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[¶8014] In the Matter of Donald E. Thompson, Bank of Bellevue, Bellevue, Nebraska, Docket No. FDIC-91-246jj (3-10-92).
Board grants an interlocutory appeal and determines that a Section 32 hearing is a de novo consideration of the statutory standards for disapproval based on all relevant evidence, and is not limited to a review of the evidence available to the FDIC before it issued its notice of disapproval to the Applicant.
[.1] Practice and Procedure—Interlocutory Appeal—Section 32
Although FDIC Rules concerning interlocutory appeals do not cover Section 32, the Board may conduct an interlocutory review under its general authority to carry out the provisions of the FDI Act, according to criteria established for interlocutory review in other situations.
[.2] FDI Act Section 32—Scope of Proceeding
The Board must be free to consider all relevant and reliable evidence bearing on an applicant's competence, integrity, character and experience. As long as the applicant's due process rights are protected, there is no justification for the Board to ignore relevant information which is learned during the hearing process which the applicant himself requested.
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In the Matter of
DONALD E. THOMPSON
BANK OF BELLEVUE
BELLEVUE,NEBRASKA
(Insured State Nonmember Bank)
DECISION AND ORDER GRANTING
SPECIAL PERMISSION TO APPEAL
FDIC-91-246jj
INTRODUCTION
This matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") upon the request of FDIC Enforcement Counsel for Special Permission to Appeal a prehearing ruling of the Presiding Officer, Richard A. White ("Presiding Officer"). The request arises in a proceeding under section 32 of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1831i. The FDIC is required under section 32 to issue a notice of disapproval if an application submitted to the FDIC indicates that the applicant lacks the requisite "competence, experience, character, or integrity" and that it is not "in the best interest of the depositors of the depository institution or in the best interests of the public to permit the individual to be employed by, or associated with, the depository institution...." 12 U.S.C. § 1831i(e).
BACKGROUND
A Notification of Addition of a Director or Employment of a Senior Executive Officer ("Notification"), dated March 11, 1991, was submitted to the FDIC by Bank of Bellevue, Bellevue, Nebraska ("Bellevue"), a troubled institution. The Notification proposed the employment of Donald E. Thompson as a senior executive officer of Bellevue (the "Applicant").1
The Regional Director (Supervision) of the FDIC's Kansas City Regional Office ("Regional Director") disapproved Mr. Thompson's proposed employment at Bellevue and issued a Notice of Disapproval of Notification of Addition of a Director and/or Employment of a Senior Executive Officer ("Notice of Disapproval"). Mr. Thompson appealed to the Director, Division of Supervision. This appeal was denied and Mr. Thompson requested a hearing before a presiding officer. Prior to the commencement of the hearing, FDIC Enforcement Counsel notified Mr. Thompson that the FDIC intended to offer evidence of unsafe or unsound practices engaged in by Mr. Thompson which was not relied on by the FDIC in issuing its Notice of Disapproval or in denying Mr. Thompson's appeal.2
Mr. Thompson objected and moved to strike these additional allegations. A telephonic hearing was held and the Presiding Officer granted Mr. Thompson's motion to strike. FDIC Enforcement Counsel requested a modification of this ruling permitting the additional evidence (and Mr. Thompson's rebuttal evidence, if any) to be presented at the hearing, but preserving the Presiding Officer's decision that this evidence should not be considered in deciding the case, thus presenting a complete record for the FDIC Board to review. This requested modification was rejected. At the request of FDIC Enforcement Counsel, the hearing was continued sine die to permit an immediate appeal of this ruling. On February 10, 1992, Counsel for Mr. Thompson submitted a letter objecting to the appeal.
DISCUSSION
This case presents the Board with two issues of first impression. The first is whether the Board may accept an interlocutory appeal in a hearing under section 32, and if it may, whether this case is appropriate for such an appeal. The second is the issue of whether a hearing pursuant to section 32 of the FDI Act is limited to a review of the evidence considered by the FDIC in issuing its Notice of Disapproval and Notice of Denial of Appeal, or is a de novo consideration of the statutory standards for disapproval based on all relevant, reliable evidence.
1 On or about March 21, 1991, Bellevue withdrew its participation in the Notification and Mr. Thompson proceeded on his own. His Notification was accepted for filing as of July 26, 1991.
2 The Notice of Disapproval and Notice of Denial of Appeal From Notice of Disapproval and Notice of Hearing ("Notice of Denial of Appeal") were based on Mr. Thompson's activities as a loan officer and head of the commercial loan department of Occidental Nebraska Federal Savings Bank, Omaha, Nebraska. By letter dated November 19, 1991, FDIC Enforcement Counsel advised Mr. Thompson's counsel that he also intended to offer evidence relating to Mr. Thompson's service as a senior vice president and head of the loan department at Packers Bank & Trust Co., Omaha, Nebraska ("Packers evidence").
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I. Interlocutory Appeal.
A. The Board May Take an Interlocutory Appeal.
[.1] Counsel for each party points out that the provision of the FDIC Rules of Practice and Procedure ("FDIC Rules") covering interlocutory appeals does not apply to hearings under section 32. See 12 C.F.R. § 308.28. Counsel for Mr. Thompson argues, therefore, that there can be no interlocutory appeal. His reading of the Board's power is too narrow. The Board may conduct an interlocutory review pursuant to its broad general grant of authority to carry out the provisions of the FDI Act. 12 U.S.C. § 1819(a) Seventh.
B. Interlocutory Appeal is Appropriate in this Case.
The Board has established criteria for the grant of an interlocutory appeal. In support of its request for special permission to appeal, a party must demonstrate that at least one of two circumstances exists, warranting prompt intervention:
(i) the interlocutory appeal involves an important, unresolved issue of general application that should be immediately decided by the Board or,
(ii) the interlocutory appeal involves clear error below, and the rights of a party are likely to be severely prejudiced if the matter is not immediately decided by the Board.
12 C.F.R. § 308.31(a)(2). Prior Board decisions have also established that such appeals may be granted: (1) where issues of first impression are involved; (2) where significant policy considerations are raised; or (3) where there exists a substantial danger of irreparable harm to a party. FDIC-89-144k, 2 P-H FDIC Enf. Dec. ¶8007 (1990); FDIC-85-87k, 2 P-H FDIC Enf. Dec. ¶5095 (1987). This case satisfies several of these tests.
First, the nature and scope of a hearing under section 32 is a matter of first impression for the Board with important ramifications. Second, in the Board's view, the Presiding Officer's ruling is erroneous and fails to give sufficient weight to the significant policy considerations underlying section 32. Additionally, because the Presiding Officer denied FDIC Enforcement Counsel's request for modification of the order to strike, which would have allowed the Board to consider all of the evidence at a later date, failure to grant this interlocutory appeal would eliminate evidence FDIC Enforcement Counsel intends to present. Because of the Board's view of the scope of section 32 hearings, this might very well result in the unnecessary delay and expense of a remand order by the Board at the conclusion of the hearing. For these reasons the Board grants the request for special permission to appeal.
II. The Nature and Scope of Hearings Under Section 32.
[.2] The Presiding Officer ruled that the FDIC may not introduce evidence relevant to Mr. Thompson's competence if that evidence was not considered by the FDIC in issuing its Notice of Disapproval or its Notice of Denial of Appeal. Thus, the Presiding Officer ruled that the factual issues to be heard in a section 32 proceeding are limited by these Notices. The Board finds that the Presiding Officer misconstrues well-settled law and practice regarding the amendment of administrative pleadings, the requirements of due process, and the nature of the hearing provided under section 32.
Section 32 was added to the FDI Act with the enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), 101 Stat. 183. It was added out of heightened concern for the safety and soundness of financial institutions and was intended as an additional means of protecting the public against incompetent, or unscrupulous bank management. The Board has described section 32 as:
a regulatory tool by which the FDIC may further the safety and soundness of insured depository institutions by screening those persons who seek to manage the affairs of institutions that have been newly chartered, have recently changed control, and/or are in a troubled condition. The senior officials of a troubled institution must be persons with demonstrated management ability.
In the Matter of Stanley A. Smith, FDIC-90-182jj, 2 P-H FDIC Enf. Dec. ¶5164A (1991). If this regulatory tool is to be effective, the Board must be free to consider all relevant and reliable evidence bearing on a petitioner's competence, integrity, character, or experience in making its final decision. The Board's concern is the protection of financial institutions, the insurance fund, and the public. It sees no justification for ignoring relevant and reliable information which is
{{6-30-92 p.I-55}}learned during the hearing process requested by an applicant, so long as the applicant is provided an opportunity to respond to this evidence. Had the applicant not requested a hearing following the denial of his appeal, the matter would have ended and this evidence may not have come to light. But once an applicant begins the hearing process, the FDIC should be free to fully investigate during the pretrial period and to present all relevant, reliable evidence to the Board, to ensure that the public does not risk the employment of an unqualified director or senior executive officer. To hold otherwise would be contrary to the policy and purpose of section 32.3
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An important element, of course, is satisfaction of the due process requirement that an applicant be given adequate notice of the evidence to be presented and an opportunity to respond to the evidence. Mr. Thompson was afforded sufficient notice by FDIC Enforcement Counsel's letter of November 19, 1991, and the FDIC's Statement of Additional Support For Notice of Denial of Appeal From Notice of Disapproval and Notice of Hearing ("FDIC Statement"), and he would have had an opportunity to rebut the evidence at the hearing. There would have been no "surprise" for the Applicant and no denial of due process.
The Presiding Officer erred in striking the FDIC's Statement. He further compounded the error by denying FDIC Enforcement Counsel's request to modify the order to strike. The Board finds that the FDIC's Statement is in the nature of a proposed amendment of the pleadings and should be reviewed in light of the legal principles applicable to such amendments.
Generally, administrative actions are not subject to the technical pleading requirements that govern private lawsuits. FDIC-85-356e, 2 P-H Enf. Dec. ¶5112 (1988). On the contrary, it is well settled that administrative pleadings are to be liberally construed and easily amended. Simplex Time Recorder Company v. Secretary of Labor, 766 F.2d 575, 585 (D.C. Cir. 1985); Donovan v. Royal Logging, 645 F.2d 822 826 (9th Cir. 1981); Brock v. Dow Chemical U.S.A., 801 F.2d 926, 930 (7th Cir. 1986). The FDIC Rules incorporate this view: "Pleadings may be amended ... at any stage of the proceeding by leave of the administrative law judge" and "[s]uch leave will be freely given." (Emphasis added.) 12 C.F.R. § 308.20(a). In addition, because neither the Administrative Procedure Act ("APA") nor Subpart A of the FDIC Rules apply to section 32 proceedings, they are intended to be less formal and subject to fewer procedural requirements than adjudications which are subject to the APA and the Subpart A of the FDIC Rules.
The case law establishes the basis for denying a proposed amendment of administrative pleadings as actual, demonstrable prejudice to the non-moving party. "[P]rejudice to the non-moving party is the touchstone for the denial of an amendment." Cornell and Company, Inc. v. OSHRC, 573 F.2d 820, 823 (3rd Cir. 1978).4 There can be no question of prejudice here as Mr. Thompson was given actual notice of FDIC Enforcement Counsel's intention to offer the Packers evidence in excess of two weeks prior to the hearing and because FDIC Enforcement Counsel stated that he would not oppose a continuance to allow Mr. Thompson to prepare his defense against this evidence. Moreover, as FDIC Enforcement Counsel points out, because this evidence relates to Mr. Thompson's personal activities, it must involve facts with which he is already familiar, reducing the likelihood of prejudice.5
As stated above, had the Presiding Officer modified his order to strike the FDIC's Statement to preserve the Packers evidence
3 Section 19 of the FDI Act requires the consent of the FDIC before a person convicted of a criminal offense involving dishonesty or a breach of trust may participate in the conduct of the affairs of an insured institution. In a recent case involving questions of an applicant's full disclosure, the Board found that "the procedures which apply under section 19 ... clearly manifest such a full disclosure policy. To interpret the statute and regulations otherwise would invite the type of evasion or lack of candor that has occurred here. This would increase the difficulty, if not render impossible, the effective regulation of the banking industry and protection of the insurance fund." FDIC-90-229L, 2 P-H FDIC Enf. Dec. ¶5167 (August 1, 1991). While the instant proceeding is brought under section 32, rather than section 19, the Board's reasons for seeking full disclosure of all relevant material are the same.
4 In some circumstances appreciable delay of the proceeding could be prejudicial to an insured institution's depositors, the insurance fund or the public.
5 Mr. Thompson included a statement summarizing his employment at Packers in the employment history submitted with his section 32 Notification.
{{6-30-92 p.I-56}}for the Board's consideration, this interlocutory appeal could have been avoided. In light of the Presiding Officer's ruling, however, the Board is reluctant to require the parties to complete a hearing and then face a possible remand to incorporate evidence currently available and appropriate for consideration. Therefore, it has been necessary to address the issues presented on an interlocutory basis.
ORDER
In view of the substantial public interest in fully reviewing the qualifications of potential directors and senior executive officers of insured institutions subject to section 32, the legal precedent favoring liberal amendment of administrative pleadings, and the absence of prejudice to Mr. Thompson, it is hereby ORDERED that,
1) FDIC Enforcement Counsel's Request for Special Permission to Appeal is GRANTED;
2) The prehearing order of the Presiding Officer striking the FDIC's Statement is REVERSED. FDIC Enforcement Counsel may enter the Packers evidence, and Mr. Thompson shall have an opportunity to present rebuttal evidence.
By direction of the Board of Directors.
Dated at Washington, D.C., this 10th day of March, 1992.
