Banking Law

The recent victory of Advanta Bank over the FDIC in federal district court gives some small encouragement to those of us who hope that the Fifth Amendment isn't a dead letter when it comes to the federal banking agencies. According to a recent American Banker article, United States District Court Judge John Facciola put a bit in the mouth of a government agency that was running wild with the notion that "judicial deference" to agency discretion means "total lack of restraint."

"The deference due to the agency in interpreting" its authority "is not limitless and does not allow for the contravention of the law which gave that agency its authority," Facciola, a magistrate judge in the Washington, D.C., district, said in his order. "Because the agency's issuance of a temporary cease and desist order was outside the bounds of a clear grant of authority from Congress, the plaintiff's motion for an injunction setting aside the temporary cease and desist order ? must be granted."

The FDIC had contended that the bankruptcy of the bank's parent, credit card giant Advanta Corp., "was prompting concerns at the Delaware bank, including that the subsidiary lacked independent board control and had failed to keep adequate records for examiners."

That, in concert with the deterioration of the ILC, meant there was "substantial threat that the bank has engaged in or will engage in violations of law and/or unsound banking practices," the FDIC said.

The bank strongly disagreed and told the FDIC that it would oppose any attempted Cease and Desist proceeding before an administrative law judge. Flexing its muscles, the FDIC then issued a "temporary cease and desist order" that attempted to impose the same restrictions on the bank until the administrative process could run its course. Unfortunately for the FDIC, applicable law authorizes such a draconian measure only if the alleged unsafe and unsound practices will likely cause the bank's "insolvency or significant dissipation of assets." The need for that factual basis didn't stop the creative minds at the FDIC, which spun the story in what they thought was the proper direction with the allegation that the bank was, in fact, shrinking in size and that, therefore, the shrinkage must be caused by the alleged unsafe and unsound practices.

Staring the judge in the face, however, were facts that could not be ignored, even by a court that normally gives deference to the regulators. The most damning fact (against the FDIC) was that the bank was in the process of voluntary liquidation. Guess what happens in a liquidation? You guessed correctly: the bank divests assets.

"It is not the unsafe banking practices which are causing the dissipation of assets, but rather the process of termination, which the FDIC started, which are 'dissipating' the assets," he said in the order. "Under the statute, the FDIC can only issue a temporary cease and desist order where the possibility of the dissipation of assets is more than a theoretical consequence of the unsafe or unsound practice."

As all of the experts quoted in the article correctly observe, victories like this one are rare. Much more common are the other two cases mentioned, both of which the regulators won. Those types of victories, and the arrogance, even hubris, they spawn in the souls of some regulators, lead to the type of statements as one that a former bank CEO related to me, in which the Chief Examiner of a federal banking agency, when confronted by bank management with fundamental errors in appraisals of assets and loss reserve calculations by examiners, sneered that the agency would simply change the assumptions under which the calculations were made to arrive at the same results.

Therefore, you've got to celebrate the rare little victories where you can find them. Even when they're won by a bank in the process of liquidating, which would have made a "victory" by the FDIC essentially useless, other than to feed a playground bully's apparently limitless need to prove that she's in charge.