37 F.3d 911 (3rd Cir. 1994), 92-3722, Matter of Seidman

Docket Nº:John Bailey, Petitioner at No. 92-3722,
Citation:37 F.3d 911
Party Name:In The Matter of Lawrence B. SEIDMAN and John Bailey, Individually, as Persons Participating in the Conduct of the Affairs of Crestmont Federal Savings and Loan Association, Edison, New Jersey,
Case Date:September 14, 1994
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

Page 911

37 F.3d 911 (3rd Cir. 1994)

In The Matter of Lawrence B. SEIDMAN and John Bailey,

Individually, as Persons Participating in the

Conduct of the Affairs of Crestmont

Federal Savings and Loan

Association, Edison,

New Jersey,

John Bailey, Petitioner at No. 92-3722,

Lawrence B. Seidman, Petitioner at No. 92-3729.

Lawrence B. SEIDMAN, Appellant,



UNITED STATES of America, Appellee

Nos. 92-3722, 92-3729 and 92-5392.

United States Court of Appeals, Third Circuit

September 14, 1994

Argued Aug. 3, 1993.

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John J. Sarno (argued), Robinson, St. John & Wayne, Newark, NJ, for John Bailey.

Samuel D. Bornstein, Paramus, NJ and Frank J. Eisenhart, Jr. (argued), Arthur W. Leibold, Jr., Edward Jewett, Dechert, Price & Rhoads, Washington, DC, for Lawrence B. Seidman.

Faith S. Hochberg, Deputy Chief Counsel, Office of U.S. Atty., Newark, NJ, Richard E. Shapiro, Office of Thrift Supervision, Jersey City, NJ and Harris Weinstein, Chief Counsel, Carolyn B. Lieberman, Sr. Deputy Chief Counsel, Thomas J. Segal, Deputy Chief Counsel, Aaron B. Kahn, Asst. Chief Counsel (argued), Teresa A. Scott, Office of the Chief Counsel, Office of Thrift Supervision, Washington, DC, for Office of Thrift Supervision, U.S. Dept. of Treasury.

Before STAPLETON, HUTCHINSON, and ROTH, Circuit Judges.

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HUTCHINSON, Circuit Judge.

In these consolidated cases, Lawrence Seidman ("Seidman") and John Bailey ("Bailey") petition for review of the order of the Director ("Director") of the Office of Thrift Supervision ("OTS") subjecting them to administrative sanctions for their part in a loan transaction Crestmont Federal Savings and Loan ("Crestmont") considered while Seidman was Chairman of Crestmont's Board of Directors ("Board") and Bailey was one of its officers. Specifically, Bailey petitions for review of that portion of the Director's order publicly directing him to cease and desist from participating in unsafe and unsound lending practices. Seidman's petition seeks review of that portion of the Director's order removing him from his office at Crestmont and banning him from further participation in the banking industry.

When the Director issued the order against Seidman and Bailey, he remanded the case to an administrative law judge ("ALJ") to determine their ability to pay civil monetary penalties because the ALJ who had heard the case failed to assess a civil penalty against Bailey and to properly document Seidman's ability to pay the $930,000 civil penalty the ALJ had recommended. The remand order raises a question of finality that we must consider before deciding whether we have jurisdiction to review Bailey's and Seidman's petitions. We conclude in Part II that we do have jurisdiction. 1

In the administrative proceeding, the Director found Bailey approved a commitment for a purchase money mortgage to a real estate buyer who was buying property from a seller in which Seidman had an interest. The Director concluded that approval of this commitment was an unsafe and unsound lending practice justifying a cease and desist order against Bailey under section 1818(b) of the Federal Deposit Insurance Act ("FDIA"), 12 U.S.C.A. Secs. 1811-1833 (West 1989 & Supp.1994), as amended by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), P.L. No. 101-73, 103 Stat. 183 (1989).

The Director concluded that Seidman's conduct required him to issue a prohibition and removal order in accord with 12 U.S.C.A. Sec. 1818(e). To support this ultimate administrative sanction the Director found Seidman impermissibly used his position at Crestmont for his own benefit in order to obtain a release from his personal guarantee of a loan; this loan had been made by another lending institution to a real estate partnership from which Seidman was in the process of withdrawing; Seidman's withdrawal from the partnership was being negotiated at the same time that Bailey made the loan commitment for a purchase from the partnership, resulting in the Director's cease and desist order against him. As additional support for his order removing Seidman from Crestmont's Board of Directors and banning him from banking for life, the Director also found that Seidman failed to renotify Crestmont's Board or Senior Loan Committee of his continuing interest in the real estate partnership he was withdrawing from while they were considering the loan OTS objected to and that Seidman later attempted to hinder the ensuing OTS investigation by covering up his part in preparing a memo in support of his request for the release. The Director concluded that each of these findings warranted Seidman's removal as Chairman of Crestmont's Board and required him to be permanently barred from banking.

We believe the Director erred in concluding Bailey's issuance of a purchase money loan commitment to a buyer from the real estate development partnership from which Seidman was in the final stages of withdrawing exposed Crestmont to the serious, abnormal risk that constitutes an unsafe or unsound

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practice. Therefore, we will grant Bailey's petition for review and vacate that part of the Director's order commanding Bailey to cease and desist from such practices.

We reject Seidman's preliminary argument that 12 U.S.C.A. Sec. 1818(e) violates due process because it fails to afford him a trial before a fair and unbiased tribunal. We conclude, however, that the Director's findings that Seidman violated 12 U.S.C.A. Sec. 1818(e)(1) when he sought to utilize his position at Crestmont to obtain a release from his guarantee and when he failed to remind Crestmont's Board or Senior Loan Committee of his interest in the real estate partnership are not supported by substantial evidence. Though the Director properly determined that Seidman engaged in an unsafe or unsound practice when he attempted to hinder the OTS investigation, we conclude that there is no evidence to support the Director's finding that this act of Seidman resulted in his receipt of an actual benefit meeting section 1818(e)(1)(B)(iii)'s condition of an untoward or prohibited effect. 2 Accordingly, we will grant Seidman's petition for review and vacate that part of the Director's order permanently removing him from his job at Crestmont and banning him from banking. Nevertheless, because of our conclusion that Seidman did commit an unsafe or unsound practice when he unsuccessfully attempted to hinder the OTS investigation in his dealings with his former partners and their lender, we will remand the case to OTS for the Director to consider entering a cease and desist order and civil monetary penalties against Seidman as authorized by section 1818(b).

Our disposition of the merits of Seidman's petition requires us to vacate the OTS preliminary suspension order for the reasons given in Part VII of this opinion. Therefore, we find it unnecessary to consider Seidman's appeal of the district court's order dismissing, for lack of jurisdiction, his action to enjoin the preliminary suspension order.

I. Factual and Procedural History

  1. Seidman's Business Dealings

    Lawrence Seidman is an attorney in his mid-forties who has been engaged in the practice of banking and securities law for twenty years. During the past decade he has specialized in real estate investments and begun to pursue a career in banking. In 1989, he headed a group of investors who purchased stock in Crestmont, a thrift institution in Edison, New Jersey. 3 Seidman became a director of Crestmont and, in November 1989, was named Chairman of its Board of Directors.

    In 1986, before he became a Crestmont director, Seidman formed a partnership, Fulton Street Associates ("FSA"), with James Zorlas ("Zorlas") and Lawrence Rappaport ("Rappaport") to purchase and develop industrial condominiums on a piece of commercial property ("Boonton Project"). FSA's partners made substantial capital contributions to the Boonton Project and obtained additional financing from United Jersey Bank ("UJB"), secured in part by all the partners' personal guarantees. Seidman listed his affiliation with FSA on conflict disclosure forms he filed with Crestmont when he became a director.

    In mid-1990, Seidman decided to focus his business activities on Crestmont. Recognizing that his outside business ventures could create conflicts that would prevent Crestmont from making otherwise desirable loans, Seidman advised the Board that he had begun to withdraw from his outside business ventures and started disposing of various business interests to his former partners. Rappaport agreed to acquire Seidman's interest in FSA, promising to indemnify Seidman against any continuing obligation on FSA's loan from UJB without any further

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    consideration flowing to Seidman. On June 1, 1991, Seidman's transfer of his interest in FSA to Rappaport became the subject of a formal agreement. Seidman testified that he lost all of the $320,000 he had invested in FSA but that he thought Crestmont offered even greater potential for profit.

    Months before the June 1st agreement, however, UJB started to worry about its loan to FSA. On January 21, 1991, it sent FSA a notice of default. UJB gave FSA a chance to cure the default, but FSA denied it was in default, contending any default would have been cured if an interest reserve fund had been properly credited against its debt. Though UJB then sent FSA a demand for immediate payment, negotiations between them continued.

    James Risko ("Risko"), a Poole & Co. commercial loan broker, handled negotiations to resolve the dispute between FSA and UJB. Poole & Co...

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