A federal appeals court in California dealt the Office of Thrift Supervision its second defeat this year, overturning a 1993 order banning a former thrift executive from the banking industry.

The Ninth U.S. Circuit Court of Appeals agreed with regulators that Young Il Kim was careless in his management of failed Delta Savings Bank in Los Angeles. But characterizing his actions as minor violations, it ruled that his conduct, "certainly does not justify the imposition of such a draconian measure as a permanent prohibition order."

The ruling is only the second time in its five-year history that the OTS has been overturned.

"If the OTS persists in this theory, apparently it will have to go to the Supreme Court because it's another in a series of cases that [show that] more than mere negligence is required," said Kip Weissman, a partner in the firm Silver, Freedman & Taff in Washington, D.C. "It's healthy to see the courts occasionally give the OTS a run for its money."

The agency has 14 days to call for a rehearing before the same court, but officials have not made a decision yet, said spokesman William Fullwider.

The ruling "doesn't go the heart of our authority," Mr. Fullwider said, noting that the agency's authority to ban individuals was not questioned. "It's on the merits of this particular case that the finding was made."

If allowed to stand, the court's decision means that Mr. Kim can re-enter the banking field.

Delta was a struggling, minority-owned, state-chartered savings and loan association that Mr. Kim and local businessmen took over in 1989 after investing $2.6 million.

The OTS charged Mr. Kim and other Delta officials in 1991 with violating banking law and operating the institution unsoundly. The agency accused Mr. Kim and the others of approving four questionable loans that it felt would lead to losses and of waiving fees for a director's returned checks.

The thrift was seized in 1991 and the agency banned Mr. Kim and another director even after an administrative law judge recommended against such action. No fines were levied, however.

OTS's decision not to seek restitution from Mr. Kim could have swayed the court, Mr. Weissman said, since that decision showed that the thrift was not financially harmed by any of Mr. Kim's actions.

"It shows that in the eyes of the court, culpable conduct and damages are related," Mr. Weissman said. "This shows that it would be very difficult for OTS to prove gross negligence without also proving that the institution was harmed and they didn't really do that."

In its decision, the appeals court noted that the OTS had proven misconduct by Mr. Kim and the thrift's officials, which could have damaged Delta.

But the court ruled that before banning someone from banking, agency must prove a higher degree of culpability well beyond mere negligence." Using a standard adopted by other courts, the court said OTS must show that Mr. Kim acted with "willful or continuing disregard" for the financial health of the thrift.

The court noted that the thrift had hundreds of good loans on its books and that Mr. Kim was only one of several officials who approved the four risky loans.

In addition, the three-judge court pointed out, rather than benefiting from any of these actions, Mr. Kim lost his own $650,000 investment in the bank when it was seized by regulators in November 1991.

Mr. Kim also questioned the OTS's characterization of the three loans as poorly underwritten and likely to cause losses, noting that all four remained performing loans.

Since the seizure of the institution one of the loans has been paid off, two have been sharply reduced in principal, and the fourth is still performing, he said. The loans ranged from $100,000 to $600,000.

"I was treated unfairly," Mr. Kim said in a telephone interview. All the banks have some kind of substandard loans. I did not do anything bad. Why [did] they seize our bank?"

Mr. Kim has filed a lawsuit against the OTS and two of its examiners seeking $120 million in restitution for lost investments and punitive damages.

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