Michael v. Federal Deposit Insurance
687 F.3d 337
7th Cir.2012Background
- FDIC sought a prohibition order under 12 U.S.C. § 1818(e)(7) and civil penalties under § 1818(i) against the Michaels for insider violations, fiduciary breaches, and unsafe banking practices.
- ALJ conducted a six-day evidentiary hearing; the Board adopted the ALJ’s findings affirming removal and penalties.
- Citizens Bank, owned by the Michaels, was regulated under the FDIA; prior regulatory actions highlighted insider abuses and poor controls.
- Harvey Hospitality loan: inflated purchase price, self-dealing, and failure to disclose the Michaels’ interests violated Regulation O and fiduciary duties.
- Double pledging of certificate #3: duplicate collateral pledged to United Trust, with signs of culpable conduct and risk to the institution.
- Vogay/Vogay-loan for Irving property: nominee loan shielding Michaels’ benefit, with Michaels controlling rents and misrepresenting borrowers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Board properly issued prohibition and penalties | FDIC argues substantial evidence supports violations of Regulation O and fiduciary duties. | Michaels contend record credibility and legal standards do not justify removal or CMPs. | Yes; Board sanction upheld. |
| Harvey Hospitality transaction supports prohibition | Harvey loan violated Regulation O, breached fiduciary duty, and yielded tangible benefit to Michaels. | Michaels argue bona fide, arm’s-length lending and lack of improper influence. | Supported; constitutes improper act with improper effect and culpable state of mind. |
| Double pledging of stock certificate supports removal | Duplicative pledges created abnormal risk and evidenced willful disregard governing safeguards. | Michaels claim inadvertence; documents signed without awareness. | Supported; shows unsafe/unduly risky practices and culpable conduct. |
| Galioto-Irving property nominee loan supports removal | Vogay line used for Michaels’ benefit; nominee loan breached Regulation O and duties. | Michaels claim Galioto as independent borrower; limited involvement by Michaels. | Supported; Michaels were true borrowers and engaged in improper donor-like arrangement. |
Key Cases Cited
- Grubb v. FDIC, 34 F.3d 956 (10th Cir. 1994) (board deference; sanctions review)
- De La Fuente v. FDIC, 332 F.3d 1208 (9th Cir. 2003) (culpable state of mind; personal dishonesty)
- In re Seidman, 37 F.3d 911 (3d Cir. 1994) (duty of candor; disclosure obligations)
- Landry v. FDIC, 204 F.3d 1125 (D.C. Cir. 2000) (unsafe/unsound practice; risk and culpability)
- Hutensky v. FDIC, 82 F.3d 1234 (2d Cir. 1996) (personal dishonesty; conflicts of interest)