Matters in litigation covered a broad spectrum including issues relating to the supervision of
insured institutions, the resolution of failed banks and savings associations, the
liquidation of assets and the pursuit of liability claims against failed institution
officers, directors and professionals. The FDICs litigation caseload declined 23
percent, from about 12,300 matters at year-end 1996 to approximately 9,500 at year-end
1997. The Legal Division and the Division of Resolutions and Receiverships recovered
nearly $156.8 million during 1997 from professional liability settlements or judgments. At
year-end, the FDICs professional liability caseload included investigations,
lawsuits and settlement collections involving more than 180 institutions. This caseload
includes the cases the FDIC assumed from the former Resolution Trust Corporation (RTC) on
January 1, 1996. The Legal Division, working closely with other divisions and offices, was
involved in several noteworthy court cases in 1997, as described below. (For more
information about professional liability settlements and judgment (click here).
As a result of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA), the Office of Thrift Supervision (OTS) changed the regulations governing the
capital requirements for thrift institutions to make them conform to those for commercial
banks. Consequently, certain forms of intangible capital, such as supervisory goodwill,
were no longer allowed to be counted as part of a thrifts capital. A number of
acquirers of thrift institutions sued the government, alleging that they had purchased
failed or failing thrifts prior to the passage of FIRREA based on a promise that they
could count certain intangibles toward their capital requirements. They said FIRREAs
changes resulted in a breach of contract or a taking of their property without just
Three of the cases were consolidated and heard by the U.S.
Supreme Court in a case known as Winstar Corporation v. United States (Winstar).
The Court issued a decision in July 1996, finding the United States liable for a breach of
contract based on FIRREAs change in capital standards. As a result of that decision,
more than 120 of these cases are pending in the U.S. Court of Federal Claims, with the
lead case, Glendale v. United States, in its seventh month of trial at year-end.
A second case was set for trial in April 1998; trial dates have not been set for remaining
cases. A small number of the Winstar cases, known as the Guarini cases, involve
challenges to legislation passed after FIRREA that changed the method for computing
certain tax benefits given to acquirers of failed or failing thrifts.
The FDIC as successor to the rights of failed institutions is a
co-plaintiff or plaintiff in more than 40 goodwill cases.
Entitlement to Deposit Insurance
In 1993, recipients of a new bank charter in Michigan filed an application with the FDIC
for deposit insurance. On June 21,1994, and on two subsequent occasions, the FDIC Board of
Directors denied the groups application for deposit insurance because of concerns
about one of the proposed bank officials. In a previous banking position, this person
mixed the banks assets with his personal assets and demonstrated a continuing
inability to identify and understand conflicts of interest.
In November 1996, in the case of Anderson v. FDIC, the
U.S. District Court for the Eastern District of Michigan granted the FDICs request
for a summary judgment and dismissed the case. The organizers filed an appeal with the
U.S. Court of Appeals for the Sixth Circuit in Cincinnati, Ohio, and a decision upholding
the FDICs action was issued on August 19,1997. The Appeals Court concluded that the
FDICs concerns were appropriate and that its decisions denying the applications were
not arbitrary or capricious. The organizers petition for rehearing was denied by the
Court on November 14, 1997. This case is significant because it upheld the FDICs
discretion to grant or deny applications for deposit insurance.
Removal and Prohibition
An individual who worked for a coin and precious metals business made more than $1 million
in cash sales to one customer as part of a money-laundering scheme in 1993. The seller
later was convicted of failing to file a Form 8300 (Currency Transaction Report), which a
business must file with the Internal Revenue Service (IRS) when it receives more than
$10,000 in a cash transaction. He also was convicted of creating a false Form 8300 to
deceive IRS compliance auditors. While the criminal proceedings were progressing, however,
the local bank where he had been previously employed hired him as its president. In 1996,
the FDIC Board removed him from banking due to his conduct at the coin business, citing
Section 8(e)(1) of the Federal Deposit Insurance Act.
In a Section 8(e)(1) proceeding, the FDIC must demonstrate
misconduct, culpability and effect due to the persons activities at a business or
financial institution. In Hendrickson v. Federal Deposit Insurance
Corporation, the U.S. Court of Appeals for the Seventh Circuit in Chicago, Illinois,
affirmed the FDICs decision to remove the individual from banking. The case is
significant to the FDIC because it involved an order of prohibition against a person for
misconduct when he was not in banking, and did not involve a bank. The case also is
sig-nificant because the "benefit" to the individual was not an immediate gain
in the form of cash or property, but instead the continued employment by his family's
Directors and Officers Standard of Liability
During the 1980s, even as many financial institutions were failing, a number of states
relaxed the traditional negligence standard of director and officer liability. These
states provided for liability based on gross negligence or even intentional wrongdoing
instead of the simple negligence standard. In addition, many states enacted
"insulating statutes" allowing, for example, corporations to eliminate the civil
liability of their directors for even gross breaches of the traditional duties of care and
diligence. When enacting FIRREA in 1989, Congress included a new statute in the Federal
Deposit Insurance Act demonstrating concern about states protecting directors and officers
from liability for breach of traditional duties to federally insured depository
institutions. The new federal statute, while allowing for "gross negligence"
liability in FDIC civil action against directors and officers of failed depository
institutions, does not impair FDIC rights "under other applicable law."
Litigation immediately ensued over the meaning of this statute.
Lower and appellate courts around the country issued widely
conflicting opinions concerning the basic standard of care for which bank and thrift
officials may be held personally liable for monetary damages. The U.S. Supreme
Court's decision in Atherton v. FDIC, issued on January 14,1997, resolved
this long-standing conflict. The Court agreed with the FDIC's position that
FIRREA's "gross negligence" standard "provides only a floor - a
guarantee that officers and directors must meet at least a gross negligence standard. It
does not stand in the way of a stricter standard (such as ordinary negligence)."
However, the Court disagreed with the FDIC on whether federal or
state law supplied the standard of pre-insolvency and receivership liability for officers
of federally chartered institutions. The Court explained that state law applies when the
institution is in receivership, although subject to the limitation of FIRREAs gross
negligence standard. The lower federal courts have been in considerable disagreement on
this issue. Because of this confusion, the Court's decision represents a needed
clarification of the law.
The Atherton decision is expected to streamline
litigation against bank officers and reduce litigation costs because it removes one of the
principal uncertainties of the law. The FDIC will continue to follow its long-standing
practice of bringing claims against outside directors where investigation shows them to
have been grossly negligent or worse. However, where applicable state law provides an
ordinary care standard, the FDIC still will sue outside directors believed to be guilty of
gross negligence but will allege only what is required under the law.
In 1942, the Supreme Court in DOench, Duhme & Co. v. FDIC established a
broad rule protecting the FDIC against any arrangements, including oral or secret
agreements, that are likely to mislead bank examiners in their review of a banks
records. Then, in 1950, Congress established strict approval and recording requirements
that, if not met, barred any claim attempting to diminish the interest of the FDIC in
assets acquired from a failed bank.
Motorcity of Jacksonville v. Southeast Bank remains one
of the most important cases in the FDICs efforts to preserve the DOench
doctrines protection from unwritten agreements or arrangements. On August 20,1997,
the U.S. Court of Appeals for the Eleventh Circuit in Atlanta, Georgia, sitting en banc
(with all active judges participating), held in Motorcity that the DOench
doctrine was intended by Congress to survive the passage of FIRREA and remains a viable
protection for the FDIC. However, that decision disagreed with a 1995 opinion by the U.S.
Court of Appeals for the District of Columbia.
The plaintiff in Motorcity appealed to the U.S. Supreme
Court, arguing that the "split" between the two circuits needed to be resolved.
Following its decision in Atherton v. FDIC, which involved federal common law in
a different context, the U.S. Supreme Court instructed the Eleventh Circuit to reconsider
its decision and determine whether Atherton affected the outcome. The Eleventh
Circuit on August 20,1997, held that nothing in Atherton altered the outcome of
its earlier decision and in an even stronger opinion, reinstated its previous decision
that the DOench doctrine is not limited by a specific asset requirement,
that the freestanding tort exception to DOench does not apply to Atherton
and that Motorcity does not have a viable state law claim. According to the
Eleventh Circuit, the Atherton decision recognized the continuing availability of federal
common law for circumstances involving uniquely federal interests requiring a special
rule. The Eleventh Circuit held that DOench recognized those special needs
and that the special rule was still required. In the absence of clear congressional intent
to displace the DOench doctrine, it survives as an effective protection for
the FDIC. The Motorcity plaintiff filed its second appeal to the U.S. Supreme
Court on December 18, 1997.
In December 1997, the Supreme Court issued a favorable decision in a case
affecting the FDICs enforcement powers. In Hudson v. United States, the
Court decided that criminal prosecution of bank officers after the Office of the
Comptroller of the Currency (OCC) had imposed civil money penalties for the same conduct
does not violate the Constitutions Double Jeopardy Clause. Hudson
effectively overruled a 1989 Supreme Court decision that created doubt as to whether the
FDIC or any other bank regulator could impose civil penalties in cases that might also
give rise to criminal prosecution. Hudson holds that only additional criminal
penalties are unconstitutional and that the sanctions imposed by the OCC were civil in
Although the case arose from OCC actions, the decision imposes
the same kind of civil money penalties that could be used by the FDIC. Hudson
effectively removes the doubt created by the 1989 decision and should result in smoother
coordination with the U.S. Department of Justice in cases with the potential for criminal