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Edgebrook Bank v. Federal Deposit Insurance Corporation

United States District Court, N.D. Illinois, Eastern Division

April 28, 2015

EDGEBROOK BANK, Plaintiff,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, Defendant.

MEMORANDUM OPINION AND ORDER

JOAN B. GOTTSCHALL, District Judge.

Dissatisfied with a temporary cease-and-desist order issued by the FDIC pursuant to 12 U.S.C. § 1818(c)(1), plaintiff Edgebrook Bank filed a motion for a temporary restraining order and preliminary injunction asking the court to set aside the FDIC's temporary cease-and-desist order or, alternatively, to modify and limit certain provisions in that order. As detailed below, the court believes that oral argument would help it resolve the Bank's challenge to the portion of the temporary cease-and-desist order regarding the Bank's call reports. Thus, the Bank's motion remains under advisement.

I. BACKGROUND[1]

Edgebrook is an Illinois state-chartered, FDIC-insured community bank based in

Chicago, Illinois. The FDIC is a federal agency of the United States and is the Bank's primary federal regulator.

A. The Notice of Charges

The Federal Deposit Insurance Act ("FDIA") authorizes the FDIC to institute an administrative cease-and-desist proceeding against a bank by serving the bank with a "notice of charges" alleging the bank has engaged in unsafe or unsound practices or violated a law, rule, regulation, or condition imposed by the FDIC. 12 U.S.C. § 1818(b)(1). The notice of charges must contain a statement of facts and set a time and place for a hearing that must occur within 60 days. Id. If the administrative law judge finds that "any violation or unsafe or unsound practice specified in the notice of charges has been established, " it may issue a cease-and-desist order. Id.

On March 19, 2015, the FDIC served Edgebrook with a notice of charges that commenced a formal administrative proceeding pursuant to 12 U.S.C. § 1818(b)(1). A copy of the notice of charges is attached to the complaint as Exhibit B. In sum, the notice of charges asserts that the quality of the Bank's loans (also known as "asset quality") is critically deficient, and that the Bank has engaged in a wide variety of "hazardous lending" practices, is operating with unacceptable concentrations in construction and restaurant loans with insufficient risk management controls for such loans, and lacks an adequate allowance for loan and lease loss reserves ("ALLL" reserves).[2] The notice of charges also asserts that the Bank has obfuscated its true financial condition by making new loans with terms that are unfavorable to the Bank for the purpose of refinancing troubled borrowers, and that the bank is "critically undercapitalized" as that term is used in the FDIA. See 12 U.S.C. § 18310; 12 C.F.R. § 325.103. (Compl. Ex. B, Dkt. 1-1.)

The Bank contends that the allegations in the notice of charges are based on an examination of its books and records as of September 30, 2014, and "even earlier." (Compl. ¶ 19, Dkt. 1.) It alleges that the FDIC has not asserted that the Bank has recently engaged in allegedly hazardous lending practices and has ignored "numerous actions that [it] has taken in recent months that have improved its condition and lending practices." (Id. ¶ 21.)

B. The FDIC's Temporary Cease-and-Desist Order

In addition to initiating administrative proceedings, the FDIA also authorizes the FDIC to seek a temporary cease-and-desist order. See 12 U.S.C. § 1818(c)(1). Specifically, if the FDIC has commenced administrative proceedings against a bank by serving a notice of charges, it can issue a temporary cease-and-desist order that is effective when it is served on a bank if the FDIC believes that "the violation or threatened violation or the unsafe or unsound practice or practices, specified in the notice of charges... is likely to cause insolvency or significant dissipation of assets or earnings of the depository institution, or is likely to weaken the condition of the depository institution or otherwise prejudice the interests of its depositors prior to the completion of the [administrative] proceedings." Id.

A temporary cease-and-desist order "may include any requirement authorized under subsection (b)(6) of this section." Id. Thus, the affected bank may be required to:

(A) make restitution or provide reimbursement, indemnification, or guarantee against loss if -
(i) such depository institution or such party was unjustly enriched in connection with such violation or practice; or
(ii) the violation or practice involved a reckless disregard for the law or any applicable regulations or prior order of the appropriate Federal banking agency;
(B) restrict the growth of the institution;
(C) dispose of any loan or asset involved;
(D) rescind agreements or contracts; and
(E) employ qualified officers or employees (who may be subject to approval by the appropriate Federal banking agency at the direction of such agency); and
(F) take such other action as the banking agency determines to be appropriate.

12 U.S.C. § 1818(b)(6).

On March 19, 2015 (the same day it served its notice of charges on the Bank), the FDIC served the Bank with a temporary cease-and-desist order. A copy of the order is attached to the complaint as Exhibit A. A bank served with a temporary cease-and-desist order may challenge that order by filing suit in the United States district court for the judicial district in which the home office of the depository institution is located or the United States District Court for the District of Columbia. 12 U.S.C. § 1818(c)(2). The court may grant injunctive relief "setting aside, limiting, or suspending the enforcement, operation, or effectiveness of [the temporary cease-and-desist] order ...


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