Board of Governors of Federal Reserve System v. Pharaon, Docket Nos. 98-6101

Decision Date19 October 1998
Docket NumberDocket Nos. 98-6101
Citation169 F.3d 110
PartiesBOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Plaintiff-Appellant-CrossAppellee, v. Ghaith R. PHARAON, Defendant-Appellee-CrossAppellant, Alanwood Anstalt, as Trustee of the Brookpark Trust, and on behalf of the named beneficiaries of the Brookpark Trust, Intervenor-Defendant-Appellee. (L), 98-6121(CON). . Heard
CourtU.S. Court of Appeals — Second Circuit

Thomas C. Baxter, Jr., New York, N.Y. (Shari D. Leventhal, Federal Reserve Bank of New York, New York, N.Y.; James V. Mattingly, Jr., Richard M. Ashton, Richard A. Small, Federal Reserve System, Wash., D.C., on the brief), for plaintiff-appellant-cross-appellee.

Richard F. Lawler, New York, N.Y. (Philip M. Smith, John C. Canoni, Whitman Breed Abbott & Morgan, New York, N.Y., on the brief), for defendant-appellee-cross-appellant.

Before: NEWMAN and JACOBS, Circuit Judges and TSOUCALAS, * Judge.

JON O. NEWMAN, Circuit Judge:

This appeal presents two issues concerning a civil penalty levied by the Board of Governors of the Federal Reserve System ("the Board"). The first is whether the Board is entitled to the ten percent surcharge on the penalty authorized by the Federal Debt Collection Procedures Act ("FDCP Act"), 28 U.S.C. §§ 3001-3308 (1994), in certain actions brought by the United States to recover debts. The second is whether the Board is entitled to an award of interest on the penalty, accruing from the date by which the Board's order directs payment of the penalty through the date a judgment enforcing that order is entered.

These issues arise on an appeal by the Board and a cross-appeal by Ghaith R Pharaon from a partial final judgment of the United States District Court for the Southern District of New York (Harold Baer, Jr., Judge), enforcing an order previously affirmed by the United States Court of Appeals for the District of Columbia. After granting the Board's motion for summary judgment enforcing a final agency order assessing a $37 million civil penalty against Pharaon for his violation of federal laws governing bank holding companies, the District Court imposed a ten percent surcharge on the penalty pursuant to section 3011 of the FDCP Act, but denied the Board's motion for an award of interest on the penalty. See Board of Governors of the Federal Reserve v. Pharaon, No. 91-6250, 1998 WL 122593 (S.D.N.Y. March 18, 1998). The Board appeals from the denial of interest, and Pharaon cross-appeals from the award of a surcharge. We affirm the District Court's imposition of a surcharge, but reverse the denial of interest.

Background

This case arises out of Pharaon's involvement with the ill-fated Bank of Credit and Commerce International ("BCCI"), of which he was a major shareholder. On September 13, 1991, the Board filed a Notice of Assessment, alleging violations of sections 3(a) and 5(c) of the Bank Holding Company Act, 12 U.S.C. §§ 1842(a)(1), 1844(c), and assessing a civil penalty of $37 million against Pharaon. Pharaon was charged with participating in a scheme whereby the BCCI, using Pharaon as a front man, acquired control of Independence Bank in Encino, California, without the requisite prior approval of the Board.

Concurrently with the filing of its administrative charges, the Board obtained from the District Court a temporary restraining order ("TRO"), preventing Pharaon from removing or dissipating his assets in the United States during the pendency of the Board's proceeding, pursuant to the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(i)(4), and the FDCP Act. See Board of Governors of the Federal Reserve System v. Pharaon, 140 F.R.D. 634, 635 (S.D.N.Y.1991) (noting that TRO was extended on consent). Subsequently, Pharaon was indicted for criminal violations of federal banking laws; since November 1991, he has been a fugitive.

Despite his fugitive status, Pharaon promptly answered the Board's Notice of Assessment through counsel and requested a hearing on the charges. An adversarial hearing lasting nineteen days was held before an administrative law judge ("ALJ") in the fall of 1995. Following that hearing, the Board adopted the ALJ's recommended decision and issued a Final Order on January 31, 1997. In the Final Order, the Board assessed a $37 million civil penalty and ordered payment by March 3, 1997. On Pharaon's appeal, the District of Columbia Circuit affirmed the Board's finding that Pharaon was personally liable for his participation in the BCCI scheme and upheld the $37 million penalty. See Pharaon v. Board of Governors of the Federal Reserve System, 135 F.3d 148, 154-57 (D.C.Cir.1998).

Upon Pharaon's failure to pay the penalty, the Board filed an amended complaint in May 1997 in the Southern District of New York. In August, the Board moved for partial summary judgment, requesting the District Court to (i) enter judgment against Pharaon in the amount of $37 million, see 12 U.S.C. § 1818(i)(1) (authorizing the Board to enforce a penalty order by commencing an action in any United States district court); (ii) impose a ten percent surcharge on the civil penalty, see 28 U.S.C. § 3011; and (iii) award prejudgment interest on the penalty from March 3, 1997, the date by which the Board's Final Order directed Pharaon to pay the penalty. Pharaon contested the surcharge and the interest, but did not oppose entry of judgment against him in the amount of $37 million.

The District Court held that a ten percent surcharge was appropriate under section 3011 of the FDCP Act, which authorizes the United States, under certain circumstances, to recover a surcharge for the cost of litigation and enforcement of a claim for a debt. See Pharaon, 1998 WL 122593, at * 1-* 3. The Court concluded that the Board was entitled to the surcharge because it had sought a prejudgment remedy against Pharaon pursuant to subchapter B of the FDCP Act, one of the circumstances under which the United States can become entitled to a surcharge under the Act. See id. The Court declined to award prejudgment interest based on its view that such an award would violate the well settled rule against awarding prejudgment interest on penalties. See id. at * 4. Judge Baer certified the partial judgment for interlocutory appeal. See Fed.R.Civ.P. 54(b).

Discussion
I. The Ten Percent Surcharge

The FDCP Act provides that "the United States is entitled to recover a surcharge of 10 percent of the amount of the debt ... to cover the cost of processing and handling the litigation and enforcement ... of the claim for such debt." 28 U.S.C. § 3011(a). To be entitled to the surcharge, the United States, or its agency, must have initiated "an action or proceeding under subchapter B or C" of the FDCP Act. 1 Id. Subchapter B, at issue in this case, provides for prejudgment remedies, which are defined to include "attachment, receivership, garnishment, or sequestration." 28 U.S.C. § 3002(11).

The Board sought such a prejudgment remedy against Pharaon in 1991. See Complaint at 7-9. Nevertheless, Pharaon contends that the imposition of a surcharge is not proper because the prejudgment remedy that the Board obtained was granted pursuant to the FDI Act, 12 U.S.C. § 1818(i)(4), not the FDCP Act. In addition, Pharaon asserts that even if the prejudgment remedy was granted pursuant to the FDCP Act, the Board was not entitled to such a remedy under that Act and, therefore, is not entitled to the surcharge.

Pharaon's contention that the Board was not granted a prejudgment remedy pursuant to the FDCP Act ignores the plain language of the District Court's order granting that remedy. Acting upon the Board's request for relief pursuant to the FDCP Act, see Complaint at 1, 7-9, the District Court explicitly cited the Act as authority for the issuance of its order restraining Pharaon from removing or dissipating his assets in the United States pending resolution of the Board's proceeding, see TRO at 1. Furthermore, in summarizing the procedural history of this case in a subsequent opinion, the District Court noted, "The TRO froze Pharaon's assets in the United States, pursuant to Section 8(i) of the [FDI Act] and the Debt Collection Act, 28 U.S.C. §§ 3001-3015." Pharaon, 140 F.R.D. at 635 (emphasis added). The fact that the District Court might have relied principally on the FDI Act, as suggested by the Court's recitation of the history of this case in another opinion, see Board of Governors of the Federal Reserve System v. Pharaon, 140 F.R.D. 642, 643-44 & n.2 (S.D.N.Y.1991), does not mean that the prejudgment attachment was not obtained, at least in part, pursuant to the FDCP Act. Since the prejudgment remedy was sufficiently grounded on subchapter B of the FDCP Act, the issue becomes whether such a remedy was properly ordered under that Act.

Subchapter B of the FDCP Act provides that "[t]he United States may, in a proceeding in conjunction with the complaint or at any time after the filing of a civil action on a claim for a debt, make application ... to a court to issue any prejudgment remedy." 28 U.S.C. § 3101(a) (emphasis added). Pharaon contends that because the assessment was not due and payable until March 31, 1997, the date by which the Board's Final Order required payment, the action commenced against him in 1991 was not one "on a claim for a debt" and, therefore, at that time the Board was not entitled to a prejudgment remedy under the FDCP Act.

Pharaon's argument is unpersuasive. The FDCP Act does not define the term "debt" as only an amount that is due and payable. Rather, it defines the term as including "an amount that is owing to the United States on account of a[n] ... assessment." 28 U.S.C. § 3002(3)(B). The penalty levied against Pharaon in 1991 was indisputably an "assessment." Furthermore, it was "an amount owing to the United States" within the meaning of the FDCP Act.

The Board has the authority to "assess[ ] and collect[ ]" penalties by issuing a notice of...

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