Opinion ID: 783298
Heading Depth: 2
Heading Rank: 2

Heading: The NCUA Board's Decision

Text: 28 Turning to the merits of Gully's appeal, the crux of her argument is that the Board failed to apply the correct legal standard when it made its misconduct and unfitness determinations. More specifically, Gully claims that scienter and culpability are essential to a finding of misconduct and unfitness under 12 U.S.C. § 1786(g)(1). In light of the plain language of § 1786(g)(1), this contention is extravagant.
29 Our review of the Board's decisions is governed by the APA, 5 U.S.C. § 706. See 12 U.S.C. § 1786(j)(2). Under the APA, the Board's conclusions must be affirmed unless they are arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, or unsupported by substantial evidence. 5 U.S.C. § 706(2)(A), (E). Substantial evidence is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion. Richardson v. Perales, 402 U.S. 389, 401, 91 S.Ct. 1420, 28 L.Ed.2d 842 (1971) (internal quotations omitted). The task of the reviewing court under th[e arbitrary and capricious] standard is to determine whether the agency has considered the pertinent evidence, examined the relevant factors, and articulated a satisfactory explanation for its action including whether there is a rational connection between the facts found and the choice made. J. Andrew Lange, Inc. v. FAA, 208 F.3d 389, 391 (2d Cir.2000) (internal quotations omitted). Our review under these standards is narrow and particularly deferential. Erie-Niagara Rail Steering Comm. v. Surface Transp. Bd., 247 F.3d 437, 441 (2d Cir.2001). 30
31 Federal credit unions are governed by the Federal Credit Union Act (FCUA), 12 U.S.C. §§ 1751-1795K, and administered by a federal agency, the NCUA, id. § 1752a(a). The NCUA is managed by the Board. Id. The FCUA authorizes the Board to issue orders barring a credit union officer or employee from further participation in the affairs of a federally insured credit union. Id. § 1786(g). A prohibition order must be buttressed by a finding that a credit union official (1) is guilty of misconduct; (2) that has an adverse effect on the credit union; and (3) evinces personal dishonesty or unfitness. Id. (the prohibition test). 32 &#x2022; The misconduct element is satisfied when it is found that a party has engaged or participated in any unsafe or unsound practice, or committed or engaged in any act, omission, or practice which constitutes a breach of such party's fiduciary duty. Id. § 1786(g)(1)(A)(ii), (iii). 33 &#x2022; The adverse effect element is established when, as a result of a party's misconduct, a credit union has suffered or will probably suffer financial loss or other damage. Id. § 1786(g)(1)(B)(i). 34 &#x2022; The final element of the prohibition test requires a finding that a party's conduct involves personal dishonesty or demonstrates such party's unfitness to serve as a director or officer of, or to otherwise participate in the conduct of the affairs of, an insured credit union. Id. § 1786(g)(1)(C)(i),(ii). 35 Here, Gully concedes, as she must, that the second element (adverse effect) was satisfied by the WFCU's loss of over $31,000 during the course of her father's misuse of the corporate credit card. The Board, however, made no finding of personal dishonesty on Gully's part. Thus, the issue is distilled to whether Gully was guilty of misconduct that rendered her unfit to serve as a fiduciary in a credit union. 36
37 Gully's central argument on appeal is that 12 U.S.C. § 1786(g)(1) requires a finding of scienter and culpability. Gully does not cite a single case — nor has this Court unearthed one — to support her novel hypothesis. 38 Gully relies on language from the legislative history of § 1786(g) for support. See H.R. Rep. 101-54(I), at 392 (1989), reprinted in 1989 U.S.C.C.A.N. 86, 188 (noting, without further explanation, that a banking agency will have to prove some scienter by the culpable individual). Gully also attributes great weight to case law interpreting the prohibition provision of the Federal Deposit Insurance Act (FDIA), 12 U.S.C. § 1818(e)(1), which Gully insists is analogous to § 1786(g)(1) and should therefore be interpreted interchangeab[ly]. Petr.'s Br. at 15 n. 4. 39 Gully's thesis suffers from two fatal flaws. First, the isolated statement in the House Report upon which Gully relies cannot trump the text of § 1786(g)(1). See, e.g., Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 739, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989) (The starting point for [the] interpretation of a statute is always its language.). The plain language of § 1786(g)(1) makes clear that no finding of scienter or culpability is required to satisfy any of the prohibition test elements. Given the plain, unambiguous language of the text, it is well settled that we cannot resort to legislative history to glean a statute's meaning. See, e.g., Conn. Nat'l Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992) (When the words of a statute are unambiguous ... `judicial inquiry is complete.'). It is clear from the text alone that neither scienter nor culpability is required to satisfy § 1786(g)(1). 40 Second, Gully's reliance on the prohibition provision of the FDIA provides no support for her argument because it is materially different from § 1786(g)(1). Unlike § 1786(g)(1)(C), which, as described above, is satisfied by a finding of personal dishonesty or unfitness, the FDIA requires that a party's conduct demonstrate personal dishonesty or  willful or continuing disregard ... for the safety or soundness of such insured depository institution. 12 U.S.C. § 1818(e)(1)(C)(i)-(ii) (emphasis added). Not surprisingly, courts have concluded that willful or continuing disregard requires a heightened showing of scienter. See, e.g., Kim v. Office of Thrift Supervision, 40 F.3d 1050, 1054-55 (9th Cir.1994) (collecting cases). 41 The FDIA decisions do not help Gully. Had Congress intended a heightened showing of scienter to apply to the FCUA, it would have drafted the prohibition provisions of the FDIA and FCUA identically. Congress's use of different standards for the issuance of prohibition orders pursuant to the FDIA and FCUA is quite telling. See Rodriguez v. United States, 480 U.S. 522, 525, 107 S.Ct. 1391, 94 L.Ed.2d 533 (1987) ([W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.) (internal quotations omitted). Therefore, since § 1786(g)(1) and § 1818(e)(1) were created by the same Act — the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub.L. No. 101-73, 103 Stat. 183 — the cases that Gully cites interpreting the FDIA are inapposite.
42 Gully's final contention is that there is no reasonable construction of the Board's factual findings — which she does not contest — from which it can be concluded that she was guilty of misconduct or is unfit to be involved in the affairs of a credit union. We disagree.
43 The Board found that Gully's failure to follow up once she became aware of her father's misuse of the WFCU American Express card constituted both an unsafe and unsound practice and a breach of her fiduciary duty. The Board has traditionally interpreted unsafe and unsound practice to mean conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder. See Doolittle v. NCUA, 992 F.2d 1531, 1538 (11th Cir.1993). The Board here defined fiduciary duty as a duty to act in the best interest of the institution, its shareholders and its depositors. See In re Majette, Final Dec. & Order (NCUA Bd. Mar. 18, 1999). 44 The parties agree that New York law applies to Gully's claim of breach of fiduciary duty and that the WFCU is considered a corporation for purposes of New York fiduciary law. Under New York law, a director or officer of a corporation owes a fiduciary duty to the corporation. See N.Y. Bus. Corp. Law § 715(h) (corporate officer shall perform his duties ... in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances). New York courts have long held fiduciaries to a standard stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is ... the standard of behavior. Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545 (1928) (Cardozo, C.J. ). A corporate officer's fiduciary duty includes discharging corporate responsibilities in good faith and with conscientious fairness, morality and honesty in purpose and displaying good and prudent management of the corporation. Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 569, 483 N.Y.S.2d 667, 473 N.E.2d 19 (1984) (internal quotations omitted). New York's fiduciary law is therefore consistent with the standard used by the Board in its decision. 45 Applying these standards, we cannot say that the Board's conclusions that Gully breached her fiduciary duty to the WFCU and engaged in unsafe and unsound practices were arbitrary and capricious. On the contrary, the Board's conclusions were supported by substantial evidence in the record. Gully concedes that, after becoming aware of her father's improper charges on the WFCU credit card and asking him to reimburse the WFCU, she made no effort to ensure that his misconduct was corrected and that it did not continue in the future. It is therefore difficult to dispute the Board's conclusion that by failing to exercise reasonable diligence Gully in effect, participated in h[er father's] scheme by continuing to send the American Express bills to him unopened and processing payment checks without ever reviewing the bills. 46 Indeed, a prudent person charged with protecting the assets of an insured credit union would not, as Gully did, blithely accept the promise of a consultant to repay the credit union and to stop misusing the credit card after discovering his illegal misuse of the credit card. Gully's conduct was particularly egregious in light of the complete lack of internal controls at the WFCU to prevent her father's continued misuse of his credit card and the conflict of interest that Gully had in policing her own father. In light of these facts, the Board's conclusions that Gully engaged in unsafe and unsound practices and breached her fiduciary duty were indeed reasonable. 47 Despite the substantial evidence supporting the Board's legal conclusions, Gully maintains that the Eleventh Circuit's decision in Doolittle v. NCUA, supra, calls into question the Board's decision. Her reliance on Doolittle, however, is misplaced. 48 In Doolittle, the Board entered a prohibition order against the president of a credit union after finding that he breached his fiduciary duties and engaged in unsafe and unsound practices by failing to report certain unauthorized commercial loans made by a loan supervisor to a credit union member. After learning of the loans, Doolittle called a meeting with the supervisor, the member, and other credit union personnel and informed the supervisor not to make any more commercial loans to the member. The supervisor ignored Doolittle's admonition and continued to make loans to the member. The member eventually defaulted on these loans, causing a loss to the credit union. Doolittle, 992 F.2d at 1535. 49 In rejecting the Board's findings that Doolittle breached his fiduciary duty and engaged in unsafe and unsound practices, the Eleventh Circuit noted that Doolittle took steps that he judged to be sufficient to prevent further escalation of the situation and cannot be held to have breached his fiduciary duty simply because his underlings failed to follow his orders. Id. at 1537. The court also emphasized that [t]his is not a case where a fiduciary ... stood idle and allowed damage to increase. Id. 50 As the Board recognized in its decision, Doolittle was not Gully. First and foremost, the underlying wrongdoing by Doolittle did not involve any personal gain to him or a relative. Here, the underlying wrongdoing involved substantial personal gain to Gully's father. Second, the corrective action taken by the credit union officer in Doolittle was far more extensive than that taken by Gully. Doolittle called a meeting with all the parties involved, including his subordinate personnel, in an effort to end the wrongdoing. In contrast, Gully conducted no investigation into her father's past or future misuse of the card. Her corrective action consisted solely of speaking to her father about his wrongdoing. Considering her conflict of interest and the complete lack of controls in the WFCU bill processing department, Gully's failure to inform any other WFCU personnel of her father's misconduct stands in stark contrast to the conduct in Doolittle. 51 Third, the Eleventh Circuit found that Doolittle's behavior did not constitute conduct traditionally considered to be a breach of fiduciary duty. Here, however, failing to monitor another party's actions has been considered a breach of fiduciary duty. See, e.g., Hoye v. Meek, 795 F.2d 893, 895-96 (10th Cir.1986) (bank director's failure to monitor an agent — his son — held to be a breach of fiduciary duty); Ault v. Soutter, 204 A.D.2d 131, 611 N.Y.S.2d 187, 187 (1st Dep't 1994) (corporate director breached his fiduciary duty by failing to do more than passively rubber-stamp the actions of a fellow corporate fiduciary). 52 Finally, unlike Doolittle, Gully indeed stood idle and allowed damage to increase. After discovering her father's misuse of the WFCU credit card, Gully failed to follow through on her obligation to protect the assets of the WFCU. The Board's finding that Gully's conduct was more egregious than Doolittle's is reasonable and supported by substantial evidence.
53 Gully also contends that the Board's finding that she was unfit to serve a credit union was arbitrary and capricious because the Board: (1) did not make a factual finding about her ability; and (2) failed to make an unfitness determination that is of equal gravity to a finding of personal dishonesty. Doolittle, 992 F.2d at 1538. 54 The Board defined unfitness as unsuitable, incompetent, or not qualified to participate in the conduct of the affairs of an insured credit union. In re Doolittle, Dec. & Order on Remand (NCUA Bd., Jan. 19, 1995). This definition is entirely consistent with the text of § 1786(g)(1)(C)(ii). The Board made a reasonable determination that Gully's failure to take adequate corrective action to end her father's unlawful use of WFCU funds demonstrated her unfitness to fulfill her responsibilities as the manager of a federal credit union. 55 Gully faults the Board for failing to make any finding regarding her ability. Gully's only support for this contention is an out-of-context factual finding by the Board. When confronted with the ALJ's factual determination that Gully was known as an honest person and capable manager, the Board added the following proviso: The Board recognizes this as [the] opinion of certain witnesses and makes no finding of fact as to [Gully's] honesty or ability. This statement merely stressed that the Board was not endorsing the testimony of the witnesses who claimed that Gully was generally honest and able. Gully's argument also ignores that after this statement, the Board proceeded to make detailed findings of fact that supported its conclusion that Gully was unfit under § 1786(g)(1)(C). 56 Gully's assertion that unfitness requires a finding of equal gravity to personal dishonesty is likewise unpersuasive. Gully relies again on the Eleventh Circuit's decision in Doolittle, supra, as authority for this proposition. She fails to recognize, however, that there is no textual support for this interpretation of the unfitness element. Furthermore, Gully ignores that it is the Board, not federal courts, that has been entrusted with the power to make determinations regarding the gravity of misconduct by credit union officials. See 12 U.S.C. § 1786(g)(1). 57 In sum, the Board's conclusions that Gully breached her fiduciary duty to the WFCU, and that her conduct constituted an unsafe and unsound practice and demonstrated her unfitness to participate in the affairs of a credit union were neither arbitrary nor capricious and were supported by substantial evidence.