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Last Friday, United Western Bank filed a motion for summary judgment against the OCC (as successor to the OTS), asking the federal district court to order the OCC to give the bank back to its rightful owners: the company that owned it immediately before the OTS placed it into an FDIC receivership in January of last year. We've been following this case since it was filed, and the latest motion contains a clear statement of the plaintiff's arguments as to why it believes that the decision of the OTS to seize of the thrift was "arbitrary, capricious, an abuse of discretion, and otherwise not in accordance with law."
Robert Barba, writing in yesterday's American Banker (paid subscription required), does a nice job of summarizing those arguments in much less than the fifty-seven pages that comprise the motion, although the full motion is worth the time it takes to read it. Among those allegations is that over six months prior to seizing the bank, the OTS had made up its mind to seize the bank and, therefore, all subsequent action and inaction by the OTS was designed to further this foregone conclusion.
"Though the bank did not know it at the time, the OTS had already determined as of June 2010 to seize the bank," the filing said. "Documents initially withheld by defendants but later obtained in court-ordered discovery revealed the true picture: by June, the OTS had begun writing the memorandum to justify the seizure and was already in discussions with the FDIC over how to handle an 'orderly resolution'."
The OTS, OCC, and FDIC fought tooth-and-nail to prevent the bank from gaining access to a raft of interagency documentation. The judge was insistent that they produce it and they eventually did (not wanting to be found in contempt). Although much of it is subject to protective orders, so that the rest of us can't see first-hand how the regulators made their decision to seize the bank, enough of the details are evident from the narrative contained in the motion to understand why the OTS never wanted its internal discussions and its discussions with other regulators to see the light of day. There are a number of "WTF?" moments contained in the narrative, and they might be laughable if they didn't involve the destruction of a business that had been built over the previous eighteen years, using a business model that was approved repeatedly by the OTS until the economy collapsed in the second half of 2008. Then, the entire business model suddenly sucked.
I'd encourage those interested (frankly, that should be any community banker, even those who think they've currently got the world by the tail) to read the motion from stem to stern. It's a disconcerting tale of how a business can be turned upside down overnight, not just by assets that go sour, but by a 180 degree turn in attitude by the bank's primary regulator. As I tell entrepreneurs who think they want to give the banking business a shot, there's no Chapter 11 for a bank. You don't get a "do-over" once things start going south. Moreover, once regulators at a high enough level "go negative" on you, they not only won't assist you to survive, they can occasionally actively impede your ability to survive. In this case, the plaintiff is alleging just that.
A few allegations stand out to me. One is that the bank's owner and senior management tried to address every concern raised by the regulators, often under ridiculously short time frames. That seems to be true. Also, the fact that the allegedly "unstable" deposit base hung in there through tough times bolsters the arguments of the plaintiff that the bank's business model (as far as liquidity was concerned) was a battle-tested one. Finally, the fact that the bank had proceeded so far down the path to raise capital (and appeared to be doing it successfully) in order to meet an individual capital requirement imposed by the OTS that was higher than that required of most other institutions, notwithstanding actions by the OTS that appear to have hindered that effort, bolsters the plaintiff's allegations that the OTS had "pre-determined" to seize the bank no matter what the bank did, and then threw roadblocks in the bank's way.
As Barba points out, the OCC has until May 18th to file a response, and there will be additional chances to reply by each side in June. All we've heard thus far is the plaintiff's story and until we get a chance to read the OCC's story, we won't know how much traction the plaintiff's spin might have with the court. Obviously, I represent people on the other side of the fence from the OCC (and the late OTS), and my bias is for the plaintiff. On the other hand, it ain't over until the federal judge sings (and I would never use the term "fat lady" to describe Judge Amy Berman Jackson). Therefore, we'll have to withhold final personal judgment until we see the repsonse.
As I said when I first discussed this case, "the terms 'arbitrary and capricious' and 'without any basis in law' are terms of art. They constitute the high bar over which United Western and the other plaintiffs must vault in order to triumph over the bureaucrats." I still think that's the case. However, based on the well-written motion, if there ever was a case where that burden had a chance of being met, this one is it. If the OCC's counterattack leaves the facts largely as they stand and, instead, focuses on the high bar the law sets for any plaintiff to hurdle, my personal, off-the-cuff belief is that the plaintiff has a real shot at winning (and a rare win it would be). Somehow, I don't think an argument that would consist of "Yeah, we were a pack of circus clowns, but you have to defer to us anyway" is going to be a winner.
Everyone understands that even if Judge Jackson grants the plaintiff's motion, the OCC will appeal that decision, and will never rest until its last right of appeal is exhausted. That's why battling the federal bank regualtors in court takes substantial patience, fortitude, and cash. The plaintiff appears to have all three.
Oh, yes, it also takes top-flight legal counsel. The plaintiff appears to have that base covered, as well.
