Mercantile Texas Corp. v. Board of Governors of Federal Reserve System

• Decision Date: 25 February 1981
• Docket Number: No. 80-1528,80-1528
• Citation: 638 F.2d 1255
• Parties: 1981-1 Trade Cases 63,897 MERCANTILE TEXAS CORPORATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent. . Unit A
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1255

638 F.2d 1255

1981-1 Trade Cases 63,897

MERCANTILE TEXAS CORPORATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent.

No. 80-1528.

United States Court of Appeals, Fifth Circuit.

Unit A

Feb. 25, 1981.

Hughes & Hill, Dallas, Tex., Arnold & Porter, John D. Hawke, Jr., Washington, D. C., for petitioner.

Neal Petersen, Gen. Counsel, Board of Governors, Federal Reserve Systems, James V. Mattingly, Jr., Alice Daniel, Asst. Atty. Gen., Civ. Div., Dept. of Justice, Washington, D. C., William J. Sweet, Jr., Bd. of Governors, Federal Reserve System, Washington, D. C., for respondent.

Petition for Review of an Order of the Board of Governors of the Federal Reserve System.

Before COLEMAN, RUBIN and WILLIAMS, Circuit Judges.

ALVIN B. RUBIN, Circuit Judge:

Mercantile Texas Corporation is a bank holding company operating nine banks throughout Texas. PanNational Group, Inc., a smaller bank holding company, operates five banks in El Paso and Waco, cities not presently served by Mercantile. Mercantile seeks review of a Federal Reserve Board order denying approval to a proposed merger between the two companies. The Board held that elimination of potential competition between the two companies would have a substantially adverse effect on competition in El Paso and Waco without countervailing benefits to those communities.

On review, the Board argues that Section 1842(c) of the Bank Holding Company Act, 12 U.S.C. § 1842(c), grants it broad discretion to reject proposed mergers upon finding that a merger would have an anticompetitive effect detrimental to the convenience and needs of the community even if the merger would not violate the explicit antitrust standards included in Section 1842(c). We conclude that the statute denies the Board the broad discretion it claims. If the Board rejects a proposed merger on anticompetitive grounds, it must find a violation of the Sherman and Clayton Act standards written into the statute.

Anticipating our interpretation, the Board argues that the merger would violate the Clayton Act standard by eliminating potential competition in the two markets. Because the Board failed to make several important findings of fact (and because we can affirm the Board's decision only on the basis of the findings that the Board actually made), we cannot determine whether the merger would violate the potential competition doctrine. Without adequate findings, we are also unwilling to decide whether the elimination of potential competition constitutes a violation of the Clayton Act standard.

Accordingly, we vacate the Board's order and remand Mercantile's petition to the Board for reconsideration and more thorough findings.

I.

Mercantile Texas Corporation is the fifth largest bank holding company in Texas. Its nine banks have aggregate deposits of $2.8 billion, representing 4.2 per cent of the total commercial bank deposits in the state. ¹ PanNational controls five banks with deposits of $622 million, representing 0.9 per cent of the commercial bank deposits in Texas. The merged corporation would have 5.1 per cent of Texas commercial bank deposits. Mercantile would remain the fifth largest banking organization, but its total deposits would increase by approximately 22 per cent.

PanNational operates four banks in El Paso; the nearest market served by Mercantile is San Antonio, more than 500 miles away. PanNational also owns one bank in Waco; the nearest market served by Mercantile is Dallas, 95 miles away. Because of these distances, the Board found that the proposed merger would not eliminate any significant present competition between the two companies.

The Board found, instead, that future potential competition in Waco and El Paso between the two companies would probably be eliminated by the merger. ² It predicted that, if the proposed merger were rejected, Mercantile would nevertheless enter the two markets, but in a manner resulting in greater competition. The Board stated this conclusion after only a limited discussion of the relevant economic data.

The Board's findings as to the facts, if supported by substantial evidence, are conclusive. 12 U.S.C. § 1848; First State Bank of Clute v. Board of Governors, 553 F.2d 950 (5th Cir. 1977). See 5 U.S.C. § 706(2)(E) (judicial review under the Administrative Procedure Act). Like decisions of other agencies, however, the Board's order may be affirmed only on the basis of the findings explicitly made in its opinions. SEC v. Chenery Corp. (Chenery I), 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947); Real v. Simon, 514 F.2d 738 (5th Cir. 1975). See Gravois Bank v. Board of Governors, 478 F.2d 546 (8th Cir. 1973). Its decision cannot be affirmed on the basis of "appellate counsel's post hoc rationalizations for agency action;" Burlington Truck Lines Inc. v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 246, 9 L.Ed.2d 207, 215 (1962); Real v. Simon, 514 F.2d 738 (5th Cir. 1975); or because the contents of the record support conclusions that the Board has not stated. When, as here, an agency makes only minimal findings, its decision rests on precarious ground.

We begin by examining Section 1842(c) to determine what standard governs the Board's discretion in reviewing proposed mergers.

II.

Section 1842(c) of the Bank Holding Company Act, 12 U.S.C. § 1842(c), ³ forbids Board approval of any merger that would foster a monopoly or "whose effect ... may be substantially to lessen competition" unless "it finds that the anticompetitive effects are clearly outweighed in the public interest." ⁴ The phrase "substantially to lessen competition" is, of course, borrowed from Section 7 of the Clayton Act, 15 U.S.C. § 18. Because this repetition was purposeful, ⁵ the principles developed under the Clayton Act are applicable to mergers of bank holding companies under Section 1842(c), Mid-Nebraska Bancshares, Inc. v. Board of Governors, 627 F.2d 266 (D.C. Cir. 1980), as well as to mergers of banks under Section 1828(c)(5)(B) of the Bank Merger Act, which uses the same language. See United States v. Marine Bancorporation, 418 U.S. 602, 94 S.Ct. 2856, 41 L.Ed.2d 978 (1974); United States v. First City National Bank, 386 U.S. 361, 87 S.Ct. 1088, 18 L.Ed.2d 151 (1967).

If the antitrust consequences of the merger do not require Board disapproval, then the statute commands the Board to "take into consideration ... the convenience and needs of the community." Counsel for the Board argues that this second provision enables it to reject proposed mergers if it finds that the anticompetitive effects of the merger would thwart the "convenience and needs" of the community even if these effects are insufficient to violate the antitrust standards. While an agency's interpretation of its own governing statutes is entitled to great deference, Board of Governors v. First Lincolnwood Corp., 439 U.S. 234, 99 S.Ct. 505, 58 L.Ed.2d 484 (1978), we are not persuaded that Congress intended the Board to have nearly unlimited discretion to reject proposed mergers on anticompetitive grounds beyond Clayton Act violations.

Two circuits have already rejected the Board's contention. In Washington Mutual Savings Bank v. F.D.I.C., 482 F.2d 459 (9th Cir. 1973), the Ninth Circuit considered this argument in the context of the identical language of the Bank Merger Act provision, 12 U.S.C. § 1828(c)(5). The court held that Congress intended to impose a uniform antitrust standard for consideration of bank mergers, thereby enabling the agencies and courts to develop a "discernible body of law." 482 F.2d at 464. The community's "convenience and needs," which the Board must also consider, was found to refer exclusively to banking (as distinguished from competitive) factors. Id. at 465. In County National Bancorporation v. Board of Governors, No. 79-1783 (8th Cir. Sept. 3, 1980), rehearing granted, the Eighth Circuit followed Washington Mutual and held that the Clayton Act standard was the exclusive test for evaluating anticompetitive effects under the Bank Holding Company Act provision, 12 U.S.C. § 1842(c).

The legislative history of the two provisions establishes that Congress did not intend for the Board to apply a more stringent standard than ordained by Section 7 of the Clayton Act. Above all, Congress sought to establish "uniform standards" for consideration of anticompetitive effects of bank mergers and acquisitions by bank holding companies. S.Rep.No. 1179, 89th Cong., 1st Sess. 10, reprinted in (1966) U.S. Code Cong. & Ad. News 2385, 2394 (1966 amendment to the Bank Holding Company Act). See H.R.Rep.No. 1221, 89th Cong., 1st Sess. 1, reprinted in (1966) U.S. Code Cong. & Ad. News 1860 (1966 amendment to Bank Merger Act); Austin, The Evolution of Commercial Bank Merger Antitrust Law, 36 Bus.Law. 297, 315 (1981). ⁶ Allowing the Board to employ a more stringent standard tailored to the "convenience and needs" of each community would destroy that uniformity.

The House Banking and Currency Committee designed the language of the statute as a compromise between those seeking the most vigorous possible application of the antitrust laws to banks and those seeking to exempt banks from their operation. ⁷ The two sides compromised by applying the established principles of the antitrust laws to bank mergers, but allowing those mergers whose anticompetitive effects are outweighed by "the convenience and needs of the community." By applying standards more stringent than the antitrust laws, the Board would go beyond the terms of the compromise to gain a victory that Congressional antitrust proponents may not have sought and certainly did not obtain.

The Board argues that Congress established standards that would be uniform only when the Board is required to reject a proposed merger, but did not limit the Board's discretion to apply a standard stricter than the Clayton Act if the "convenience and needs" of the community warrant. This construction, however, gives ...