Bloomington Nat. Bank v. Telfer

• Decision Date: 31 October 1990
• Docket Number: No. 89-3707,89-3707
• Citation: 916 F.2d 1305
• Parties: BLOOMINGTON NATIONAL BANK, Hoosier Bancshares, Incorporated, Frank A. Rogers, Joseph R. Hartley, Robert W. Linnemeier, Robert D. Mann and Richard M. Leagre, Plaintiffs-Appellants, v. James S. TELFER, Rudolph T. Kuehn, as Executor of the Estate of Sophie T. Kuehn, Robert S. Telfer, Jr. and John T. Barrett, Defendants/Counterclaimants and Third-Party Plaintiffs-Appellees, v. Robert L. CLARKE, Comptroller of the Currency, Third-Party Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1305

916 F.2d 1305

BLOOMINGTON NATIONAL BANK, Hoosier Bancshares, Incorporated,

Frank A. Rogers, Joseph R. Hartley, Robert W.

Linnemeier, Robert D. Mann and Richard

M. Leagre, Plaintiffs-Appellants, v. James S. TELFER, Rudolph T. Kuehn, as Executor of the Estate

of Sophie T. Kuehn, Robert S. Telfer, Jr. and John

T. Barrett, Defendants/Counterclaimants and Third-Party Plaintiffs-Appellees, v. Robert L. CLARKE, Comptroller of the Currency, Third-Party

Defendant-Appellee.

No. 89-3707.

United States Court of Appeals, Seventh Circuit.

Argued May 16, 1990.

Decided Oct. 31, 1990.

Theodore J. Nowacki, Ronald E. Elberger, Bose, McKinney & Evans, Indianapolis, Ind., for plaintiffs-appellants.

Robert L. McLaughlin, Wooden, McLaughlin & Sterner, Indianapolis, Ind., for defendants/counterclaimants and third-party plaintiffs-appellees.

Yvonne D. McIntire, Comptroller of the Currency Enforcement & Compliance Div., Washington, D.C., for third-party defendant-appellee.

Before BAUER, Chief Judge, COFFEY, Circuit Judge, and SNEED, Senior Circuit Judge. ^*

SNEED, Senior Circuit Judge.

Bloomington National Bank (Bloomington) appeals in its suit against James S. Telfer, Rudolph L. Kuehn, Robert S. Telfer, Jr., and John T. Barrett (the Telfer group) for a declaration that its reorganization plan was authorized by federal law. In rendering summary judgment for the Telfer group, the district court ruled that Bloomington violated the National Banking Act, 12 U.S.C. Sec. 21 et seq., by repurchasing its own stock and failing to provide Telfer with appraisal rights. We affirm.

I. FACTS AND PROCEEDINGS BELOW

The facts in this case are not in dispute. In November 1985, Bloomington, a national banking association chartered by the Comptroller of the Currency (Comptroller) under the National Banking Act (Act), initiated a plan to become a wholly owned subsidiary of Hoosier Bancshares, Inc. (Hoosier), an Indiana holding company. At that time Hoosier owned 90.85 percent of Bloomington's stock. Appellees and thirty-two other minority shareholders owned the remaining 9.15 percent of the outstanding shares.

In a letter to the Comptroller dated November 27, 1985, Bloomington outlined a five-step plan to effect the reorganization and to cash out the minority shareholders. Bloomington patterned this plan after similar bank reorganizations that had been approved by the Comptroller.

First, Hoosier would pay Bloomington $225,000 as a subscription for fifteen thousand shares of common stock that would be sold after a reverse stock split. Second, the bank would amend its articles of association to reduce the par value of its outstanding stock from ten dollars to one cent per share, thereby reducing the aggregate par value of the outstanding shares from $870,000 to $870. The difference between the two amounts would be retained in a capital-over-par account.

The third step required the bank's authorization of a reverse stock split under which Bloomington would issue one new share of common stock for every fifteen hundred shares of old outstanding common Finally, with all the old shares in its possession, Bloomington would then issue fifteen thousand new shares of stock to Hoosier pursuant to the subscription price agreement. Hoosier would then become a 100 percent owner of Bloomington.

stock. After the split, Hoosier would own 52.81 shares and the thirty-six minority shareholders would hold 5.19 shares with each minority shareholder possessing a fractional share. Bloomington would then eliminate the fractional share interests by purchasing them for twenty-five dollars per old share. Bloomington's board of directors had adopted this price after reviewing a study conducted by an investment banking firm retained by the bank.

Federal banking statutes and regulations required the bank to obtain the Comptroller's approval for this transaction. Bloomington received preliminary approval on February 12, 1986. Bloomington then certified to the Comptroller, by letter of April 4, 1986, that two-thirds of the shareholders had approved the amendments to the articles of association necessary to carry out the transaction. The Comptroller authorized the deal on April 17, 1986 and the restructuring plan went into effect.

On June 16, 1987, Bloomington and its directors filed suit seeking a declaratory judgment that the bank restructuring plan and related transactions did not violate federal banking laws, federal and Indiana securities laws, or common law fiduciary duties. This was apparently in response to a letter from the appellees claiming such violations. The Telfer group filed a counterclaim arguing that Bloomington had breached its fiduciary duty and violated federal and state securities laws as well as the National Banking Act. The Telfer group added the Comptroller as a third-party defendant and claimed that he had exceeded his statutory authority in approving a reorganization plan that violated the Act.

The district court rendered summary judgment for Telfer on November 18, 1988 on the cross-claim against the Comptroller. The court ruled that Bloomington's plan violated 12 U.S.C. Secs. 83 & 214a-215a (1988), and that the Comptroller exceeded his authority by approving the plan. Bloomington Nat'l Bank v. Telfer, 699 F.Supp. 190, 194 (S.D.Ind.1988). Although Telfer's first motion against the Comptroller also sought judgment against Bloomington, the bank did not respond to the motion. The Comptroller did not appeal the district court's decision.

On June 30, 1989, Bloomington filed a motion for partial summary judgment on the issue of whether the restructuring plan violated section 83. The district court denied this motion. Instead, the court granted Telfer's motion for summary judgment, finding that "the Bank has merely restated the arguments previously advanced by the Comptroller in support of the restructuring plan which were rejected by the Court." Appellant's Brief at A15. On November 27, 1989, Bloomington and Telfer filed a joint stipulation with the district court which, among other things, dismissed with prejudice the securities fraud and breach of fiduciary duty claims. The parties also agreed on the judgment to be entered. Accordingly, on November 29, 1989, the district court entered final judgment in favor of Telfer in the amount of $246,632. ¹ This appeal followed. This court has jurisdiction under 28 U.S.C. Sec. 1291 (1988).

II. STANDARD OF REVIEW

Review of a district court's grant of a summary judgment motion is de novo. See Wolf v. Larson, 897 F.2d 1409, 1411 (7th Cir.1990). Therefore, this court sits in the same position as the district court and applies the same summary judgment test that governs the district court's decision. See Commercial Union Ins. Co. v. Ramada Hotel Operating Co., 852 F.2d 298, 300 (7th Cir.1988). There is no dispute as to the material facts in this case. Our inquiry focuses only on whether the district court erred in finding that Telfer was entitled to summary judgment as a matter of law.

III. DISCUSSION

Bloomington's appeal from the district court's summary judgment order raises two questions: (1) Does the reorganization plan violate the National Banking Act? (2) Was the Comptroller's approval of the plan in accordance with the Act or did he exceed his statutory authority? For the reasons set forth below, we find that the plan did violate the National Banking Act and that the Comptroller exceeded his statutory authority in approving the plan.

At the outset we must make one overriding observation about this case. Bloomington's plan, if carried out, would only provide twenty-five dollars per share to each minority shareholder. That price is in significant contrast to the fifty-six dollar per share price stipulated by the parties at this time. Accepting the new figure as valid, it becomes readily apparent that Bloomington seriously misjudged the value of its stock. It is also apparent that Bloomington and Hoosier would reap profits exceeding $130,000 if their plan were upheld. ² The gross disparity in the share values strongly suggests that this reorganization plan be examined very carefully.

A. Bloomington's Plan and the National Banking Act

The district court concluded that Bloomington's plan violated sections 83 and 214a-215a of the National Banking Act. Bloomington, 699 F.Supp. at 194; see also Judgment of Nov. 8, 1989, Appellant's Brief at A17. ³ Section 83 of the National Banking Act provides:

No association shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith....

12 U.S.C. Sec. 83 (1988); see also Deitrick v. Greaney, 309 U.S. 190, 194, 60 S.Ct. 480, 482, 84 L.Ed. 694 (1940) (noting, in dicta, that section 83 "prohibits the purchase by a bank of its own shares of stock and their retention when purchased").

Sections 214a thru 215a all provide protection to minority shareholders when their bank is merged or consolidated with another association. See 12 U.S.C. Secs. 214a-215a (1988). The courts have previously recognized Congress's interest in protecting the rights of a bank's minority shareholders. Congress has provided appraisal rights to those stockholders when attempts are made to eliminate them. See Beerly v. Department of the Treasury, 768 F.2d 942, 944-45 (7th Cir.1985), cert. denied, 475 U.S. 1010, 106 S.Ct. 1184, 89 L.Ed.2d 301 (1986); Nehring v. First DeKalbBancshares, Inc., 692 F.2d 1138, 1141-42 (7th Cir.1982).

Bloomington's reorganization plan clearly violates the National Banking Act. The bank's reacquisition of capital stock, at a price significantly lower than the current stipulated value, combined with an avoidance of appraisal rights for the minority shareholders, is not in accordance with sections 83 and 214a-215a of the National Banking Act. ⁴ Bloomington has attempted to do...