BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM OF THE UNITED STATES OF AMERICA, PETITIONER V. MCORP FINANCIAL, INC., ET AL. No. 90-913 In The Supreme Court Of The United States October Term, 1990 The Solicitor General, on behalf of the Board of Governors of the Federal Reserve System of the United States of America, respectfully petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Fifth Circuit in this case. Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Fifth Circuit PARTIES TO THE PROCEEDING In addition to the parties named in the caption, MCorp and MCorp Management were plaintiffs in the district court and appellees in the court of appeals. The Official Creditors' Committee of MCorp, MCorp Financial, Inc., and MCorp Management was an intervenor in the district court and an appellee in the court of appeals. TABLE OF CONTENTS Questions Presented Parties To The Proceeding Opinions below Jurisdiction Statutory and regulatory provisions involved Statement A. The statutory and regulatory scheme B. The proceedings in this case C. The court of appeals decision Reasons for granting the petition Conclusion OPINIONS BELOW The opinion of the court of appeals (App., infra, 1a-26a) is reported at 900 F.2d 852. The opinion of the district court (App., infra, 29a-48a) is reported at 101 Bankr. 483. JURISDICTION The judgment of the court of appeals was entered on May 15, 1990. A petition for rehearing was denied on August 6, 1990. App., infra, 27a-28a. On October 22, 1990, Justice Scalia extended the time within which to file a petition for a writ of certiorari to and including December 10, 1990. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTORY AND REGULATORY PROVISIONS INVOLVED Pertinent sections of the Bank Holding Company Act of 1956 (12 U.S.C. 1842(a), 1842(c), 1844) are reprinted at App., infra, 49a-55a. Pertinent sections of the Financial Institutions Supervisory Act of 1966 (12 U.S.C. 1818), as amended by Section 902 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, are reprinted at App., infra, 55a-70a. Sections 908 and 910 of the International Lending Supervision Act of 1983 (12 U.S.C. 3907, 3909) are reprinted at App., infra, 70a-72a. Pertinent sections of Federal Reserve Board regulations, 12 C.F.R. Part 225, are reprinted at App., infra, 72a-75a. QUESTIONS PRESENTED 1. Whether despite the express limitation of 12 U.S.C. 1818(i)(1), the district court may invoke Leedom v. Kyne, 358 U.S. 184 (1958), to exercise jurisdiction over a bank holding company's claim that the Federal Reserve Board lacked statutory authority to file administrative charges enforcing its "source of strength" regulations. 2. Whether the Federal Reserve Board has statutory authority to promulgate and enforce its "source of strength" regulations, which make bank holding companies responsible for maintaining adequate capitalization of subsidiary banks. STATEMENT A. The Statutory and Regulatory Scheme 1. Congress has vested the Board of Governors of the Federal Reserve System with substantial supervisory authority over the formation, structure, and operation of bank holding companies, i.e., any company that has direct or indirect control of any bank. 12 U.S.C. 1841(a)(1). The Board exercises such authority under three related statutory schemes, the Bank Holding Company Act of 1956 (BHCA), 12 U.S.C. 1841 et seq., the International Lending Supervision Act of 1983 (ILSA), 12 U.S.C. 3901 et seq., and the Financial Institutions Supervisory Act (FISA), 12 U.S.C. 1818, as amended by Section 902 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), Pub. L. No. 101-73, Tit. IX, 103 Stat. 450-451. Under the BHCA, a company may not acquire a bank without first obtaining the Board's approval. 12 U.S.C. 1842(a). In reviewing a company's application to buy a bank, the Board must consider, among other factors, "the financial and managerial resorces and future prospects of the company or companies and the banks concerned." 12 U.S.C. 1842(c); see Board of Governors v. First Lincolnwood Corp., 439 U.S. 234 (1978). The BHCA generally requires the company to limit its operations to banking activities and to other "nonbanking" activities that are closely related or incident to banking. 12 U.S.C. 1843; see also 12 C.F.R. 225.21-225.31. /1/ Under its supervisory power, the Board "from time to time may require reports (from) * * * and * * * may make examinations of each bank holding company and each subsidiary thereof." 12 U.S.C. 1844(c). The Board has authority to curtail a bank holding company's "nonbank" activities that pose risks to a bank's financial stability or are "inconsistent with sound banking principles or with the purposes of (the BHCA)." 12 U.S.C. 1844(e); see, e.g., Independent Ins. Agents v. Board of Governors, 890 F.2d 1275 (2d Cir. 1989), cert. denied, 111 S. Ct. 44 (1990). Under Sections 908 and 910 of ILSA, 12 U.S.C. 3907 and 3909, the Board regulates and enforces the capital adequacy of each holding company. Section 908 empowers the Board to establish minimum capital levels, 12 U.S.C. 3907(a), and provides that the failure of a holding company's insured bank to maintain these capital levels "may be deemed by the (Board), in its discretion, to constitute an unsafe and unsound practice within the meaning of (12 U.S.C. 1818)," 12 U.S.C. 3907(b)(1); see 12 U.S.C. 3909(a)(2). Moreover, ILSA provides that the Board may order holding companies to achieve required levels of capital where necessary to remedy unsafe or unsound banking practices. 12 U.S.C. 3909(a)(2); see 12 C.F.R. 263.35-263.40. Under FISA, the Board has authority to begin "cease-and-desist" proceedings against a bank holding company if, in the Board's view, the company "is engaging or has engaged" or the Board "has reasonable cause to believe that (the company) is about to engage, in an unsafe or unsound practice in conducting the business of such (company)." 12 U.S.C. 1818(b)(1); see 12 U.S.C. 1818(b)(3) (Board's authority under Section 1818(b) applies to "any bank holding company, and to any subsidiary (other than a bank) of a bank holding company"). After an administrative hearing, /2/ the Board may direct the holding company to "take affirmative action to correct the conditions resulting from any such violation or practice." 12 U.S.C. 1818(b)(1). As amended by Section 902 of FIRREA, FISA further provides that the Board's remedial powers include the authority to order the offending holding company to make restitution to subsidiaries, to dispose of a loan or asset, or to "take such other action as (the Board) determines to be appropriate." 103 Stat. 450-451 (to be codified at 12 U.S.C. 1818(b)(6)). In addition, under FISA, the Board has authority to issue a temporary cease-and-desist order -- without first holding a hearing -- if it finds that the unsafe or unsound practice "is likely to cause insolvency or substantial dissipation of assets or earnings of the bank, or is likely to seriously weaken the condition of the bank or otherwise seriously prejudice the interests of its depositors" before completion of administrative proceedings under Section 1818(b)(1). 12 U.S.C. 1818(c)(1). The Board's order under this provision may direct "affirmative action to prevent such insolvency, dissipation, condition, or prejudice pending completion of such proceedings." 12 U.S.C. 1818(c)(1). Such an order is effective immediately upon service and is enforceable by injunction in the appropriate United States District Court. 12 U.S.C. 1818(c)(1) and (d). FISA provides specific avenues for judicial review of matters involving the Board's enforcement actions. First, a bank holding company may petition for review of a final cease-and-desist order under the Administrative Procedure Act, 5 U.S.C. 701 et seq., in the appropriate United States Court of Appeals. 12 U.S.C. 1818(h)(2). /3/ Second, the United States District Courts have jurisdiction to issue an injunction "setting aside, limiting, or suspending" a temporary cease-and-desist order pending completion of the administrative enforcement proceedings. 12 U.S.C. 1818(c)(2). Third, upon the Board's application, the district courts have jurisdiction to enforce compliance with any notice or order issued under Section 1818. 12 U.S.C. 1818(i)(1). FISA, however, expressly bars federal courts from assuming jurisdiction to review or intervene in the Board's enforcement proceedings in any other manner or circumstance, stating that except as otherwise provided in (12 U.S.C. 1818) no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement of any notice or order under this section, or to review, modify, suspend, terminate, or set aside any such notice or order. 12 U.S.C. 1818(i)(1); see 12 U.S.C. 1818(h)(1). 2. As part of its supervision of bank holding companies' corporate practices, the Board's "source of strength" regulation generally provides that "(a) bank holding company shall serve as a source of financial and managerial strength to its subsidiary banks and shall not con(d)uct its operations in an unsafe or unsound manner." 12 C.F.R. 225.4(a)(1) (Regulation Y). The Board first articulated the policy reflected in that regulation in its case-by-case review of companies' applications to acquire banks. In reviewing these applications, the Board made clear that it would not approve bank acquisitions unless the prospective parent holding company would retain the ability to act as a source of financial and managerial assistance to its subsidiary banks, should the need for such assistance arise. /4/ And in First Lincolnwood Corp., 439 U.S. at 248, this Court upheld the Board's authority to disapprove the formation of a bank holding company on the basis of the grounds asserted in those administrative determinations, namely, the applicant's inability to act as a "source of strength" to subsidiary banks. In 1984, the Board codified the source of strength policy in its published regulations governing a holding company's corporate practices. See 49 Fed. Reg. 818, 820 (1984). As part of that codification, the Board explained that its source of strength regulation is derived from section 3(c) of the BHC Act (12 U.S.C. 1842(c)), which requires the Board to consider the financial and managerial resources and future prospects of the company and banks concerned; from section 5(b) of the BHC Act (12 U.S.C. 1844(b)), which authorizes the Board to issue regulations; and from the Board's authority under the Financial Institutions Supervisory Act to issue cease-and-desist orders to prevent unsafe or unsound banking practices (12 U.S.C. 1818(b)(1) and (3)). 48 Fed. Reg. 23,520, 23,523 (1983) (notice of proposed rulemaking). In 1987, the Board issued a formal statement clarifying its long-standing policy that bank holding companies should act as sources of strength to their subsidiary banks by "stand(ing) ready to use available resources to provide adequate capital funds to * * * subsidiary banks during periods of financial stress or adversity." Policy Statement; Responsibility of Bank Holding Companies to Act as Sources of Strength to Their Subsidiary Banks, 52 Fed. Reg. 15,707, 15,707 (1987). In support of that policy, the Board pointed out that a holding company derives financial benefits from ownership of institutions that can accept federally insured deposits, and reasoned that these commercial advantages create a correlative obligation to serve as sources of strength and support to subsidiary banks. Ibid. The Board also stated that bolstering a subsidiary bank's capital cushion promotes bank safety and public confidence, and reduces the federal deposit insurance fund's exposure to loss. Ibid. Accordingly, the Board stated that "(a) bank holding company's failure to assist a troubled or failing subsidiary bank * * * would generally be viewed as an unsafe and unsound banking practice or a violation of Regulation Y or both" that would result in an appropriate enforcement action. Id. at 15,707-15,708. B. The Proceedings in This Case 1. In October 1988, the Board issued a "notice of charges" under 12 U.S.C. 1818(b) against respondent MCorp, a bank holding company headquartered in Texas, and two of its subsidiaries, respondents MCorp Financial, Inc., and MCorp Management (collectively MCorp). MCorp owned 25 subsidiary banks, many of which were in deteriorating financial condition and could not meet the Comptroller of the Currency's requirements for minimally acceptable capital reserves. The Board alleged that MCorp was engaging in unsafe and unsound practices, likely to cause substantial dissipation of the assets of MCorp that could be used to allow MCorp to serve as a source of financial strength for the subsidiary Banks. App., infra, 2a; see id. at 31a. /5/ Accordingly, the Board notified MCorp of the convening of an administrative hearing to determine whether the company should be ordered to cease and desist from specified unsafe and unsound practices and to undertake appropriate remedial measures. In an amended notice filed a week later, the Board sought to require MCorp to implement() an acceptable capital plan that would ensure that all of MCorp's available assets are used to recapitalize the Subsidiary Banks that are suffering capital deficiencies. Id. at 2a. At the same time, the Board issued temporary cease-and-desist orders under 12 U.S.C. 1818(c)(1) that prohibited MCorp from dissipating its assets through dividend payments or unusual business transactions, and directed MCorp to identify those subsidiary banks that would receive capital infusions from MCorp's corporate assets and resources. See Order, In re MCorp, No. 88-062-C-HC (Fed. Res. Bd. Oct. 19, 1988); Amended Order, In re MCorp, No. 88-062-C-HC (Fed. Res. Bd. Oct. 26, 1988). The Board postponed resolution of the "source of strength" charges pending MCorp's attempt to secure "open bank" financial assistance from the Federal Deposit Insurance Corporation. See 12 U.S.C. 1823(c). In late March 1989, however, the FDIC denied MCorp's request, concluding that such financial assistance would not be in the public interest. 2. Soon after the FDIC's decision, three of MCorp's creditors filed an involuntary petition against MCorp in the United States Bankruptcy Court for the Southern District of New York. On March 28 and 29, 1989, the Comptroller of the Currency declared a total of 20 of MCorp's 25 subsidiary banks insolvent and, by operation of law, placed them under the receivership of the FDIC. On March 31, MCorp filed voluntary bankruptcy petitions in the United States Bankruptcy Court for the Southern District of Texas. App., infra, 2a-3a, 31a-32a. /6/ At this time, the Board issued a second notice of charges against MCorp. This notice alleged that MCorp had violated Section 23A of the Federal Reserve Act, 12 U.S.C. 371c, which, among other things, imposes collateral requirements on extensions of credit by a subsidiary bank to a nonbank affiliate. /7/ And in late May 1989, the Board issued a second amended notice of charges (relating to the original October 1988 notice), alleging that MCorp had failed to act as a "source of strength" to its five remaining subsidiary banks. App., infra, 3a. 3. Before the Board held an administrative hearing on the outstanding charges, MCorp filed an adversary bankruptcy proceeding against the Board in the Southern District of Texas. MCorp sought a temporary restraining order and a preliminary injunction to prevent the Board from prosecuting its administrative charges and taking further actions against MCorp without prior approval of the bankruptcy court. On May 3, 1989, the bankruptcy court denied MCorp's request for temporary relief. App., infra, 3a. The Board then filed in the district court for the Southern District of Texas a motion to withdraw the reference of the adversary proceeding to the bankruptcy court. See 28 U.S.C. 157(d). The district court granted that motion on May 12, thereby agreeing to exercise jurisdiction over MCorp's request for injunctive relief. App., infra, 3a. On June 9, the district court granted MCorp's motion and issued a preliminary injuction against the Board's administrative enforcement proceedings. App., infra, 29a-48a. The court concluded that the express jurisdictional limitation contained in FISA, 12 U.S.C. 1818(i)(1) -- providing that "no court shall have jurisdiction to affect by injunction or otherwise the issuance or enforcement" of any Board order, except as set forth in the statute -- has "been overridden through control of the debtor's estate having been entrusted to the authority of the bankruptcy court." App., infra, 37a; see 28 U.S.C. 1334(d). Alternatively, the court determined that "the Board's generalized, diffuse interest in the holding company as well as the duplicative, distracting hearings militate for its being not exempt from the (automatic stay provisions of the Bankruptcy Code, 11 U.S.C. 362)." App., infra, 41a. /8/ C. The Court of Appeals Decision In May 1990, the Fifth Circuit vacated the injunction with respect to proceedings on the Board's Section 23A charges, /9/ but remanded with instructions to enjoin proceedings on the Board's source of strength charges because those "proceedings exceeded its statutory authority." App., infra, 2a. With respect to its jurisdiction, the court of appeals concluded that the plain language of Section 1818(i) deprives the district court of jurisdiction to enjoin the Board's administrative proceedings if the Board's actions do not exceed the authority Congress granted to it. App., infra, 11a. Nevertheless, citing Leedom v. Kyne, 358 U.S. 184 (1958) and circuit precedent, the court determined that (i)f the Board's proceedings exceed its statutory authority, we may review the Board's action * * * despite the jurisdictional bar of Section 1818; if the Board "was not acting within (the) authority granted by Congress, then 12 U.S.C. Section 1818(i) could not withdraw jurisdiction." App., infra, 11a (quoting Manges v. Camp, 474 F.2d 97, 99 (5th Cir. 1973)). Turning to the Board's "source of strength" proceedings, the court of appeals rejected the argument that MCorp may not challenge the Board's authority because it has not exhausted its administrative remedies. In the court's view, "(t)he sole question presented is a legal one * * * (and that) legal issue * * * can be resolved without further factual development." App., infra, 14a-15a. On the merits, the court acknowledged that, under 12 U.S.C. 1842(c), the Board has "authority to consider financial and managerial soundness of subsidiary banks (when deciding whether) to grant or deny a holding company's application." App., infra, 20a (citing First Lincolnwood Corp., supra). But the court concluded that the BHCA "does not grant the Board authority to consider the financial and managerial soundness of the subsidiary banks after it approves the application." App., infra, 20a. Accordingly, the court held that "the Board is without authority under the BHCA to require (MCorp) to transfer its funds to its troubled subsidiary bank." App., infra, 21a. /10/ The court of appeals also rejected the Board's contention that "MCorp's failure to provide capital to its subsidiary banks is an unsafe or unsound practice which the Board may act to restrain under (FISA, 12 U.S.C. 1818)." App., infra, 21a. Applying the framework established by Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the court determined that "Congress has not spoken clearly to what constitutes an unsafe or unsound practice, leaving the development of the phrase to the regulatory agencies." App., infra, 22a. The court therefore examined the "reasonableness" and "permissibility" of the Board's construction of that phrase, i.e., that a "failure of the holding company to inject capital into subsidiary banks is an 'unsafe or unsound' practice." App., infra, 22a. In the court's view, "(e)nforcement of the Board's source of strength regulation * * * can hardly be considered a 'generally accepted standard() of prudent operation.'" App., infra, 23a (quoting 112 Cong. Rec. 26,474 (1966), cited in Gulf Federal Savings & Loan Ass'n v. Federal Home Loan Bank Bd., 651 F.2d 259, 264 (5th Cir. 1981), cert. denied, 458 U.S. 1121 (1982)). Not only would such a transfer of funds require a holding company such as MCorp "to disregard its own corporation's separate status," that transfer also "would amount to a wasting of the holding company's assets in violation of its duty to shareholders." App., infra, 23a. Moreover, the court stated that the Board's regulations conflict with "one of the fundamental purposes of the BHCA," namely, "to separate banking from commercial enterprises," since those regulations would permit the Board "to treat a holding company as merely an extension of its subsidiary bank." App., infra, 23a. /11/ Accordingly, the court concluded that the Board's determination that the holding company's failure to transfer its assets to a troubled subsidiary was an "unsafe or unsound practice" under Sections 1818(b) (1) and (3) is an unreasonable and impermissible interpretation of that term. App., infra, 25a. /12/ REASONS FOR GRANTING THE PETITION In striking down the Federal Reserve Board's source of strength policy, the court of appeals has invalidated a longstanding, frequently invoked, and critically important federal regulatory tool for safeguarding the stability of the Nation's banking institutions. The decision below rests on a flawed construction of the interrelated statutory schemes Congress established in the Bank Holding Company Act, the Financial Institutions Supervisory Act, and the International Lending Supervision Act, to empower the Board to supervise bank holding companies' activities regarding subsidiary banks. Such a substantial narrowing of the Federal Reserve Board's authority in this important regulatory arena calls for this Court's review. Moreover, the court of appeals effectively reached out to nullify the Board's policy by misappropriating jurisdiction under the doctrine set forth in Leedom v. Kyne, 358 U.S. 184 (1958). Such an exercise of jurisdiction -- in the face of the express preclusion provision of 12 U.S.C. 1818(i)(1) -- conflicts with this Court's decision in Leedom v. Kyne, and the decisions of other courts of appeals applying Leedom. In view of the substantial importance of the federal banking policy at stake, and the court of appeals' misuse of Leedom v. Kyne to circumvent the exclusive judicial review provisions crafted by Congress in FISA, further review by this Court is plainly warranted. 1. The court of appeals -- by striking down the "source of strength" policy -- has stripped the Federal Reserve Board of a critically important enforcement tool for safeguarding the stability of the Nation's banking institutions. Since enactment of the Bank Holding Company Act of 1956, the Board has frequently relied on the source of strength policy to bolster the capital reserves of weakened subsidiary banks, principally by initiating negotiations and other informal supervisory actions to obtain bank holding companies' cooperation in ensuring that banking subsidiaries remain adequately capitalized. Since the policy was first articulated, the Board -- without resort to formal administrative proceedings -- has managed to obtain hundreds of voluntary agreements, consent cease-and-desist orders, and memoranda of understanding that have required bank holding companies to inject capital into financially troubled subsidiaries. /13/ The decision below, however, has now undermined the Board's legal authority to back these informal negotiations with the power to enforce its stated regulatory policies. As such, it casts considerable uncertainty over the Board's ability to secure holding companies' agreements to maintain the capital adequacy of subsidiary banks. That uncertainty is particularly daunting today in light of the concentration of assets controlled by bank holding companies. As of 1990, holding companies controlled over 8,800 banks and 92 percent of the assets of all insured commercial banks in the country. See Board of Governors of the Federal Reserve System, 76th Annual Report, 1989, at 170-171. The failure of even a small fraction of these subsidiary banks would undermine the stability of the banking system and drastically overburden the already strapped federal banking insurance system. /14/ Indeed, the FDIC's plan to rescue those MCorp subsidiary banks that have already failed is alone expected to cost the insurance system $2 billion, making the plan the second most expensive bank rescue ever undertaken. Absent recourse to the Board's source of strength policy, there are no alternative regulatory means of effectively redressing the substantial problems posed by inadequately capitalized subsidiary banks. The Comptroller of the Currency can issue capital directives instructing troubled subsidiary banks to obtain new financing. See 12 U.S.C. 3907(b)(2); 12 C.F.R. 3.15-3.21. But in the Board's experience, it is virtually impossible to persuade new investors to make minority position investments in weakened banks controlled by other, independent interests represented by bank holding companies, particularly where the holding companies themselves are unwilling to support their subsidiaries. Under the "cross-guaranty" provisions of Section 206(e) of FIRREA, Tit. II, 103 Stat. 201 (to be codified at 12 U.S.C. 1818(e)), the FDIC can now order subsidiary banks to pay for losses incurred by the FDIC in disposing of failed banks within multibank holding company systems. These provisions, however, fall short of the Board's more potent authority under the source of strength regulations. The newly enacted cross-guaranty provisions do not authorize enforcement steps to be taken against the solvent holding companies themselves, and do not even come into play unless there has been a default or an imminent danger of collapse. The regulatory vacuum created as a result of the court of appeals' decision poses substantial risks for the stability of the Nation's banking system. Once bank holding companies choose to abandon troubled subsidiaries, the holding companies have strong incentives to transfer valuable business operations and assets elsewhere, thereby further weakening the subsidiaries, increasing the likelihood of insolvency, and ultimately exposing the banking insurance fund to additional liabilities. Indeed, absent the source of strength regulations, bank holding companies could -- subject to statutory limits on inter-affiliate transactions -- routinely draw profits away from subsidiary banks in good years, but then allow them to slip unaided into insolvency in lean years. The court of appeals' decision could thus create an incentive for holding companies to maximize the short-term, cyclical profits of their subsidiary banks, regardless of risk, because the bank insurance fund -- not the parent holding companies -- would ultimately bear the costs if the subsidiaries later fail. We recognize that the Fifth Circuit is the first court of appeals to consider the validity of the Board's source of strength policy. Nonetheless, the decision below will likely have nationwide significance. According to statistics compiled by the Board, the number of national bank failures in the States that comprise the Fifth Circuit -- Texas, Louisiana, and Mississippi -- accounted for 62.7% of all bank failures in the United States in 1988, 76% of all bank failures in 1989, and 68.7% of all bank failures in 1990. On this issue, the Fifth Circuit is where the action is. Moreover, the General Accounting Office has recently notified Congress that the banks in the greatest danger of failing remain concentrated in, among other areas, the Southwest. General Accounting Office, Bank Insurance Fund 4 (1990). In other words, the court of appeals' decision divests the Federal Reserve Board -- the principal regulator of bank holding companies -- of the power to enforce capital standards on companies located in that part of the country where the threat to bank stability remains substantial and where additional capital infusions will most likely be needed. 2. The Fifth Circuit should not have even have had the opportunity to err. In reaching the issue of the validity of the Board's source of strength regulations, the court of appeals misapplied the doctrine set forth in Leedom v. Kyne, 358 U.S. 184 (1958), to exercise jurisdiction despite FISA's explicit preclusion provision, 12 U.S.C. 1818(i)(1). The Fifth Circuit's misapplication is not only fundamentally inconsistent with this Court's decision in that case, it also conflicts with decisions from other circuits properly construing Leedom's reach. /15/ a. In Leedom, union representatives challenged a National Labor Relations Board order including both professional and nonprofessional employees within the same collective bargaining unit without the professional employees' consent. 358 U.S. at 186. This Court held that although the bargaining unit certifications were not reviewable final orders under the National Labor Relations Act, the district court nonetheless had jurisdiction to consider the union's challenge. Id. at 191. The Court explained that that lawsuit was not one to "review," in the sense of that term as used in the (National Labor Relations) Act, a decision of the Board made within its jurisdiction. Rather it is one to strike down an order of the Board made in excess of its delegated powers and contrary to a specific prohibition in the Act. Id. at 188. The Court noted that it could not "lightly infer that Congress does not intend judicial protection of rights it confers against agency action taken in excess of delegated powers." Id. at 190. As a result, the Court concluded that, despite the governing statute's failure to provide for judicial review, Congress intended that the statutory rights violated by the NLRB remain judicially enforceable through the general jurisdiction of the federal courts. Id. at 190-91. b. This Court has emphasized "the painstakingly delineated procedural boundaries of (Leedom v. Kyne)," making plain that the "Kyne exception (to statutory judicial review provisions) is a narrow one." Boire v. Greyhound Corp., 376 U.S. 473, 481 (1964); see Brotherhood of Ry. & S.S. Clerks v. Association for the Benefit of Non-Contract Employees, 380 U.S. 650, 660 (1965). The court of appeals' invocation of Leedom -- on the record presented here -- ignores the Court's limitations in several critical respects. First, Leedom neither held nor suggested that federal courts could invoke their "general jurisdiction" to review agency action, particularly where, as here, the governing statute itself provides an exclusive avenue of review that affords a full and complete means of securing judicial vindication of statutorily created rights. Leedom's jurisdictional holding was largely predicated on the fact that the union had no other effective means of obtaining judicial review and thus would have been left without any judicial remedy for a right created by Congress. 358 U.S. at 190-91; see id. at 197 (Brennan, J., dissenting). This Court has recognized that where Congress has provided an avenue of judicial review, that avenue must be followed; as a result, claims of unlawful agency action must be resolved in the manner, time, and forum ordained by Congress. E.g., Whitney Nat'l Bank v. Bank of New Orleans & Trust Co., 379 U.S. 411, 419-423 (1965). For that reason, the courts of appeals -- contrary to the decision below -- have consistently rejected invocation of jurisdiction under Leedom v. Kyne where Congress has provided adequate, alternative means of judicial review of agency action. /16/ Here, Congress has certainly provided companies in MCorp's position an adequate means of obtaining judicial review over any question pertaining to an exercise of the Board's regulatory enforcement power or authority that has binding legal effect. The court of appeals was thus wrong to label 12 U.S.C. 1818(i)(1) a "jurisdicitional bar." App., infra, 11a. Rather, that statute provides only that no court shall have jurisdiction to affect any notice or order issued under FISA, "except as otherwise provided in (12 U.S.C. 1818)." 12 U.S.C. 1818(i)(1) (emphasis added). And 12 U.S.C. 1818(h)(2) expressly provides that any party subject to an order issued after a final decision under FISA may petition for review of that order in the appropriate United States Court of Appeals; the court of appeals then has exclusive jurisdiction to "affirm, modify, terminate, or set aside, in whole or in part, the order of the agency." 12 U.S.C. 1818(h)(2). The court of appeals' misuse of jurisdiction under Leedom v. Kyne thus circumvents the otherwise fully adequate scheme of judicial review Congress provided in FISA. Second, this Court has stressed that jurisdiction under Leedom v. Kyne may not be invoked merely to "review" agency action. Rather, such an exercise of jurisdiction is appropriate only where necessary to remedy action that is manifestly beyond the agency's delegated authority and thus in excess of the agency's jurisdiction. E.g., Brotherhood of Ry. & S.S. Clerks, 380 U.S. at 659; Boire v. Greyhound, 376 U.S. at 481; Leedom v. Kyne, 358 U.S. at 188. The decision below brushed aside this limitation. Here, the court of appeals acknowledged that the Board's authority to promulgate and enforce its source of strength regulations ultimately turned on application of the framework set forth in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). App., infra, 21a-22a. But the very existence of such an issue under the Chevron framework presupposes that Congress has not spoken to the precise issue at hand, and that the agency therefore has the jurisdiction and delegated authority to construe the meaning of the statutory provision. /17/ For that reason alone, invocation of Leedom v. Kyne is particularly inappropriate and amounts to wholesale circumvention of the congressional scheme for obtaining judicial review of final agency action. Finally, since jurisdiction under Leedom v. Kyne is, as this Court recognized, exercised only to prevent an agency's ultra vires action from destroying otherwise legally cognizable rights, 358 U.S. at 190, such jurisdiction must be predicated on agency action that has binding legal effect on the aggrieved party. The court of appeals, however, jumped the gun and misapplied Leedom in the absence of legally binding agency action. In this case, the Board has only filed notices of charges and initiated administrative proceedings; the Board has neither found that MCorp violated any federal law or regulation, nor has the Board issued a final cease-and-desist order directing MCorp to take any corrective measures. The Board's preliminary steps are not the sort of final agency actions that constitute cognizable legal injury otherwise subject to judicial review. See Federal Trade Comm'n v. Standard Oil Co., 449 U.S. 232 (1980). And in the absence of such an injury, Leedom v. Kyne offers scant support for federal courts to interfere with ongoing administrative proceedings, particularly where, as here, the lawfulness of such proceedings is fully reviewable upon issuance of a final agency decision (and where the statute, by precluding other avenues of judicial review, effectively calls for the exhaustion of administrative remedies). /18/ 3. In invalidating the source of strength regulations, the court of appeals misconstrued the Federal Reserve Board's statutory authority, derived from the Bank Holding Company Act, the Financial Institutions Supervisory Act, and the International Lending Supervision Act, to supervise bank holding companies' activities that may adversely affect bank safety. The decision below is inconsistent with Congress's delegation of supervisory power to the Board and threatens to restrict the Board's delegated authority to exercise continuing control and supervision of bank holding company practices that impair the stability of the Nation's banking system. a. Turning to the Board's authority under FISA, the court of appeals correctly recognized -- as a threshold matter -- that "Congress has not spoken clearly to what constitutes an unsafe or unsound practice, leaving the development of the phrase to the regulatory agencies." App., infra, 22a; accord Investment Co. Inst. v. FDIC, 815 F.2d 1540, 1550 (D.C. Cir.), cert. denied, 484 U.S. 847 (1987). /19/ Consequently, the Board's conclusion that failure to act as a source of strength to subsidiary banks constitutes an unsafe or unsound practice must be upheld unless it is an unreasonable or impermissible construction of the statute. Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. at 844. Contrary to the court of appeals' restrictive analysis, the Board's source of strength policy is a reasonable and sound interpretation of its statutory duty under FISA to compel bank holding companies to cease and desist from "unsafe or unsound (banking) practices." 12 U.S.C. 1818(b)(1) and (3). First, the legislative record surrounding FISA's cease-and-desist authority shows that Congress intended to empower the Board to rectify bank holding company practices that adversely affect the safety and stability of subsidiary banks. As originally enacted in 1966, FISA's authority to remedy unsafe banking practices did not extend to bank holding companies. In 1974, however, Congress expressly brought bank holding companies within the reach of this regulatory power. See Act of Oct. 28, 1974, Pub. L. No. 93-495, Tit. I, Section 110, 88 Stat. 1506 (codified at 12 U.S.C. 1818(b)(3)). In reporting out this legislation, the Senate Banking Committee explained that it believes that the principal concern of the Federal supervisory agencies in discharging their responsibilities under the Federal law should be with the soundness of affiliated financial institutions. It is clearly in the public interest that these institutions remain sound and viable whether operated independently or as part of a holding company system. The cease and desist authority that the Committee recommends will, among other things, help prevent or terminate practices which might result in significant damage to depositors or to public confidence in the financial system. S. Rep. No. 902, 93d Cong., 2d Sess. 10 (1974). Accordingly, the Board has acted well within its delegated authority in defining an unsafe bank holding company practice with reference to its impact on affiliated banks. Second, the Board has reasonably determined that bank holding company activities (or failures to take steps) that allow subsidiary banks' capital reserves to fall below minimally acceptable standards constitute unsafe or unsound banking practices within the meaning of FISA, 12 U.S.C. 1818(b). Subsidiary banks' safety and stability depend, in large measure, on their capital position. And as this Court has pointed out, "Congress has long regarded capital adequacy as a measure of bank safety." First Lincolnwood Corp., 439 U.S. at 250. For that reason, in ILSA, Congress has authorized the Board -- and other federal banking regulatory agencies -- to establish minimum capital levels for the banking institutions under their supervision. See 12 U.S.C. 3907(a). Indeed, Congress has made plain that (f)ailure of a banking institution to maintain capital at or above its minimum level * * * may be deemed by the appropriate Federal banking agency, in its discretion, to consitute an unsafe and unsound practice within the meaning of (FISA, 12 U.S.C. 1818). 12 U.S.C. 3907(b). Third, nothing in FISA precludes the Board from determining -- as a matter of sound federal banking policy -- that bank holding companies, despite their legal status as separate corporate entities, must ultimately remain accountable for the capital adequacy of their subsidiary banks. Had Congress intended that the Board uniformly observe a rigid distinction between holding companies and subsidiary banks, Congress assuredly would not have vested the Board with the power, under FISA, to rectify holding company practices that adversely affect bank safety. Moreover, the strict separation of corporate entities demanded by the court of appeals' reasoning, see App., infra, 23a-25a, is belied by the economic realities of holding company operations. A holding company's subsidiary banks are -- by definition -- under the holding company's ownership or control. As expert observers have pointed out, a bank holding company, in some respects, functions as a single economic entity. /20/ The holding company may well be separately incorporated, but that separate corporate status does not prevent it from deriving considerable economic benefits from its subsidiary banks. Indeed, the holding company derives distinct commercial advantages from control of institutions that, through their power to accept federally insured deposits, have the ability to attract capital and to make profitable loans and investments. The Board's source of strength policy insures that the relationship between the holding company and its banks does not become a one-way street permitting the holding company to derive the full benefit of federal deposit insurance and to maximize its own economic advantage without imposing correlative obligations to preserve bank safety or to prevent injury to depositors and the federal insurance system. b. The Bank Holding Company Act -- particularly its provision empowering the Board to consider the "future prospects" of subsidiary banks when approving acquisitions, 12 U.S.C. 1842(c) -- further supports the Board's source of strength regulations. In First Lincolnwood Corp., 439 U.S. at 250-252, this Court held that Section 3(c) of the BHCA, 12 U.S.C. 1842(c), authorizes the Board, when reviewing a proposed bank acquisition, to consider whether a holding company can act as a source of strength to a subsidiary bank. Here, the court of appeals, in light of First Lincolnwood, limited the reach of Section 1842(c) to the acquisition stage. See App., infra, 18a-21a. That limitation is at odds with the statutory scheme of the BHCA, which vests the Board with broad powers to regulate holding companies' ongoing banking practices. First, unless the Board can impose on holding companies a continuing obligation to act as sources of strength to subsidiary banks, the Board's undisputed power under Section 1842(c) to consider holding companies' resources when reviewing bank acquisitions would have virtually no impact on bank safety. /21/ Such a state of affairs would be inconsistent with the mandate of Section 1842(c) that requires the Board to consider the "future prospects" of banks that may come under the holding company's control. Indeed, the Board's express statutory power to base the approval of a bank acquisition on the holding company's ability to protect the capital position of a proposed subsidiary would be nullified if the holding company has no continuing obligation to fulfill that requirement once the bank acquisition is completed. /22/ Second, the entire statutory scheme of the BHCA governing the Board's authority over holding companies reflects Congress's intent that the Board exercise ongoing supervisory powers over holding company operations that affect the stability of subsidiary banks. Accordingly, Congress gave the Board the power to examine the financial transactions and records of each holding company and subsidiary, see 12 U.S.C. 1844(c) -- a power this Court has characterized as "perhaps the most effective weapon of federal regulation of banking." United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 329 (1963). In addition, Congress authorized the Board to curtail holding companies' ability to engage in "nonbank" activities that pose risks to the financial stability of subsidiary banks. See 12 U.S.C. 1843, 1844(e). These statutory provisions -- among others /23/ -- show that Congress plainly intended to vest the Board with broad and substantial powers to regulate holding company practices that bear directly on the day-to-day integrity of banking subsidiaries. Cf. Toilet Goods Ass'n v. Gardner, 387 U.S. 158, 163 (1967). The Board's source of strength regulations thus further Congress's overarching objective of "assur(ing) that financial institutions are not endangered with respect to activities engaged in by parent holding companies." S. Rep. No. 902, supra, at 10. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted. KENNETH W. STARR Solicitor General STUART M. GERSON Assistant Attorney General JOHN G. ROBERTS, JR. Deputy Solicitor General MICHAEL R. LAZERWITZ Assistant to the Solicitor General ANTHONY J. STEINMEYER JEFFREY A. CLAIR Attorneys JAMES V. MATTINGLY, JR. General Counsel RICHARD M. ASHTON Associate General Counsel Board of Governors of the Federal Reserve System DECEMBER 1990 /1/ The BHCA empowers the Board to "issue such regulations and orders as may be necessary to enable it to administer and carry out the purposes of the (the Act) and prevent evasions thereof." 12 U.S.C. 1844(b). /2/ FISA and the Board's implementing regulations establish comprehensive procedures for exercising these enforcement powers. The statute requires sufficient notice to the holding company of the underlying charge, an evidentiary hearing before an independent presiding official, and a decision based on the hearing record. 12 U.S.C. 1818(b)(1), (b)(3), 1818(h). Board regulations further provide that the holding company may appear through counsel, compel the attendance of witnesses and the production of documents, adduce any relevant and material evidence, cross-examine adverse witnesses, and present its position through written submissions and oral argument. 12 C.F.R. 263.1 et seq. /3/ Once a petition for review is filed, FISA provides that the court of appeals' jurisdiction shall be "exclusive, to affirm, modify, terminate, or set aside, in whole or in part, the order of the agency." 12 U.S.C. 1818(h)(2). The sole exception to this exclusive jurisdiction is limited to instances where the Board, with the court's permission, modifies, terminates, or sets aside its order. See 12 U.S.C. 1818(h)(1) and (2). /4/ See, e.g., Citizens Bancorporation, 61 Fed. Res. Bull. 806, 806 (1975); Midwest Bancorporation, Inc., 56 Fed. Res. Bull. 948, 950 (1970); Mid-Continent Bancorporation, 52 Fed. Res. Bull. 198, 200 (1966). /5/ In particular, the Board alleged that it had reasonable cause to believe that MCorp will not take the actions that are necessary (1) to prevent the substantial dissipation of corporate assets through cash dividends, and (2) to maintain and prevent the dissipation of available resources at the parent company level that could be used, where appropriate, to make immediate capital injections into the Subsidiary Banks. Notice of Charges Paragraph 7(b), In re MCorp, No. 88-062-B-HC (Fed. Res. Bd. Oct. 19, 1988). In the amended notice of charges filed one week later, the Board also alleged that it had reasonable cause to believe that "MCorp will not take the actions that are necessary * * * to use all available resources to make immediate capital injections into the Subsidiary Banks." Amended Notice of Charges Paragraph 8(b), In re MCorp, No. 88-062-B-HC (Fed. Res. Bd. Oct. 26, 1988). /6/ The voluntary and involuntary bankruptcy proceedings were later consolidated in the Southern District of Texas. App., infra, 3a. /7/ In particular, the notice claimed that MCorp had caused two of its closed banks to lend $63.7 million to MCorp Management without requiring sufficient collateral. App., infra, 3a. /8/ Moreover, the court held that it had general equitable power under 11 U.S.C. 105 to enjoin the Board's proceedings that would threaten MCorp's assets or otherwise impede MCorp's reorganization. App., infra, 41a-42a. /9/ With regard to those proceedings, the court concluded that the Board has authority to regulate MCorp's relationships with former subsidiary banks. App., infra, 4a-11a. The court also concluded that the Board was "well within its authority in seeking an order against MCorp to cease and desist any transactions which violate the provisions of (Section 23A), or "'to take affirmative action' as may be appropriate." App., infra, 13a (quoting 12 U.S.C. 1818(b)(1)). /10/ The court suggested that the Board was not necessarily without an adequate alternative to its "source of strength" regulations. In its view, "(a)s a condition to approving an application, the Board could possibly require the holding company to agree to maintain the subsidiary banks to some degree of financial soundness." App., infra, 21a n.5 (noting similar practice of the Office of Thrift Supervision). /11/ In this regard, the court noted that Congress, in enacting and amending the BHCA in 1956 and 1966, "set forth detailed limits on transactions considered unsound between subsidiary banks and holding companies, without mentioning the infusion of capital by holding companies into subsidiaries." App., infra, 24a. /12/ On August 6, 1990, the court of appeals denied the Board's petition for rehearing and suggestion of rehearing en banc. App., infra, 27a-28a. On August 23, the court of appeals denied MCorp's motion for a stay of the mandate. On remand from the court of appeals, the district court recently entered an order enjoining the Board from, among other activities, prosecuting its outstanding source of strength administrative charges against MCorp. Injunction on Remand Paragraph 4, MCorp v. Board of Governors, No. H-89-1677 (S.D. Tex. Nov. 8, 1990). The Board's motion for a modification of that injunction is pending before the district court. MCorp, through the pending bankruptcy proceedings, is currently pursuing plans to sell each of its remaining five subsidiary banks. MCorp has executed contracts to sell three of those banks. None of those transactions has been closed; one of the contracts has not yet received the requisite approvals from either the bankruptcy court or the Comptroller of the Currency. /13/ The specific terms and underlying circumstances of these source of strength enforcement actions are often unreported. This state of affairs stems from the fact that those actions are informal and from the Board's previous policy of keeping the terms of recapitalization agreements confidential in order to prevent a loss of public confidence in the banking institution. The Board, however, has noted the use of these voluntary "source of strength" agreements in its annual reports on enforcement actions. See, e.g., 1989 Annual Report on Formal Enforcement Actions 15, 17; 1988 Annual Report on Formal Enforcement Actions 19; 1987 Annual Report on Formal Enforcement Actions 13; 1986 Annual Report on Formal Enforcement Actions 15; 1985 Annual Report on Formal Enforcement Actions 16. /14/ The General Accounting Office has recently reported to Congress that the federal bank insurance fund ended 1989 with a net loss of $852 million and that the ratio of the fund balance to insured deposits is at the lowest level ever recorded. See General Accounting Office, Bank Insurance Fund 5 (1990). /15/ Moreover, by authorizing the district court to broaden its injunction on remand -- in the absence of a cross-appeal filed by MCorp -- the court of appeals may well have exceeded its appellate jurisdiction. See United States v. American Ry. Express Co., 265 U.S. 425, 435 (1924). /16/ See, e.g., Telecommunications Research and Action Center v. FCC, 750 F.2d 70, 78 (D.C. Cir. 1984); Quivira Mining Co. v. EPA, 728 F.2d 477, 484 (10th Cir. 1984), cert. denied, 474 U.S. 1055 (1986); Compensation Dep't v. Marshall, 667 F.2d 336, 343-344 (3d Cir. 1981); Nor-Am Agricultural Products, Inc. v. Hardin, 435 F.2d 1151, 1159-1160 (7th Cir. 1970) (en banc), cert. dismissed, 402 U.S. 935 (1971); but see Greater Detroit Resource Recovery Auth. & Combustion Eng'g v. EPA, No. 88-2269 (6th Cir. Aug. 30, 1990), slip op. 11. /17/ See, e.g., K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 292-293 (1988); Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833, 844 (1986). /18/ As the court of appeals correctly determined, in the absence of jurisdiction under Leedom v. Kyne, 28 U.S.C. 1334 does not otherwise provide jurisdiction to review the Board's initiation of administrative proceedings MCorp. App., infra, 5a-11a. /19/ In considering FISA, Congress relied on the memorandum submitted by the then Chairman of the Federal Home Loan Bank Board, John Horne. Chairman Horne, in commenting on the proposed legislation, noted that the term "unsafe or unsound" practice would necessarily have a flexible application adapted to the circumstances of each case. 112 Cong. Rec. 26,474 (1966); see 112 Cong. Rec. 25,007-25,008 (1966). /20/ For example, the Chairman of the Federal Reserve Board recently told Congress: (T)he practical realities of the market place and the internal dynamics of a business organization under central direction drive bank holding companies to act . . . as one business entity, with the component parts drawing on each other for marketing and financial strength. Certainly, the market conceives of a bank holding company and its components in that way. And if market participants tend to consider the bank holding company as an integrated entity, problems in one part of the system will inevitably be transmitted to other parts. S. Rep. No. 19, 100th Cong., 1st Sess. 9 (1987); see also Mayne, New Directions in Bank Holding Company Supervision, 95 Banking L.J. 729, 730-732 (1978). /21/ To be sure, the court of appeals stated that "(a)s a condition to approving an application, the Board could possibly require the holding company to agree to maintain the subsidiary banks to some degree of financial soundness." App., infra, 21a n.5. The court's equivocal statement offers the Board little solace, since the Board -- under the court's holding -- would still lack any statutory basis for enforcing the source of strength policy against the thousands of banks that are already under holding company control. /22/ Although Section 1842(c), by its terms, does not empower the Board to consider the holding company's continuing compliance with the terms and conditions of the acquisition, the Board, under 12 U.S.C. 1844(b), has express authority to "issue such regulations and orders as may be necessary to enable it to administer and carry out the purposes of (the BHCA) and prevent evasions thereof" (emphasis added). Accordingly, the Board may reasonably regard a holding company's failure to adhere to the requirements governing its initial acquisition as an evasion of the purposes of the BHCA -- and evasion that is remediable as an unsafe and unsound banking practice under FISA, 12 U.S.C. 1818(b)(1). /23/ As mentioned above, under ILSA, the Board has authority to establish minimum capital requirements for holding companies where necessary to promote bank safety. See 12 U.S.C. 3907, 3909(a)(2); 12 C.F.R. 263.35-263.40. And under FISA, the Board can order holding companies to cease and desist from engaging in unsafe banking practices. See 12 U.S.C. 1818(b). APPENDIX