Berens v. Ludwig

• Citation: 160 F.3d 1144
• Decision Date: 17 November 1998
• Docket Number: No. 97-3545,97-3545
• Parties: Mark H. BERENS, Plaintiff-Appellant, v. Eugene A. LUDWIG, Comptroller of the Currency, and Marquette Bank, N.A., as successor in interest to Marquette Bank Shakopee, N.A., Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1144

160 F.3d 1144

Mark H. BERENS, Plaintiff-Appellant, v. Eugene A. LUDWIG, Comptroller of the Currency, and Marquette

Bank, N.A., as successor in interest to Marquette

Bank Shakopee, N.A., Defendants-Appellees.

No. 97-3545.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 29, 1998.

Decided Nov. 17, 1998.

Richard M. Carbonara, Jeffrey P. DeJong, W. Bruce Hoff, Mark H. Berens (argued), Altheimer & Gray, Chicago, IL, for Mark H. Berens.

James M. Kuhn, Office of the United States Attorney, Chicago, IL; Kenneth J. Lennon, Cory C. Caouette (argued), Office of the Comptroller of the Currency, Washington, DC, for Eugene A. Ludwig.

Barry S. Rosen (argued), Sachnoff & Weaver, Chicago, IL; Susan E. Barnes, Lindquist & Vennum, Minneapolis, MN, for Marquette Bank, N.A.

Before POSNER, Chief Judge, and BAUER and WOOD, JR., Circuit Judges.

POSNER, Chief Judge.

Mark Berens was a minority shareholder in Marquette Bank Shakopee, a national bank. The bank's majority shareholder (a bank holding company) decided to consolidate the bank with several other banks that the company owned to form Marquette Bank. The terms of the consolidation required minority shareholders to surrender their shares in exchange for a cash payment based on the company's valuation of the shares. The company fixed that value at $12,071 per share (Berens owned 33 shares). Berens thought this too little and invoked his right under 12 U.S.C. § 215(d) to have the Comptroller of the Currency determine the value of his stock, see Beerly v. Department of Treasury, 768 F.2d 942 (7th Cir.1985) (applying § 215a, the materially identical provision for valuing stock in bank mergers); Boone v. Carlsbad Bancorporation, Inc., 972 F.2d 1545, 1552-54 (10th Cir.1992); Central-Penn National Bank v. Portner, 201 F.2d 607 (3d Cir.1953) (applying a materially identical provision in a predecessor statute), which he claimed was $16,700. The Comptroller fixed the value at $13,034 and Berens responded by filing this suit under 28 U.S.C. § 1331 against both the Comptroller and Marquette Bank. The suit claims that the Comptroller's valuation was arbitrary and so in violation of the Administrative Procedure Act, 5 U.S.C. § 706(2)(A), and that the bank should have paid Berens interest on the value of his shares from the date of the consolidation to the date on which the bank sent him a check for the amount fixed by the Comptroller. The district court rejected Berens's claims, 953 F.Supp. 249, 964 F.Supp. 1215 (N.D.Ill.1997), precipitating this appeal.

The parties agree that stock in Marquette Bank Shakopee was traded too infrequently to allow the price of those trades to be taken to be the value of the stock. They further agree that a proper substitute method of valuation is to identify banks (actually, in this case, bank holding companies, but we'll disregard that detail) whose stock is traded frequently enough to have a market value that are comparable to Marquette Bank Shakopee. The parties' chief disagreement is over how the comparative analysis should treat what Berens calls the bank's "excess capital." Between 1978 and the consolidation in 1995, the bank paid an unchanging annual dividend of $20 per share even though its earnings grew more than sevenfold during that period. By the end of the period, the bank was distributing only 1 percent of its earnings as dividends. With so little going out, the bank's capital grew substantially and by the time of the consolidation had reached $12 million. This was $5 million more than the Comptroller required it to be to support the bank's banking assets, that is, the loans and other investments of the money deposited in the bank. Berens calls this $5 million of capital "excess" and "unproductive" because, rather than being lent out at substantial interest, it was held in low-risk, low-yield securities, presumably short-term Treasury notes or the equivalent, although the record, surprisingly, is mum on the identity of the securities or the interest earned on them.

Berens's appraisers determined that banks that were comparable in size and location to the Marquette Bank Shakopee were valued at 1.3 to 1.4 times their total capital. The appraisers multiplied the bank's $7 million of "productive" capital by these figures, and added $5 million, to determine the value of the bank on the eve of the consolidation. Their rationale for adding the $5 million rather than putting it in the base with the other capital was that investors would not value unproductive capital above its face amount.

As an alternative method of valuation, the appraisers multiplied the bank's annual earnings by 10.5, the price to earnings ratio of shares in the comparable banks, and then added the $5 million in excess capital on the theory that this entire amount could be paid out in the form of a dividend without impairing the bank's earnings. The price-earnings valuation method yielded a valuation (an "investment value," as it is called) approximately equal to the capital-valuation method.

The Comptroller, in conducting his own appraisal, made no adjustment for the presence of "excess" capital. His price-earnings valuation involved multiplying the bank's earnings by the price-earnings ratio of the comparable banks, with no addition to earnings of the $5 million. This procedure yielded a value substantially lower than that estimated by Berens's appraisers because the earnings figure that the Comptroller multiplied to derive the value of the bank was $5 million lower than Berens's earning figure. The Comptroller's capital valuation (the alternative method of valuing the firm) yielded an estimate similar to Berens's. But because the Comptroller weighted the price-earnings valuation three times as heavily as the capital valuation in determining an overall valuation, the overall valuation was more than 20 percent below that of Berens's appraisers.

His appraisers used still a third method of valuation, the discounted cash flow method, and the Comptroller didn't. But as with Berens's other methods, this one yielded a higher valuation than the Comptroller's only because Berens treated the $5 million in supposedly excess capital as in effect earnings.

Bearing in mind that our review of the Comptroller's determination of value is deferential, Central National Bank v. U.S. Dept. of Treasury, 912 F.2d 897, 904 (7th Cir.1990); Beerly v. Department of Treasury, supra, 768 F.2d at 945; Lewis v. Clark, 911 F.2d 1558, 1563 (11th Cir.1990) (per curiam); Abernathy v. Clarke, 857 F.2d 237, 239 (4th Cir.1988), we cannot say that the Comptroller acted arbitrarily either in weighting so heavily the price-earnings method of valuation or in disregarding the bank's so-called excess capital. The primary value of stock to investors is, of course, as a source of income; that is, it is an investment value. It is thus a function of the income that the stock is expected to yield (discounted to present value) and of any risks associated with the income; and that riskiness is proxied by the price-to-earnings ratio of comparable investments, in this case the stock of banks similar to Marquette Bank Shakopee. The more secure the bank's earnings prospects, other things being equal, the higher the price-earnings ratio will be.

The fact that under...