FDIC Asks Court to Dismiss Independence Bank Litigation
Agency says court lacks jurisdiction to hear case
Happy Basel Endgame (and long-term debt, and GSIB surcharge) comment letter deadline day to all. There will be a post later this week looking at some of the more interesting arguments in the letters. For now, though, an update on a strange dispute covered on this blog last year.
Independence Bank is a tiny nonmember bank with its only office in East Greenwich, Rhode Island.
In a complaint filed last October in federal court, Independence Bank declared that it has but one simple desire: to stop being a bank. In the bank’s telling, however, the Federal Deposit Insurance Corporation is standing in the way:
Independence Bank … has been unable, is still, and will continue to be unable to overcome a Kafka-esque nightmare of the FDIC’s design: it is requiring Independence to operate — despite the Bank’s stated intention to wind down its operations, surrender its banking charter and terminate its deposit insurance — for an indefinite, potentially infinite period of time until the FDIC in its apparently unfettered discretion determines that the Bank may cease operating.
This blog previously wrote about the case back in November. The story is difficult to summarize succinctly (as the meandering blog post linked in the previous sentence demonstrates), but this is a rough outline of the important facts:
Independence Bank, which opened for business in 2003, over the course of the 2010s found itself subject to increasingly severe enforcement actions, culminating in a 2019 consent order.
This 2019 consent order imposed growth restrictions on Independence Bank, both as a general matter and with respect to the bank’s SBA lending, in response to which the bank apparently ceased lending entirely.
The 2019 consent order also required Independence Bank to develop a new strategic plan for operation of the bank. This provision of the order has not been satisfied, and the order therefore remains outstanding.
In addition to its enforcement actions against the bank, the FDIC in February 2023 brought charges against two executives of Independence Bank and another individual who referred business to the bank.
The FDIC, which is seeking monetary penalties and to bar these three individuals from further work in the banking industry, alleges that these individuals engaged in various acts of misconduct in relation to the bank’s SBA lending activities between 2017 and 2019.
The individuals are contesting the charges and the matter has yet to be resolved.
The FDIC also, in November 2023, brought charges against Independence Bank in relation to some of the same misconduct at issue in the February 2023 charges against the individual executives.
The November 2023 charges seek the entry of a cease and desist order against the bank, including an order that the bank pay appropriate restitution.
At some point while all this was going on (the parties may disagree on the exact date1), Independence Bank’s leadership decided that the best course of action was for Independence Bank to repay its depositors, give up its charter and voluntarily liquidate.
It is here where the dispute at issue in this case comes in. Independence Bank in its complaint characterized the FDIC’s position as requiring, before the bank may liquidate, that the bank resolve all outstanding regulatory matters, most notably the 2019 consent order. Independence Bank further claims that the 2019 consent order is still open only because the FDIC has repeatedly rejected the bank’s strategic plan submissions under that order,2 driven by what the bank asserts is an “ongoing vendetta” seeking to “see the Bank bled dry of equity.”
Today was the deadline for the FDIC to respond to Independence Bank’s complaint.3 The FDIC’s response tells a slightly different story.
The FDIC’s Response
The FDIC does not dispute that it has objected, and continues to object, to Independence Bank’s plans to voluntarily liquidate.
But, the FDIC says, this is not because of a regulatory vendetta, but rather because allowing the bank to liquidate could jeopardize the FDIC’s ability to secure restitution for the small business customers that the FDIC believes Independence Bank has wronged.
The FDIC is IB’s primary federal regulator, and the agency has brought a pending administrative enforcement action against the Bank seeking restitution of an estimated $6.9 million payable to small business customers as a result of the Bank’s misconduct. In this lawsuit, however, IB seeks declarations authorizing it to exit the banking business, allowing it to self-liquidate over the FDIC’s objection. Permitting the Bank to liquidate and distribute its capital to shareholders would dissipate funds needed to resolve IB’s regulatory liabilities. Further, once IB loses its insured status, the FDIC will not have jurisdiction to maintain the enforcement proceeding at all, which would allow the Bank to escape its responsibility to pay restitution to customers harmed by violations of law.
A little later on, the FDIC elaborates by saying that the agency considered whether Independence Bank should be permitted to liquidate under Section 18(i)(3) of the Federal Deposit Insurance Act, which requires prior FDIC consent before any insured depository institution may convert into a noninsured institution. According to a copy of an FDIC board resolution attached as Exhibit A to today’s filing, the FDIC’s board of directors on December 5, 2023, consistent with staff recommendations, determined that Independence Bank does not meet the factors the FDIC must consider when evaluating a request under Section 18(i)(3):
[T]he FDIC must consider certain factors set forth in section 18(i)(4) of the FDI Act, 12 U.S.C. §1828(i)(4), in granting or withholding its consent for an institution to convert from insured to uninsured status. […]
[S]taff was able to recommend favorable findings with respect to the statutory factors of financial history and condition and future earnings prospects, but was unable to recommend that the FDIC Board find favorably with respect to four statutory factors: (1) the adequacy of the Bank’s capital structure, (2) the general character and fitness of Bank management, (3) the convenience and needs of the Bank’s community, and (4) whether the exercise of the Bank’s corporate powers is consistent with the purposes of the FDI Act. […]
[T]he FDIC Board, having reviewed the staff’s presentation and recommendations, and having considered the relevant statutes and regulations, along with other considerations, has found unfavorably with respect to the four statutory factors set forth above; […]
[I]n consideration of the unfavorable findings with respect to such statutory factors, the FDIC Board has determined to withhold its consent to the Bank’s conversion from insured to uninsured status until such time as the Bank (1) submits an acceptable strategic plan outlining how the Bank will address its outstanding regulatory issues, and (2) successfully resolves its outstanding obligations, including the estimated restitution to its customers
Because neither of those conditions have yet been met, the FDIC maintains that it cannot provide its consent under Section 18(i)(3) and therefore Independence Bank cannot be allowed to liquidate.
The FDIC says all this essentially by way of introduction. The FDIC’s legal argument in today’s motion is that, regardless of the merits (or not) of Independence Bank’s claim that the FDIC is being unfair in setting these barriers to a voluntary liquidation, the court does not have jurisdiction to decide the case:
Congress divested district courts of subject-matter jurisdiction to “affect by injunction or otherwise the issuance or enforcement of any [FDIC enforcement] notice or order . . . or to review, modify, suspend, terminate, or set aside any such notice or order.” 12 U.S.C. § 1818(i)(1). […]
Issuing the declaratory judgments IB seeks would “affect by injunction or otherwise” the enforcement proceeding. Because this Court is statutorily prohibited from issuing such relief, the case must be dismissed.
***
Independence Bank’s call report for the quarter ended December 31, 2023 has not yet been filed. In the most recent report we do have, for the quarter ended September 30, 2023, Independence Bank reported assets of a little over $28 million (almost entirely cash), around $5.6 million in deposits, around $1.7 million in other liabilities,4 and just over $21 million in total equity capital.
A response to the FDIC’s filing is due from Independence Bank by the end of January.
The complaint filed by Independence Bank last year suggests that it first decided to liquidate at least as early as 2022. See paragraph 21: “The Bank was granted non-objection by the FDIC to sell its entire loan portfolio to a third party in August 2022 in preparation for its anticipated voluntary liquidation by the end of that calendar year.”
The FDIC’s brief today does not respond directly to this claim, but says on page 5 that “In February of 2023, IB notified the FDIC that the Bank was interested in pursuing voluntary termination of its FDIC insurance under 12 U.S.C. § 1818(p).”
From the complaint:
Since entering the 2019 Consent Order, the Bank has submitted at least five (5) revisions to its Strategic Plan to the FDIC. Each subsequent submission has been revised to reflect and address all regulatory recommendations from the FDIC examiners and all comments from each prior FDIC visitation. . . . [E]ach time, the FDIC nonetheless objected to the strategic plan revisions.
The deadline for the RI DOB to respond was also today. The state regulator filed a short motion to dismiss for lack of standing, essentially arguing that, to the extent Independence Bank has any claim at all, it is only against the FDIC. The RI DOB also includes arguments as to why the court lacks subject matter jurisdiction with respect to the claim against the RI DOB, assuming for the sake of argument that Independence Bank does have standing.
According to Schedule RC-G on the call report, the bulk of these other liabilities consist of an unspecified contingent liability in the amount of $1.4 million.