Justices Don't Limit Punitive Damages; Bank's Challenge of Fed to Be Considered --- Court to Decide If Regulator Can Force Bank Firms To Bail Out Ailing Units
WASHINGTON -- The Supreme Court will decide the legality of a weapon the Federal Reserve Board says is critical in regulating bank holding companies -- the power to force them to bail out their ailing bank subsidiaries.</br></br>The justices agreed to hear an appeal by the Fed challenging the May 1990 ruling of a federal appeals court in New Orleans in favor of MCorp, a Dallas bank holding company.</br></br>The dispute concerns the Fed's "source of strength" doctrine, which requires bank holding companies to use their own assets to help their bank units that are in "financial stress or adversity." The doctrine was applied by the Fed on a case-by-case basis until it was adopted in formal regulations issued in 1984 and 1987. Just the threat of administrative proceedings, however, has often been enough to spur bank holding companies to assist their ailing banks.</br></br>In 1989, the Fed told MCorp that it would begin administrative action to require MCorp and its subsidiaries to come to the rescue of ailing banks. MCorp responded by challenging the Fed's authority in federal bankruptcy court. At about the same time, the Federal Deposit Insurance Corp. in March 1989 declared 20 of MCorp's 25 bank units insolvent and in federal receivership. The 20 banks were sold later to Banc One Corp. of Columbus, Ohio.</br></br>The Fed succeeded in moving MCorp's case from bankruptcy court to federal district court. In June 1989, the district court barred the Fed from continuing enforcement proceedings against MCorp.