Federal Deposit
Insurance Corporation

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   [¶5166A] In the Matter of Janice J. France, Berrien E. Moore, Ada P. Sands, Leonard S. Sands, Crowley & Cuneo, and Christensen, White, Miller, Fink & Jacobs, First Pacific Bank, Beverly Hills, California, Docket No. FDIC-90-156c&b (7-16-91).

   Board rejects ALJ's recommended decision, denies motions for summary judgment, and remands case to ALJ for a hearing to determine (1) whether transfer of funds, in contemplation of the Bank's insolvency, to law firms for representation of Bank officers and directors constituted unsafe or unsound practices, (2) whether the law firms were institution-affiliated parties, and (3) whether restitution is appropriate. (For subsequent orders in this matter, see ¶5169, ¶9004A and ¶9007.)

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   [.1] Unsafe or Unsound Practices—Insolvency—Outside Counsel
   The act of engaging counsel to challenge state regulatory action is not per se an unsafe or unsound banking practice, but may be, depending on factual circumstances surrounding the transaction.

   [.2] Unsafe or Unsound Practices—Insolvency—Relevant Factors
   Factors relevant to determination of whether insolvent bank engaged in unsafe or unsound banking practice by engaging outside counsel include the size of the retainer in relation to the institution, the existence of a retainer agreement, timing of the expense, and the scope of services actually performed.

   [.3] Institution-Affiliated Parties—Outside Counsel
   A finding of outside counsel's institution-affiliated status will be dependent upon the determination of whether payment of retainer constituted an unsafe or unsound banking practice.

   [.4] Directors and Officers—Restitution
   Determination of whether unjust enrichment occurred, and what restitution is appropriate, is dependent on a finding that officers committed an unsafe or unsound banking practice.

In the Matter of
JANICE J. FRANCE,
BERRIEN E. MOORE,
ADA P. SANDS,
LEONARD S. SANDS,
CROWLEY & CUNEO,
and CHRISTENSEN, WHITE, MILLER, FINK & JACOBS
and FIRST PACIFIC BANK
BEVERLY HILLS, CALIFORNIA
(IN RECEIVERSHIP)
DECISION AND REMAND ORDER
FDIC-90-156c&b

   The Federal Deposit Insurance Corporation ("FDIC"), initiated this action on August 10, 1990, pursuant to sections 8(b) and 8(c) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §§ 1818(b) and (c), by issuing to First Pacific Bank, Beverly Hills, California ("Bank"), and certain individual Respondents, including Janice J. France, Berrien E. Moore, Ada P. Sands, and Leonard S. Sands, a Findings of Fact and Conclusions of Law, a Temporary Order to Cease and Desist, and a Notice of Charges and of Hearing ("Notice").¹ The Notice also named four law firms as Respondents: Keck, Mahin & Cate; Ronald D. Jaman, Esq.; Crowley & Cuneo; and Christensen, White, Miller, Fink & Jacobs. The Notice alleged that a total of $180,000 had been transferred from the Bank to the law firms with knowledge that the FDIC considered the Bank to be in an insolvent condition and subject to imminent closure by the California State Banking Department.
   The law firm of Keck, Mahin & Cate and certain individual Respondents challenged the Temporary Order to Cease and Desist by petitioning the United States District Court for the Central District of California, Los Angeles, for a Temporary Restraining Order. The Court denied the request for a Temporary Restraining Order at a hearing on September 25, 1990.
   A prehearing conference in this administrative proceeding was held in Los Angeles, California on October 18, 1990.
   On December 5, 1990, Respondent Janice J. France filed a Motion for Summary Judgment. Enforcement Counsel filed an Opposition on December 14, 1990. On December 19, 1990, Berrien E. Moore filed a Notice of Joinder to Respondent France's Motion for Summary Judgment. On December 21, 1990, Leonard S. Sands and Ada P. Sands filed a Notice of Joinder to Respondent France's Motion for Summary Judg-

   The individual Respondents seek summary judgment on the ground that there are no genuine issues of triable fact. They assert that, under In the Matter of Harold A. Hoffman, et. al. and Alaska Continental Bank, 1990 FDIC Enf. Dec. (P-H) ¶5140, aff'd on appeal, Hoffman v. FDIC, 912 F.2d 1172 (9th Cir. 1990) ("Hoffman"), engaging a law firm to challenge the regulators is not an unsafe or unsound practice. Id. at A-1493. Further, they assert that, as a matter of law, neither of the two requirements for restitution set forth in 12 U.S.C. §§ 1818(b)(6)(A)(i) and (ii) are met. Respondent law firms seek summary judgment on the ground that there are no genuine issues of triable fact under Hoffman, since the prepayments of the retainers at issue are proper as a matter of law. Further, Respondent law firms assert that they are not institution-affiliated parties.
   Under section 8(b) of the FDI Act, if, in the opinion of the FDIC, after notice and opportunity for hearing, an insured depository institution or institution-affiliated party is engaging or has engaged, or the FDIC has reasonable cause to believe that the bank or party is about to engage in an unsafe or unsound practice, then the FDIC may issue an order to cease and desist. The order may require that affirmative action be taken to correct the conditions resulting from the practice. Restitution or reimbursement may be ordered if: (1) the depository institution or institution-affiliated party was unjustly enriched in connection with any violation or practice; or (2) the violation or practice involved a reckless disregard for the law or any applicable regulations or a prior order of the regulators. 12 U.S.C. §§ 1818(b)(6)(A)(i) and (ii).
   The FDIC examined the Bank as of April 30, 1990, and the preliminary findings of that examination were discussed with the management of the Bank throughout May and June. On July 12, 1990, a meeting was held at the California State Banking Department's Los Angeles office. At the meeting, all present were advised by the State of the Bank's insolvent condition and that the regulators were prepared to take "extreme action" unless the Bank promptly corrected its

   With respect to the Respondent law firms, the ALJ's March 19, 1991, Recommended Decision ("R.D."), first determined whether there was any dispute concerning the purpose of the legal fees. Enforcement Counsel admit that the allegedly improper payments to the Respondent law firms on August 6, 1990 in the amounts of $25,000 and $50,000, were retainers for matters relating to the State Department of Banking. R.D. of 3-19-91 at 3–4. The ALJ found that these law firms were engaged throughout July and August 1990 in representing and defending the Bank, including participation in filing at least one lawsuit against the State Department of Banking on behalf of the Bank immediately after the funds were received. R.D. of 3-19-91 at 4.
   The ALJ determined that there is no legitimate dispute regarding the purpose of the two August 6, 1990 payments.⁸ The ALJ

   As we discussed at the meeting of July 12, 1990, the Bank is in critical condition. We wish to repeat the notice given to the Bank at the meeting that we may take extreme action unless it promptly corrects the situation by increasing its capital or by merging with or selling its business to another depository institution.

In the Matter of
Janice J. France, et al., and
First Pacific Bank
Beverly Hills, California
(Insured Nonmember State Bank)
Steven M. Charno, Administrative Law Judge:

   By Motion filed February 15, 1991, Respondent Crowley & Cuneo (Respondent Crowley) seeks an Order recommending a grant of summary judgement in its favor. By Notice of Joinder and Incorporation filed February 15, 1991, Respondent Christensen, White, Miller, Fink & Jacobs (Respondent Christensen) also seeks an Order recommending a grant of summary judgment in its favor. The opposition briefs to both motions were filed on February 26, 1991. At a March 4, 1991 hearing on the subject motions, pursuant to my inherent authority to conduct this proceeding and without objection having been made by any party, I granted the joinder of Respondent Christensen. Thereafter, oral argument was heard. My decision on the motion is made in the context of the following procedural history.
   On August 10, 1990, Petitioner Federal Deposit Insurance Corporation (Petitioner) issued a Notice of Charges and of Hearing (Notice), Findings of Fact and Conclusions of Law and a Temporary Order to Cease and Desist against Respondents Crowley and Christensen, among others. The basis for the proceedings against two respondents was explicitly set forth in Petitioner's pleadings. Paragraph 20(f) of the Notice provided that "on or about August 6, 1990, the [First Pacific] Bank...advanced the sum of $25,000 to Respondent Crowley & Cuneo as a retainer for any future matters related to the California State Banking Department." Paragraph 20(g) of the Notice provided that "on or about August 6, 1990, the [First Pacific] Bank...advanced the sum of $50,000 to Respondent Christensen, White, Miller, Fink & Jacobs as a retainer for any future matters related to the California State Banking Department." These payments were alleged to constitute unsafe and unsound banking practices within the meaning of Section 8(b) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(b). It is undisputed that the California State Banking Department (Department) was First Pacific Bank's primary regulator and, at the time the payments at issue were made, was engaged in substantial regulatory activity with respect to First Pacific Bank (Bank). The Bank was closed by the Department on August 10, 1990.
   A prehearing conference was held in this proceeding on October 18, 1990 in Los Angeles, California. At that conference, I ordered that:
   1. On or before October 22, 1990, the parties were to produce documents responsive to the discovery requests made in this proceeding.
   2. On or before December 7, 1990, the parties were to file and exchange witness lists, which were to include a short narrative description of the testimony of each witness and reference the paragraph(s) in the Notice as to which the witness would testify.
   3. On or before December 7, 1990, the parties were to exchange their prenumbered documentary exhibits, and Petitioner's exhibits were to include an indexed set of all statutory and regulatory authority upon which it intended to rely.
   4. The failure to specify a witness or the subject of a witness's testimony on a party's witness list would preclude the admission of such evidence as part of that party's case in chief.
   5. The failure to include a document in a party's documentary submission would preclude the admission of such evidence as part of that party's case in chief.
   6. On January 4, 1991, the parties were to file their proposed findings of fact and conclusions of law and Petitioner was to file the proposed Order that it sought in this proceeding. These findings were explicitly ordered to be sufficiently comprehensive and detailed so as to permit them to be used as a basis for the decision in this proceeding and to ensure that the highest degree of due process and fair play took place.
   7. On or before February 1, 1991, the parties were to file briefs which stated
{{4-30-92 p.A-1766.8}}whether the filing party agreed or disagreed with each of the findings and conclusions proposed by the opposing party or parties and, with respect to each disputed finding, the filing party was to comprehensively state the nature and extent of its disagreement and identify and describe with particularly the evidence and relevant legal authority which supported its position.
   8. During the week of February 25, 1991, counsel for the parties were to meet, formulate and execute stipulations which embodied all factual and legal matters shown to be undisputed by the findings of fact, conclusions of law and briefs previously filed.
   9. The hearing in this case was scheduled to commence on March 4, 1991 in Los Angeles, California.
   Document production by Petitioner and Respondents Crowley and Christensen occurred as scheduled in October 1990. Respondents Crowley and Christensen subsequently exchanged their respective witness lists and prenumbered exhibits with Petitioner on or about December 7, 1990. Another Respondent, Keck, Mahin & Cate (Respondent Keck), failed to tender its prenumbered exhibits to Petitioner by the ordered deadline.
   On or about January 4, 1991, Petitioner filed its proposed findings of fact and conclusions of law. Paragraph 41 of that pleading stated, in pertinent part: "The $25,000 sum advanced to Respondent law firm of Christensen, White, Miller, Fink & Jacobs ...represented prepayment of legal services as a retainer for matters related to the California State Banking Department and capitalization of the Bank..."
   On or about January 29, 1991, Petitioner filed a motion to compel Respondent Keck to exchange its exhibits with Petitioner or, in the alternative, for an order excluding the offer of any documentary evidence by that Respondent. On February 13, 1990, I issued an Order barring the introduction of documentary evidence by Respondent Keck.
   On March 4, 1991, the parties submitted their Joint Factual, Legal and Evidentiary Stipulations ("Joint Stipulation") to me.
   During the March 4, 1991 hearing on the merits which followed the severance of Respondents Crowley and Christensen from the proceeding. Petitioner several times sought and was granted the exclusion of testimony offered by Respondent Keck on the ground of surprise because such testimony had not previously been identified in accordance with my October 18, 1990 Order.
   Having reviewed the full pleading record before me, including without limitation the Notice, the Answers filed by Respondents Crowley and Christensen, the parties' proposed findings of fact and conclusions of law, their prehearing briefs, the Joint Stipulation, and the instant motions, oppositions to motions and reply brief of the parties; and having heard and considered extensive oral argument on March 4, 1991, I hereby make the following:

   Neither Respondent Crowley nor Respondent Christensen engaged in any unsafe or unsound banking practice, nor is either Respondent an institution-affiliated party as that term is defined in 28 U.S.C. § 1813(u)(4).
   Petitioner has consistently maintained throughout the course of this proceeding that the allegedly improper payments to the Respondents on August 6, 1990 in the sums of $25,000 and $50,000, respectively, were retainers for matters relating to the Department.¹ Petitioner also admits that the Department was the Bank's primary regulator and that both law firms, throughout July and August 1990, were engaged in representing and defending the Bank with respect to the Department's regulatory actions, including the filing of at least one lawsuit against the Department on behalf of the Bank immediately after the subject funds were received.²
   There is no legitimate dispute on the record before me as to the purpose of the two August 6, 1990 payments at issue in this proceeding. Prior to the March 4, 1991 hearing on the summary judgment motion, Petitioner insisted that the payments were for matters relating to the Bank's primary regulator and to the Respondent law firms' efforts to keep the Bank open.³ Indeed, Petitioner confirmed during the hearing that its prior position had been that "the purposes of

   [A]ny independent contractor (including any attorney, appraiser or accountant) who knowingly or recklessly participates in—

   (A) any violation of any law or regulation;
   (B) any breach of fiduciary duty; or
   (C) any unsafe or unsound practice,

which caused or is likely to cause more than a minimal financial loss to, or significant adverse effect on, the insured depository institution.

   1. Summary Judgment on all issues in favor of Respondent Crowley & Cuneo is granted on the Notice of Charges and of Hearing, and the Notice is dismissed as to said Respondent.
   2. Summary Judgment on all issues in favor of Respondent Christensen, White, Miller, Fink & Jacobs is granted on the Notice of Charges and of Hearing, and the Notice is dismissed as to said Respondent.
   Done at Rosslyn, Virginia, this 19th of March, 1991.
   /s/ Steven M. Charno
   Administrative Law Judge

In the Matter of
Janice J. France, et al., and
First Pacific Bank
Beverly Hills, California
(Insured Nonmember State Bank)
Steven M. Charno, Administrative Law Judge:

   This proceeding was initiated by the Federal Deposit Insurance Corporation (Petitioner) upon the issuance of a Notice of Charges and of Hearing (Notice) dated August 10, 1990. By Motion for Recommendation to Grant a Summary Judgment dated December 5, 1990, Respondent Janice J. France (Respondent France) moved for summary judgment on the basis that this case contains no triable issue of material fact. Petitioner filed a December 14, 1990 memorandum of points and authorities in opposition to Respondent France's motion for summary judgment. Respondent France filed a December 19, 1990 Reply to the FDIC's Memorandum of Points and Authorities. By Notice of Joinder of Respondent Berrien E. Moore (Respondent Moore) dated December 19, 1990 and Notice of Joinder and Re-

   The following facts are undisputed:
   (a) On July 13, 1990, the First Pacific Bank (Bank) paid $30,000 to the law firm of Keck, Mahin & Cate.¹
   (b) On August 2, 1990, the Bank paid $25,000 to the law firm of Keck, Mahin & Keck.²
   (c) On August 7, 1990, the Bank made two payments of $25,000 to the law offices of Ronald D. Jaman.³
   (d) On August 6, 1990, the Bank paid $25,000 to the law firm of Crowley & Cuneo.⁴
   (e) On August 6, 1990, the Bank paid $50,000 to the law firm of Christensen, White, Miller, Find & Jacobs.⁵
   (f) The $25,000 sum advanced to Crowley & Cuneo represented prepayment of legal services as a retainer for matters relating to the California State Banking Department.⁶
   (g) The $50,000 sum advanced to Christensen, White, Miller, Fink & Jacobs represented prepayment of legal services as a retainer for matters relating to the California State Banking Department.⁷
   (h) Respondents did not directly obtain any of the funds enumerated in paragraphs (a) through (e).⁸
   In this action for restitution or reimbursement under Petitioner's cease and desist powers, the controlling statutory provision is Section 1818(b)(6) of the Federal Deposit Insurance Act (Act), 12 U.S.C. § 1818(b)(6). That section provides that a condition resulting from a statutory violation or an unsafe or unsound banking practice may be redressed by restitution or reimbursement if one of two conditions is met: (a) the party of whom restitution is demanded received unjust enrichment or (b) such party violated or acted in reckless disregard of a "law," a "regulation" or a "prior order" issued by the appropriate Federal banking agency.
   Petitioner argues that Respondents were indirectly unjustly enriched as a result of the transfers from the Bank to the law firms of Crowley & Cuneo and Christensen, White, Miller, Fink & Jacobs, because such transfers would tend to prolong the existence of the Respondents' respective positions at the Bank or would safeguard the value of the Bank stock owned by Respondents. This argument must be rejected. First, such transfers are specifically allowed by controlling and dispositive precedent. In the Matter of Harold A. Hoffman, Joseph L. Hayes and Alaska Continental Bank, 1990 F.D.I.C. Enf. Ed. (P-H) ¶5140 at A-1493, on appeal, Hoffman v. Federal Deposit Insurance Corporation, 912 F.2d (9th Cir. 1990), the Board of Directors of the FDIC specifically found that "engaging a law firm to challenge the State Banking Authority or the FDIC does not constitute an unsafe and unsound banking practice." Second, it is difficult to conceive of circumstances in which it would not be to the benefit of a bank's management to

   Summary judgment on all issues in favor of Respondents Janice J. France, Berrien E. Moore, Leonard S. Sands and Ada P. Sands is granted, and the Notice in this proceeding is dismissed with prejudice in so far as it relates to each of the Respondents.
   Done at Rosslyn, Virginia, this 22nd of March, 1991.
   /s/ Steven M. Charno
   Administrative Law Judge