Feinberg v. Federal Deposit Ins. Corp.

• Decision Date: 13 August 1976
• Docket Number: C. A. No. 74-1150.
• Citation: 420 F. Supp. 109
• Parties: Bernard FEINBERG, Plaintiff, v. The FEDERAL DEPOSIT INSURANCE CORPORATION, and Alan R. Miller, Defendants.
• Court: U.S. District Court — District of Columbia

420 F. Supp. 109

Bernard FEINBERG, Plaintiff, v. The FEDERAL DEPOSIT INSURANCE CORPORATION, and Alan R. Miller, Defendants.

C. A. No. 74-1150.

United States District Court, District of Columbia.

August 13, 1976.

Samuel J. Betar, Joseph A. Lamendella, Chicago, Ill., Ralph A. Muoio, Richard W. Skillman, John F. Dienelt, Washington, D. C., for plaintiff.

Redford J. Wedel, Acting Gen. Counsel, Burton L. Raimi, Acting Deputy Gen. Counsel, Werner Goldman, Counsel, Douglas H. Jones, for defendants.

Before McGOWAN, Circuit Judge, and SMITH and RICHEY, District Judges.

CHARLES R. RICHEY, District Judge.

This case has been remanded¹ to this three-judge district court for determination of whether section 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1818(g)(1) (1970)², is constitutional insofar as it authorizes the Federal Deposit Insurance Corporation (hereinafter, "FDIC") to issue a Notice and Order of Suspension upon the mere fact of an indictment for a felony involving dishonesty or breach of trust without provision for a prior or subsequent opportunity to be heard. The parties have filed cross motions for summary judgment and have agreed that there are no material facts in dispute.

This issue has arisen as the result of the plaintiff, Bernard Feinberg, receiving a Notice and Order of Suspension after he was indicted, on May 9, 1973, by a federal grand jury in the United States District Court for the Northern District of Illinois. The indictment charged him with conspiracy to commit mail fraud, a felony, in violation of 18 U.S.C. § 1341. Plaintiff was tried under a superseding mail fraud indictment, and on June 27, 1975, was found guilty on four counts of mail fraud and not guilty on two. He was sentenced to six months imprisonment on one count and was given a suspended sentence on the remaining three counts. On May 17, 1976, the United States Court of Appeals for the Seventh Circuit affirmed Feinberg's conviction. Plaintiff's petition for rehearing was denied on July 12, 1976. Counsel for plaintiff have indicated that they will file a petition for a writ of certiorari in the Supreme Court.

Prior to being suspended on February 8, 1974, plaintiff Feinberg was president and director of the Jefferson State Bank, an Illinois State Banking corporation insured by the F.D.I.C. and having its principal place of business in Chicago, Illinois. Feinberg had been president and director of the bank for fourteen years and received a salary of $55,000 from the bank for the year 1973. Feinberg also owns twenty-eight per cent of the bank's outstanding stock and is the administrator of the estate of his deceased brother, who owned twenty-three per cent of the bank's outstanding stock. Plaintiff will inherit one-third of his deceased brother's stock, thereby giving him approximately a thirty-five per cent interest in the bank.

Prior to the issuance of the Notice and Order of Suspension, plaintiff and his attorneys had a conference with the F.D.I.C. Regional Director for Chicago. At this December 14, 1973 conference, Feinberg requested a hearing, which was denied for the stated reason that the Washington, D.C. staff of the F.D.I.C. had decided that section 1818(g)(1) was applicable to the plaintiff and that a hearing would serve no useful purpose.

Since Feinberg's suspension, the F.D.I.C. has permitted two bank officials to make presentations prior to any action under section 8(g)(1). One official was suspended, the other was not. As to the suspended official, the sole issue at his hearing was whether the indictment charged a felony involving dishonesty or breach of trust, a requirement for suspension under the statute. As to the non-suspended official, an executive panel of the F.D.I.C. determined, after a hearing, that the alleged conduct, a violation of 18 U.S.C. § 656 (willfully misapplying bank funds) involved a practice prevalent in the banking industry. The panel therefore decided not to suspend the official.

On July 31, 1974, plaintiff brought this action seeking a declaration that 12 U.S.C. § 1818(g)(1) "is unconstitutional on its face in that it authorizes the F.D.I.C. to effect a substantial deprivation of liberty and property without satisfying minimal due process requirements. Specifically, plaintiff claims that the lack of any standards other than the mere fact of a felony indictment, and the lack of any provision in the Act for notice, hearing or judicial review of section 8(g)(1) suspension orders, renders the Notice and Order of Suspension against him void; consequently, he seeks to enjoin its enforcement." 522 F.2d at 1337.

Defendants argue that this Court need not reach the merits of plaintiff's claim because, they assert, this case is not justiciable inasmuch as plaintiff's conviction has triggered the application of section 1829 of title 12, and because plaintiff has allegedly failed to seek a modification of the Notice and Order of Suspension from the defendants.

I. JUSTICIABILITY

This action focuses on section 1818 of the Federal Deposit Insurance Corporation Act, 12 U.S.C. §§ 1811 et seq. Section 1818 sets forth the action the F.D.I.C. can take with respect to insured banks and their officers, directors, and employees who are thought to be acting either contrary to sound business practices or in violation of the law, and where an officer, director or employee has been charged in an indictment with a felony involving dishonesty or breach of trust. Section 1818 can be bifurcated as follows: subsections (a) through (d) relate to insured banks, whereas subsections (e) through (q) relate to officers, directors and employees of insured banks. These latter subsections can be further divided into those subsections relating to the F.D.I.C.'s powers regarding officers, directors and employees who are believed to have committed a breach of sound business and financial practice or to have violated the law (subsections (e) and (f)), and the subsection relating to the F.D.I.C.'s power regarding officers, directors and employees who have been indicted for a felony involving dishonesty or breach of trust (subsection (g)).³ Subsections (h) and (i) relate to hearings and judicial review. These subsections provide for a hearing and judicial review under subsections (e) and (f), but do not provide for a hearing under subsection (g), and substantially limit judicial review of F.D.I.C. action under subsection (g). The remaining pertinent subsection is (j), which provides for penalties for persons who violate suspension notices and cease and desist orders. Another section of importance here is section 1829⁴ of title 12, which prohibits directors, officers, and employees from serving in those capacities after having been convicted of any criminal offense involving dishonesty or a breach of trust.

The threshold question presented is whether a justiciable controversy with respect to section 8(g)(1) of the Federal Deposit Insurance Corporation Act, 12 U.S.C. § 1818(g)(1), continues to exist despite the fact that plaintiff has been convicted, thereby triggering the application of section 1829 of the Act, which prohibits the plaintiff from serving as a director or officer of the insured bank. The Court finds that the case remains justiciable because of the secondary impact of the Notice and Order of Suspension issued pursuant to 12 U.S.C. § 1818(g)(1)—prohibiting plaintiff from "participation in any manner in the conduct of the affairs of the bank." 12 U.S.C. § 1818(g)(1).

A Notice and Order of Suspension may provide for either or both of the following prohibitions: (1) suspend the director or officer from holding office, and (2) prohibit him from further participation in any manner in the conduct of the affairs of the bank. In this case, plaintiff was subjected to both prohibitions. The Notice and Order of Suspension of § 1818(g)(1) can only follow an indictment. In this case, plaintiff was notified of the suspension nine months after his indictment. Upon conviction, however, the prohibition of section 1829 is triggered. That section prohibits an officer or director from continuing to serve in such capacity. Thus, upon conviction the first prohibition of section 1818(g)(1), holding office, is superceded by the prohibition of section 1829. In this case, plaintiff was convicted on June 27, 1975, and is therefore subject to the prohibition of section 1829.

If the Notice and Order of Suspension issued against the plaintiff had been limited to his holding of office and position on the board of directors, this case would be non-justiciable, because the Court could not afford the plaintiff any relief that would affect his status, inasmuch as that status would be controlled by section 1829 rather than section 1818(g)(1). However, the Notice and Order of Suspension was not limited to the first prohibition of section 1818(g)(1). Instead, it also prohibited the plaintiff from participating in any manner in the conduct of the affairs of the bank.

Since the second prohibition of section 1818(g)(1) is unaffected by plaintiff's conviction and section 1829's prohibition, the Notice and Order of Suspension continues to have an effect upon the plaintiff—it keeps him from participating in the affairs of the bank and, particularly, voting his stock. Thus, a determination of the issues raised herein would have a practical and real effect upon the interests of the plaintiff, making this case justiciable.⁵

Defendants, however, maintain that since the plaintiff failed to avail himself of the opportunity of having the F.D.I.C. lift the remaining prohibition of Section 1818(g)(1), the court should decline to consider plaintiff's claims. The defendants' argument for non-justiciability is premised upon a reading of section 1818(j)⁶ which would permit the F.D.I.C. to lift that part of the Notice and Order of Suspension prohibiting plaintiff from participating in any manner in the conduct of the affairs of the bank. A careful...