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FDIC Enforcement Decisions and Orders

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   [5178] In the Matter of Maine National Bank, Portland, Maine, and Bank of New England, National Association, Boston, Massachusetts, Docket No. FDIC-91-100kk (4-28-92).

   FDIC Board grants special permission to appeal on an issue of first impression under the cross-guarantee provisions of FDI Act Section 5(e); rejects ALJ's recommendation and finds holding company's trustee in bankruptcy lacks standing to intervene in the proceeding between FDIC as receiver of an insolvent institution and FDIC as issuer of a cross-guarantee assessment notice against insolvent bank's affiliated institution; and orders the affiliate bank to pay estimated loss of insolvent bank. (The motions to dismiss were granted in part and denied in part by the United States District Court for the District of Massachusetts, 825 F.supp. 384.)

   [.1] Practice and Procedure—Interlocutory Appeal—Standard
   Special permission to appeal is granted where there is a legal issue of first impression that is of general application and the appeal involves a misapplication of law which severely prejudices the rights of the FDIC.

   [.2] Bank Insolvency—Cross-Guarantee—Standing of Holding Company—Statutory Scheme
   FDI Act section 5(e) imposes liability for the costs of a bank's failure on commonly controlled insured depository institutions; the common parent holding {{6-30-92 p.A-1979}}company has no liability for the assessment and no right to participate in an assessment hearing.

   [.3] Bank Insolvency—Cross-Guarantee—Standing of Holding Company—Interest of Shareholders
   The FDIC as receiver of an insolvent institution must administer assets to protect creditors, depositors and shareholders; the institution's sole shareholder, its holding company's trustee in bankruptcy, may assert his claims against the receiver according to the statutory scheme for receiverships, not in a cross-guarantee proceeding.

   [.4] Bank Insolvency—Cross-Guarantee—Standing of Holding Company—Conflict of Interest
   The FDIC's separate roles as receiver of an insolvent bank and regulator assessing costs against an affiliated institution are not in conflict with each other. Mere allegation that the existence of two roles makes it impossible for the FDIC receiver to represent the holding company's interest is insufficient to require the holding company trustee's participation in the assessment hearing.

   [.5] Bank Insolvency—Cross-Guarantee—Standing of Holding Company—Trustee's Derivative Claim
   Receiver's refusal to file holding company trustee's answer to the notice of assessment against an affiliated bank (i.e., refusal to challenge the assessment) was made after due consideration of the request, and therefore the trustee is not entitled to pursue a shareholder derivative claim.

   [.6] Bank Insolvency—Cross-Guarantee—Scope of Hearing
   The scope of a cross-guarantee hearing is limited to three issues: (1) the amount of loss incurred by FDIC in connection with an insured institution; (2) the liability of commonly controlled institutions for that loss; and (3) the schedule of payments to be made by the assessed institution.

   [.7] Bank Insolvency—Cross-Guarantee—Calculation of Loss
   Revised assessment of loss at $500 million, rather than initial assessment of $1 billion, does not change relevant positions of receiver and trustee of holding company — even the lower assessment far exceeded the assessed institution's equity capital, so Receiver acted properly in declining to challenge the assessment.

   [.8] Bank Insolvency—Cross-Guarantee—FDIC Authority to Assess
   Section 5(e) gives FDIC clear mandate to make cross-guarantee assessments, and it may do so following its procedures governing administrative hearings generally; interests of shareholders are subordinated to the cross-guarantee assessment obligations.
   [.9] Practice and Procedure—Cross-Guarantee—Application of Administrative Procedures Act—Participation of Trustee

   Neither section 5(e) nor the Administrative Procedures Act provides a right for the Trustee to participate in cross-guarantee proceedings; participation of an "interested person" is completely within the discretion of the agency.

In the Matter of

(Insured Depository Institution)
Related to

(Commonly COntrolled Insured
Depository Institution)

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   This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") upon FDIC Enforcement Counsel's Application for Special Permission to Appeal and for Stay of Proceedings ("Application for Special Permission to Appeal") of the Recommended Decision of Administrative Law Judge James L. Rose ("ALJ"). The Recommended Decision granted permission to the Trustee in Bankruptcy ("Trustee") of Bank of New England Corporation, Boston, Massachusetts ("BNEC"), to enter an answer in the above- captioned assessment proceeding under the cross-guarantee provisions of section 5(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1815(e) ("cross-guarantee provisions").
   For the reasons set forth both, the Board grants the Application for Special Permission to Appeal and strikes the Answer of John L. Whitlock as Trustee of BNEC on behalf of BNEC and the Maine National Bank ("Answer"). The Board also exercised its discretion in this case to request supplemental information and has considered the substantive arguments of both parties. The Board finds that the Trustee's challenge to the FDIC's actions pursuant to the cross-guarantee provisions is without merit.


   On January 6, 1991, the Office of the Comptroller of the Currency ("Comptroller") declared the Bank of New England, National Association, Boston, Massachusetts ("BNE"), insolvent and appointed the FDIC receiver for BNE, as required by statute. On the same date, invoking the cross- guarantee provisions, the FDIC in its corporate capacity served BNE's affiliate, Maine National Bank, Portland, Maine ("MNB"), a commonly controlled insured depository institution within the definition of section 5(e) of the FDI Act, with a Notice of Assessment of Liability, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Assessment Notice"), based on loss experienced or an estimate of loss anticipated by the FDIC as a result of the failure of BNE. MNB was assessed a $1,015,900,000 cross-guarantee liability by the FDIC. MNB informed the FDIC that it was unable to pay the assessment which was due and owing to the FDIC. As a result, the Comptroller declared MNB insolvent. The Comptroller closed MNB and appointed the FDIC as receiver for MNB ("Receiver"). Shortly thereafter, BNEC, the common holding company of BNE and MNB, declared bankruptcy and the Trustee was appointed for BNEC.
   The Answer from MNB to the Assessment Notice was due 20 days from the date of service. By letter dated January 25, 1991, the Trustee for the holding company, as the sole shareholder of MNB, asked for an extension of time to file an answer, which was granted by the FDIC Executive Secretary. During the period of the extension, the Trustee made a demand on the FDIC, as Receiver of MNB, that it file an answer raising defenses to the Assessment Notice which he suggested, and requested a hearing. The FDIC, as Receiver, responded to the Trustee by letter dated February 12, 1991, declining to file the answer requested by the Trustee because it determined the defenses raised therein were not "well-founded." The Trustee then purported to file an answer on behalf of BNEC and MNB.
   Enforcement Counsel, representing FDIC in its corporate capacity as assessor, moved to strike the Answer of the Trustee.2 Briefs were filed by Enforcement Counsel and counsel for the Trustee. A hearing on FDIC Enforcement Counsel's Motion to Strike was held before the ALJ on May 15, 1991, in Washington, D.C. On July 8, 1991, the ALJ issued a Recommended Decision and Order denying FDIC Enforcement Counsel's Motion to Strike and permitting the Trustee to represent the interests of MNB in an administrative proceeding under section 5(e) of the FDI Act, 12 U.S.C. § 1815(e)(3)(B). FDIC Enforcement Counsel timely filed with the Board an Application for Special Per-

1 References to the record shall be as follows:
Answer of the Trustee in Bankruptcy — "Answer ¶____."

2 Enforcement Counsel's Motion also sought a stay of proceedings, which request has been mooted by the parties' agreement to stay discovery pending the outcome of this Appeal Application.
{{6-30-92 p.A-1981}}mission to Appeal the Recommended Decision of the ALJ on an interlocutory basis. The Application for Special Permission to Appeal was opposed by the Trustee.
   By letter dated January 31, 1992, the Board informed the ALJ that its review of this case would be assisted by supplementation of the record. The Board requested that the ALJ obtain a written submission from FDIC Enforcement Counsel addressing various aspects of the amount of the cross-guarantee assessment. Counsel for the Trustee was provided an opportunity to respond to the submission. The Board has received and considered the record, including the supplemental materials submitted by both parties.
   On March 30, 1992, the Board received FDIC Enforcement Counsel's Motion for Summary Disposition and Request to Forward Motion. On April 9, 1992, the Trustee filed a Response to FDIC's Motion for Summary Disposition. The Board has determined that this matter is appropriate for disposition on the issue of standing as well as the underlying issues and has made findings consistent with such determination.3


   [.1] The grant of an interlocutory appeal such as the one requested here is an extraordinary action warranted only when the Board's standards have been met. The decision to grant or deny an interlocutory appeal, however, is within the sole discretion of the Board. 12 C.F.R. § 308.31.
   The Board has determined to grant the Application for Special Permission to Appeal because it raises a legal issue of first impression that is of general application and the appeal involves the misapplication of the law which severely prejudices the rights of the FDIC. FDIC-89-144k, 2 P-H FDIC Enf. Dec. ¶8007 (1990); FDIC-88-159e, 2 P-H FDIC Enf. Dec. ¶5095 (1987).4


A. FDIC Enforcement Counsel's Position

   FDIC Enforcement Counsel contends that neither BNEC nor the Trustee is a proper party to this administrative proceeding because (1) section 5(e) of the FDI Act limits participation in the cross-guarantee procedures to depository institutions; and (2) the Receiver, which "stand[s] in the shoes of MNB" by statute, is charged by law with the representation of the interests of the shareholders of MNB. Standing alone, the Receiver's refusal to file the answer requested by the Trustee or otherwise to contest the cross-guarantee liability is not a sufficient basis to permit the Trustee to contest the action. Moreover, argues FDIC Enforcement Counsel, the Trustee's action is really a "back-door" challenge to the closing of MNB by the Comptroller, and such a challenge cannot be heard in this restricted administrative proceeding. Finally, FDIC Enforcement Counsel points out that assuming, arguendo, the truth of the Trustee's allegations that the amount of loss assessed by the FDIC should be reduced by the amount of uninsured deposits, MNB would still have been insolvent as a result of the FDIC's (reduced) assessment, and the Trustee would be in no different position than he is currently.

B. The Trustee's Position

   The Trustee claims that he is a proper party because the FDIC as Receiver has refused to defend the assessment action and, in any event, could not effectively defend due to the inherent conflict of interest between the FDIC's responsibilities as Receiver and as issuer of the Assessment Notice. The Trustee claims the right to proceed through a shareholder derivative action, as well as by an independent action as a shareholder whose interest and injury is separate from that of BNEC. He asserts that, without his participation, there can be no challenge

3 Because of its "eleventh-hour" filing, FDIC Enforcement Counsel's motion has essentially been superseded by the Bank's action on the interlocutory appeal. The Board analyzed the appropriateness of summary disposition sua sponte and reached a conclusion similar to the one ultimately urged by FDIC Enforcement Counsel in its motion. Absent extraordinary circumstances, the Board will not address a motion for summary disposition without first receiving a recommended decision on the motion.

4 The Trustee's Answer raised Constitutional challenges to section 5(e) of the FDI Act and the FDIC's actions thereunder. This administrative proceeding is not the proper forum for these challenges. Moreover, the Trustee has determined that he "will pursue this [Constitutional] claim in an appropriate federal court." Trustee's Opposition at 13.
{{6-30-92 p.A-1982}}to the FDIC's assessment. Trustee's Opposition at 7.
   The Trustee seeks a hearing so that he can further examine the amount of the loss, find out "why the FDIC exercised its power in this case to assert liability [against MNB] and in some other cases it hasn't," and why "the FDIC exercised its discretion apparently to demand immediate payment." Hearing Tr. at 30–32.

C. The Recommended Decision

   The ALJ denied Enforcement Counsel's Motion to Strike the Trustee's Answer because he found that "[i]f accepted, the FDIC's contention would result in a grant of absolute authority to the FDIC in assessment order actions which render the target banks insolvent, precluding them from having these actions aired in an administrative adjudication." R. D. at 3. He stated his assumption that a "Receiver would never challenge a cross-guarantee assessment." R. D. at 5. On his findings that the insolvency of MNB was caused by the FDIC's cross-guarantee assessment, and that MNB would not have been closed by the Comptroller absent the assessment of liability, the ALJ determined that the Trustee was a proper party to intervene because it had a substantial interest in the proceeding which would be impaired by his exclusion. R. D. at 1–2, 4, 5, and 8. Therefore, the ALJ did not address the Trustee's derivative claims. The ALJ concluded that:

    The explicit direction of Congress in Section 1815(e) that the FDIC prescribe procedures for a "hearing on the record" is tantamount to requiring an opportunity for a formal Administrative Procedure Act ("APA") proceeding. Under the APA, the FDIC does not have absolute and unreviewable authority to decide issues of liability and amount of loss where the target bank's assessment results in its insolvency. There must be a procedure available for these issues to be resolved in a trial type setting. R. D. at 7–8.


A. The Trustee Does Not Have Standing

   The ALJ determined that the Administrative Procedure Act ("APA") requires a hearing in which the Trustee, as an "interested person" within the meaning of the FDIC's Rules of Practice and Procedure ("FDIC Rules") should be permitted to participate. The Board disagrees, and has determined that neither the APA nor the FDIC Rules create a right of participation by the Trustee. At best, his participation would be discretionary.

1. The Statutory Scheme

   [.2] Section 1815(e), added to the FDI Act by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), was intended to give the FDIC a source of protection in light of the anticipated strains on the insurance fund. It is designed to ensure that the deposit insurance fund does not suffer disproportionate losses in situations where assets that could be used to offset bank-failure costs are held in commonly controlled depository institutions. The language of the statute is clear and specific, and limits participants in a cross-guarantee assessment to depository institutions:

    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 in accordance with this subsection.
12 U.S.C. § 1815(e)(1)(B) (emphasis added).
   Thus, the FDIC may assess the institutions which it insures. This is a fair exchange for the benefit of federal deposit insurance. The liability in this case is MNB's, not its parent holding company's.
   The independence of corporations within a holding company structure provides an advantage to the holding company. It insulates the holding company from the liabilities of others within the structure. For example, there has been no assertion in this case that the Trustee is responsible for claims against MNB or BNE, and to be sure, the Trustee has not volunteered to share these burdens. Why then, should the holding company be able to upset the statutory scheme and challenge the assessment issued to the insured depository institution?
   The cross-guarantee provision of FIRREA was enacted in August 1989. The Trustee (and the holding company he represents) has been on notice for two years that each of the commonly controlled depository institutions in the holding company network would be subject to liability if one of them failed. BNEC obviously thought that the risk of a cross-guarantee assessment was a risk worth taking, in return for federal deposit insurance of its bank subsidiaries. Thus, {{6-30-92 p.A-1983}}BNEC, as sole shareholder of MNB, benefited from a well-balanced bargain: MNB was covered by federal deposit insurance and in return was subject to the federal statutes and regulations governing national banks, including the cross-guarantee provision. Now MNB and BNEC must abide by the terms of a statute which provides for an assessment of MNB and a hearing for MNB.

2. Receiver Represents the Shareholders

   [.3] Once a receiver for a national bank is appointed, the receiver 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).5 Despite this unambiguous language, the Trustee argues that he should be allowed to defend these proceedings as the representative of the shareholder of MNB, and states that his interests are not adequately represented by the Receiver.
   The Trustee acknowledges, however, that his interest is as the sole shareholder of MNB and he is attempting to protect the value of BNEC's stock interest in MNB. Hearing Tr. at 16.6 Beyond the Trustee's argument regarding an "inherent" conflict of interest in the FDIC's dual capacity which is addressed below, he makes no argument which distinguishes him from any other shareholder attempting to assert a claim against a receivership. As such, the Board sees no reason to exempt the Trustee from the statutory scheme enacted by Congress for the administration of insolvent national banks. The Receiver has a duty to administer the receivership assets to protect creditors, depositors, and shareholders. If BNEC has a claim against the receivership or the Receiver there is a well-established statutory process for it, or its Trustee, to assert such claims. 12 U.S.C. § 1821(d).

3. The Conflict of Interest

   [.4] The Trustee seems to argue that in drafting the legislation, Congress only contemplated that the cross-guarantee assessment would be issued against an open institution, which would be able to defend itself in an assessment proceeding. The Trustee implies, and the ALJ agreed, that Congress never intended this provision to operate against an institution in receivership, especially where the FDIC is appointed the receiver, putting the FDIC on both sides of the assessment proceeding.
   The Board finds nothing in the statute or the legislative history to support the Trustee's theory. The Trustee's argument is premised on the notion that Congress could not have intended the FDIC to be on both sides of an assessment, and even if it did, the inherent conflict is so pervasive that the Receiver's actions must be subject to challenge, even by a party outside the scope of the statutory scheme. This premise is incorrect.
   The fact that the FDIC frequently functions in separate capacities has long been judicially recognized and accepted.7 In passing the legislation directing the appointment of the FDIC as receiver for national banks (and more recently in enacting the cross-guarantee provision of FIRREA), Congress was fully cognizant of the dual role of the

5 See United States v. Weitzel, 246 U.S. 533 (1918). See also Renfro v. FDIC, 773 F.2d 657, 660 (5th Cir. 1985) (court notes with approval shareholder's concession that FDIC owns Despite this shareholder's derivative causes of action.); FDIC v. Hatmaker, 756 F.2d 34, 36 n.2 (6th Cir. 1985); In Wittnebel v. Loughman, 9 F. Supp. 465, aff'd, 80 F.2d 222, cert. denied, 56 S. Ct. 590 (1935), the court stated "[i]ts [the bank's] affairs are in the charge of the receiver rather than of its officers and directors, and the receiver deals with its assets on behalf of creditors and stockholders."

6 The Trustee attempts to characterize his injury as something other than the diminution of the value of his stock holdings: "This is a direct injury to BNEC, because, among other things, it reduces the value of certain operating subsidiaries of BNEC which supplied services to [BNE and MNB] and which are assets of the Trustee." Trustee's Opposition at 9–10. The Board fails to see how this alleged "direct injury" differs significantly from the Trustee's recognition that the closing of MNB reduced the value of his shares of MNB. Id. at 3. Something more than a general reduction in the value of shares or assets must be shown to sustain a shareholder's individual cause of action. Gaubert v. United States, 885 F.2d 1284 (5th Cir. 1989). The Trustee's attempt to make this showing, falls short of the mark. The Board finds the statement of Trustee's counsel at the hearing to be a more accurate description of his alleged injury: "[u]ntil we get that [cross-guarantee assessment] bill wiped off the books we are not going to be able to get the remaining money coming to us as the shareholder of [MNB]." Hearing Tr. at 16.

7 See, e.g., Portobello Road at Silvercreek v. FDIC, (D. Colo. 1990); FDIC v. Berry, 659 F. Supp. 1475 (E.D. Tenn. 1987) ("that the FDIC/Receiver and FDIC/Corporation...are two separable entities is well accepted law"); FDIC v. Hudson, 643 F. Supp. 496 (D. Kan. 1986) (the FDIC has the "authority to act simultaneously in a dual capacity as federal insurer and as receiver of state and national banks"); First Western Federal Savings Bank v. FDIC, 678 F. Supp. 224 (D.S.D. 1988) (the FDIC may act simultaneously as both receiver and corporation).
{{6-30-92 p.A-1984}}FDIC. The court in Landy v. Federal Deposit Insurance Corporation, 486 F.2d 139, 149 (3d Cir. 1973) makes this perfectly clear:
    ...Congress has explicitly authorized the FDIC to act as receiver, 12 U.S.C. § 1819, and has required the Comptroller to appoint the FDIC as receiver of any insured national bank which is closed. 12 U.S.C. § 1821(c). Thus, under the federal banking laws the FDIC has the right to act for a closed (insolvent) bank and its stockholders. Moreover, in specifically providing in § 1821(d) that the FDIC as receiver should " to itself for its own account such portions of the amounts realized from...[the] liquidation as it shall be entitled to receive on account of its subrogation to the claims of depositors ...", Congress recognized that the FDIC would be functioning in the dual role of receiver and creditor. The FDIC's role as receiver had, as the district court aptly observed, "[t]he primary marshal funds for distribution, a goal which would include protection of shareholders." Plaintiff's argument that as shareholders of ENB they should not be compelled to rely upon the FDIC to prosecute their derivative claims is essentially predicated on the proposition that the FDIC is a "major creditor of Eatontown" and as such its interest in recovering against defendants will be "limited to its losses arising out of the payment of the insurance claims of Eatontown's depositors." Implicit in this argument is the assumption that the FDIC will not carry out its statutory duties as receiver, obligations which transcend the interest of both creditors and stockholders. We will not make such a presumption in the absence of factual allegations supporting it. [Emphasis added.]
   In carrying out their statutory mandate, all agencies, including the FDIC, are entitled to a presumption "that they will act properly and according to law." FCC v. Schreiber, 381 U.S. 279, 296 (1965). As the Supreme Court said in dismissing a due process challenge to the Federal Home Loan Bank Board's dual roles of appointing conservators and presiding over hearings to determine whether the conservators were prop erly appointed, it is inappropriate for court to "assume in advance that an administrative hearing may not be fairly conducted." Fahey v. Mallonee, 332 U.S. 245, 256 (1947).
   Congress has determined that the separate roles of the FDIC could be appropriately fulfilled. The Trustee merely alleges that the existence of the two roles makes it impossible for the FDIC Receiver to represent the Trustee's interest. These allegations without support are insufficient to require the Trustee's participation in this hearing process.8
   Moreover, that the FDIC in one capacity has regulated and assessed an open institution, and in another acts as its receiver after it is closed to review its assets and liabilities and to contest those liabilities which are inappropriate, is essentially no different than in the usual bank receivership and poses no other significant issues than does the usual bank receivership. That the liability here happens to arise as a result of a cross-guarantee assessment does not make it significantly different from any other liability a bank might have that was assessed or levied by the FDIC, such as insurance fees due and owing by a closed institution.9

4. Trustee's Direct Standing

   The Trustee asserts an independent cause of action on behalf of BNEC based on the alleged injury to BNEC resulting from the FDIC's assessment, whose alleged purpose was to "render MNB insolvent so that the FDIC could take over the bank and sell its

8 General or conclusory allegations of a conflict of interest will not suffice to shift the managerial responsibilities from a corporate board of directors or from the Receiver. Levine v. Smith, 591 A.2d 194, 207 (Del. Supr. 1991). In Gaubert v. Federal Home Loan Bank Bd., 863 F.2d 59 (D.C. Cir. 1988), the United States Court of Appeals for the District of Columbia stated that "most other courts that have confronted the question have held that mere allegations or conclusory statements regarding director's dual allegiances, self-interest, or control by others is insufficient" [to excuse the demand requirement]. (Citations omitted). The court further explained that "mere allegation of improper motives are especially inadequate when the challenged action is not facially suspect: if there are conceivably valid corporate reasons to explain the board's position, the plaintiff must clearly show the contrary." (Emphasis in original). See Heit v. Baird, 567 F.2d 1157 (1st Cir. 1977).
   The Gaubert discussion of the responsibilities of the board of directors is analogous to the responsibilities of the Receiver in this case. Absent "particularized allegations and specific facts," the Board has no basis for assuming that the receiver will fail to carry out its fiduciary responsibility to the fullest extent. Grossman v. Johnson, 674 F.2d 115 (1st Cir.), cert. denied, 459 U.S. 838 (1982).

9 In such cases, the obligation of the institution to pay insurance fees which are in arrears survives the closing and the receiver must pay past due premiums.
{{6-30-92 p.A-1985}}assets for its own benefit." Trustee's Opposition at 7.
   The string of cases cited by the Trustee in support of this position all deal with standing of a shareholder to challenge the appointment of a receiver. See Trustee's Opposition at 8–9. That is not at issue in this proceeding. Indeed, the Trustee's use of these cases supports the claim of FDIC Enforcement Counsel that the Trustee's action is a thinly disguised attempt to challenge the actions of the Comptroller. The Board has no jurisdiction to address this issue.
   In recognition of the general rule of law that shareholders have no right to sue for damages suffered by a corporation which result solely in the diminution of the value of the corporation's shares, Trustee's Opposition at 9, the Trustee characterizes his action as one "not simply [to seek redress for] the reduce[d] value of MNB." Id. Rather, he asserts independent standing to file an answer on his own behalf based upon a direct injury to BNEC because "[the seizing of MNB and transfer of its assets to a bridge bank] reduce[d] the value of certain operating subsidiaries of BNEC which supplied services to [BNE and MNB] and which are assets of the Trustee." Id.
   This is an assertion without merit. BNEC's operating subsidiary had a contractual relationship with MNB solely as a service provider. The notion that a third-party vendor of a defunct corporation has standing to challenge the failure of that corporation is without any support in the law.10 The Trustee's theory would give standing to challenge the Assessment Notice to the supplier of coffee to MNB, the maintenance crew, or the security guards, among others, who had contract rights no different than BNEC's operating subsidiary. This is not what Congress intended. To the contrary, a party to a contract with a failed institution allegedly injured by a breach is limited by statute to the remedies provided under 12 U.S.C. § 1821 (d). The Trustee may assert his claim for payment under the contract to the Receiver pursuant to that statute. He cannot, however, sustain an independent cause of action challenging the cross-guarantee liability assessment.
   Moreover, because the operating subsidiary is an "affiliate" of MNB, its status in relation to the cross-guarantee assessment is specifically stated in section 5(2)(C)(i)(II) of the FDI Act. The Trustee as shareholder and the operating subsidiary "affiliate" are relegated to the same class of creditors, whose priority is equally inferior to the liability of the assessment.

5. Trustee's Derivative Claims

   [.5] As his primary argument, the Trustee asserts that because the FDIC "is on both sides of the assessment, the only way to challenge the FDIC's action is through a shareholder derivative suit." Trustee's Opposition at 4 n.3. By analogy to shareholder derivative actions, he asserts his right to defend against the assessment where the Receiver has failed to do so.11 The law governing derivative actions has been raised by the Trustee. Therefore, the Board will assume a right to a derivative claim for purposes of this decision, but will address the issue only insofar as is necessary to find that under governing principles of law, the Trustee's claim would be insufficient and subject to dismissal.
   The Trustee alleges that he has made the proper demand on the Receiver to assert his defenses, and that once the Receiver declines to raise them, he may do so. This is incorrect. A shareholder derivative suit is a unique equitable remedy in which a shareholder asserts on behalf of a corporation a claim belonging not to the shareholder, but to the corporation. Levine v. Smith, 591 A.2d 194.
   The procedural prerequisites of standing to maintain a derivative shareholder's suit are contained in Rule 23.1 of the Federal Rules of Civil Procedure and various state statutes, the most significant being Dela-

10 The Board notes that the Trustee did not cite any authority for this proposition.

11 The Trustee recognizes that shareholder derivative suits are generally actions in which the shareholders are plaintiffs, rather than actions in which the shareholder asserts a right to answer an assessment notice. The Trustee therefore argues that his Answer raises "affirmative defenses" and should be treated like a complaint. Trustee's Opposition at 3 n.2. Counter-claims, not affirmative defenses, are in the nature of a complaint. The issues contained in the Trustee's Answer are not in the nature of counter-claims and would not be treated like a complaint in a court. For the purposes of this discussion only, however, the Board will treat the Trustee's assertions as if they were allegations of a plaintiff shareholder.
{{6-30-92 p.A-1986}}ware Chancery Court Rule 23.1.12 Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1166 (Del. Supr. 1989). It is well established that the requirement of pleading wrongful refusal of demand is designed to strike a balance between a shareholder's claim of right to assert a derivative claim and a board of directors' duty to decide whether to invest the resources of the corporation in pursuit of the shareholder's claim of corporate wrong. Spiegel v. Buntrock, 571 A.2d 767, 773 (Del. Supra. 1990); Aronson v. Lewis, 473 A.2d 805, 812 (Del. Supr. 1984).
   The decision is predicated upon and is "inextricably bound to issues of business judgment and the standards of that doctrine's applicability." Id. As long as the board of directors or, here, the Receiver, acts in good faith and on an informed basis, the shareholder is bound by the decision. As stated by the Delaware Supreme Court, if a board's decision can be "attributed to any rational business purpose," a court will not substitute its judgment for that of a board. Sinclair Oil Corp. v. Levine, 280 A.2d 717, 720 (Del. Supr. 1971) (emphasis supplied).
   Because the Trustee made a demand on the Receiver, the question becomes: Was that demand wrongfully refused? "The focus of a complaint alleging wrongful refusal of demand is different from the focus of a complaint alleging demand futility.... A shareholder plaintiff, by making demand upon a board before filing suit, `tacitly concedes the independence of a majority of the board to respond. Therefore, when a board refuses a demand, the only issues to be examined are the good faith and reasonableness of its investigation.'" Levine v. Smith, 591 A.2d at 212 (citing Spiegel, 571 A.2d at 777).
   In Levine v. Smith, the Delaware Supreme Court's recent and thorough discussion of a shareholder's claim of wrongful refusal, the court dismissed the plaintiff's action on facts quite similar to the facts here. In relevant part, Levine alleged that the General Motors' ("GM") board of directors, after receiving his demand letter, "did not undertake an investigation and did nothing." Id. The reply letter from the board stated: "following review of the matters set forth in your...letter, the Board...unanimously determined that an attempt to rescind, or litigation...concerning [the repurchase agreement] is not in the best interests of the Corporation." The court found that the reply letter is "inconsistent with, and thus diminishes the force of, plaintiff's allegation that the Board `did nothing,'" and that the response refusing Levine's demand "`following review of the matters'...reflects on its face the GM board's consideration of Levine's demand." Levine v. Smith, 591 A.2d at 214. On this basis, the court held that "the only reasonable inference to be drawn from this document is that the GM Directors did act in an informed manner in addressing Levine's demand. The business judgment rule accords directors the presumption that they acted on an informed basis." Id. The court affirmed the dismissal of Levine's complaint for failure to plead particularized facts sufficient to create a reasonable doubt that the GM board's rejection of Levine's demand was wrongful. Id.
   The Board has considered the demand of the Trustee and the response of the Receiver. The Receiver stated:
    We have reviewed applicable law and have concluded that the FDIC in its corporate capacity has the requisite authority to issue the Notice of Assessment of Liability. Further, we have considered your draft answer and particularly the claims that FDIC corporate's actions taken pursuant to 12 U.S.C. § 1815(e) violated the due process and equal protection clauses of the Fifth Amendment to the Constitution. Based on our review of applicable law, we do not believe that your conclusions are well founded.
   On this basis, it determined not to file the Trustee's answer.13 This is an appropriate judgment for the Receiver. The Receiver is not required to raise all defenses, or to pursue frivolous claims—by the holding company, as shareholder or otherwise—that will not monetarily benefit the claimant because of statutorily specified priorities. Nor is the Receiver required to object to an assessment on the sole ground that a shareholder wishes it to do so.
   The ALJ is correct in that, without the participation of the Trustee, and absent the

12 Rule 23.1 of the Federal Rules of Civil Procedure is identical to Chancery Court Rule 23.1 in all parts relevant to this proceeding.

13 FDIC Enforcement Counsel suggested at the hearing that the Receiver may have determined to conserve the assets of the receivership rather than pay for a not well-founded challenge to the assessment. Hearing Tr. at 23.
{{6-30-92 p.A-1987}}special circumstances of this case, the crossguarantee proceeding would have concluded with the Receiver's decision not to answer the Assessment Notice. That is not, however, an inappropriate or unjust outcome.
   The Receiver's failure to answer may be improper if he could have challenged the assessment to such a degree that the Trustee would receive a distribution.14 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 the Trustee's Answer, or an answer on behalf of the receivership. As discussed below, the assessment would have to be reduced to near zero to enable the Trustee to share in the receivership assets.
   In light of the improbability of such a reduction, the Board finds that the Receiver's consideration of the Trustee's demand was satisfactory and therefore, the Trustee is not entitled to pursue a derivative claim.

B. The Trustee's Challenges Have No Merit

   The Board has determined that the Trustee does not have standing to participate in these proceedings. Ordinarily, consideration of this matter would conclude at this point. However, because of the unique posture of this case, and because resolution of this limited administrative matter has been protracted, the Board exercised its discretion to request supplementation of the record. It did so in the interests of administrative efficiency and economy in order to consider a full record on the limited issue in contest, and reach a decision on the merits. The Board has considered the evidence and arguments of FDIC Enforcement Counsel and the Trustee. With the exception of the amount of the estimate of loss, there are no factual disputes regarding the key issues.15 Essentially the Trustee raises legal issues which can be disposed of now. With regard to the amount of the loss estimate, the Board concludes that, even conceding the Trustee's argument for the sake of discussion, his challenge is meritless.

1. The Trustee Had Adequate Opportunity to Respond

   FDIC Enforcement Counsel had an opportunity to submit to the Board additional information addressing the amount of the loss, and the Trustee had an opportunity to respond to the submission of FDIC Enforcement Counsel. Thus, even if the Trustee had standing, he has been provided the opportunity to be heard which he seeks.16
   The Trustee has been given ample opportunity to make his case and to challenge the comprehensive affidavits submitted by FDIC Enforcement Counsel. However, he failed to do so, and the record before the Board contains only the FDIC's uncontroverted affidavits. The Trustee complains that "meaningful discussion of the affidavits" submitted by FDIC Enforcement Counsel is "impossible because the information supporting them, such as the underlying loss estimates, is within the possession of the FDIC." Trustee's Resp. at 2. This is contrary to the facts. The information relied upon by the FDIC in estimating its loss was generated by BNE itself. The parent holding company of MNB and BNE had access to all of the underlying

14 This is really what the Trustee is seeking when he claims "until we get that [cross-guarantee assessment] bill wiped off the books we are not going to be able to get the remaining money coming to us as the shareholder of [MNB]." Hearing Tr. at 16.

15 Section 5(e)(1) establishes the prerequisites for cross-guarantee liability: loss arising from the default of a commonly controlled insured depository institution. The Trustee admits that BNE and MNB were commonly controlled insured depository institutions. Answer ¶13. The Trustee also admits that BNE was deemed to be insolvent by the Comptroller and that, on January 6, 1991, the FDIC was appointed receiver. Answer p 15. This is sufficient to establish loss. Although paragraph 16 of the Answer states that the Trustee is without sufficient knowledge or information to form a belief as to whether BNE was "in default," the FDI Act defines "default" as "any adjudication or other official determination by...the appropriate Federal banking agency...pursuant to which a conservator, receiver, or other legal custodian is appointed for an insured depository institution...." Thus, by the admissions in paragraph 15 of the Answer, the Trustee has admitted the allegations contained in paragraph 6 of the Assessment Notice, Thus, the elements of liability have been admitted, leaving only the amount of loss in controversy.

16 In his Response to the FDIC's Motion for Summary Disposition and Request to Forward Motion, the Trustee reiterates his reading of the APA. He cites 5 U.S.C. § 556(d) as entitling "a party" to "participate in the hearing, submit evidence, and cross-examine witnesses." Trustee's Sum. Disp. Resp. at 2. As discussed in section VII below, the board has determined that the Trustee is not a "party" to this proceeding, making § 556(d) inapplicable. Moreover, even for parties, cross-examination is limited to that which "may be required for a full and true disclosure of the facts." 5 U.S.C. § 556(d). The Board has determined that cross-examination is not necessary on this record.
{{6-30-92 p.A-1988}}data generated by MNB and BNE at the time of the failure. The Trustee admits that "during better times the holding company had access to information about its subsidiary banks," but complains that "the situation changed dramatically when the banks were closed and the holding company was forced into bankruptcy." Trustee's Sum. Dips. Resp. at 5. The information upon which the assessment was based is preclosing data which the Trustee admits was available to BNEC. The post-closing data about which he complains is irrelevant to this issue. Indeed, the portions of BNE's last three call reports which demonstrated its condition was rapidly deteriorating were required to be published in a local newspaper pursuant to 12 U.S.C. § 161. This information was available to BNEC as a matter of public record.
   Moreover, the affidavits and supporting documents submitted to the Board were provided to the Trustee so that he would have the opportunity to review and respond to them. That he failed to do so is unfortunate, but does not negate the fact that he had the opportunity and the information necessary to do so.
   The Trustee states that the data received from FDIC Enforcement Counsel are insufficient because they do not provide underlying support for the estimated loss on gross assets of BNE. Trustee's Sum. Disp. Resp. at 4. The Board disagrees and finds that FDIC Enforcement Counsel has provided a rational basis for the FDIC's determination of the estimated losses. The estimated loss on gross assets provided by a Total Asset Purchase and Assumption ("TAPA") review is the result of an on-site statistical sampling by which the FDIC's Division of Liquidation ("DOL") establishes the value of certain variables: for example, whether a loan is likely to default, the value of loan collateral, the time required to obtain title to collateral, cost of selling assets, and liquidation expenses, etc. It is analogous to the process by which bank examiners classify loans, which has been recognized by the courts to be within the specific expertise of the FDIC as the "type of agency[] judgment ...involv[ing] the exercise of discretion, technical expertise and informed prediction about the likely course of future events." Sunshine State Bank v. FDIC, 783 F.2d 1580, 1582 (11th Cir. 1986).
   In Sunshine, the court held that because of the unique experience of bank examiners, their loan classifications were subject to deference and could not be overturned unless they were shown to be arbitrary and capricious or outside a zone of reasonableness. Id. at 1581. The United States Supreme Court has also consistently recognized the deference which should be afforded to judgments and predictions made by an agency within its area of special expertise. See, e.g., Baltimore Gas & Electric Co. v. Natural Resources Defense Council, Inc., 462 U.S. 87 (1983); Federal Communications Commission v. National Citizens Committee for Broadcasting, 436 U.S. 775 (1978); See also, Franklin Federal Savings Bank v. Director, Office of Thrift Supervision, 927 F.2d 1332, 1337 (6th Cir. 1991). Because this estimate of losses on assets is necessarily a question of probabilities, the DOL experience in determining its statistical sampling and its loss and recovery factors provides a rational basis for the TAPA review number.
   As is made clear by the affidavit submitted by Alvin E. Kitchen, Associate Director of the FDIC's Division of Accounting and Corporate Services ("Kitchen Affidavit"), however, 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 BNE's failure has been modified by the purchase and assumption agreement ("P & A") with Fleet/Norstar Financial Group, Inc., Providence, Rhode Island ("Fleet/Norstar").
   As a result of a formal bidding process conducted by the FDIC, Fleet/Norstar was selected on April 22, 1991, to purchase certain assets and assume certain deposits and other liabilities of the BNE group of banks. The Kitchen Affidavit describes the modified loss estimate as a result of the P & A. It projects a half billion dollar loss. Kitchen Affidavit ¶8. This modified estimate is also the product of agency judgment and experience and must be given deference. Even the revised loss estimate of approximately half a billion dollars depends upon the assumption that "all goes as projected over the next 3 years - attributable to the default of BNE-Boston." Kitchen Affidavit ¶8. But "the future is not subject to proof" today, Missouri-Kansas-Texas Railroad, Co. v. United States, 632 F.2d 392, 406 (5th Cir. 1980). The Kitchen Affidavit provides a rational basis for predicting future losses; section 5(e)(2)(D) of the FDI Act provides a
{{6-30-92 p.A-1989}}means for adjusting predictions to actual experience over time. Significantly, Mr. Kitchen points out that on July 12, 1991, the date of the P & A agreement, the FDIC was left with a pool of assets totalling approximately $5 billion which Fleet/Norstar declined to accept because they were classified according to the internal loan rating standards of the failed banks. These troubled assets are being managed and liquidated through a servicing agreement with Fleet/ Norstar. For three years after the P & A, Fleet/Norstar may transfer certain loans which become classified to this asset pool. At the time of the P & A, the book value of the loans which Fleet/Norstar estimated as eligible for transfer was approximately $6.6 billion.17 Looking at the transaction on July 12, 1991, six months after the bank failures, in light of the $3.428 million in cash the FDIC was required to provide to balance the assets to liabilities assumed by Fleet/Norstar ("net commencement day funding"), and Mr. Kitchen's estimate of a $501 million loss to the FDIC, it is fair to conclude that the possibility of reducing losses to MNB's $65 million in equity is almost zero. Kitchen Affidavit ¶1.

2. The Scope of the Hearing

   [.6] The administrative hearing under section 5(e) of the FDI Act, 12 U.S.C. § 1815(e), is limited by its terms to three issues: (1) the amount of any loss incurred by the FDIC in connection with an insured depository institution; (2) the liability of commonly controlled depository institutions for the amount of such loss; and (3) the schedule of payments to be made by such commonly controlled depository institution. The Trustee implies that the hearing may address additional issues, but he reads the statute incorrectly. The language of the statute is clear. There is no reason to go beyond the plain language of the statute. 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.
   Therefore, the Trustee's assertion that he is entitled to a hearing on the record with regard to why the FDIC assessed MNB rather than another commonly controlled depository institution, and why the FDIC demanded immediate payment rather than providing for a payment schedule, is not contemplated by the scheme of section 5(e)(3). Significantly, the Trustee admits that both of these issues are within the discretion of the FDIC. Hearing Tr. at 31.

3. The Trustee's Calculation of Loss Does Not Alter His Liability

   [.7] It is clear from the pleadings that the only issue for hearing is the amount of the loss incurred by the FDIC, which was the basis for the assessment. The Trustee asserts that "more than" $300 million of uninsured deposits were improperly paid. He alleges that the FDIC decided to protect uninsured depositors of BNE by agreeing to insure all deposits in excess of the statutory maximum contained in 12 U.S.C. § 1821(a), and other creditors including foreign depositors. Thus, asserts the Trustee, the FDIC inappropriately increased the anticipated loss to the FDIC and the assessment against MNB.18 Answer ¶21–24. As discussed below, the record before the Board plainly does not support the Trustee's assertion.
   In response to the Board's request for supplemental information, FDIC Enforcement Counsel submitted the affidavit of George Unthank, the Assistance Transaction Specialist who had responsibility in January 1991, for preparing the estimated loss to the FDIC resulting from the failure of BNE.    Mr. Unthank provided the Board with a detailed description of the manner in which the estimated loss to the FDIC and the corresponding amount of the assessment was determined. Unthank Affidavit ¶¶9–14. Specifically, Mr. Unthank states that the $1,015,900,000 loss figure "does not include the loss associated with uninsured deposits or foreign deposits." Unthank Affi-

17 Fleet/Norstar sold shares of stock to provide a portion of the capital necessary to fund the P & A. Its public prospectus, dated June 13, 1991, explained in detail: the FDIC assistance package, the unaudited financial information available regarding the failed banks and the approximately $4.6 billion of troubled loans that would not be purchased but would be liquidated under a servicing agreement. All of this information was available to the Trustee.

18 In none of its submission does the Trustee support these allegations with any facts, or evidence. In the Trustee's Response, however, he claims this description of his position is "incorrect." Trustee's Resp. at 2. The Board has reviewed the characterization of the Trustee's Second Defense.
{{6-30-92 p.A-1990}}davit ¶14. The financial data submitted by Mr. Unthank in support of his affidavit (much of which is data prepared by BNE) corroborates his narrative description. See Unthank Affidavit Attachments. Thus, the record substantiates that there is no basis in fact for the trustee's allegation that uninsured and/or foreign investments were included in the amount of the estimated loss.19
   The record before the Board contains the Reports of Condition and Income prepared by the Bank as of September 30 and December 31, 1990. FDI Ex. Nos. 3 and 4. These documents demonstrate that at the time of the assessment the Bank's total equity capital equalled approximately $65 million. Even assuming, arguendo, that the $300 million of uninsured or foreign deposits contested by the Trustee were subtracted from the assessment, the FDIC assessment would have approximated $715.9 million, substantially in excess of the $65 million in equity which MNB had at the time of its closing. Answer ¶5. The Bank would still have been grossly insolvent and subject to closure by the Comptroller. The alleged injury to the Trustee caused by the reduced value of certain operating subsidiaries of BNEC (after the closing of MNB), or caused by the diminution of the value of his MNB stock (after the closing of MNB), would be no different if the loss were calculated as the Trustee proposes.
   In his Response to FDIC's Submission to the Board, the Trustee protests the characterization that this is his "only challenge" to the assessment. Trustee's Resp. at 2. The Board has carefully reviewed the pleadings and additional submissions. As discussed below, the Trustee's arguments do not present any genuine substantive or procedural challenge to the assessment.

4. The FDIC's Actions Were Not
Arbitrary or Capricious

   The Trustee states that the affidavits "do not even purport to address [his] claim that the assessment of MNB was arbitrary and capricious." Trustee's Resp. at 2. The Board disagrees and finds that the affidavits and the accompanying exhibits provide substantial evidence of the rational basis for the assessment. In addition, as discussed previously, the Board finds that the decision to assess MNB rather than a sister institution, and the decision to demand immediate payment have been left by statute to the sole discretion of the FDIC. Given that the Trustee has admitted the statutory prerequisites to cross-guarantee liability and that the record contains substantial evidence supporting the loss assessment, there can be no valid claim that the assessment was arbitrary or capricious.

5. The Revised Loss Estimate

   Congress recognized the preliminary nature of the loss calculations upon which an assessment may be based, and provided in the statute for adjustments to the amount of loss. 12 U.S.C. § 1815(e)(2)(D). The supplemental information provided to the Board indicates the wisdom of this statutory scheme. Mr. Kitchen, who is responsible for the accounting and reporting of the liquidation of the BNE receivership, states in his affidavit that there has been a reduction in the amount of estimated loss because a portion of the original loss estimate may be recovered.20 The current revised loss estimate is $501 million. Kitchen Affidavit ¶8. This number may be revised again.21 Moreover, Congress has provided a mechanism by which the FDIC can reimburse MNB for the amount of the assessment MNB has paid to the FDIC in excess of the actual loss the FDIC ultimately suffers from BNE's default.

19 The FDIC's enabling statute explicitly gives it the authority and discretion to use the resources of the Bank Insurance Fund to make additional payments to any claimant or category of claimants in the interest of maintaining stability and confidence in the banking system. 12 U.S.C. §§ 1821(i)(3) and 1823(c); see also FDIC Statement of Policy and Criteria on Assistance to Operating Insured Banks, 51 Fed. Reg. 44, 122 (December 8, 1986), 55 Fed. Reg. 12,559 (April 4, 1990). The Trustee's assertion that inclusion of such amounts in the loss calculation would have been improper is also incorrect as a matter of law.

20 At the time of the failure of BNE, the estimated loss was based upon the assumption that the failure of BNE would be resolved by a payoff of insured deposits and liquidation of assets—the most conservative treatment of anticipated loss—because a purchaser for BNE was not assured. Ultimately, the FDIC entered into a Purchase and Assumption Agreement with Fleet/Norstar under which Fleet/Norstar purchased certain assets of BNE and assumed certain liabilities of BNE. The revision in the calculation of estimated losses reflects this change in the method of resolving the failed institution. Kitchen Affidavit at ¶2.

21 The FDIC acted fully in accordance with the law in calculating its estimate of loss at the time of the closing. The statute takes into consideration that the FDIC must act on the basis of an estimate and provides for subsequent adjustments. 12 U.S.C. § 1815(e)(2)(D).
{{6-30-92 p.A-1991}}
   For purposes of this case, it is significant, however, that the reduced estimate of loss does not change the relative positions of the parties. An assessment of $501 million (rather than $1 billion) would still have been so far in excess of MNB's equity capital at the time it was closed that the chance for a shareholder to recover its investment was virtually nil. With the benefit of hindsight, even at the reduced loss estimate, and again conceding for the argument the $300 million contested by the Trustee, the Receiver acted appropriately in declining to challenge the assessment.

6. The Trustee's Additional Arguments

   [.8] The Trustee makes two additional arguments. First, the Trustee asserts that the FDIC has no jurisdiction to make the assessment. Answer ¶¶21 and 29. This is incorrect. Section 5(e) of the FDI Act is a clear jurisdictional mandate for the assessment action taken. Not only is the FDIC given full discretion to make the assessment, but also it may take such actions, upon the default of a commonly controlled institution, without regard to any factor other than the actual or reasonably anticipated losses incurred in connection with the failure of such commonly controlled depository institution. Thus, the assertions of the Trustee's Answer that the assessment liabilities "are not incurred by MNB voluntarily or in the ordinary course of the operations of MNB", or that they "do not represent and are not based upon preexisting obligations of the MNB to BNEC or BNE," are irrelevant. Answer ¶¶26 and 27.
   Second, section 5(e)(3)(B) of the FDI Act requires the FDIC to "prescribe regulations and establish administrative procedures which provide for a hearing on the record. ..." The Trustee asserts that the FDIC failed to fulfill this statutory requirement because no new regulations were issued. Answer ¶31. FDIC Enforcement Counsel contends that the statute did not require the promulgation of separate regulations and the existing FDIC regulations governing administrative hearings, published at 12 C.F.R. Part 308, satisfy the statutory requirements. The Board agrees.
   The Trustee correctly claims that the FDIC's Statement of Policy Regarding Liability of Commonly Controlled Depository Institution (55 Fed. Reg. 21,934, May 30, 1990) contains no statement regarding the applicability of Part 308 to actions under section 5(e). This is harmless error, however. Given that the Assessment Notice served on MNB specified that the Part 308 procedures were applicable to this section 5(e) action, there was no harm to the Trustee.
   Finally, the Board notes that the injuries of which the Trustee complains flow from the decision of the Comptroller to close MNB. The Board will not permit a "backdoor" attempt at such a challenge in this limited administrative forum. The Board recognizes that the closing of MNB has had an impact upon the holding company. Congress also recognized that exercise of the cross-guarantee would affect a variety of parties and specifically addressed this in section 1815(e)(2)(C) of the FDI Act. The interests of the Trustee shareholder are by statute subordinated to the cross-guarantee assessment obligations. That is a rational position for Congress to have taken. The regulatory scheme was intended to protect depositors, and then, only if there are funds available, the shareholders who must bear the risk of their investment.


   [.9] The ALJ determined that the APA requires a hearing in which the Trustee, as an "interested person" within the meaning of the FDIC regulations should be permitted to participate. The Board is unable to find any authority for this conclusion. On the contrary, neither the APA nor the FDIC Rules create a right of participation by the Trustee. At best, his participation would be discretionary, and the Bank has determined there is no persuasive justification for the Trustee's intervention.
   Section 5(e)(3)(A) of the FDI Act provides that all the FDIC's actions under this subsection shall be reviewable pursuant to Chapter 7 of Title 5. Section 5(e)(3)(B) calls for a hearing on the record to review three specific aspects of the assessment process. The Assessment Notice specifically states that "the hearing will be conducted in accordance with the Administrative Procedure Act, 5 U.S.C. §§ 551–559," and the FDIC Regulations. Assessment Notice at 5. The relevant section of the APA, section 554(c) provides:

    The agency shall give all interested parties opportunity for —
    (1) the submission and consideration of {{6-30-92 p.A-1992}}facts, arguments, offers of settlement, or proposals of adjustment when the time, the nature of the proceeding, and the public interest permit; and
    (2) to the extent that the parties are unable to determine a controversy by consent, hearing and decision on notice and in accordance with section 556 and 557 of this title. [Emphasis added.]
   Section 5(e) of the FDI Act makes it clear that only the insured depository institution is a "party" to the assessment proceeding. Thus, section 554(c) of the APA does not provide a right of participation for the Trustee, who is not an "interested party."
   Section 555(b) of the APA refers to "interested persons" and provides that "so far as the orderly conduct of public business permits, an interested person may appear before an agency or its responsible employees for the presentation, adjustment, or determination of an issue, request, or controversy in a proceeding, whether interlocutory, summary, or otherwise, or in connection with an agency function." Thus, in an APA hearing, the participation of an interested person is completely within the discretion of the agency.22
   The FDIC's Rules at 12 C.F.R. § 308.23, setting forth the conditions for intervention, embody the agency discretion provided in section 555 of the APA. The ALJ opines that the Trustee, as the sole shareholder, has an interest in the proceedings, and seeks to provide a vehicle for participation through the FDIC regulations. The ALJ relies upon the discretion granted by § 308.23 to permit the intervention of the Trustee. This reliance is misplaced, because it is based on two faulty assumptions. First, as described in detail, contrary to the ALJ's conclusion, the Trustee's interests are fully and adequately represented by the Receiver. Second, the Trustee's interests were not impaired by the Receiver's decision not to contest the assessment.
   The ALJ assumes that the Receiver cannot adequately represent the Trustee, and therefore concludes that without the Trustee's participation, the requirements of a hearing on the record cannot be met. By statute the Receiver is the representative of the institution's shareholders. 12 U.S.C. § 1821(d). Here the interested party, the Receiver, made a determination not to file an answer. This satisfies the requirements of the APA because the failed institution was given an opportunity for a hearing on the record.


   The Board has fully examined the record and finds nothing contained in it to require or justify participation of the Trustee in this assessment proceeding. Accordingly, the Board finds it appropriate to issue an order GRANTING Enforcement Counsel's Application for Special Permission to Appeal and STRIKING the Answer of John L. Whitlock, Trustee in Bankruptcy for Bank of New England Corporation. The Board further finds the revised amount of estimated loss to be due and owing and ORDERS payment of that amount.


   Upon consideration of the entire record in this case
   IT IS HEREBY ORDERED, that the FDIC Enforcement Counsel's Application for Special Permission to Appeal and for Stay of Proceedings of the Recommended Decision is GRANTED; and
   IT IS FURTHER ORDERED, that the Answer of John L. Whitlock as Trustee of Bank of New England Corporation on Behalf of Bank of New England Corporation and the Maine National Bank is STRICKEN; and
   IT IS FURTHER ORDERED, that the revised amount of $501,000,000 is hereby assessed against Maine National Bank, pursuant to section 5(e)(2)(A) of the FDI Act, 12 U.S.C. § 1815(e)(2)(A).
   Pursuant to the provisions of section 5(e)(2)(B) of the FDI Act, 12 U.S.C. § 1815(e)(2)(B), payment of this amount may be satisfied by the direct payment, in cash, immediately, to the FDIC of the sum of $501,000,000 by Maine National Bank.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of this

22 "Courts have long accorded agencies broad discretion in fashioning rules to govern public participation and have for the most part permitted denials of requests for leave to intervene when, for example, other parties to the proceeding adequately represent the would-be intervenor's viewpoint or intervention would broaden unduly the issues considered, obstruct or overburden the proceedings, or fail to assist the agency's decision making." (Footnotes omitted.) Nichols v. Asbestos Workers Local 24 Pension Plan, 835 F.2d 881 (D.C. Cir. 1987). Accord American Trucking Ass'ns v. United States, 627 F.2d 1313 (D.C. Cir. 1980); Cities of Statesville v. Atomic Energy
{{6-30-92 p.A-1993}}Decision and Order on all parties, the Trustee, the ALJ, and on the Superintendent, Bureau of Banking for the State of Maine.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 28th day of April, 1992.
/s/ Robert W. Feldman
Deputy Executive Secretary


In the Matter of
Maine National Bank
Portland, Maine
(Insured Depository Institution)
Related to
Bank of New England
National Association
Boston, Massachusetts
(Commonly Controlled Insured
Depository Institution)

James L. Rose, Administrative Law Judge:
   On January 6, 1991, after the Comptroller of the Currency (the Comptroller) had declared Bank of New England, N.A. (BNE) insolvent, the Federal Deposit Insurance Corporation (the FDIC) served Maine National Bank (the Bank), a commonly controlled insured depository institution, with a Notice of Assessment of Liability (Notice) pursuant to section 5(e) of the Federal Deposit Insurance Act, 12 U.S.C. § 1815(e). The assessment of $1,015,900,000 was for losses anticipated by the FDIC in connection with the liquidation of BNE and for paying insured depositors.
   The Comptroller concluded that the assessment was a liability, the amount of which rendered the Bank insolvent. He closed the Bank and appointed the FDIC receiver. Absent the assessment liability, the Bank would not have been declared insolvent.
   Subsequently, the holding company for BNE and the Bank, Bank of New England Corporation (BNEC), filed for bankruptcy protection under Chapter 7 of Title 11 of the United Code, and a temporary trustee was appointed to administer the assets of BNEC. (A permanent trustee was later appointed and succeeded to the rights, duties, and actions of the temporary trustee. As used herein, Trustee refers either to the temporary or permanent trustee.)
   On January 25, 1991, the Trustee as sole shareholder of the Bank requested an extension of time for filing an answer to the Notice, which the Executive Secretary for the FDIC granted until February 12, 1990. Then the Trustee requested that the FDIC as the receiver of the Bank contest the FDIC action by filing an answer to the Notice, and requesting a hearing. On February 12, 1991, the FDIC as the receiver stated it would decline to file an answer and request a hearing, because no meritorious defense could be raised. In its role as the receiver, the FDIC concluded that in its role as a regulator, its action was proper in all respects. After this refusal, the Trustee filed an answer on behalf of the Bank and BNEC.
   The FDIC filed a motion to strike the Trustee's answer arguing that neither BNEC nor the Trustee is a proper party to this proceeding because neither "stand in the shoes of" the Bank and 12 U.S.C. § 1815(e) limits participation to banks or savings associations. The FDIC contends that the FDIC as the receiver is the only proper party to contest this matter. The Trustee opposed the FDIC's Motion to Strike arguing that the Trustee is a proper party because the FDIC as the receiver of the Bank has refused to defend this action and in any event could not effectively defend due to the inherent conflict of interest between its responsibilities as receiver and regulator. On May 15, 1991, oral argument was heard on the motion to strike.
   Having considered the arguments of counsel, I find that the position of the FDIC is untenable. If accepted, the FDIC's contention would result in a grant of absolute authority to the FDIC in assessment order actions which render the target banks insolvent, precluding them from having these actions aired in an administrative adjudication. Since I conclude that 12 U.S.C. § 1815(e) provides for review of FDIC assessment orders in a proceeding under the Administrative Procedures Act (APA), I deny the FDIC's motion to strike the Trustee's answer and grant the Trustee's motion to intervene pursuant to 12 C.F.R. § 308.23.
   The FDIC's Rules of Practice and Procedures, 12 C.F.R. Part 308 give the administrative law judge the discretion to allow, {{6-30-92 p.A-1994}}upon timely application, a person to intervene in any proceeding upon a showing that:
   (1) The intervening person has a substantial interest relating to the subject of the action, and the intervening person is so situated that the disposition of the action may as a practical matter impair or impede his or her ability to protect that interest;
   (2) The intervening person's interest may not be fully and adequately represented if that person is not allowed to intervene; and
   (3) The intervention will not delay the proceeding or otherwise unfairly prejudice any party, provided that no intervenor shall be allowed to appear through counsel for, or any firm representing, any Respondent in the action.
12 C.F.R. § 308.23(a).
   The Trustee's Memorandum in Opposition to the FDIC's Motion to Strike constitutes the requisite showing on the above factors to allow the Trustee to intervene in this matter.
   It cannot be denied that the Bank and its sole stockholder have an interest in contesting the validity of the FDIC's assessment order. A liability sufficiently large to affect the Bank's solvency is clearly substantial. The FDIC's assessment of over one billion dollars is a contingent liability which, if finalized, would make the Bank insolvent. The appropriateness of the assessment and its size clearly have a substantial adverse impact on the Bank and BNEC.
   The FDIC claims, however, that the only entity which has standing to contest its assessment order is itself—the appointed Receiver after the Bank was declared insolvent. The FDIC contends that its decision not to defend this action is fully within its discretion, since it believes any challenge would be unfounded.
   No doubt Congress was fully cognizant of the dual role of the FDIC as both regulator and receiver when it passed the statute under which this action is brought. However, there is no indication that Congress contemplated the outcome for which counsel for the FDIC argues.
   As the Trustee points out, to accept the FDIC's position would make unavailable any challenge to an assessment order whose effect would render the target bank insolvent. Indeed, it is impossible to comprehend a situation in which the FDIC receiver would ever agree to challenge an assessment order of the FDIC. (Counsel asserts that there is some kind of in house separation between the liquidation and litigation parts of the FDIC. Nevertheless, the act of each is an act of the agency.)
   The FDIC's memorandum in support of its motion to strike demonstrates that the FDIC believes Congress gave it absolute authority, unreviewable in an APA hearing, in situations where the FDIC's assessment order resulted in a bank's insolvency: "[e]ven if the FDIC is assessing [the Bank] for losses in connection with the default of BNE, the FDIC in its capacity as receiver is not obligated to object to this in order to impart its duties as receiver of [the Bank] and BNE," and, "[s]ince the assessment by the FDIC against [the Bank] is expressly allowed by law, the receiver would be doing no less than is required by statute and case law in discharging the obligation." FDIC Memorandum, pp. 13–14.
   Though recognizing the availability of an APA hearing to test its regulatory actions in most cases, the FDIC contends that in this particular situation, an APA proceeding is not available, unless it chooses to defend the action it initiated.
   Thus the question is whether Congress meant for an APA review of the FDIC's assessment determination to be available to the affected parties. Resolution of this requires interpretation of Section 1815(e)(3), which reads:
   (3) Review

       (A) Judicial
       Actions of the Corporation shall be reviewable pursuant to chapter 7 of Title 5.
       (B) Administrative
       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.
   In this there is no reference to the APA. The Corporation is simply required to provide procedures for a "hearing on the record." By contrast, in Section 1818(h) gov- {{7-31-92 p.A-1995}}erning administrative hearings on civil money penalties, removals and prohibitions, and cease and desist matters, chapter 5 of Title 5 (the APA) is specifically stated. Therefore, a reasonable argument can be made that Congress did not have APA hearings in mind when enacting Section 1815(e).

   On the other hand, a "hearing on the record" outside the purview of the APA would not be much of a safeguard for the affected parties. Such would not afford the protection the APA was designed to give. For instance, without an APA hearing here, parties fundamentally affected by the assessment order would have no forum in which to it test its validity. Thus it is a fundamental principle of administrative law that the words, "hearing on the record" in an agency's enabling act means a hearing under 5 U.S.C. §§ 554, 556 and 557. "The APA thus provides in clear terms that when a statute requires a hearing with a determination on the record, § 556 applies, and §556 clearly requires trial procedures." (Original emphasis.) 2 K. Davis, Administrative Law Treaties § 10.7, p. 333 (2d ed. 1979). Among other cases, Professor Davis cites United States v. Florida East Coast Railway Co., 410 U.S. 224, 234 (1973) where the Court distinguished between "hearing" and "hearing on the record" and concluded that only by use of the latter language did Congress mean to invoke formal APA proceedings. See, United States v. Allegheny-Ludlum Steel Corp., 406 U.S. 742, 757 (1972): "Sections 556 and 557 need be applied only where the agency statute, in addition to providing a hearing, prescribes explicitly that it be `on the record.'" See also, Railroad Com'n. of Texas v. United States, 765 F.2d 221 (1985).
   I conclude that the explicit direction of Congress in Section 1815(e) that the FDIC prescribe procedures for a "hearing on the record" is tantamount to requiring an opportunity for a formal APA proceeding. Under the APA, the FDIC does not have absolute and unreviewable authority to decide issues of liability and amount of loss where the target bank's assessment results in its insolvency. There must be a procedure available for these issues to be resolved in a trial type setting. Indeed, Counsel for the FDIC does not argue that anything less than a formal APA hearing would be required by this section in cases where announcement of an assessment would not result in a declaration of insolvency.

   The FDIC also argues that the Trustee has failed to demonstrate that the disposition of the action may impair his ability to protect the interests with which he is charged. The FDIC argues that the statute provides for review by the appropriate United States Court of Appeals via an appeal from any FDIC decision in this action. However, counsel also admits that the Trustee would not have standing to appeal since he would not have been a party to this action. Such is a tacit admission that this proceeding provides the only forum where the FDIC's assessment can be tested. Thus, the Trustee must be permitted to intervene in this action.

   Further, the Trustee's interests will not be fully and adequately represented absent his intervention because if his answer is struck, the action is in default. Though the FDIC asserts that in a default it need only put on prima facie evidence of the three statutory factors, the rules provide that failure to answer "shall render the assessment ... final and unappealable." In either event, the Trustee's interests cannot be adequately protected absent being allowed to litigate the FDIC's allegations. No defenses would be litigated and the FDIC would not be required to establish the validity of its assessment by a preponderance of the credible evidence.

   Allowing the Trustee to intervene will not delay this proceeding or otherwise unfairly prejudice the FDIC. Nor will it impair the ability of the Bank to perform its obligations under the statute. The Trustee has already filed an answer and the action can proceed to hearing. The Trustee's intervention will only have the effect of requiring the FDIC to demonstrate the validity of its assessment by a preponderance of the credible evidence. This cannot be deemed "unfair prejudice" to the FDIC's interest since that is only what is required by both the APA and section 1815(e)(3).

   The Trustee's additional argument that it is a proper party under a stockholder derivative theory need not be considered.

   The FDIC's motion to strike is denied and the Trustee's motion to intervene is granted.

   Dated: July 8, 1991

{{7-31-92 p.A-1996}}


   Upon consideration of the motion of FDIC to strike the Answer, and Trustee Ben Branch's response thereto, it is hereby ORDERED:
   1. That—upon the contention of FDIC that the Trustee's constitutional challenge to the relevant statute and its application cannot be pursued in this forum, the Trustee's acquiescence in that view, and the undersigned's identical conclusion that such a constitutional challenge cannot be made or decided in this forum—the Trustee's constitutional challenge to the statute and its application is hereby stricken from this proceeding (although it may be brought in any appropriate forum); and
   2. That the FDIC's motion to strike is denied in all other respects.
/s/ James L. Rose
Administrative Law Judge
July 8, 1991

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