The Office of Thrift Supervision is appealing a ruling in California last month that overturned the agency's order to ban the president of a failed thrift.
The agency is requesting a rehearing by the same court, the Ninth U.S. Circuit Court of Appeals, arguing that it ignored the agency's findings in reversing a decision to oust Young Il Kim, the former president of Delta Savings Bank, from the industry.
OTS attorneys contend that the three-judge panel's ruling imposes a high standard of negligence for proving culpability that could "severely impair the banking agencies' ability to prohibit senior banking officials" from working in the industry, even when there are repeated violations.
In its decision, the court ruled that the OTS had failed to show that Mr. Kim acted with "willful or continuing disregard" for the failed thrift's financial health.
The court determined that Mr. Kim was only one of several bank officers to commit minor regulatory violations and to approve a few questionable loans out of hundreds of good loans.
But by comparing Delta's few bad loans to its "hundreds of good loans," OTS says, the court set a precedent that weighs many good loans against a few bad in deciding whether a person can be banned.
The agency also argues in the brief that the court disregarded OTS's findings of a history of continuing recklessness by Mr. Kim. OTS contends that in 1990, a year before seizing the institution, examiners twice warned Mr. Kim to stop unsound banking practices, including loaning too much to single borrowers and authorizing insider transactions.
Both violations were characterized as minor by the court.
Richard Garabedian, a lawyer with Silver, Freedman & Taff in Washington, agreed with the OTS that a balance between good and bad loans should not be a standard.
"I don't necessarily agree with the court that you have to balance what other good loans were made while he was at the helm of the institution," he said. "People have been banned for transactions that may have involved a single isolated loan or a couple of loans."
Mr. Garabedian also noted that it was unusual for the court not to defer to the agency's findings, but noted, "On the other hand, the OTS disregarded the findings of the administrative law judge" who recommended against sanctions against Mr. Kim in 1992. But he also doubted a rehearing would be granted or that the case would go to the Supreme Court, because it's a fact-intensive case, not one dealing with the agency's powers.
Delta, a minority-owned California thrift, was seized in November 1991 after the OTS had charged Mr. Kim and others with violations of banking regulations. Mr. Kim was removed from office and, in April 1993 was banned from banking.
