439 U.S. 234 (1978), 77-832, Board of Governors of Federal Reserve System v. First Lincolnwood Corp.

Docket Nº:No. 77-832
Citation:439 U.S. 234, 99 S.Ct. 505, 58 L.Ed.2d 484
Party Name:Board of Governors of Federal Reserve System v. First Lincolnwood Corp.
Case Date:December 11, 1978
Court:United States Supreme Court
 
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Page 234

439 U.S. 234 (1978)

99 S.Ct. 505, 58 L.Ed.2d 484

Board of Governors of Federal Reserve System

v.

First Lincolnwood Corp.

No. 77-832

United States Supreme Court

Dec. 11, 1978

Argued October 11, 1978

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

Section 3(a) of the Bank Holding Company Act of 1956 (Act) prohibits any company from acquiring control of a bank without prior approval by the Board of Governors of the Federal Reserve System (Board). Under § 3(c) of the Act, the Board must disapprove a transaction that would, inter alia, generate anticompetitive effects not clearly outweighed by beneficial effects upon the acquired bank's ability to serve the community. Section 3(c) also directs the Board "[i]n every case" to

take into consideration the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served.

Individual stockholders who controlled an existing bank organized respondent corporation to acquire their bank stock. Respondent submitted the transaction for the Board's approval. Upon review, the Board found that the transaction would have no anticompetitive effects and would not change the services offered by the bank to customers. However, it ultimately disapproved the transaction, against the recommendation of the Comptroller of the Currency, on the ground that formation of the holding company would not bring the bank's financial position up to the Board's standards. The Court of Appeals set aside the Board's order, holding that § 3(c) empowers the Board to withhold approval because of financial or managerial deficiencies only if those deficiencies would be "caused or enhanced by the proposed transaction."

Held:

1. The Board has authority under § 3(c) to disapprove formation of a bank holding company solely on grounds of financial or managerial unsoundness. This conclusion is supported by the language of the statute and the legislative history, and, in addition, comports with the Board's own longstanding construction, which is entitled to great respect. Pp. 242-248.

2. The Board's authority is not limited to instances in which the financial or managerial unsoundness would be caused or exacerbated by the proposed transaction. Such a limitation would be inconsistent with the language and legislative history of the statute and with the Board's own construction of its mandate, a construction in which Congress has

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acquiesced. Nor does the legislative history suggest that Congress intended to reserve questions of bank safety to the Comptroller of the Currency or state agencies except where a transaction would harm the financial condition of an applicant or a bank. Pp. 249-252.

3. The Board's denial of the application is supported by substantial evidence that respondent would not be a sufficient source of financial and managerial strength to its subsidiary bank. Pp. 252-254.

560 F.2d 258, reversed.

MARSHALL, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, STEWART, WHITE, BLACKMUN, and POWELL, JJ., joined. SEVENS, J., filed a dissenting opinion, in which REHNQUIST, J., joined, post, p. 254.

MARSHALL, J., lead opinion

[99 S.Ct. 507] MR. JUSTICE MARSHALL delivered the opinion of the Court.

Section 3(a) of the Bank Holding Company Act of 1956, 12 U.S.C. § 1842(a), prohibits any company from acquiring control of a bank without prior approval by the Board of Governors of the Federal Reserve System (Board).1 Under § 3(c)(1)

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of the Act, 12 U.S.C. § 1842(c)(1), the Board may not approve a transaction that would create a monopoly or further an attempt to monopolize the business of banking. In addition, it must disapprove a transaction that would generate anticompetitive effects not clearly outweighed by beneficial effects upon the bank's ability to serve the community. § 1842(c)(2). The final sentence of § 3(c) directs that,

[i]n every case, the Board shall take into consideration the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served.2

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The threshold question before us is whether this final sentence authorizes the Board to disapprove a transaction on grounds of financial unsoundness in the absence of any anticompetitive impact. If so, we must decide whether the Board can only exercise that authority when the transaction would cause or exacerbate the financial unsoundness of the holding company or a subsidiary bank.

I

The First National Bank of Lincolnwood, Ill., is controlled by four individuals who hold 86% of its stock in a voting trust. These individuals organized respondent, the First Lincolnwood Corp., to serve as a bank holding company. They planned to exchange their shares in the bank for shares of respondent and, in addition, to have respondent [99 S.Ct. 508] assume a $3.7 million debt they had incurred in acquiring control of the bank.3 Respondent intended to use the dividends it would receive on the bank's shares to retire this debt over a 12-year period. Further, in order to augment the bank's capital,

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respondent would issue $1.5 million in capital notes and then use the proceeds to purchase new shares issued by the bank. The purpose of restructuring ownership interests in this fashion was to enable the holding company and the bank to file a consolidated tax return, and thereby realize substantial tax savings.4

Because, under the proposed transaction, respondent would become a bank holding company, § 3(a) of the Act required that the proposal be submitted for the Board's approval. See n. 1, supra. Respondent filed its application with the Federal Reserve Bank of Chicago, as specified by Board regulations.5

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The Chicago Reserve Bank concluded that the Lincolnwood bank's capital position -- in essence, the difference between its assets and its liabilities -- was inadequate and, under respondent's proposal, was unlikely to improve enough to attain the minimum level the Board had determined necessary to protect the bank's depositors.6 Nonetheless, the Lincolnwood bank's favorable earnings prospects and strong management led the [99 S.Ct. 509] Chicago Reserve Bank to recommend that the transaction be approved. The Comptroller of the Currency, however, independently reviewed respondent's application and concluded that it should be denied unless the bank's capital position was strengthened.

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Respondent thereupon modified its proposal to accommodate the Comptroller's objections. Instead of issuing $1.5 million in capital notes and using the proceeds to purchase new bank stock, respondent proposed that the bank itself sell $1 million in long-term capital notes and $1.1 million in new common stock. In addition, respondent proposed a substantial reduction in the dividends to be paid on the bank stock. Upon review of the modified proposal, the Chicago Reserve Bank adhered to its original recommendation, finding the modification salutary insofar as it increased the total addition to the bank's capital, though "slightly unfavorable" insofar as it decreased the addition to the bank's equity capital from $1.5 to $1.1 million.7 The Comptroller considered the revised plan superior to the original proposal; therefore, he, too, recommended approval.

The Board staff independently evaluated the application and determined that the bank's projected capital position would fall below the Board's requirements.8 The staff also found that respondent had not established its ability to raise the additional capital without the individual shareholders'

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incurring more debt. Although acknowledging that the bank's management was capable, the staff concluded that

it would appear desirable that Bank's overall capital position should be materially improved, and that financing arrangements for the proposed capital injections into Bank [should] be made more definite.

App. 54-55.

The Board concurred. It reviewed each of the elements enumerated in § 3(c), determining first that the proposal had no anticompetitive impact because the transaction merely transferred control of the bank "from individuals to a corporation owned by the same individuals." First Lincolnwood Corp., 62 Fed.Res.Bull. 153 (1976). Similarly, the Board found that the proposal would effect no significant changes in the services offered by the bank to customers, so factors relating to the convenience and needs of the community militated neither for nor against approval. Id. at 154. Thus, the financial and managerial considerations specified in the final sentence of § 3(c) were dispositive of respondent's application.

Addressing these considerations, the Board ruled that a bank holding company "should provide a source of financial and managerial strength to its subsidiary bank(s)." 62 Fed.Res.Bull. at 153. Here, the Board found, even if the [99 S.Ct. 510] bank's optimistic earnings projections were realized, respondent would lack the financial flexibility necessary both to service its debt and to maintain adequate capital at the bank. This, as well as the uncertainty regarding the proposed source of the capital injections, raised serious doubts as to respondent's financial ability to resolve unforeseen problems that could arise at the bank. The Board therefore concluded that

it would not be in the public interest to approve the formation of a bank holding company with an initial debt structure that could result in the weakening of Bank's overall financial condition.

Id. at 154.

A divided panel of the Court of Appeals for the Seventh Circuit affirmed, the...

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