Opinion ID: 3009588
Heading Depth: 1
Heading Rank: 5

Heading: The Charges Against Seidman

Text: Courts have recognized that the power to remove a bank officer is an extraordinary power that should be carefully exercised in strict accordance with the law. Cf. Manges v. Camp, 474 F.2d 97, 100-01 (5th Cir. 1973). Accordingly, we might expect that the statute under which OTS sought the far more serious sanction of Seidman's removal from office and his permanent prohibition from participation in the thrift industry, 12 U.S.C.A. § 1818(e), requires elements additional to those that justify the lesser sanction of a cease and desist order. We are not disappointed. By requiring a three part conjunctive test in section 1818(e)(1), Congress has imposed significant additional conditions before a banker can be deprived of his office and permanently barred from banking. Thus, before an agency regulating a banking institution can impose this ultimate administrative sanction on any banker, it must show by substantial evidence that: (1) the banker has committed an unlawful act; (2) the act has either an adverse effect on the regulated institution or its depositors or confers a benefit on the actor and (3) the act is accompanied by a culpable state of mind.22 See Oberstar v. FDIC, 987 F.2d 494, 500 (8th Cir. 1993). 22 . The full text of section 1818(e)(1) is: (..continued) (1) . . . Whenever the appropriate Federal banking agency determines that-- (A) any institution-affiliated party has, directly or indirectly-- (i) violated-- (I) any law or regulation; . . . (ii) engaged or participated in any unsafe or unsound practice in connection with any insured depository institution or business institution; or (iii) committed or engaged in any act, omission, or practice which constitutes a breach of such party's fiduciary duty; (B) by reason of the violation, practice, or breach described in any clause of subparagraph (A)-- (i) such insured depository institution or business institution has suffered or will probably suffer financial loss or other damage; (ii) the interest of the insured depository institution's depositors have been or could be prejudiced; or (iii) such party has received financial gain or other benefit by reason of such violation, practice, or breach; and (C) such violation, practice, or breach-- (i) involves personal dishonesty on the part of such party; or The acts come in three varieties. The effects also divide into three subclasses, but there are only two kinds of culpable mental states. Under section 1818(e)(1), at least one of the prohibited acts, accompanied by at least one of the three prohibited effects and at least one of the two specified culpable states of mind, must be established by substantial evidence on the whole record before the regulatory agency can properly remove a person from office and ban him from the banking or thrift industries. Id. The Director concluded five separate charges warranting the sanction of removal and prohibition were proven against Seidman: (1) acting to gain release from the UJB loan; (2) failing to notify Crestmont's Senior Loan committee of his interest in FSA and the Boonton project; (3) destroying material information during the investigation; (4) giving misleading testimony in a deposition; and (5) instructing a material witness to withhold evidence. We will examine the record as to each to see if the evidence relevant to each meets the statutory requirements we have just described. A. Seidman's Release From His Guarantee on the UJB Loan 1. Did Seidman Violate Any Law or Regulation in Seeking the Release? (..continued) (ii) demonstrates willful or continuing disregard by such party for the safety or soundness of such insured depository institution or business institution. 12 U.S.C.A. § 1818(e)(1) (West 1989). On the first charge, we begin with the particular acts described in section 1818(e)(1)(A). If Seidman's effort to secure a release from the UJB guarantee is not among the three kinds of acts section 1818(e)(1)(A) prohibits, we need not consider any of the particular effects section 1818(e)(1)(B) specifies or either of the culpable states of mind section 1818(e)(1)(C) describes because the elements of act, effect and state of mind are conjunctive. Oberstar, 987 F.2d at 500. Each must be established by substantial evidence before the Director may issue an order of removal and prohibition under the statute. OTS contends Seidman acted in violation of law or regulation under section 1818(e)(1)(A)(i)(I) when he and Risko took steps to secure Seidman's release from his guaranty of FSA's indebtedness to UJB. The ALJ concluded that Seidman violated 12 C.F.R. § 563.43 in securing his release from the UJB guarantee.23 Section 563.43 made it improper for a savings association to [m]ake any loan to . . . any third party on the security of real property purchased from any affiliated person of such association, unless the property was a single-family dwelling owned and occupied by the affiliated person as his or her principal residence. 12 C.F.R. § 563.43(c)(1) (1991) (since repealed).24 Seidman argues section 563.43(c)(1) does not apply because it expressly requires consummation of a loan, and 23 . In his opinion the Director does not expressly find a violation of section 1818(e)(1)(A)(i)(I) on this ground, but his acceptance of the ALJ's recommendation implies he did. 24 . See supra note 8. Crestmont never granted any prohibited loan. We agree with Seidman.25 The Director also held, however, that Seidman violated 12 C.F.R. § 571.7, and that violation met section 1818(e)(1)(A)(i)(I)'s requirement of a prohibited act because it was a violation of a regulation. Seidman argues that section 571.7 is a policy statement, not a regulation, and therefore any violation of it did not meet section 1818(e)(1)(A)(i)(I)'s requirement. Section 571.7 is expressly labeled a Statement of Policy and reads, in relevant part: [E]ach director, officer, or other affiliated person of a savings association has a fundamental duty to avoid placing himself or herself in a position which creates, or which leads to or could lead to, a conflict of interest or appearance of a conflict of interest. . . . 12 C.F.R. § 571.7(b) (1993). OTS's predecessor, FHLBB, consistently drew a distinction between general statements of policy and substantive regulations. See 12 C.F.R. §§ 508.11, 508.12, 508.14 (1989).26 The enactment of FIRREA does not remove this distinction because the APA, 5 U.S.C.A. § 553(b)(A) (West 1977), requires more exacting procedures of notice and comment for the promulgation of rules that have the force of law than it 25 . Indeed, in his brief and argument on Seidman's petition for review, the Director appears to place little, if any, reliance on this regulation. 26 . After enactment of FIRREA, OTS amended the old FHLBB regulations. The version applicable to Seidman's case, however, is the FHLBB version. does for statements of policy. A regulated person's failure to follow the guidance of a policy statement is not sanctionable under section 1818(e)(1)(A)(i)(I) unless it is also shown that the failure to follow the policy violated some specific statute, rule or regulation that has the force of law: [C]ourts are in general agreement that interpretive rules simply state what the administrative agency thinks the statute means, and only remind affected parties of existing duties. In contrast, a substantive or legislative rule, pursuant to properly delegated authority, has the force of law, and creates new law or imposes new rights or duties. Jerri's Ceramic Arts, Inc. v. Consumer Prod. Safety Comm., 874 F.2d 205, 207 (4th Cir. 1989) (citations omitted); see also FLRA v. Dep't of the Navy, 966 F.2d 747, 762 (3d Cir. 1992) (in banc); Northwest Nat'l Bank, 917 F.2d at 1117. The United States Court of Appeals for the District of Columbia has observed: A general statement of policy . . . does not establish a binding norm. It is not finally determinative of the issues or rights to which it is addressed. When the agency applies the policy in a particular situation, it must be prepared to defend it, and cannot claim that the matter is foreclosed by the prior policy statement. Guardian Federal Sav. & Loan Ass'n v. FSLIC, 589 F.2d 658, 666 (D.C. Cir. 1978) (internal quotation and citation omitted). FHLBB issued section 571.7 as a caution against the risk that is added when an affiliated person like Seidman has a personal stake in a business transaction his savings institution is considering, a risk inherent in self-dealing. See generally First Nat'l Bank v. Smith, 610 F.2d 1258, 1265 (5th Cir. 1980). The FHLBB first announced section 571.7 in 1968 as a policy without giving interested persons any opportunity for comment. See 33 Fed. Reg. 16,382 (1968) (codified at 12 C.F.R. § 571.1). In 1975, the FHLBB published a request for comment on a number of conflict of interest proposals that had been adopted on November 19, 1970. It included section 571.7. See 35 Fed. Reg. 12,216, 18,038 (1975). Nevertheless, section 571.7 continued to appear in a section of C.F.R. entitled Statements of Policy. Accordingly, Seidman argues it is wrong to take away a person's livelihood under a provision promulgated, codified and described as a policy statement rather than as a rule or regulation having the force of law. In Northwest National Bank the bank was charged with violating 12 C.F.R. § 7.3025 (1987). Northwest Nat'l Bank, 917 F.2d at 1116. The court concluded that the rule was legislative in nature because it clearly purports to create new substantive requirements. Id. at 1117. It considered several factors, including the text of the rule and the procedure the agency had used to promulgate it, in deciding whether it was interpretive or legislative in nature. Id. at 1116-17. The rule's classification as interpretive was an important but not dispositive factor. Id. The legislative rule the court in Northwest National Bank considered is materially different from section 571.7, which imposes no specific substantive requirements. Moreover, Northwest National Bank's failure to follow 12 C.F.R. § 7.3025 plainly led to a violation of the statute itself. Id. at 1116 (The Comptroller found Northwest in violation of [the regulation] and thereby in violation of 12 U.S.C. § 29.). In addition, the text of section 571.7 does not support OTS's position. Section 571.7 has not changed since it was first published as a policy statement. OTS has since promulgated regulations with the force of law prohibiting specific conflicts of interest. They would be redundant if section 571.7's general statement independently has the force of law. See, e.g., 12 C.F.R. §§ 563.40, 563.41, 563.43 (1993). Considering the Northwest National Bank factors together, we hold section 571.1(b), whose text, title and codification as a policy statement have never changed, is just that--a policy statement, not a regulation.27 Congress and the agencies that regulate lending institutions have specifically prohibited particular acts as conflicts of interest in statutes, rules and regulations that plainly do have the force of law.28 Congress and the regulators have shown that they know how to 27 . We need not and do not decide that FIRREA does not give OTS the authority to expand the duty of loyalty officers of banking corporations OTS regulates owe their institutions from actual conflicts of interest to appearances of conflict, but we do hold that if it wishes to assert such authority its intent to do so must be more clearly expressed than it is in section 571.7. 28 . Nothing about policy statements in general nor section 571(b) in particular would indicate to persons who might be affected by them that violation of the policy against apparent conflicts could subject them to an order banning them from the trade or profession they work in. define specific conduct that gives rise to an illegal conflict of interest. We think the sweeping language of section 571.7(b) indicates it is no more than a statement of policy that a director of a banking institution, like Seidman, should use as a guide for personal conduct, not a rule whose violation triggers the severe penalty section 1818(e) imposes. Accordingly, we reject the Director's conclusion that section 571.7(b)'s Statement of Policy is a regulation or law within the meaning of section 1818(e)(1)(A)(i)(I). 2. Did Seidman Engage in an Unsafe or Unsound Practice by Seeking the Release? Because Seidman did not act in violation of a law or regulation as required by section 1818(e)(1)(A)(i)(I) when he sought the release, we next consider whether by doing so he engaged in an unsafe or unsound practice under section 1818(e)(1)(A)(ii). The Director summarily concluded that Seidman's conduct in seeking a release from the UJB guarantee without informing the Board or the Senior Loan Committee of his interest in FSA, the second charge against him, constituted an unsafe or unsound practice. OTS urges us to affirm this holding. As stated previously, an unsafe or unsound practice embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk of loss or damage to an institution, its shareholders, or the agencies administering the insurance funds. MCorp Fin., Inc., 900 F.2d at 862 (quotation omitted). An unsafe or unsound practice has two components: (1) an imprudent act (2) that places an abnormal risk of financial loss or damage on a banking institution. See supra Part V. OTS contends that Seidman's conduct in seeking a release from his UJB guarantee and failing to inform the Board or the Senior Loan Committee of his interest meets these requirements. OTS and the Director equate the imprudence component of an unsafe or unsound practice with a breach of the fiduciary duty of due care, once called the prudent man rule and now more often described as the business judgment rule. See Revised Model Business Corporation Act (RMBCA) § 8.30 comment (1992). In its brief, OTS asserts [t]he prudent operation of Crestmont certainly requires that its directors and officers comply with OTS regulations concerning conflicts of interest as well as Crestmont's own policy governing conflicts. Appellee Brief at 31.29 While the same act may be both an unsafe or unsound practice under section 1818(e)(1)(A)(ii) and a breach of a fiduciary duty under section 1818(e)(1)(A)(iii), we hesitate to make one a proxy for the other.30 If OTS seeks to prove a 29 . OTS also relies on Hoffman v. FDIC, 912 F.2d 1172 (9th Cir. 1990), but that case dealt with self-dealing, a breach of the fiduciary duty of loyalty, not the fiduciary duty of care. 30 . Congress obviously thought the concepts were distinct enough to require separate specification in section 1818(e)(1)(A). Here, we need not consider the details of any overlap between acts that are unsafe or unsound practices and those that are breaches of fiduciary duty because we apply different tests to determine which category applies to any particular act. It is violation of section 1818(e)(1)(A)(ii), it must satisfy the definition of an unsafe or unsound practice. Conversely, if OTS wishes to prove a violation of section 1818(e)(1)(A)(iii), it must do so under the standards that define a fiduciary's duty. Our present inquiry is only whether the first charge against Seidman concerning his successful efforts to obtain a release from his guarantee of FSA's obligations to UJB was an unsafe and unsound practice. So considered, we conclude Seidman's attempt to secure a release was not an unsafe and unsound banking practice with respect to Crestmont. OTS not only placed Seidman in the position of selecting between his business life and his banking life but also compelled him to deprive Crestmont of potentially desirable loans. OTS told Seidman he had to relinquish his outside interests and disengage himself from the obligations he had incurred while a partner in FSA and then, when he did so, charged him with an unsafe and unsound practice. Seidman's successful effort to secure a release from his guarantee was potentially beneficial to Crestmont by giving it an added source of desirable loans. The record does not support a conclusion that Seidman's attempts to extricate himself from the UJB guarantee were contrary to accepted banking practices for persons acting on behalf of Crestmont. (..continued) important, however, in deciding cases and in imposing sanctions to separately compare the act under consideration with all the elements of each category. The Director's failure to do so is a source of many of the problems and much of the confusion in this case. Even if we were to conclude that Seidman behaved imprudently in seeking the release, OTS would still have to show that his actions created an abnormal risk of financial loss for Crestmont. See supra Part V. Unable to identify any specific harm to Crestmont, OTS argues, if directors are free to make choices for the institutions they control based on the personal benefit that would result from their choice there would be an inherent risk that the interests of the depositors and the institution would take a back seat to the personal interest of the director. Appellee App. at 31. OTS again fails to recognize any distinction between the separate requirements of section 1818(e). Its argument conflates the act of engaging in an unsafe practice with the prohibited effect of personal gain. Compare 12 U.S.C.A. § 1818(e)(1)(A)(ii) with id. § 1818(e)(1)(B)(iii). This record does not show that Seidman's attempt to obtain relief from his guarantee and free Crestmont from OTS's prohibition against end-user financing on FSA's Boonton development created an abnormal risk of loss or damage to Crestmont. We therefore turn to section 1818(e)(1)(A)(iii). 3. Did Seidman Violate Any Fiduciary Duty In Seeking the Release? In a final attempt to demonstrate that Seidman's release from the UJB guarantee was an act under section 1818(e)(1)(A) and therefore one of the three elements needed to justify a removal and prohibition order, OTS argues that the Director correctly concluded that Seidman's efforts to secure his release constituted self-dealing and violated his fiduciary duty of loyalty to Crestmont under section 1818(e)(1)(A)(iii).31 As a member of the board and an officer of Crestmont, Seidman did owe a duty of loyalty to Crestmont. Section 8.42 of the RMBCA states: (a) An officer with discretionary authority shall discharge his duties under that authority: (1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner he reasonably believes to be in the best interests of the corporation. RMBCA § 8.42 (1992). Common law also imposes on a director a duty of loyalty to the corporation served. See Fleishacker v. Blum, 109 F.2d 543, 547 (9th Cir.), cert. denied, 311 U.S. 665 (1940). The duty of loyalty includes a duty to avoid conflicts of interest. See Pepper v. Litton, 308 U.S. 295, 306, 310-11 (1939). In In re Bush, OTS AP 91-16, 1991 OTS DD LEXIS 2 (April 18, 1991), the Director discussed both a director's duty 31 . The Director also concluded that Seidman breached his duty of candor when he failed to inform the Senior Loan Committee or the Crestmont Board of his interest in FSA before the Levine loan commitment. This argument is addressed infra at Part VI.B. The Director did not conclude either of these acts violated Seidman's fiduciary duty of care, only the duty of loyalty. of loyalty and the initial inquiry of whether a director has a conflicting interest in a transaction: A fundamental component of the fiduciary duties of directors in every jurisdiction, however, is that directors owe a duty of loyalty to the institution they serve. This duty prohibits directors from engaging in transactions that involve conflicts of interest with the institution. . . .