992 F.

2d 1531

John R. DOOLITTLE, as a person participating in the affairs

of Bay Gulf Federal Credit Union, Petitioner,
v.
NATIONAL CREDIT UNION ADMINISTRATION,
Respondent.
No. 91-4075.

United States Court of Appeals,

Eleventh Circuit.
June 14, 1993.

Steven R. Bisker, Annandale, VA, for petitioner.

Barbara C. Biddle and Christine N. Kohl, Appt. Staff/Civ. Div., Dept. of
Justice, Washington, DC, for respondent.
Petition for Review of an Order of the National Credit Union Association.
Before KRAVITCH and ANDERSON, Circuit Judges, and HILL, Senior
Circuit Judge.
HILL, Senior Circuit Judge:

John R. Doolittle appeals an order of the National Credit Union Administration

that prohibits him from participating in any manner in the affairs of any
federally-insured institution and directs him to pay the sum of $42,857 to Bay
Gulf Credit Union as restitution. We vacate and remand the decision of the
National Credit Union Administration.

I. Background
2

John R. Doolittle ("Doolittle") worked for Bay Gulf Credit Union ("Bay Gulf")
for eighteen years, the last eight of which he served as president and was a
member of the Board of Directors. Bay Gulf is a federally insured credit union,
and as such it falls under the auspices of the National Credit Union
Administration ("NCUA") pursuant to the Federal Credit Union Act ("FCU

Act"), 12 U.S.C. 1751, et seq. On April 19, 1990, Doolittle's employment

with Bay Gulf was terminated by vote of the Board of Directors. Doolittle
subsequently brought suit against Bay Gulf for breach of contract and against
David Becker, a consultant for the NCUA who succeeded Doolittle as
president, for tortious interference with a business and contractual relationship.
3

On February 12, 1991, the NCUA filed a Notice of Intent to Prohibit and
Impose Other Remedial Sanctions ("Notice of Intent") against Doolittle. The
Notice of Intent set forth five counts against Doolittle that charged him with
violating the provisions of the FCU Act and accompanying regulations by
engaging in unsafe and unsound practices, thus imperiling Bay Gulf and
demonstrating Doolittle's unfitness to participate in the affairs of a federally
insured credit union. The Notice of Intent did not allege and the record does not
indicate that Doolittle derived any personal gain from the conduct set forth in
the charges.

A formal administrative hearing was held before an Administrative Law Judge

("ALJ") who issued a Recommended Decision proposing that Doolittle be
prohibited from future participation in the conduct of the affairs of any
federally insured credit union and that he also be ordered to make restitution to
Bay Gulf in the amount of $42,857. The NCUA Board adopted the ALJ's
decision and recommended findings and conclusions in its October 15, 1991,
Final Decision and Order after finding Doolittle's exceptions to the ALJ's
decision non-meritorious. Doolittle then filed the appeal now before us.

The Notice of Intent alleged five counts of wrongdoing by Doolittle. Count I

involved certain real estate, Priority One Learning Center ("Priority One"),
owned by Bay Gulf. Priority One was valued on the books at $459,243 as a
commercial property because a day care center had been operated there. This
amount equaled the balance due on the outstanding loan on Priority One and
was $30,000 less than a July 1989 appraisal. Desiring to know more about the
property and the operation of a day care center in order to sell Priority One,
Doolittle had a local real estate firm do an analysis of the property. The firm
valued the property at $264,000 as residential property. Priority One was a
commercial property in a residential area, but its zoning reverted to residential
use while Bay Gulf owned it. The commercial zoning status could be renewed.
Despite the apparent drop in the value of Priority One, Doolittle neither
changed the valuation on the books nor adjusted the loan loss reserves to reflect
a probable loss on the outstanding loan due to the reduced value of the
property. Doolittle contended that he did not act on this market analysis
because it failed to include the information he wanted about how to operate a
day care center. The ALJ found that, in light of the change of the zoning,

Doolittle should have obtained another appraisal after finding this one
unsatisfactory, and, at a minimum, should have informed the Board of
Directors. Before distributing any dividend, Bay Gulf was required to adjust its
loan loss reserves to reflect any anticipated losses. Because Bay Gulf had only
$50,000 in undivided earnings for the first quarter of 1990, even a $50,000
transfer to the loan loss reserves would have wiped out the undivided earnings,
and Bay Gulf would have been unable to pay a quarterly dividend without prior
NCUA approval.
6

Counts II, III, and IV of the charges against Doolittle arise from certain
accounting irregularities in Bay Gulf's books. The NCUA concluded that
Doolittle breached his duty to insure that all transactions were recorded in an
accurate and timely manner and reflected the results of the operation of Bay
Gulf, and that such failures violated regulations requiring full and fair
disclosure.

Specifically, Count II alleges improper accounting for legal expenses, data

processing expenses, and employee sick time. The ALJ found that over $10,000
in legal expenses were invoiced in March, but recorded as an expense in April.
The insurance reimbursement check for the legal expenses was received in
April, but pursuant to Doolittle's specific directions, the reimbursement was
recorded as income for March after the end of that month. Bay Gulf received a
commitment from the insurer in March that it would pay $10,000. This
recording method did not comply with either accrual or modified cash basis
accounting, which are the two authorized accounting methods for credit unions.

Bay Gulf had a recurring monthly data processing expense of which Doolittle
was aware. The ALJ found that the General Ledger indicated that a special
entry was made so that the expense would appear in April rather than March.
The amount of this deferred expense ($22,000) was material because of the
negligible net income for the first quarter ($2,500). Doolittle testified without
contradiction that the data processing expenses were recorded in the same
manner from 1986 through March 1990 pursuant to an agreement between Bay
Gulf and the data processing agent, and that there were always twelve bills
recorded in each fiscal year.

The final violation alleged in Count II was that vested employee vacation, sick,
and compensatory time was not recorded as a liability in the records of the
Credit Union. Thus, the financial records failed to disclose an almost $100,000
liability. Doolittle testified without contradiction that employee leave time was
recorded as an expense when taken rather than when it vested, and this practice
had been consistently followed for several years.

10

Count III of the Notice of Intent charged Doolittle with improperly altering
asset depreciation schedules to inflate income for the first quarter of 1990.
Doolittle changed the depreciation lives of certain fixed assets in March, but he
contended that these changes were made in response to a NCUA directive to
reduce expenses. Doolittle checked with two board members who were IRS
employees, and the changes complied with IRS guidelines. Doolittle admitted
that the reason for the changes was to increase income for the quarter. The net
effect of these changes for March alone was enough to determine whether the
Credit Union showed a net profit or net loss for the first quarter of 1990. The
ALJ found that where there is a change in an accounting estimate, there should
have been some justification (like new evidence) and disclosure of the impact
on the profitability of the institution.

11

Count IV concerns alleged improprieties in recording Non-Sufficient Funds

("NSF") income and Automatic Teller Machine ("ATM") income. Rather than
being recorded as income, NSF and ATM fees were recorded as credits to the
expense accounts. The effect of this accounting procedure was to decrease
gross income which reduced the requisite transfer to statutory reserves, which,
in turn, left more money available for the undivided earnings dividend pool.
Doolittle testified without opposition that these fees were recorded in this
manner since 1987 or 1988 without NCUA objection, and also contended that
the accounting procedure had only a negligible impact on Bay Gulf's income
and reserve transfers.

12

Count V involved certain unauthorized loans that Bay Gulf extended to one of
its members, James Mims ("Mims"). In April 1989 Doolittle became aware that
Bay Gulf had made commercial loans to Mims in violation of NCUA and Bay
Gulf rules and regulations against commercial loans. Doolittle called a meeting
between Mims and Bay Gulf personnel at which he informed Mims that no
more loans would be made. Doolittle told the loan department supervisor who
had handled Mims' file not to make any more loans to Mims and to mark the
file accordingly. The loans were current at that time, and Doolittle did not
inform the Board of Directors or the NCUA of the unauthorized commercial
loans until they later went into default. Despite Doolittle's instructions to the
contrary, Bay Gulf made four more loans to Mims before he defaulted and
eventually suffered a $42,857 loss. The ALJ concluded that Doolittle's failure
to supervise his loan employees effectively and to inform the Board of
Directors constituted a breach of his fiduciary duty and an unsafe and unsound
practice. The ALJ further found that by failing to take effective measures and
inform the board, Doolittle demonstrated reckless disregard of the prohibition
against commercial loans.

II. Discussion
A. Standard of Review
13

We review the NCUA Board's decision on a narrow standard. Thus, we cannot

reverse the NCUA Board's action unless the findings upon which it is based are
not supported by substantial evidence, or unless the sanctions imposed by the
Board constitute an abuse of discretion or are otherwise arbitrary and
capricious. 5 U.S.C. 706(2)(A), (E); Sunshine State Bank v. Federal Deposit
Ins. Corp., 783 F.2d 1580, 1584 (11th Cir.1986).
B. Prohibition Sanction

14

Section 1786(g)(1) 1 of the FCU Act gives the NCUA authority to issue a
prohibition order when it determines that a party has directly or indirectly
violated any law or regulation, participated in an unsafe or unsound practice, or
breached a fiduciary duty, and, by reason of such conduct, the financial interest
of the credit union is imperiled. The NCUA Board must also conclude that the
person has engaged in practice constituting personal dishonesty or is otherwise
unfit to participate in the conduct of the affairs of a federally insured credit
union.

15

In the instant case, the NCUA Board based its prohibition order primarily on
Doolittle's alleged violations of laws or regulations, except for the breach of
fiduciary duty found in relation the Mims loans. Specifically, the NCUA Board
ruled, by adopting the ALJ's findings, that Doolittle violated 12 C.F.R.
702.3(c)(2) by not making a proper allowance for loan losses with regard to the
Priority One property involved in Count I. With regard to the accounting
irregularities alleged in Counts II, III, and IV, the NCUA Board found that
Doolittle violated both 12 C.F.R. 702.3(b)(1) which requires full and fair
disclosure of "all income and expenses necessary to present fairly the results of
operations for the period concerned" and 702.3(d) which requires the
president to declare that the financial statements are true and correct to the best
of his knowledge and present "fairly the financial position and the results of
operations for the period covered." With regard to the Mims loans, the NCUA
Board found that Doolittle breached his fiduciary duty and engaged in an
unsafe and unsound practice, thereby satisfying 12 U.S.C. 1786(g)(1)(A)(ii)
and (iii).

16

Some of the accounting irregularities found by the NCUA Board support the
conclusion that Doolittle violated NCUA regulations requiring adjustments to

loan loss reserves and full and fair disclosure of the credit union's financial
condition. In particular, the evidence suggests that Doolittle did have notice that
the value of Priority One had fallen because of the change in zoning but failed
to act on this knowledge. Also, Doolittle specifically directed that the insurance
reimbursement check for legal services that was received in April be reported as
income for March. The bill for the legal services was received in March, but
was not listed as an expense until April. Doolittle's conduct in these matters
implies intentional misrepresentation of the financial condition of Bay Gulf. To
a lesser extent, the change in asset depreciation schedules involved in Count III
also demonstrates misrepresentation because even though the alterations were
justified under IRS guidelines, Doolittle instituted these changes without
justification, other than to increase income, and failed to disclose the impact on
profitability to the Board of Directors or the NCUA.
17

At first glance, these accounting practices seem relatively insignificant, but

Doolittle's conduct gains significance when viewed in light of the
circumstances. March 1990 was the end of the first quarter of Bay Gulf's fiscal
year. Dividends were payable on a quarterly basis, and, even with these
accounting irregularities, Bay Gulf was only marginally profitable for the first
quarter. The record indicates that if Bay Gulf had shown a loss for the first
quarter, it would have had to obtain special permission from the NCUA prior to
declaring its quarterly dividend. Furthermore, the NCUA had recently
downgraded the competency rating of Bay Gulf's management due to its
inability to improve the financial condition of the credit union. Given these
circumstances, Doolittle was probably under some pressure to show a profit for
the first quarter of 1990 so that Bay Gulf could declare a dividend. The NCUA
Board found that each of the accounting violations it alleged was sufficient to
change the outcome of the first quarter from loss to profit. Therefore,
Doolittle's misrepresentations of Bay Gulf's financial condition for the first
quarter of 1990 support the NCUA Board's determination that Doolittle
violated regulations requiring full and fair disclosure of Bay Gulf's financial
condition.

18

The remaining accounting irregularities found by the NCUA Board do not give
rise to the inference that Doolittle violated full and fair disclosure regulations.
Specifically, the improper accounting practices alleged in Count II, that data
processing expenses were reported the month after the bill was received and
that employee leave time was recorded as an expense when taken rather than
when it vested, and in Count IV, netting NSF and ATM fee income against
expenses, were, according to Doolittle's uncontroverted testimony, employed
by Bay Gulf for several years. Doolittle testified without opposition that these
items were recorded in the same manner since at least 1988 and the NCUA

regularly inspected Bay Gulf's books without objection. Also, the data
processing expenses recurred monthly, and Doolittle testified without
contradiction that twelve such expenses were reported monthly in each fiscal
year. Given the consistency of these accounting practices, the record does not
contain substantial evidence to support the conclusion that Doolittle violated
full and fair disclosure regulations by manipulating the accounting of these
items to inflate Bay Gulf's income for the first quarter of 1990.
19

Similarly, the NCUA Board's determination that Doolittle's handling of the

Mims loans was an unsafe and unsound practice and a breach of his fiduciary
duty is not supported by substantial evidence. After Doolittle became aware of
the problem loans, he took steps that he judged to be sufficient to prevent
further escalation of the situation. Hindsight reveals that he did not do enough,
but he cannot be held to have breached his fiduciary duty simply because his
underlings failed to follow his orders. The loans were current at the time
Doolittle took the actions for which he is now prosecuted. When the loans
defaulted, he informed the Board of Directors and took action to reduce Bay
Gulf's losses.

20

This is not a case where a fiduciary engaged in imprudent lending activities or

stood idle and allowed damage to increase. Instead, Doolittle took what he
mistakenly believed to be appropriate corrective actions. Doolittle's behavior
does not resemble that which is traditionally considered to be a breach of
fiduciary duty. See, e.g., Hoye v. Meek, 795 F.2d 893 (10th Cir.1986) (Bank
director delegated too much authority to agent, failed to monitor agent, and
failed to respond to bank's increasing exposure to risk); Federal Deposit Ins.
Corp. v. Butcher, 660 F.Supp. 1274 (E.D.Tenn.1987) (Director's failure to
provide time and attention required by the corporation, surrender of control and
power to officers, committing large, unsecured loans to insolvent entities and to
companies affiliated with corporation and its president, and failure to carefully
examine financial reports); Federal Deposit Ins. Corp. v. Wise, 758 F.Supp.
1414 (D.Colo.1991) (Directors caused bank to extend large, imprudent loans to
favored parties contrary to bank policies and federal regulations, commit
excessive assets high risk loans despite repeated warnings from state and
federal regulators, acquire loans without full and adequate investigation, and
enter transactions with affiliated parties contrary to lending and underwriting
policies). Doolittle's response to the Mims loans does not reflect a breach of the
sacred trust owed by a fiduciary, and therefore we cannot agree that Doolittle
breached his fiduciary duty.

21

Neither can we agree that Doolittle engaged in an unsafe or unsound practice

with regard to the Mims loans. "Unsafe and unsound banking practices are

defined as 'conduct deemed contrary to accepted standards of banking

operations which might result in abnormal risk or loss to a banking institution
or shareholder.' " Northwest Nat'l Bank, Fayetteville, Ark. v. Department of the
Treasury, 917 F.2d 1111, 1115 (8th Cir.1990), quoting First Nat'l Bank v.
Department of the Treasury, 568 F.2d 610, 611 (8th Cir.1978). Taking
corrective actions to minimize the risk of loss on improvident loans is not
conduct contrary to accepted standards of banking operations which might
result in an abnormal risk to a banking institution. Thus, Doolittle did not
engage in unsafe and unsound banking practices.
22

The prohibition sanction adopted by the NCUA Board is harsh. Doolittle is

precluded from working in his chosen profession for the remainder of his
career. We must assume that the NCUA Board considered all of the accounting
violations in fashioning this draconian sanction. We hold that some of the
violations relied upon by the NCUA, as described above, do not show that
Doolittle breached the full and fair disclosure regulations in 12 C.F.R. 702.3,
and also that Doolittle's conduct with regard to the Mims loans did not breach
his fiduciary duty or amount to unsafe or unsound practices. We cannot assume
that the NCUA Board would issue the same severe sanction without all of the
violations upon which it previously relied. Therefore, we vacate the prohibition
order and remand this case to the NCUA Board for reconsideration in light of
only those accounting practices which we find to be indicative of Doolittle's
violating his obligation to full and fair disclosure of Bay Gulf's financial
condition.

23

We must also explore the meaning of 12 U.S.C. 1786(g)(1)(C), which

provides that when the NCUA Board determines that a party has engaged in a
violation, practice, or breach that satisfies subparagraph (A) (violation of law or
regulation, unsafe or unsound practice, or breach of fiduciary duty) and
subparagraph (B) (jeopardizes financial interests of credit union and members
or inures to personal benefit of party), the Board may order prohibition if it also
finds that such violation, practice, or breach involves personal dishonesty
(1786(g)(1)(C)(i)) or "demonstrates such party's unfitness to serve as a director
or officer of, or to otherwise participate in the conduct of the affairs of, an
insured credit union." (1786(g)(1)(C)(ii)). Because there is no indication of
personal dishonesty, the NCUA Board based the prohibition order on unfitness
to serve. The NCUA Board did not specify how Doolittle's conduct
demonstrated his unfitness to serve as an officer and director, but, instead, the
Board merely adopted the ALJ's cursory conclusion that all of the statutory
requirements for a prohibition order had been met. We conclude that this
omission cannot stand.

24

25

When divining the meaning of a statute, we must bear in mind "the elementary
canon of construction that a statute should be interpreted so as not to render one
part inoperative...." Mountain States Telephone & Telegraph Co. v. Pueblo of
Santa Ana, 472 U.S. 237, 249, 105 S.Ct. 2587, 2594, 86 L.Ed.2d 168 (1985).
Applying this maxim to subsection 1786(g)(1)(C)(ii) leads to the conclusion
that the NCUA Board must make some finding as to a party's fitness to
participate in the conduct of the affairs of a credit union. This finding must be
more than a violation, practice, or breach sufficient to satisfy subparagraph (A)
because otherwise subsection 1786(g)(1)(C)(ii) would be surplusage. Thus, the
NCUA must do more than find a subparagraph (A) violation, practice, or
breach and recite such as the basis for concluding that subparagraph (C) is
satisfied.
Subparagraph (C) provides that a prohibition order may be based either on a
finding of personal dishonesty or on a finding of unfitness to serve. We interpret
this juxtaposition to mean that the NCUA Board's determination of unfitness
must be supported by a finding of equal gravity to a finding of personal
dishonesty. This conclusion is supported by cases interpreting the analogous
removal and prohibition section of the Federal Deposit Insurance Act ("FDI
Act"), 12 U.S.C. 1818(e)(1). Subparagraphs 1818(e)(1)(A) and (B) contain
nearly identical language to 12 U.S.C. 1786(g)(1)(A) and (B). Subparagraph
1818(e)(1)(C) of the FDI Act provides that a prohibition order may issue when
the agency determines that a party has engaged in a violation, practice, or
breach which:

(i) involves personal dishonesty on the part of such party; or

26
27 demonstrates willful or continuing disregard by such party for the safety or
(ii)
soundness or such insured depository institution or business institution
28

12 U.S.C.A. 1818(e)(1)(C) (West 1989). Conduct sufficient to satisfy

subsection 1818(e)(1)(C)(ii) must have the same magnitude as personal
dishonesty. See, e.g., Jameson v. Federal Deposit Ins. Corp., 931 F.2d 290 (5th
Cir.1991) (falsification of bank records to conceal bonus from other bank
officials); Van Dyke v. Board of Gov. of the Fed. Reserve Sys., 876 F.2d 1377
(8th Cir.1989) (bank officer participated in check-kiting scheme); Brickner v.
Federal Deposit Ins. Corp., 747 F.2d 1198 (8th Cir.1984) (continuing disregard
evinced where bank officers knew cashier was engaging in unsafe and unsound
banking practices for months, but failed to take suitable preventative action
before substantial losses occurred); [Anonymous] v. Federal Deposit Ins. Corp.,
619 F.Supp. 866 (D.D.C.1985) (interim suspension order required allegations
of dishonesty or habitually disastrous banking practices). Enlightened by cases

interpreting the FDI Act's prohibition section, we conclude that a prohibition

order under the FCU Act which is based on a party's unfitness to serve must be
supported by a finding of similar magnitude as personal dishonesty.
29

Therefore, we hold that the NCUA Board must provide some explanation of
why Doolittle is unfit to serve as a director and officer of Bay Gulf beyond
merely stating that he violated a law or regulation or breached his fiduciary
duty. This justification must have weight commensurate with a finding of
personal dishonesty.
C. Restitution Sanction

30

The NCUA Board ordered Doolittle to make restitution to Bay Gulf in the
amount of $42,857, which equals Bay Gulf's losses on the Mims loans. The
NCUA issued this order pursuant to 12 U.S.C. 1786(e)(3)2 which grants
authority to the NCUA to order restitution when it finds that a party has
engaged in any violation or practice that involves a reckless disregard for the
law or any applicable regulations. Here, the NCUA Board determined that
Doolittle's conduct in relation to the Mims loans displayed reckless disregard of
NCUA regulations prohibiting credit unions from extending commercial loans
to its members. 12 C.F.R. 701.21(h) provides that a credit union shall not
make business loans to its members unless the Board of Directors has adopted a
written loan policy authorizing a commercial loan to that specific type of
business. Bay Gulf had no policy allowing loans to the type of business run by
Mims; thus, the Mims loans were made in violation of this regulation.

31

The NCUA Board determined that Doolittle demonstrated reckless disregard

for 12 C.F.R. 701.21(h) by failing "to take other reasonably prudent steps to
insure that no further loans would be made" and by failing "to act effectively
and diligently once he learned of the illegal loans." In particular, the NCUA
adopted the ALJ's conclusion that Doolittle should have informed the Board of
Directors of the unauthorized loans much sooner. Also, the NCUA Board found
thatDoolittle should have done more than telling only one loan supervisor to
make no further loans and mark the file accordingly.

32

We do not agree that Doolittle's behavior manifested reckless disregard for the
regulation prohibiting commercial loans. According to Doolittle's
uncontroverted testimony, he took those actions which he honestly believed
would remedy the problem. Mims did not default on the loans until six months
later after four more loans had been made contrary to Doolittle's orders.
Hindsight reveals that Doolittle could have done more to prevent Bay Gulf's

exposure from increasing, but the clarity of ex post facto examination does not
inform us as to Doolittle's mental state at the time of the alleged infraction.
Doolittle's judgment proved to be unwise, but he certainly did not disregard the
commercial loan interdiction.
33

The NCUA argues that Brickner v. Federal Deposit Ins. Corp., supra, is on four
squares with the present case and, accordingly, we should uphold the NCUA
Board's determination that Doolittle showed reckless disregard. In Brickner, the
FDIC sought removal of bank officers pursuant to the FDI Act, 12 U.S.C.
1818(e)(1)(C)(ii), which authorizes removal when an officer engages in an act
or practice which demonstrates a continuing disregard for the soundness of the
bank. The conduct in question was the officers' failure to take appropriate steps
to curtail unsafe and unsound activities of a bank cashier who repeatedly
disobeyed their directions to cease the activities. The officers did not disclose
the continuing illicit activities of the cashier to the other directors or the FDIC
until FDIC examiners discovered the activities. After determining that
"continuing disregard" is akin to "reckless disregard," the court found that the
officers exhibited continuing disregard because they knew for months that the
cashier was "engaging in unsafe and unsound banking practices, yet they failed
to disclose this knowledge to the other directors or to take suitable action to
prevent substantial losses to the Bank." Brickner, 747 F.2d at 1203.

34

At first glance, this seems to be our case exactly, but there is a crucial
distinction. In Brickner the officers knew that their orders were disobeyed,
whereas Doolittle did not know that his instructions were defied. The Brickner
officers knew their actions were ineffective, but failed to do more and were thus
found liable for disregarding their duty to protect the bank from unsafe
practices. Doolittle, by contrast, took what he reasonably thought were effective
steps to curtail the extension of unauthorized loans. When he discovered that
his actions were insufficient; i.e., when the loans defaulted, he informed the
board of directors and the NCUA and took immediate actions to limit Bay
Gulf's losses. While the Brickner officers disregarded their duty by knowingly
failing to take effective remedial measurers, Doolittle responded to the Mims
loans with actions that he believed were sufficient, even though the actions
turned out to be not enough. We do not agree that Doolittle demonstrated
reckless disregard of the commercial loan prohibition.

35

Because we find that Doolittle did not act with reckless disregard, the
restitution sanction cannot stand. The legislative history of 12 U.S.C. 1786(e)
(3) supports this outcome in that it indicates that the restitution sanction is
reserved for "serious misconduct." H.R.Rep. No. 54, 101st Cong., 1st Sess., pt.
1, at 392 (1989), reprinted in 1989 U.S.C.C.A.N. 86, 188. Doolittle's poor

judgment did not amount to his engaging in serious misconduct. Due to the
absence of reckless disregard, we reverse the NCUA Board's order that
Doolittle pay restitution to Bay Gulf.
III. Conclusion
36

We VACATE the NCUA Board's prohibition order and REMAND for

reconsideration in accordance with this opinion. We REVERSE the NCUA
Board's order that Doolittle make restitution to Bay Gulf in the amount of
$42,857.

This section states:

(g) Removal and prohibition authority
(1) Authority to issue order. Whenever the Board determines that-(A) any institution-affiliated party has, directly or indirectly-(i) violated-(I) any law or regulation;
(II) any cease-and-desist order which has become final;
(III) any condition imposed in writing by the Board in connection with the grant
of any application or other request by such credit union; or
(IV) any written agreement between such credit union and the Board;
(ii) engaged or participated in any unsafe or unsound practice in connection
with any insured credit union or business institution; or
(iii) committed or engaged in any act, omission, or practice which constitutes a
breach of such party's fiduciary duty;
(B) by reason of the violation, practice, or breach described in any clause of
subparagraph (A)-(i) such insured credit union or business institution has suffered or will probably
suffer financial loss or other damage;
(ii) the interests of the insured credit union's members have been or could be

prejudiced; or
(iii) such party has received financial gain or other benefit by reason of such
violation, practice or breach; and
(C) such violation, practice, or breach-(i) involves personal dishonesty on the part of such party; or
(ii) demonstrates such party's unfitness to serve as a director or officer of, or to
otherwise participate in the conduct of the affairs of, an insured credit union,
the Board may serve upon such party a written notice of the Board's intention to
remove such party from office or to prohibit any further participation, by such
party, in any manner in the conduct of the affairs of any insured credit union.
12 U.S.C.A. 1786(g)(1) (West 1989).
2

This statute states:

(3) Affirmative action to correct conditions resulting from violations or
practices. The authority to issue an order under this subsection and subsection
(f) of this section which requires an insured credit union or any institutionaffiliated party to take affirmative action to correct any conditions resulting
from any violation or practice with respect to which such order is issued
includes the authority to require such insured credit union or such party to-(A) make restitution or provide reimbursement, indemnification, or guarantee
against loss if-(i) such credit union or such party was unjustly enriched in connection with
such violation or practice; or
(ii) the violation or practice involved a reckless disregard for the law or any
applicable regulations or prior order of the Board;
(B) restrict the growth of the institution;
(C) rescind agreements or contracts;
(D) dispose of any loan or asset involved; and
(E) employ qualified officers or employees (who may be subject to approval by
the Board at the direction of such Board); and

(F) take such other action as the Board determines to be appropriate.

12 U.S.C.A. 1786(e)(3) (West 1989).