Beerly v. Department of Treasury

• Decision Date: 29 July 1985
• Docket Number: No. 84-1763,84-1763
• Citation: 768 F.2d 942
• Parties: Gustav E. BEERLY, Trustee of the Gustav E. Beerly Trust, Plaintiff-Appellant, v. DEPARTMENT OF the TREASURY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 942

768 F.2d 942

Gustav E. BEERLY, Trustee of the Gustav E. Beerly Trust, Plaintiff-Appellant, v. DEPARTMENT OF the TREASURY, et al., Defendants-Appellees.

No. 84-1763.

United States Court of Appeals, Seventh Circuit.

Argued April 12, 1985.

Decided July 29, 1985.

James E. McParland, Morgan, Lanoff, Denniston & Madigan, Chicago, Ill., for plaintiff-appellant.

Frank C. Bonaventure, Jr., Washington, D.C., for defendants-appellees.

Before CUMMINGS, Chief Judge, POSNER, Circuit Judge, and PECK, Senior Circuit Judge. ^*

POSNER, Circuit Judge.

This appeal requires us to examine the meaning and constitutionality of the little-known statutory provisions for appraisal by the Comptroller of the Currency of shares owned by shareholders dissenting from (1) mergers, consolidations, or conversions of national banks into state banks, 12 U.S.C. Sec. 214a; (2) consolidations of national or state banks under the charter of a national bank, 12 U.S.C. Sec. 215; or (3) mergers of national or state banks into a national bank, 12 U.S.C. Sec. 215a--all transactions that require the Comptroller's approval. The provisions for appraisal go back to 1918, yet, surprisingly in this litigious age, in only one reported case has an appraisal under any of them been challenged. See Simonds v. Guaranty Bank & Trust Co., 492 F.Supp. 1079 (D.Mass.1979).

In the case of a type (3) transaction, the type involved in this case, a dissenting shareholder who gives the proper notice (as was done here) is entitled to receive the "value" of his shares. 12 U.S.C. Sec. 215a(b). Value is determined by a committee of three appraisers of which the dissenters select one, the bank resulting from the merger another, and the two party-designated appraisers the third. 12 U.S.C. Sec. 215a(c). If any dissenter is dissatisfied with the appraisers' valuation of his shares, or if for some reason one of the appraisers is not appointed, or if the appraisers fail to make an appraisal, then the Comptroller shall on request "cause an appraisal [or reappraisal, if the dissenter was dissatisfied with the appraisers' appraisal] to be made which shall be final and binding" on all parties. 12 U.S.C. Secs. 215a(c), (d). Similar provisions are applicable to transactions of types (1) and (2). See 12 U.S.C. Secs. 214a(b), 215(c), (d).

The Mid-City National Bank of Chicago was merged into Mid-City Bank, N.A., which immediately became a subsidiary of Mid-Citco, a newly formed bank holding company. All three entities are under common ownership, the purpose of the chain of transactions being simply to enable Mid-City National Bank to operate in the bank holding company form. However, the first step--the merger of Mid-City National Bank into Mid-City Bank, N.A., a so-called "interim bank," see 12 C.F.R. Sec. 5.21(a)--required the Comptroller's approval under 12 U.S.C. Sec. 215a. Beerly, trustee of 2,061 shares, dissented from the merger. When the party-designated appraisers were unable to agree on a neutral appraiser, Beerly, pursuant to 12 U.S.C. Sec. 215a(d), requested the Comptroller to do the appraising, who after considering written submissions from the parties fixed a value of $282.39 per share for Beerly's stock. Beerly thought the appraisal too low, sued the Comptroller under 28 U.S.C. Sec. 1331, lost in the district court, and appeals to us. The record is silent on the current price of Mid-City's stock.

Even though section 215a(d) states that the Comptroller's appraisal is "final and binding" on all parties, and no procedure for judicial review of an appraisal is specified, it has not been suggested that Congress wanted to insulate the Comptroller's appraisal from judicial review. We cannot rest on the parties' concession of subject-matter jurisdiction, but our independent analysis leads us to the same conclusion. The presumption that final administrative action substantially affecting personal and property rights is judicially reviewable is a powerful one, see, e.g., Abbott Laboratories v. Gardner, 387 U.S. 136, 140-41, 87 S.Ct. 1507, 1510-11, 18 L.Ed.2d 681 (1967), and we can find nothing in the history or setting of the appraisal provisions to overcome it. The valuation of dissenters' shares is a traditional judicial function, see Simonds v. Guaranty Bank & Trust Co., supra, 492 F.Supp. at 1081-82, and, when performed by an administrative agency rather than a court, invites judicial review. It is not a managerial or political judgment, the kind of judgment that a court cannot usefully review because it lacks the proper analytic tools. The statutory words "final and binding" have no necessary reference to judicial review; they may just mean that the Comptroller's appraisal is the last appraisal.

When no statute prescribes the procedure for judicial review of a particular administrative action, review is in the district court under 28 U.S.C. Sec. 1331, the general federal-question jurisdictional statute, see Administrative Procedure Act, Sec. 10(b), 5 U.S.C. Sec. 703; General Finance Corp. v. FTC, 700 F.2d 366, 371 (7th Cir.1983), with a right of appeal to the court of appeals. That was the route followed here.

Our review of the district court's decision is plenary, Stop H-3 Ass'n v. Dole, 740 F.2d 1442, 1450 (9th Cir.1984), since that court and this court have the identical information on which to base review of the challenged administrative action, namely the written record compiled in the administrative proceedings. So it is as if we were reviewing the Comptroller directly; and the parties agree as they must that the scope of judicial review of the Comptroller's decision is for the usual reasons narrow, deferential. See E.I. DuPont de Nemours & Co. v. Collins, 432 U.S. 46, 56-57, 97 S.Ct. 2229, 2235, 53 L.Ed.2d 100 (1977); City Federal Savings & Loan Ass'n v. Federal Home Loan Bank Bd., 600 F.2d 681, 688 (7th Cir.1979). Thus the issue for us is not whether the Comptroller's decision was correct but whether it was reasonable--not "arbitrary, capricious, [or] an abuse of discretion," 5 U.S.C. Sec. 706(2)(A); cf. Camp v. Pitts, 411 U.S. 138, 141-42, 93 S.Ct. 1241, 1243-44, 36 L.Ed.2d 106 (1973).

There are many ways to value a share of stock. The Comptroller considered four: book value, adjusted book value, market value, and investment value.

1. Book value is the difference between the firm's assets and liabilities as valued on its books of account, divided by the number of shares. For Mid-City this comes out to $600.10. But the Comptroller gave book value zero weight in his appraisal.

2. Adjusted book value is book value multiplied by the ratio of the market prices of comparable institutions to their book values. The "peer group" used by the Comptroller to determine the adjusted book value of Mid-City stock consisted of other middle-sized Chicago banks. Their stock was selling at an average of 46 percent of book value. Multiplying this by Mid-City's book value per share produced the figure $294.05; this was the stock's adjusted book value.

3. The meaning of market value is self-evident; but because Mid-City's stock had been very thinly traded (only one-quarter of one percent of its stock had been traded in any recent year), the Comptroller decided to give zero weight to this valuation too. The stock's market value was about $160.

4. Finally, the Comptroller computed an "investment value" for Mid-City by multiplying its most recent annual earnings per share by the price-earnings multiple--which was 6--of Mid-City's peer group; and this produced a figure of $270.72. The Comptroller averaged the two figures he had calculated--the adjusted book value and the investment value--and this yielded his appraisal of $282.39 for each of Beerly's shares.

The methodology of appraisal used by the Comptroller resembles that used in appraising dissenting shareholders' rights under state corporation laws. See, e.g., Fischel, The Appraisal Remedy in Corporate Law, 1983 Am.Bar Foundation Research J. 875, 889-96; Note, The Valuation of a Close Corporation: Glimpses of Objectivity in an Inflationary Period, 13 Loyola U.L.J. 107, 114-25 (1981); Note, Valuation of Dissenters' Stock Under Appraisal Statutes, 79 Harv.L.Rev. 1453, 1456-71 (1966). Although this methodology has frequently been criticized (as in the articles just cited), the fact that the Comptroller was following a conventional approach goes far to shield his results from judicial invalidation. It is not for a reviewing court to tell an administrative agency to defy the conventional wisdom, to innovate, to be daring. And one of the principal criticisms of the conventional methodology of appraisal--that market value is a better index of value than any valuation formula--is, as we shall see, inapplicable to this case. The criticisms of the Comptroller's appraisal that Judge Keeton made in the Simonds case, supra, 492 F.Supp. at 1084, are also inapplicable.

The purpose of an appraisal is to give the owner of the property being appraised the cash equivalent of what he has given up by relinquishing his ownership. In the case of stock what he gives up is the opportunity to sell the stock or to keep it and obtain an income from it. Ordinarily the best estimate of what an opportunity to sell is worth is found in recent sales of the same thing, which would mean, recent sales of stock in Mid-City National Bank. See, e.g., Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826, 835-36 (7th Cir.1985). If the Comptroller had used this method of estimation, it would have turned out very badly for Beerly, because the market value of the stock in the relevant period was only about $160 a share.

It is true that when stock is traded infrequently, past sales may not be a reliable guide to current value, because they impound valuations by only a few buyers and sellers, and because circumstances may have changed since those sales took place. (The other side of the coin is that if a stock has a "thick" market, not only is market value the...