Banking Law

In October 2006, the FDIC filed an appeal of a decision by Houston federal district court judge Lynn Hughes to sanction the FDIC for over $72 million for its conduct in filing and pursuing litigation (and financing an administrative proceeding by the OTS) against MAXXAM, Inc. and its principal owner, Charles Hurwitz. The judges original decision was discussed in one of our earlier posts.

Last week, a three judge panel of the US Fifth Circuit Court of Appeals overturned a portion of Judge Hughes' decision and sent it back to the court for further determinations on damages. Basically, the Court of Appeals found that the FDIC's filing of the suit was not "frivolous or baseless," and the FDIC and OTS cannot be said to have pursued the suit solely for the purpose of having MAXXAM cough up some redwood forests in California (to appease environmental activists and their enablers in the Clinton administration). On the other hand, the appeals court agreed that the "able district court" had a reasonable basis for concluding that that the suit was pursued for an improper purpose, "in a manner calculated to increase the costs of the defense" and "in needless harassment and delay" designed to force a settlement that involved the forfeiture of the redwoods (and, presumably, the spotted owls that nested within them and other endangered fauna and flora). The Court of Appeals pruned over $56 million from the sanctions for the OTS proceeding and sent the case back down for a redetermination of the award with respect to the approximately $15 million in sanctions for the FDIC proceeding; however, the court upheld an award of almost $7 million for interest on the cost of attorneys fees as appropriate as part of the sanctions due to the delaying tactics of the FDIC.

This case appears to be classic evidence of the brilliance of the founding fathers' system of checks and balances on governmental power. An agency of the executive branch, the FDIC, goaded to litigate, against preliminary conclusions of litigation counsel, by pressure from political hacks from the congressional branch and at least one appointed agency leader, and aided by another agency, the OTS, (whose costs the FDIC reimbursed in order to force the defendants to fight a "two front war"), tried to strong arm a settlement out of the defendants by using scorched earth tactics. The defendants turned to the first line of defense, a tenured federal district court judge who, as we have previously noted, often seems to sit at the right of hand of God when it comes to earthly power. That judge  stops the litigation in its tracks (although it's interesting to note that the administrative judge in the OTS action also found that the claims of the OTS against the defendants were "without merit"). The federal district court judge, obviously outraged by the conduct of the FDIC, stretches his power to the limit (and beyond) in slapping sanctions on the FDIC, and makes what are entertaining (to us) remarks that can only be seen by cooler heads as being angry and, arguably, intemperate. Those cooler heads at the appellate level review the district court's findings and reign him in, at least to a substantial degree, where they believe he's gone too far, disallow a large chunk of the sanctions that they believe are not justified, uphold other damages that they believe are justified, and order him to reconsider some of the damages where they cannot determine how the dollars were apportioned between permissible and impermissible sanctions. If either party is dissatisfied, either now or after the further proceedings at the district court level, further appeals (or rehearings) are possible. In the end, notwithstanding the passions and other failings of the participants, no government official or group of officials gets to run around unchecked, lopping the heads off of villagers.

It is interesting that appellate decision contains this summary of the district court's findings:

...the district court found that the FDIC had acted in bad faith ? that its suit was part of a larger government conspiracy to extort the redwoods from Hurwitz. The court found that the Government pursued claims "like Soviet threats;" acted as a "secret society of extortionists;" filed "imaginary claims;" used "slander as legal leverage;" embodied the "progressive," bureaucratic "nightmare on 17th Street;" engaged in a personal vendetta against Hurwitz arising from ?bureaucrats? and their like-thinking co-conspirators? appreciation of a successful entrepreneur as the personification of what they opposed in America;" and fought a "political guerrilla war at the behest of interest groups and the administration." The court concluded that the FDIC?s employees, attorneys, and chairwoman who testified that the FDIC had a legitimate interest unrelated to the redwoods had all lied.

It's not entirely clear to me whether the appellate court included the inflammatory language because they agreed with it, got a kick out of it, thought it was wacky, or, like a recent Bud Light commercial, just wanted to follow it with a simple, "Dude!"

Predictably, both sides claimed victory, with Hurwitz and his lawyer asserting that the remaining sanctions "give the FDIC a black eye" (the FDIC uses plenty of pancake makeup, so black eyes don't bother it) and with the FDIC crowing that the decision "was a victory and vindication for the FDIC." The FDIC's spokesman's nose immediately grew to six feet, he toppled face forward, but barely moved an inch before springing backwards and knocking himself unconscious against the back wall. Inasmuch as the decision was a "victory and vindication for the FDIC," I was surprised to see that the FDIC is "considering its options." I guess that it's eager to snatch defeat from the jaws of "victory."

Black is white and day is night. Just ask the FDIC.

Judge Hughes gets another shot at "parsing the nuances" of sanctions. We'll see if he's toned down his rhetoric at the next hearing. If the FDIC keeps crowing publicly and preposterously that "the 5th Circuit clearly recognized the merits of the FDIC case," I expect that he can be goaded into some pronouncements that will make for some excellent future posts.