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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA _______________________________________ ) UNITED WESTERN BANK, ) ) Plaintiff, ) ) v. ) ) OFFICE OF THE COMPTROLLER ) OF THE CURRENCY, et al., ) ) Defendants. ) _______________________________________)

1:11-cv-00408 The Honorable Amy Berman Jackson

MEMORANDUM IN OPPOSITION TO DEFENDANTS MOTION FOR SUMMARY JUDGMENT AND REPLY IN SUPPORT OF PLAINTIFFS MOTION FOR SUMMARY JUDGMENT

Theodore J. Abariotes Deputy General Counsel UNITED WESTERN BANCORP, INC. 700 17th Street, Suite 2100 Denver, Colorado 80202 (720) 932-4216 (Telephone) (720) 946-1218 (Facsimile)

Andrew L. Sandler (DC Bar No. 387825) Samuel J. Buffone (DC Bar No. 161828) Liana R. Prieto (DC Bar No. 987287) Michael R. Williams (DC Bar No. 994953) BUCKLEYSANDLER LLP 1250 24th Street NW, Suite 700 Washington, DC 20037 (202) 349-8001 (Telephone) (202) 349-8080 (Facsimile) . Kirby D. Behre (DC Bar No. 398461) Lawrence D. Kaplan (DC Bar No. 415186) PAUL HASTINGS LLP 875 15th Street NW Washington, DC 20005 (202) 551-1719 (Telephone) (202) 551-0119 (Facsimile)

Attorneys for Plaintiff United Western Bank June 8, 2012

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TABLE OF CONTENTS Page TABLE OF AUTHORITIES ......................................................................................................... iii PRELIMINARY STATEMENT .....................................................................................................1 ARGUMENT ...................................................................................................................................4 I. The OTSs Sudden and Unexpected Decision to Declare a Liquidity Crisis Is Unsupported By the Administrative Record ....................................................................4 A. Defendants Attempt to Rewrite History In Arguing There Was No Change in Agency Policy.........................................................................................5 Defendants Confused Liquidity Analysis Still Does Not Establish Any Likelihood That The Institutional Depositors Would Withdraw .....................8 1. The Bank was unaffected when two related entities were forced by the OTS to withdraw their deposits ........................................................8 Equity Trust Company and Lincoln Trust Company were ready to stay with the Bank ........................................................................................9 The Bank held sufficient liquidity to cover any permissible withdrawals ................................................................................................12

B.

2.

3.

II.

The OTS Inappropriately Determined That the Bank Had Failed to Submit an Adequate Capital Restoration Plan Within a Reasonable Time .....................................14 A. The OTSs Decision To Give the Bank Just Seven Days to Submit a Capital Restoration Plan Was Unjustified and Prejudicial ....................................14 1. 2. B. The OTS erred in giving the Bank too little time ......................................14 The OTSs error was not harmless.............................................................16

The Banks Well-Supported Capital Restoration Plan Should Not Have Been Denied ...........................................................................................................17 1. The Recapitalization Transaction presented a realistic opportunity to recapitalize the Bank ..............................................................................18 The OTSs problems with the Recapitalization Transaction were unsupported by facts ..................................................................................21 The OTS is not entitled to technical deference here ..............................24

2.

3.

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III.

The Bank Was Operating in a Safe and Sound Condition, Despite the OTSs Multitude of Repackaged Concerns ...................................................................................25 A. For All Practical Purposes, Defendants Have Conceded that the OTS Applied the Wrong Law.........................................................................................25 No Matter What Standard Applies, the Bank Was Not In an Unsafe and Unsound Condition ................................................................................................27

B.

IV.

Even If the Court Determines That One Ground of the Seizure Order Was Valid, None of the Alleged Grounds Is SufficientStanding Aloneto Sustain the Decision .......................................................................................................................28

CONCLUSION ..............................................................................................................................29

ii

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TABLE OF AUTHORITIES Page(s) CASES Astoria Fed. Sav. & Loan Assn v. United States, 568 F.3d 944 (Fed. Cir. 2009)........................................................................................................18 Am. Petroleum Inst. v. Johnson, 541 F. Supp. 2d 165 (D.D.C. 2008) ...............................................................................................12 BellSouth Telecommcns, Inc. v. FCC, 469 F.3d 1052 (D.C. Cir. 2006) .....................................................................................................12 Cities of Carlisle & Neola v. FERC, 741 F.2d 429 (D.C. Cir. 1984) .......................................................................................................24 Cove Assocs. Joint Venture v. Sebelius, No. 1:10-cv-01316 (BJR), 2012 WL 987862 (D.D.C. Mar. 26, 2012)............................................5 Cox v. Commodity Futures Trading Commn, 138 F.3d 268 (7th Cir. 1998) .........................................................................................................24 CS-360, LLC v. U.S. Dept of Veterans Affairs, No. 11-00078, 2012 WL 718374 (D.D.C. Mar. 6, 2012) ........................................................15, 26 Exxon Co., U.S.A. v. FERC, 182 F.3d 30 (D.C. Cir. 1999) .........................................................................................................24 FCC v. AT&T Inc., 131 S. Ct. 1177 (2011) ...................................................................................................................26 In re Subpoena Served Upon Comptroller of the Currency, 967 F.2d 630 (D.C. Cir. 1992) .......................................................................................................29 Intl Union, United Mine Workers of Am. v. Dept of Labor, 358 F.3d 40 (D.C. Cir. 2004) .........................................................................................................28 James Madison Ltd. v. Ludwig, 868 F. Supp. 3 (D.D.C. 1994) ..........................................................................................................4 PDK Labs. Inc. v. DEA, 362 F.3d 786 (D.C. Cir. 2004) .......................................................................................................16 Republic Airline Inc. v. U.S. Dept of Transp., 669 F.3d 296 (D.C. Cir. 2012) .........................................................................................................5

iii

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Satellite Broad. Co., Inc. v. FCC, 824 F.2d 1, 3 (D.C. Cir. 1987) .................................................................................................21, 23 Sprint Nextel Corp. v. FCC, 508 F.3d 1129 (D.C. Cir. 2007) .....................................................................................................26 Taniguchi v. Kan Pac. Saipan, No. 10-1472, 2012 WL 1810216 (U.S. May 21, 2012) .................................................................26 Typographical Union No. 18 v. NLRB, 216 F.3d 109 (D.C. Cir. 2000) .......................................................................................................12 United Western Bank v. OTS, 793 F. Supp. 2d 357 (D.D.C. 2011) .............................................................................................2, 6 Wedgewood Vill. Pharm. v. DEA, 509 F.3d 541 (D.C. Cir. 2007) .......................................................................................................26 Williams Gas Processing-Gulf Coast, Co., L.P. v. FERC, 475 F.3d 319 (D.C. Cir. 2006) ...................................................................................................7, 28 Yousuf v. Samantar, 451 F.3d 248 (D.C. Cir. 2006) .......................................................................................................26 STATUTES AND REGULATIONS 12 C.F.R. 565.4 .....................................................................................................................19, 23 12 C.F.R. 565.5 .....................................................................................................................14, 17 12 U.S.C. 1464 ..................................................................................................................2, 16, 25 12 U.S.C. 1818 ......................................................................................................................25, 26 12 U.S.C. 1821 ..................................................................................................................8, 25, 26 12 U.S.C. 1831o .................................................................................................................. passim OTHER AUTHORITIES Binyamin Appelbaum, Bank Lending Plummets by $587 Billion in 2009, Wash. Post (Feb. 23, 2010), available at 2010 WLNR 3811012 ..................................................27 OTS Examination Handbook (2008), available at http://www.ots.treas.gov/_files/422347.pdf...............................................................21

iv

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S. Rep. No. 89-1482 (1966), reprinted in 1966 U.S.C.C.A.N. 3532 .............................................................................................2

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PRELIMINARY STATEMENT In its initial motion for summary judgment, United Western Bank (United Western or the Bank) established that Defendants had inappropriately seized a viable bank despite the absence of any legitimate concerns with the Banks financial health. In response, Defendants largely offer post hoc justifications and unsupported excuses for their decision to close the Bank. In reality, the administrative record shows that the Office of Thrift Supervision (OTS) acted because of its newly found discomfort with the Banks business modelone that the OTS had monitored and approved of during years of regulatory supervision. Defendants combined opposition and cross-motion offers two principal defenses for the closure of the Bank. Neither rings true. In their first argument, Defendants craft a broad notion of agency deference. Indeed, they insist that this deference is so broad as to render the OTSs flawed decisionmaking essentially unreviewable. But in doing so, they disregard the language of the controlling statute. Furthermore, they reduce the important role for reviewing courts and render the sole remedy for an improper seizure of a bank effectively meaningless. A federal bank regulators power to seize a bank has limits. The relevant statutes contemplate that the regulator will take action only in limited, statutorily-defined circumstances. Congress further mandated that any decision to wield the ultimate power of seizure must be grounded in careful and reasoned decisionmaking. To this end, Congress also provided for meaningful judicial review of the decision to appoint a receiver. This judicial review is critical to ensure that savings and loan associations and their officials receiv[e] fair treatment from the Government, and receiv[e] a reasonable degree of protection from Government actions which might at times, for one reason or another, [de]generate into arbitrary[,] capricious, and

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overbearing tactics. S. Rep. No. 89-1482 (1966), reprinted in 1966 U.S.C.C.A.N. 3532, 3535. Though these basic concepts are undeniable, Defendants have pressed theories throughout this case that would render meaningful judicial review unattainable. Initially, they sought to sidestep review by creating a completely new theory of jurisdiction. The Court rejected this attempt to eviscerate the judicial review provision contained in section 1464(d)(2)(B). United Western Bank v. OTS, 793 F. Supp. 2d 357, 364 (D.D.C. 2011).1 Defendants then launched a months-long campaign to reinvent the scope of the administrative record for revieweven arguing that they had total discretion to decide what went in the record in the first place. See, e.g., Hrg Tr. 52, Aug. 11, 2011, ECF No. 67. This Court expressed appropriate skepticism toward Defendants attempt at cherry-picking. Id. This Court now should reject Defendants latest invitation to enfeeble the carefully crafted limitations on seizure, which were crafted by a Congress well aware of the potential for abuse inherent in the ultimate regulatory actclosure of an otherwise viable bank. In their second argument, Defendants rely on their carefully constructed administrative record to advance arguments that are neither supported by the record or the facts before this Court. In particular, Defendants present a gross distortion of the relevant facts that relies upon omissions, revisions, and misrepresentations. They then ask the Court to push aside the Banks challengea challenge to an improper seizure unnecessarily costing hundreds of millions to the Federal Deposit Insurance Corporations (FDIC) Deposit Insurance Fund and the Banks shareholdersas an instance of mere disagreement warranting no remedy. Defs. Mem. of Points and Auths. In Supp. of Their Mot. for Summ. J. and In Opp. to Pl.s Mot. for Summ. J. 38, ECF No. 100-1 (Defs. Mem.). Simply put, Defendants have found themselves unable to rely

Internal marks and citations are omitted throughout this memorandum.

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on prudent and rational decisionmaking by the OTS. Consequently, they resort to a skewed reading of the record to justify their position. Yet when one looks past Defendants efforts at revisionist history, the facts of this case are actually rather straightforward. There was no dire liquidity or capital problem at United Western. The principal problem for the Bank lay with its regulator; that regulator made a legally-unsupportable decision to appoint the FDIC as receiver for the Bank and set upon a course of action to do so, without regard to the agencys obligation to use its overwhelming powers wisely and judiciously. First, as the OTS itself conceded in January 2011, United Western had taken steps to increase liquidity and there was a strong indication that [the] institutional depositiors [were] unlikely to immediately withdraw significant amounts of funds. See OCC-UWB 00793. The Institutional Depositors had a history of staying true to the Bank. That history was buttressed by the written agreements thatrather than terminating in weeks, as the OTS suggestsbound the Institutional Depositors to the Bank for at least several more months. See, e.g., AR 1555-57. Second, by the time the Bank was seized, United Western Bancorp, Inc. (the Holding Company) had obtained commitments for roughly $201 million to shore up the Banks capital. This recapitalization transaction (the Recapitalization Transaction) would have provided funds directly to the Bank; the Bank would have been rendered well-capitalized, with capital ratios well above the meet-and-maintain capital requirements imposed on the Bank via a June 24, 2010 OTS cease and desist order (the Cease and Desist Order). The Recapitalization Transaction also addressed the OTSs new and questionable safety and soundness concerns by permanently removing criticized assets from the Banks balance sheet. Defendants, however, address the Recapitalization Transaction through unfounded hindsight speculation about the

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seriousness of the investments and derisive comments about the identities of the relevant investors. The OTS was either unwilling or unable to come to grips with basic facts. And at bottom, this is the story of an agency that contrived a series of events to give a post hoc justification for its entirely unfounded decision to seize the Bank. Only more robust discovery would reveal whether this action was spurred by a soon-to-be failed agency trying to justify its continuing existence (or some other improper justification). But it is now known that the OTS had determined to seize the Bank long before it acted to do so. OCC-UWB 00734. It then embarked on a path that gave the Bank no opportunity to change [the] OTSs approach. AR 4229. Defendants should not be permitted to use the agencys success in effecting its plan to undermine the Bank to now deny the Bank relief from that plan. After all, banking regulators may not set out to find banks insolvent and place them in receivership, regardless of their true financial state. James Madison Ltd. v. Ludwig, 868 F. Supp. 3, 9 (D.D.C. 1994). ARGUMENT I. The OTSs Sudden and Unexpected Decision to Declare a Liquidity Crisis Is Unsupported By the Administrative Record. Defendants attempts to substantiate their fabricated liquidity crisis actually demonstrate that the OTS had sufficient information to understand that the Banks liquidity position was adequate. The documents that Defendants insist warned the Bank of its liquidity issues in fact reference the Institutional Depositors as a continuing source of funds. More significantly, Defendants own documents demonstrate that the Bank had firm written commitments from two such depositors. Meanwhile, two other related depositors were driven from the Bank by the OTS, expressly for the purpose of creating a liquidity crisis where there was none.

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A.

Defendants Attempt to Rewrite History In Arguing There Was No Change in Agency Policy.

As the Bank explained in its previous memorandum, the OTSs concern over the Banks relationship with certain Institutional Depositors was a sudden shift from the agencys earlier regulatory supervision of the Bank. See Mem. in Supp. of United Western Banks Mot. for Summ. J. 35-37, ECF No. 99 (Banks Mem.). The OTS said as much in the LMemorandum, which acknowledged that the agency did not object to the concentration in several previous examinations. AR 12; see also AR 6 n.9 (In certain previous examinations, OTS did not object to the [Institutional Depositor] concentration.). Because OTSs new hostility towards the Institutional Depositors was a material change in course, the agency was obligated to supply a reasoned analysis for the change. Republic Airline Inc. v. U.S. Dept of Transp., 669 F.3d 296, 299 (D.C. Cir. 2012). Yet instead of providing any reasoned analysis for a shift that undermined a core element of the Banks long-standing business model, the administrative record offers absolutely no analysis concerning the new position taken in the January 21, 2011 Order seizing the Bank (the Seizure Order). See AR 2-8. Sudden and unexplained change, or change that does not take account of legitimate reliance on prior interpretation, may be arbitrary, capricious or an abuse of discretion. Cove Assocs. Joint Venture v. Sebelius, No. 1:10-cv-01316 (BJR), 2012 WL 987862, at *15 (D.D.C. Mar. 26, 2012). Defendants do not point to any contemporaneous explanation for the shift in policy. Instead, they now insistcontrary to the OTSs earlier viewthat there was no change at all. In other words, the OTSthrough its successor agencyhas changed its position on whether it changed position, in direct contradiction of the administrative record. AR 12. In support of this radical change, Defendants cite comments from two Reports of Examination (ROEs) in 2007 and 2009, which they say warned the Bank that the Institutional

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Depositors were a problem. See Defs. Mem. 10-12. Much like they did earlier in this case, Defendants read[] too much into sentence fragments lifted out of their proper context. United Western Bank, 793 F. Supp. 2d at 362. The 2007 ROE, for instance, could hardly be said to have sounded the alarm: Liquidity and cash flow management policies and practices are satisfactory and effective given the complexity of the institution. AR 80. Liquidity sources are satisfactory and related reports provided the Board of Directors and management are adequate. Id. Contractual agreements with some of the largest of these depositors help protect the institutions liquidity position and would allow management time to obtain additional funds. Id. Many of the institutional deposit relationships are long-standing. [The Bank] has contracts and other arrangements with its institutional depositors generally requiring advance notice of the withdrawal of deposits in excess of an established threshold. [The Bank] maintains excess borrowing capacity at the [Federal Home Loan Bank] and is building a branch deposit franchise. AR 99. The OTS assigned a rating of 2 for the Banks liquidity component. AR 55. 2

As for the 2009 ROE,3 there was nothing whatsoever to alert the Bank that the OTS had adopted

The ROE did not list any corrective actions relating to liquidity and merely instructed management to remain cognizant of the Institutional Depositor concentration. AR 56, 84. Furthermore, the ROE noted that second largest institutional depositor, Sterling Trust Company, was an affiliate of the Bank, AR 81, rendering it far less likely that the depositor would withdraw its deposits on a whim. Unfortunately, Defendants loose treatment of the facts relayed in the 2007 ROE is not limited to liquidity issues. For instance, Defendants suggest that the ROE criticized the quality of the Banks assets, Defs. Statement of Facts with References to the Admin. R. 4, ECF No. 100-2 (Defs. Statement), but the examination actually gave the Banks asset quality a rating of 2, the second best possible rating, AR 55. Similarly, though Defendants correctly note that the Banks capital had decreased as of the 2007 ROE (because of the shift to community lending), Defs. Statement 7, they fail to mention that the Banks capital ratios exceeded its peers, AR 60, and that the Bank was maintain[ing] a prudent level of capital, a practice it was encouraged to continue, AR 62. Defendants also misleadingly parse the 2009 ROE. For example, though Defendants claim the ROE identified serious weaknesses in the Banks underwriting for [certain] loan programs, the ROE also found that [m]anagements responses addressed [those] concerns, AR 148.

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a new policy that the Institutional Depositors were per se unsafe.4 Certainly, the ROE indicated that the Bank should develop a concentration policy that would set limits on funding sources, including exposures to institutional depositors. AR 139. But the 2009 ROE concluded that [l]iquidity and cash flow management [were] satisfactory for the banks day-to-day operations. AR 159. Especially given the agencys accepting view of the Institutional Depositors in years past, such a muddled message was not an adequate signal of a major policy change.5 And perhaps most importantly, the ROE still lacked any useful analysis explaining the agencys new hostility toward the historically-stable, long-standing Institutional Depositors.6 If an agency decides to change course, then it must supply a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored. Williams Gas Processing-Gulf Coast, Co., L.P. v. FERC, 475 F.3d 319, 326 (D.C. Cir. 2006). As Defendants have not identified any such reasoned analysis in this record, the OTSs change of course with regard to the Institutional Depositors should be seen for what it isan unfounded and unjustified basis upon which to attack the Banks stability.

By late-2010, there was obviously such a per se policy. The OTS proclaimed during a meeting with the Bank that it was generally not comfortable with business models that rely on large blocks of institutional or other wholesale deposits, whether or not those deposits are technically brokered. OCC-UWB 00787. The message remained muddled because of the agencys later failure to deliver an ROE from 2010. The OTS completed an ROE on April 28, 2010 and included that report in the administrative record. AR 255-266. However, that ROE was never provided to the Bank. Defs. Opp. To Pl.s Motion to Supp. the Admin. R. 6, ECF No. 48. Instead, the OTS sent the Bank a letter indicating some corrective measures were necessary from the examination, but not otherwise outlining the apparent seriousness of the OTSs concerns, especially as to the Banks model for determining Other Than Temporary Impairment (OTTI) charges. AR 267-69. Thus, the Bank was never made aware that the OTS had assumed a decidedly hostile posture towards the Bank. Because the ROE was never provided to the Bank, the Court should provide it no weight in considering whether the Bank was informed of the agencys change in position. Any argument that a change in circumstances warranted the reversal would be disingenuous. After all, between 2007 and 2009, the Institutional Depositors had weathered a brutal financial crisis and maintained their deposits with the Bank. If ever there were a time for the Institutional Depositors to leave, it would have been before 2009, not after.

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B.

Defendants Confused Liquidity Analysis Still Does Not Establish Any Likelihood That The Institutional Depositors Would Withdraw.

The Bank explained in its initial memorandum that the OTS did not establish any likelihood that Institutional Depositor withdrawals would exceed the Banks liquidity reserves. Banks Mem. 37-39. In response, the OTS misrepresents the facts concerning two depositors who left the Bank and offers entirely unsubstantiated theories about two other depositors who stayed. There is simply no support for Defendants arguments in the administrative record. 1. The Bank was unaffected when two related entities were forced by the OTS to withdraw their deposits.

First, Defendants wrongly assert that [t]wo large institutional depositors simultaneously began withdrawing their deposits from the Bank on December 20, 2010. Defs. Mem. 29. Defendants apparently contend that this coordinated withdrawal of two purportedly independent depositors substantiated OTSs expert predictions. But these were not two independent depositors at all; one of themCPI Qualified Plan Consultants, Inc. (CPI)was the client of the otherMatrix Settlement and Clearing Services, Inc. (MSCS). AR 2242-43. Nor were both large depositors; CPIs deposits comprised a very small portion of the Banks deposit base. See AR 1557 (indicating that CPI would withdraw approximately $30 million). Thus, these combined withdrawals did not have a significant impact on the deposit base. But most importantly, both CPI and MSCS withdrew their deposits because the OTSin its quest to set the Bank up for failureissued a directive requiring the Bank to force them out.7 AR 1457-58; 2242-41. While Defendants conveniently make no mention of the directive, which called for the Bank to divest itself of any employee benefit plan deposits, it was this directive

The directive resulted from the OTSs decision to force the Bank into undercapitalized status via an unnecessary OTTI charge. Because the Bank was in undercapitalized status, it could no longer accept such deposits. See 12 U.S.C. 1821(a)(1)(D)(iii)(II).

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and this directive alonethat caused the deposits to be lost. There is no indication of any further loss of confidence in the bank by these Institutional Depositors. Thus, Defendants are wrong to (repeatedly) suggest that these compelled withdrawals were some early indication of a broader run on the Bank by its Institutional Depositors.. See, e.g., Defs. Mem. 21 (Institutional Depositors Begin to Flee the Bank); 26; 30 n.30. Thus, the facts show that these withdrawals would not have occurred but for the OTSs actions. Moreover, the facts show that the Bank was easily able to replace these OTS-demanded withdrawals via other sources of liquidity. See AR 1553-1725; 2242-43. 2. Equity Trust Company and Lincoln Trust Company were ready to stay with the Bank.

Second, Defendants make unsupported allegations that the Bank was forced to scramble to convince two other Institutional Depositors to temporarily forestall [their] departure. Defs. Mem. 36. Nothing in the record indicates that the two Institutional DepositorsEquity Trust Company (Equity Trust) and Lincoln Trust Company (Lincoln Trust)were anything less than the same voluntary and willing depositors they had always been. Each Institutional Depositor had a fiduciary duty to their customers, and maintained funds at the Bank because they remained fully insured by the FDIC; thus, there was no need to precipitously withdraw those funds from the Bank. It is hard to understand the agencys view that these were reluctant depositors, who wanted to withdraw fully insured funds from the Bank, when these depositors were nevertheless willing to sign written agreements with the Bank reiterating their commitment to maintain those deposits.8 And to make matters worse, the OTS misrepresents these agreements as forbearance agreements that set absolute deadlines for
8

See, e.g., AR 1556 ([Equity Trust] has advised the Bank that the consummation of the Recapitalization Transaction as quickly as possible is in its best interest and that as a client of the Bank for almost ten years, it is supportive of the Banks operations.).

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future withdrawals.9 Defendants incorrectly say that Lincoln Trust pledged to hold off on withdrawing its funds on deposit until January 31, 2011. Defs. Mem. 36. Lincoln Trust had previously entered a subaccounting agreement with the Bank;10 after the OTS pushed the Bank into undercapitalized status, Lincoln Trust and the Bank agreed to amend that agreement. In the amendment, Lincoln Trust did in fact reserve its right to terminate the Agreement if the Bank did not achieve wellcapitalized status by January 31, 2011. AR 1947. But the agreement between Lincoln Trust and the Bank still required 30 days notice before termination. AR 1952. Because February 1 was the first possible day Lincoln Trust could give such notice, Lincoln Trust could not withdraw any funds until March 3, 2011, a full month after the OTSs perceived deadline. Likewise, Defendants mistakenly contend that Equity Trust gave the Bank a final shortterm forbearance until February 15, 2011.11 Here again, the OTS misunderstands (or mischaracterizes) the relevant agreement, which was simply another amendment to an already existent subaccounting agreement. The agreement actually provided that Equity Trust could not terminate its subaccounting agreement with the Bank until after February 15, 2011. AR 194445. As with the Lincoln Trust agreement, Equity Trust was required to give the Bank 30 days notice before beginning deposit withdrawals upon termination. AR 1927. Consequently, Equity Trust could not start withdrawing funds until March 18, 2011, at the earliest. Furthermore, as

The OTS struggled to understand these agreements throughout the relevant events. Even the SMemo cryptically labeled the agreements as ambiguous. AR 32. The OTS argues that the Lincoln Trust agreement expired in February 2011. Defs. Statement 83. Not so. The agreement could only expire on February 1, 2011 if Lincoln Trust provided notice to the Bank at least 90 days before that date; because Lincoln Trust never provided notice, the agreement renewed for an additional one-year period. AR 1952. Defendants claim this forbearance came two days before [Equity Trust] was set to leave. Defs. Mem. 37. There is nothing in the record that indicates that Equity Trust planned to withdraw any deposits on December 31, 2010.

10

11

10

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Defendants recognized in the 2007 ROE, [i]f [Equity Trust] decides to terminate the agreement, [Equity Trust] can only withdraw up to 1/6 of the deposit balance at the end of the termination date at the end of each calendar month for a period of six months. AR 82. Defendants insist that Equity Trust was definitely going to withdraw its funds after the termination date, apparently because of Equity Trusts reference to the absolute outside date for termination in its transmittal letter for the amendment. Defs. Mem. 37. Defendants misunderstand the meaning of the phrase. The amended subaccounting date contained three possible dates triggering Equity Trusts right to terminate: (i) the date the October 28, 2010 investment agreement (the Investment Agreement) was terminated, (ii) the date the Investment Agreement was consummated, or (iii) the termination date set by the agreement (i.e., the absolute outside date.). Equity Trusts reference to an absolute date simply meant that it was referring to the only set termination date in its agreement with the Banka date akin to a period of repose.12 The company was not issuing an ultimatum, and the Bank had informed the OTS that the relevant Institutional Depositors planned to extend their agreements further. AR 4190. In fact, Equity Trust (along with Lincoln Trust and Legent Clearing) was entering an additional amendment just when the Bank was seized, further mitigating any cause of an imminent liquidity crises.13 See AR 4192 (indicating, as of January 20, 2011, that [e]ach of [the Banks] three largest institutional depositors, Lincoln Trust, Equity Trust, and Legent Clearing, ha[d] agreed to modify their deposit agreements to extend the terms of such agreements). Defendants erroneous reading of these critical dates is not their most serious error; the

12 13

On January 21, 2011, this set date was extended to March 31, 2011. AR 4218-4225. Specifically, the Bank, Equity Trust, and Lincoln Trust were in the process of amending their respective deposit agreements to extend the date in which the depositor could provide notice to the Bank to terminate the deposit agreement due to the Bank being undercapitalized to March 31, 2011the same date as the termination date in the Investment Agreement. AR 4218-4225.

11

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most irrational aspect of this imagined liquidity crisis was the OTSs belief that all the relevant Institutional Depositors would withdraw their deposits the moment that they could. That assumption finds no support in the record, and speculation is not evidence. Detroit Typographical Union No. 18 v. NLRB, 216 F.3d 109, 121 (D.C. Cir. 2000). Indeed, the OTS itself recognized as late as January 2011 that there was a strong indication that Institutional Depositors [were] unlikely to immediately withdraw significant funds. OCC-UWB 00793. The OTSs assessment of the Banks liquidity position in January 2011, as demonstrated by its own statements in the administrative record, are wholly inconsistent with the Defendants current argument that the Bank presented an unacceptably high risk of an uncontrolled collapse due to liquidity issues or a devastating liquidity failure. Defs. Mem. 2, 18, 30. The OTSs liquidity paranoia was rebutted by the long and loyal history of the Institutional Depositors, even through periods of economic difficulty and regulatory scrutiny. See No. 99 at 3-5. Much like the Seizure Order, Defendants fail to address this long history in any meaningful fashion. [T]he deference owed agencies predictive judgments gives them no license to ignore the past when the past relates directly to the question at issue. See BellSouth Telecommcns, Inc. v. FCC, 469 F.3d 1052, 1060 (D.C. Cir. 2006); see also Am. Petroleum Inst. v. Johnson, 541 F. Supp. 2d 165, 183 (D.D.C. 2008) (condemning an agency for ignoring a long and complicated history relevant to its administrative decision). 3. The Bank held sufficient liquidity to cover any permissible withdrawals.

In any event, the Banks liquidity would have been enough to cover depositor withdrawals even if a worst-case mass withdrawal had occurred. In the days leading up to the seizure, the Banks on-hand liquidity actually increased from $394 million (on January 7, 2011) to $426 million (on January 20, 2011), OCC-UWB 00793, 00798, which was well above

12

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industry standards. Moreover, at any time the Bank could have obtained an additional $137 million to $256.8 million from Legent Clearing, LLC (Legent). AR 39, 2245-46. The Bank also could have taken advances from the Federal Home Loan Bank or continued to accept deposits through the Qwikrate deposit-gathering system. AR 1553-1725. And the worst case scenario was not nearly the parade of horribles that the agency now suggests it to be, as Equity Trust could not immediately withdraw all of its deposits even if it chose to terminate its agreement with the Bank. Rather, as noted above, Equity Trust had the right to withdraw no more than one-sixth of its deposits each month over the course of six months upon termination. See AR 82, 1916, 2250-51. Thus, even assuming the Bank obtained no additional funds from Legent, and even assuming that Lincoln Trust and Equity Trust both withdrew the maximum amount of deposits permitted under their agreements, the Banks liquidity on hand would still have covered these withdrawals.14 As the OTS earlier acknowledged, these [c]ontractual agreements with some of the largest of these depositors help[ed] protect the institutions liquidity position and would allow management time to obtain additional funds. AR 80. The contracts with the Institutional Depositors were no less useful in 2011 than they were in 2007. In sum, the administrative record does not suggest that a liquidity crisis was occurring or that one was imminent, notwithstanding Defendants arbitrary and unfounded speculation about the motives and intent of the Institutional Depositors.

14

In Defendants worst case world, on January 21, Lincoln Trust could have withdrawn its entire balance of $137 million, AR 1912, while Equity Trust could have withdrawn only 1/6 of its total balance of its balance (or $115 million), AR 82, 1916. The Banks liquidity on handstanding at $426 millionwould have covered this entire amount with plenty of remaining liquidity, while Qwikrate and other available liquidity sources could have been pursued. See OCC-UWB 00793, 00798, AR 1559-60.

13

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II.

The OTS Inappropriately Determined That the Bank Had Failed to Submit An Adequate Capital Restoration Plan Within a Reasonable Time. The Banks opening memorandum explained how (a) the OTS did not give it a

reasonable time to submit its capital restoration plan (CRP); and (b) the OTS inappropriately rejected its plan. Banks Mem. 26-29. In response, Defendants offer three excuses for the OTSs decision to limit the Banks reasonable time to a mere seven days. They suggest that the OTS had full discretionwhich it granted to itself via its own regulationsto shorten the time for CRP submission when quick action was needed. Defs. Mem. 31-32. They then offer a line of analysis that boils down to no harm, no foul. And they further invoke notions of agency deference in matters involving technical knowledge. Id. at 33-34. Defendants are wrong on all three counts. A. The OTSs Decision To Give the Bank Just Seven Days to Submit a Capital Restoration Plan Was Unjustified and Prejudicial. 1. The OTS erred in giving the Bank too little time.

A financial institution ordinarily gets 45 days to submit a CRP. Even the OTSs own regulations agree. See 12 C.F.R. 565.5 (A savings association shall file a written capital restoration plan with the appropriate Regional Office within 45 days unless the OTS notifies the savings association in writing that the plan is to be filed within a different period.). Even so, Defendants insist that the OTS had absolute discretion to shorten this time anytime it chose to do so. That position ignores Congress explicit instruction to banking regulators that they provide insured depository institutions with reasonable time to submit capital restoration plans, which is generally 45 days. 12 U.S.C. 1831o(e)(2)(D)(i). Moreover, the entire purpose of the prompt corrective action regime is to resolve the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund. See 12 U.S.C. 1831o(1). Providing an

14

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unreasonable and unnecessary timeframe undermines that statutory mandate.15 The OTSs only contemporaneous excuse for the truncated response time was the Banks unspecified and unexplained unsafe and unsound condition.16 AR 16, 1441. While not supported in the administrative record, Defendants now point more specifically to the perceived liquidity threat, even though (a) the OTS felt at the time that there was a strong indication that Institutional Depositors [were] unlikely to immediately withdraw significant funds, OCC-UWB 00793; and (b) the liquidity threat was never mentioned at the time as the reason for the truncated time period. Defendants here are developing new rationales during the course of litigation. But, of course, counsels post hoc rationalizations, offered for the first time on judicial review, [cannot] substitute for an agencys obligation to articulate a valid rationale in the first instance. CS-360, LLC v. U.S. Dept of Veterans Affairs, No. 11-00078, 2012 WL 718374, at *12 (D.D.C. Mar. 6, 2012). In another act of creative misdirection, Defendants suggest the vague reference to an unsafe and unsound condition referred to the Banks entry of the Cease and Desist Order. Defendants contend that the Bank stipulated to the existence of unsafe or unsound practices at the Bank when it consented to the June 24, 2010 [Cease and Desist Order]. Defs. Statement of Facts with References to the Admin. R. 90, ECF No. 100-2 (Defs. Statement).17 The Bank

15

Of course, the OTS announced during a November 17, 2010 meeting that it would take actions based on the conditions at United Western, not on concerns about possible negative effective on the FDIC insurance fund. OCC-UWB 00787. In truth, the short deadline likely resulted from planned preset timetable that anticipated receivership for the Bank on January 7, 2011. OCC-UWB 787. The Bank filed a motion to strike Defendants Statement of Facts because the document violates the Local Rules limiting motions and oppositions to 45 pages. See generally Pl.s Mot. to Strike Defs. Statement of Facts, ECF No. 102. Because that motion remains pending, however, the Bank addresses allegations contained within the statement. Nevertheless, the Bank would be remiss if it failed to indicate that the Statement of Fact is filled with conjecture, argumentation, and references to facts beyond the administrative record. Thus, should the Court determine not to

16

17

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did not stipulate to any such thing, and Defendants misrepresentation of its own enforcement document is deeply troubling to say the least. See AR 568 (stating that the Bank agreed to the Cease and Desist Order without admitting or denying that such grounds exist, but only admitting the statements and conclusions in Paragraphs 1 and 2 below concerning jurisdiction). 2. The OTSs error was not harmless.

Tacitly acknowledging that there was no genuine basis for a seven-day deadline, Defendants also invoke the notion of harmless error. It is not even clear that harmless error applies in this context. In instances of administrative agency procedural error, the challengers interests can usually be vindicated by remand (as the challengers procedural rights are effectively restored by the remand). Harmless error analysis is a companion to this remedy; it exists because it would be senseless to vacate and remand for reconsideration when the end result would be the same. PDK Labs. Inc. v. DEA, 362 F.3d 786, 799 (D.C. Cir. 2004). But the judicial review statute implicated by this case contemplates only two outcomes: dismissal of the suit or reversal of the receivership. 12 U.S.C. 1464(d)(2)(B). Remand is not an optionand common sense dictates that the Bank cannot undertake a do-over of its CRP. Consequently, the fear of a futile remand that animates harmless error review of administrative law cases does not exist here. As such, harmless error review should not be undertaken. But even if harmless error analysis did apply, the Bank quite obviously was prejudiced. For instance, the OTS partly denied the CRP because of the Banks assumption that the OTS would allow the Bank to acquire Legent as an operating subsidiary. The OTS strategically denied the CRP on the same day that it denied the Banks application to buy Legent. See AR 4119, 4123. Had the Bank been given an appropriate amount of time, it could have presented a

strike the statement, the Bank respectfully requests an opportunity to offer a response to the statement in its own separate filing.

16

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CRP that took the denial into account by either (a) excluding the Legent acquisition from its CRP or (b) restructuring the Legent transaction into a purchase by the Banks Holding Companyas the Bank proposed to the OTS just two days after the CRPs denial. AR 4192. Likewise, the OTS condemned the Bank for unreasonably assum[ing] that its Recapitalization Transaction would be successful. AR 4124. Had the Bank been granted an appropriate amount of time, it would have provided additional evidence of the viability of the Recapitalization Transaction just as it did right up until its final hours of existence. AR 4195-4222. Defendants now speculate that the Bank could have amended its CRP because the Bank purportedly had more than sufficient time to make any additional arguments or submit any additional evidence. Defs. Mem. 33. Neither the statute nor the regulations, however, contemplate such supplemental submissions, probably because they would be superfluous were an institution afforded reasonable time. See 12 U.S.C. 1831o(e)(2); 12 C.F.R. 565.5. And in any event, the record indicates that the OTS had already determined to deny the CRP as early as December 30, 2010.18 AR 4176. In sum, the shortened period precluded the Bank from offering additional essential facts that might have saved the institution. B. The Banks Well-Supported Capital Restoration Plan Should Not Have Been Denied.

In its initial motion, the Bank addressed each purported ground that the OTS invoked in rejecting the Banks CRP.19 See Banks Mem. 29-34. In response, Defendants largely repeated

18

Defendants misleadingly suggest that the OTS considered the CRP for almost a month, Defs. Mem. 33-34, but the truth was closer to ten days, at least assuming agency staff worked over the three-day federal holiday weekend, AR 4176; see also OCC-UWB 00793 (UWB submitted the CRP and accompanying business plan on December 20, 2010. We intend to deny the CRP and business plan and are drafting a letter to do so at a time immediately before the receivership date.). It is not clear why the OTS then waited nineteen days to notify the Bank of its decision. The whole reason why the Bank was required to submit a CRP in the first place was that the Bank was pushed into undercapitalized status by an OTS directive ordering it to restate its financials. The directive, which concerned so-called OTTI charges, pushed the Bank 0.2% below the

19

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verbatim the grounds stated in the Seizure Order, filling them in with a bit of speculation and conjecture. Defendants rehashed version of the CRP rejection does not reflect reasoned agency decisionmaking. 1. The Recapitalization Transaction presented a realistic opportunity to recapitalize the Bank.

By selectively quoting portions of the Banks CRP, Defendants misleadingly suggest that the plan would actually push the Bank further into a weakened financial condition. Defs. Mem. 38. The CRP demonstrates otherwise, showing that the Banks capital ratios would substantially exceed the requirements for well-capitalized status shortly after the consummation of the Recapitalization Transaction. Nevertheless, Defendants allege that there was no credible capital plan on the horizon. Defs. Mem. 30. This characterization seems to relate to Defendants belief that the CRP should have established prospects for complete recapitalization in the near term. See, e.g., Defs. Mem. 2. As an initial matter, Defendants do not specify what constitutes the near term, and the OTS demanded recapitalization in just two weeks. AR 1442. The language of the statute expected the CRP would achieve its results over a period of years, not weeks. See 12 U.S.C. 1831o(e)(2)(B)(i)(III) (requiring a CRP to state the levels of capital to be attained during each year in which the plan will be in effect); see also, e.g., Astoria Fed. Sav. & Loan Assn v. United States, 568 F.3d 944, 948-49 (Fed. Cir. 2009) (describing a CRP spanning almost 4 years). Congress understood that no financial institution could secure, in a matter of days, (a) millions of dollars in additional capital, and (b) all required regulatory approvals or non-

threshold for adequately capitalized status. The OTS never provided a sufficient explanation or reasoned analysis of these directed OTTI charges. Instead, it criticized a model for determining such charges that had been used by other institutions without criticism from their regulators, including the OTS. See, e.g., AR 1337, 1339-40.

18

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objections.20 Either the OTS lacked this basic understanding, rendering its decision arbitrary and capricious, or it simply did not matter because the OTS had already decided to fail the Bank and the CRP process was a sham.21 The OTSs warped view of the relevant timeframes aside, the CRP presented a viable scenario for the timely recapitalization of the Bank. In particular, the CRP projected that, as of March 31, 2011, the Bank would hold capital ratios of 16.3% total risk-based capital, 15.3% Tier One risk-based capital, and 8.5% core capital, above the requirements for a well-capitalized bank and above the capital requirements imposed by the Cease and Desist Order. See 12 C.F.R. 565.4(b) (requiring ratios of 10%, 6%, and 5%, respectively). This significant improvement in the Banks capital position reflected the anticipated success of the Recapitalization Transaction. The Recapitalization Transaction also would have transferred the criticized mortgage-backed securities from the insured Bank into the Holding Company, avoiding any further losses to the Bank and potential related losses to the deposit insurance fund. See AR 1492 (projecting the Banks return to profitability by September 30, 2011). Defendants nevertheless take issue with the Recapitalization Transaction by calling it a complex and ultimately unsuccessful private-placement recapitalization plan.22 Defs. Mem. 16. It comes as some surprise that a financial regulator would view a straightforward private investment as complex. And in what can only be defined as deliberate obtuseness, Defendants

20

The anchor investors in the Recapitalization Transaction filed rebuttals of the control on November 8, 2010. Although OTS guidance suggests a prompt 20-day review period for noncontrol filings, the agency affirmatively took steps to extend the time frames. See AR 2467-71 (letter from the Bank requesting that the OTS take prompt action on the rebuttal of control notices). For the OTS, even a well-capitalized bank clearly was not enough. See OCC-UWB 00787 (indicating view of the OTS that a simple infusion of capital into the institution would not immediately solve the problems there).

21

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complain that the plan was not in fact a $200 million capital raise. Defs. Mem. 17. As reflected in written and oral commitments from various investorsall of which were secured before the Banks seizure on January 21this transaction was a $200 million deal that could be quickly closed given that the Holding Company had already secured the necessary NASDAQ shareholder approval waiver.23 AR 2453-55. Moreover, based on the commitments received by the Bank and transmitted to the OTS, the offering would have raised more than the required $200 million. In fact, the transaction was already subscribed over the $200 million mark: Investor Initial Anchor Investment Kemnay Fund Investors, Inc. Auda Alternative Investments Lovell Minnick Partners LLC
(Increased Investment)

Investment Size $103 million $10 million $17.5 million $3.83 million $12.8 million $3.83 million $50 million

Administrative Record AR 980 AR 4198 AR 4201 AR 4207 AR 4210 AR 4221 AR 4192

Henry C. Duques
(Increased Investment)

Oak Hill Capital Partners

(Increased Investment)

Olympus Partners TOTAL

$200.96 million

The OTS felt the Bank needed to immediately secure these commitments in the form of binding, written contracts. Particularly given the short timeframe afforded the Bank to assemble its CRP, that expectation is nonsense. It is also nowhere to be found in the statute, as the statute only requires that a CRP be built on realistic assumptions. 12 U.S.C. 1831o(e)(2)(C)(i)(II).
22

Defendants even draw assumptions from the national origin of one of the investors. See Defs. Mem. 25. Strangely, the OTS suggested that the Bank did not hold letters of intent from any investors. Of course, the Bank held written investment agreements from the Anchor Investors, and letters of intent from Kemnay and Auda.

23

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Congress did not call for banks to submit irrefutable, tangible evidence supporting every assumption or projection in a CRP. And in fact, even prior OTS guidance did not seem to conflate the realistic assumptions requirement with an evidentiary standard; that guidance simply defined realistic assumptions as those based on current interest rates and market conditions. AR 1447; see also OTS Examination Handbook 080A.4 (2008), available at http://www.ots.treas.gov/_files/422347.pdf (listing realistic assumptions as those based on (1) current Treasury rates, (2) market-based mortgage loan prepayment rates, and (3) loan origination rates that account for recent experience and current market conditions). If the OTS was determined to require written, unqualified commitments to support multimillion dollar capital investments in troubled banks, then the OTS should have at least announced its intention to do so. The Bank cannot be punished for reasonably expecting that commitments and letters of intent from investors would be enough to satisfy the statutory requirements. Traditional concepts of due process incorporated into administrative law preclude an agency from penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule. The quid pro quo for stringent acceptability criteria is explicit notice of all application requirements [or, here, plan requirements]. Satellite Broad. Co., Inc. v. FCC, 824 F.2d 1, 3 (D.C. Cir. 1987). 2. The OTSs problems with the Recapitalization Transaction were unsupported by facts.

Fundamentally, the OTSs complaints concerning the CRP centered around three things: (1) the Bank had not really secured the additional investors needed to support the Recapitalization Transaction; (2) the transaction contemplated that the OTS would waive certain regulatory requirements, which the agency was unwilling to do; and (3) the Recapitalization Transaction relied upon approval of the Banks acquisition of Legent, which the agency was

21

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unwilling to approve.24 These complaints find no support in the record, as the Banks assumptions were decidedly realistic. 12 U.S.C. 1831o(e)(2)(C)(i)(II). First, as indicated above, the Bank had secured the needed additional investment. Investment interest in the Bank actually continued to grow through the final days of the Banks existence. Even so, the OTS simply chose to ignore the additional investors by imposing everhigher burdens of proof on the Bank without even informing the Bank. That was error. Second, it was reasonable for the Bank to expect certain conditions of the Cease and Desist Order would be waived at the time of closing of the Recapitalization Transaction. The Cease and Desist Order was intended to address certain conditions that the OTS believed existed at the Bank. These conditions included a purported drop in asset quality, insufficient lending supervision, and inadequate liquidity planning. AR 569. But none of the conditions that the Bank and investors proposed removing addressed these concerns. And it was entirely realistic for the Bank and investors to anticipate that a highly capitalized bank would be permitted to operate subject to fewer imposed conditions. The OTSs refusal to consider any modification of the Cease and Desist Order, therefore, failed to account for the Banks increased capital position resulting from the private-sector Recapitalization Transaction. From the perspective of the Bank and its investors, a bank that significantly exceeded the well-capitalized capital requirements (as United Western would have after the Recapitalization Transaction) should expect to be treated as a well-capitalized institution. Such determination, however, is only achievable by

24

The OTS also noted the CRP increased the level of institutional deposits. But the actual concentrationthe relevant concern for the regulatordeclined. See Banks Mem. 29. Moreover, the OTS seemed to assume that Legent was an ordinary, third-party Institutional Depositor after completion of the Recapitalization Transaction. However, as an operating subsidiary or affiliate of the Bank, Legents deposits would presumably have been more stable than an outside depositor, as was the case with deposits of Sterling Trust Company noted in the 2007 ROE. AR 81.

22

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modifying the Cease and Desist Order to delete the meet-and-maintain capital requirement.25 The Bank was particularly justified in believing many conditions could be waived because, excepting the meet-and-maintain requirement, the OTS had never suggested waiver was an impossibility until the CRP denial. The OTS even refused to indicate whether it would waive conditions when the Bank asked the agency directly. See, e.g., AR 1193 (refusing to comment on anything but the meet-and-maintain requirement); see also AR 4228 (Mr. Peoples [of United Western] asked OTS to comment; we advised them [sic] that OTS was not making any commitments and was only listening to what he (Mr. Peoples) conveyed to the OTS [concerning the Recapitalization Transaction.). In short, Defendants used the Cease and Desist Order to force the Bank into a dangerous game of administrative Russian Roulette. Satellite Broad. Co., 824 F.2d at 4. Third, the OTSs rejection of the Banks acquisition of Legent (on the same day it rejected the CRP and the proposed business plan) would not have doomed the Recapitalization Transaction. Defendants essentially offer a number of reasons why they feel Legent was not a good acquisition target.26 Such musings are irrelevant. Legent was viewed as a necessary element of the Recapitalization Transaction because it was an attractive investment to the outside investors involved in the Recapitalization Transaction. But these investors did not insist on having the Bank own Legent. They were also agreeable to a purchase of Legent by the Holding Company. AR 4192. A purchase by the Holding Company would not have faced the regulatory

25

So long as it was operating under a written order imposing a meet-and-maintain requirement, the Bank could not be considered well-capitalized. See 12 C.F.R. 565.4(b)(1)(iv). Defendants memorandum and accompanying statement of facts is filled with inflammatory, unsubstantiated allegations concerning Legent. The Court should not afford these statements any weight. See, e.g., Defs. Mem. 18 n. 19 (asserting without support that Legent was used as a vehicle by known penny stock fraudsters); Id. at 28 (same); Defs. Statement 64 (accusing Legent itself of money laundering and penny stock fraud).

26

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hurdles that Defendants assume were insurmountable in a purchase by the Bank.27 And the Holding Company was ready to proceed with just such a purchase. Id. Simply put, the Banks CRP proceeded upon realistic assumptions and would have improved the Banks condition. Under the terms of the statute, its denial was yet another arbitrary and capricious act by the OTS. 3. The OTS is not entitled to technical deference here.

In a last ditch effort to save the OTSs faulty analysis, Defendants retreat to the notion that technical judgments made by agencies are entitled to deference. See Defs. Mem. 33-34. That may be so, but technical deference does not excuse an agency from its obligation to engage in rational decisionmaking. Exxon Co., U.S.A. v. FERC, 182 F.3d 30, 38 (D.C. Cir. 1999). Where, as here, the agency has stopped short of carefully considering the disputed facts, then no deference is due. Cities of Carlisle & Neola v. FERC, 741 F.2d 429, 433 (D.C. Cir. 1984). By simply ignoring facts that undermined its conclusion, the OTS effectively declined to exercise its expert judgment. And in reality, the OTSs decision on the CRP did not involve a matter of significant technical expertise. This was not an agency grappling with uncertain scientific questions or matters undergoing evolving technological change. Rather, the OTS was simply asked to interpret certain contractual agreements comprising the Recapitalization Transaction and determine their likely effect. Courts routinely confront these kinds of questions in ordinary contract cases; they are therefore well equipped to assess the agencys decision. Cf. Cox v. Commodity Futures Trading Commn, 138 F.3d 268, 272 (7th Cir. 1998) (explaining that an

27

Moreover, the OTSs months-long delay in handling the Banks application to purchase Legent prevented the Bank from making modifications following the rejection of its proposed Legent purchase in the CRP. See Banks Mem. 32-33.

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agencys decision is entitled to less deference when it involves a question of the sort that courts commonly encounter). This all the more so given that Congress specifically called for on the merits review of the OTSs decision by enacting the judicial review provision in FIRREA. III. The Bank Was Operating in a Safe and Sound Condition, Despite the OTSs Multitude of Repackaged Concerns. Defendants fill their memorandum with a variety of irrelevant facts concerning the Banks final years. Though they place this random assortment under the heading of unsafe and unsound practices, both the memorandum and the Seizure Order make clear that unsafe and unsound focused on three things: liquidity, capital, and earnings. The OTS assessed these matters using the wrong standard. And in any event, none of them posed a genuine threat to the Bank. A. For All Practical Purposes, Defendants Have Conceded that the OTS Applied the Wrong Law.

In finding that the Bank was in unsafe and unsound condition, the OTS did not use the definition of unsafe and unsound employed by the U.S. Court of Appeals for the D.C. Circuit. Banks Mem. 39-40. Instead, the Seizure Order used a more permissive standard that reaches risks that do not necessarily pose a direct threat to the relevant institution. Id. Defendants do not argue otherwise. Rather than defending the standard that the OTS used, Defendants correctly (but irrelevantly) note that the D.C. Circuit defined unsafe and unsound in the context of an enforcement action under 12 U.S.C. 1818. They also observe that this action concerns 12 U.S.C. 1464. They accordingly conclude the Section 1818 cases do not apply here. Defs. Mem. 30 n.30. Yet the actual permissible grounds for receivership are found in another statute, 12 U.S.C. 1821(c)(5). See AR 5 (noting that the grounds for the Seizure Order are drawn from

25

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grounds specified in the Federal Deposit Insurance Act). The relevant reference to unsafe and unsound is found there. And both Section 1818 and Section 1821 fall within the Federal Deposit Insurance Act. Thus, Defendants chose to ignore a basic rule of statutory construction. Because Section 1818 and Section 1821 fall within the same act, their identical phrases referring to unsafe and unsound would almost certainly be construed identically. [I]t is the normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning. Yousuf v. Samantar, 451 F.3d 248, 256 (D.C. Cir. 2006); see also Taniguchi v. Kan Pac. Saipan, No. 10-1472, 2012 WL 1810216, at *7 (U.S. May 21, 2012) (As we have said before, it is a normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning.); FCC v. AT&T Inc., 131 S. Ct. 1177, 1185 (2011) ([I]dentical words and phrases within the same statute should normally be given the same meaning.). Defendants attempt to correct the OTSs error by inviting the Court to apply the proper test on its own. Defs. Mem. 30 n.30. But a reviewing court may not attempt to supply a reasoned basis for the agencys action that the agency itself has not given. CS-360, LLC, 2012 WL 718374, at *12. In other words, courts do not sustain a right-result, wrong-reason decision of an agency. Sprint Nextel Corp. v. FCC, 508 F.3d 1129, 1132-33 (D.C. Cir. 2007). Instead, the reviewing court must judge the propriety of such action solely by the grounds invoked by the agency. Wedgewood Vill. Pharm. v. DEA, 509 F.3d 541, 550 n.13 (D.C. Cir. 2007). Because the agency did not begin with the right legal standard in mind, this ground for the Seizure Order cannot stand.

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B.

No Matter What Standard Applies, the Bank Was Not In an Unsafe and Unsound Condition.

As has been said before, the third ground for the Seizure Orderthe Banks ostensible unsafe and unsound conditionwas not a separate ground at all. Rather, it was substantially a restatement of the two other alleged grounds (i.e., the Banks capital levels and liquidity). Defs. Mem. 2. For good measure, the OTS also suggested that the Banks losses posed a threat. Id. The Bank need not burden the Court with another full discussion of the capital and liquidity issues. The record establishes that these issues were well under control and posed no genuine threat to the Bank.28 And as for earnings, it would prove entirely unreasonable if an insured institution could be closed after suffering two years of losses in the midst of the worst financial crisis since the Great Depression. Were that the case, the OTS would have seized much of the national thrift system in 2009, when one in three banks suffered losses during the final quarter. Binyamin Appelbaum, Bank Lending Plummets by $587 Billion in 2009, Wash. Post (Feb. 23, 2010), available at 2010 WLNR 3811012. As to United Western, the losses were largely traceable to certain non-agency mortgage backed securities.29 These securities would have been removed from the Banks balance sheet via the Recapitalization Transaction, eliminating any future ability for them to inflict a loss on the Bank. Thus, earnings were not a continuing concern.
28

Indeed, from June 2010 until the seizure of the Bank, the OTS continually acknowledged that the Banks management was responsive to OTS concerns regarding concentration risk, asset quality, and liquidity. OCC-UWB 00728, 00733,00739, 00744, 00750, 00756, 00761, 00766, 00771, 00776, 00781, 00786, 00792, 00797, 01021, 01027, 01032, 01037, 01042 and 01047. Defendants overstate the number of problem assets at the Bank, claiming that the Banks nonperforming assets stood at $348.2 million on September 30, 2010. Defs. Mem. 38. Even according to the S-Memo, the Banks non-performing assets were only $98.888 million. AR 29. Defendants would also have the Court believe that losses were also traceable to the Banks community lending program. The 2007 ROE seemed perfectly comfortable with these assets, noting that they enjoyed solid underwriting practices and procedures, an effective internal asset review system, and government insurance for a portion of the credits. AR 66.

29

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IV.

Even If the Court Determines That One Ground of the Seizure Order Was Valid, None of the Alleged Grounds Is SufficientStanding Aloneto Sustain the Decision. Defendants improperly assume that the Seizure Order must be affirmed if any one of its

three grounds proves valid. Defs. Mem. 9. In reality, [w]hen an agency relies on multiple grounds for its decision, some of which are invalid, [courts] may only sustain the decision where one is valid and the agency would clearly have acted on that ground even if the other were unavailable. Williams Gas Processing-Gulf Coast Co., 475 F.3d at 321. Where one of the independent grounds is really illusoryperhaps because the ground is conclusory, or perhaps because the ground is not really independent at allthen the Court has even less reason to sustain a decision on this tenuous ground. See, e.g., Intl Union, United Mine Workers of Am. v. Dept of Labor, 358 F.3d 40, 44-45 (D.C. Cir. 2004) (finding agency decision could not be affirmed where two of three grounds were invalid and third ground was conclusory). Here, the Seizure Order did not indicate any belief on the part of the OTS that these were three independent grounds. In fact, the agency memoranda prepared in support of the seizure demonstrate that each of the three alleged grounds did not, and could not, serve as independent bases for seizing the Bank. Rather, each alleged ground was intertwined with the others. AR 1617. For example, the imagined liquidity crisis was presented as an unsafe or unsound condition because of circumstances that purportedly resulted from (a) other alleged unsafe or unsound conditions and (b) the denial of the CRP. Furthermore, these grounds were premised on alleged facts thatwhen examined individuallycould reach almost every bank operating in a troubled economy. If, for instance, regulators set out to seize every bank operating with losses and some number of sub-par assets, a great portion of the banking system would have been seized during recent years. It seems

28

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equally unlikely that regulators would invoke a supposed liquidity crisis as the sole basis for receivership, at least where the agency had just days earlier determined that the immediate withdrawal of a significant amount of funds was unlikely. And as for the alleged capital issues, many banks operate in undercapitalized statusand without approved CRPseach day. These common sense facts signal that the OTS acted only because of its misperception that there was a confluence of negative circumstances happening at United Western. To the extent one of these circumstances proves unsupported, the Court should not assume the regulator would have leapt into action anyway. CONCLUSION Effective agencies make careful decisions that find substantial support in fact. And effective bank regulators, in particular, should favor adjustment, not adjudication. In re Subpoena Served Upon Comptroller of the Currency, 967 F.2d 630, 634 (D.C. Cir. 1992). In contrast, the OTS here overlooked critical facts in its race towards a preordained punishment. In acting so rashly, the agency did not just violate the public trust; it also thwarted its own regulatory goals by (a) creating instability in the market via a painful, forcible, and avoidable closure; (b) causing an unnecessary loss to the FDICs Deposit Insurance Fund; and (c) fostering distrust between banks and their regulators. Congress anticipated that there could come a time when judicial intervention was necessary in a bank receivership. Now is that time. The OTS utterly failed to meet its statutory obligations. Defendants motion should therefore be denied, and the Court should order Defendants to remove the FDIC from its post as receiver of the Bank and return the Bank to its rightful owner.

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Respectfully submitted, /s Andrew L. Sandler . Andrew L. Sandler (DC Bar No. 387825) Samuel J. Buffone (DC Bar No. 161828) Liana R. Prieto (DC Bar No. 987287) Michael R. Williams (DC Bar No. 994953) BUCKLEYSANDLER LLP 1250 24th Street NW, Suite 700 Washington, DC 20037 (202) 349-8001 (Telephone) (202) 349-8080 (Facsimile) /s Lawrence D. Kaplan . Kirby D. Behre (DC Bar No. 398461) Lawrence D. Kaplan (DC Bar No. 415186) PAUL HASTINGS LLP 875 15th Street NW Washington, DC 20005 (202) 551-1719 (Telephone) (202) 551-0119 (Facsimile) /s Theodore J. Abariotes Theodore J. Abariotes Deputy General Counsel UNITED WESTERN BANCORP, INC. 700 17th Street, Suite 2100 Denver, Colorado 80202 (720) 932-4216 (Telephone) (720) 946-1218 (Facsimile) Attorneys for Plaintiff United Western Bank Dated: June 8, 2012

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CERTIFICATE OF SERVICE I hereby certify that on this 8th day of June, 2012, a true copy of the foregoing was filed electronically. Notice of this filing will be sent by email to all parties by operation of the Courts electronic filing system. Parties may also access this filing through the Courts electronic filing system.

/s Liana R. Prieto Liana R. Prieto

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