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FDIC Enforcement Decisions and Orders

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   [8003] Docket No. FDIC-87-222b (6-7-88).

   Request for Special Permission to Appeal granted. The FDIC Board of Directors granted this motion so that it could set forth its views regarding the scope of prehearing discovery. (For further proceedings relating to this case, see [¶ 15,114])
In the Matter of
* * * BANK
* * *
(Insured State Nonmember Bank)


A. Facts

   On November 4, 1987, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Charges and of Hearing ("Notice") in this proceeding, pursuant to section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), alleging that * * * Bank * * * ("Respondent" or "Bank") had engaged in certain unsafe and unsound banking practices and violations of law and regulation, and seeking imposition of an order requiring Respondent to cease and desist from such practices and violations and to take affirmative action to correct the conditions resulting from such practices and violations. Respondent filed its Answer to the charges contained in the Notice on November 19, 1987.
   The Administrative Law Judge ("ALJ") appointed to hear this case held a prehearing conference with the parties on February 17, 1988, during which he ordered, inter alia, that the parties file any prehearing discovery requests by March 8, 1988. Pursuant to this order, Respondent filed a Request for Production of Documents and More Definite Statement and Requests for Admissions (collectively, "Discovery Requests") on March 7, 1988. The ALJ then issued a Prehearing Order (the "Order") on March 22, 1988, which provided, inter alia, that all responses to motions and oppositions to discovery must be filed and served on or before April 1, 1988. The Order also set the hearing to commence on June 6, 1988.
   On March 29, 1988, FDIC enforcement counsel filed a response to the Respondent's Discovery Requests ("FDIC's Response"). FDIC enforcement counsel objected to most of Respondent's Discovery Requests contending that they were, in fact, in the nature of contention interrogatories and requests for admissions, neither of which are provided for in the FDIC's Rules, and/or called for information or documents which are otherwise not subject to discovery on the basis of the attorney work product doctrine or attorney-client privilege. Enforcement counsel did produce or offer to make available for inspection and copying, pursuant to section 308.08 of the FDIC's Rules those documents which were specifically requested by Respondents.*
   During a telephone conference call with the parties on April 15, 1988, the ALJ made the following oral rulings on Respondent's Request for More Definite Statement and the FDIC's Response:
   (a) With respect to the hazardous lending and lax collection practices alleged in paragraphs 4(a) through 4(f) of the Notice, the FDIC is ordered to identify individually those specific loans in Respondent's loan portfolio reviewed by the FDIC's examination team during the May 13, 1987 examination of the Bank which the FDIC contends evidence each alleged hazardous lending or lax collection practice.
   (b) The FDIC is ordered to identify each and every unsafe or unsound banking practice which resulted in an inadequate level of capital protection for the Bank, as alleged in paragraph 6 of the Notice.
   (c) The FDIC is ordered to identify each and every unsafe or unsound practice which resulted in the Bank's inadequate allowance for loan and lease losses, as alleged in para-

* In its Discovery Requests, Respondent requested that the FDIC: "Produce reports of examination, reports of visitation, or any written reports generated as a result of an on premises review of the Bank and prepared by the FDIC from January 1, 1984 until the present time." Respondent's Discovery Requests, paragraph 14. In response, the FDIC originally produced the May 13, 1987 Report of Examination of the Respondent Bank, on which the instant proceeding is premised, but objected to production of the other reports requested on the grounds of relevancy. FDIC Response, paragraph 14. However, the FDIC has since withdrawn this objection and produced the other reports requested. Thus, this objection is not part of the instant Request for Special Permission to Appeal.

{{4-1-90 p.I-12}}graph 7 of the Notice. The FDIC is also ordered to identify the level of the allowance for loan and lease losses that would be adequate for the Bank.
   (d) The FDIC is ordered to identify each and every unsafe or unsound practice which resulted in inadequate earnings for the Bank, as alleged in paragraph 9 of the Notice. The FDIC is also ordered to define what an appropriate net interest margin for the Bank would be, and to identify what remedy it seeks to obtain this net interest margin.
   (e) The FDIC is ordered to identify the policies and practices engaged in by management of the Bank which were detrimental to the Bank and jeopardized the safety of the Bank's deposits, as alleged in paragraph 12 of the Notice.
   (f) The FDIC is ordered to identify calculations supporting the conclusion that the Bank required an equity capital injection of $450,000 as of May 13, 1987, as sought in the cease and desist order proposed by the FDIC.
In addition, the FDIC was ordered to respond to paragraph 1, 3 through 6, 9 and 11 of Respondent's Requests For Admissions. Specifically, in connection with the proposed cease and desist order, the FDIC was ordered to admit or deny the following, and explain:
   (1) As of May 13, 1987 Board of Directors did meet at least monthly and did follow a written agenda.
   (2) The Bank currently has an adequate loan loss reserve.
   (3) Provision 3 of the order does not require any director of the Bank to use his or her own personal funds to increase the Bank's capital in compliance with this order.
   (4) Provision 4 of the order requires the Bank to maintain a loan loss reserve believed adequate by the Board of Directors of the Bank. The Regional Director of the FDIC does not have a veto over the determination made by the Board of Directors. (Emphasis in original text.)
   (5) The Bank's current written loan policy is adequate for purposes of paragraph 8 of the order.
   (6) The Bank must obtain the permission of the Commissioner of Banks for the State of Minnesota before it can legally pay cash dividends.
   (7) Concentrations of credit are neither illegal nor necessarily an unsound banking practice.
   FDIC enforcement counsel took exception to the rulings of the ALJ and, pursuant to section 308.12(e) of the FDIC's Rules, filed a request for special permission to appeal those rulings ("FDIC's Request for Appeal") on May 13, 1988. On May 20, 1988, Respondent filed an opposition to the FDIC's Request for Appeal ("Respondent's Opposition").

B. Discussion

   [.1] Section 308.12(e) of the FDIC's Rules provides, in pertinent part:

    Rulings of an administrative law judge or the Executive Secretary on any motion may not be appealed to the Board of Directors prior to its consideration of the administrative law judge's recommended decision, findings and conclusions, except by special permission of the Board. Such rulings shall be considered by the Board in reviewing the record. Requests to the Board for special permission to appeal from such rulings shall be filed promptly in writing, and shall briefly state the grounds for the request ... [emphasis added].

Respondent's Opposition does not argue that FDIC enforcement counsel failed to comply with the procedural requirements governing permissive interim appeals under section 308.12(e). Therefore, the Board will not address that issue. However, Respondent does contend that the request for special permission to appeal should be denied because the ALJ had the authority to issue the discovery order pursuant to the FDIC's Rules, the Administrative Procedures Act, 5 U.S.C. § 554, and judicial precedent, and thus, his order should stand.
   Under section 308.12(e), it is within the Board's sole discretion to determine whether to grant special permission to appeal an interim order, and that discretion is rarely exercised. The Board is keenly aware of and concerned about the potentially disruptive effects of such a decision to exercise its discretion to grant an appeal on the swift, orderly, and efficient processing of these administrative actions and is reluctant to interfere with the discretion of the administrative law judges in handling enforcement cases. For these reasons, the Board has chosen to exercise its discretion only in situa- {{4-1-90 p.I-13}}tions that involve important questions of law or policy with respect to relevant statutes or regulations. The Board believes this matter does involve important questions as to the permissible type and scope of discovery in FDIC administrative enforcement proceedings.

   [.2] The expansive scope of the ALJ's April 15 discovery Order presents a case of first impression to this Board. Defining the type and scope of permissible discovery in FDIC administrative enforcement proceedings is essential to the proper interpretation and implementation of FDIC's regulations generally. The Board has therefore decided to take this opportunity to review and clarify its views with respect to such discovery and thereby grants FDIC enforcement counsel's request for special permission to appeal the ALJ's discovery order. The Board is cognizant of the impending hearing date and for that reason is issuing this order granting the request for special permission to appeal. Given the importance of the issues presented in this appeal, the Board will issue a decision on the merits of the appeal at such time as it has had an adequate opportunity to review and consider the record in this proceeding.


   For the reasons set forth above, it is hereby ORDERED that enforcement counsel's request for special permission to appeal the April 15, 1988 discovery ruling of the Administrative Law Judge in this proceeding, pursuant to section 308.12(e) of the FDIC's Rules and Regulations, is GRANTED.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 7th day of June, 1988.

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