The Vampire Strikes Back

Bank & Lender Liability Litigation Reporter September 4, 2003

Copyright 2003 Andrews Publications, Inc.
Bank & Lender Liability Litigation Reporter

September 4, 2003

SECTION: Vol. 9; No. 7; Pg. 8

LENGTH: 774 words

CASE: Restitution: FDIC v. Hurwitz

HEADLINE: Banker Pursues Sanctions Against FDIC, Seeks $61 Million

BODY:
Banker Charles E. Hurwitz and two of his companies have filed briefs in Texas federal court in support of their efforts to sanction the Federal Deposit Insurance Corporation in the amount of $61 million. The agency
unsuccessfully sought to hold Hurwitz liable for the failure of a thrift institution, and he claims sanctions are warranted as a result. Federal Deposit Insurance Corporation v. Hurwitz et al., No. H-95-3956, reply
brief filed (S.D. Tex. July 11, 2003); see Bank & Lender Liability LR, Nov. 27, 2002, P. 3.

Background

The FDIC filed suit against Hurwitz in the U.S. District Court for the Southern District of Texas, following the failure of United Savings Association of Texas, which was placed into receivership in late December 1988.

The bank was owned by United Financial Group Inc., a publicly held company. MAXXAM Inc. and Federated Development Company own 24.9 percent of UFG. Hurwitz and his family own Federated, and Hurwitz and Federated also have an interest in MAXXAM, a publicly held company. Hurwitz is the chairman of the board of MAXXAM.

The FDIC sought to hold Hurwitz and others who worked with him responsible for the failure of the bank. The FDIC requested millions to compensate
the taxpayers for the cost of the failure, which it estimated at $1.6 billion. The action claimed Hurwitz was a de facto controlling shareholder of the bank and was liable for the failure as a result.

The Office of Thrift Supervision also filed an administrative action against Hurwitz, MAXXAM, Federated and five former officers of the thrift in December 1995. The OTS claimed Hurwitz had to make sure MAXXAM and Federated maintained the net worth of United Savings because their ownership interest was over 25 percent, a figure disputed by the
defendants. Hurwitz was a controlling shareholder of UFG and was in a position to cause UFG to comply with the capital maintenance requirements of the bank, the OTS said, asserting he bore personal responsibility for UFG's failure to transfer assets to United Savings. The action sought $821million in restitution.

After an OTS administrative law judge ruled in September 2001 that Hurwitz should be absolved of liability for the bank failure, the parties settled
the administrative action. MAXXAM, Federated and Hurwitz did not admit or deny the allegations, but they paid $206,000 to the government.

The FDIC then elected to drop its federal court suit in November 2002.

The Counterclaim

MAXXAM filed a counterclaim against the FDIC in the District Court, and the claim is currently pending. The counterclaim alleges that prior to filing suit against Hurwitz, the FDIC knew its claims lacked merit yet
entered into a letter agreement with the OTS, under which it agreed to finance the administrative proceeding against MAXXAM, Hurwitz and others.
The OTS agreed to turn over to the FDIC any monies it recovered in its administrative action, MAXXAM contends.

The counterclaim says the letter agreement gives the OTS the FDIC's unlimited resources for the prosecution of civil claims the FDIC knew would be barred in federal court. One of the reasons cited by the FDIC to justify the arrangement is the fact that the OTS has a longer statute of limitations, MAXXAM says.

The counterclaim requests that all payments by the FDIC to the OTS be declared illegal and that the FDIC be enjoined from paying the OTS.
MAXXAM also requests unspecified costs, attorney fees and equitable damages.

Sanctions

Hurwitz and MAXXAM are also seeking sanctions against the FDIC as a result of its alleged arrangement with the OTS and its litigation over United
Savings. In briefs submitted to the District Court July 11, 2003, they argue that the agency should be ordered to pay some of MAXXAM's attorney fees. A minimum of $61 million is requested.

Hurwitz and the MAXXAM claim, in their brief in support of sanctions and in their reply memorandum to the FDIC's opposition pleading, that the FDIC is not above being sanctioned because federal agencies have been previously sanctioned by the courts. In addition, the agency acted in its corporate capacity when it pursued its claims against MAXXAM and the agency cannot hide behind governmental immunity.
MAXXAM contends that the sums it expended on attorneys should be used as the measure of sanctions. The company says it has spent approximately $34.9 million in fees and adds that the present value of this money is more than $61 million.

The briefs further state that an order of sanctions against the FDIC will serve the goals of deterrence, punishment and compensation.

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