transactions described in the Removal Notice were also contained in a June 27, 1990 Notice of Charges and of Hearing ("Cease and Desist Notice") against Respondent Hufnagle and the Bank. This cease-and-desist action was settled pursuant to a Stipulation and Consent to the Issuance of an Order to Cease-and-Desist ("Consent Order"), dated December 26, 1990. Under the terms of the Consent Order, none of the alleged improper conduct was admitted or denied.
   On September 18, 1991, Administrative Law Judge ("ALJ") James L. Rose conducted a pre-hearing conference in Minneapolis, Minnesota. At the conference, the ALJ considered Respondent's Motion to Strike from the Removal Notice and four transactions which were also subjects of the Cease and Desist Notice.3

Respondent argued that res judicata or claim preclusion barred relitigation of the facts concerning there four allegedly improper transactions.4

The ALJ sustained Respondent's defense of claim preclusion as to paragraphs 13, 14, 16, and 22, and ordered these allegations stricken from the Removal Notice.5

Both parties filed applications for special permission for an interlocutory appeal to the Board. Respondent asserts that: (1) all causes of action which arise out of the same transaction must be presented in the first litigation or they are waived; (2) the Consent Order is silent on the issue of claim preclusion and Respondent did not agree that the FDIC could pursue successive actions against him based on the same facts; and (3) the Supreme Court has found claim preclusion applicable unless FDIC could prove violations subsequent to the cease-and-desist proceeding which establish that the original relief had been ineffective.6

Respondent also asserted in its brief that the ALJ erred by failing to strike paragraph 18 from the Removal Notice since it allegedly concerned the same line of credit described in paragraph 14. Respondent's Brief at 11.
   Enforcement Counsel argues that claim preclusion is inapplicable to this case because it is contrary to congressional intent, prevailing law, and public policy. Enforcement Counsel also requests oral argument before the Board.

II. REQUEST FOR ORAL ARGUMENT

   After considering Enforcement Counsel's request for oral argument and the allegations and arguments presented in the briefs, the Board finds that: (1) the factual and legal arguments are
fully set forth in the parties' submissions; (2) no benefit will be derived from oral argument; and (3) Enforcement Counsel will not be prejudiced by the lack of oral argument. Therefore, the Board declines to exercise its discretion under section 308.40(b) of the FDIC's Rules and Regulations and denies the request for oral argument. 56 Fed. Reg. 37985 (to be codified at 12 C.F.R. § 308.40(b)); In the Matter of Harold Hoffman, FDIC-88-156c&b, 2 P-H ¶5140 (1989); FDIC-85-42b, 1 P-H ¶5062 (1986).

III. AN INTERLOCUTORY APPEAL IS
APPROPRIATE

   Section 308.28(b)(1) of the FDIC Rules and Regulations states, in pertinent part, that:
   The Board of Directors may exercise interlocutory review of a ruling of the administrative law judge if the Board of Directors finds that: The ruling involves a controlling question of law or policy as to which substantial grounds exist for a difference of opinion. 56 Fed. Reg. 37983 (to be codified at 12 C.F.R. § 308.28).

   The grant of an interlocutory appeal is an


2 ContinuedO is set forth in 12 C.F.R. § 215.4(c). The provision of Regulation O concerning features unfavorable to a bank is set forth in 12 C.F.R. § 215.4(a).

3 The record before the Board of Directors ("Board") does not contain a written Motion to Strike.

4 The doctrine of res judicata, which includes the concept of claim preclusion, concerns the preclusive effect of a prior adjudication. Once a final judgment has been rendered between two parties, the underlying claim is extinguished and the judgment acts as a bar to relitigation of the claim in a subsequent suit between the parties. Kaspar Wire Works, Inc. v. Lack Engineering & Machine, Inc., 575 F.2d 530, 535–536 (5th Cir. 1978). The ALJ refers to "settlement bar" which concerns an aspect of claim preclusion, that settlements and consent orders have preclusive effects similar to claims litigated on the merits. See e.g. Hollywood Roosevelt Hotel Company, 235 NLRB 1397 (1979).

5 Respondent and Enforcement Counsel both now maintain that it was mistakenly represented to the ALJ that the contents of paragraph 16 (concerning a $35,000 loan) were in both Notices. The Board agrees with the parties that this allegation is present in the Removal Notice, but not the Cease and Desist Notice. Thus, only three transactions (the subjects of paragraphs 13, 14, and 22 of the Removal Notice) were common to both Notices.

6 Respondent cites Wallace Corporation v. NLRB, 323 U.S. 248, 255 (1944).
{{4-30-92 p.I-43}}extraordinary action to be taken by the Board in limited circumstances. Prior decisions of the Board have set forth the standards for granting such appeals: where issues of first impression are involved, where significant policy considerations are raised, or where there exists a substantial danger of irreparable harm to a party. FDIC-88-247k, 2 P-H FDIC Enf. Dec. ¶5135 (1989); FDIC-85-87k, 2 P-H FDIC Enf. Dec. ¶5095 (1987); FDIC-85-326b, 2 P-H FDIC Enf. Dec. ¶5070 (1986).

   [.1] The issue of whether claim preclusion bars the admission of evidence in a removal action of specific transactions which were also the subject of an earlier cease-and-desist action involves an important, unresolved question of law and policy. Policy issues are raised by this question of law since a finding that claim preclusion applies would significantly limit the practical availability of certain enforcement remedies. For these reasons, the Board exercises its discretion under section 308.28 of the FDIC Rules and Regulations to permit interlocutory review of this case. 56 Fed. Reg. 37983 (to be codified at 12 C.F.R. § 308.28).

IV. DISCUSSION

   [.2] The Board has carefully and thoroughly reviewed the parties' submissions, the cases cited in the briefs, the ALJ's ruling, the Consent Order and the policy and legal arguments concerning this issue. The Board concludes that claim preclusion does not bar the admission of evidence concerning the three transactions in the removal action, although they were also the subject of the earlier cease-and-desist action. The Consent Order does not contain language evidencing an intent that claim preclusion apply to the settlement. The parties' expressed intent is pivotal to the issue of whether claim preclusion applies to a matter resolved by settlement.7

This key issue aside, the Board has considered the general application of claim preclusion to this proceeding. While there is a general presumption that res judicata or claim preclusion applies to a proceeding, the presumption is overcome if its application would be inconsistent with Congress' intent in enacting a particular statute.8

The Board finds that this case falls within the statutory scheme exception to claim preclusion.
   The Restatement 2d of Judgments §§ 83(3)&(4) sets forth exceptions to claim preclusion or res judicata which reflect the statutory scheme exception. The Restatement generally states that administrative decisions are normally given preclusive effect and sets forth these exceptions:

       (3) An adjudicative determination of a claim by an administrative tribunal does not preclude relitigation in another tribunal of the same or a related claim based on the same transaction if the scheme of remedies permits assertion of the second claim notwithstanding the adjudication of the first claim.
       (4) An adjudicative determination of an issue by an administrative tribunal does not preclude relitigation of that issue in another tribunal if according preclusive effect to determination of the issue would be incompatible with a legislative policy that:
       (a) The determination of the tribunal adjudicated the issue is not to be afforded conclusive effect in subsequent proceedings....

   [.3] The United States Court of Appeals for the Seventh Circuit applied this principle in Porter & Dietsch, Inc. v. Federal Trade Commission, 605 F.2d 294, 300 (7th Cir. 1979), finding that relitigation of an issue is not precluded even between the original parties when "[t]here is a clear and convincing need for a new determination of the issue... because of the potential impact of the determination on the public interest or persons not parties to the initial action."9

Here, removal is a remedy designed to protect the public, depositors and the deposit insurance fund.
   Moreover, Congress' intention that claim


7 18 Wright, Miller & Cooper, Federal Practice and Procedure: Jurisdiction § 4443 (1981). The type of language (not present here) which would manifest an intent that claim preclusion apply includes statements such as: "This settlement is a full and complete disposition of all claims that were filed or could have been filed."

8 International Harvester Co. v. Occupational Safety and Health Review Commission, 628 F.2d 982, 986 (7th Cir. 1980); see also Kalb v. Feurstein, 308 U.S. 433, 60 S. Ct. 343 (1940); 4 K. Davis, Administrative Law Treatise § 21:2 (1983).

9 Restatement 2d of Judgments § 68.1 (e)(i) (Tent. Draft No. 4, 1977). Comment h to this section of the Restatement gives as an example of the § 68.1 (e)(i) exception an action by "an agency of government ... for the protection ... of a broad segment of the public."
{{4-30-92 p.I-44}}preclusion not be applied to FDIC enforcement actions is evident in the overall scheme of the FDI Act and in the legislative history. 2A Sutherland Statutory Construction §§ 45.05; 48.02 (N. Singer 4th ed. 1984).10

Congress granted a broad array of enforcement powers to the FDIC, including but not limited to actions to cease-and-desist, to remove and prohibit participation, for civil money penalties and to terminate deposit insurance, 12 U.S.C. §§ 1818(a)-(e). By granting such powers, Congress intended to provide the FDIC with great flexibility to use its expertise and informed discretion to address troubled institutions, to tailor solutions to specific problems, and to prevent fraud through prompt corrective action, the ultimate goal being to protect the deposit insurance funds by eliminating the risk of loss.11

   [.4] Analysis of FDIC's enforcement remedies further indicates Congress' intention that claim preclusion not apply to successive enforcement actions. The FDI Act gives the banking agencies a variety of enforcement actions of graduated severity for use in achieving supervisory objectives. A cease-and-desist action, designed to place limits on the activities of an institution, requires proof of a violation of law or unsafe or unsound banking practice. The remedy is an enforceable order to halt the violation or improper practice. These is a substantial need for an expedient resolution in a cease-and-desist proceeding in order to immediately halt improper activities. It is a corrective measure for the bank designed to prevent future abuses and to protect the bank insurance fund. First State of Wayne County v. FDIC, 770 F.2d 81 (6th Cir. 1985). The purpose of a cease-and-desist action would be frustrated if, prior to initiating the action, all possible legal theories must be fully investigated and joined with the cease-and-desist action or waived.
   In contrast, a removal action is designed to sanction an individual who has engaged in conduct evidencing personal dishonesty or other misconduct. Three "tiers" of proof are required for the successful prosecution of a removal action: (1) misconduct, i.e., a violation of law, regulation, or a cease-and-desist order which has become final; or an unsafe or unsound practice; or a breach of fiduciary duty; (2) effect, i.e., financial loss or other damage to the institution, prejudice to the interests of depositors, or financial gain or other benefit to the Respondent; and (3) culpability, i.e., personal dishonesty of the Respondent or willful or continued disregard for the safety or soundness of the institution. The remedy sought is significantly more serious—removal of the individual from the institution and prohibition from employment in FDIC-insured institutions, for the protection of the public and to prevent potential future threats to the Bank insurance fund. Van Dyke v. Board of Governors of the Federal Reserve System, 876 F.2d 1377 (8th Cir. 1989); Brickner v. FDIC, 747 F.2d 1198 (8th Cir. 1984). The focus of the two types of enforcement actions is different. Congress intended that the more serious removal action follow a cease-and-desist action, and this places the instant case within the statutory scheme exception to claim preclusion.12

   [.5] The Board finds that public policy favors presentation of all bases for a removal action (even those previously at issue in a cease-and-desist proceeding) before a trier of fact, so that a decision can be rendered on a complete, not fragmented, factual record. The instant removal case contains certain additional factual allegations not present in the cease-and-desist proceed-


10 These sections state that in the interpretation of statutes the intention of the legislature is the key criterion and that legislative history is relevant and probative.

11 The legislative history of various acts authorizing enforcement actions evidences Congress' repeatedly expressed desire for the federal financial institution regulatory agencies to have adequate authority to take prompt and effective corrective action. See the Senate Report accompanying the Financial Institutions Supervisory Act of 1966 for discussion of inadequacy and severity of then existing remedies for many situations (such as taking custody of an institution or terminating its insured status) or excessive delay or cumbersomeness, so that substantial injury occurs to the institution before remedial action is effected. See also House Report accompanying the Financial Institutions Regulatory and Interest Rate Control Act of 1978, H.R. Rep. No. 95-1383. 95th Cong., 2d Sess. 1, reprinted in 1978 U.S. Code Cong. & Admin. News 9273, 9289.

12 An example of the statutory scheme exception is present in Board of Education of City School District v. Hufstedler, 641 F.2d 68 (2nd Cir. 1981). In Hufstedler, a school board sought funds under the Emergency School Aid Act and the application was denied. The Court held that this prior judgment (concerning denial of an initial application) did not bar, as a matter of res judicata, the Board's subsequent application for waiver. The Court noted that "many of the same facts are in evidence in both cases" but the "essence" of the two actions was different, since the Board was seeking two different remedies. Id. at 71.
{{5-31-92 p.I-45}}proceeding.13

Presentation of all of these factual allegations will afford the trier of fact a more complete basis for determining whether removal is appropriate.

V. RESPONDENT'S CONTENTIONS

   The Board has considered Respondent's assertions that the exception to claim preclusion (contained in the Restatement 2d of Judgment) only applies to legal claims "which could not have been presented to the administrative tribunal because of limitations on its authority." Reply Brief at 6. Respondent also asserts that claim preclusion is applicable unless FDIC could prove violations subsequent to the cease-and-desist proceeding which establish that the original relief is ineffective. The Board rejects Respondent's narrow view of claim preclusion. To the extent it applies, a modified res judicata doctrine or claim preclusion is appropriate in administrative adjudications. The Seventh Circuit Court of Appeals has held:
   Finally, we note that even where the technical requirements of res judicata have been established, a court may nonetheless refuse to apply the doctrine. This court does not adhere to a rigid view of the doctrine in the administrative context:
   The sound view is therefore to use the doctrine of res judicata when the reasons for it are present in full force, to modify it when modification is needed, and to reject it when the reasons against it outweigh those in its favor. [Citations omitted.] Res judicata must yield on occasion to competing public policies.14
   Claim preclusion is not an inflexible, universally applicable principle. Rather, policy considerations may limit its use.15

Respondent and the ALJ rely on an argument that this case does not fall squarely within an exception to claim preclusion present in certain labor relations cases.16

The Board has reviewed the cited labor cases and concludes that the exception for labor cases is distinct from the statutory scheme exception to claim preclusion applicable in this case.17
   Respondent further argues that claim preclusion bars all alleged matters in the removal action, which were known at the time, or could have been the subject of the cease-and-desist proceeding.18

In the Board's view, claim preclusion requiring the joining of all claims that could be brought into a single proceeding has limited application in the context of bank regulatory enforcement proceedings.19

Aside from the practical problems of proving that factually complex financial transactions support different causes of action within a single proceeding, requiring joinder of all possible claims is inconsistent with the long recognized bank regulator's broad discretion to fashion appropriate remedies.20
   Finally, the Consent Order is silent on the issue of claim preclusion, and thus the Board finds that it does not evidence the parties'


13 Specifically, paragraph 16 of the Removal Notice (at 11) alleges that a $35,000 loan to Respondent was identified as secured by certificates of deposit, when in fact there were no certificates of deposit or other collateral securing the loan; the interest rate was preferential, well below the rate charged on comparable transactions with non-insiders; and the loan was classified "Substandard" as of November 17, 1989. Further, paragraph 21 of the Removal Notice (at 16) alleges that in 1989 Respondent converted campaign funds totaling $8,939.55 on deposit at the Bank to his own use and benefit to partially fund his investment in a Domino's pizza franchise.

14 International Harvester Co. v. Occupational Safety and Health Review Commission, 628 F.2d 982, 986 (7th Cir. 1980); see also Kalb v. Feurstein, 303 U.S. 433, 60 S. Ct. 343 (1940); 4 K. Davis, Administrative Law Treatise § 21:2 (1983).

15 Kelly v. Trans Globe Bureau Inc., 131 Cal. Rptr. 488 (Ca. App. 1976).

16 E.g. Wallace Corporation v. NLRB, 323 U.S. 248, 255 (1944) and Hollywood Roosevelt Hotel, 235 NLRB 1397 (1978).

17 Accordingly, the Board places limited weight on Keith v. Aldridge, 900 F.2d 736 (4th Cir. 1990) cited by the ALJ.

18 The ALJ also mentions that claim preclusion generally bars all claims which could have been brought and cites Natural Resources Defense Council, Inc. v. Thomas 838 F.2d 1224, 1252 (D.C. Cir. 1988); however, he declines to apply this to the subject case.

19 The Board of Governors of the Federal Reserve System recently reached a similar conclusion in a final decision. In the Matter of A. Frederick Greenberg, AA-EC-90-45 (October 28, 1991). Enforcement Counsel brought this case to the attention of the Board over the objection of Respondent. Respondent states that the submission is in the nature of a reply brief, prohibited under the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.31(3) (1991) (which governed the proceeding at that time), and that factual differences exist since the Greenbergs were not parties to a prior cease-and-desist proceeding. The Board does not view the submission, "Citation of Supplemental Authorities" as a reply brief—it simply states that a recently decided case is relevant, but otherwise contains no argument. However, the Board is mindful of the factual differences noted by Respondent.

20 Accordingly, the Board finds it unnecessary to reach Respondent's assertion that the ALJ erred by failing to (Continued)

{{5-31-92 p.I-46}}intention that this doctrine apply.21

The Board also notes that under the Consent Order, none of the allegations of the Cease and Desist Notice were admitted or denied. Thus, in the removal action, the FDIC will have the burden of proof as to all of the factual allegations, since the cease-and-desist action did not result in any findings or admissions of improper conduct.

VI. CONCLUSION

   Accordingly, the Board reverses the ruling of the ALJ and remands this case pursuant to the accompanying Order, with instructions to permit Enforcement Counsel to assert all of its claims and grounds for relief in the removal action.

ORDER

   The Board, having reviewed the record and the applicable law, hereby rejects the ALJ's ruling that, under the doctrine of claim preclusion, certain transactions may not be considered as a basis for removal. The Board remands this matter to the ALJ for a full hearing on the merits concerning all factual allegations set forth in the Removal Notice.
   By direction of the Board of Directors,
   Dated at Washington, D.C. this 7th of January, 1992.


20 Continuedalso strike paragraph 18 from the Removal Notice, since it allegedly concerned the same line of credit described in paragraph 14.

21 In contrast, in Keith v. Aldridge, an employment discrimination case, a settlement order in the first case barred a second action raising an identical cause of action. However, the settlement order stated that it was in full and complete disposition of those claims "that were filed or that could have been filed (except attorney's fees) and that were brought or could have been brought against the [Air Force] pursuant to Title VII and the Privacy Act" Id. at 739. No such language is present in the subject Consent Order.

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

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