Federal Deposit
Insurance Corporation

{{2-28-94 p.A-2371}}
   [¶5209] In the Matter of First City, Texas—Austin, National Association, et al., Austin, Texas, Docket No. FDIC-92-316kk (12014093).

   Board remands cross-guarantee assessment proceeding to ALJ, ruling that a bank holding company may represent assessed banks on a derivative basis, at its own expense, if the FDIC as receiver of the failed banks declines to challenge the cross-guarantee assessment.

   [.1] Cross-Guarantee Proceedings—Subject of Hearings
   The proper subject of cross-guarantee hearings is the amount of loss to the insurance fund as of the closest appropriate date to the date of the hearing, thus permitting an early hearing while providing an estimate more refined than that
{{2-28-94 p.A-2372}}possible at the initial assessment, and while it is still possible to provide relief if the initial assessment is shown inaccurate.

   [.2] Cross-Guarantee Proceedings—Relief Available
   The only statutory remedy for an incorrect assessment is an adjustment to reflect the actual loss incurred by the insurance fund, based on the most current figures available.

   [.3] Cross-Guarantee Proceedings—Parties
   The right to challenge an assessment belongs to the receiver of a failed institution, but if the receiver fails to challenge or to respond to demands that it do so from holding companies, holding companies may participate and represent failed assessed institutions in a derivative capacity, at their own expense and without recourse against receivers for reimbursement of expenses.

   [.4] Cross-Guarantee Proceedings—Notice—Calculation of Assessment
   The FDIC's notice of assessment, when read as a whole, must provide sufficient information for an outside reader to understand how FDIC calculated the loss.

In the Matter of

FIRST CITY, TEXAS-AUSTIN, NATIONAL ASSOCIATION
AUSTIN, TEXAS, et al.
(Commonly Controlled Insured Depository Institutions)
DECISION AND ORDER
FDIC-92-316kk

   This is a challenge to the application of the cross-guarantee statute brought by two holding companies—First City Bancorporation of Texas, Inc., Houston, Texas ("FCBOT"), and FCB Holdings, Inc. ("FCB Holdings") (together, the "Holding Companies")— which owned a group of twenty commonly controlled insured depository institutions. The group consisted of First City, Texas-Houston, National Association, Houston, Texas ("First City-Houston"), and a state bank, First City, Texas-Dallas, Dallas, Texas ("First City-Dallas") (together, the "Triggering Banks"), and eighteen (18) other state and national banks ("Assessed Banks").¹ The challenge is brought in the administrative hearing provided for in subsection (3)(B) of the cross-guarantee statute, section 5(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1815(e).
   Upon the failure of the Triggering Banks, assessments of liability were made by the Federal Deposit Insurance Corporation ("FDIC" or "Corporation") against the Assessed Banks for the amount of estimated losses anticipated from the failure of First City-Houston and First City-Dallas. Based on the assessments, each of the Assessed banks was declared insolvent and the FDIC was appointed receiver by the appropriate regulatory authority. The Holding Companies filed an answer and requested a hearing. FDIC Enforcement Counsel opposed the request on the grounds that the Holding Companies lack standing to participate in the administrative hearing. The Administrative Law Judge, Walter J. Alprin ("ALJ"), in a Recommended Decision Upon Default ("Recommended Decision"), held that the Hold-

   On or about October 30, 1992, the Acting Comptroller of the Currency deemed First City-Houston to be insolvent pursuant to 12 U.S.C. § 191, and appointed the FDIC as receiver. On the same date, the Banking Commissioner for the State of Texas deemed First City-Dallas to be insolvent and appointed the FDIC as receiver of First City-Dallas. The failure of First City-Houston and First City-Dallas triggered the issuance by the FDIC of a Notice of Assessment of Liability, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing ("Notice"), dated October 30, 1992, against the Assessed Banks pursuant to subsection 5(e)(1) of the FDI Act. The Notice assessed anticipated losses totalling $476 million arising out of the failures of First City-Houston and First City-Dallas.⁴ The Notice directed each Assessed Bank to make immediate payment of an assessed amount that, in each case, was in excess of its capital. Based on the assessments, the Assessed Banks were closed on October 30, 1992, by the Acting Comptroller of the Currency or the Banking Commissioner for the State of Texas, and the FDIC was appointed Receiver of each of these 18 institutions.
   The Notice required that answers and requests for a hearing be filed within twenty (20) days of its receipt; otherwise the assessments would become final and unappealable in accordance with the FDIC's Rules of Practice and Procedure, 12 C.F.R. § 308.167(2)(v). By letter dated November 18, 1992, the Holding Companies demanded that the FDIC as Receiver of each Assessed Bank request a hearing and file answers by the November 19th deadline contesting "the validity of the notice of Assessment."⁵ The Receivers did not file answers or hearing requests, or otherwise respond to the demand. The Holding Companies then entered appearances "on their own behalf and on behalf of" the Assessed Banks, and moved to dismiss the Notice in a proceeding before the ALJ pursuant to subsection 5(e)(3)(B) of the FDI Act. FDIC Enforcement Counsel moved to strike the answer of the Holding Companies for lack of standing. On January 17, 1993, the ALJ granted FDIC Enforcement Counsel's Motion to Strike the Answer of the Holding Companies, and denied the Holding Companies' Motion to Strike the Notice.
   On January 27, 1993, the FDIC sold the 20 "bridge banks" which had been established by the agency in October to continue the banking services of the Triggering Banks and Assessed Banks. The FDIC announced in a January 27, 1993, press release that, as a result of the larger than expected economic premium, including the acquiring institutions' willingness to absorb certain future

   On November 5, 1993, the Board received a Motion filed jointly by FDIC Enforcement Counsel and counsel for the Holding Companies requesting the Board to stay further consideration of this matter up to and including December 3, 1993, in furtherance of ongoing settlement negotiations. At the time the Motion was received, it was clear that the Board's decision would not be issued prior to December 3, 1993, and, therefore, it was not necessary for the Board to act upon the requested stay. As of this date, the parties have not announced any settlement agreement.

   Prior to the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"), the FDIC was handicapped in handling failing banks within multi-bank holding company structures such as the First City system which nominally consist of a series of separate banking corporations but which in effect operate with the lead banks functioning as "main offices" and the affiliates as "branches" of the lead banks. Larger banks in such systems often generate most of their loan business and draw much of their funding from smaller affiliated banks through a variety of devices such as long-term deposits in the lead banks or long-term federal funds loans to the lead banks. Good assets of a problem bank can be sold to affiliated banks at less than full value, and bad assets of a healthy bank can be transferred to a problem bank for more than full value. When the FDIC was required to treat each bank in such a system as a separate entity, losses caused by the failure of a problem bank would be borne primarily by the deposit insurance fund, not the banks or holding company that contributed to the loss.
   Recognizing that commonly controlled institutions can operate as a single interrelated entity and directly affect the magnitude of loss, and that banks within a commonly owned system should have to reimburse any loss to the FDIC caused by the failure of one of them, Congress enacted the cross-guarantee provisions as part of the 1989 amendments to the FDI Act contained in FIRREA. The major provisions affecting the issues in this case are summarized below.
   Subsection 5(e)(1)(A) of the FDI Act provides that any insured depository institution shall be liable for "any loss incurred by the Corporation, or any loss which the Corporation reasonably anticipates incurring," in connection with (1) the default [i.e., failure] of a commonly controlled insured depository institution, or (2) any assistance provided by the Corporation to any commonly controlled insured depository institution in danger of default. Subsection 5(e)(1)(B) provides that 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.
   Subsection 5(e)(2)(A) provides that when an insured depository institution is in default, the Corporation shall, "(i) in good faith, estimate the amount of the loss the Corporation will incur from such default ..."; (ii) estimate the amount of each such

   (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.

   The major positions asserted by the Holding Companies can be summarized as follows:
   (1) The Holding Companies have standing to participate in the subsection 5(e)(3)(B) proceeding because (a) as "parties whose rights have been directly and adversely affected by agency action," they have a right to protect those interests under the APA; and (b) they should be allowed to represent the failed Assessed Banks on a derivative basis because the FDIC as Receiver has failed to fulfill its obligation to protect the Assessed Banks and shareholders with respect to the assessments. The "obvious, irreconcilable conflict between the position of the FDIC as assessor and FDIC as Receiver should be itself reasonable grounds to justify the [Holding Companies'] not having to rely on FDIC Receivers to protect its interests." They argue that the failure of the Receivers to challenge the assessments is evidence of this conflict.
   (2) The subjects of the hearing should be: (a) to measure the assessment and the estimated loss against the best and most current information available at the time of the hearing to determine FDIC's reasonableness and good faith in formulating its initial estimate. It is argued that the FDIC's initial estimate has proven to be grossly inaccurate and hence not reasonable or in good faith when made.⁸ (b) Whether the Notice was invalid and should be stricken. The Holding Companies argue that the Notice should be stricken because (i) it does not contain a statement of the method by which the loss was calculated, and (ii) it contains an order to pay rather than a "proposed order,' both in violation of the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.167(b)(iii) and (iv). (c) Whether the FDIC should have delayed the payment schedule to allow the sale of 13 banks by the Holding Companies, which the Holding Companies allege they were on the verge of consummating on October 30, 1992, when the assessments were made, under the "schedule of payments" language of subsection (e)(3)(B)(iii). It is argued that the FDIC should have delayed making the assessments.

   The major positions of FDIC Enforcement Counsel can be summarized as follows:
   (1) An assessed institution or the receiver of a failed assessed institution is the only proper party to participate in a proceeding pursuant to subsection 5(e)(3) of the FDI Act. A decision not to defend a cross-guarantee assessment is fully within the discretion of a receiver where it believes the challenge to be unfounded. Here, the Receivers had no reason to believe that the Notice was unreasonable or otherwise not in good faith and therefore no reason to believe that a challenge would permit an adjustment to provide a distribution to the Holding Companies. Such decision by the Receivers was not a breach of fiduciary duty or negligence, as alleged by the Holding Companies, but a reasonable and appropriate decision made in the Receivers' discretion.
   (2) The Notice is valid. It contains a sufficient description of the method of calculation of the initial estimate of loss. The term "order" rather than "proposed order" is consistent with the provisions of the statute.
   (3) The subject of the hearing in this case should be only the amount of the assessments—an analysis and review of "the nature of the bill"—including the reasonableness and good faith of the initial estimate based on facts and circumstances as they existed at the time the estimate was made.
   (4) The relief that can be granted is limited to that provided in subsection 5(e)(2)(D) of the cross-guarantee statute—if the compensation estimated by and paid to the Corporation is greater or smaller than the actual loss incurred by the Corporation, the Corporation shall or may, as appropriate, make reimbursement or require additional payment, as appropriate.

A. The Proper Subjects of Cross-Guarantee Hearings

   The cross-guarantee statute in subsection 5(e)(3)(B) provides 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.
   The Board has previously noted the limited nature of the hearing provided by the statute. As the Board stated in Maine National Bank, supra:

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.

   [.1] Taken together, these considerations lead the Board to conclude that the proper subject of a subsection 5(e)(3)(B)(i) hearing is the current loss figure, determined as of the closest appropriate date to the date of the hearing, set by the ALJ ("Loss Date"). The current loss figure as the subject of the hearing is the most compatible with the rest of the cross-guarantee statute: (1) it concerns the amount of loss; (2) it allows the hearing to take place promptly after assessment, thus avoiding the need to resolve any due process and fairness problems that would be raised by awaiting the final loss figure; (3) it provides a remedy—adjustment of the assessment to the current loss figure—that can provide real relief, as discussed in section VII.B, infra; (4) it is compatible with the statutory remedy, since it allows for adjustment of the compensation estimated by and paid to the Corporation, as provided in subsection 5(e)(2)(D); and (5) it will involve a more refined estimate of losses than the initial estimate because, generally speaking, the triggering bank or banks will have been sold under purchase and assistance agreements. There will also be some actual experience in dealing with both assets and liabilities of the triggering bank, making valuation thereof less problematic. Hence, it is a much more appropriate subject of administrative and judicial review.
   This is in fact the approach taken by the Board in Maine National Bank, supra. That case involved an interlocutory appeal on the question of whether the Trustee in Bankruptcy of a holding company of the triggering and assessed institutions had standing to participate in the hearing on the record. The Receiver of the assessed institution had declined to request a hearing following demand by the Trustee, deeming a challenge to be without merit. On appeal, a determining issue was whether a challenge by the Receiver could have amended the assessment to the extent that the Trustee would receive a distribution. In deciding that issue, the Board first remanded the case for updated information concerning the extent of

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 [the triggering bank's] failure has been modified by the purchase and assumption agreement . . .

B. Available Relief in Cross-Guarantee Proceedings

   The only remedy provided in the statute is found in section 5(e)(2)(D), entitled "Adjustments of estimated payment," which requires or allows, as appropriate, adjustments if the amount of compensation estimated by and paid to the Corporation is greater or less, as appropriate, than the actual loss incurred. As discussed above, the board is reluctant to delay a statutorily required hearing until actual loss is determined. For the same reason, the Board is reluctant to delay relief until "the actual loss incurred" has been determined.

   [.2] As the Holding Companies concede, the board has considerable discretion in crafting a remedy under this statutory scheme. Here, however, the Board concludes that specific guidance and insight is contained in the carefully crafted remedy provided by Congress. Recognizing the FDIC's need to act quickly on the basis of estimated figures, Congress provided for retroactive adjustments of loss estimates and payments. Similarly, the Board concludes that under the statute the only remedy which should be available after a hearing is the provision of a new, more current loss figure. Clearly, it is consistent with the statutory remedy to adjust for any underpayment or overpayment based upon a current loss figure determined at the hearing on the record. The appropriateness of this interim remedy, which is wholly consistent with the statutory scheme, further supports the choice of the current loss figure as the appropriate subject of the hearing on the record provided by the statute.
   It is anticipated that a hearing pursuant to subsection 5(e)(3)(B)(i) will involve relatively straightforward identification of the losses incurred to date by the triggering institution, and projected future losses, and will result in adjustments to the original loss estimate and assessment, as may be appropriate. In most cases, enough time will have elapsed between the Notice and the hearing to result in changed circumstances affecting the initial estimate.¹⁵ In cases where an assessed institution remains open, an interim adjustment to the assessment may well afford significant relief by reducing the liabilities of or allowing reimbursement to the assessed institution. Where the assessed institution is in receivership, such an adjustment may lead to an interim distribution to shareholders in an appropriate situation.¹⁶ Such a distribution is, of course, within the discretion of the institution's receiver, and the Board does not here intend to upset or modify the separate statutory scheme which governs receiverships. See 12 U.S.C. § 1821.
   The Board rejects the suggestions of the Holding Companies that other types of relief might be granted in this case. After due con-

C. Proper Parties to a Cross-Guarantee Proceeding.

   The Holding Companies demanded that the Receivers of the Assessed Banks file answers and request a hearing in this matter, then sought to answer "on their own behalf and on behalf of" the Assessed Banks. They argue that (1) the Receivers have an "irreconcilable conflict of interest" which would prevent them from adequately contesting the actions of the FDIC or the constitutionality of the statute and regulations; (2) neither the statute nor the legislative history show Congressional intention to exclude entities whose rights and interests have been directly and adversely affected by an assessment; and (3) the failure of the Receivers to contest the Notice, especially in light of the asserted failure of the Notice to comply with the FDIC Rules of Practice and Procedure, indicates bad faith or breach of trust on the part of the Receivers; hence, by analogy to corporate derivative actions, the Holding Companies are entitled to challenge on behalf of the Assessed Banks.
   FDIC Enforcement Counsel argues that (1) the statute imposes no liability on holding companies of commonly controlled institutions and likewise does not accord them the status of parties to the hearing on the record; (2) by statute, a receiver for an assessed bank 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); and (3) by analogy to corporate derivative actions, the Receivers' failure to comply with the request to defend is insufficient to give the Holding Companies derivative standing; rather, they must prove that the Receivers are personally involved or interested in a way calculated to impair their exercise of business judgment on behalf of the Assessed Banks, or which reflects bad faith or breach or trust, citing Landy v. Federal Deposit Insurance Corporation, 486 F.2d 139 (3rd Cir. 1973).
   Finally, both parties cite the Board's decision in Maine National Bank, supra. The Board there held that the Trustee in Bankruptcy of the holding company of the triggering and assessed banks had neither direct nor derivative standing to participate in the hearing on the record on the cross-guarantee assessment. The Holding Companies point to two differences in circumstance between Maine National Bank and this case: in the former, the Receiver of the Assessed Bank reviewed the Trustee's demand and declined to challenge the assessment, while, in this case, the Receivers neither responded to the demand nor challenged the assessment. In Maine National Bank, the Board stated that the Receiver's failure to challenge:

may be improper if he could have challenged the assessment to such a degree that the Trustee would receive a distribution. 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...an answer on behalf of the receivership.

   [.3] With respect to so-called "derivative" standing, the Board reiterates its holding in Maine National Bank, supra, that the right to challenge an assessment belongs to the receiver of a failed assessed institution, and that the mere assertion of a conflict of interest between the FDIC as receiver and the FDIC as assessor clearly inherent in the statutory scheme established by the Congress is insufficient to overcome the presumption of the propriety of agency action and Congressional recognition of the FDIC's dual function. Landy v. Federal Deposit Insurance Corporation, supra; FCC v. Schreiber, 381 U.S. 279, 296 (1965; Fahey v. Mallonee, 332 U.S. 245, 256 (1947).
   However, the Receivers in this matter neither challenged the assessment nor responded to the demand of the Holding Companies. The cross-guarantee statute provides for a hearing on the record. For that reason alone, the Board will not deny holding companies the right to participate on a derivative basis if receivers fail or refuse to challenge assessments or to determine on a case-by-case basis whether a challenge is worthwhile.¹⁷
   The Receivers of the Assessed Banks may well have taken the position, later expressed in their letter to the Holding Companies dated March 23, 1993,¹⁸ that they had no reason to believe that the Notice was unreasonable or not in good faith and hence no reason to believe that a challenge to the assessments would result in an adjustment that would provide a distribution to the Holding Companies. If that is the case, the Receivers should reassess their determination in accordance with the holdings in this Decision as to the proper subject matter of the hearing.
   On the other hand, it may be that the FDIC Division of Depositor and Asset Services ("DAS"), which fulfills the functions of FDIC as receiver, determined as a matter of general policy that challenges to cross-guarantee assessments on behalf of failed assessed institutions are not worthwhile and a poor use of receiver resources to the detriment of creditors of the failed institution. Such a position, based upon a determination that adjustments to assessments against failed institutions will not usually result in distributions to shareholders, and that if in a particular case such a distribution might be possible, an appropriate revision of the assessment(s) can be issued by FDIC/Corporate, would certainly be reasonable. If such is the case, however, the Board will allow holding companies to participate and represent failed assessed institu-

   The Board will reopen the record and remand this matter to the ALJ for further proceedings in accordance with the Decision and Order. The Board makes the following additional determinations with respect to such further proceedings.

A. Notice of Assessment.

   The Holding Companies have argued that the Notice is "invalid" because it fails to contain a "statement of the method by which the estimated loss was calculated."²¹ FDIC Enforcement Counsel responded that the Notice does contain such a statement, in that paragraph 13 thereof contains figures that "constitute the basis for the calculations used to determine the FDIC's estimated loss resulting from the default" of the Triggering Banks. FDIC Enforcement Counsel's response included the filing of an Affidavit of Robert H. Hartheimer, Associate Director, Division of Resolutions, FDIC, who was personally involved in the initial loss calculations ("Hartheimer Affidavit").²²
   The FDIC Rules of Practice and Procedure, 12 C.F.R. Part 308 Subpart O, Liability of Commonly Controlled Depository Institutions, provides in part as follows with respect to the contents of the Notice of Assessment:

   The Notice of Assessment of Liability shall set forth:

   (i) The basis for the FDIC's jurisdiction over the proceeding;
   (ii) A statement of the Corporation's good faith estimate of the amount of loss it has incurred or anticipates incurring;
   (iii) A statement of the method by which the estimated loss was calculated
. . .

   [.4] The purpose of the "statement of the method by which the estimated loss was calculated" is to disclose sufficient information concerning the financial data, assumptions, and methodologies employed by the agency. This information may be relevant to the issue of the current loss figure and may assist a reader in assessing whether a hearing on the current loss figure is appropriate and worthwhile. The Board is of the view that the Notice in this case, as supplemented by the Hartheimer Affidavit, does not constitute a sufficient disclosure. For example, the Notice as supplemented states that an estimate of loss on a liquidation basis was based on an Asset Valuation Review ("AVR") but does not describe the adjustments to asset values in the AVR, how such adjustments were calculated, how the adjustments were used to calculate loss on a liquidation basis, or the amount of the loss so calculated. The Notice as supplemented also states that the savings over liquidations that the FDIC might reasonably expect from the sale of the banks was applied to the estimate of loss on a liquidation basis, without indicating the expected savings or how they were calculated. Reference is made to "the FDIC's standard analysis used when faced with the imminent failure of a large bank or banking system," without describing that analysis. There is no numerical summary of

   The FDIC shall issue an amended Notice within twenty (20) days of service of this Decision and Order. The Receivers shall have twenty (20) days after service of the amended Notice to answer and request a hearing or inform the Holding Companies in writing whether the Holding Companies may represent the interests of one or more Assessed Banks. The Holding Companies shall have twenty (20) days after service of written permission to represent, if granted, to file an Answer to such amended Notice and a Request for Hearing.²⁴
   If a hearing is requested, the ALJ will set a hearing date and a Loss Date.²⁵

   Upon consideration of the entire record in this proceeding, IT IS HEREBY ORDERED, that:
   1. The record in this proceeding is reopened.
   2. This matter is remanded to the ALJ for further proceedings in accordance herewith.
   3. FDIC Enforcement Counsel shall issue an amended Notice in accordance with this Decision and Order within twenty (20) days after service of this Order.
   4. Within twenty (20) days after service of the amended Notice, the Receivers shall either file an answer on behalf of each Assessed Bank and request a hearing, or notify its holding company in writing that the Receiver has determined that the assessment against the Assessed Bank should not be challenged, or that the Receiver has no objection to its holding company representing that Assessed Bank on a derivative basis to challenge the assessment.
   5. Within twenty (20) days after service of written notice that the Receiver does not object to its holding company representing an Assessed Bank on a derivative basis, the holding company may file an answer and request a hearing pursuant to subsection 5(e)(3)(B) in its derivative capacity on behalf of the Assessed Bank, provided that it does so at its own expense and without recourse against the FDIC as Receiver of the Assessed Bank for reimbursement of such expenses.
   6. In accordance with 12 C.F.R. § 308.167(b)(2)(v), failure of the holding company to request a hearing with respect to an Assessed Bank shall render the amended Notice a final and unappealable order as to the Assessed Bank.
   7. If a hearing is requested on behalf of one or more Assessed Banks, the ALJ shall establish as the Loss Date a date as of which the estimate of loss will be determined, and hold a hearing in accordance with the FDIC Rules of Practice and Procedure to determine the current estimate of loss incurred by the FDIC as of the Loss Date in accordance with this Decision and Order.
   8. Following the hearing, the ALJ shall issue for submission to the Board a recommended decision which determines the current estimate of loss as of the Loss Date and recommends, if appropriate, modification of the assessments.

In the Matter of
First City, Texas-Austin, National Association
Austin, Texas, et al.
(Commonly Controlled Insured Depository Institutions)
Docket No. FDIC-92-316kk

   On January 17, 1993 the undersigned issued on Order striking the "Answer" to the Notice of Assessment of Liability. As a result of that ruling Respondents were in default of answer, and on February 9, 1993, FDIC Enforcement counsel filed a Motion for Recommended Decision. In order to comply with Rule 19(c)(1) of the Uniform Rules of Practice and Procedure, 12 C.F.R. 308.19(c)(1), the undersigned accepts this as a motion for an order of default as well as motion for recommended decision and order by consent.
   On the basis of the resulting default in answering the Notice of Assessment of Liability, a finding is here entered that no good cause has been shown for said default¹ and pursuant to the Rule cited above, the undersigned grants the motions, and submits the Recommended Decision, with Order of Assessment by Consent, attached hereto and made a part hereof.
   SO ORDERED.
   /s/ Walter J. Alprin
   Administrative Law Judge
   Office of Financial Institution Adjudication

In the Matter of
FIRST CITY, TEXAS-AUSTIN, NATIONAL ASSOCIATION
AUSTIN, TEXAS, et al.
(Commonly Controlled Insured Depository Institutions)
Docket No. FDIC-92-316kk

   On or about October 30, 1992, the Comptroller of the Currency deemed First City, Texas-Houston, National Association, Houston, Texas ("First City-Houston") to be insolvent pursuant to 12 U.S.C. § 191, and appointed the Federal Deposit Insurance Corporation ("FDIC") as receiver of these banks.
   On or about October 30, 1992, the Banking Commissioner for the State of Texas deemed First City, Texas-Dallas, Dallas, Texas ("First City-Dallas"), to be insolvent and appointed the FDIC as receiver of First City-Dallas.
   Thereafter, First City-Houston and First City-Dallas (collectively, "Banks") were closed and the FDIC has incurred or reasonably anticipates incurring loss in connection with the insolvency and receivership of the Banks.
   The following named institutions, referred to as "Liable Institutions," to wit First City, Texas-Beaumont, National Association, Beaumont, Texas ("Liable Institution 1"); First City, Texas-Corpus Christi, Corpus Christi, Texas ("Liable Institution 2"); First City, Texas-El Paso, National Association,

   1. One of the two Banks (First City-Houston) was a national banking association doing business under the laws of the United States, having its principal place of business in Houston. First City-Houston was, at all times pertinent to this proceeding, an insured national bank subject to certain applicable sections of the Act, 12 U.S.C. §§ 1811-1831t, certain applicable rules and regulations of the FDIC, 12 C.F.R. Chapter III, and the National Bank Act, 12 U.S.C. § 1-216d.
   2. The second Bank, First City-Dallas, was a State banking association doing business under the laws of the State of Texas, having its principal place of business in Dallas, Texas. First City-Dallas was, at all time pertinent to this proceeding, an insured State nonmember bank subject to the Act, 12 U.S.C. §§ 1811-1831t, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Texas.
   3. Liable Institution 2 and Liable Institution 16 are State banking associations doing business under the laws of the State of Texas, having their principal places of business in Corpus Christi and Kountze, Texas, respectively. They are, and were at all times pertinent to this proceeding, insured State member banks, subject to certain applicable sections of the Act, 12 U.S.C. §§ 1811-1831t, certain applicable rules and regulations of the FDIC, 12 C.F.R. Chapter III, the Federal Reserve Act, 12 U.S.C. §§ 221–522, and the laws of the State of Texas.
   4. Liable Institution 7, Liable Institution 13, Liable Institution 14, and Liable Institution 15 are State banking associations doing business under the laws of the State of Texas, having their principal places of business in Alice, Lake Jackson, Aransas Pass, and Sour Lake, respectively. They are, and were at all times pertinent to this proceeding, insured State nonmember banks subject to the Act, 12 U.S.C. §§ 1811-1831t, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Texas.
   5. The remaining Liable Institutions are national banking associations doing business under the laws of the United States, having their principal places of business in Beaumont, El Paso, Midland, Bryan, Tyler, San Angelo, Lufkin, Orange, Madisonville, San Antonio, Austin and Graham, Texas, respectively. These institutions are, and were at all times pertinent to this proceeding, insured national banks subject to certain applicable sections of the Act, 12 U.S.C. §§ 1811-1831t, certain applicable rules and regulations of the FDIC, 12 C.F.R. Chapter III, and the National Bank Act, 12 U.S.C. §§ 1-216d.
   6. At all times pertinent to this proceed-
{{2-28-94 p.A-2386}}ing, the Banks and the Liable Institutions were each "insured depository institutions" as defined in section 3(c)(2) of the Act, 12 U.S.C. § 1813(c)(2).
   7. At all times pertinent to this proceeding, the Banks were wholly-owned subsidiaries of First City Bancorporation of Texas, Houston, Texas, a multi-bank holding company which also owns 100 percent of each of the other Liable Institutions. Therefore, the Liable Institutions and the Banks were "commonly controlled" insured depository institutions as defined in section 5(e)(9) of the Act, 12 U.S.C. § 1815(e)(9).
   8. The FDIC has jurisdiction over the Banks, the Liable Institutions, and the subject matter of this proceeding.
   9. On or about October 30, 1992, the Comptroller of the Currency deemed First City-Houston to be insolvent pursuant to 12 U.S.C. § 191, and appointed the FDIC as receiver for this bank. Thereafter, this banks were closed.
   10. On or about October 30, 1992, the Banking Commissioner for the State of Texas deemed First City-Dallas to be insolvent and appointed the FDIC as receiver of this bank. Thereafter, this bank was closed.
   11. By virtue of the insolvency and receivership of the Banks, the Banks were in "default" as that term is defined in section 3(x)(1) of the Act, 12 U.S.C. § 1813(x)(1).
   12. In its capacity as receiver of the Banks, the FDIC transferred certain of the assets of the Banks to an acquiring institution in return for the assumption by the bridge bank of the Banks' deposits and certain other liabilities ("Purchase and Assumption/Loan Purchase Transaction").
   13. As of June 30, 1992:

   a. Total deposits of the Banks equalled $3,962,741,000.
   b. The book value of the Banks' assets totalled $4,356,836,000.
   c. Total liabilities totalled $ 4,299,953.
   d. Total loans of the Banks equalled $ 2,658,730,000.

In the Matter of

First City, Texas-Austin, National Association
Austin, Texas
and
First City, Texas-Beaumont, National Association
Beaumont, Texas
and
First City, Texas-Corpus Christi
Corpus Christi, Texas
and
First City, Texas-El Paso, National Association
El Paso, Texas
and
First City, Texas-Midland, National Association
Midland, Texas
and
First City, Texas-Bryan/College Station, National Association
Bryan, Texas
and
First City, Texas-Tyler National Association
Tyler, Texas
and
First City, Texas-Alice
Alice, Texas
and
First City, Texas-San Angelo, National Association
San Angelo, Texas
and
First City, Texas-Lufkin, National Association
Lufkin, Texas
and
First City, Texas-Orange, National Association
Orange, Texas
and
First City, Texas-Madisonville, National Association
Madisonville, Texas
and
First City, Texas-Graham, National Association
Graham, Texas
and
First City, Texas-Lake Jackson
Lake Jackson, Texas
and
First City, Texas-Aransas Pass
Aransas Pass, Texas
and
First City, Texas-San Antonio, National Association
San Antonio, Texas
and
First City, Texas-Sour Lake
Sour Lake, Texas
and
First City, Texas-Kountze
Kountze, Texas
(Insured Depository Institutions)
Related to
First City, Texas-Houston, National Association
Houston, Texas
and
First City, Texas-Dallas
Dallas, Texas
(Commonly Controlled Insured Depository Institutions)
{{2-28-94 p.A-2388}}
NOTICE OF ASSESSMENT
OF LIABILITY, FINDINGS OF FACT
AND CONCLUSIONS OF LAW,
ORDER TO PAY, AND NOTICE OF
HEARING

FDIC-92-kk

   The Board of Directors of the Federal Deposit Insurance Corporation ("FDIC") having considered the entire record in this proceeding including the Notice of Assessment and Order of Default in answering, finds that pursuant to 12 U.S.C. § 1815(e), each of the above insured depository institution shall be liable for (1) any loss incurred by the Corporation in connection with the default of a commonly controlled insured depository institution, or (2) any assistance provided by the Corporation to any commonly controlled insured depository institution in danger of default, as hereinafter set forth.