1995 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

6-5-1995

FDIC v Wentz

Precedential or Non-Precedential:

Docket 94-5556

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Recommended Citation

"FDIC v Wentz" (1995). 1995 Decisions. Paper 155.

http://digitalcommons.law.villanova.edu/thirdcircuit_1995/155
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 ____________ 

 No. 94-5556 

 ____________ 

 FEDERAL DEPOSIT INSURANCE CORPORATION, 

 as Receiver for The Howard Savings Bank, 

 Appellee

v. 

 SIDNEY F. WENTZ; NATALIE I. KOETHER; WILLIAM E. MARFUGGI; 

 ROBERT M. KREMENTZ; J. ROBERT HILLIER, 

 Natalie I. Koether and 

 Sidney F. Wentz, Appellants

 ____________ 

 APPEAL FROM THE UNITED STATES DISTRICT COURT 

 FOR THE DISTRICT OF NEW JERSEY 

 (D.C. Civ. No. 94-cv-03287) 

 ____________ 

 Argued April 20, 1995 

 Before: STAPLETON, HUTCHINSON, and WEIS, Circuit Judges

 Filed June 5, 1995 

 ____________ 

Laurence B. Orloff, Esquire (ARGUED) 

Laura V. Studwell, Esquire 

Orloff, Lowenbach, Stifelman & Siegel, P.A. 

101 Eisenhower Parkway 

Roseland, New Jersey 07068 

Attorneys for Appellants

Jerome A. Madden, Esquire (ARGUED) 

Ann S. DuRoss, Esquire 

Richard J. Osterman, Jr., Esquire 

Federal Deposit Insurance Corporation 

550 17th Street, N.W. 

Washington, D.C. 20429 

Attorneys for Appellee
 ____________ 

 OPINION OF THE COURT 

 ____________ 

WEIS, Circuit Judge. 

 In the course of its investigation of a failed 

depository institution, the Federal Deposit Insurance Corporation 

issued a subpoena to former directors of the bank directing them 

to produce a wide variety of their personal financial records as 

well as those of family members. The district court required the 

directors to produce only their own records, showing additions or 

reductions in their assets. Rejecting the directors' claims of 

privacy violations, we will affirm the district court's order. 

 Natalie I. Koether and Sidney F. Wentz were directors 

of The Howard Savings Bank of Livingston, New Jersey, which was 

declared insolvent on October 2, 1992. On that same day, the 

FDIC was appointed receiver. 

 In April 1993, the FDIC issued an "Order of 

Investigation" pursuant to 12 U.S.C. § 1820(c) and 12 C.F.R. 

§ 303.9(i)(2), targeting former officers and directors of the 

bank. Four purposes were cited in the order: (1) determining 

whether the individuals may be liable as a result of any action 

or inaction that could have affected the bank; (2) assessing 

whether the pursuit of litigation would be cost effective by 

considering the ability of the individuals to satisfy a judgment; 

(3) establishing whether the FDIC should seek to avoid transfers 
of interests or incurrences of obligations; and (4) ascertaining 

whether the FDIC should seek attachments of assets. The order 

authorized FDIC representatives to issue subpoenas duces tecum. 

 The directors, together with other bank principals, 

were served with notices to appear for depositions and ordered to 

produce documents in some twenty-eight different categories 

covering the six-year period preceding October 1992. Included 

were records in their possession pertaining to bank operations. 

In addition, the subpoena demanded production of such documents 

as financial statements and credit applications of the directors 

and their spouses; records of any bank accounts of the directors 

and those maintained by "any member of [their] immediate 

famil[ies]," including canceled checks and bank statements; tax 

returns; title and registration papers for motor vehicles, boats, 

and airplanes; pension and profit-sharing plans in which the 

directors or their spouses had an interest; insurance policies; 

and records of inheritance, and other such gifts received by the 

directors and "any member of [their] immediate famil[ies]." 

 The directors timely complied with the requests for 

documents having any connection with their activities as 

officials of the bank, but refused to produce their personal 

records and those of their families. 

 In seeking enforcement of the subpoena in the district 

court, the FDIC presented the affidavit of James M. Judd, an 

investigations specialist for the FDIC. It stated that the 

documents were necessary to enable the FDIC to determine the 

nature and extent of any losses sustained by the bank because of 
negligence or breach of fiduciary duty by the directors, and to 

establish whether it would be cost-effective to pursue any such 

claims. The affidavit alleged that the directors had approved 

transactions that resulted in losses of millions of dollars and 

that the transactions "appear[ed] to exhibit inadequate 

documentation, unsafe concentrations of credit, poor credit 

administration, and inadequate supervision of management." 

Finally, the affidavit asserted that the directors had been 

"warned repeatedly" by bank examiners about lax business 

practices at the bank, but that the deficiencies were not 

corrected. 

 The district court conducted a hearing and, at its 

conclusion, ordered the directors to produce all records that 

demonstrated increases or depletions in, or transfers of, their 

assets. As the judge explained, 

 "I do not sanction an inquiry whose sole 

purpose is to find out whether these folks 

have money to respond to a judgment, if one 

should eventuate. . . . [M]y requirement of 

document production . . . is narrow enough to 

specifically address transfers or sudden 

accretions or depletions of wealth. . . . I 

feel that those purposes are reasonably 

within the power of the FDIC, and I feel that 

what I have ordered is a limited incursion 

into the financial affairs that is tailored 
to match up with the purposes that I have 

articulated." 

 In a formal order filed a few days later, the court 

denied the FDIC's request for enforcement of the subpoena duces 

tecum, except that the directors were instructed to produce: 

 "(a) All documents which relate to any increases or 

depletions of assets, or any transfer of assets, for the period 

October 1986 through the date of this Order; and 

 (b) All financial statements prepared by 

or on behalf of [the directors] from October 

1986 through the date of this Order." 

The court then granted a stay of its order pending resolution of 

this appeal. 

 The directors now contend that (1) the FDIC's statutory 

powers do not permit an unwarranted intrusion into their personal 

affairs, (2) the subpoenas were issued for an improper purpose, 

particularly in the context of "cost effectiveness" of potential 

litigation that might be initiated by the FDIC, and (3) the 

documents sought are not relevant. The directors also complain 

that the FDIC offered no grounds for suspicion of wrongdoing to 

justify issuance of a subpoena, and hence, it violates the Fourth 

Amendment. 

 Preliminarily, we observe that the district court's 

order substantially narrows the subpoena in two significant 

aspects. First, the demand for production of documents of the 

directors' spouses and immediate family members is no longer 

effective. Second, the documents that the directors must produce 
are limited to those pertaining to additions or diminutions of 

their own assets. 

 As an appellate court, we will affirm an order 

enforcing an agency's subpoena unless we conclude that the 

district court has abused its discretion. NLRB v. Frazier, 966 

F.2d 812, 815 (3d Cir. 1992). To determine whether there has 

been an abuse of discretion, the reviewing court must consider 

whether the district court's decision was based on irrelevant 

factors or on clearly erroneous findings of fact, and whether 

there has been a clear error of judgment. Id. "[T]he district 

court's role is not that of a mere rubber stamp, but of an 

independent reviewing authority called upon to insure the 

integrity of the proceeding." Wearly v. FTC, 616 F.2d 662, 665 

(3d Cir. 1980). 

 To obtain enforcement of an administrative subpoena, 

the agency must show that the investigation will be conducted 

pursuant to a legitimate purpose, that the inquiry is relevant, 

that the information demanded is not already within the agency's 

possession, and that the administrative steps required by the 

statute have been followed. United States v. Powell, 379 U.S. 

48, 57-58 (1964); United States v. Morton Salt Co., 338 U.S. 632, 

652 (1950). The demand for information must not be unreasonably 

broad or burdensome. United States v. Westinghouse Elec. Corp., 

788 F.2d 164, 166 (3d Cir. 1986). 

 It is not necessary, in most instances, that the agency 

make a showing of liability before seeking to enforce a subpoena. 

As the Supreme Court has observed, an agency "`can investigate 
merely on suspicion that the law is being violated, or even just 

because it wants assurance that it is not.'" Powell, 379 U.S. at 

57 (quoting Morton Salt, 338 U.S. at 642-43). The subpoenaed 

party bears the heavy burden of establishing an abuse of the 

court's process. United States v. Cortese, 614 F.2d 914, 919 (3d 

Cir. 1980). 

 When personal documents of individuals, as contrasted 

with business records of corporations, are the subject of an 

administrative subpoena, privacy concerns must be considered. 

See Whalen v. Roe, 429 U.S. 589, 599 (1977). Thus, in United 

States v. Westinghouse Elec. Corp., 638 F.2d 570, 578 (3d Cir. 

1980), where a governmental agency sought production of employee 

medical records, we listed as relevant factors such matters as 

the type of record requested, the information that it might 

contain, the potential for harm and subsequent nonconsensual 

disclosure, the adequacy of safeguards to prevent unauthorized 

disclosure, the degree of need for access, the specificity of the 

agency's statutory mandate, and the presence of recognizable 

public interests justifying access. See also In re McVane, 44 

F.3d 1127, 1137 (2d Cir. 1995) (agency subpoenas directed at 

individuals do implicate privacy rights); Resolution Trust Corp. 

v. Walde, 18 F.3d 943, 948 (D.C. Cir. 1994) (same). 

 12 U.S.C. § 1818(n) supplies the FDIC with the power to 

issue subpoenas duces tecum. The permissible purposes are set 

out in 12 U.S.C. § 1821(d)(2)(I)(i) as "carrying out any power, 

authority, or duty with respect to an insured depository 

institution (including determining any claim against the 
institution and determining and realizing upon any asset of any 

person in the course of collecting money due the institution)." 

The FDIC is empowered to avoid fraudulent asset transfers, 12 

U.S.C. § 1821(d)(17), assert claims against directors and 

officers, id. § 1821(k), and seek court orders attaching assets, 

id. § 1821(d)(18). 

 Against this sweeping grant of power to the FDIC, we 

consider the challenges mounted by the directors. As noted 

earlier, the district court -- entertaining grave doubts about 

the breadth of the subpoena, the relevance of documents of family 

members, and the burdens of production imposed on the directors 

-- substantially reduced the original scope of the subpoena. The 

FDIC has not challenged the district court's order, and as the 

record now stands, the directors object only to producing those 

personal records that would show additions and subtractions to 

their private assets. 

 In applying the factors we identified in 

Westinghouse, 638 F.2d at 578, we observe at the outset that 

there is a significant public interest in promptly resolving the 

affairs of insolvent banks on behalf of their creditors and 

depositors, many of whom have lost significant sums of money and 

are often left with little hope for recovery. Personal financial 

records have never been as tightly guarded as "information 

concerning one's body." Id. at 577. Subpoenas and summonses of 

the Internal Revenue Service requiring production of such records 

have routinely been enforced. See, e.g., Pickel v. United 

States, 746 F.2d 176, 184 (3d Cir. 1984). 
 The FDIC has shown a reasonable need for gaining access 

to the directors' records in order to determine whether they 

reveal breaches of fiduciary duties through the improper 

channeling of bank funds for personal benefit. Moreover, the 

directors have not produced any evidence to show that the 

information contained in their personal financial records "is of 

such a high degree of sensitivity that the intrusion could be 

considered severe or that the [directors] are likely to suffer 

any adverse effects from disclosure to [FDIC] personnel." 

Westinghouse, 638 F.2d at 579. Finally, we observe that 

regulatory provisions have been promulgated to guard against 

subsequent unauthorized disclosure of the subpoenaed information. 

See 12 C.F.R. pts. 309 & 310. 

 Accordingly, we conclude that the strong public 

interest in safeguarding the FDIC's legislative mandate outweighs 

the minimal intrusion into the privacy that surrounds the 

directors' personal financial records and any accompanying 

burdens of production. 

 In balancing competing interests in this case, we 

cannot say that the district court abused its discretion in 

concluding that the limited investigation it approved is relevant 

to the proper functions of the FDIC. Without impugning in any 

way the integrity of the directors, it must be observed that the 

allegations of mishandling of certain loans by the bank furnishes 

a proper basis for an investigation into (1) whether the 

individuals might be liable, (2) whether there might be transfers 
that should be avoided, or (3) whether the FDIC should seek 

attachment of assets. 

 We do not resolve the directors' contention that the 

FDIC must assert an articulable suspicion of liability before 

pursuing an inquiry into the cost-effectiveness of potential 

litigation against them. The directors rely heavily on McVane

and Walde. However, in McVane, the Court found an adequate basis 

for enforcing the subpoena against directors even as to the costeffectiveness factor. Walde did sustain an objection to the 

disclosure of personal records of certain directors for that 

limited purpose, but we need not discuss that case further in 

view of the fact that the district court's order here is 

sustainable on any one of the FDIC's other three objectives. 

 The directors also contend that the district court's 

order is too vague because, literally, a purchase of groceries 

would be included within the scope of the subpoena as a depletion 

of personal assets. At oral argument, counsel for the FDIC 

suggested that this difficulty might be avoided by reading into 

the order the $5,000 limitation on items stated in the subpoena 

itself. That appears to us to be a reasonable reading of the 

district court's order, but if it is not satisfactory to the 

parties, they may request further clarification from the district 

judge. 

 The order of the district court will be affirmed.