WASHINGTON — The Office of the Comptroller of the Currency definitely got the better end of its merger with the Office of Thrift Supervision. But among the downsides: The OCC is now on the legal hook for closing a thrift it never regulated.
Under the Dodd-Frank Act, multiple agencies officially took over the OTS's former duties Thursday, but the comptroller's office inherited the most work, including standing in for OTS in trials related to federal thrift supervision.
While OTS's pending caseload was small, the OCC must now handle the intriguing case of United Western Bank. The former Colorado thrift sued regulators in February, saying OTS was wrong to close its doors and asking the judge for reinstatement. Last month, U.S. District Court Judge Amy Berman Jackson ruled the suit against the OTS — so really the OCC — could move forward.
"The OCC is not the agency that took the regulatory action, but they're the regulatory agency that remains on the hook to clean up the mess," said Lawrence Kaplan, an attorney involved in the case who is at the firm Paul, Hastings, Janofsky & Walker LLP. "The cases just don't disappear because the agency disappeared."
The case is the one known attempt by any of the roughly 400 recent failed banks to contest its collapse, and some believe the outcome could determine if others follow. United Western, whose balance sheet was sold off in January, alleged the OTS and the Federal Deposit Insurance Corp. orchestrated the seizure before giving the thrift enough opportunity to recover.
In her June ruling, Jackson granted the FDIC's request to exit the case, but allowed the plaintiff to pursue its claims against OTS.
"Since the statute specifically contemplates that a bank may challenge the Director of OTS's decision to appoint a receiver in the District Court, the Court will permit the claims filed on behalf of plaintiff United Western Bank to proceed," she wrote.
Overall, however, the litigation workload left by the OTS for the OCC and other agencies to handle does not appear that large. (Under Dodd-Frank, the FDIC must take over proceedings involving state-chartered thrifts, and the Federal Reserve Board inherits responsibility for matters related to thrift holding companies.)
But while United Western was not huge — it held about $2 billion in assets at the time of its closure — the lawsuit is being watched with interest amid more than 10 straight quarters of elevated failures.
Observers said the new defendant, while not the party technically accused of any wrongdoing, is not likely to back down.
"As a matter of principle I would assume the OCC would defend that case as the OTS" would, said Thomas Vartanian, a partner at Dechert LLP.
Lawyers involved in the suit say, except for swapping out the official name of the defendant, the merger of the OCC and OTS does not appear to have much an effect on the case. Among the 674 employees who joined the OCC July 18 as part of the merger, those who had worked on the OTS's defense are believed to be doing the same now for a new employer.
"It's not infrequent that a successor entity inherits the responsibility as a defendant brought against a predecessor entity," said Andrew Sandler, a partner at BuckleySandler LLP, who represents United Western. "It's my first experience where a regulator has been merged into another regulator. But there have many instances where a company is merged into or bought by another company."
Kaplan agreed, saying, "The case moved over, the people moved over."
