Mallen v. Federal Deposit Ins. Corp.

• Decision Date: 19 October 1987
• Docket Number: No. 2C 87-3016.,2C 87-3016.
• Parties: James E. MALLEN, and Farmers State Bank, Plaintiffs, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant.
• Court: U.S. District Court — Northern District of Iowa

667 F. Supp. 652

James E. MALLEN, and Farmers State Bank, Plaintiffs, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant.

No. 2C 87-3016.

United States District Court, N.D. Iowa, C.D.

February 17, 1987.

On Motion to Alter or Amend March 10, 1987.

On Motion for Stay Pending Appeal March 11, 1987.

Probable Jurisdiction Noted October 19, 1987.

COPYRIGHT MATERIAL OMITTED

James P. McCarthy, Mary E. Curtin, Minneapolis, Minn., David J. Siegrist, Britt, Iowa, for plaintiffs.

Gerald Lamberti, John J. Rubin, Regional Counsel, FDIC, Kansas City, Mo., Asher Schroeder, Asst. U.S. Atty., Sioux City, Iowa, for defendant.

Probable Jurisdiction Noted October 19, 1987. See 108 S.Ct. 256.

ORDER

DONALD E. O'BRIEN, Chief Judge.

The Court has before it the Motion for Temporary Restraining Order, and for Preliminary Injunction filed by the Plaintiffs James E. Mallen and the Farmers State Bank, Kanawha, Iowa on February 6, 1987. The Court held oral argument on the Motion on February 10, 1987 at which all parties were represented by counsel. The parties have also submitted evidence in the form of affidavits and exhibits. Since the Court has received input at a hearing and briefs from both sides, the Court considers this on the Motion for Preliminary Injunction. The same is hereby sustained as set out herein, and an Order is entered declaring that the the FDIC's "Notice and Order of Suspension" which had prohibited James Mallen from participating in any manner in the conduct of the affairs of the Farmers State Bank, Kanawha, Iowa is null and void. The FDIC is enjoined from enforcing the "Notice and Order of Suspension and Prohibition" pursuant to 12 U.S.C. Section 1818(g) of the act based on the December 10, 1986 Indictment.

Plaintiffs bring this action challenging the suspension on January 26, 1987 by the Federal Deposit Insurance Corporation (FDIC) of James E. Mallen, the President and Secretary of the Farmers State Bank, and a member of the Board of Directors.

I. Factual Background

On December 10, 1986, an indictment was returned by the Grand Jury in Cedar Rapids, Iowa charging James E. Mallen in two counts for felonies in connection with his employment as President and as a Director of Plaintiff Farmers State Bank of Kanawha, Iowa. In Count 1 of the Indictment, Mallen is charged with making a false statement to the Farmers State Bank, for the purpose of influencing the actions of the Federal Deposit Insurance Corporation, an alleged violation of 18 U.S.C. Section 1014. Mallen allegedly omitted disclosing in a financial statement submitted on or about January 15, 1982 that he had a financial interest in two other businesses, Mallen, et al., and Elmwood Limited Partnership. Conviction of Count 1, a felony, carries a maximum penalty of two (2) years imprisonment and a $5,000 fine.

In Count 2 of the indictment, Mallen is charged with making a false statement to a federal agency in violation of 18 U.S.C. Section 1001. Mallen allegedly failed to disclose on a Bank Officer's Questionnaire form submitted to the FDIC on or about November 22, 1982 that accomodation loans were made to the following individuals, Carl Martin, dated November 13, 1981; William Dahl, Carl Martin, and Robert and William Shipman, dated February 26, 1982; and Robert and William Shipman, dated May 17, 1982. Conviction of Count 2, a felony, carries a maximum penalty of five (5) years imprisonment and a $5,000 fine.

On January 26, 1987, James Mallen was served notice that the Federal Deposit Insurance Corporation (FDIC) had suspended him pursuant to 12 U.S.C. Section 1818(g) from further service or participation in the conduct of the affairs of the Bank. (Exhibit 2 to Affidavit of James P. McCarthy). The "Notice and Order of Suspension and Prohibition" was dated January 20, 1987 and was effective by its terms upon service of the Notice. The Notice is signed by Hoyle G. Robinson, Executive Secretary of the Federal Deposit Insurance Corporation. The Notice relies on the fact an indictment (Exhibit 1 to McCarthy Affidavit) alleging crimes involving dishonesty or breach of trust had been filed against Mallen, and in pertinent part the notice states:

It further appearing that continued service or participation by Respondent in the conduct of the affairs of the Bank may pose a threat to the interests of the Bank's depositors or may threaten to impair public confidence in the Bank.

There are no written reasons supporting the above "finding". This finding is merely a recitation of the statutory language which language establishes the minimal findings required for suspension under 12 U.S.C. Section 1818(g) where an indictment has been filed against a bank officer of an FDIC insured bank. See 12 U.S.C. Section 1818(g)(1); 12 CFR Section 308.57.

Neither Mr. Mallen or the Farmers State Bank were given an opportunity to present any evidence or argument under 12 U.S.C. Section 1818(g) to the FDIC before the issuance of the suspension.¹ The lack of a pre-suspension hearing is consistent with the statutory scheme under Section 1818(g), and Section 308 of the Code of Federal Regulations.

On January 30, 1987, plaintiff's Attorney Mr. McCarthy wrote to Hoyle L. Robinson, Executive Secretary of the FDIC demanding an immediate administrative hearing under 12 U.S.C. Section 1818(g) with both oral testimony and written evidence. (Exhibit 4 to McCarthy Affidavit).

Regional Counsel initially took the position that the hearing should simply be oral argument on written submissions to be held no earlier than February 25, 1987, in reliance on Section 1818(g)(3) which says that the FDIC may take up to 30 days to set a post-suspension hearing. (Exhibit 6 attached to McCarthy Affidavit). The parties have informed the Court that a post-suspension hearing has now been set for Wednesday, February 18, 1987. It is not clear whether oral evidence would be permitted, since denying permission to present oral evidence is in the discretion of the hearing officer as set out in the FDIC's rules, which state:

At the discretion of the presiding officer witnesses may be presented within specified time limits, provided that a list of witnesses is furnished to the presiding officer prior to the hearing.

12 CFR Section 308.61(e). After the hearing, the hearing officer must make a recommendation, where possible, to the Executive Board within ten days after the record is closed. 12 CFR Section 1261(h). The record "shall remain open for 5 business days following the hearing for the parties to make additional submissions to the record. The record shall thereafter be closed." 12 CFR Section 308.61(g). Under 12 U.S.C. Section 1818(g)(3), the Executive Board can take up to 60 days from the date of the hearing to rule on whether the suspension will be continued, terminated, or otherwise modified. The FDIC's regulations purport to lengthen this time by an additional five days, representing the five day period after the hearing during which the record remains open. Thus, under the regulations, one could be forced to wait up to 95 days before a post-suspension disposition. The affected individual then has up to ten days to petition for reconsideration. 12 CFR Section 308.63.

Under the Speedy Trial Act, 18 U.S.C. Section 3161(c)(1), not including "excludable time", the trial of a criminal defendant must start within 70 days of the filing date and making public of an indictment, or from the date the defendant first appears before a judicial officer of the court, whichever date last occurs.

As mentioned above, under Section 1818(g)(3), and the FDIC's regulations, the agency could delay a disposition for up to 95 days. Ninety-five days is longer than the Speedy Trial deadline for the parallel criminal case. The administrative hearing is set for February 18, 1987. The trial of Mallen's criminal case is set for March 16, 1987. As applied in this case, the subsection (g) post-suspension process could take longer to conclude with a disposition than the criminal proceedings. Following its own regulations, the FDIC could delay ruling on the merits of the Mallen's suspension until April 24, 1987. By that time the criminal trial will be completed. If Mallen is found not guilty, the FDIC would no longer have a suspension remedy under Section 1818(g) since there no longer would be a pending indictment. If no disposition on the administrative hearing is reached before the criminal trial, the purpose of the hearing may become moot. The FDIC may still have an immediate suspension remedy under Section 1818(e) if in the opinion of the FDIC Mallen violated a law, rule, or regulation, or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has breached a fiduciary duty under certain circumstances prescribed in Section 1818(e)(4).² If Mallen is found guilty, the purpose of the hearing becomes moot because according to the FDIC's lawyers, the FDIC will not permit a convicted person to hold a position as officer or director of an FDIC insured bank without prior FDIC approval. The bottom line is that the Section 1818(g) post-suspension hearing provided by the FDIC is meaningless, or nearly so, if the Executive Board of the FDIC postpones its disposition as the statute and its rules allow.

II. Discussion

The plaintiffs challenge the post-suspension process on the basis that its insufficiencies violate their rights to procedural due process of law under the Fifth Amendment to the United States Constitution. They argue that 12 U.S.C. Section 1818(g) is unconstitutional because it it does not assure them of an opportunity to present oral testimony, does not assure them of a prompt disposition, and does not permit judicial review. The Court finds that the statute, and rules enacted thereunder, do not provide for a full hearing permitting oral evidence, and a prompt disposition. For these reasons, based on the record made thus far, the Court would find that 12 U.S.C. Section 1818(g) is...