[00:00:02] Speaker 04: Case number 17-1188, William R. Blanton, Petitioner versus Office of the Comptroller of the Currency. [00:00:10] Speaker 04: Mr. Berkshie for the petitioner, Ms. [00:00:12] Speaker 04: Melton for the respondent. [00:01:08] Speaker 00: May it please the court. [00:01:09] Speaker 00: My name is Craig Burchie, and I represent the petitioner in this case, Mr. William Blanton. [00:01:13] Speaker 00: I'd like to reserve three minutes for rebuttal, please. [00:01:17] Speaker 00: With me today is my co-counsel, Ms. [00:01:19] Speaker 00: Mary Zinsner, and Mr. Blanton is also in the courtroom today. [00:01:22] Speaker 00: He made the trip to hear the argument. [00:01:25] Speaker 00: This afternoon, we're asking the court to review an agency decision, specifically a decision of the Office of the Comptroller of the Currency that entered a second-tier civil money penalty against Mr. Blanton pursuant to 12 U.S.C. [00:01:39] Speaker 00: Section 1818. [00:01:42] Speaker 00: Before addressing the substantive merits of the case, there is one threshold issue that I'd like to discuss, and that involves the standard of review. [00:01:49] Speaker 00: The parties disagree regarding what is the standard of review in this case. [00:01:53] Speaker 00: It is petitioners' position that the court should adopt a de novo standard of review. [00:01:58] Speaker 00: The case below was decided on summary disposition pursuant to 12 CFR section 1929A. [00:02:05] Speaker 00: That provision is identical in all material respects to Federal Rule of Civil Procedure 56. [00:02:10] Speaker 00: So there was no hearing in this case. [00:02:14] Speaker 00: The case was decided on the law and ostensibly on the undisputed facts. [00:02:18] Speaker 03: This is an APA case. [00:02:21] Speaker 00: Yes, Your Honor. [00:02:22] Speaker 03: Right. [00:02:22] Speaker 03: It makes it different from your standard summary judgment decision from a district court. [00:02:28] Speaker 00: Well, that is correct, Your Honor. [00:02:30] Speaker 00: The statute that is involved here is 5 USC, section 706, and we believe the court should apply subsection 2A, which provides that the court should reverse agency action that is arbitrary, capricious, and abusive discretion, or not in accord with the law. [00:02:47] Speaker 00: And the case that we were able to find that directly addressed this issue was actually a Fifth Circuit case, the Scott versus FDIC case. [00:02:57] Speaker 00: In that case, the FDIC brought a very similar type of enforcement action against a bank officer. [00:03:02] Speaker 00: Issues with respect to liability were decided entirely on summary disposition, and then a brief one-day hearing, evidentiary hearing, was held with respect to the penalty. [00:03:14] Speaker 00: In the Scott case, the Fifth Circuit held that the issues that were decided on summary disposition, in other words, the liability issues, were reviewed on a de novo basis, and that is, in fact, what the Fifth Circuit did. [00:03:27] Speaker 00: The issues that were decided after the evidentiary hearing with respect to the penalty, those got a more deferential standard of review, perhaps the one that you have referenced, Your Honor. [00:03:38] Speaker 00: Under, I believe, the government's position as the case should be decided under 5 USC 706. [00:03:45] Speaker 03: It just, you know, I hear what you're saying. [00:03:47] Speaker 03: It just doesn't, I'm not sure I understand why, since it's an APA case, we would not review the agency's decision about whether there was a genuine issue of material fact here. [00:03:59] Speaker 03: That is, whether the case was appropriate for summary disposition or not, for use of discretion, like we review every agency decision. [00:04:06] Speaker 03: I just don't, you know, I don't understand why we would do it that way. [00:04:14] Speaker 03: We wouldn't do it that way. [00:04:15] Speaker 03: Can you explain it? [00:04:17] Speaker 00: Yes, Your Honor. [00:04:18] Speaker 00: In this case, well, first of all, you would be reviewing a decision on summary disposition using the same standard as after an evidentiary hearing. [00:04:27] Speaker 00: And when agencies make, I understand the importance of deferring to an agency when there's been an opportunity to hear testimony from witnesses, to judge credibility, those are the sorts of things that a trier of fact typically does. [00:04:41] Speaker 00: But in this case, that did not happen. [00:04:44] Speaker 00: The case was decided ostensibly on the basis of undisputed facts, and we contend that there were disputed facts. [00:04:50] Speaker 00: So if you review it using the more lenient standard of review, that issue effectively evades review. [00:04:57] Speaker 00: And nobody ever looks at it. [00:04:59] Speaker 06: So you mean, in inquiring whether there were disputed facts or not, we review that question to know. [00:05:06] Speaker 06: At least that narrow question of deciding whether there were disputed facts in the case. [00:05:09] Speaker 06: That's correct, Your Honor, as well as... Material disputed facts. [00:05:12] Speaker 00: That's correct, Your Honor. [00:05:13] Speaker 00: And in fact, we would go one step further and say one of the main problems in this case was that the Comptroller and the ALJ before the Comptroller drew inferences based on facts that were in favor of the movement, which they should not have done. [00:05:29] Speaker 00: There were a number of inferences that were drawn here that should have been drawn in favor of the non-movement. [00:05:34] Speaker 00: So that would be another issue as well. [00:05:36] Speaker 03: You know, we, we decide so many APA cases for abuse of discretion where all we, where all the agency had before was a record. [00:05:46] Speaker 03: I mean, a paper record. [00:05:49] Speaker 03: Isn't that true? [00:05:50] Speaker 03: I mean, I don't think that, I don't think our… That is true, Your Honor. [00:05:54] Speaker 03: Yeah. [00:05:55] Speaker 03: So, so this case is the same. [00:05:58] Speaker 03: It's a paper record. [00:06:00] Speaker 00: Actually, it is not. [00:06:01] Speaker 00: And let me take you back to what's an older decision of this court. [00:06:06] Speaker 00: I apologize. [00:06:07] Speaker 00: It was not cited in our brief. [00:06:10] Speaker 00: Preparing for oral argument often sharpens one's focus on the case law. [00:06:15] Speaker 00: This is Independent Bankers Association versus Board of Governors. [00:06:20] Speaker 00: It's a 1975 case that was decided by this court. [00:06:24] Speaker 00: And in that case, it actually involves rulemaking authority, I believe. [00:06:28] Speaker 00: So it's under Section 75. [00:06:30] Speaker 00: It's under 553. [00:06:33] Speaker 00: But there, there should have been a, the court reversed an agency decision where there was not a hearing and held the agency, however, carries a heavy burden of justification. [00:06:45] Speaker 00: Where Congress has plainly given interested parties the right to a full hearing, the agency must show that the parties could gain nothing thereby because they disputed none of the material facts upon which the agency's decision could rest. [00:07:01] Speaker 00: So this was a decision under the APA where the court said, no, you should have had a hearing because there were disputed issues of fact. [00:07:09] Speaker 00: That's 516F2nd, 1206. [00:07:14] Speaker 00: And I believe the Sebelius decision, Shirley versus Sebelius, which was also cited in our brief, goes along the same lines. [00:07:22] Speaker 00: In that case, the court, I believe, also held that [00:07:27] Speaker 00: Yeah, and this was cited in our brief under the standard review argument, specifically addressing the standard of review under 57062A. [00:07:37] Speaker 00: This court said, thus, we, as did the district court, must allow summary judgment for appellees, in this case, Sebelius, unless the appellants have produced in the record at least enough evidence for their position to establish a genuine dispute as to some material fact. [00:07:57] Speaker 00: So we believe that the Fifth Circuit's decision, which is squarely on point, is also in line with some of this Court's decisions addressing review under the APA. [00:08:09] Speaker 00: And here, again, let me reiterate, I understand the importance of deferring to agency action when they have made a decision after an evidentiary hearing. [00:08:18] Speaker 00: And that's, most of the cases here, Your Honor, we had a hard time finding cases that were decided on summary disposition to cite to the court. [00:08:26] Speaker 00: That certainly makes sense because the agency has had an opportunity to see the witnesses, to judge their credibility, et cetera. [00:08:34] Speaker 00: Here, none of that happened. [00:08:40] Speaker 03: Before you move on, suppose, just suppose, this is a hypothetical question. [00:08:44] Speaker 03: Suppose we don't agree with you, and we think standard APA deference applies here. [00:08:52] Speaker 03: Does your case rise and fall on your de novo argument? [00:08:55] Speaker 03: In other words, can we read your brief as arguing in the alternative that if we don't agree with you, that the agency's decision was an abuse of discretion? [00:09:04] Speaker 00: Yes, sir. [00:09:06] Speaker 00: Your Honor, we anticipated that. [00:09:09] Speaker 00: are prepared to argue on substantial evidence basis as well. [00:09:12] Speaker 00: And you think you argued that in the brief? [00:09:14] Speaker 00: Yes, Your Honor, we did. [00:09:15] Speaker 00: I know expressly we did. [00:09:16] Speaker 00: It was certainly not the main focus of the brief, but we did make the argument in the alternative because we anticipated that the court might view things differently than we did. [00:09:27] Speaker 00: And so, yes, under the substantial evidence test as well, this case should go back and there should be a hearing. [00:09:35] Speaker 00: Briefly, if I may, let me address the two other, sort of the two substantive issues in the case. [00:09:43] Speaker 00: The first is what we call the campus overdrafts. [00:09:46] Speaker 00: And here, there are three main issues I want to address. [00:09:49] Speaker 00: The first is whether or not the case overdrafts safe and unsound banking practice. [00:09:55] Speaker 00: The bank's practice of allowing the Campos overdrafts went on for more than seven years, probably 10 years, in fact. [00:10:02] Speaker 00: During that time, the bank never suffered a loss, and Mr. Campos never failed to make good on his overdrafts. [00:10:09] Speaker 00: So empirically, there was no loss and no risk, and risk is, of course, part of the test of an unsafe and unsound banking practice. [00:10:19] Speaker 00: Secondly, the bank had in place controls that prevented any risk associated with the campus overdrafts from coming to fruition. [00:10:30] Speaker 00: Mr. Campos had multiple accounts. [00:10:32] Speaker 00: The bank would not honor an overdraft on any of those accounts unless there was enough money in the aggregate in the Campos accounts to cover the overdrafts. [00:10:42] Speaker 00: In effect, these overdrafts were secured by cash in the bank. [00:10:47] Speaker 00: The best form of collateral one could have. [00:10:49] Speaker 06: Well, when you say in the aggregate, does that include the accounts that he didn't even have signature authority for? [00:10:56] Speaker 06: uh... that mister campos did not have signature before yes your honor all of the campos company accounts how can those possibly be legitimately factored in because you couldn't transfer even with his permission he didn't have access to that money [00:11:12] Speaker 00: Yeah. [00:11:14] Speaker 00: The Cheatham Affidavit addresses this. [00:11:16] Speaker 00: It's at page 298 in the record. [00:11:19] Speaker 00: And what it says is the bank had authority both from Mr. Campos and his personnel to transfer money between and among all of those considered part of the Campos accounts. [00:11:29] Speaker 00: So that would be page 298 of the record. [00:11:32] Speaker 06: Does he say as to the ones which Mr. Campos didn't have signature authority, how could Mr. Campos or his personnel give you authority over that? [00:11:39] Speaker 06: I don't understand that. [00:11:40] Speaker 00: the personnel who had authority over the accounts. [00:11:48] Speaker 00: Well, as a matter of fact, it was done and it was done with the acquiescence of the holders of the accounts for more than 10 years. [00:11:56] Speaker 00: So from that and from that lengthy course of dealing, I would infer that there was authority. [00:12:03] Speaker 00: In fact, at a trial, that evidence would be [00:12:08] Speaker 00: Very important that there was a 10 year course of authority of moving money between these accounts without any objection without problem. [00:12:17] Speaker 00: So I don't think that authority was ever an issue, but. [00:12:23] Speaker 00: in any event. [00:12:24] Speaker 00: We also have testimony from Mr. Cheatham here. [00:12:27] Speaker 00: Mr. Cheatham was the bank's attorney. [00:12:29] Speaker 00: He gave hybrid fact expert testimony in which he testified that this was a safe and sound policy and was not an unsafe and unsound policy. [00:12:41] Speaker 02: I mean, it can certainly be unsafe and unsound even if the risk hasn't come to fruition, right? [00:12:47] Speaker 02: I mean, there's obviously [00:12:49] Speaker 02: There can be a need to act against a risk that could come to fruition even if it turns out that it didn't. [00:12:55] Speaker 00: Yeah. [00:12:56] Speaker 00: We have to be careful in going too far down that road because one tends to then conflate consequences with risk. [00:13:03] Speaker 02: So by analogy... I guess I'm making the opposite point that I wouldn't want to conflate happenstance beneficial consequences with lack of risk. [00:13:14] Speaker 00: A point that we made in our brief, if one safely crosses a bridge every day for 10 years, that says something about the risks associated with crossing the bridge. [00:13:23] Speaker 00: The fact that this went on for 10 years, one could hardly say, was happenstance. [00:13:27] Speaker 00: In fact, Mr. Campos made good on a $5 million overdraft in 2003. [00:13:33] Speaker 00: So the overdrafts that were taking place in July and August of 2010 when Mr. Blanton was the interim CEO were minuscule by comparison. [00:13:42] Speaker 02: I'm not necessarily saying this is or isn't happenstance. [00:13:44] Speaker 02: I guess I'm just making a broader conceptual point, which is that the fact that the overdrafts may have been made good on doesn't necessarily show that it was a sound and safe practice to permit this to go on. [00:13:58] Speaker 02: It could still be an unsound and unsafe practice. [00:14:00] Speaker 00: I would look at it a little differently. [00:14:03] Speaker 00: On summary disposition and depending on which standard of review you apply, the argument I would make is the inference should be drawn in favor of the non-movement and so Mr. Blanton should have received the benefit of the doubt that a 10-year history of overdrafts always being covered [00:14:20] Speaker 00: Leads one to the conclusion that they would continue to be covered. [00:14:23] Speaker 00: And in fact, that's what happened. [00:14:23] Speaker 02: Do you think the amount of the overdrafts should matter? [00:14:25] Speaker 02: Excuse me? [00:14:26] Speaker 02: Do you think the amount of the overdrafts should matter? [00:14:28] Speaker 00: No, I do not. [00:14:29] Speaker 00: Because once you start looking at the amount of the overdrafts, you're now conflating consequences and risks. [00:14:34] Speaker 00: So by analogy, falling from 30,000 feet results in certain death, but we consider it an acceptable risk to be at 30,000 feet when we're in a commercial airliner. [00:14:45] Speaker 00: Same situation here. [00:14:47] Speaker 00: Any one of these overdrafts might well have put the bank into the red, but the fact that we have controls around the overdrafts, meaning the bank does not honor one unless there's cash on deposit in the bank, and we have a 10-year history of the overdrafts always being covered, means you have no risk. [00:15:02] Speaker 00: It's like being in the commercial airliner. [00:15:05] Speaker 00: So briefly, I see that my time is running out. [00:15:08] Speaker 00: I just want to briefly touch on the final issue in the case, and that is the H&H and Brooks Avenue loans. [00:15:18] Speaker 00: One of the arguments that the government makes is that Mr. Blanton's view that the call reports were correctly stated, accurately stated, was objectively unreasonable. [00:15:28] Speaker 00: The statute he's alleged to have violated, 12 USC 161, is not a strict liability statute. [00:15:35] Speaker 00: He had advice from his CFO, [00:15:37] Speaker 00: who was an accountant. [00:15:38] Speaker 00: He had advice from his outside auditor, who is a CPA, in writing, taking the position that it was appropriate for the write-downs of these loans to be reversed and that the call reports were accurate. [00:15:51] Speaker 00: In fact, his CFO even signed the call reports testifying to his belief that it was accurate. [00:15:57] Speaker 00: If his belief was that those call reports were accurate, then Mr. Blanton's belief was as well. [00:16:02] Speaker 00: I see my time is out. [00:16:05] Speaker 00: Thank you. [00:16:17] Speaker 05: May it please the court? [00:16:18] Speaker 05: My name is Amber Melton, and I represent the Comptroller of the Currency. [00:16:22] Speaker 05: Your Honors, this is a straightforward case of a banker with misplaced certainty in his own opinions, causing him to disregard the realities surrounding the bank, guidance from the OCC, and advice from the bank's external auditor when it was inconsistent with petitioners' own opinions. [00:16:37] Speaker 05: With respect to the call reports, petitioner states that the OCC did not have a proper basis to direct the loan charge-offs. [00:16:44] Speaker 05: But the undisputed facts show [00:16:46] Speaker 05: that the bank, the OCC, and petitioner initially agreed that the loan should be charged off, that the criticized asset reports which supported the loan charge-offs in this case acknowledged that the guarantor's financial resources were insufficient to prevent the charge-offs, that the guarantors were not making principal payments on the loans or they were having a non-party to the loan agreements making payments on the loans despite entering into several loan modification agreements that relaxed these loan terms. [00:17:16] Speaker 05: that the OCC and the bank's external auditor either. [00:17:20] Speaker 03: Are we are we review. [00:17:21] Speaker 03: What's your view about how we review what you're telling us about the record here. [00:17:26] Speaker 03: Are we counsel for petitioner says it's clearly de novo because it's the question is it was all decided on summary disposition. [00:17:37] Speaker 05: Your Honor, the APA standard of review applies here, the substantial evidence test. [00:17:43] Speaker 03: Well, that's stating the conclusion. [00:17:44] Speaker 03: Why is that? [00:17:46] Speaker 05: Well, Your Honor, first, within the enforcement penalties, within the enforcement statute of 12 USC 1818H, it says that the APA standard of review applies to enforcement proceedings, review of enforcement proceedings. [00:18:00] Speaker 05: Further, [00:18:02] Speaker 05: The Fifth Circuit in Scott v. FDIC, a case cited by both the OCC and by petitioners, the court applied the substantial evidence test to the substantive ruling in that case. [00:18:15] Speaker 05: In that case, it was a reg O violation. [00:18:18] Speaker 05: And the court specifically stated when addressing the reg O violation was whether or not substantial evidence supported the findings by [00:18:27] Speaker 05: the board of the FDIC in that case. [00:18:30] Speaker 06: In this case, his argument is you have chosen to adopt a regulation that says we're going to follow the summary judgment standard. [00:18:41] Speaker 06: We're going, in deciding whether to do summary disposition, not looking at the substance of your decision, but in deciding whether to do a summary disposition or to give him [00:18:51] Speaker 06: a hearing where he can come forward and try to put on his case, we're going to follow the summary judgment standard. [00:18:57] Speaker 06: Now, in deciding whether there are disputed material facts or reasonable inferences that were not taken in his favor, don't we review that narrow question de novo? [00:19:13] Speaker 06: Because if you have violated that, then you have engaged in arbitrary enforcement of your own regulation. [00:19:21] Speaker 05: Well, Your Honor, if ultimately the court can look to whether or not there are actually any disputed facts. [00:19:33] Speaker 05: But however, whether or not the court should apply the substantial evidence, seeing that whether or not the OCC or the comptroller in this case had substantial evidence to support its decision, [00:19:51] Speaker 05: that standard should still be applicable. [00:19:53] Speaker 05: And that was the standard. [00:19:54] Speaker 06: I'm still going to back up. [00:19:55] Speaker 06: Let's see. [00:19:56] Speaker 06: You agree that under your own regulations, I take it, that to do the summary disposition you did here, you had to take all the evidence in the light most favorable to him and not have rely on disputed material facts or ignore reasonable inferences in his behavior. [00:20:17] Speaker 06: That's what your summary judgment regulation means, correct? [00:20:19] Speaker 05: The summary does, judgment regulation does follow the summary, the summary disposition regulation, yes. [00:20:25] Speaker 06: Okay, so when we're trying to review just that narrow question of whether looking at this record, [00:20:34] Speaker 06: not whether you could have had substantial evidence on a record like this after a hearing, but whether you actually complied with that or there were disputed material facts or reasonable inferences not given to him. [00:20:46] Speaker 06: When we undertake that review of the record, [00:20:50] Speaker 06: how do we do that. [00:20:52] Speaker 05: I believe it would still be the differential standard would apply and yes you do I believe the court can review whether or not there were any [00:21:06] Speaker 05: Well, one, the summary judgment standard also says that evidence that is of insufficient caliber or quantity does not have to be considered in determining the summary judgment rule. [00:21:17] Speaker 06: I get all the summary judgment standards, so I'm asking you how we review whether you complied with that standard in this case, and I thought you just said we should be [00:21:29] Speaker 06: deferential in doing that and I'm which has my head kind of spinning because I'm trying to figure out how I deferentially determine whether there were disputed material facts or you took all reasonable inferences in his favor. [00:21:42] Speaker 06: How do I do that? [00:21:43] Speaker 06: So does that mean if there were disputed material facts you still get some leash on that? [00:21:48] Speaker 05: No, I believe that if there were, if there are any disputes of material fact that are material to the determination, then the court would have to consider that. [00:21:58] Speaker 06: However... Consider that. [00:21:59] Speaker 06: Then that would mean you were improperly engaged in summary disposition here. [00:22:05] Speaker 06: Is that correct? [00:22:06] Speaker 05: Yes, I think the court ultimately could determine that there were genuine disputes as to material fact. [00:22:12] Speaker 05: However, what constitutes the material fact and whether or not there's a genuine dispute of material fact, again, is determined by the substance of law and it's also determined [00:22:23] Speaker 05: is determined by the substantive law. [00:22:27] Speaker 05: Here, the substantive law with respect to the overdraft show that large and uncontrollable overdrafts are unsafe or unsound practice. [00:22:37] Speaker 05: And with respect to the call reports, it says that the bank is obligated to file. [00:22:42] Speaker 06: The record also shows that OCC knew about this for at least eight years. [00:22:48] Speaker 06: Dropped its own investigation into these overdrafts in 2003. [00:22:54] Speaker 06: Raised the issue with Mr. Blanton even when he came on board. [00:22:57] Speaker 06: Two months, May, June went by without OSCC doing anything. [00:23:03] Speaker 06: Isn't that a reasonable inference in his favor that maybe under all the circumstances of this case and all the history of these overdrafts being honored, [00:23:14] Speaker 06: and the fact if they slammed down quickly on Mr. Campos, he would take all his money out and the entire bank would fail. [00:23:22] Speaker 06: Then under all those circumstances, maybe it wasn't so, maybe it was the less unsafe and unsound alternative that Mr. Blanton had at the time. [00:23:34] Speaker 05: I believe that the inference here was proper because I don't think that Mr. Blanton points to the fact that the OCC, that it didn't take the same approach in previous years with respect to the overdraft. [00:23:51] Speaker 05: However, the bank was in a different position in 2003 and the years preceding. [00:23:58] Speaker 05: Mr. Mr. Blanton's tenure as interim CEO again at the time was a bank in the year before he took over that was different from the one he did take over well your honor your honor at least with respect to when the 2000 and with respect to the year before the bank [00:24:16] Speaker 05: I believe it was in 2009 when the bank was rated a five bank, where it was deemed critically undercapitalized. [00:24:28] Speaker 05: However, the controls that Mr. Blanton points to, the 2003 controls, they were implemented at a time where a bank was in a different financial condition. [00:24:38] Speaker 06: At that time... But they were still doing the same overdrafts. [00:24:41] Speaker 06: I'm sorry? [00:24:42] Speaker 06: This overdraft policy was going on for at least eight years before he came on the scene, correct? [00:24:46] Speaker 01: Yes. [00:24:46] Speaker 01: Is that disputed? [00:24:47] Speaker 06: Yes. [00:24:48] Speaker 06: That's not disputed. [00:24:49] Speaker 06: And OCC didn't at least turn an eye to or didn't react in the way it did with Mr. Blanton. [00:24:58] Speaker 06: It kind of acquiesced or tolerated these things for quite some time. [00:25:02] Speaker 06: Is that true? [00:25:03] Speaker 06: Or is that a reasonable inference a decision-maker could make? [00:25:06] Speaker 05: Well, I think that the concern regarding the overdrafts was heightened in 2010. [00:25:11] Speaker 05: And that's because of the state of the bank in 2010. [00:25:14] Speaker 06: Well, but that was the state he came into. [00:25:16] Speaker 06: So it was already in that state before he came to the helm of it, right? [00:25:21] Speaker 06: Correct, Your Honor. [00:25:22] Speaker 06: OK. [00:25:22] Speaker 06: So I guess I'm still back to if we're talking about reasonable inferences on a summary judgment stand. [00:25:28] Speaker 06: And that's your choice of a regulation. [00:25:30] Speaker 06: That's your choice of a regulation to have that. [00:25:34] Speaker 06: And he says there could be testimony that would say that if they had come down hard on Campos really fast, he would have yanked all his money out and crashed the entire bank down quickly. [00:25:47] Speaker 06: And so Mr. Guantan was working on it slowly over this four-month period. [00:25:53] Speaker 06: Doesn't that raise a question about whether that was unsafe to take the time to try to find a way to impose further controls that would allow more regulation of these overdrafts without driving Mr. Campos and all his money out of the bank? [00:26:12] Speaker 06: And yeah, so we keep the status quo just because we've got to keep treading water here until we can actually put together something that's going to work. [00:26:24] Speaker 05: Well, Your Honor, I think here, the unsafe foreign sale practice here, the risk posed here, the undue risk here, was that the overdrafts in this case amounted to over $400,000. [00:26:36] Speaker 05: At times, while petitioner was interim CEO, they at times amounted to over $430,000, approximately 65% of the bank's tier one capital. [00:26:47] Speaker 06: But that was going on before. [00:26:50] Speaker 06: Huge percentages were going on all the way back to 2003. [00:26:53] Speaker 06: This is all about not whether a decision like this, if you didn't have this summary judgment rule, would meet substantial evidence. [00:27:04] Speaker 06: It's about whether what happened here meets that substantial evidence standard. [00:27:09] Speaker 06: There we go. [00:27:10] Speaker 06: I'm also just not quite sure what action is it that Mr. Blanton did [00:27:16] Speaker 06: I think you say it's the failure to stop these overdrafts when he came on board. [00:27:24] Speaker 06: Because he wasn't actually the one signing and authorizing the overdrafts, but he [00:27:30] Speaker 06: got an email, I guess, in late June, said, do you want to continue this? [00:27:34] Speaker 06: And he said, we'll continue it while I'm working on this solution. [00:27:38] Speaker 06: So was it his policy of allowing these? [00:27:41] Speaker 06: Is that what his unsafe practice was? [00:27:43] Speaker 05: Correct, Your Honor. [00:27:45] Speaker 05: As the record reflects, in March 2010 and April 2010 and May 2010, Mr. Blanton told the OCC that he would get the overdrafts out of the bank. [00:27:55] Speaker 05: or that he would implement the additional controls. [00:27:57] Speaker 05: However, the record also shows that as of July 20, 2010, the bank's practice was, or its policy was, to pay for everything. [00:28:05] Speaker 06: And that was a continuation of the policy he had adopted in June, at least, in response to the email. [00:28:12] Speaker 05: Yeah, well, yes, but simultaneously he was telling the OCC that he would get the overdrafts out of the bank or that he would implement additional controls. [00:28:22] Speaker 06: Sure, but is that supposed to have been going on for eight years? [00:28:25] Speaker 06: So he was taking them, he assigned, there's no, doesn't seem to be a dispute that he asked, tasked Mr. Beal with this job and that Mr. Beal was doing it within, I don't know, a month or so of that task. [00:28:37] Speaker 06: He had an outline of, [00:28:39] Speaker 06: conditions and was meeting with Mr. Campos about it. [00:28:43] Speaker 06: So again, these are all about inferences from the evidence, which I'm having trouble reconciling with your summary judgment standard. [00:28:51] Speaker 05: Well, Your Honor, I think that, again, the surroundings of the bank, what was going on, its capital levels are very important. [00:29:02] Speaker 05: In 2003, there were overdrafts of millions of dollars in uncollected balances with respect to the campus accounts. [00:29:09] Speaker 06: I'm talking about 2009, 2008, even the first half of the year of 2010. [00:29:16] Speaker 05: The evidence on the record is specific to the 2003 period and the 2010 period with respect to when Mr. Blanton was CEO of the bank. [00:29:29] Speaker 05: However, in 2003, there was an uncollected balance of millions of dollars. [00:29:35] Speaker 05: And in the email from the OCC examiner in August 2003, it says that even if the bank were to lose on those uncollected balance, capital levels would have still been adequate. [00:29:46] Speaker 05: However, in 2010, $430,000 worth of uncollected overdrafts could have taken the bank. [00:29:54] Speaker 06: When did the bank come into this condition where it could no longer tolerate these overdrafts? [00:29:59] Speaker 06: When did the overdrafts become unsafe and unsound under your theory of the record? [00:30:04] Speaker 05: It would have been, well, at least, it would have at least been clear at the time that the bank conveyed, that the OCC conveyed to the bank that it was an unsafe or unsound practice. [00:30:14] Speaker 05: Again, the OCC told petitioner... When was that? [00:30:18] Speaker 02: That was when? [00:30:18] Speaker 05: The record reflects that petitioner told the OCC as early as March 2010 that he was taking care of the overdraft issues, that it was close to a resolution, and that he would get the loans. [00:30:31] Speaker 06: He wasn't even a CEO in March. [00:30:34] Speaker 06: Maybe the last day of March 2010, right? [00:30:36] Speaker 05: He was on the board of directors of the bank. [00:30:41] Speaker 05: He did assume the position of CEO in April. [00:30:44] Speaker 06: He was pushing Mr. Froman out, so he was taking some steps to try to deal with this situation. [00:30:51] Speaker 05: However, at the time that he came back, at the time that he did assume the position of interim CEO, he did not address the overdrafts in the way that he was telling the OCC that he was. [00:31:00] Speaker 06: This all sounds like, I guess this somewhat relates to the statute of limitations issue. [00:31:03] Speaker 06: It sounds like the problems were that he, because you said, adopted this policy of allowing the overdrafts in June 2010. [00:31:13] Speaker 06: And after that, other folks just implemented it. [00:31:18] Speaker 06: So how is that not a situation of attaching responsibility to the effects of an act rather than the act itself? [00:31:30] Speaker 06: What you had from July on were the effects of his policy decision in June, not him making a new decision each time every overdraft came in. [00:31:40] Speaker 05: Well, Your Honor, with respect to when the statute of limitations begin to run, you have to look at that second prong of the CMP statute, which means that it's part of a pattern of misconduct here. [00:31:52] Speaker 05: Every time he allowed these overdrafts to continue throughout July, throughout August, and throughout September 2010 while he was interim CEO, he could have implemented these additional controls. [00:32:04] Speaker 05: or he could have stopped the overdraft activity as he was conveying to the OCC. [00:32:09] Speaker 05: So every time he failed to implement those controls or stop those overdrafts, there was an unsafe or unsound practice for the purposes of the statute of limitations beginning to run. [00:32:21] Speaker 06: Well, when we have continuing violations, you have to distinguish between a pattern of violations and a bad act that has forward-going effects. [00:32:34] Speaker 06: And if the bad act was his decision in June in response to that email to say, go ahead and do the overdrafts until I'm getting something in place, but until then, go ahead and do the overdrafts consistent with the 2003 controls, that was June. [00:32:51] Speaker 06: And after that, you just have the effects going forward. [00:32:54] Speaker 05: Your Honor, I think, again, an unsafe foreign sound practice can be an act or a failure to act. [00:32:58] Speaker 05: And I think in July and August and September of 2010, he failed to implement these additional controls or stop the overdraft activity, despite telling the OCC that he was doing so. [00:33:09] Speaker 05: And then even Mr. Beal, within days after Petitioner stepped down as interim CEO, he implemented the additional controls via email. [00:33:17] Speaker 05: And he also, Mr. Beal also, within weeks of implementing this additional controls, actually told Mr. Campos to stop the overdraft activity. [00:33:25] Speaker 05: So that shows that Petitioner could have implemented these controls as he was telling the OCC, or he could have stopped this overdraft activity during his tenure as interim CEO as he told the OCC. [00:33:37] Speaker 05: He just did not. [00:33:38] Speaker 05: even though there was reasonably foreseeable undue risk associated with these overdrafts. [00:33:46] Speaker 03: So I have two questions for you. [00:33:55] Speaker 03: One is the opposite of what I asked counsel for a petitioner. [00:33:58] Speaker 03: If you're wrong about our standard of review, if this is just like summary judgment, can you prevail? [00:34:04] Speaker 03: I mean, can we review this de novo and still conclude there's no genuine issue of material [00:34:10] Speaker 05: Your Honor, yes, because there are, based on the undisputed material facts on the record, with respect to the loan charge-offs, the OCC properly directed the loan charge-offs. [00:34:22] Speaker 05: And even with respect to the loan charge-offs, even under the Sunshine Bank standard, the FDIC, deference is owed to the examiner's conclusions with respect to loan classifications. [00:34:31] Speaker 05: And then with respect to the overdrafts, it's undisputed that the bank was critically undercapitalized and on the verge of collapse at the time that petitioner was CEO, that the overdrafts at times amounted to over $430,000, 65% of the bank's tier one capital, which is the bank's core capital to insulate it against losses, and that the OCC warned petitioner on several occasions [00:34:58] Speaker 05: of the risk associated with the overdraft, and petitioner told the OCC that he would either get the overdrafts out of the bank or he would implement additional controls. [00:35:07] Speaker 05: Petitioner never made good on any of those assurances to the OCC. [00:35:11] Speaker 05: So based on that undisputed record, we believe that the OCC's determination that there was a violation of law and that there was an unsafe or unsound practice with respect to the overdraft should be affirmed. [00:35:23] Speaker 03: My second question was unrelated. [00:35:28] Speaker 03: You go ahead. [00:35:28] Speaker 06: I was going to go to the properties. [00:35:30] Speaker 03: Oh, OK. [00:35:30] Speaker 03: So my unrelated question is, so the comptroller says in the decision that each of these problems, but each, the overdrafts and the inaccurate call reports, says each provide an independent basis to impose the CMP far beyond 10K. [00:35:48] Speaker 03: Does that mean that we only have to sustain one of these? [00:35:53] Speaker 05: Yes, Your Honor. [00:35:54] Speaker 03: Well, you didn't say that in your brief. [00:35:57] Speaker 03: I'm curious about that. [00:35:58] Speaker 03: So your view then is if we sustain the comptroller on the overdrafts, we don't have to even consider the call reports? [00:36:07] Speaker 03: Well, Your Honor, below we did say that each... I know you said that's what I just read to you, but I'm asking you what we're supposed to do. [00:36:15] Speaker 05: Your Honor, yes, I think if the court were to come down, that it agree with the OCC on one issue and not the other, that the penalty should be stayed in this case, or it should still be applied. [00:36:27] Speaker 02: Why does the agency do this? [00:36:28] Speaker 02: I saw that too, and I thought if there's more than one violation, why is it that the agency would say that we're at a flat amount, regardless of whether you have one or two? [00:36:39] Speaker 05: I'm sorry. [00:36:41] Speaker 02: Does the agency typically do this, that if there's multiple violations, it doesn't add anything new for a different violation? [00:36:47] Speaker 02: That it says, well, the first violation is worth 10,000 alone. [00:36:50] Speaker 02: There's a second one, too, but we're not going to add anything to that. [00:36:53] Speaker 02: It's still 10,000. [00:36:54] Speaker 05: I believe below that there was a hearing on the appropriateness of the CMP and there was a stipulation that $10,000 would be our appropriate amount. [00:37:02] Speaker 05: However, in the briefs below that we did say that the penalty that the agency could impose with respect to the violation of the unsafe foreign sound practice could have been millions of dollars. [00:37:12] Speaker 06: So was that stipulation that that would be the right amount if there were only the one violation and not the call report violations, or was it that was stipulation that that was the right amount for the collective violations found by the comptroller? [00:37:25] Speaker 05: I think the stipulation was whether or not $10,000 would be appropriate as to both the unsafe or unsound practice of violation of law. [00:37:34] Speaker 05: However, again, the agency below said that each, that the CMP that it imposed or the penalty that it imposed would be sufficient for either the violation of law or the unsafe or unsound practice, and the petitioner doesn't dispute that determination in this court. [00:37:50] Speaker 06: But wouldn't we still have to, since you're talking about agency deference here, [00:37:54] Speaker 06: Wouldn't we still have to send it back for the Comptroller to decide what should be done if there's only one violation? [00:38:03] Speaker 05: Again, because the Comptroller below said that there was an independent basis to impose for each, for either the call report issue or for the unsafe or unsound practice related to the overdrafts, and each provided independent basis for the $10,000 CMP that you would not have to remand this to the Comptroller below. [00:38:25] Speaker 06: With respect to the call reports, where did the OCC specifically tell Blanton that if the original write-downs were in error? [00:38:37] Speaker 06: Let's just assume. [00:38:38] Speaker 06: I know that OCC didn't agree with this, but assume that those original write-downs were in error. [00:38:44] Speaker 06: Did OCC say that regardless of whether they're in error, you cannot write them down, or did it just disagree about whether they were in error? [00:38:53] Speaker 05: Donner, there's no evidence in the record that the OCC specifically said that if there was an error, that it couldn't be amended. [00:39:02] Speaker 05: However, in this case, the OCC told petitioners specifically that it wouldn't be an acceptable accounting practice to write up these loans after they've been written off. [00:39:15] Speaker 05: And then they also told them that they didn't agree with the view of the bank's outside auditor, Auditor and Sara. [00:39:23] Speaker 05: And the call report instructions which are applied to the way the call reports are reported specifically says that when the OCC's interpretation of GAAP conflicts with that of the bank, the OCC's interpretation should be applied. [00:39:40] Speaker 06: Yeah, but the statute says you only get to do that if your interpretation is no less stringent than GAAP, correct? [00:39:47] Speaker 06: Yes. [00:39:47] Speaker 06: And so your handbook can't be doing anything more than what the statute says, correct? [00:39:51] Speaker 05: The call report instructions can be no less stringent. [00:39:56] Speaker 06: No less stringent. [00:39:57] Speaker 06: So that has to capture that same idea. [00:39:59] Speaker 06: It seems to me far from self-evident that a requirement that you not adjust write-downs that were taken in error is more stringent than gap. [00:40:10] Speaker 06: That seems to me to be tolerating. [00:40:13] Speaker 06: In this case, you think it might be more protective. [00:40:15] Speaker 06: In lots of cases, it could be less protective. [00:40:17] Speaker 06: So I don't understand how that instruction, if it's interpreted to apply to an erroneous write-down, would satisfy the statute. [00:40:25] Speaker 05: Well, Your Honor, here, the more conservative position would be not to rebook the loans. [00:40:30] Speaker 06: In this particular case? [00:40:31] Speaker 05: Yes. [00:40:31] Speaker 06: Right, but that can't be. [00:40:33] Speaker 06: You're saying the instruction was in the instruction manual, not a case-specific one. [00:40:38] Speaker 06: And I don't know that that's more protective or more stringent to perpetuate errors. [00:40:44] Speaker 06: I can imagine lots of situations where telling a bank to perpetuate an error would be less stringent than GAAP and very troublesome. [00:40:54] Speaker 05: Well, Your Honor, again, the call report instruction says the OCC interpretations of GAP should be reported in the call report. [00:41:01] Speaker 05: And here in this case, the OCC told Mr. Blanton about their interpretation of GAP of whether or not this would be an acceptable accounting practice. [00:41:12] Speaker 05: And also the record also shows that Mr. Blanton never attempted to reconcile these differences with the OCC. [00:41:22] Speaker 05: Mr. Blanton makes the argument that the OCC examiners are not CPAs and that they're not entitled to deference with respect to their decisions of accounting principles. [00:41:30] Speaker 05: However, the record also shows that the examiner Karen Hudson said that [00:41:39] Speaker 05: If the OCC, I'm sorry, Examiner Anne Marie Fernandez said that if Mr. Blanton would have been the prudent and appropriate thing and came to the OCC with his differences, particularly if the bank's external auditor had a different position than the OCC, they would have gotten the OCC CPAs involved. [00:41:56] Speaker 05: Also, it's also undisputed that the CPA expressed reservations with respect to the write downs. [00:42:03] Speaker 05: He said that you have to convince the OCC of your position with respect to rebooking the loans or else you cannot recover that amount until you receive cash. [00:42:13] Speaker 05: And Mr. Blanton's deposition testimony said upon receiving this email that this email prompted him to become livid and that he was upset that Mr. Insara was backpedaling on this issue. [00:42:25] Speaker 05: And Mr. Insara's deposition testimony also says that he made the bank aware, he made petitioners specifically aware of his position with respect to rebooking the loans and that you have to convince the OCC of your position at the time that he gave this advice. [00:42:41] Speaker 05: And also the auditor and Sarah's deposition testimony says that the bank never even informed him that he was rebooking the loans and they never provided the additional information that he needed to support rebooking the loans. [00:42:54] Speaker 05: So with all that in mind, [00:42:56] Speaker 05: I think it shows that that petitioner wanted these loans to be rebooked because he wanted to put three million dollars back on the bank's books but not necessarily because it was an acceptable accounting practice and that when the petition that when the his his experts specifically that the banks outside auditor [00:43:15] Speaker 05: agreed with his position, he was fine with using that position as a basis to support the rebooking of the loans, but when he disagreed with that position, that he still rebooked the loans anyway and caused the bank to file the amended call rewards. [00:43:30] Speaker 05: Okay. [00:43:32] Speaker 03: Anything else? [00:43:33] Speaker 05: No. [00:43:33] Speaker 05: Okay. [00:43:33] Speaker 05: Thank you. [00:43:34] Speaker 05: Okay. [00:43:34] Speaker 05: Your Honors, for the reasons stated here, we accept the petition for review to be denied. [00:43:39] Speaker 05: Thank you. [00:43:39] Speaker 03: Thank you. [00:43:40] Speaker 03: Council's out of time, right? [00:43:42] Speaker 03: You can take two minutes. [00:43:45] Speaker 03: Yeah. [00:43:50] Speaker 00: But your honor, you're right. [00:43:52] Speaker 00: The standard of review is the critical issue in this case. [00:43:55] Speaker 00: And one thing I want to address before I move on to the substantive merits is that Scott versus FDIC decision. [00:44:02] Speaker 00: Council for the OCC says that in that case, the Fifth Circuit applied that deferential standard of review. [00:44:08] Speaker 00: And that is just an incorrect reading of the case. [00:44:10] Speaker 00: I've got the Scott decision here. [00:44:13] Speaker 00: And in this case, the Fifth Circuit expressly says, [00:44:16] Speaker 00: The FDIC standard for summary disposition is similar to the standard for summary judgment. [00:44:25] Speaker 00: Consequently, we review a grant of summary disposition as if it were a grant of summary judgment. [00:44:32] Speaker 00: Then, at the very conclusion of the opinion, the court says, after reviewing the record, we agree with the ALJ that petitioners did not present evidence demonstrating a genuine dispute of material fact. [00:44:48] Speaker 00: The last sentence of the opinion, thus, the ALJ did not improperly resolve contested factual issues. [00:44:56] Speaker 00: I understand that it is the Fifth Circuit, and it's only persuasive precedent here, but... Well, it's not even persuasive there, right? [00:45:01] Speaker 06: Because it's unpublished. [00:45:04] Speaker 00: That is correct. [00:45:05] Speaker 00: It is persuasive there. [00:45:06] Speaker 00: That's exactly right. [00:45:07] Speaker 00: It's not persuasive there. [00:45:08] Speaker 00: I'm sorry. [00:45:09] Speaker 06: It's only persuasive there. [00:45:10] Speaker 06: It's not binding there. [00:45:10] Speaker 00: That's exactly right, of course. [00:45:12] Speaker 00: Yes. [00:45:12] Speaker 00: Thank you, Your Honor. [00:45:20] Speaker 00: The next issue I want to address, because I'm running very low on time, let me just briefly say with respect to the loans and the charge off of those loans, the OCC never instructed Mr. Blanton that those write-offs were improper. [00:45:36] Speaker 00: not in the May 23rd, 24th email, not in the July 15th or 13th emails, and not in the July 27th emails. [00:45:44] Speaker 00: And with the small amount of time I have left, let me just say, it's been an honor arguing in front of this Court. [00:45:49] Speaker 00: This is my first time. [00:45:50] Speaker 02: Thank you. [00:45:51] Speaker 02: Can I just ask you, the August 18th email? [00:45:53] Speaker 02: The August 18th email? [00:45:57] Speaker 00: Didn't that say that? [00:45:58] Speaker 00: There was an August 15th letter that, oh, you're talking about Ms. [00:46:03] Speaker 00: Carruthers' email to the bank. [00:46:08] Speaker 00: So the August 18th email came after all of the call reports at issue in this case were already sent. [00:46:14] Speaker 00: So the second quarter call report went out on July 30th, so the August 18th email obviously post-dated that, and then [00:46:21] Speaker 00: The other call reports, the amended call reports for fourth quarter of 2009, first quarter of 2010, and second quarter of 2010 were filed, I believe, on August 15th. [00:46:32] Speaker 00: So that instruction in the August 18th email, the chronology is out of whack. [00:46:39] Speaker 00: To the extent that email contains instructions, it post-dates when the operative events upon which the violation is based occurred. [00:46:49] Speaker 03: Going back to the previous point you made, did the petitioner ever get the agency's position to rebook the loans and file the amended call report? [00:47:07] Speaker 03: I didn't see that anywhere in the record. [00:47:11] Speaker 03: You're talking about the July 15th email? [00:47:13] Speaker 03: No, I'm talking about the rebooking of the loans. [00:47:16] Speaker 03: That was never approved by the agency, correct? [00:47:21] Speaker 00: It was never approved, but it was never disallowed either. [00:47:23] Speaker 03: But it was never approved, right? [00:47:25] Speaker 03: It was an amended call report, rebooking it, that was not approved, correct? [00:47:31] Speaker 03: I don't know if they were... Well, I ask you the question because the instructions make clear that the agency has to approve the filing of an amended call report. [00:47:44] Speaker 03: That didn't happen here, correct? [00:47:46] Speaker 00: Yes. [00:47:47] Speaker 00: I do not believe that's on the record one way or another, Your Honor. [00:47:50] Speaker 00: I don't know. [00:47:51] Speaker 03: Well, can you tell me where in the record there is evidence that the agency approved the filing of the amended call report rebooking the loan? [00:48:00] Speaker 03: Where is that in the record? [00:48:03] Speaker 00: I don't believe it there the record speaks to that. [00:48:05] Speaker 03: Well, then doesn't that suggest that it wasn't approved? [00:48:08] Speaker 03: And doesn't that mean that the instructions regarding filing amended call reports were violent? [00:48:15] Speaker 00: Well, there was no disapproval of the filing prior. [00:48:21] Speaker 03: You agree that the call report instructions require the approval of an amended call report, right? [00:48:27] Speaker 03: That's what the instructions require. [00:48:29] Speaker 00: I'm sorry, Your Honor. [00:48:29] Speaker 00: I don't know where that is in the record. [00:48:32] Speaker 00: I don't know if it's required or not. [00:48:34] Speaker 03: All right. [00:48:35] Speaker 03: Well, thank you very much. [00:48:36] Speaker 03: Thank you. [00:48:36] Speaker 03: Both of you, the case is submitted.