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WBK Industry News - Litigation Developments

Tenth Circuit Allows Suit Against State Banking Officials

The Tenth Circuit Court of Appeals held that a bank properly alleged violation of its procedural due process rights by a state regulatory official, and that, although the bank had been dissolved for a number of years, this violation could still be rectified by a proper court ruling.

In 2008, a state bank commissioner (“Commissioner”) declared a state-chartered bank (“Bank”) insolvent and took charge of the Bank, appointing the FDIC as its receiver.  The Bank sought review of this declaration in state court and was given a post-deprivation hearing conducted by the office of the commissioner.  The hearing went in favor of the Commissioner and the decision was appealed by the Bank in state court.  After receiving another negative ruling, the Bank filed suit in federal court asserting a denial of due process rights and seeking an injunction requiring the Commissioner to, among other things, provide a hearing in front of a neutral magistrate.  The federal district court found that the Bank had not alleged an “ongoing” violation of its due process rights, leading to this appeal.

Typically, states, state agencies, and state officials enjoy sovereign immunity from suit in federal court.  However, that immunity is not absolute.  Under an exception carved out by the United States Supreme Court, a party may bring suit against an individual state officer acting in their official capacities if the complaint alleges an ongoing violation of federal law and the party seeks future relief.

In Columbian Financial Corporation et al. v. Stork et al., the Tenth Circuit addressed whether the Bank properly alleged an ongoing violation of federal law seeking prospective relief in order to trigger the exception to sovereign immunity.  The Bank argued that alleging a violation of its due process rights was still “ongoing” because it had not received a meaningful hearing – over seven years from the declaration of insolvency.  Defendants responded that the Bank had not identified any ongoing violation of federal law because all actions giving rise to the case were in the distant past and the Bank no longer exists.

Holding that the Bank had sufficiently alleged an ongoing violation of federal law, the Tenth Circuit noted that a party seeking to right a previous wrong does not disqualify them from the exception.  Further, the Bank also met the “seeking future relief” requirement by requesting a hearing to review the Commissioner’s original determination.  Just because the Bank was granted some form of hearing does not mean their due process rights were not violated.  If that were the case, the Court reasoned, any state actor could avoid complying with federal due process by simply providing a sham hearing.

Finally, the Tenth Circuit held the case was not moot because, although the Bank had been dissolved for some time, a rehearing could provide them some relief in the form of rescinding the “insolvency” designation, reinstating their ability to charter a new bank, or some kind of other meaningful relief.

The Tenth Circuit’s opinion may be found here.