FDIC v. Wentz , 55 F.3d 905 ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
6-5-1995
FDIC v Wentz
Precedential or Non-Precedential:
Docket 94-5556
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Recommended Citation
"FDIC v Wentz" (1995). 1995 Decisions. Paper 155.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/155
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 94-5556
____________
FEDERAL DEPOSIT INSURANCE CORPORATION,
as Receiver for The Howard Savings Bank,
Appellee
v.
SIDNEY F. WENTZ; NATALIE I. KOETHER; WILLIAM E. MARFUGGI;
ROBERT M. KREMENTZ; J. ROBERT HILLIER,
Natalie I. Koether and
Sidney F. Wentz, Appellants
____________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
(D.C. Civ. No. 94-cv-03287)
____________
Argued April 20, 1995
Before: STAPLETON, HUTCHINSON, and WEIS, Circuit Judges
Filed June 5, 1995
____________
Laurence B. Orloff, Esquire (ARGUED)
Laura V. Studwell, Esquire
Orloff, Lowenbach, Stifelman & Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attorneys for Appellants
Jerome A. Madden, Esquire (ARGUED)
Ann S. DuRoss, Esquire
Richard J. Osterman, Jr., Esquire
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Attorneys for Appellee
____________
OPINION OF THE COURT
____________
WEIS, Circuit Judge.
In the course of its investigation of a failed
depository institution, the Federal Deposit Insurance Corporation
issued a subpoena to former directors of the bank directing them
to produce a wide variety of their personal financial records as
well as those of family members. The district court required the
directors to produce only their own records, showing additions or
reductions in their assets. Rejecting the directors' claims of
privacy violations, we will affirm the district court's order.
Natalie I. Koether and Sidney F. Wentz were directors
of The Howard Savings Bank of Livingston, New Jersey, which was
declared insolvent on October 2, 1992. On that same day, the
FDIC was appointed receiver.
In April 1993, the FDIC issued an "Order of
Investigation" pursuant to 12 U.S.C. § 1820(c) and 12 C.F.R.
§ 303.9(i)(2), targeting former officers and directors of the
bank. Four purposes were cited in the order: (1) determining
whether the individuals may be liable as a result of any action
or inaction that could have affected the bank; (2) assessing
whether the pursuit of litigation would be cost effective by
considering the ability of the individuals to satisfy a judgment;
(3) establishing whether the FDIC should seek to avoid transfers
of interests or incurrences of obligations; and (4) ascertaining
whether the FDIC should seek attachments of assets. The order
authorized FDIC representatives to issue subpoenas duces tecum.
The directors, together with other bank principals,
were served with notices to appear for depositions and ordered to
produce documents in some twenty-eight different categories
covering the six-year period preceding October 1992. Included
were records in their possession pertaining to bank operations.
In addition, the subpoena demanded production of such documents
as financial statements and credit applications of the directors
and their spouses; records of any bank accounts of the directors
and those maintained by "any member of [their] immediate
famil[ies]," including canceled checks and bank statements; tax
returns; title and registration papers for motor vehicles, boats,
and airplanes; pension and profit-sharing plans in which the
directors or their spouses had an interest; insurance policies;
and records of inheritance, and other such gifts received by the
directors and "any member of [their] immediate famil[ies]."
The directors timely complied with the requests for
documents having any connection with their activities as
officials of the bank, but refused to produce their personal
records and those of their families.
In seeking enforcement of the subpoena in the district
court, the FDIC presented the affidavit of James M. Judd, an
investigations specialist for the FDIC. It stated that the
documents were necessary to enable the FDIC to determine the
nature and extent of any losses sustained by the bank because of
negligence or breach of fiduciary duty by the directors, and to
establish whether it would be cost-effective to pursue any such
claims. The affidavit alleged that the directors had approved
transactions that resulted in losses of millions of dollars and
that the transactions "appear[ed] to exhibit inadequate
documentation, unsafe concentrations of credit, poor credit
administration, and inadequate supervision of management."
Finally, the affidavit asserted that the directors had been
"warned repeatedly" by bank examiners about lax business
practices at the bank, but that the deficiencies were not
corrected.
The district court conducted a hearing and, at its
conclusion, ordered the directors to produce all records that
demonstrated increases or depletions in, or transfers of, their
assets. As the judge explained,
"I do not sanction an inquiry whose sole
purpose is to find out whether these folks
have money to respond to a judgment, if one
should eventuate. . . . [M]y requirement of
document production . . . is narrow enough to
specifically address transfers or sudden
accretions or depletions of wealth. . . . I
feel that those purposes are reasonably
within the power of the FDIC, and I feel that
what I have ordered is a limited incursion
into the financial affairs that is tailored
to match up with the purposes that I have
articulated."
In a formal order filed a few days later, the court
denied the FDIC's request for enforcement of the subpoena duces
tecum, except that the directors were instructed to produce:
"(a) All documents which relate to any increases or
depletions of assets, or any transfer of assets, for the period
October 1986 through the date of this Order; and
(b) All financial statements prepared by
or on behalf of [the directors] from October
1986 through the date of this Order."
The court then granted a stay of its order pending resolution of
this appeal.
The directors now contend that (1) the FDIC's statutory
powers do not permit an unwarranted intrusion into their personal
affairs, (2) the subpoenas were issued for an improper purpose,
particularly in the context of "cost effectiveness" of potential
litigation that might be initiated by the FDIC, and (3) the
documents sought are not relevant. The directors also complain
that the FDIC offered no grounds for suspicion of wrongdoing to
justify issuance of a subpoena, and hence, it violates the Fourth
Amendment.
Preliminarily, we observe that the district court's
order substantially narrows the subpoena in two significant
aspects. First, the demand for production of documents of the
directors' spouses and immediate family members is no longer
effective. Second, the documents that the directors must produce
are limited to those pertaining to additions or diminutions of
their own assets.
As an appellate court, we will affirm an order
enforcing an agency's subpoena unless we conclude that the
district court has abused its discretion. NLRB v. Frazier, 966
F.2d 812, 815 (3d Cir. 1992). To determine whether there has
been an abuse of discretion, the reviewing court must consider
whether the district court's decision was based on irrelevant
factors or on clearly erroneous findings of fact, and whether
there has been a clear error of judgment. Id. "[T]he district
court's role is not that of a mere rubber stamp, but of an
independent reviewing authority called upon to insure the
integrity of the proceeding." Wearly v. FTC, 616 F.2d 662, 665
(3d Cir. 1980).
To obtain enforcement of an administrative subpoena,
the agency must show that the investigation will be conducted
pursuant to a legitimate purpose, that the inquiry is relevant,
that the information demanded is not already within the agency's
possession, and that the administrative steps required by the
statute have been followed. United States v. Powell, 379 U.S.
48, 57-58 (1964); United States v. Morton Salt Co., 338 U.S. 632,
652 (1950). The demand for information must not be unreasonably
broad or burdensome. United States v. Westinghouse Elec. Corp.,
788 F.2d 164, 166 (3d Cir. 1986).
It is not necessary, in most instances, that the agency
make a showing of liability before seeking to enforce a subpoena.
As the Supreme Court has observed, an agency "`can investigate
merely on suspicion that the law is being violated, or even just
because it wants assurance that it is not.'" Powell, 379 U.S. at
57 (quoting Morton Salt, 338 U.S. at 642-43). The subpoenaed
party bears the heavy burden of establishing an abuse of the
court's process. United States v. Cortese, 614 F.2d 914, 919 (3d
Cir. 1980).
When personal documents of individuals, as contrasted
with business records of corporations, are the subject of an
administrative subpoena, privacy concerns must be considered.
See Whalen v. Roe, 429 U.S. 589, 599 (1977). Thus, in United
States v. Westinghouse Elec. Corp., 638 F.2d 570, 578 (3d Cir.
1980), where a governmental agency sought production of employee
medical records, we listed as relevant factors such matters as
the type of record requested, the information that it might
contain, the potential for harm and subsequent nonconsensual
disclosure, the adequacy of safeguards to prevent unauthorized
disclosure, the degree of need for access, the specificity of the
agency's statutory mandate, and the presence of recognizable
public interests justifying access. See also In re McVane, 44
F.3d 1127, 1137 (2d Cir. 1995) (agency subpoenas directed at
individuals do implicate privacy rights); Resolution Trust Corp.
v. Walde, 18 F.3d 943, 948 (D.C. Cir. 1994) (same).
12 U.S.C. § 1818(n) supplies the FDIC with the power to
issue subpoenas duces tecum. The permissible purposes are set
out in 12 U.S.C. § 1821(d)(2)(I)(i) as "carrying out any power,
authority, or duty with respect to an insured depository
institution (including determining any claim against the
institution and determining and realizing upon any asset of any
person in the course of collecting money due the institution)."
The FDIC is empowered to avoid fraudulent asset transfers, 12
U.S.C. § 1821(d)(17), assert claims against directors and
officers, id. § 1821(k), and seek court orders attaching assets,
id. § 1821(d)(18).
Against this sweeping grant of power to the FDIC, we
consider the challenges mounted by the directors. As noted
earlier, the district court -- entertaining grave doubts about
the breadth of the subpoena, the relevance of documents of family
members, and the burdens of production imposed on the directors
-- substantially reduced the original scope of the subpoena. The
FDIC has not challenged the district court's order, and as the
record now stands, the directors object only to producing those
personal records that would show additions and subtractions to
their private assets.
In applying the factors we identified in
Westinghouse, 638 F.2d at 578, we observe at the outset that
there is a significant public interest in promptly resolving the
affairs of insolvent banks on behalf of their creditors and
depositors, many of whom have lost significant sums of money and
are often left with little hope for recovery. Personal financial
records have never been as tightly guarded as "information
concerning one's body." Id. at 577. Subpoenas and summonses of
the Internal Revenue Service requiring production of such records
have routinely been enforced. See, e.g., Pickel v. United
States, 746 F.2d 176, 184 (3d Cir. 1984).
The FDIC has shown a reasonable need for gaining access
to the directors' records in order to determine whether they
reveal breaches of fiduciary duties through the improper
channeling of bank funds for personal benefit. Moreover, the
directors have not produced any evidence to show that the
information contained in their personal financial records "is of
such a high degree of sensitivity that the intrusion could be
considered severe or that the [directors] are likely to suffer
any adverse effects from disclosure to [FDIC] personnel."
Westinghouse, 638 F.2d at 579. Finally, we observe that
regulatory provisions have been promulgated to guard against
subsequent unauthorized disclosure of the subpoenaed information.
See 12 C.F.R. pts. 309 & 310.
Accordingly, we conclude that the strong public
interest in safeguarding the FDIC's legislative mandate outweighs
the minimal intrusion into the privacy that surrounds the
directors' personal financial records and any accompanying
burdens of production.
In balancing competing interests in this case, we
cannot say that the district court abused its discretion in
concluding that the limited investigation it approved is relevant
to the proper functions of the FDIC. Without impugning in any
way the integrity of the directors, it must be observed that the
allegations of mishandling of certain loans by the bank furnishes
a proper basis for an investigation into (1) whether the
individuals might be liable, (2) whether there might be transfers
that should be avoided, or (3) whether the FDIC should seek
attachment of assets.
We do not resolve the directors' contention that the
FDIC must assert an articulable suspicion of liability before
pursuing an inquiry into the cost-effectiveness of potential
litigation against them. The directors rely heavily on McVane
and Walde. However, in McVane, the Court found an adequate basis
for enforcing the subpoena against directors even as to the cost-
effectiveness factor. Walde did sustain an objection to the
disclosure of personal records of certain directors for that
limited purpose, but we need not discuss that case further in
view of the fact that the district court's order here is
sustainable on any one of the FDIC's other three objectives.
The directors also contend that the district court's
order is too vague because, literally, a purchase of groceries
would be included within the scope of the subpoena as a depletion
of personal assets. At oral argument, counsel for the FDIC
suggested that this difficulty might be avoided by reading into
the order the $5,000 limitation on items stated in the subpoena
itself. That appears to us to be a reasonable reading of the
district court's order, but if it is not satisfactory to the
parties, they may request further clarification from the district
judge.
The order of the district court will be affirmed.