In a recent battle with its regulator, Advanta Bank (Bank), a bank subsidiary of Advanta Corp. (Advanta) that is regulated by the Federal Deposit Insurance Corporation (FDIC), won a victory over the agency, when a U.S. District Court ruled that the FDIC did not have the authority to issue a temporary cease and desist order (C&D) against the Bank. Temporary C&Ds are rarely issued by banking regulators because, among other things, they impose a heavy burden of proof on the agency due to the C&D restrictions being immediately effective unless a federal court sets the order aside. At a time when there is a strong inclination for courts to defer to regulatory judgment, the court's skepticism of the agency's position is noteworthy.
Advanta filed for bankruptcy in late 2009. Subsequently, the FDIC requested that the Bank, which only provided services to its affiliates, consent to the issuance of a C&D that would have restricted transactions between the Bank and Advanta and its affiliates and that would have prohibited dividends by the Bank. The Bank refused to consent. The FDIC responded by issuing a temporary C&D against the Bank, and the Bank filed its lawsuit asking the court to issue an order setting aside the temporary C&D.
On February 16, 2010, a magistrate judge in the U.S. District Court for the District of Columbia vacated the temporary C&D on the grounds that it was outside the statutory authority of the FDIC. The FDIC contended that it was necessary to "wall off" the Bank because there was a substantial threat that the assets of the Bank would be dissipated, based on the bankruptcy filing by the parent company, unexplained transactions between the Bank and its nonbanking affiliates, a lack of independence by the Bank's board of directors and a sister bank's financial condition. The FDIC argued that the dissipation of assets would potentially harm the Bank's depositors and reduce or eliminate the support that the Bank could provide to its sister bank under the Bank's cross-guarantee obligation.
The court was unconvinced by the FDIC's showing of the potential for harm to the Bank or its depositors. The Bank, at the FDIC's urging, had nearly completed the process of winding down its operations and paying off its depositors. The court found that the actions cited by the FDIC were the result of that process. It also found that the FDIC could have taken action sooner to protect the Bank from the potential adverse effects of the winding down and termination of deposit insurance.
We draw several conclusions from these developments:
1. The adverse economic times are compelling the federal banking agencies to be aggressive in the pursuit of safety and soundness. This is demonstrated by a tremendous increase in enforcement actions, which we discuss in our 2009 annual enforcement update, to be published shortly in BNA Banking Reporter.
2. Cross-guarantee liability considerations and the use of this authority by the FDIC are becoming more prominent and are sure to figure more prominently in how third parties and investors deal with banks that (i) have sister institutions under common control or (ii) with regard to banks acquired subject to the FDIC's recent policy statement on acquisitions of failed banks, just happen to have 80% ownership in common, regardless whether the ownership is controlling or passive in nature.
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