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Columbian Financial Corp. v. Bowman

United States District Court, D. Kansas

May 17, 2018

MICHELLE W. BOWMAN, in her official capacity as Bank Commissioner of Kansas, et al, Defendants.


          Sam A. Crow, U.S. District Senior Judge

         The plaintiff Columbian Financial Corporation (“CFC”), as the sole shareholder of Columbian Bank and Trust Company (“Bank”), originally brought this action with the Bank against the Office of the Kansas State Bank Commissioner (“OSBC”) and four commission officials under 42 U.S.C. § 1983. The action principally alleged denial of due process from the OSCB declaring the Bank insolvent, seizing the Bank's assets, and doing so without providing adequate constitutional protections and remedies before and after the declaration and seizure. Twice this court granted motions to dismiss in favor of the defendants, and twice the Tenth Circuit returned the case for further consideration. An understanding of these two instances is helpful background for framing the pending dispositive motion.

         On the first motion to dismiss, the district court agreed that abstention under Younger v. Harris, 401 U.S. 37 (1971), required the plaintiff's claims for injunctive and declaratory relief to be dismissed without prejudice due to the pending state court matters. ECF# 30, pp. 12-13. The court dismissed the Bank as not a person capable of bringing a § 1983 action and dismissed the OSBC as not a person amenable to suit under § 1983. Id. at pp. 13-14, 18. The court held that the defendant Edwin G. Splichal was entitled to absolute immunity for his role in presiding over the 2012 administrative hearing, in determining what discovery to allow, and in deciding the parties' cross-motions for summary judgment. Id. at 22-25. Finally, on grounds of qualified immunity, the court dismissed the individual capacity actions against the defendant J. Thomas Thull, the former bank commissioner who issued the declaration of insolvency; the defendant Deryl K. Schuster, the bank commissioner coming into office in April 2014; and the defendant Judi Stork, the acting bank commissioner and deputy bank commissioner during the relevant period. ECF# 30, pp. 25-38. The plaintiffs appealed the Younger abstention ruling and the qualified immunity rulings in favor of the defendants Stork and Thull.

         While this order was on appeal, the circumstances of this case for Younger abstention changed when the pending state proceedings terminated in favor of the defendants. Consequently, the Tenth Circuit “vacate[d] dismissal of the equitable claims and remand[ed] these claims to the district court so that it can reconsider them without the need to abstain now that the state proceedings have ended.” Columbian Financial Corp. v. Stork, 811 F.3d 390, 395 (10th Cir. 2016) (citation omitted). The circuit court de novo reviewed and affirmed the district court's dismissal of the defendants Stork and Thull based on qualified immunity. The circuit court also found that the seizure of the bank's assets and the appointment of a receiver without a prior hearing did not violate a clearly established right and that the delay in the post-deprivation hearing did not violate a clearly established right.

         On remand, the plaintiff filed an amended complaint with leave of the court granted over the defendants' objections. ECF## 63 and 66. The defendants then filed their next motion to dismiss the first amended complaint asserting the lack of jurisdiction and other legal defenses, including the failure to state a claim for relief. ECF# 69. Their first issue was that the plaintiff's remaining equitable action against the defendants in their official capacities was barred by the Eleventh Amendment. The defendants specifically argued the plaintiffs were not seeking prospective relief against an ongoing violation within the exception created by Ex Parte Young, 209 U.S. 123 (1908). Instead, the plaintiffs were seeking “backward-looking relief” against OSBC's order of seizure and receivership. ECF# 70, pp. 11-16. Based on the parties' arguments as briefed and presented to it, the district court granted the defendants' motion to dismiss for Eleventh Amendment immunity and did not address the balance of the issues presented in the defendants' motion to dismiss.

         On appeal, the Tenth Circuit construed the plaintiff's amended complaint to “allege[] an ongoing violation of federal law and [to] seek[] from the federal court only prospective relief and other relief ancillary thereto.” Columbian Financial Corporation v. Stork, 702 Fed.Appx. 717, 721 (10th Cir. Jul. 25, 2017). The panel understood the plaintiff to be alleging an ongoing due process violation from the denial of “a hearing before an impartial hearing officer after sufficient opportunity for discovery.” Id.[1]

         Citing precedent that involved claims such as ongoing exclusion from school, from employment, and from an approved vendors' list, as well as the ongoing denial of a hearing in each instance, the panel saw no distinction between them and the plaintiff's claim here of just the ongoing denial of a constitutionally adequate due process hearing. Id. at 721-22. The panel believed that an injunction giving the plaintiff another hearing fell within the Young exception. Finally, on the question of whether any meaningful relief was available here pursuant to the Young exception, Columbian argued for the first time on appeal:

Columbian contends that its right to a constitutionally adequate hearing exists independently of its ability to have the Bank's assets restored. Moreover, it maintains that a partial remedy is still available. Columbian notes that, as a consequence of the seizure, it lost not only the Bank's assets but also the Bank's charter to conduct future business in Kansas. And furthermore, Columbian argues that the Declaration's insolvency finding could be held against in in a future application for a Kansas banking charter. Thus, Columbian argues that an opportunity to clear its name in a proper due process hearing would have “some effect in the real world” sufficient to avoid mootness of its procedural due process claim. (citation omitted).

702 Fed.Appx. at 723. The Tenth Circuit held that “Columbian identifies injuries that could be redressed by its requested relief-specifically, a new hearing with adequate procedural protections-which could overturn the insolvency finding and restore the Bank's charter.” Id. The district court's judgment was reversed and remanded for further proceedings consistent with the Circuit's order and judgment.

         Now on remand, there has been a substitution of defendants with Michelle W. Bowman replacing Deryl K. Schuster for the official capacity action against the Bank Commissioner and with the titled position of Deputy Bank Commissioner replacing Judi Stork. ECF# 101. The plaintiff has propounded discovery requests for which the defendant Bowman sought an extension of the response deadline and then sought a stay after filing a dispositive motion. ECF## 102, 104 and 106. The Magistrate Judge denied the stay request, and review of that ruling is also pending before this court.

         ECF# 121. The district court has entered an order staying discovery pending the filing of this order. ECF# 130. With the matters fully briefed and before the court, the court takes up the defendant Bowman's motion for summary judgment, or in the alternative, judgment on the pleadings. ECF# 104.

         Judicial Notice

         In her motion, the defendant asks the court to take judicial notice of all proceedings in this litigation and all related commission proceedings and state court proceedings. The court may take judicial notice of state court documents. See Pace v. Swerdlow, 519 F.3d 1067, 1072-73 (10th Cir. 2008). In doing so, the court will follow the Tenth Circuit's holding:

However, facts subject to judicial notice may be considered in a Rule 12(b)(6) motion without converting the motion to dismiss into a motion for summary judgment. See Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1278 n. 1 (10th Cir. 2004) (citing 27A Fed. Proc., L.Ed. § 62:520 (2003)). This allows the court to “take judicial notice of its own files and records, as well as facts which are a matter of public record.” Van Woudenberg ex rel. Foor v. Gibson, 211 F.3d 560, 568 (10th Cir. 2000), abrogated on other grounds by McGregor v. Gibson, 248 F.3d 946, 955 (10th Cir. 2001). However, “[t]he documents may only be considered to show their contents, not to prove the truth of matters asserted therein.” Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1188 (11th Cir. 2002).

Tal v. Hogan, 453 F.3d 1244, 1265 (10th Cir. 2006), cert. denied, 549 U.S. 2007); see Winzler v. Toyota Motor Sales U.S.A., Inc., 681 F.3d 1208, 1213 (10th Cir. 2012) (“The contents of an administrative agency's publicly available files, after all, traditionally qualify for judicial notice, even when the truthfulness of the documents on file is another matter. (citations omitted).”). Thus, the court will take judicial notice of the existence and content of the orders and pleadings submitted and publicly filed and take note of the content of what was argued and what was decided. See Kaufman v. Miller, 2013 WL 4446977, at *2 (10th Cir. Aug. 21, 2013) (“[W]e can take judicial notice of the contents of the habeas petition to determine whether this claim had been presented in the district court. See Guttman v. Khalsa, 669 F.3d 1101, 1130 n. 5 (10th Cir.2012).”). But, the court will not assume the truth or correctness of the matters or facts alleged, asserted, or decided therein.

         Legal Standards Governing Motion

         Rule 56 mandates summary judgment “against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). “Of course, a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, ' which it believes demonstrate the absence of a genuine issue of material fact.” Id. at 323, 106 S.Ct. 2548. This does not mean the moving party must negate the other side's claims or defenses through affidavits. Id. Upon a properly supported motion for summary judgment, the nonmoving party must go beyond the pleadings, that is, mere allegations or denials, and set forth specific facts showing a genuine issue of material fact for trial, relying upon the types of evidentiary materials contemplated by Rule 56. Id.

         The court decides the motion “through the prism of the substantive evidentiary burden.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Thus, a factual dispute is “material” only if it “might affect the outcome of the suit under the governing law.” Id. at 248, 106 S.Ct. 2505. A “genuine” factual dispute requires more than a mere scintilla of evidence in support of a party's position. Id. at 252, 106 S.Ct. 2505. The purpose of Rule 56 “is not to replace conclusory allegations of the complaint or answer with conclusory allegations of an affidavit.” Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 888, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990). At the summary judgment stage, the court is not to be weighing evidence, crediting some over other, or determining the truth of disputed matters, but only deciding if a genuine issue for trial exists. Tolan v. Cotton, ---U.S. __, 134 S.Ct. 1861, 1866, 188 L.Ed.2d 895 (2014). The court performs this task with a view of the evidence that favors most the party opposing summary judgment. Id. Summary judgment may be granted if the nonmoving party's evidence is merely colorable or is not significantly probative. Liberty Lobby, 477 U.S. at 250-51, 106 S.Ct. 2505. Essentially, the inquiry is “whether the evidence presents a sufficient disagreement to require submission to the jury or whether it is so one-sided that one party must prevail as a matter of law.” Id. at 251-52, 106 S.Ct. 2505.

         The defendants move, in the alternative, for judgment on the pleadings. “A motion for judgment on the pleadings under Rule 12(c) is treated as a motion to dismiss under Rule 12(b)(6), ” Atlantic Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1160 (10th Cir. 2000), and the same standards govern motions under either rule, Ward v. Utah, 321 F.3d 1263, 1266 (10th Cir. 2003). On either motion, the court considers only the contents of the complaint. Gee v. Pacheco, 627 F.3d 1178, 1186 (10th Cir. 2010). The court accepts as true “all well-pleaded factual allegations in a complaint and view[s] these allegations in the light most favorable to the plaintiff.” Smith v. United States, 561 F.3d 1090, 1098 (10th Cir. 2009), cert. denied, 558 U.S. 1148 (2010). To withstand a Rule 12(b)(6) motion, “a complaint must contain enough allegations of fact, taken as true, to state a claim to relief that is plausible on its face.” Al-Owhali v. Holder, 687 F.3d 1236, 1239 (10th Cir. 2012) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). “The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678 (internal citation and quotation marks omitted). “Thus, in ruling on a motion to dismiss, a court should disregard all conclusory statements of law and consider whether the remaining specific factual allegations, if assumed to be true, plausibly suggest the defendant is liable.” Kansas Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011).


         Rather than restate all the uncontested facts appearing in this court's prior orders, the Tenth Circuit's opinions, and the parties' current and past filings in this case, the court provides the following summary as sufficient for the context of its ruling. The court does not share the plaintiff's position that its § 1983 action constitutes a routine federal case for which discovery should occur before any summary judgment matters are decided. By taking judicial notice of the publicly-filed records which both sides have submitted as exhibits in this dismissal/summary judgment proceeding, the court finds itself fully informed of all relevant rulings and facts and is well-positioned to rule on the arguments presented without the delay and burden of additional discovery being shouldered. As reflected in what follows, the court has been careful to review the state court filings, because the plaintiff's federal claims are being uniquely presented in an apparent effort to avoid the res judicata/collateral estoppel bar.

         In July of 2008, the state-chartered Bank with federal-insured deposits consented to the entry of an “Order to Cease and Desist” which required the Bank to cease and desist from engaging in the listed “unsafe or unsound banking practices and violations” and to modify its operations and policies in numerous areas and to report these changes. ECF# 70-1. CFC has alleged that the Bank complied with this order revising its policies and submitting the required reports and analyses which demonstrated the Bank's financial strength and liquidity. On August 22, 2008, without additional notice or a prior hearing, then-Bank Commissioner J. Thomas Thull issued a Declaration of Insolvency and Tender of Receivership (“Declaration”) finding, “the Commissioner is satisfied that the bank is insolvent within the meaning of K.S.A. 9-1902(2) and as such, the situation presents an immediate danger to the public welfare justifying uses of this emergency proceeding.” ECF# 117-6, p. 2. The Commissioner's Declaration quoted this Kansas statute as providing, “A bank or trust company shall be deemed to be insolvent . . . (2) when it is unable to meet the demands of its creditors in the usual and customary manner.” Id. The Declaration directed that the Commissioner was taking charge of Bank's “properties and assets.” Id. The Declaration further appointed the Federal Deposit Insurance Corporation as receiver after finding that the Bank “cannot resume business or liquidate its indebtedness to the satisfaction of depositors and creditors and knowing further that the deposits of said bank are insured by the Federal Deposit Insurance Corporation.” Id. On the same day as this seizure, the FDIC followed through with a pre-arranged sale of a substantial portion of the Bank's assets.

         The Declaration also notified the Bank it had “30 days to file an appeal petition for judicial review under the Kansas Judicial Review Act, K.S.A. § 77-602 et seq.Id. at 3. A timely petition for review was filed. The petitioners Bank and CFC argued, in part, that the Bank “was not, in fact, insolvent within the meaning of” state law. ECF# 117-7, pp. 2-3. Eighteen months later in March of 2010, the state district court entered a judgment “denying relief to the” plaintiffs except for “remanding this matter back to the State Banking Commissioner and the State Banking Board for further proceedings consistent with” the district court's fifty-two-page opinion. ECF# 117-9, p, 53. The district court's opinion included an interpretation of the state statute in question:

Thus, Petitioners'/Appellants' assertion that the phrase “is unable”, as used in K.S.A. 9-1902, means “insolvency” in actual fact is too strict of a standard by which to measure the authority of the Commissioner to seize a banking institution.
Thus, here, the legal question before the Court, properly determined, would be not whether the Columbian State Bank and Trust Company was, in fact, insolvent, only whether it reasonably appeared to be so at seizure and that based on examination and reports available to the Commissioner at the time he was ‘satisfied that it . . . cannot sufficiently . . . resume business or liquidate . . . .” (K.S.A. 9-1905).

ECF# 117-9, pp. 35-36, 40. As these quotations show, the district court interpreted the relevant Kansas statutes and established the governing legal standard on insolvency which was followed throughout the administrative review proceedings.

         CFC's petition for judicial review also asserted the denial of due process (lack of notice and hearing) in violation of the Fourteenth Amendment and 42 U.S.C. § 1983. ECF# 117-7, pp. 4-5. On this due process issue, the state district court's opinion included these conclusions of law:

It seems clear that bank seizures, given their exigency, have long been excused from any notice or pre-hearing seizure requirement (citation omitted). However, such is not necessarily the case post-seizure. Some substantive post-deprivation review is required in order to constitutionally ground the decision. (citation omitted). A bank seizure is not excepted. In Woods v. Federal Home Loan Bank Bd., 825 F.2d 1400 (5th Cir. 1987), cert. denied, 485959, 99 L.Ed.2d 422 (1988), a review of the administrative record and an opportunity to submit evidentiary matters under standard summary judgment rules, by which the case was presented to the Court, was deemed constitutionally sufficient, particularly in light of the fact the financial institution had been the subject of in-house scrutiny by regulators for four years and was the subject of a formal cease and desist order. Id. at pp. 1410-1413. . . .
Thus, since to date a seemingly constitutionally adequate post-seizure procedure has been omitted here, and the consequences of such an omission, given the record before the court, is to disable an adequate remedy or adequate review, the justification or remedy for such an omission needs further examination. . . .
Here, while the Commissioner, as noted, purported to act under the emergency procedures granted in the Kansas Administrative Procedure Act (K.S.A. 77-536), he, to the Court's knowledge, has not yet followed through with a post-deprivation hearing (K.S.A. 77-536(e)). If this is the case, the Court believes this was error.
. . . Given the breadth of circumstances affecting licensure that invoke a hearing when a license is effected, clearly, then, a bank's seizure and the effective termination of its operation as a going banking concern, as occurred in present case, should command a hearing by the directive of K.S.A. 77-512. . . .
If this is correct, then, at best here, Petitioners are before the Court appealing “non-final agency action” as defined by K.S.A. 77-607(b)(2). . . .
. . . . Thus, postponement of judicial review of the limited issue, as available in this proceeding, provokes no more inadequate remedy than that which presently exists nor has substantial harm been shown to probably have been increased by such a postponement (K.S.A. 77-608(b)). Further, delay for a K.S.A. 77-536(e) post-deprivation hearing certainly offends no public benefit disproportionately. Id. As such, Petitioners' petition, seen as a petition for interlocutory review, would fail for the reason that K.S.A. 77-608's “non-final”, interim, relief could simply not be sustained under K.S.A. 77-608(b) in fact or law at the time the petition in this case was filed.
Further, as noted earlier, given that the record in this case lacks any precedent and substantive constitutional development and grounding that would be essential for meaningful judicial review or that could command constitutional respect for any judicial order entered, a remand to the agency for implementation of the hearing process contemplated by K.S.A. 77-536(e) seems warranted from any perspective. Once such proceedings are concluded, whether by hearing, meaningful stipulation, summary judgment, or admission, only then can judicial review, if elected, be meaningfully and constitutionally exercised. However, this said, any future remedy as previously discussed would still be grossly limited.
ECF# 117-9, pp. 44-52. Besides remanding the matter for a post-seizure hearing under K.S.A. § 77-536, the district court, as shown above, concluded as a matter of law that a substantive review here post-seizure would be constitutionally adequate, that such a procedure was provided by this statute, and that postponing judicial review for this hearing would not make the “grossly limited” future remedies any more “grossly limited” than they already were. These rulings were necessarily part of the state judicial review proceedings here.

         Around two years later, in April of 2012, the OSBC issued its sixteen-page decision granting summary judgment against CFC and the Bank. ECF# 117-13. In that decision, then-Commissioner Splichal characterized the issues in dispute as these:

The sole issues in dispute as a matter of law are (1) whether Columbian Bank was insolvent on August 22, 2008, when the former Bank Commissioner issued a Declaration of Insolvency and (2) whether there were grounds to appoint the FDIC as Receiver and for the FDIC to continue serving as Receiver. The parties are all in agreement that Summary Judgment as a matter of law is appropriate as there are no genuine material facts in dispute. What is disputed between the parties are the conclusions that should be drawn from the facts.

ECF# 117-13, p. 9. In addressing the Bank's arguments against the OSBC's failure to include its adequate sources of liquidity in the formula, Splichal concluded, in part:

The liquidity position of Columbian Bank deteriorated even further leading up to its closure. Bankers Bank of Kansas withdrew its line of credit to Columbian Bank. The FHLB froze their line of credit. AVIVA (the bank's largest depositor) was in the process of withdrawing its funds by the end of the third quarter that year. By July 30, 2008, Columbian Bank was notified the FDIC was taking bids for the sale of the bank's deposit accounts. The bank was in dire condition.
Columbian Bank viewed its liquidity position through rose-colored glasses. The fact that the bank had not improved its liquidity position prior to the closing, despite having had months of advance notice regarding the regulator's stance on its liquidity position, further justifies viewing the contingent liquidity sources with skepticism and not including them in the liquidity formula. If the liquidity sources were as readily available as Columbian Bank now contends, then it presumably could have and should have secured them well in advance of the closing. In fact, Columbian Bank's brokered deposit plan dated August 15, 2008, recognized the risks involved with the speculative sources of liquidity. As such, the brokered deposit plan provides additional support for the methodology used by the OSBC to calculate the bank's liquidity. (R. 154.) To conclude, the attempts of Columbian Bank to improve its liquidity situation were simply too little, too late.

ECF# 117-13, pp. 13-14. Splichal also rejected the Bank's reading of K.S.A. 9-1902(2) as to require an actual unsatisfied creditor's demand before a finding of insolvency. Id. at pp. 14-15. Splichal concluded that, “[a] preponderance of evidence, that is clear and convincing in nature, demonstrates Columbian Bank was insolvent, as defined in K.S.A. 9-1902(2), on August 22, 2008.” Id. at p. 15. This order notified the parties that they had thirty days to file a petition for judicial review under K.S.A. 77-613. Id. at p. 17.

         In May of 2012, the Bank and CFC filed a new twelve-page petition for judicial review in Shawnee County District Court and “concurrently filed a materially identical Second Amended Petition for Judicial Review” in the prior judicial review proceeding. ECF# 117-14, p. 1, n. 1. The petitioners claimed relief because:

a. The Commissioner's actions, or the statute or rule and regulation on which the Commissioner's actions are based, violates the Due Process Clause on its face or as applied by allowing the Commissioner ...

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