Board of Governors of Federal Reserve System v. DLG Financial Corp. ( 1994 )

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
Nos. 93-2944 & 94-20013
BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM,
Plaintiff-Appellee,
versus
DLG FINANCIAL CORP. and
DANIEL S. DE LA GARZA
Defendants-
Appellants.
Appeals from the United States District Court
For the Southern District of Texas
C\W
No. 94-10078
DLG FINANCIAL CORPORATION and
DANIEL S. DE LA GARZA,
Plaintiffs-
Appellants,
versus
FEDERAL RESERVE SYSTEM OF THE UNITED
STATES, BOARD OF GOVERNORS, FEDERAL
RESERVE BANK OF DALLAS and THE FEDERAL
DEPOSIT INSURANCE CORPORATION,
Defendants-
Appellees.
Appeal from the United States District Court
for the Northern District of Texas
(August 15, 1994)
Before GOLDBERG, KING, and WIENER, Circuit Judges.
WIENER, Circuit Judge:
These consolidated appeals stem from two separate actions,
one filed in the federal district court for the Northern District
of Texas (hereafter the Dallas Court), and the other filed in the
federal district court for the Southern District of Texas
(hereafter the Houston Court). In the Dallas action, Appellants
DLG Financial Corporation ("DLG") and Daniel S. De La Garza ("De
La Garza") appeal the Dallas Court's decision to dismiss various
state and federal claims they brought against the Board of
Governors of the Federal Reserve System ("Board"), the Federal
Reserve Bank of Dallas ("FRBD"), and the Federal Deposit
Insurance Corporation ("FDIC"). As we conclude that these claims
are precluded by the Federal Deposit Insurance Act ("FDIA"), the
Federal Tort Claims Act ("FTCA"), and the Tucker Act, we affirm
the dismissal of these claims.
In the Houston action, DLG and De La Garza appeal the
Houston Court's issuance of a restraining order and a preliminary
injunction, pursuant to FDIA § 1818(i)(4), that encumbered
certain of their assets. Finding the restraining order to be
unappealable, we dismiss the appeal of that order. With respect
to the appeal of the preliminary injunction, we conclude that DLG
and De La Garza were afforded due process and that the Board made
the requisite showing; we therefore affirm the Houston Court's
order granting injunctive relief.
2
I
FACTS AND PROCEEDINGS
DLG is a company engaged in the business of buying discount
promissory notes and other assets of failed commercial entities and
reselling them at a profit. De La Garza is the president, CEO, and
sole shareholder of DLG. On October 30, 1990, DLG entered into a
letter agreement to purchase two promissory notes from NCNB Texas
National Bank, N.A., which was acting on behalf of the FDIC. These
notes were executed by International Bancorporation, Inc. ("IBI")
and were secured by a pledge of all outstanding common stock of
International Bank, N.A. The security agreement provided that if
the notes came into default the noteholder could exercise all of
the voting rights and corporate powers concerning the pledged stock
without having to foreclose on the notes.
Between the execution of the letter agreement and the
acquisition of the promissory notes by DLG, the relationship
between the parties grew contentious. Ultimately, DLG and De La
Garza were forced to sue the FDIC to compel performance under the
letter agreement. On March 17, 1992, pursuant to a settlement
agreement, DLG acquired the promissory notes for $1,000,000. At
the time of acquisition, the notes were already in default.
Shortly after DLG obtained the notes from the FDIC, another
fiscal agency of the federal government, the FRBDSQthe entity that
supervises bank holding companies in Texas on behalf of the
BoardSQwrote to DLG stating that its purchase of the promissory
notes and the concomitant acquisition of bank voting rights
3
appeared to violate the Bank Holding Company Act ("BHCA"),1 which,
inter alia, generally prohibits an entity from becoming a bank
holding company without obtaining prior approval from the Board.2
The letter from the FRBD instructed DLG to file immediately either
(1) an application for approval to acquire the notes or (2) a
divestiture plan.3
DLG and De La Garza, however, insist that DLG did not become
a bank holding company by purchasing the notes, and therefore prior
Board approval was not required. Accordingly, they responded to
the letter from the FRBD by turning to the courts.
A. The Dallas Action
On October 9, 1992, DLG and De La Garza filed suit in the
Dallas Court against the Board, the FRBD, and the FDIC. In this
action, DLG and De La Garza sought declaratory and injunctive
relief to (1) establish their rights with respect to the promissory
notes, (2) prevent interference with those rights, and (3) preclude
the Board from asserting jurisdiction over DLG as a bank holding
company under the BHCA. DLG and De La Garza also sought monetary
1
12 U.S.C. §§ 1841-1850 (1988 & Supp. III 1991).
2
Section 1842(a)(1) of the BHCA prohibits an entity from
becoming a bank holding company without obtaining prior approval
of the Board. In general, a bank holding company is any company
that has control over a bank. Id. § 1841(a)(1). One way that a
company can control a bank is to own, control, or have the power
to vote 25% or more of any class of voting security of a bank,
whether directly, indirectly, or acting through one or more
other persons. Id. § 1841(a)(2)(A).
3
DLG and the FRBD later agreed that within 60 days DLG would
sell the notes, obtain Board approval, or file a new divestiture
plan.
4
damages and attorney's fees for breach of contract, tortious
interference with contract, tortious interference with prospective
contractual and business relations, fraud, conspiracy to commit
fraud, and violations of the Due Process Clause of the Fifth
Amendment.
On March 30, 1993, the Dallas Court dismissed DLG's and De La
Garza's claims for declaratory and injunctive relief, reasoning
that such relief was explicitly precluded by 12 U.S.C.
§ 1818(i)(1). As for the monetary claims, the court dismissed
(1) DLG's and De La Garza's state-law tort claims against the Board
and the FDIC, holding that such claims must be brought against the
United States pursuant to the Federal Tort Claims Act ("FTCA")4;
(2) a constitutional takings claim against the Board, finding that
the Tucker Act granted the Court of Federal Claims exclusive
jurisdiction over such an action5; (3) a motion to dismiss a
takings claim against the FDIC6; and (4) a breach of contract claim
against the FDIC, but granted an opportunity to replead. DLG and
De La Garza amended their complaint, but, late in 1993, voluntarily
dismissed all remaining claims and filed this appeal.
In May 1993, IBI redeemed the promissory notes for $2,000,000.
4
28 U.S.C. §§ 2671-2680 (1988 & Supp. III 1991).
5
28 U.S.C.A. § 1491(a)(1) (West 1994). The district court
denied a motion to dismiss without prejudice Appellants' state-
law tort and constitutional claims against the FRBD, declining to
decide whether the FTCA or the Tucker Act applied to that entity.
Subsequently, appellants voluntarily dismissed these claims.
6
Appellants voluntarily dismissed takings claims against the
other defendants.
5
De La Garza instructed IBI to wire the payment to a recently formed
entity headed by his wife, Southwest Underwood Company, which had
no previous connection with the promissory note transaction.
On September 22, 1993, a state grand jury sitting in Travis
County, Texas returned an indictment charging De La Garza and
others with misapplication of approximately $9,000,000 in insurance
company assets.7 This indictment and De La Garza's decision to
have the proceeds of the sale of the notes wired to Southwest
Underwood Company precipitated, in part, the Board's decision to
commence litigation in the Houston Court.
B. The Houston Action
In October 1993, pursuant to its authority under the Federal
Deposit Insurance Act ("FDIA"),8 the Board commenced an
administrative proceeding against DLG and De La Garza. In this
proceeding, the Board made the same allegation asserted earlier by
the FRBD))namely, that the acquisition of the promissory notes made
DLG a bank holding company, and therefore the failure to obtain
Board approval prior to the purchase of the notes violated the
BHCA. Based on this charge, the Board assessed civil penalties
totaling $1,000,000))$500,000 each against DLG and De La Garza9 but
7
Of which amount, roughly $900,000 was used for the purchase
of the promissory notes that gave rise to this litigation.
8
Under the Federal Deposit Insurance Act ("FDIA"), 12
U.S.C.A. §§ 1811-1834b (West 1989 & Supp. 1994), the Board has
the exclusive authority to commence administrative proceedings
for civil penalties and other relief for violations of the BHCA.
Id. §§ 1818(b)(3), 1818(i).
9
See BHCA, 12 U.S.C. § 1847(b)(1) (providing for the
imposition of civil fines of up to $25,000 per day against any
6
provided that the fines were payable only after an opportunity for
an adversary administrative enforcement proceeding and the
exhaustion of appeals therefrom.
On November 1, 1993, the Board filed a motion in the Houston
Court, seeking a restraining order to freeze De La Garza's and
DLG's assets to prevent their dissipation.10 As noted, the Board
relied, in part, on De La Garza's alleged "diversion" of the
proceeds from the sale of the promissory notes to Southwest
Underwood Company, and on his recent indictment for misapplying
insurance company assets, as justification for seeking such an
order.
Based on the evidence presented by the Board, which included
a sworn declaration by an agency official, the court found that the
Board had made a prima facie showing that DLG and De La Garza had
violated the BHCA and that civil penalties were justified.11 The
company or person who participates in the violation of the BHCA).
10
The FDIA empowers the Board to obtain such a restraining
order to assist it in its administrative actions. Specifically,
§ 1818(i)(4)(A) provides that a district court may, "in the aid
of . . . any administrative . . . action for . . . civil money
penalties . . . issue a restraining order that))(i) prohibits any
person subject to the proceeding from withdrawing, transferring,
removing, dissipating, or disposing of any funds, assets or other
property."
11
DLG purchased the promissory notes before the effective
date of the 1993 amendments to the BHCA. These amendments
altered the burden of proof that the Board must meet prior to
attaching assets. Compare 12 U.S.C. § 1818(i)(4)(B) (Supp. III
1991) ("A permanent or temporary injunction or restraining order
shall be granted without bond upon a prima facie showing that
money damages, restitution, or civil money penalties, as sought
by such agency, is appropriate.") with 12 U.S.C.A.
§ 1818(i)(4)(B) (West Supp. 1994) ("Rule 65 of the Federal Rules
of Civil Procedure shall apply [to an application for a
7
court immediately issued an "Order to Show Cause and Temporary
Restraining Order," commanding DLG and De La Garza to appear in
court on November 3, 1993, and show cause why they should not be
enjoined from "withdrawing, transferring, removing, dissipating, or
disposing of" their assets ("November 1 Order"). Pending further
order of the court, the November 1 Order also prohibited DLG and De
La Garza, or any of their employees, from withdrawing,
transferring, removing, dissipating, or disposing of any of their
assets. DLG and De La Garza appeal this order.
Two days later, on November 3, 1993, a hearing was conducted
by the Houston Court during which it received evidence and heard
arguments from both sides. From the bench Chief Judge Black then
orally issued a preliminary injunction ("November 3 Injunction")
that substantially modified and limited the November 1 Order,
imposing a lien of $1,000,000 on but three among a number of
properties owned by DLG. A slightly modified version of this
preliminary injunction was issued in written form on December 23,
1993 ("December 23 Injunction"), replacing the November 3
Injunction entirely. De La Garza and DLG appeal from the December
23 Injunction.
On March 17, 1994, the district court again modified its
injunction, but unlike the December 23 Injunction, this March 17
modification was just thatSQa modificationSQwhich did not supplant
the prior injunction. DLG and De La Garza have appealed the March
restraining order] without regard to the requirement of such rule
that the applicant show that the injury, loss, or damage is
irreparable and immediate.").
8
17 modification, but the appeal of this modification was not
consolidated with the instant appeals and thus is not before us.
II
ANALYSIS
A. The Dallas Action
We address first whether the Dallas Court properly dismissed
claims by DLG and De La Garza for declaratory and injunctive relief
and monetary damages. We conclude that it did.
1. Declaratory and Injunctive Relief
DLG and De La Garza filed the Dallas action against the Board,
the FRBD, and the FDIC, seeking various declaratory and injunctive
relief. The Dallas Court dismissed these claims, reasoning that
such relief was precluded by § 1818(i)(1) of the FDIA. We agree.
DLG and De La Garza argue that the district court's decision
is flawed because, when they filed the Dallas action, there was no
ongoing administrative proceeding. We find this argument
unavailing.
In essence DLG and De La Garza asked the district court to
enjoin the board from continuing its investigation into or bringing
an enforcement proceeding against them. Section 1818(i)(1),
however, provides that "no court shall have jurisdiction to affect
by injunction or otherwise the issuance or enforcement of any
notice, or order under [this section], or to review, modify,
suspend, terminate, or set aside any such notice or order."12
Accordingly, § 1818(i)(1) divested the district court of
12
12 U.S.C. § 1818(i)(1). (emphasis added).
9
jurisdiction to enjoin the commencement of the Board's
administrative enforcement. The fact that no administrative action
was pending when DLG and De La Garza filed the Dallas action is
irrelevant to this determination. As this court stated in Groos
National Bank v. Comptroller of Currency,13 "[s]ection 1818 as a
whole provides a detailed framework for regulatory enforcement and
for orderly review of the various stages of enforcement; and
§ 1818(i) in particular evinces a clear intention that this
regulatory process is not to be disturbed by untimely judicial
intervention, at least where there is no `clear departure from
statutory authority.'"14
2. Claims for Monetary Damages
The Dallas Court dismissed state-law tort claims against the
Board and the FDIC. This judgment was proper, as such claims must
be brought against the United States pursuant to the FTCA. DLG's
and De La Garza's contention that their state-law tort claims
against the FDIC should not have been dismissed because § 1819(a)
of the FDIA authorizes the FDIC to "sue and be sued"15 is feckless.
We have noted that, notwithstanding the "sue and be sued" clause of
13
573 F.2d 889, 895 (5th Cir. 1978) (quoting Manges v. Camp,
474 F.2d 97, 99 (5th Cir. 1973)).
14
Latching onto the last phrase in the quotation above,
Appellants argue that we should recognize an exception to the
explicit command of § 1818(i)(1) and permit an action to enjoin
the Board from acting beyond its statutory authority. In Board
of Governors of Federal Reserve System v. MCorp Financial, Inc.,
502 U.S. 32, (1991), however, the Supreme Court rejected this
very argument and held that a "beyond the Board's statutory
authority" exception to § 1818(i)(1) is not available.
15
See 12 U.S.C. § 1819(a) (Supp. III 1991).
10
§ 1819(a), the FTCA provides the exclusive avenue for claims
cognizable under that Act.16
Also correct was the court's dismissal of the takings claim
against the Board. The Tucker Act17 and the Little Tucker Act18
operate to vest the Court of Federal Claims with exclusive
jurisdiction for all constitutional claims against the federal
government for money damages exceeding $10,000.19 Because DLG and
De La Garza sought $25,000,000 for the alleged violations of their
rights, the district court properly determined that this takings
claim must be brought before the Court of Federal Claims. Thus
concluding that the Dallas Court properly dismissed the foregoing
claims, we next address related proceedings conducted further
south, in the Houston federal courthouse.
B. The Houston Action
We shall consider first whether the Houston Court's November
1 Order is appealable. Next, we shall turn to DLG's and De La
Garza's argument that § 1811(i)(4) violated due process. Finally,
16
See Gregory v. Mitchell, 634 F.2d 199, 204 (5th Cir.
1981).
17
28 U.S.C.A. § 1491(a)(1) (West 1994).
18
28 U.S.C. § 1346(a)(2) (1988) (granting district courts
concurrent jurisdiction for takings claims not exceeding
$10,000).
19
See Preseault v. I.C.C., 494 U.S. 1 (1990); Graham v.
Henegar, 640 F.2d 732, 734 (5th Cir. Unit A 1981); see also Bell
Atl. Tel. Co. v. FCC, Nos. 92-1619, 92-1620, 93-1028, and 93-
1053, 1994 WL 247134, at *6 n.1 (D.C. Cir. June 10, 1994) ("The
Tucker Act, 28 U.S.C. § 1491(a)(1), vests exclusive jurisdiction
over takings claims that exceed $10,000 in controversy . . . in
the United States [Court of Federal Claims].")
11
we shall consider their claim that they were not required to obtain
Board approval prior to acquiring the promissory notes.
1. The November 1 Order
On November 1, the district court issued an order commanding
DLG and De La Garza to appear two days later and show cause why
they should not be enjoined from "withdrawing, transferring,
removing, dissipating, or disposing of" their assets. The Board
urges that this order is not appealable, and we agree. We arrive
at our conclusion based on two distinct but related rationales.
First, we find the November 1 Order to be, in substance, an
unappealable temporary restraining order ("TRO"). In general, a
TRO is not appealable.20 This is so because, as Judge Tuttle
observed, TROs are "usually effective for only very brief periods
of time, far less than the time required for an appeal . . . and
are then generally supplanted by appealable temporary or permanent
injunctions."21 That is precisely what happened here. Less than
two days after its issuance, the November 1 Order evaporated when,
upon completion of the show cause hearing, Chief Judge Black orally
entered a preliminary injunction that supplanted the TRO. This
injunction, as Judge Tuttle might have forecast, subsequently was
appealed.
We find unpersuasive the arguments by DLG and De La Garza to
20
In re Lieb, 915 F.2d 180, 183 (5th Cir. 1990) ("This court
has long held that the denial of an application for a [TRO] is
not appealable."); see 11 CHARLES A. WRIGHT & ARTHUR R. MILLER, FEDERAL
PRACTICE AND PROCEDURE § 2962, at 616 (1973).
21
Connell v. Dulien Steel Prods., Inc., 240 F.2d 414, 418
(5th Cir. 1957), cert. denied, 356 U.S. 968 (1958).
12
the contrary. They contend that because the November 1 Order had
no specific expiration date, it was in substance a preliminary
injunction and thus was appealable. Although a TRO with a lengthy
duration may be appealable, the two-day term of the November 1
Order clearly was insufficient for any such transmogrification.
Second, mootness interdicts the appeal of the November 1
Order; it became moot when it was superseded by the November 3
Injunction. Thus, since November 3, 1993, DLG and De La Garza have
been free of the restraints imposed on them by the November 1
Order. Moreover, because the preliminary injunction was appealed,
we need not consider the November 1 Order "to protect the rights of
the parties."22 The rights of the parties were guarded adequately
through appeal of the subsequently issued injunctions.
2. Section 1818(i)(4) Comports with Due Process
DLG and De La Garza contend that the Houston Court's November
1 Order and the subsequent injunctions granted by that court were
improper, as the provision authorizing the court to encumber assets
violated the Due Process Clause of the Fifth Amendment. In
particular, they argue that the version of 12 U.S.C.
§ 1818(i)(4)(A) in effect before December 1993 was unconstitutional
in that it required a court to grant injunctive relief without a
predeprivation hearing. But, as the statute merely permitted the
court to act without a hearing but clearly did not require it to do
so, this argument is specious. Moreover, as explained below, a
predeprivation hearing was not constitutionally required in this
22
WRIGHT & MILLER, supra, note 20, § 2962, at 618.
13
case.
a. Section 1818 Permitted, But Did Not Require,
Injunctive Relief Without A Predeprivation Hearing
Section 1818(i)(4)(A) provides that a district court may, "in
the aid of . . . any administrative . . . action for . . . civil
money penalties . . . issue a restraining order that))(i) prohibits
any person subject to the proceeding from withdrawing,
transferring, removing, dissipating, or disposing of any funds,
assets or other property." Prior to December 1993, the section
also stated that such "[a] permanent or temporary injunction or
restraining order shall be granted . . . [only] upon a prima facie
showing that . . . civil money penalties . . . [are] appropriate."23
Although in general statutory schemes use "may" to identify
permissive acts and "shall" to identify mandatory acts, in
circumstances such as this where "shall" is used with reference to
a court's authority to render an equitable decision, the use of
"shall" does not eliminate all discretion absent "an unequivocal
statement of [congressional] purpose" to do so.24 As
§ 1818(i)(4)(B) lacks such a clear legislative command,25 "shall"
as used in this paragraph thus permitted))but did not require))an
injunction to be issued without a hearing. Moreover, based on the
23
12 U.S.C. § 1818(i)(4)(B)(i) (Supp. III 1991) (amended
1993).
24
Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944); Director,
OTS v. Lopez, 960 F.2d 958, 961 n.8 (1992).
25
Lopez, 960 F.2d at 961 n.8 (finding that § 1818(i)(4)(B)
did not strip district court of discretion to order prejudgment
attachment of assets upon a prima facie showing).
14
facts of this case, a predeprivation hearing was not required.
b. A Predeprivation Hearing Was
Not Constitutionally Required
It is undisputed that § 1818(i)(4) allowed a court to freeze
assets, thereby depriving a property interest and triggering the
Due Process Clause of the Fifth Amendment.26 The parties differ,
though, on what process was due.
In general, individuals must receive notice and an opportunity
to be heard before the government deprives them of a property
interest.27 But there are exceptions to the general rule, and the
Board maintains that this case provides an example of an
"extraordinary situation[] where some valid governmental interest
is at stake that justifies postponing the hearing until after the
[deprivation]."28 In light of Supreme Court authority identifying
when such situations exist, we agree.
i. Mallen factors
In FDIC v. Mallen,29 the Supreme Court identified three factors
that typically are present in cases in which a postdeprivation
hearing is sufficient to satisfy due process: (1) the action is
necessary to further an important governmental interest; (2) there
is a need for prompt action; and (3) there is a substantial
26
U.S. CONST. amend. V.
27
See, e.g., United States v. James Daniel Good Real
Property, 114 S. Ct. 492, 498 (1993).
28
Id. at 501 (quotations omitted).
29
486 U.S. 230 (1988).
15
assurance that the deprivation is not baseless or unwarranted.30
Here, all three factors were present.
First, the government has an important interest in maintaining
public confidence in the integrity of financial institutions. In
fact, in Spiegel v. Ryan,31 the Ninth Circuit held that such an
interest was sufficiently important to justify ordering a bank
official to pay restitution pending an administrative hearing to
determine whether a permanent cease and desist order should issue.
Moreover, in Mallen itself, the Court found the government's
interest in maintaining public confidence in banking institutions
to be of sufficient importance to forego a predeprivation hearing.
In that case, the Court upheld the constitutionality of § 1818(g)
of the FDIA, which permits the FDIC to suspend from office, without
a predeprivation hearing, an indicted bank official if his or her
continued service is deemed by the FDIC to pose a threat to the
interests of the bank's depositors or to public confidence in the
bank. The Court allowed such deprivation to stand despite the
absence of a prior hearing, given the importance of taking prompt
action to protect depositors and "to maintain public confidence in
our banking institutions."32 We conclude that the Board's interest
30
Id. at 240; see Fuentes v. Shevin, 407 U.S. 67, 91 (1972);
see also North Am. Cold Storage Co. v. Chicago, 211 U.S. 306
(1908) (permitting officials to order destruction of putrid
poultry before giving notice and an opportunity to be heard
because of public health exigency).
31
946 F.2d 1435, 1440 (9th Cir. 1991), cert. denied, 112 S.
Ct. 1584 (1992).
32
Mallen, 486 U.S. at 241. In Mallen, Justice Stevens noted
that such an interest "is certainly as significant as the State's
16
in freezing the assets of DLG and De La Garza was at least as
strong as it was in Spiegel and Mallen.33
Second, prompt action was necessary. In general, prompt ex
parte action is necessary to prevent persons identified in Board
administrative actions from dissipating or concealing assets. In
the instant case, De La GarzaSQwho had been indicted by a grand
jury in Texas for misapplying the assets of an insurance
companySQdirected the proceeds from the sale of the promissory
notes to the account of a recently formed corporation that had no
known prior involvement with the note transaction and of which De
La Garza's wife was the president. Those facts provide substantial
evidence supporting the need for prompt action.
Third, the deprivation was neither baseless nor unwarranted.
Section 1818(i)(4) was drawn to further its stated interest. To
obtain an injunction, the Board was required to make a prima facie
showing that civil money penalties were appropriate. The Board
here made out such a case, submitting to the court the verified
statement of Stephen Meyer, who satisfactorily explained the
Board's finding that civil money penalties were justified. The
Houston Court evaluated this declaration and found that the Board
interest in preserving the integrity of the sport of horse
racing, an interest that we deemed sufficiently important in
Barry v. Barchi, [443 U.S. 55, 64-65 (1979),] to justify a brief
period of suspension prior to affording the suspended trainer a
hearing." Id.
33
Freezing the assets of DLG and De La Garza directly
furthers the government's interest in collecting fines that it
may, in the future, be entitled to collect and indirectly
furthers the government's interest in maintaining the integrity
of financial institutions.
17
had established that civil penalties were warranted. Moreover,
both the November 3 and December 23 Injunctions were narrowly
tailored to encumber assets having no more aggregate value than was
necessary to satisfy the civil penalties in the event of
nonpayment. In sum, the three factors that the Mallen Court
identified as being required for a postdeprivation hearing to be
sufficient to satisfy due process were present here.
ii. Mathews Balancing
More recent Supreme Court cases support the conclusion that a
predeprivation hearing was not required here. In United States v.
James Daniel Good Real Property,34 the Court employed the Mathews
v. Eldridge35 balancing test to determine whether the seizure of
real property without notice and without a hearing comported with
due process.36 The factors weighed in the familiar Mathews
balancing test are "the private interest affected by the official
action; the risk of an erroneous deprivation of that interest
through the procedures used, as well as the probable value of
additional safeguards; and the government's interest, including the
administrative burden that additional procedural requirements would
34
114 S. Ct. 492 (1993).
35
424 U.S. 319 (1976).
36
See James Daniel Good Real Property, 114 S. Ct. at 501;
see also Connecticut v. Doehr, 501 U.S. 1 (1991) (relying upon
the Mathews balancing test to determine the constitutionality of
a Connecticut statute that authorized the prejudgment attachment
of real estate without prior notice or hearing).
18
impose."37 Applying the Mathews test to the instant case
demonstrates that due process did not require a predeprivation
hearing.
On one side of the scale, the freeze of Appellants' assets
unquestionably affected an important property interest.38 Also, the
risk of an erroneous deprivation was substantial. The danger of an
erroneous deprivation in this case))in which the availability of
prejudgment attachment is conditioned on the establishment of a
prima facie case))differed little from the risk of an erroneous
deprivation present in Doehr.39
On the other side of the scale, the government's interest and
the presence of exigent circumstances weigh heavily against the
need of a predeprivation hearing. In Doehr, the Court noted that
"there was no allegation that Doehr was about to transfer or
encumber his real estate or take any other action during the
pendency of the action that would render his real estate
unavailable to satisfy a judgment."40 Significantly, though, the
Court explained that "a properly supported claim [that a person was
about to transfer or encumber his assets] would be an exigent
37
James Daniel Good Real Property, 114 S. Ct. at 501 (citing
Mathews, 424 U.S. at 335).
38
See Doehr, 501 U.S. at 11 (stating that "the property
interests that attachment affects are significant").
39
See id. at 12 (finding the risk of an erroneous
deprivation to be "substantial" where prejudgment attachment
could be achieved by showing that there was probable cause to
sustain the validity of the plaintiff's claim).
40
Id. at 16.
19
circumstance permitting postponing any notice or hearing until
after the attachment is effected."41 In this case, the Board
adequately supported its claim that De La Garza was disposed to
dissipating his assets by showing that (1) he had been indicted for
misapplying assets of an insurance company, and (2) he had ordered
that the proceeds from the sale of the promissory notes be
delivered to a company controlled by his wife that had no previous
involvement in the note transaction. Thus, under the Mathews
balancing test, a postdeprivation hearing was sufficient to satisfy
due process in this case.
c. A Postdeprivation Hearing Was Held Promptly
Even when a predeprivation hearing is not required, a
"sufficiently prompt" postdeprivation hearing still must be held.42
Here, the Houston Court met this requirement. Within two days
after the issuance of its restraining order, the court conducted a
postdeprivation hearing in which the broad assets freeze was lifted
and replaced with a narrowly tailored freeze of barely sufficient
collateral real estate.
During this November 3 postdeprivation hearing, DLG and De La
Garza were given an opportunity to present evidence to an Article
III judge. After receiving such evidence, the district court
orally imposed a preliminary injunction, encumbering only so much
of the real property of DLG and De La Garza as was necessary to
41
Id. (citing Fuentes v. Shevin, 407 U.S. 67, 90-92) (1972);
Sniadach v. Family Fin. Corp., 395 U.S. 337, 339 (1969)).
42
See FDIC v. Mallen, 486 U.S. 230, 241 (1988).
20
cover the amount of the civil fines that the Board was seeking to
collect. The scope of this injunction was further refined when it
was issued in writing on December 23, 1993. In our view, the
district court's prompt action and narrow tailoring of its
orders))which were based on a thorough consideration of the
evidence presented))eviscerate the arguments asserted by DLG and
De La Garza in support of their due process claim.
3. The Board's Prima Facie Case
Finally, DLG and De La Garza insist that the Board did not
present sufficient evidence to establish a prima facie case, as
required to justify the November 1 Order and the subsequent
preliminary injunctions. We find, however, that the facts are
otherwise.
DLG and De La Garza first argue that DLG was not a bank
holding company because DLG neither owned nor had the ability to
control or vote the stock of the International Bank, N.A. This
assertion, however, is refuted by the express terms of the security
agreement containing the pledge of the bank stock as collateral for
the promissory notes. The agreement provided that, if the notes
came into default, the secured noteholder could exercise all voting
rights of the pledged stock. As DLG obtained the notes when they
were already in a condition of default, DLG immediately acquired
the power to vote all of the stock in the International Bank, N.A.,
ipso facto becoming a bank holding company pursuant to the BHCA.43
43
A company becomes a bank holding company if, inter alia,
it has the power to vote 25% or more of any class of voting
security of a bank. 12 U.S.C. § 1841(a)(2)(A).
21
Nevertheless, DLG and De La Garza contend that, even if DLG
were a bank holding company, it was not required to obtain Board
approval prior to the acquisition because DLG previously contracted
for control of the bank in good faith, an exception to the notice
requirement. This argument also lacks merit.
At the outset, we note the explicit admonishment from Congress
that "[t]he Board should interpret . . . exemptions [from the BHCA]
as narrowly as possible in order that all bank holding companies
which should be covered under the Act in order to protect the
public interest will, in fact, be covered."44 Section 1841(a)(5)(D)
exempts prior Board approval if a company becomes a bank holding
company "by virtue of [its] ownership or control of shares acquired
in securing or collecting a debt previously contracted in good
faith."45 But here, when DLG and De La Garza purchased the
promissory notes they were already in default. So DLG and De La
Garza obtained immediate power to vote the shares of a bank; thus
the debt they acquired was not one that they had "previously
contracted in good faith."
Our reading of § 1841(a)(5)(D) is consistent with
interpretations by the FDIC and the Office of the Comptroller of
the Currency ("OCC") of an analogous provision. Section 1817(j) of
44
BANK HOLDING COMPANY ACT AMENDMENTS OF 1970, H.R. CONF. REP. NO.
1747, 91st Cong., 2d Sess. 23 (1970), reprinted in 1970
U.S.C.C.A.N. 5561, 5574.
45
Id. § 1841(a)(5)(D) (emphasis added); 12 C.F.R. §
225.12(b).
22
the Change in Bank Control Act of 1978 ("CBCA"),46 provides that no
person may acquire control of any insured bank unless the
appropriate federal banking agency has been given prior written
notice of the proposed transaction.47 Prior notice is not required,
however, if the shares are acquired "in satisfaction of a debt
previously contracted in good faith."48
Both the FDIC and the OCC have expressly stated that this
exemption to the notice requirement is not applicable where a loan
collateralized by a controlling interest of the stock of an insured
bank is purchased and the loan already is in default.49 In such an
instance, the FDIC recognized that "the acquisition of the loan and
the acquisition of the shares is virtually inseparable due to the
default status of the loan at the time of its purchase."50 Thus,
"[i]n order for the `good faith' element of the [debt previously
contracted in good faith] exemption to be satisfied, a lender must
either make or acquire a loan secured by bank stock in advance of
any known default."51 As we find neither arbitrary nor capricious
46
Pub. L. No. 95-630, 92 Stat. 3683 (codified as amended in
scattered sections of 12 U.S.C.).
47
Id. § 1817(j). As with the BHCA, "control" of an insured
depository institution means, inter alia the power, directly or
indirectly, to vote 25% or more of any class of voting
securities.
48
See 12 C.F.R. § 5.50(f)(3).
49
See FDIC Interp. Ltr. Rul. 84-13 (Aug. 3, 1984); OCC
Inter. Ltr. No. 451, Fed. Banking L. Rep. (CCH) ¶ 85,675 (Aug. 8,
1988).
50
FDIC Interp. Ltr. Rul. 84-13, at 2.
51
OCC Inter. Ltr. No. 451.
23
this consistent interpretation, and we see no meaningful
distinction between the good faith exemptions of the CBCA and the
BHCA, we conclude that the good faith exemption was inapplicable
here, making prior Board approval a requirement. And, as DLG and
De La Garza failed to obtain the requisite approval, the Board did
establish a prima facie case that the parties were liable for civil
money penalties under the BHCA.52
III
CONCLUSION
For the foregoing reasons, we conclude that the Dallas Court
properly dismissed claims by DLG and De La Garza for declaratory
and injunctive relief and monetary damages. We therefore affirm
the judgment of that district court.
We also conclude that the November 1 Order issued by the
Houston Court was not appealable. We therefore dismiss the appeal
of that Order.
And finally we conclude that the then-current version of
§ 1811(i)(4) of the BHCA did not violate due process, and that the
52
Nevertheless, we are troubled by the actions taken by
closely related government entities that resulted in these
lawsuits. Here, the FDIC sold the controlling vote in a bank (by
virtue of selling an already delinquent promissory note that was
secured by a pledge of bank stock already susceptible of being
voted by the pledgee), immediately after which the FRBD
interceded, alleging that the purchaser was a "bad guy" for
violating the BHCA requirement for prior approval
and))coincidentally, or perhaps not so coincidentally))claiming a
fine exactly equal to the profit made by the purchaser when he
divested himself of the note (and bank control), as demanded by
the FRBD. This kind of "Mutt and Jeff" activity by apparently
over-zealous regulators hardly makes one proud of his government,
even if such activity is technically lawful.
24
Houston Court was correct in holding that the Board established a
prima facie case that civil money penalties against De La Garza and
DLG were appropriate. Accordingly, all rulings in that case are,
in all respects, affirmed.
94-10078 is AFFIRMED; 93-2944 is DISMISSED; 94-20013 is AFFIRMED.
25