No. 95-329 In the Supreme Court of the United States OCTOBER TERM, 1995 JOHN R. DOOLITTLE, PETITIONER v. NATIONAL CREDIT UNION ADMINISTRATION ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT BRIEF FOR THE RESPONDENT IN OPPOSITION DREW S. DAYS, III Solicitor General FRANK W. HUNGER Assistant Attorney General BARBARA C. BIDDLE EDWARD HIMMELFARB Attorneys Department of Justice Washington, D.C. 20530 (202) 514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether petitioner had notice and an opportunity to be heard regarding one of the administrative findings that was a prerequisite to the order barring him from further participation in the conduct of the affairs of a federally chartered or insured financial institution. (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinions below . . . . 1 Jurisdiction . . . . 1 Statement . . . . 2 Argument . . . . 5 Conclusion . . . . 9 TABLE OF AUTHORITIES Cases: Jameson v. FDIC, 931 F.2d 290(5th Cir. 1991) . . . . 7 Van Dyke v. Board of Governors, 876 F.2d 1377 (8th Cir. 1989) . . . . 7 Constitution, statutes and regulation: U. S. Const. Amend. v (Due Process Clause) . . . . 6 12 U.S.C. 1766 . . . . 2 12 U.S.C. 1786(g)(1)(A) . . . . 2, 4 12 U.S.C. 1786(g)(1)(B) . . . . 2-3, 8 12 U.S.C. 1786(g)(1)(B)(iii) . . . . 7 12 U.S.C. 1786(g)(1)(C) . . . . 3, 5 12 U. S.C. 1786(g)(2) . . . . 2 12 U.S.C. 1786(g)(4) . . . . 3 12 U.S.C. 1786(g)(7) . . . . 2 12 C.F.R. 702.3 . . . . 4 (III) ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1995 No. 95-329 JOHN R. DOOLITTLE, PETITIONER v. NATIONAL CREDIT UNION ADMINISTRATION ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT BRIEF FOR THE RESPONDENT IN OPPOSITION OPINIONS BELOW The opinion of the court of appeals (Pet. App. a3-a4) is unpublished, but the decision is noted at 48 F.3d 536 (Table). The earlier opinion of the court of appeals (Pet. App. a17-a32) is reported at 992 F.2d 1531. JURISDICTION The judgment of the court of appeals was entered on February 15, 1995. The petition for rehearing was denied on May 16, 1995 (Pet. App. a1-a2). The petition for a writ of certiorari was filed on August 14, 1995. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). (1) ---------------------------------------- Page Break ---------------------------------------- 2 1. The National Credit Union Administration (NCUA) Board is the independent federal agency that charters, insures, and regulates federal credit unions. Under the Federal Credit Union Act (FCU Act), the Board's enforcement responsibilities are akin to those of the FDIC, the Office of Thrift Supervision, the Comptroller of the Currency, and the Federal Re- serve Board, which oversee the regulated functions of other financial institutions. 12 U.S.C. 1766. The NCUA Board has authority to remove a credit union official from office or prohibit the official's futher participation in the conduct of the affairs of any insured credit union. See 12 U.S.C. 1786(g)(2). Such action has the effect of barring the official's par- ticipation in the affairs of any federally insured finan- cial institution. See 12 U.S.C. 1786 (g)(7). To take such action, the Board must first issue a Notice of Intent that includes three determinations. First, the Board must find misconduct; it must find that the "institution-affiliated party has, directly or indirectly[,] (I) violated * * * any law or regulation; * * * (ii) engaged or participated in any unsafe or unsound practice in connection with any insured credit union or business institution; or (iii) com- mitted or engaged in any act, omission, or practice which constitutes a breach of such party's fiduciary duty." 12 U.S.C. 1786(g)(1)(A). Second, the Board must find that the misconduct had a proscribed effect: that, as a result of the misconduct, either the credit union "has suffered or will probably suffer financial loss or other damage," or the members' interests "have been or could be prejudiced," or the party has "received financial gain or other benefit." 12 U.S.C. ---------------------------------------- Page Break ---------------------------------------- 3 1786(g)(1)(B). Third, the Board must determine that the violation, practice, or breach either involves per- sonal dishonesty or "demonstrates such party's unfit- ness to serve as a director or officer of, or to other- wise participate in the conduct of the affairs of, an insured credit union." 12 U.S.C. 1786(g)(1)(C). After a hearing on such charges, if the Board finds "upon the record * * * that any of the grounds specified in [the] notice have been established," it may issue an order of removal or prohibition. 12 U.S.C. 1786(g)(4). 2. Petitioner was employed by Bay Gulf Federal Credit Union, in Tampa, Florida, for approximately 18 years, serving as the compensated manager/president and as a member of the Board of Directors from Jan- uary, 1982, until his forced resignation in April, 1990. Pet. App. a18. An NCUA examination of Bay Gulf as of December 31, 1989, showed that the credit union had suffered net losses in 1988 and 1989 and had material weaknesses, suggesting that its solvency could be significantly affected by adverse economic changes. Gov't C.A. Br. 8. A rating of Bay Gulf's management competence was downgraded. Pet. App. a25. 3. In February, 1991, the NCUA Board issued a "Notice of Intent to Prohibit and Impose Other Remedial Sanctions" to petitioner, charging him with violations of the FCU Act, the agency's regulations, Bay Gulf's bylaws, and generally accepted accounting principles; unsafe and unsound practices; and breach of his fiduciary duty. Pet. App. a18. The Notice of Intent set forth five counts against him. Id. at a19. Four counts charged violations of the NCUA's regu- lations requiring that a credit union's financial state- ments make "full and fair disclosure" of all assets, lia- bilities, equity, income, and expenses for the period ---------------------------------------- Page Break ---------------------------------------- 4 concerned, 12 C.F.R. 702.3. The fifth charged peti- tioner with unsafe and unsound practices and breach of fiduciary duty concerning certain improper com- mercial loans. Pet. App. a19-a22. Following a three-day hearing, an ALJ rendered a decision recommending the issuance of an order of prohibition and restitution against petitioner on the ground that the NCUA had sustained its burden of proving all five counts. Pet. App. a19. Petitioner filed exceptions with the NCUA Board. In a final decision issued on October 15, 1991, the NCUA Board adopted the ALJ's decision and ordered that petitioner be prohibited from participating in the affairs of any federally insured or chartered institution, and that he pay restitution to Bay Gulf in the amount of $42,857. Ibid. 4. Petitioner sought judicial review of the NCUA Board's order, and the court of appeals upheld two counts and a portion of a third count against petition- er, noting that petitioner's "conduct in these matters implies intentional misrepresentation of the financial condition of Bay Gulf." Pet. App. a24. However, finding a lack of substantial evidence to support the remaining counts against petitioner, the court va- cated the order of prohibition and remanded to the NCUA Board for reconsideration. Id. at a27. The court also reversed the order of restitution. Id. at a32. 5. Upon further briefing by the parties following remand, the NCUA Board reinstated its order of pro- hibition against petitioner. Pet. App. a5-a15. With respect to the first and third prongs of the standard for prohibition, the NCUA Board found that peti- tioner had engaged in intentional misconduct under 12 U.S.C. 1786(g)(1)(A) (see Pet. App. a7-a9), and that ---------------------------------------- Page Break ---------------------------------------- 5 petitioner's conduct "demonstrate[d] [his] unfitness to serve as a director or officer of, or to otherwise participate in the conduct of the affairs of, an insured credit union" under 12 U.S.C. 1786 (g)(1)(C) (see Pet. App. a11-a14). The Board also found that the "effects" prong of the statutory standard was satisfied on two bases. First, the Board found (Pet. App. a9-a10) that petitioner's misconduct led Bay Gulf's volunteer board of direc- tors unwittingly to take the dangerous step of paying dividends for the first quarter of 1990 while unaware that the credit union had insufficient earnings to do so. Second, the Board found that petitioner received personal benefit as a result of his misconduct. Pet. App. a10. The Board stated that, given the NCUA's then-recent downgrading of the competency of Bay Gulf's management for its inability to improve the credit union's financial condition, petitioner "was probably under some pressure to show a profit," and that he therefore "personally benefitted" from his misconduct when, as a result of being able to show the hoped-for profit, he retained his job. Ibid. (quoting id. at a25); see id. at a10 n.4. 6. Petitioner again sought judicial review. On February 15, 1995, the court of appeals upheld the order of prohibition without comment in an unpub- lished order. Id. at a3-a4. ARGUMENT Petitioner's primary claim of error (Pet. 7-8) is that the court of appeals upheld the NCUA Board's finding on remand that petitioner had obtained a "personal benefit" (Pet. App. a10) from his miscon- duct, despite the court's statement in the first appeal that the Notice of Intent did not allege (and the record ---------------------------------------- Page Break ---------------------------------------- 6 did not show) that petitioner derived any "personal gain" from his misconduct. Id. at a18. Petitioner as- serts that he therefore had no notice or opportunity to be heard regarding whether he obtained a "personal benefit" or "personal gain," and that that failure violated the Due Process Clause of the Fifth Amend- ment. Pet. 8. Petitioner's claim is meritless. The "personal ben- efit" theory was raised at the very start of the admin istrative proceedings, and petitioner had ample oppor- tunity to litigate that issue. NCUA counsel ex- plained in her opening statement at the hearing before the NCUA's administrative law judge that the government would show that, although petitioner "may not have had any personal financial gain, his conduct was geared to obtain a personal benefit for himself." 1 Hearing Tr. 12. She explained that the "benefit to [him] from these accounting maneuvers, given his position as General Manager, is clear: If the credit union looked good, he would look good, and his job would be protected." Id. at 14. See Pet. App. a10 n.4. Petitioner had more than adequate opportunity to be heard on the issue at that hearing and at later pro- ceedings in this case before the NCUA and the court of appeals. Although he was unable to rebut the clear import of the evidence on that point, his failure to do so was not the result of any procedural irregularity. Petitioner's claim also appears to be based on a misreading of the language of the applicable statute. The FCU Act does not limit the sanction of an order of prohibition to those cases in which it can be shown that the subject of the order received "personal gain" (Pet. 8), which petitioner presumably understands to mean direct payments of funds to which he was not legally entitled. Instead, the Act provides authority ---------------------------------------- Page Break ---------------------------------------- 7 to impose an order of prohibition if the person "received financial gain or other benefit by reason of such violation." 12 U.S.C. 1786(g)(1)(B) (iii) (emphasis added). As the language of the provision makes clear, "financial gain" (what petitioner refers to as "person- al gain") and "other benefit" (what the NCUA Board referred to as "personal benefit") are indepen- dent bases for satisfying the statutory requirement.* Thus, even if there were no financial gain-that is, no monetary benefit, see, e.g., Jameson v. FDIC, 931 F.2d 290, 291 (5th Cir. 1991) (concealing bonus); Van Dyke v. Board of Governors, 876 F.2d 1377, 1379 (8th Cir. 1989) (check-kiting scheme)-that would not mean that a non-monetary "other benefit" could not exist. As the court of appeals recognized, petitioner "was probably under some pressure to show a profit for the first quarter of 1990 so that Bay Gulf could declare a dividend." Pet. App. a25. For petitioner, then, there was the very real "other benefit" of en- hancing his stature (and thus protecting his job) with Bay Gulf's board of directors, who had just been made ___________________(footnotes) * For this reason, petitioner's reliance on the statement by the court of appeals that he had derived no "personal gain" (Pet. 8) is misleading. The court of appeals stated in its first opinion that the "Notice of Intent did not allege and the record does not indicate that [petitioner] derived any personal gain" from his misconduct. Pet. App. a18. But it went on to suggest in that same opinion that the misconduct may have occurred because petitioner "was probably under some pressure to show a profit * * * so that Bay Gulf could declare a dividend." Id. at a25. Thus, as the court of appeals necessarily found in ultimately upholding the order of prohibition, the NCUA Board's finding that petitioner derived a "benefit" from his misconduct by avoiding the threat that lay behind this pressure to turn a profit, id. at a10, is consistent with both the Notice of Intent and the earlier decision of the court. ---------------------------------------- Page Break ---------------------------------------- 8 aware that his management had been downgraded for failure to improve Bay Gulf's financial condition in 1988 and 1989. In any event, even if the Board's finding of personal benefit were defective, the order of prohibition would nonetheless be valid on the basis of the Board's al- ternative "effects" finding (Pet. App. a8-a9) that peti- tioner's misconduct prejudiced the interests of the credit union members. Because of petitioner's mis- conduct, the credit union's board of directors paid dividends at a time when it did not have the earnings to support them. As the Board observed, that practice "threatens the financial soundness of a credit union and can lead to the institution's insolvency." Id. at a9. It therefore "prejudice[d]" the interests of the mem- bers of the credit union. 12 U.S.C. 1786 (g)(1)(B). Con- trary to petitioner's contention (Pet. 8 n.2), this issue was involved in the proceedings from the beginning. See 1 Hearing Tr. 11-12 (opening statement of NCUA counsel at administrative hearing that "the [govern- ment] will * * * show that, by reason of [petition- er's] conduct. * * * the interests of the members have been prejudiced"). ---------------------------------------- Page Break ---------------------------------------- 9 CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. DREW S. DAYS, III Solicitor General FRANK W. HUNGER Assistant Attorney General BARBARA C. BIDDLE EDWARD HIMMELFARB Attorneys OCTOBER 1995