Groos Nat. Bank v. Comptroller of Currency

• Decision Date: 26 May 1978
• Docket Number: 77-1398,Nos. 76-4065,s. 76-4065
• Citation: 573 F.2d 889
• Parties: GROOS NATIONAL BANK and Clinton Manges, Plaintiffs-Appellants, v. COMPTROLLER OF the CURRENCY, Defendant-Appellee. GROOS NATIONAL BANK OF SAN ANTONIO, TEXAS, and Clinton Manges, Petitioners, v. UNITED STATES of America, DEPARTMENT OF the TREASURY, OFFICE OF the COMPTROLLER OF the CURRENCY, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 889

573 F.2d 889

GROOS NATIONAL BANK and Clinton Manges, Plaintiffs-Appellants, v. COMPTROLLER OF the CURRENCY, Defendant-Appellee.

GROOS NATIONAL BANK OF SAN ANTONIO, TEXAS, and Clinton

Manges, Petitioners, v. UNITED STATES of America, DEPARTMENT OF the TREASURY, OFFICE

OF the COMPTROLLER OF the CURRENCY, Respondent.

Nos. 76-4065, 77-1398.

United States Court of Appeals, Fifth Circuit.

May 26, 1978.

Robert L. Schwind, William R. King, Atlanta, Ga., for plaintiff-appellant Clinton Manges and intervenor Helen Ruth Manges.

Bernard Ladon, San Antonio, Tex., for Groos Nat. Bank.

John E. Clark, U. S. Atty., Jeremiah Handy, Archie Carl Pierce, Asst. U. S. Attys., San Antonio, Tex., Ronald R. Glanz, Mary Gallagher, Attys., Civ. Div., Dept. of Justice, Washington, D. C., Barbara Allen Babcock, Asst. Atty. Gen., for defendant-appellee.

Petition for Review of an Order of the Department of the Treasury, Office of the Comptroller of the Currency.

Before MORGAN and GEE, Circuit Judges, and KING ^*, District Judge.

GEE, Circuit Judge:

These two cases concern the efforts of the Comptroller of the Currency to cope with the relationship between the Groos National Bank, a nationally chartered banking association in San Antonio, Texas, and its chief shareholder, Clinton Manges. These efforts have continued for some time, and a certain amount of background information is necessary in order to comprehend the present controversy.

Mr. Manges acquired a controlling interest in the Groos National Bank in early 1971. Manges had a prior criminal record, and the Comptroller of the Currency attempted to bar his participation in the bank's affairs for that reason; but the Comptroller's restrictions on Manges' voting of his shares were overturned in the 1973 case of Manges v. Camp, 474 F.2d 97 (5th Cir. 1973). Thereafter Manges, as majority shareholder, was able to control the bank and its board of directors. The Comptroller's office continued to scrutinize the bank and Manges' relationship to it, and its examinations later in 1973 turned up several practices that the Comptroller considered illegal or unsafe. These chiefly concerned a large percentage of high-risk loans, and more particularly a very high concentration of loans to two individuals one of whom was Manges himself along with persons whom the Comptroller considered to be closely related to these two, either by family or business connections. To allay these practices, the Comptroller set in motion cease and desist proceedings as authorized by 12 U.S.C. § 1818. However, instead of prosecuting these matters to a final cease and desist order, the parties including the Comptroller, Groos National Bank, and Manges in his individual capacity entered an agreement on November 14, 1973. The agreement included a number of measures to deconcentrate the bank's loans and to render them less risky. Among other clauses, the one central to the present controversy is Article II, forbidding all loans or extensions of credit, direct or indirect, to any shareholder owning five percent or more of the bank's voting securities, as well as to such a shareholder's "related companies or individuals." The article defined the latter phrase to include business associations and family relations of the shareholder. ¹

The next chapter of this saga opened on January 5, 1976, when national bank examiners The third transaction occurred on January 2, 1976, when Groos National Bank, on the request of Manges, charged the account of Clinton or Helen Ruth Manges $80,000 and transferred the funds to the account of the Harlingen National Bank for the credit of one Dial M. Dunkin. This transfer created a overdraft of over $68,000 in the Clinton or Helen Ruth Manges account at Groos National. This overdraft, too, was paid through the First State Bank on January 7, 1976.

discovered three transactions at Groos National Bank, all of which the Comptroller regarded as extensions of credit to Mr. Manges in violation of the 1973 agreement. The first of these transactions occurred on December 5, 1975, when Mr. Manges cashed a check at Groos National Bank for $50,000. The check was payable to the order of cash on Mr. Manges' account at the First State Bank and Trust Company of Rio Grande City. ² In laymen's language, the check bounced. First State Bank returned this check unpaid to Groos National with the notation "refer to drawer" and only paid it on January 7, 1976, upon its third submission by Groos National Bank. The second transaction was rather similar: on December 6, 1975, Manges made out a check for $60,000 payable to one Perry Horine, again drawn on Manges' First State account. This check was deposited to Mr. Horine's account at Groos National Bank; but it, too, was returned unpaid by First State Bank and was not paid to Groos until January 7, 1976, upon its third submission by Groos National. It appears that Mr. Manges, upon inquiry from the president of Groos National Bank when the checks were returned, explained that he had expected the checks to be covered by a loan that he was arranging, the proceeds of which were to be deposited for him at First State Bank. For this reason, Groos National continued to submit the checks to First State Bank. The actual date of payment on these checks, January 7, 1976, was of course two days after the national bank examiners discovered the items; the Comptroller maintains that payment was made in response to the examiners' discovery.

Thus, in each of these transactions Manges enjoyed the use of Groos National Bank funds for a period of days. The Comptroller, viewing these transactions as substantial, albeit short-term, extensions of credit to Manges, prepared to bring cease and desist proceedings against Groos National Bank based on the violation of the 1973 agreement. Before these were completed, however, Groos National and Manges ran through a quite extraordinary maze of procedural maneuvers, the resolutions of which form the basis for a part of this case.

The bank's and Manges' first move was an attempt to steal a march on the Comptroller: just before the agency began formal proceedings, Manges and the bank brought an action in the federal district court on May 3, 1976, seeking a declaratory judgment that the 1973 agreement was invalid, as well as an injunction against any action by the Comptroller based on this agreement. Two days later the Comptroller nevertheless issued a notice of charges under 12 U.S.C. § 1818(b), alleging that the bank had operated in an unsafe and unsound manner and reciting the violations of the 1973 agreement. Accompanying the notice of charges was a temporary cease and desist order under 12 U.S.C. § 1818(c)(1), prohibiting the bank from extending credit to Manges or to several of his relatives and business associations, as well as certain other named persons, forbidding the bank from maintaining a demand deposit account for Manges, and generally requiring the bank to adhere to the terms of the 1973 agreement.

Groos National Bank's response was a "First Supplemental Complaint" in its case in the district court, seeking an order suspending the notice of charges and temporary cease and desist order pending determination of the validity of the 1973 agreement.

A "Second Supplemental Complaint" sought to enjoin the Comptroller from further investigations.

To this the Comptroller answered with a broadside of his own, including various motions to dismiss the bank's action and to enjoin alleged violations of the temporary cease and desist order. On all these points the district court ruled in favor of the Comptroller, and Groos appeals these rulings in No. 76-4065, to which we shall return shortly.

While all these proceedings were taking place in the district court, however, administrative action continued on the enforcement of a permanent cease and desist order. As is required by 12 U.S.C. § 1818(b)(1), the notice of charges stated a date for an administrative hearing to determine whether a permanent cease and desist order should issue with respect to the violations charged in the notice of charges. This hearing was held on July 7, 1976; on September 16, 1976, the Administrative Law Judge entered his recommendation that a permanent cease and desist order be issued, based upon his finding that Groos National Bank had violated the 1973 agreement and that, in addition, the practices complained of constituted unsafe and unsound banking practices. With certain modifications the Comptroller accepted the ALJ's conclusions and issued a final cease and desist order on January 27, 1977. The bank and Manges, joined by several intervenors, appeal this final order in No. 77-1398.

Since these two cases raise several points about the administrative procedures through which the Comptroller regulates banking practices, we briefly recapitulate some pertinent sections of the banking laws. The Comptroller's power to initiate cease and desist orders in the present case was based on 12 U.S.C. § 1818(b)(1). Section 1818 applies to banks insured through the Federal Deposit Insurance Corporation, and among other things it authorizes the appropriate regulatory agency in this case the Comptroller (12 U.S.C. § 1813(q)) to deliver on the insured bank notice of charges in the event that the agency has reasonable cause to believe that the bank is engaged in an "unsafe or unsound practice" or is violating a law, rule, or regulation, or agreement entered into with the agency. This notice of charges must fix a time for a hearing to determine whether an administrative cease and desist order shall issue; such an order may issue if the agency finds the violation or unsafe or unsound banking practice specified in the notice of charges. Judicial review of final agency cease and desist orders is placed in the United States Circuit Courts of Appeal by 12 U.S.C. § 1818(h). However, pending the outcome of action on a cease and desist order, the regulatory agency may issue a...