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FDIC Enforcement Decisions and Orders

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   [8013] In the Matter of First State Bank of Marlin, Marlin, Texas, Docket No. FDIC-90-207a (3-10-92).

   Board grants interlocutory appeal and decides that an ALJ violates both statute and regulation by delaying issuance of his recommended decision in order to delay termination of insurance for 180 days while Bank may improve its condition.

   [.1] Practice and Procedure—Interlocutory Review—ALJ Rulings
   Board review of ALJ's order continuing a proceeding for 180 days after the hearing is appropriate because it raises a question of law or policy on which a difference of opinion exists, and immediate review may advance the ultimate termination of the proceeding.

   [.2] Practice and Procedure—Administrative Law Judge—Recommended Decision—Time for Filing
   ALJ order continuing proceedings for 180 days after hearing violates the plain requirement of FDIC Rule 38 which provides that an ALJ must file his recommended decision with the Board within 45 days after post-hearing briefs are due.

   [.3] Termination of Insurance—Authority to Order
   The Board alone has statutory authority to order termination of insurance, and ALJ's recommendation to delay termination undermines this authority.

In the Matter of
(Insured State Nonmember Bank)
Docket No. FDIC-90-207a


   This case is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") on FDIC Enforcement Counsel's Request for Interlocutory Review of an Order of Administrative Law Judge Steven M. Charno ("ALJ") dated January 10, 1992. That Order, issued after a hearing and filing of post-hearing briefs in this action to terminate the insurance of First State Bank of Marlin, Marlin, Texas ("Bank"), continued the proceeding until July 8, 1992. For the reasons set forth below, the Board concludes that it should grant
{{5-31-92 p.I-50}}the request for interlocutory review, and that the ALJ's Order continuing the proceeding should be vacated.


   On March 1, 1991, the FDIC issued to the Bank a Notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing ("Notice"). The Notice charged that the Bank was in an unsafe or unsound condition, and, therefore, posed a significant risk of loss to the insurance fund. The ALJ conducted a hearing on October 9, 1991, and the parties filed post-hearing briefs on December 3, 1991.
   On December 17, 1991, the ALJ orally announced his decision on the record. He concluded that the record supported a decision to terminate the Bank's insurance, but there was no need for the termination order to be effective immediately. The ALJ believed that, since the Bank's financial deterioration had ceased and a conservator had been appointed, the Bank should be allowed an additional period to increase its capital to required levels. He instructed the prevailing party, FDIC Enforcement Counsel, to prepare a draft Recommended Decision that would find termination was warranted but delaying for 180 days the issuance of the order effectuating the termination. On January 7, 1992, FDIC Enforcement Counsel submitted the draft Recommended Decision. However, on January 10, 1992, the ALJ issued the Order continuing the proceeding until July 8, 1992.
   On January 23, 1992, FDIC Enforcement Counsel filed a Request for Interlocutory Review of the ALJ's Order. The Bank filed a Response in Opposition.


   This case presents two issues for resolution: (1) whether the Board should grant interlocutory review, and (2) if review is granted, whether the ALJ's Order was improper under the Uniform Rules of Practice and Procedure as well as the statute. The Board concludes that interlocutory review is appropriate, and that the ALJ's Order must be vacated because it is inconsistent with Uniform Rule of Procedure 38, 12 C.F.R. § 308.38, and the provisions of section 8(a) and (h) of the Federal Deposit Insurance Act, 12 U.S.C. §§ 1818(a) and (h).

   A. Interlocutory Review is Warranted.

   [.1] Rule 28 of the Uniform Rules of Practice and Procedure, 12 C.F.R. § 308.28, governs interlocutory appeals. That Rule provides that the Board may grant interlocutory review of an ALJ ruling if:

       (1) The ruling involves a controlling question of law or policy as to which substantial grounds exist for a difference of opinion;
       (2) Immediate review of the ruling may materially advance the ultimate termination of the proceeding;
       (3) Subsequent modification of the ruling at the conclusion of the proceeding would be an inadequate remedy; or
       (4) Subsequent modification of the ruling at the conclusion of the proceeding would cause unusual delay or expense.
   12 C.F.R. § 303.28(b). In requesting interlocutory review, FDIC Enforcement Counsel relies on ground (1). The Board agrees that ground (1) is properly invoked. This case involves a controlling question of law and policy: whether the ALJ has authority to delay issuance of his recommended decision in order to delay the termination of insurance. It is also clear that there is a difference of opinion on the proper procedure for delaying termination between the ALJ in this case and the Board in FDIC-80-33a, 1 P-H FDIC Enf. Dec. and Ord. ¶5007 (May 28, 1981), in which the ALJ recommended that termination be delayed in his Recommended Decision and the Board adopted that recommendation with modifications.
   In the Board's view, grounds (2) and (3) also furnish a solid basis for granting review. The problem in this case is that the ALJ has refused to complete his assigned role in the proceeding because he "believes" the Bank should be given an opportunity to come into compliance with the applicable capital requirements. Therefore, immediate review will advance the termination of this case.
   Additionally, subsequent modification of the Order at the conclusion of the case may not be an adequate remedy. The purpose of a termination proceeding is to limit the risk an insured institution poses to the insurance fund. See In the Matter of Southwestern Bank & Trust Co., Oklahoma City, Oklahoma, 2 P-H FDIC Enf. Dec. and Ord. ¶8007B at I-29 (Aug. 14, 1990). The ALJ's Order in this case reflects his view that the condition of the institution is not likely to deteriorate {{5-31-92 p.I-51}}and may, in fact, improve. However, if that scenario turns out to be incorrect, subsequent modification of the order will not remedy the additional exposure incurred by the insurance fund.
   In short, the ALJ's Order warrants interlocutory review for several reasons. Accordingly, the Board grants FDIC Enforcement Counsel's Request for Interlocutory Review.
   B. The ALJ's Order is Inconsistent with Rule 38 of the Uniform Rules of Practice and Procedure and 12 U.S.C. §§ 1818(a)(3), (a)(9) and (h)(1).

   [.2] As set forth above, the ALJ issued his January 10 Order continuing the proceedings until July 8, 1992, because he believed that the Bank should be given time to improve its capital position and remedy the deficiencies which led to the initiation of these proceedings. In effect, his action substitutes his judgment for the Board's as to the proper approach to resolution of a termination of insurance proceeding where the institution has presented evidence of an improvement of its condition. In so doing, he relied primarily on FDIC-80-33a, supra. Because his action usurps the Board's exercise of the judgment and authority vested in it by regulation implementing the statutory scheme, it must be vacated.
   The ALJ's Order is plainly inconsistent with Rule 38 of the Uniform Rules of Practice and Procedure, 12 C.F.R. § 308.38, which implements the statute.1

That Rule provides that "[w]ithin 45 days after expiration of the time allowed for filing reply briefs under § 308.37(b), the administrative law judge shall file and certify to the Executive Secretary for decision the record of the proceeding [including the ALJ's recommended decision]." 12 C.F.R. § 308.38.2

In this case, the parties' post-hearing briefs were filed on December 3, 1991. Under Rule 37(b), they could have filed reply briefs within the next 15 days, that is until December 18, 1991. Under Rule 38, therefore, the ALJ was required to submit the case to the Board no later than February 1, 1992, 45 days after the expiration of time for filing reply briefs. His Order, continuing the case until July 8, 1992, violates the plain requirement of Rule 38.3

   [.3] The Order is also inconsistent with the statutory provision governing termination. Under sections 1818(a)(3) and (h)(1), only the Board may make the final decision concerning termination, and, having done so, only the Board "may issue an order terminating the insured status of [a] depository institution effective as of a date subsequent to such finding." 12 U.S.C. §§ 1818(a)(3). Section 8(a)(9), 12 U.S.C. § 1818(a)(9), forbids delegation of this authority. Thus, by statute, the Board alone has the authority to make decisions concerning termination.
   This scheme serves an important purpose which is undermined by the ALJ's action. The decision to delay termination, like other decisions concerning appropriate relief in section 1818 proceedings, is a highly significant one potentially involving substantial exposure of the insurance fund. For that reason, it is the type of decision which Congress entrusted exclusively to the Board. 12 U.S.C. §§ 1818(a)(3) and (a)(9). Rule 38 effectuates the mandate from Congress that the Board make the final decisions in termination proceedings, see 12 U.S.C. § 1818(a)(3) and (a)(9), as well as other section 1818 proceedings, 12 U.S.C. § 1818(h)(1). See also 12 C.F.R. § 308.29 (only the Board may issue final order granting a motion for summary disposition), 308.5(b)(7) (same).4
   The ALJ has authority to recommend that the Board grant relief to a respondent based

1 The Uniform Rules were promulgated in 1991 and appear at 56 Fed. Reg. 37,975 (Aug. 9, 1991).

2 Rule 38 replaces an analogous requirement contained in 12 C.F.R. § 308.40(a) (1991). That requirement was based on a somewhat different time limit: submission to the Board within 50 days from the filing of proposed post-hearing findings of fact and conclusions of law.

3 The Bank suggests that Rule 38 may be inapplicable to an action, as here, commenced prior to promulgation of the Rule. This claim lacks merit; procedural changes which do not affect substantive rights apply to pending cases. RTC v. Ward, 888 F.2d 57, 58 (8th Cir. 1989); Turboff v. Merrill Lynch, Pierce, Fenner & Smith, 867 F.2d 1518, 1521 (5th Cir. 1989). See Sandefur v. Cherry, 718 F.2d 682, 684 (5th Cir. 1983). In any event, the ALJ's Order would have violated the predecessor to Rule 38, 12 C.F.R. § 308.40(a)(1991), see note 2, supra.

4 The ALJ's reliance on FDIC-80-33a is misplaced because of the different procedural posture of that case. In that case, by way of contrast to this one, the ALJ followed the procedures mandated by the rules. He concluded in his Recommended Decision and Order that the evidence justified termination of the bank's insurance, but that the bank should be given a set period of time to raise additional capital and termination should only be ordered if the (Continued)

{{5-31-92 p.1–52}}on his view of the facts and the law. However, he is not at liberty to unilaterally undertake to effectuate that recommendation where it involves action that is inconsistent with the statute and/or the Uniform Rules of Practice and Procedure.5

Only the Board possesses the authority to "issue an order terminating the insured status of [a] depository institution effective as of a date subsequent to [a] finding [that termination is appropriate]." 12 U.S.C. § 1818(a)(3). See also 12 U.S.C. §§ 1818(a)(9) and (h)(1). The decision to delay implementation of an order to terminate insurance is solely within the Board's authority. Accordingly, the ALJ's Order of January 10, 1992 must be vacated.6


   The Board has considered the record in this case including the January 10, 1992 Order and the pleadings filed by the parties in connection with the Request for Interlocutory Review. On the basis of its review of the record and the relevant legal authority, the Board finds that the Request for Interlocutory Review is well taken and that the ALJ's Order cannot stand. Accordingly, it is hereby
   ORDERED that FDIC Enforcement Counsel's Request for Interlocutory Review is granted. It is further
   ORDERED that the January 10, 1992, Order issued by the ALJ is vacated and the case is remanded to the ALJ with instructions to submit this case to the Board pursuant to Rule 38 within 35 days of the date of this Decision and Order. The parties shall have fifteen days from the date of this Decision and Order to furnish to the ALJ updated information on the Bank's financial condition.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 10th day of March, 1992.

4 Continuedbank failed to do so, Id. at A-95-96. On appeal, the Board adopted in modified form the ALJ's recommendation that the bank, although meeting the criteria for termination of insurance, be given some additional time to raise capital. Id. at A-68.

5 One problem raised by the ALJ's action is that if he has incorrectly predicted that the Bank's condition is improving, he has not put in place any structure for reevaluating his prediction prior to the expiration of the 180 day continuance, and, in any event, he has no final decision authority permitting immediate termination to limit the exposure of the insurance fund. The Board, by way of contrast, has the necessary authority to put in place a structure characterized by immediate termination of insurance if certain interim goals are not met. Thus, only the Board is in a position to properly manage a delayed termination.

6 Because of the delay resulting from the ALJ's actions, his Recommended Decision, which the Board is ordering him to submit within 35 days, may be based on out-of-date information. Accordingly, it is appropriate to give the parties an opportunity to update the information in the record.

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