Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-95-05126/USCOURTS-caDC-95-05126-0/pdf.json

Parties Involved:
Federal Deposit Insurance Corporation
Appellee
James Madison Limited
Appellant
Eugene A. Ludwig
Appellee
United States Department of the Treasury
Appellee

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 5, 1995 Decided May 3, 1996

No. 95-5126

JAMES MADISON LIMITED, BY NORMAN F. HECHT, SR., ASSIGNEE,

APPELLANT

v.

EUGENE A. LUDWIG, COMPTROLLER OF THE CURRENCY, ET AL.,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 93cv00792)

William J. Smith argued the cause and filed the briefs for appellant.

Ellen M. McElligott, Senior Trial Attorney, Office of the Comptroller of the Currency, with whom

L. Robert Griffin, Director of the Litigation Division was on the brief, argued the cause for appellee

Comptroller of the Currency. Joan M. Bernott, Assistant Director of the Litigation Division entered

an appearance.

Thomas L. Holzman, Counsel, Federal Deposit Insurance Corporation, with whom Thomas A.

Schulz, Assistant GeneralCounsel, Colleen J. Bombardier, Senior Counsel and Charles L. Cope, II,

Senior Counsel were on the brief, argued the cause for appellee Federal Deposit Insurance

Corporation.

Before: GINSBURG, ROGERS, and TATEL, Circuit Judges.

Opinion for the court filed by Circuit Judge TATEL.

TATEL, Circuit Judge: After examining the financial condition of Madison National Bank and

MadisonNationalBank ofVirginia, theComptroller oftheCurrencydeclared the banksinsolvent and

appointed the Federal Deposit Insurance Corporation receiver of the two institutions. The banks'

holding companysued, charging that the federal agencies abused their discretion, acted arbitrarilyand

capriciously, and failed to follow statutorily prescribed procedures in taking over the banks. The

holding company later sought leave to amend its original complaint to add counts alleging that the

statute authorizing the government seizure of the banks and the seizure itself violated the Fifth

Amendment's due process guarantee. The district court granted summary judgment for the

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 1 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Government on the claims in the original complaint and denied the motion to amend.

Rejecting the FDIC's argument that federal district courtslack jurisdiction to grant any of the

relief the holding company seeks, we reach the merits of this appeal. Because we agree with the

district court that the question of whether the Government acted arbitrarily in seizing the banks

presents no genuine issues of material fact and that the Government is entitled to judgment as a

matter of law, we affirm the district court's grant of summary judgment for the Government. And

because the undisputed facts show that the banks received all the process they were due under the

Fifth Amendment, we agree with the district court that amending the complaint would have been

futile and so affirm its denial of the motion to amend.

I.

The Office of the Comptroller of the Currency, a bureau of the United States Department of

the Treasury, is headed by the Comptroller of the Currency and is the primary regulator of federally

chartered commercial banks, known as national banks. The OCC periodically examines national

banks. See 12 U.S.C. § 481 (1994). Upon determining that a national bank is insolvent, the

Comptroller may appoint either a conservator or a receiver of the institution. Id. § 191 (authorizing

appointment of receiver); id. § 203 (authorizing appointment of conservator). If the Comptroller

choosesto appoint a conservator of a national bank, the statute allowsthe appointment of the FDIC;

but if the Comptroller appoints a receiver, the statute requires the appointment of the FDIC. 12

U.S.C. § 1821(c)(2)(A)(i)-(ii) (1994). The principal difference between a conservator and receiver

is that a conservator may operate and dispose of a bank as a going concern, while a receiver has the

power to liquidate and wind up the affairs of an institution. 12 U.S.C. § 1821(d)(2) (1994); H.R.

CONF. REP. NO. 209, 101st Cong., 1st Sess. 398 (1989).

In January 1991, the OCC conducted a limited review of Madison National Bank, Madison

National Bank of Virginia, and Union National Bankthree banks owned by James Madison Ltd.,

a bank holding company. The investigation focused on the banks' aggregate allowance for loan and

lease losses, a reserve that banks maintain to absorb losses they are likely to incur because of an

inability to recover the full value of the loans and leases on their books. See Interagency Policy

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 2 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Statement on the Allowance for Loan and Lease Losses, BB 93-60, 1993 WL 542562 (Dec. 21,

1993). This reserve may be critical to a bank's financial condition. Banks treat additions to their

reserves as expenses, charging themfirst against current earnings; if earnings are inadequate to cover

the cost of an addition to the reserve, the addition is charged against the bank's equity capital. Thus,

a relatively large addition to the reserve might not only eliminate all of a bank's current earnings, but

also deplete a bank's accumulated capital, rendering the institution insolvent.

At the conclusion of its January review, the OCC informed the Madison banks that it had

found serious weaknesses in their methodology for establishing their loan loss allowance and that it

would return to conduct a more detailed examination of the adequacy of the banks' reserves. That

second examination lasted frommid-Februarythrough the end of April, during which Union National

Bank, along with a state-chartered institution, Madison Bank of Maryland, merged into Madison

National Bank, leaving James Madison Ltd. as the owner of two national banks: Madison National

Bank and Madison NationalBank of Virginia. Determining that the loan loss allowances for the two

resulting banks were inadequate, the OCC directed the banks on May 1 to add approximately $31.6

million to their allowances, leaving the institutions insolvent with a combined net worth of minus

$15.8 million. At the same time, the OCC gave the banks an opportunity to submit a capital plan

showing how they would return to financial health by the end of the year. After rejecting the banks'

subsequently filed capital plan and acting pursuant to 12 U.S.C. § 191, the Comptroller declared the

banks insolvent and appointed the FDIC as receiver. The FDIC began immediately disposing of the

banks' assets and liabilities.

Having filed for bankruptcy, James Madison, Ltd. sued the Comptroller, the OCC, and the

FDIC in the United States District Court for the District of Columbia. Count I of Madison's

complaint alleged that, byfailing to follow the agency's ownguidelinesin conducting the examination,

the OCCexaminers abused their discretion in violation ofthe Administrative Procedure Act, 5 U.S.C.

§ 706(2)(A) (1994). Count II claimed that, because the examiners lacked a rational basis for

requiring $31.6 million in additionalreserves, they acted arbitrarily and capriciously also in violation

of 5 U.S.C. § 706(2)(A). Counts III and IV alleged that, by failing to conduct a "due examination"

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 3 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

of the affairs of the banks prior to appointing the receiver under 12 U.S.C. § 191, the Comptroller

abused his discretion and failed to observe procedures required by law in violation of 5 U.S.C. §

706(2)(A) and (D). As a remedy, Madison sought an injunction removing the FDIC as receiver;

returning bank assetsthat the FDIC still had in its possession, as well asthe proceedsfromthe FDIC's

prior sales of the banks' assets; restoring the banks' charters to allow them to resume business; and

returning the banks' files.

The Government moved for dismissal or, alternatively, for summary judgment. While the

agencies' motions were pending, Madison filed a motion for leave to amend its complaint to add

several new claims, two of which are at issue in this appeal: count IX, alleging that 12 U.S.C. § 191

on its face violates the due process guarantee of the Fifth Amendment by allowing the government

to seize national banks without an adequate hearing; and count X, making the same due process

challenges as applied in this case. As the remedy for these two alleged due process violations,

Madison sought declaratory relief and an injunction similar to the one it sought for counts I through

IV, or alternatively, monetary damages.

Shortly after filing its complaint, Madison requested discovery. Without objection from

Madison, the court granted the Government's motion to stay discovery pending the outcome of its

dispositive motions. In support of its motion for summary judgment, the Government submitted a

statement of undisputed material facts describing events leading up to the seizure and liquidation of

the banks, as well as a voluminous administrative record containing contemporaneousreports by the

examiners regarding their findings during the 1991 examinations. Madison failed to file a statement

of controverted materialfacts asrequired by LocalRule 108(h), submitting instead a list of questions

along with affidavits of former bank officers and consultants challenging the reserves that the

government required the banks to establish. Together with the pleadings and legal memoranda, this

was the record before the district court. 

The district court granted summary judgment to the Government, ruling that the OCC acted

in accordance with the requirements of the Administrative Procedure Act in requiring the banks to

add $31.6 million to their loan loss allowances and in declaring the banksinsolvent. The district court

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 4 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

also denied Madison's motion to amend its complaint, concluding that the two due process claims

were "futile." In response to Madison's motion for reconsideration, the district court stood by its

rulings. Madison now appeals the grant of summary judgment on counts I through IV and the denial

of its motion to add counts IX and X, based not only on the merits of the district court's rulings, but

also on the adequacy of the record before the district court.

II.

Before addressing the merits ofMadison's appeal, we first consider the FDIC's argument that

two provisions of federal law deprive United States district courts of jurisdiction to grant the

declaratory and injunctive reliefMadison seeks. Although the agency suggests, without explanation,

that we need not reach its jurisdictional arguments until after we consider the merits of the case, we

have an affirmative obligation "to consider whether the constitutional and statutory authority exist

for usto hear each dispute." Herbert v. National Academy of Sciences, 974 F.2d 192, 196 (D.C. Cir.

1992). If, as the FDIC contends, federal courts cannot grant any of the relief sought by Madison, a

decision of this court would be an advisory opinion barred by Article III of the Constitution. See

Preiser v. Newkirk, 422 U.S. 395, 401 (1975); see also Lujan v. Defenders of Wildlife, 504 U.S.

555, 560 (1992) (For a plaintiff to have standing, "it must be "likely,' as opposed to merely

"speculative,' that the injury will be "redressed by a favorable decision.' ").

Because Congress has not specifically defined the power of federal courts to review the

appointment of the FDIC as receiver of a national bank, our jurisdictional task is not easy. In other

situations, where Congress authorized appointment of the FDIC as conservator or receiver of

troubled financial institutions, it specifically addressed federal court jurisdiction to review those

appointments. For example, Congress specifically authorized federal courts to review the

appointment of the FDIC as a conservator of a national bank. 12 U.S.C. § 203(b)(1)-(2) (1994). It

also authorized judicial review of the FDIC's appointment as conservator or receiver of federally

chartered savings associations and state-chartered institutions. 12 U.S.C. § 1464(d)(2)(A)-(B) (1994)

(savings associations); 12 U.S.C. § 1821(c)(1), (4), (7) (1994) (state-chartered institutions). By

comparison, the statute authorizing the FDIC's appointment as receiver of a national bank does not

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 5 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

include a companion provision regarding judicial review of that appointment. See 12 U.S.C. § 191

(1994). In the absence of such specific authorization, we do not presume, as the FDIC argues, that

Congress intended to preclude judicial review. Rather, we assume just the oppositethat the

Administrative Procedure Act authorizes federal district courts to review the appointment, Abbott

Labs. v. Gardner, 387 U.S. 136, 140 (1967), unless another statute specifically precludes review or

the action is committed by law to agency discretion, 5 U.S.C. § 701(a) (1994). Because of this

presumption favoring judicial review, we require " "clear and convincing evidence' of a legislative

intention" to bar such review. Ball, Ball & Brosamer, Inc. v. Reich, 24 F.3d 1447, 1450 (D.C. Cir.

1994) (quoting Reno v. Catholic Social Servs., Inc., 113 S. Ct. 2485, 2499 (1993)).

The FDIC first argues that 12 U.S.C. § 1821(j) prevents courts from reviewing its

appointment as receiver of a national bank. Congress enacted section 1821(j) as part of section 212

of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), which

expanded the FDIC's powers as conservator or receiver of all FDIC-insured depository institutions,

including national banks. Pub. L. No. 101-73, § 212(a), 103 Stat. 222-43; H.R.CONF.REP.NO. 209,

101st Cong., 1st Sess. 398-99 (1989). The new section 1821(j) stated that: "Except as provided in

this section"i.e., section 1821"no court may take any action, except at the request of the Board

of Directors [of the FDIC] to restrain or affect the exercise of powers or functions of the [FDIC] as

a conservator or a receiver." 12 U.S.C. § 1821(j) (1994). According to the FDIC, because section

1821(j) prevents courts from "restrain[ing] or affect[ing] the exercise" of its power as conservator

or receiver, district courts may neither remove the FDIC as receiver of Madison nor grant any of the

other declaratory and injunctive relief that Madison seeks.

Until now, this circuit has not considered whether section 1821(j) precludes federal courts

from granting injunctive or declaratory relief if the Comptroller improperly appointed the FDIC

receiver of a national bank. In our view, section 1821 does no such thing. Section 1821(j) states only

that courts cannot "restrain or affect the exercise of the powers or functions of the [FDIC] as

conservator or receiver." Id. (emphasis added). It does not address federal court power to set aside

an illegal appointment of a conservator or receiver. Congress knows the difference between judicial

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 6 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

power to restrain an agency properly acting as a receiver and judicial power to remove an improperly

appointed agency. For example, Congress distinguishes between courts' authority to "restrain or

affect the exercise of powers or functions of a conservator or receiver" of a savings institution and

their authority to "take any action for or toward the removal of any conservator or receiver" ofsuch

an institution. 12 U.S.C. § 1464(d)(2)(D) (1994) (emphasis added). We thus read section 1821(j)

to prevent courts from interfering with the FDIC only when the agency acts within the scope of its

authorized powers, not when the agency was improperly appointed in the first place. We have

recognized this principle before, observing that "§ 1821(j) does indeed bar courts from restraining

or affecting the exercise of powers or functions of the FDIC as a conservator or a receiver unless it

has acted or proposed to act beyond, or contrary to, its statutorily prescribed, constitutionally

permitted, powers orfunctions." Freeman v. FDIC, 56 F.3d. 1394, 1398 (D.C. Cir. 1995) (quoting

National Trust for Historic Preservation v. FDIC, 21 F.3d 469, 472 (D.C. Cir.) (Wald, J.,

concurring), cert. denied, 115 S. Ct. 683 (1994)) (emphasis added; internal quotations and ellipsis

omitted).

The FDIC's expansive reading of section 1821(j)interpreting "restrain" and "affect" to

prevent courts from interceding when the FDIC is wrongfully appointedwould not only bar relief

in this case, but also preclude court action when the FDIC is named either receiver or conservator

of any FDIC-insured depository institution. This interpretation conflicts with two other provisions

of FIRREA: 12 U.S.C. § 203(b)(1), explicitly authorizing federal district courts to remove the FDIC

as conservator of a national bank if the court finds the appointment "arbitrary, capricious, an abuse

of discretion, or otherwise not in accordance with law"; and 12 U.S.C. § 1464(d)(2)(B), authorizing

federal courts to remove the FDIC as conservator or receiver of a federally chartered savings

association. See Pub. L. No. 101-73, § 802, 103 Stat. 442 (conservatorships of nationalbanks); Pub.

L. No. 101-73, § 301, 103 Stat. 292 (originally codified at 12 U.S.C. § 1464(d)(2)(E)) (receiverships

and conservatorships of savings associations). Were we to adopt the FDIC's view that section

1821(j) prohibits courts from removing an illegally-appointed FDIC, we could reconcile section

1821(j) with section 203(b)(1) and section 1464(d)(2)(B) only by treating them asspecial exceptions

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 7 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

to the general rule set forth in section 1821(j). Yet we find nothing in the legislative history

suggesting that Congress viewed either section 203(b)(1) or section 1464(d)(2)(B) as creating

exceptions to section 1821(j). See H.R. CONF. REP. NO. 209, 101st Cong., 1st Sess. 398-400, 405-

410, 443 (1989); H.R.REP. NO. 54, 101st Cong., 1st Sess., pt. 1 at 415-21, 463 (1989). In our view,

the more naturalreading ofsection 1821(j), the reading that comports with our obligation to interpret

the statute's provisionsin harmony with each other, see Ralpho v. Bell, 569 F.2d 607, 617 (D.C. Cir.

1977), isthis: section 1821(j) restricts judicial power over the actions of a properly-appointed FDIC,

while sections 203(b)(1) and 1464(d)(2)(B) address a different matterjudicial power to remove an

improperly-appointed FDIC.

We recognize that our interpretation of section 1821(j) could make it more difficult for the

FDIC to fulfill one ofthe goals of FIRREA: "to expeditiously wind up the affairs of literally hundreds

of failed financial institutions throughout the country." Freeman, 56 F.3d at 1398. Under our

interpretation, failed national banks may, as Madison does here, challenge the FDIC's appointment

pursuant to the APA, which carries a six-year statute of limitations. Impro Prods., Inc. v. Block, 722

F.2d 845, 850 (D.C. Cir. 1983), cert. denied, 469 U.S. 931 (1984) (interpreting 28 U.S.C. § 2401

to apply to claims brought under the APA). In other contexts, Congress requires seized institutions

challenging an allegedly unlawfulseizure to move swiftly. National banks, for example, have twenty

days to challenge the appointment of the FDIC as conservator, and federally chartered savings

associations and state-chartered institutions have thirty daysto challenge the FDIC's appointment as

conservator or receiver. 12 U.S.C. § 203(b)(1)-(2) (national bank challenge to FDIC as conservator);

12 U.S.C. § 1464(d)(2)(B) (savings association challenge to FDIC as conservator or receiver); 12

U.S.C. § 1821(c)(1)(4),(7)(state-chartered institutionchallenge to FDICas conservator or receiver).

Yet the six-year statute of limitations for national banks would not necessarily frustrate Congress's

goal of winding up the affairs of troubled institutions expeditiously. Courts may still exercise their

discretion to deny injunctions under the APA, see Indiana & Michigan Elec. Co. v. Federal Power

Comm'n, 502 F.2d 336, 346 (1974), and the Government may invoke equitable defenses such as

laches where banks delay challenging the Government's seizure, see Abbott Labs., 387 U.S. at 155.

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 8 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Moreover, disposing ofinsolvent institutions quicklywas not FIRREA's onlypurpose. Congress also

sought to protect the rights of financial institutions by allowing them to appeal their seizures. Our

interpretation of section 1821(j), unlike the FDIC's, would preserve that right for national banks

placed in receivership.

The second provision that the FDICcitesin support ofitsjurisdictional argument12 U.S.C.

§ 1821(d)(11), also originally enacted as part of Section 212 of FIRREAis one of several

provisions defining the procedure that the FDIC must follow when, acting as receiver of a failed

institution, it processes claims against the institution. See 12 U.S.C. § 1821(d)(3)-(13); Freeman,

56 F.3d at 1399. Section 1821(d)(11) requires the FDIC to satisfy depositors, creditors, and other

claimants, as well as to pay administrative expenses, before distributing any funds to the institution's

stockholders. According to the FDIC, section 1821(d)(11) bars district courts from granting the

relief Madison seeks because to do so would in effect place Madison and itsstockholders at the head

ofthe line to recover their assets. Instead, the FDIC argues, Madison must wait until the government

liquidates the institution, satisfies all claimants, and pays all administrative expenses, at which point

Madison can recover whatever is left.

This argument ignores the text of the statute. The distribution requirements of section

1821(d)(11) apply only to claims that the FDIC processes "as receiver," not to claims that courts

adjudicate regarding the actual validity ofthe FDIC's appointment. See § 1821(d)(3)(A), (d)(11)(A).

Moreover, requiring stockholders of wrongfully seized national banks to wait on the sidelines while

the FDIC liquidatestheir institutions conflicts withCongress's apparent desire, discussed above, that

seized institutions act quickly in challenging the FDIC's appointment. The FDIC fails to explain why

Congress would have permitted rapid judicial review of the FDIC's appointment as conservator of

nationalbanks or as a conservator or receiver of other depositoryinstitutions, while preventing courts

fromreviewing the FDIC's appointment asreceiver of nationalbanks untilafterthe agencydismantles

the institution.

In the absence of a statute specificallyproviding for judicialreview ofthe FDIC's appointment

as receiver of a national bank, and without clear evidence that Congress intended either section

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 9 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

1821(j) or section 1821(d)(11) to bar federal court jurisdiction, we hold that the APA authorizes

federal courts to review and set aside improper appointments of the FDIC as receiver of a national

bank. See FDIC v. Irwin, 916 F.2d 1051, 1054 n.4 (5th Cir. 1990). Because the district court has

jurisdiction to grant injunctive and declaratory relief, we need not reach the FDIC's additional

argument that FDIC v. Meyer, 114 S. Ct. 996 (1994), bars the district court from granting the

monetary relief that Madison seeks as an alternative remedy. We therefore turn to the merits of

Madison's claims.

III.

Madison offersseveralreasons why the district court erred in granting summary judgment for

the Government on Counts I through IV. We begin with its claim that the district court acted on an

inadequate record. According to Madison, the court should have reviewed all of the banks' loan files,

underwriting materials, and credit documents the examiners might have seen. These materials came

into the Government's possession when it seized the banks. As with a district court's denial of

discovery, we review a district court's refusal to supplement the administrative record for abuse of

discretion and may reverse factual findings regarding the state of the administrative record only for

clear error. Fort Sumter Tours, Inc. v. Babbitt, 66 F.3d 1324, 1335-36 (4th Cir. 1995); Occidental

Petroleum Corp. v. SEC, 873 F.2d 325, 339-40 (D.C. Cir. 1989).

The APA requires courts to "review the whole record or those parts of it cited by a party."

5 U.S.C. § 706. Ordinarily, courts confine their review to the "administrative record." Edison Elec.

Inst. v. OSHA, 849 F.2d 611, 617-18 (D.C. Cir. 1988). The administrative record includes all

materials "compiled" by the agency, Citizensto Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402,

419 (1971), that were "before the agencyat the time the decisionwas made," Environmental Defense

Fund, Inc. v. Costle, 657 F.2d 275, 284 (D.C. Cir. 1981).

Madison concedes that the banks' files were not part of the administrative record compiled

by the agency when the Senior DeputyComptroller declared the banksinsolvent. Madison also fails

to demonstrate the existence of any of the factors we have previously recognized asrequiring district

courts to supplement the administrative record. Madison does not contend that the agency

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 10 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

deliberately or negligently excluded documents that may have been adverse to its decision. See Kent

County v. EPA, 963 F.2d 391, 395-96 (D.C. Cir. 1992). Nor has Madison shown that the district

court needed to supplement the record with "background information" in order to determine whether

the agency considered all ofthe relevant factors. Environmental Defense Fund, Inc., 657 F.2d at 285

(quoting Asarco, Inc. v. EPA, 616 F.2d 1153, 1160 (9th Cir. 1980)). This is not a case where the

agency failed " "to explain administrative action [so] as to frustrate effective judicial review.' " Id.,

657 F.2d at 285 (quoting Camp v. Pitts, 411 U.S. 138, 142-43 (1973)). To the contrary, the record

contains detailed contemporaneous reports from the examiner-in-charge and members of her

examination team explaining how and why they reached their conclusions regarding the banks'

reserves.

Madison claimsthat the agencyacted in bad faith. It relies on affidavits of two former officers

and a consultant Madison had retained, who stated that "it appeared" from the examiners' hostile

attitudes, their unwillingness to correct errors, and the "severity" of the reserves, that the examiners

were "expected," "instructed," or had a "predetermined agenda" to render the bank insolvent by

requiring additional loan lossreserves. Unsupported by other evidence, these conclusory statements

fall far short of the "strong showing" of bad faith required to justify supplementing the record.

Overton Park, 401 U.S. at 420.

Madison has demonstrated no other "unusual circumstances" requiring the district court to

expand the record. See Texas Rural Legal Aid, Inc. v. Legal Servs. Corp., 940 F.2d 685, 698 (D.C.

Cir. 1991). Claiming that the examiners were the "real decision-makers," Madison argues that the

district court should have reviewed whatever materials the examiners may have seen during their

on-site investigation of the banks. In our view, the role of the examiners is irrelevant. Regardless

of how much influence the examiners may have had in the decision to declare the banksinsolvent, the

administrative record included detailed memoranda describing the examiners' findings and

recommendations, and Madison has given no reason why the district court should have looked

beyond those memos.

In short, Madison failsto demonstrate that the record wasin any respect inadequate as a basis

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 11 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

for district court review of the Government's decisions. The district court thus did not err in limiting

its review to the administrative record presented by the agency.

Madison makes a related claim that the district court erred in granting summary judgment

without allowing it to conduct further discovery. Under Rule 56(f) of the Federal Rules of Civil

Procedure, a district court may deny a motion for summary judgment in order to permit further

discovery if "the party opposing the motion adequately explains why ... it cannot present by affidavit

facts needed to defeat the motion." Strang v. United States Arms Control & Disarmament Agency,

864 F.2d 859, 861 (D.C. Cir. 1989). Madison concedes that it asked the district court to vacate its

order staying discovery only if the court "considered the examples of wrongful and arbitrary action

by the examinersrelating to the ... loans discussed in [Madison's] affidavitsto be insufficient asto the

dollar amount of the loans affected." Appellants' Br. at 43. This conditional request did not amount

to the adequate explanation that Rule 56(f) requires. At most, Madison invited the district court to

expand its review beyond the administrative record if it found Madison's evidence insufficient. Such

a request fell far short of offering specific reasons why, absent discovery, Madison was incapable of

contesting summary judgment based on the administrative record and the recollections of the banks'

loan officers and consultants. See Strang, 864 F.2d at 861. In declining to grant discovery, the

district court thus did not abuse its discretion.

This brings usto Madison's challengesto the merits of the district court'ssummary judgment

ruling. We may uphold the district court's grant of summary judgment only if, viewing the evidence

in the light most favorable to Madison, we find no genuine issues of material fact and, absent such

issues, we determine that the Government is entitled to judgment as a matter of law. Fed. R. Civ. P.

56(c); In re Sealed Case, 67 F.3d 965, 967 (D.C. Cir. 1995). We conduct our review de novo

without deference to the district court's determinations. Dr. Pepper/Seven-Up Cos., Inc. v. Federal

Trade Comm'n, 991 F.2d 859, 862 (D.C. Cir. 1993).

Madison claims that there are "issues of fact as to whether ... the examiners acted arbitrarily

and capriciously in requiring ... such large additional loan loss reserves." Appellant's Brief at 44-45

(emphasis added). Although Madison characterizes its arguments as raising issues of fact, we think

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 12 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

they primarily raise issues of law. Generally speaking, district courts reviewing agency action under

the APA's arbitrary and capricious standard do not resolve factual issues, but operate instead as

appellate courts resolving legal questions. See Marshall County Health Care Auth. v. Shalala, 988

F.2d 1221, 1224 (D.C. Cir. 1993); 6 J. Moore, Federal Practice ¶ 56.17[3], 56-362 (1988). Like

appellate courts, district courts do not duplicate agency fact-finding efforts. Instead they address a

predominantly legal issue: Did the agency "articulate a rational connection between the facts found

and the choice made"? Bowman Transp., Inc. v. Arkansas-Best Freight Sys. Inc., 419 U.S. 281, 285

(1974) (internal quotation marks omitted). District courts may, however, need to resolve factual

issues regarding the process the agency used in reaching its decision. See Occidental Petroleum

Corp., 873 F.2d at 339-40. Although these facts are usually established by the administrative record

or are otherwise undisputed, partiesmayoccasionallyraise an issue requiring district courtsto engage

in independent fact-finding. See, e.g., Overton Park, 401 U.S. at 420.

Viewed in this light, Madison sought to raise only one factual issue before the district court:

it claimed that the examiners acted in bad faith. If true, this "fact" would be material to determining

whether the Government acted arbitrarily in establishing the loan loss allowance. See Latecoere Int'l,

Inc. v. United States Dep't of the Navy, 19 F.3d 1342, 1364-65 (11th Cir. 1994). But the only

evidence of the Government's bad faith were the affidavits that Madison submitted in opposition to

the motion for summary judgment. We may not rely upon these affidavits as evidence of the

Government's motivation because, aside from Madison's failure to comply with Local Rule 108(h),

they failed to make a "strong showing" of bad faith that would permit their consideration. See

Overton Park, 401 U.S. at 420. Therefore, confining our inquiry to the administrative record, we find

no evidence to justify a reasonable trier of fact concluding that the Government acted in bad faith.

Regarding Madison's legal arguments, our task is to determine whether the OCC acted

reasonably in requiring the banks to establish reserves of such magnitude as to force them into

insolvency. According to the Government's undisputed statement of facts, the examiners began the

process of determining the level of required reserves by reviewing the ratings that the banks had

assigned to approximately 50% of the loans in their portfolio. Under federal guidelines, loans are

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 13 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

rated in descending scale of quality: pass; other assets especially mentioned (known as "special

mention"); substandard; doubtful; and loss. After reviewing these ratings and downgrading many,

the examiners calculated the reserves required for the portfolio. For loans rated doubtful and for

some loans rated substandard, the examiners conducted a loan-by-loan analysis, requiring the banks

to establish "specific reserve allocations" reflecting the likely losses on those individual assets. For

the remainder of the loans, the examiners established a "general reserve allocation" by conducting

what is known as a "migration analysis." This analysis determined the percentage of losses that the

banks experienced during the preceding two years on loans rated pass, special mention, and

substandard and, applying those historic loss rates to the loans currently rated pass, special mention,

and substandard, projected the losses that the banks were likely to experience. By then adding the

specific and general allocations, the examiners determined the overall amount that the banks had to

add to their reserves.

Attacking the general reserve allocation, Madison claims that because Washington, D.C.

suffered an "unprecedented" decline in real estate values during the 1989-1990 period covered by the

migration analysis, the analysis projected artificially inflated losses. According to Madison, the

migration analysis should have used three to five years of data to provide a more realistic projection

of future losses. We are not persuaded. Although banks might usually use three to five years of data

to forecast future losses, Madison itself acknowledgesthat much ofits own historicaldata wasflawed

because it had an inadequate system for risk-rating its loans prior to the fourth quarter of 1989. We

doubt that additional years of flawed data would have generated more accurate predictions.

Moreover, the examiners' approach took into account the problems with the bank's data in a way that

benefitted the banks: rather than mechanically applying the historic loss percentages to the banks'

current portfolio, the examiners disregarded certain data from the first three quarters of 1989 that

generated abnormally high levels of losses. Indeed, Madison's own affidavit shows that the reserves

required by the Government's migration analysis14 percent for substandard real estate loans and

23 percent for substandard commercial loanswere within the "usual and customary" range in the

banking industry of 5 to 25 percent for such loans.

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 14 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Focusing on three particular loans, Madison also argues that the specific reserve allocations

were arbitrary and capricious. Based on our own review of the written summaries that the examiners

prepared for each of these loans, we conclude that the examiners offered a reasoned explanation for

the reserves they required.

As to the first loan, the examiners instructed Madison to establish a reserve of $1.75 million

for a $4 million unsecured loan that was two months past due. Under a proposed restructuring of

the loan, the borrower planned to provide a personal guaranty and a 743-acre farm, appraised at

$11.9 million, as collateral to secure repayment. According to Madison, the examiners should have

regarded the personal guaranty and the farm as adequate collateral. To us, however, the examiners

offered sensible reasonsfor discounting the value of both the guaranty and the farm. The guarantor's

net worth consisted primarily ofinterestsin real estate partnerships and closely held corporationsthat

had lost millions of dollars in 1990 and were projected to do so again in 1991. Moreover, the

guarantor's contingent liabilities exceeded his estimated net worth bya ratio ofmore than two-to-one.

As for the farm, the examiner noted, and Madison does not disagree, that the appraisal assumed the

land would be used for a residential development, requiring rezoning the property, which the county

had been reluctant to do in other circumstances. Given the dubious prospects for repayment, the

examiners provided a rational explanation for requiring a $1.75 million reserve for this loan.

We are equally unconvinced by Madison's objections to a $477,000 reserve that the OCC

required for a $4.6 million loan secured by 75 acres of undeveloped residential land and 35 acres of

developed commercial property. Although acknowledging that the value of the property appeared

adequate to repay the loan, the examiners were concerned about the absence of a current appraisal.

Lacking that information, the examiners based theirreserve requirement on the uncontested factsthat

the borrower had lent $4.4 million to a joint venture to develop the residential property, that the joint

venture had defaulted on that loan and was in serious financial difficulty, and that the borrower had

indicated that he would have problems paying Madison if the joint venture failed to repay its loan.

In light of these circumstances, we cannot say that the OCC acted irrationally in requiring a reserve

of approximately 10 percent.

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 15 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Madison's third objection is to a $2.3 million reserve that the examiners required for a $5.7

million loan to three real estate partnerships. As collateral, the borrowers had provided a $1 million

certificate of deposit, a $625,000 third party note, and an unrecorded second mortgage on two office

buildings. The loan was due in full in several months. While giving credit to the certificate of deposit

and the note, the examiners concluded that refinancing the two buildings would provide only

$500,000 toward the repayment of the loan. They based their finding on Madison's own analysis,

which indicated that the borrowers could obtain a new mortgage loan on the buildings for $20.5

million. After paying off the $20 million first mortgage held by another institution, this left $500,000

for the Madison loan. Since the borrowers had only this $500,000, the certificate of deposit, and the

note to pay off a $5.7 million loan, we think the requirement of a $2.3 million reserve wasreasonable.

Madison has thus failed to demonstrate that the examiners acted irrationally in establishing

either the general or specific reserve allocations. This failure also dooms Madison's final argument:

that the district court erred by focusing on the reasonableness of the OCC's procedures rather than

on the substance of its decision to require $31.6 million in additionalreserves. We agree that judicial

review of agency action under the APA must go beyond the agency's procedures to include the

substantive reasonableness of its decision. See Overton Park, 401 U.S. at 415 (stating that section

706 "require[s] the reviewing court to engage in a substantial inquiry"). Although the reasonableness

of the agency's procedures is relevant to the court's inquiry, reasonable procedures alone cannot

absolve a court from making a "thorough, probing, in-depth review" to determine if the agency has

considered the relevant factors or committed a clear error of judgment. Id. at 415-16. For example,

examiners could follow all the prescribed steps for estimating loan loss reserve

requirementsreviewing loan files, assigning risk ratingsto the loans, using historical experience to

determine the future losses on those loansand still violate the APA by ignoring salient facts in the

loan files, offering patently implausible justifications for their decisions, or acting from a personal

desire to shut down the bank regardless of what they found.

Even if the district court here based its decision on the strength of the process alonewhich

we do not believe is the caseour de novo review of the record satisfies us that the agency's

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 16 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

conclusions were not arbitrary. As we indicate above, the record shows that the agency exercised

reasoned judgment in requiring the banksto add $31.6 million to cover potential credit lossesin their

portfolios.

IV.

We turn finally to the district court's denial of Madison's request to amend its complaint to

add counts IX and X challenging 12 U.S.C. § 191 on due process grounds. At the time the

Government seized the banks, section 191 provided that "whenever the Comptroller shall become

satisfied of the insolvency of a national banking association, he may, after due examination of its

affairs ... appoint a receiver, who shall proceed to close up such association." 12 U.S.C. § 191

(1988).

We review a district court's denial of a motion for leave to amend a complaint for abuse of

discretion, Kowal v. MCI Communications Corp., 16 F.3d 1271, 1279 (D.C. Cir. 1994), requiring

only that the court base its ruling on a valid ground, National Treasury Employees Union v. Helfer,

53 F.3d 1289, 1295 (D.C. Cir. 1995). Courts may deny a motion to amend a complaint as futile, as

the district court did here, if the proposed claim would not survive a motion to dismiss. Foman v.

Davis, 371 U.S. 1271, 1279 (1962); Moldea v. New York Times, 22 F.3d 310, 319 (D.C. Cir.), cert.

denied, 115 S. Ct. 202 (1994). Because both the facts alleged in Madison's own complaint and the

Government's statement of undisputed facts establish beyond doubt that the Government did not

violate Madison's due process rights, we agree with the district court that amendment was futile.

Although the precise requirements of due process depend upon the circumstances, Morrisey

v. Brewer, 408 U.S. 471, 481 (1972), the fundamentals remain constant: to deprive an individual of

a protected interest, the government must provide adequate notice and a "meaningful" opportunity

to be heard, Mathews v. Eldridge, 424 U.S. 319, 333 (1976). Except in "extraordinary situations

where some valid governmental interest is at stake that justifies postponing the hearing until after the

event," the government must provide the hearing before the deprivation takes place. United States

v. James Daniel Good Real Property, 114 S. Ct. 492, 501 (1993) (internal quotations omitted).

Madison does not object to the notice it received under section 191, and for good reason.

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 17 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

The OCC gave ample warning of its concerns about the adequacy of the banks' reserves and the

possibility of a government seizure. For at least three years prior to the examination leading to the

takeover, the OCC repeatedly expressed its concern about the inadequacyofMadison'smethodology

for calculating its loan loss allowances. In January 1991, the Government informed Madison of its

dissatisfaction with the banks' reserve methodology and its intention to make the reserves the focus

of a special examination. The banks were clearly on notice that they might be declared insolvent.

Madison argues that, because of the timing of the district court proceeding, it had no

meaningful opportunity to be heard. It claims that it was entitled to an administrative hearing by an

impartial officer prior to the Government's seizure of the banks or, at the very least, prior to the

FDIC's liquidation of its banks. Although Madison was clearly entitled to a hearing before a neutral

decision-maker, see University of the Dist. of Columbia Chairs Chapter, American Ass'n of Univ.

Professors v. Board of Trustees of the Univ. of the Dist. of Columbia, 56 F.3d 1469, 1473 (D.C. Cir.

1995), we do not agree that due process requires a hearing prior to the disposal of its assets.

To determine whether due process demands a pre-deprivation hearing, we consider three

factors: "the Government's interest," "the private interest affected by the official action," and "the

risk of erroneous deprivation of that interest through the procedures used, as well as the probable

value of additional safeguards" provided by a pre-deprivation hearing. James Daniel Good, 114 S.

Ct. at 501. As to the first of these factors, the Government has a substantial interest in moving

quickly to seize insolvent institutions. We have previously recognized that requiring a pre-seizure

hearing could expose both depositors and the FDIC insurance fund to further losses from the

continued operation of a failed institution by its management. Haralson v. Federal Home Loan Bank

Bd., 837 F.2d 1123, 1127 (D.C. Cir. 1988). Equally strong is the Government's interest in swiftly

disposing of assets and liabilities after a seizure takes place in order to ensure the smooth transfer of

a bank's deposits and branches to other institutions, as well asto minimize lossesfor both depositors

and taxpayers that could occur if the Government had to hold on to a bank's assets when the value

of those assets is declining. Cf. 58 Fed. Reg. 6,363, 6,365 (1993) (noting that the value of an

institution's deposits depends in part upon the stability of those deposits); 57 Fed. Reg. 11,005,

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 18 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

11,006 (1992) (same). In other contexts, the Supreme Court has found the government's interest in

protecting depositors and preserving the integrity ofthe banking industrysufficiently strong to justify

seizing a bank, suspending the bank's officers, and attaching liens against the property of a bank's

stockholders without a prior hearing. Fahey v. Mallonee, 332 U.S. 245, 253-54 (1947) (upholding

appointment of conservator of a bank during an investigation into unsound banking practices, with

administrative hearing provided after the seizure); FDIC v. Mallen, 486 U.S. 230, 241-42 (1988)

(upholding suspension of indicted bank officer where the government would grant an administrative

hearing within 30 days of a request to do so); Coffin Bros. v. Bennett, 277 U.S. 29 (1928)

(upholding the government's power to place a lien on the property of a bank's stockholders to pay

depositors of a failed bank, where a post-attachment trial would serve as the hearing). The

Government's interests here are no less compelling.

The private interests at stakethe second ofthe three factors we weighare less compelling

than the Government's interest. To be sure, Madison's stockholders have a valid interest in avoiding

the arbitrary seizure of their business, even if that seizure lasts only for a limited time. See

Connecticut v. Doehr, 111 S. Ct. 2105, 2113 (1991). As entities subject to constant and intensive

government regulation, however, the banks' interest is not as strong as the public's interest in

protecting the stability and integrity of the banking system. Nor is the banks' interest as compelling

as an individual'sinterest in avoiding "governmental interference" with homes or furniture, which the

Supreme Court has recognized as requiring a pre-deprivation hearing. James Daniel Good, 114 S.

Ct. at 501 (discussing Fuentes v. Shevin, 407 U.S. 67 (1972) and Connecticut v. Doehr, 111 S. Ct.

2105 (1991)); see also Woods v. Federal Home Loan Bank Bd., 826 F.2d 1400, 1411 (5th Cir.

1987), cert. denied, 485 U.S. 959 (1988).

As for the last of the three factorsthe risk of errorthe OCC's examination process

included numerous safeguards against an arbitrary seizure of the banks. From the very beginning,

Madison had many opportunities to express its views. Through memoranda and meetings, loan

officers and senior management had the chance to respond to the risk ratings that the examiners

proposed to assign to the banks' loans. Madison's Audit Committee met with the examiner-in- charge

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 19 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

to discuss the migration analysis and her preliminary reserve recommendations, even providing the

OCC with a written critique of the migration analysis. To present their concerns about the

examination, the banks' managers met repeatedly with members of the examination team, as well as

with the Deputy Comptroller for Special Supervision and the Senior Deputy Comptroller for Bank

Supervision Operations. The banks' independent auditors and outside consultants also met with the

examiners and OCC officials. On May 1, the boards and senior management of the banks met with

officials from the OCC, the FDIC, and the Federal Reserve Board to discuss the results of the

examination; at that time, the OCC also gave the banks an opportunity to submit a capital plan to

avoid closure. The OCC itself subjected the examiners' findings to internal review. Along with the

oversight provided by senior officials, agency staff not involved in the Madison examination

conducted independent "peer" reviews of the examiners' risk ratings and their migration analysis.

Although a formal pre-deprivation hearing might have reduced the risk of error, that risk was already

substantially limited by the examination process itself.

In light of the Government's need to act swiftly, the limited nature of Madison's interest, and

the procedures in place to minimize the risk of an erroneous decision, we find no due process defect

in the timing of Madison's hearing. Nor do we agree with Madison's alternative argument that the

district court violated the Fifth Amendment by denying discovery or refusing to expand the record

to include the banks' loan files and other underwriting documents. As noted above, if Madison had

presented the court with a sufficient reason to conduct discovery or expand the record, the court

could have done so. Madison therefore had a meaningful opportunity to challenge the Government's

actions. Due process requires no more.

In view of our finding that the judicial proceedings here and in district court satisfied the

hearing requirements of the Fifth Amendment, we agree with the district court that amending the

complaint to add Madison's as-applied due process challenge in Count X would have been futile.

Since the requirements of due process have been satisfied in this instance, we agree with the district

court that Madison's facial challenge in Count IX would have been futile as well. See United States

v. Salerno, 481 U.S. 739, 745 (1987) (stating that a federal court generally can invalidate a statute

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 20 of 21
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

on its face only if "no set of circumstances exists under which the [a]ct would be valid").

V.

Because Madison has not demonstrated that the federal government acted arbitrarily or failed

to abide by the requirements ofthe Fifth Amendment in seizing the banks, we affirm the district court

in all respects.

So ordered.

USCA Case #95-5126 Document #197949 Filed: 05/03/1996 Page 21 of 21