                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-5-1995

FDIC v Wentz
Precedential or Non-Precedential:

Docket 94-5556




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Recommended Citation
"FDIC v Wentz" (1995). 1995 Decisions. Paper 155.
http://digitalcommons.law.villanova.edu/thirdcircuit_1995/155


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                   UNITED STATES COURT OF APPEALS
                       FOR THE THIRD CIRCUIT
                            ____________

                            No. 94-5556
                            ____________

               FEDERAL DEPOSIT INSURANCE CORPORATION,
              as Receiver for The Howard Savings Bank,

                                           Appellee
                                 v.

    SIDNEY F. WENTZ; NATALIE I. KOETHER; WILLIAM E. MARFUGGI;
             ROBERT M. KREMENTZ; J. ROBERT HILLIER,

                                  Natalie I. Koether and
                                  Sidney F. Wentz, Appellants
                            ____________

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                 FOR THE DISTRICT OF NEW JERSEY
                   (D.C. Civ. No. 94-cv-03287)
                           ____________

                       Argued April 20, 1995

    Before:   STAPLETON, HUTCHINSON, and WEIS, Circuit Judges

                     Filed June 5, 1995
                            ____________


Laurence B. Orloff, Esquire (ARGUED)
Laura V. Studwell, Esquire
Orloff, Lowenbach, Stifelman & Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068

Attorneys for Appellants


Jerome A. Madden, Esquire (ARGUED)
Ann S. DuRoss, Esquire
Richard J. Osterman, Jr., Esquire
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429

Attorneys for Appellee
                           ____________

                       OPINION OF THE COURT
                           ____________



WEIS, Circuit Judge.
           In the course of its investigation of a failed

depository institution, the Federal Deposit Insurance Corporation

issued a subpoena to former directors of the bank directing them

to produce a wide variety of their personal financial records as

well as those of family members.   The district court required the

directors to produce only their own records, showing additions or

reductions in their assets.    Rejecting the directors' claims of

privacy violations, we will affirm the district court's order.

           Natalie I. Koether and Sidney F. Wentz were directors

of The Howard Savings Bank of Livingston, New Jersey, which was

declared insolvent on October 2, 1992.    On that same day, the

FDIC was appointed receiver.

           In April 1993, the FDIC issued an "Order of

Investigation" pursuant to 12 U.S.C. § 1820(c) and 12 C.F.R.

§ 303.9(i)(2), targeting former officers and directors of the

bank.   Four purposes were cited in the order:   (1) determining

whether the individuals may be liable as a result of any action

or inaction that could have affected the bank; (2) assessing

whether the pursuit of litigation would be cost effective by

considering the ability of the individuals to satisfy a judgment;

(3) establishing whether the FDIC should seek to avoid transfers
of interests or incurrences of obligations; and (4) ascertaining

whether the FDIC should seek attachments of assets.     The order

authorized FDIC representatives to issue subpoenas duces tecum.

          The directors, together with other bank principals,

were served with notices to appear for depositions and ordered to

produce documents in some twenty-eight different categories

covering the six-year period preceding October 1992.   Included

were records in their possession pertaining to bank operations.

In addition, the subpoena demanded production of such documents

as financial statements and credit applications of the directors

and their spouses; records of any bank accounts of the directors

and those maintained by "any member of [their] immediate

famil[ies]," including canceled checks and bank statements; tax

returns; title and registration papers for motor vehicles, boats,

and airplanes; pension and profit-sharing plans in which the

directors or their spouses had an interest; insurance policies;

and records of inheritance, and other such gifts received by the

directors and "any member of [their] immediate famil[ies]."

          The directors timely complied with the requests for

documents having any connection with their activities as

officials of the bank, but refused to produce their personal

records and those of their families.

          In seeking enforcement of the subpoena in the district

court, the FDIC presented the affidavit of James M. Judd, an

investigations specialist for the FDIC.   It stated that the

documents were necessary to enable the FDIC to determine the

nature and extent of any losses sustained by the bank because of
negligence or breach of fiduciary duty by the directors, and to

establish whether it would be cost-effective to pursue any such

claims.   The affidavit alleged that the directors had approved

transactions that resulted in losses of millions of dollars and

that the transactions "appear[ed] to exhibit inadequate

documentation, unsafe concentrations of credit, poor credit

administration, and inadequate supervision of management."

Finally, the affidavit asserted that the directors had been

"warned repeatedly" by bank examiners about lax business

practices at the bank, but that the deficiencies were not

corrected.

           The district court conducted a hearing and, at its

conclusion, ordered the directors to produce all records that

demonstrated increases or depletions in, or transfers of, their

assets.   As the judge explained,

           "I do not sanction an inquiry whose sole

           purpose is to find out whether these folks

           have money to respond to a judgment, if one

           should eventuate. . . . [M]y requirement of

           document production . . . is narrow enough to

           specifically address transfers or sudden

           accretions or depletions of wealth. . . . I

           feel that those purposes are reasonably

           within the power of the FDIC, and I feel that

           what I have ordered is a limited incursion

           into the financial affairs that is tailored
           to match up with the purposes that I have

           articulated."

           In a formal order filed a few days later, the court

denied the FDIC's request for enforcement of the subpoena duces

tecum, except that the directors were instructed to produce:

           "(a) All documents which relate to any increases or

depletions of assets, or any transfer of assets, for the period

October 1986 through the date of this Order; and

                (b) All financial statements prepared by

           or on behalf of [the directors] from October

           1986 through the date of this Order."

The court then granted a stay of its order pending resolution of

this appeal.

           The directors now contend that (1) the FDIC's statutory

powers do not permit an unwarranted intrusion into their personal

affairs, (2) the subpoenas were issued for an improper purpose,

particularly in the context of "cost effectiveness" of potential

litigation that might be initiated by the FDIC, and (3) the

documents sought are not relevant.   The directors also complain

that the FDIC offered no grounds for suspicion of wrongdoing to

justify issuance of a subpoena, and hence, it violates the Fourth

Amendment.

           Preliminarily, we observe that the district court's

order substantially narrows the subpoena in two significant

aspects.   First, the demand for production of documents of the

directors' spouses and immediate family members is no longer

effective.   Second, the documents that the directors must produce
are limited to those pertaining to additions or diminutions of

their own assets.

          As an appellate court, we will affirm an order

enforcing an agency's subpoena unless we conclude that the

district court has abused its discretion.     NLRB v. Frazier, 966

F.2d 812, 815 (3d Cir. 1992).    To determine whether there has

been an abuse of discretion, the reviewing court must consider

whether the district court's decision was based on irrelevant

factors or on clearly erroneous findings of fact, and whether

there has been a clear error of judgment.     Id.   "[T]he district

court's role is not that of a mere rubber stamp, but of an

independent reviewing authority called upon to insure the

integrity of the proceeding."    Wearly v. FTC, 616 F.2d 662, 665

(3d Cir. 1980).

          To obtain enforcement of an administrative subpoena,

the agency must show that the investigation will be conducted

pursuant to a legitimate purpose, that the inquiry is relevant,

that the information demanded is not already within the agency's

possession, and that the administrative steps required by the

statute have been followed.     United States v. Powell, 379 U.S.
48, 57-58 (1964); United States v. Morton Salt Co., 338 U.S. 632,

652 (1950).   The demand for information must not be unreasonably

broad or burdensome.   United States v. Westinghouse Elec. Corp.,

788 F.2d 164, 166 (3d Cir. 1986).

          It is not necessary, in most instances, that the agency

make a showing of liability before seeking to enforce a subpoena.

As the Supreme Court has observed, an agency "`can investigate
merely on suspicion that the law is being violated, or even just

because it wants assurance that it is not.'"    Powell, 379 U.S. at

57 (quoting Morton Salt, 338 U.S. at 642-43).    The subpoenaed

party bears the heavy burden of establishing an abuse of the

court's process.   United States v. Cortese, 614 F.2d 914, 919 (3d

Cir. 1980).

          When personal documents of individuals, as contrasted

with business records of corporations, are the subject of an

administrative subpoena, privacy concerns must be considered.

See Whalen v. Roe, 429 U.S. 589, 599 (1977).    Thus, in United

States v. Westinghouse Elec. Corp., 638 F.2d 570, 578 (3d Cir.

1980), where a governmental agency sought production of employee

medical records, we listed as relevant factors such matters as

the type of record requested, the information that it might

contain, the potential for harm and subsequent nonconsensual

disclosure, the adequacy of safeguards to prevent unauthorized

disclosure, the degree of need for access, the specificity of the

agency's statutory mandate, and the presence of recognizable

public interests justifying access.   See also In re McVane, 44

F.3d 1127, 1137 (2d Cir. 1995) (agency subpoenas directed at

individuals do implicate privacy rights); Resolution Trust Corp.
v. Walde, 18 F.3d 943, 948 (D.C. Cir. 1994) (same).

          12 U.S.C. § 1818(n) supplies the FDIC with the power to

issue subpoenas duces tecum.   The permissible purposes are set

out in 12 U.S.C. § 1821(d)(2)(I)(i) as "carrying out any power,

authority, or duty with respect to an insured depository

institution (including determining any claim against the
institution and determining and realizing upon any asset of any

person in the course of collecting money due the institution)."

The FDIC is empowered to avoid fraudulent asset transfers, 12

U.S.C. § 1821(d)(17), assert claims against directors and

officers, id. § 1821(k), and seek court orders attaching assets,

id. § 1821(d)(18).

          Against this sweeping grant of power to the FDIC, we

consider the challenges mounted by the directors.    As noted

earlier, the district court -- entertaining grave doubts about

the breadth of the subpoena, the relevance of documents of family

members, and the burdens of production imposed on the directors

-- substantially reduced the original scope of the subpoena.    The

FDIC has not challenged the district court's order, and as the

record now stands, the directors object only to producing those

personal records that would show additions and subtractions to

their private assets.

               In applying the factors we identified in

Westinghouse, 638 F.2d at 578, we observe at the outset that

there is a significant public interest in promptly resolving the

affairs of insolvent banks on behalf of their creditors and

depositors, many of whom have lost significant sums of money and

are often left with little hope for recovery.    Personal financial

records have never been as tightly guarded as "information

concerning one's body."   Id. at 577.   Subpoenas and summonses of

the Internal Revenue Service requiring production of such records

have routinely been enforced.   See, e.g., Pickel v. United
States, 746 F.2d 176, 184 (3d Cir. 1984).
          The FDIC has shown a reasonable need for gaining access

to the directors' records in order to determine whether they

reveal breaches of fiduciary duties through the improper

channeling of bank funds for personal benefit.   Moreover, the

directors have not produced any evidence to show that the

information contained in their personal financial records "is of

such a high degree of sensitivity that the intrusion could be

considered severe or that the [directors] are likely to suffer

any adverse effects from disclosure to [FDIC] personnel."

Westinghouse, 638 F.2d at 579.   Finally, we observe that

regulatory provisions have been promulgated to guard against

subsequent unauthorized disclosure of the subpoenaed information.

See 12 C.F.R. pts. 309 & 310.

          Accordingly, we conclude that the strong public

interest in safeguarding the FDIC's legislative mandate outweighs

the minimal intrusion into the privacy that surrounds the

directors' personal financial records and any accompanying

burdens of production.

          In balancing competing interests in this case, we

cannot say that the district court abused its discretion in

concluding that the limited investigation it approved is relevant

to the proper functions of the FDIC.   Without impugning in any

way the integrity of the directors, it must be observed that the

allegations of mishandling of certain loans by the bank furnishes

a proper basis for an investigation into (1) whether the

individuals might be liable, (2) whether there might be transfers
that should be avoided, or (3) whether the FDIC should seek

attachment of assets.

          We do not resolve the directors' contention that the

FDIC must assert an articulable suspicion of liability before

pursuing an inquiry into the cost-effectiveness of potential

litigation against them.    The directors rely heavily on McVane

and Walde.   However, in McVane, the Court found an adequate basis

for enforcing the subpoena against directors even as to the cost-

effectiveness factor.     Walde did sustain an objection to the

disclosure of personal records of certain directors for that

limited purpose, but we need not discuss that case further in

view of the fact that the district court's order here is

sustainable on any one of the FDIC's other three objectives.

           The directors also contend that the district court's

order is too vague because, literally, a purchase of groceries

would be included within the scope of the subpoena as a depletion

of personal assets.     At oral argument, counsel for the FDIC

suggested that this difficulty might be avoided by reading into

the order the $5,000 limitation on items stated in the subpoena

itself.   That appears to us to be a reasonable reading of the

district court's order, but if it is not satisfactory to the

parties, they may request further clarification from the district

judge.

           The order of the district court will be affirmed.
