Bank of the Ozarks v. DKK Dev. Co.

• Decision Date: 12 April 2012
• Docket Number: No. A11A1916.,A11A1916.
• Citation: 315 Ga.App. 539,12 FCDR 1240,726 S.E.2d 608
• Parties: BANK OF the OZARKS v. DKK DEVELOPMENT CO.
• Court: Georgia Court of Appeals

315 Ga.App. 539

726 S.E.2d 608

12 FCDR 1240

BANK OF the OZARKS

v.DKK DEVELOPMENT CO.

No. A11A1916.

Court of Appeals of Georgia.

March 23, 2012.

Reconsideration Denied April 12, 2012.

Taylor, English & Duma, William Gordon Leonard, Atlanta, James A. Bishop, Brunswick, for appellant.

Gilbert, Harrell, Sumerford & Martin, Wallace E. Harrell, James L. Roberts IV, Brunswick, for appellee.

BARNES, Presiding Judge.

DKK Development Company petitioned the superior court for a declaratory judgment against Oglethorpe Bank Holding Company, Inc. (the “ Holding Company”) and Oglethorpe Bank, seeking to have DKK's $930,000 debt to the bank set off against DKK's $2 million loan to the Holding Company. After a hearing, the trial court granted the declaratory judgment, finding that DKK was entitled to an equitable set-off of its debt to the bank. In its order, the court “deemed” DKK's $930,000 note to the bank to be paid in full and ordered that the Holding Company's $2.25 million promissory note to DKK be reduced accordingly. The trial court also directed the Clerk of the Superior Court to cancel and mark as satisfied the bank's deeds to secure DKK's debt, and to attach a copy of the court's order to the original DKK promissory note and deed to secure debt.

Oglethorpe Bank and the holding company appealed. Less than a month later, the Georgia Department of Banking and Finance (“GDBF”) closed Oglethorpe Bank, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver. The FDIC then transferred assets of Oglethorpe Bank to Bank of the Ozarks, including the loan to DKK, and the trial court substituted Bank of the Ozarks as the defendant successor in interest to Oglethorpe Bank. Bank of the Ozarks then filed an amended notice of appeal, noting the substitution, and the Holding Company, which was already insolvent when the trial court held its hearing in this case, withdrew from the appeal.

Bank of the Ozarks (“the Bank”) ¹ argues on appeal that the trial court erred in offsetting its loan to DKK against DKK's loan to the Holding Company because the set-off violated federal banking regulations, specifically Federal Reserve Regulation W, 12 C.F.R. Part 223, limiting the transactions between a holding company and its wholly-owned subsidiary bank. See 12 C.F.R. § 223.11. The Bank also argues that the set-off violated the Bank's consent order from the GDBF and the FDIC, DKK had “unclean hands” and was not entitled to equitable relief, and the set-off was not permissible because the Bank was not the same entity as the Holding Company. We agree that the set-off was improper because the Bank and the Holding Company were separate entities, and therefore reverse the trial court. We need not decide whether the set-off was also improper for other reasons.

A trial court's findings of fact after a declaratory judgment hearing “are analogous to a jury verdict and will not be interfered with if there is any evidence to support them. However, we review the trial court's conclusions of law de novo.” (Citation and punctuation omitted.) Burnette v. Caplan, 287 Ga.App. 142, 143, 650 S.E.2d 798 (2007).

A set-off “allows the defendant to set off a debt owed him by the plaintiff against the claim of the plaintiff.” OCGA § 13–7–1. “ Between the parties themselves any mutual demands, existing at the time of the commencement of the suit, may be set off.” (Punctuation omitted.) Nixon v. Nixon, 194 Ga. 301, 303(2), 21 S.E.2d 702 (1942). OCGA §§ 13–7–7 through 13–7–11 provide specific legal grounds for which set-off is available. “The right to set off one legal demand against another, other than in cases covered by our statute, is itself an equitable right.” (Punctuation omitted.) Gormley v. Chance, 55 Ga.App. 838, 841, 191 S.E. 701 (1937) (codified in OCGA § 23–2–76). That statute provides that, “[r]egarding a setoff, equity generally follows the law; but, if there is an intervening equity not reached by the law or if the setoff is of an equitable nature, equity shall take jurisdiction to enforce the setoff.” OCGA § 23–2–76. Whether the claim for a set-off is legal or equitable in nature, however, it must be between the same parties and in their own right. OCGA § 13–7–4; Shingler v. Furst, 176 Ga. 497, 168 S.E. 557 (1933).

The material facts about these transactions are not in dispute. In 2005, DKK obtained a development loan from the Bank which was secured by real property on St. Simon's Island. The bank renewed the loan several times. The loan was last renewed in February 2010 for $930,000.

In 2007, the Bank reorganized, redeemed its shareholders' stock, and issued shares of the Holding Company to the former shareholders of the Bank. The same individuals served as the officers and directors of both the Holding Company and its wholly owned subsidiary, the Bank. DKK's attorney explained that “the holding company was formed solely for the purpose of acquiring cash either by borrowing it or selling stock and passing it down to the bank as capital for the bank.” If the Bank borrowed money, its capital or equity did not increase because the loan was offset by a debt. But money transferred from the Holding Company to the Bank constituted an equity contribution which the Bank was not required to repay.

In March 2009, the Holding Company was solvent, but the Bank needed an infusion of capital to avoid falling below a capital-to-asset ratio that would have triggered regulatory action, which would in turn have made it more difficult for the Bank to raise funds in the future. See 12 CFR §§ 325.4(b), 325.6(b). Frank Deloach was the vice chair of the Board of Directors of both the Bank and the Holding Company, and owned half of DKK's stock. He was also “the chief architect of the bank,” one of its organizers and its largest shareholder. DKK borrowed $2.5 million from another bank at 6 percent interest, drew out $2.25 million, and on March 31, 2009, lent it to the Holding Company for one year at 8.5 percent interest and a fee of $100,000. The Holding Company in turn made an equity contribution of $2 million to the Bank, retaining $250,000 of DKK's loan in reserve.

After the infusion of $2 million in capital to the bank, the parties anticipated that economic conditions would improve to the point that the Bank would be able to start paying dividends again to the Holding Company, which would enable the Holding Company to repay DKK. Instead, economic conditions worsened, and the Bank's value “declined precipitously” over the next year. The Holding Company's loan from DKK matured in March 2010, but the Holding Company did not repay the loan.

The Bank's capital-to-asset ratio fell below six percent, and in June 2010 the Bank entered into a consent order with the GDBF and FDIC. Among other things, the consent order provided that the Bank could not enter into any “covered transactions” with an affiliate. Pursuant to the regulators' suggestions, the Holding Company transferred its remaining $200,000 to the Bank to keep its reserves above two percent and delay the issuance of a “prompt corrective action letter,” which would give the Bank 90 days to raise its capital above four percent or face closure. In July 2010, the FDIC issued a letter to the Holding Company notifying it that its financial condition was unsatisfactory with insufficient capital, cash flow, and liquidity, to which the Holding Company's Board of Directors responded in ...