WASHINGTON -- A federal judged resolved a legal dispute earlier this month that makes it easier for the Office of Thrift Supervision to recoup money from the holding companies of failed institutions.
Judge Harold H. Greene of the U.S. District Court for the District of Columbia wrote in a Sept. 8 decision that the OTS does not lose authority over holding companies once their banking affiliates fail.
Instead, the judge ruled the OTS can step into the place of the depositors and issue temporary cease-and-desist orders aimed at protecting the holding company's assets.
Richard C. Stearns, the OTS' deputy chief counsel for litigation, said the case was an important victory for his agency.
"Now it will be easier to ensure money will remain to pay off the insurance fund," Mr. Steams said.
Mr. Steams said this is the first time a court has ruled on whether the OTS can issue temporary cease-and-desist orders against failed holding companies.
CityFed got its start in 1984 when the Federal Home Loan Bank allowed it to takeover the ailing City Federal savings bank.
The regulator required CityFed to maintain minimum capital levels as part of the deal.
CityFed, however, allowed capital to drop by more than $118 million below the minimum, prompting the OTS to start an adminstrative action in the late 1980s against the holding company to recover that difference. The agency also took over City Federal, the company's banking affiliate.
As part of its administrative action, the OTS slapped the holding company in June 1994 with a temporary cease-and-desist order requiring the company to put all $9 million of its assets in escrow. The holding company, which continues to manage some income-producing investments, balked at the order, saying it needed access of its assets to pay its legal and operating fees. It filed suit, charging that the OTS lacked the authority to pursue holding companies of failed institutions.
Judge Greene explicitly rejected all of CityFed's arguments. First, he wrote that the order does not cause irreparable harm to CityFed because it can survive even with all of its assets in escrow.
The judge then made his key ruling -- the OTS does have jurisdiction. "[B]ankruptcy. does not exonerate an entity responsible for violating a regulation or agreement," Judge 'Greene wrote.
Finally, the judge ruled that because CityFed was in continuous violation of the agreement, the statute of limitation did not expire.
The case also is significant for another reason. One attorney familiar with the case said the decision buttresses an argument OTS acting director Jonathan Fiechter made in a letter to the U.S. Senate last week.
Mr. Fiechter, as part of an agreement to allow the interstate branching bill to pass, wrote that his agency will sue directors of failed institutions in cases where the' other agencies cannot.
The attorney. the case said this support that decision because it clearly gives OTS authority over closed institutions. The attorney said this will not be the last time bankers hear of the case.
"We haven't seen the end of it yet," the attorney said. "There probably will be an appeal."
