De La Fuente v. F.D.I.C.
| Decision Date | 18 June 2003 |
| Docket Number | No. 00-71547.,00-71547. |
| Citation | 332 F.3d 1208 |
| Parties | Roque DE LA FUENTE II, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Respondent. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Michael H. Fish, James S. McNeill, McKenna Long & Aldridge LLP, San Diego, CA, and Stephens B. Woodrough, The Banking Law Firm, St. Petersburg, FL, for the petitioner.
Colleen J. Boles, Charles L. Cope, Robert D. McGillicuddy, Thomas L. Holzman, and J. Scott Watson, Federal Deposit Insurance Corporation, WA, D.C., for the respondent.
On Petition for Review of an Order of the Federal Deposit Insurance Corporation. FDIC No. 97-31e.
Before BROWNING, KOZINSKI, and WARDLAW, Circuit Judges.
Roque De La Fuente II petitions for review of an order of the Board of the Federal Deposit Insurance Corporation ("Board")1 removing him as a director of First International Bank ("FIB") and forbidding him from participating in, voting shares of, or serving on the board of any federally regulated bank for life. The Board found that De La Fuente had used his position at FIB to secure several loans in excess of applicable limits for entities in which he and his close associates were interested, as well as to engage in other self interested lending practices. We have jurisdiction to review the Board's decision under the judicial review provisions of the Administrative Procedures Act, 5 U.S.C. §§ 701-706. See 12 U.S.C. § 1818(h)(2); see also 5 U.S.C. § 706(2)(A) (). We grant the petition in part, deny it in part, and remand the matter to the Board.
De La Fuente became a board member of FIB, formerly known as People's Bank, on March 30, 1987, and served in that position until he was removed. This appeal centers around twelve FIB loans and two loan-related transactions, all of which occurred between 1990 and 1995, involving entities in which De La Fuente, his family, or his close associates were interested.
The loans that formed the basis for the removal action are (in chronological order):
(1) a May 17, 1990 loan in the amount of $1 million to the Roque de la Fuente Alexander Trust ("Fuente Alexander Trust"), a revocable trust set up by De La Fuente's father in which De La Fuente had a 25% contingent interest.
(2) an October 8, 1990 loan in the amount of $1 million to Rancho de la Fuente International Industrial Park ("Fuente/ IIP"), an entity owned by De La Fuente's mother through offshore corporations. De La Fuente's mother is a housewife who lives in Mexico City and does not participate in the operations of Fuente/IIP. Jose Luis Andreu, one of De La Fuente's close associates — who is also vice president of American International Enterprises ("AIE"), a company solely owned by De La Fuente — is the agent for Fuente/IIP.
(3) a December 26, 1990 loan in the amount of $400,000 to Rancho Vista del Mar, Inc. ("RVDM"), another entity owned by De La Fuente's mother through offshore corporations. As he is for Fuente/IIP, Andreu is the company's agent. RVDM has no employees.
(4) a January 24, 1992 loan in the amount of $800,000 to RVDM.
(5) a July 15, 1992 loan in the amount of $1.6 million to RVDM.
(6) September 9, 1992 personal loan to De La Fuente in the amount of $800,000.
(7) a July 20, 1995 loan in the amount of $763,000 to the Fine Particle Technology Corporation ("FPTC"), a company of which De La Fuente owned 5.6%. De La Fuente transferred his interest in FPTC into trusts for his children in 1995. Among FPTC's other shareholders are Andreu (24.42%), and Isaias Zapata (5.02%), another close De La Fuente associate. Andreu is also the president of FPTC, and has been a director and board chairman. This company also has no employees.
(8) an August 11, 1995 loan in the amount of $1.35 million to FPTC.
(9) an October 27, 1995 loan in the amount of $750,000 to National Enterprises, Inc. ("NEI"), an entity of which De La Fuente was the sole owner. De La Fuente transferred his interest in NEI into his children's trusts in 1995. The trustees at relevant times were Zapata and Sidney Schwartz, another close De La Fuente associate, who is currently the chairman of the FIB board. Schwartz is also a director of NEI.
(10) a November 8, 1995 loan in the amount of $600,000 to FPTC.
(11) a December 18, 1995 loan in the amount of $200,000 to C.T. Produce, Inc. ("C.T.Produce"), an entity of which Andreu is a director, and which is engaged in a joint venture with NEI.
(12) a December 28, 1995 loan in the amount of $800,000 to FPTC.
The Board's removal order was based on two additional transactions involving collateral for FIB loans:
(13) a 1994 FIB decision to accept the substitution of inferior substitute collateral to secure a loan the bank had made to RVDM (the "Collateral Substitution Transaction"); and
(14) a 1995 FIB decision to allow a non-creditworthy NEI employee to assume liability for a loan the bank had made to the Parking Company of America ("PCA Transaction").
In 1997, the Federal Deposit Insurance Corporation notified De La Fuente that it was proceeding against him under 12 U.S.C. § 1818(e) for his role in FIB's lending practices. It charged him with lending sums to the various entities identified above over the period from 1990 through 1995, which exceeded the percentage of a bank's funds that may be loaned to "affiliates" or "insiders" of a bank's directors under Regulation O and Section 23A of the Federal Reserve Act. It also charged De La Fuente with facilitating the Collateral Substitution Transaction and the PCA Transaction, alleging that his role in these transactions violated 12 U.S.C. § 1818(e).
The case was tried before an administrative law judge ("ALJ"), who issued a recommended decision finding that all of the above loans and transactions violated § 1818(e) and concluding that De La Fuente should be ordered removed from the board of FIB and prohibited from participating in the banking industry for life. On review, the Board adopted and incorporated these findings, and affirmed the ALJ's recommended decision.
The Board correctly found that De La Fuente "controlled" all of the loan recipients, and that the loans therefore violated the provisions of Regulation O, 12 C.F.R. § 215.1-.13. Regulation O restricts the ability of member banks in the Federal Reserve system (as well as nonmember, FDIC-insured banks such as FIB, see 12 U.S.C. § 1828(j)(2)) to extend credit to their "insider[s]." 12 C.F.R. § 215.4(a). The regulation defines "insider," in turn, as "an executive officer, director, or principal shareholder, and includes any related interest of such a person," id. § 215.2(h); a "[r]elated interest" is defined to include "[a] company that is controlled by that person," id. § 215.2(n)(1). Under the regulation, a person controls a company, when inter alia he or she owns 25% or more of the shares of a company, id. § 215.2(c)(1)(i), or "[h]as the power to exercise a controlling influence over the management or policies of the company," id. § 215.2(c)(1)(iii). The regulation also creates certain rebuttable presumptions of control for persons who own more than 10% of the stock in a company. Id. § 215.2(c)(2).
The Board found that De La Fuente controlled FPTC by owning, controlling, or having the power to vote 25% or more of its shares, under § 215.2(c)(1)(i). With respect to the other loans (except the loan to C.T. Produce), the ALJ found that the borrowing entities were "actual[ly] control[led]" by De La Fuente, which the Board determined constituted a finding of exercising a controlling influence under § 215.2(c)(1)(iii).
De La Fuente argues that because the regulation contains rebuttable presumptions of control in § 215.2(c)(2) for persons who own more than 10% of a company's shares, it creates a "safe harbor" insulating people who do not fall within the rebuttable presumption (i.e., De La Fuente) from a finding of control under § 215.2(c)(1)(iii). We disagree. Subsection 215.2(c)(1) establishes the test for control.2 The following subsection, § 215.2(c)(2), sets forth a list of circumstances from which "control" is to be presumed.3 "Control" may be established if a proper finding under the first subsection is made, or if one of the requirements of the second subsection is met and the presumption of control is not rebutted. De La Fuente would have us disregard the test in the first subsection because he was not presumed to have control under the second subsection. This is illogical. To read the regulation in this manner would render portions of the regulation surplusage, and would defeat the plain purpose of the regulatory scheme.
De La Fuente cites two twenty-odd-year-old unpublished Federal Reserve Board interpretive letters in support of his position that the presumptions in § 215.2(c)(2) create a "safe harbor." See 1979 WL 44400, at *1 (); 1980 WL 121899, at *1 ().
In response, the FDIC cites an interpretive letter from the Office of the Comptroller of the Currency ("OCC"), which explains that the rebuttable presumptions of § 215.2(c)(2) are only implicated when an agency relies for its determination of control on the person's stock...
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