Federal Court of Appeals rules that there is no “clearly established” right to a hearing before regulators seize bank assets

On January 26, the U.S. Court of Appeals for the Tenth Circuit rejected a bank’s attempt to sue officials of the Office of the Kansas Bank Commissioner for damages relating to the seizure of the bank’s assets. The bank claimed that the seizure of assets without a hearing violated its constitutional due process rights. The court dismissed the bank’s claims on the grounds that “[t]he seizure of the bank’s assets and the appointment of the FDIC as receiver without a prior hearing did not violate a clearly established constitutional right.”

The case arose from The Columbian Bank and Trust Company’s financial difficulties in the midst of the economic crisis in 2008. After a bank examination, the FDIC determined that the Bank had engaged in unsafe and unsound practices. The Bank entered into a consent order with the FDIC, under which the Bank agreed to cease and desist engaging in unsafe and unsound practices. The Bank also was required to submit various documentation to the FDIC and the state banking commission. Although the Bank complied with the conditions of the consent agreement, the state commission nevertheless declared the Bank insolvent, seized its assets, and appointed the FDIC as receiver. On the same day, the FDIC sold the Bank’s assets in a prearranged sale.

The Bank did not obtain a hearing with the state banking commission until after the seizure and sale of its assets. As a result, the Bank filed a petition for review in state court. While the state court action was working through the appellate system, the Bank filed a federal civil rights lawsuit alleging that the state banking commission and its officials violated the Bank’s constitutional right to due process. The federal district court dismissed the action for several reasons, including a finding that the commission officials were entitled to immunity.

The Bank appealed the dismissal to the Tenth Circuit court of appeals, which affirmed the finding of immunity. The Tenth Circuit explained that the commission officials were immune from a civil rights lawsuit because they did not violate a “clearly established” right. In so holding, the court noted that Supreme Court precedent supported seizure of assets without a prior hearing when three circumstances exist: (1) the seizure “is directly necessary to secure an important governmental or general public interest”; (2) there is a “special need for prompt action”; and (3) the government keeps strict control over its power and that power is exercised under a narrowly drawn statute. The court concluded that the state banking commission officials “could reasonably conclude that these factors would allow the seizure of bank assets without a prior hearing.” Thus, the court determined that “[t]he seizure of the bank’s assets and the appointment of the FDIC as receiver without a prior hearing did not violate a clearly established constitutional right.”

The court of appeals sent the case back to the trial court to resolve some remaining issues. But this case makes clear that banks should expect a hearing before a state banking commission declares the bank insolvent. Even if a bank complies with the terms of a consent agreement, a state banking agency and the FDIC may seize and sell assets without a hearing.

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