Bullion v. Federal Deposit Ins. Corp., s. 88-4390
| Decision Date | 05 September 1989 |
| Docket Number | Nos. 88-4390,88-4391 and 88-4409,s. 88-4390 |
| Citation | 881 F.2d 1368 |
| Parties | Ronald L. BULLION, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent. A. Freeman EDGERTON, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent. Anthony V. NOTO, Joseph A. Dazzio, and Carol L. Harelson, Petitioners, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent. |
| Court | U.S. Court of Appeals — Fifth Circuit |
John P. Aydell, Jr., Baton Rouge, La., for Ronald L. Bullion.
A. Freeman Edgerton, Baton Rouge, pro se.
Peter T. Dazzio, Watson, Blanche, Wilson & Posner, William H. Patrick, Baton Rouge, La., for Anthony V. Noto, Joseph A. Dazzio and Carol L. Harelson.
James Clark, Charles L. Cope, II, Hoyle L. Robinson, Exec. Secretary, FDIC, Washington, D.C., for respondent.
Petition for Review of an Order of the Federal Deposit Insurance Corporation.
Before WISDOM, KING and WILLIAMS, Circuit Judges.
The petitioners Ronald L. Bullion, A. Freeman Edgerton, Anthony V. Noto, Joseph A. Dazzio, and Carol L. Harelson appeal the assessment of civil penalties against them for violation of Sec. 22(h) of the Federal Reserve Act, 12 U.S.C. Sec. 375b, and its implementing regulations, 12 C.F.R. Sec. 215.4(a) and (c). We uphold the determination of violations by the Board of Examiners of the Federal Deposit Insurance Corporation. There is substantial evidence in the record to support its conclusion. We further uphold the penalties awarded under the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1828(j)(4)(A) and (B), except as to Dazzio. We reverse as to him and remand for reconsideration of an appropriate penalty.
Dr. Joseph Dazzio was chairman of the board of the Metropolitan Bank & Trust Company of Baton Rouge (the "Bank"). Ronald Bullion, A. Freeman Edgerton, Anthony Noto, and Carol Harelson were officers.
Dazzio sought $1.5 million in financing from the Bank for the construction, renovation, and operation of the Sherwood Meadows Townhouses, owned by a limited partnership, Sherwood Meadows Properties, Ltd. Dazzio was the general partner and had exclusive control of this partnership.
To obtain financing, a transaction was structured under which low interest, multi-family housing revenue bonds in the amount of $1.5 million were issued by the Louisiana Public Facilities Authority. Interest on the bonds was set at 75% of Chase Manhattan Prime with a 30-year amortization, callable after ten years. The Sherwood Meadows partnership gave a $1.5 million promissory note and an assignment of rents to the issuer. Security for the issuers' loan consisted of a first mortgage on the townhouses, $174,000 cash in escrow, and a $100,000 certificate of deposit. Petitioner Dazzio also gave his personal guaranty for the indebtedness.
The Bank was the sole purchaser of the bond issue. In effect, the Bank loaned the money to Dazzio for this business endeavor, which is the way the transaction was treated at all times by the Bank. In reaching the decision to purchase the bonds, Directors Bullion, Noto, Edgerton, and Harelson relied on the oral report of Jimmy Davis, one of the Bank's lending officers, and a loan application that was prepared by him. Before the loan was actually funded on November 22, 1985, the file on this purchase included an appraisal of the townhouses dated August 7, 1985, based on the sales price of the properties if sold as condominiums, and a financial statement of Dazzio dated October 2, 1985, which indicated that he and his wife had a net worth of $2.2 million.
On November 7, 1986, the Bank was declared insolvent, and it was closed by the Louisiana Commissioner of Financial Institutions. While it had received a clean bill of health on November 16, 1983, the last time it had been examined, the Bank's stability had substantially declined as had the stability of many of the banks in this area of the country.
Pursuant to 12 U.S.C. Sec. 1828(j)(4), a formal adversary enforcement proceeding was conducted against Dazzio and the directors for approving the purchase of the bonds (collectively, the "officers"). The enforcement process began on April 8, 1987, when the FDIC's Board of Review issued a Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing. 12 U.S.C. Sec. 1828(j)(4)(C). The notice informed the officers that the FDIC was seeking penalties in the amount of $290,000 against Dazzio, $8000 against Raymond E. Kron, Jr., and $3000 against each of the other eleven directors of the Bank.
The notice alleged violation of 12 U.S.C. Sec. 375b, and its implementing regulations, 12 C.F.R. Sec. 215.4(a) and (c). 1 Under Sec. 215.4(c), the FDIC Board alleged that the extension of credit to Sherwood Meadows Properties violated the Bank's lending limit because the partnership was a business interest of Dazzio who was an "insider" under the statute. The maximum amount that should have been extended to an "insider" under the lending limit was $1,225,000, so that the Bank had overextended by $275,000 in the purchase of the bonds.
Under Sec. 215.4(a), the Board alleged that the loan involved more than the normal risk of repayment or other unfavorable features. Only Dazzio, Edgerton, Noto, Harelson, and Bullion exercised their right to contest the proposed penalty assessment.
A hearing was held July 27-30, 1987, before an Administrative Law Judge. While the central facts of the loan were not contested, the officers advanced two contentions in their defense. As to the Sec. 215.4(c) violation, they argued that Dazzio was not an "executive officer" so that he was not properly considered an "insider" under Regulation O. As to the Sec. 215.4(a) violation, they argued that the extension of credit did not involve more than the normal risk of repayment or other unfavorable features.
On June 8, 1987, the ALJ held a pretrial conference to expedite discovery. At this hearing, the lead counsel for the FDIC, Phillip Schwartz, agreed to produce certain memoranda, including a memorandum sent from the FDIC's regional office in Memphis to the Washington D.C. office. On June 25, the FDIC provided the Bank officers with a two-and-one-half page memorandum, "Noto 2," which did not contain the regional office's recommendation and which was not signed. 2
At the first day of the hearing, June 27, the officers protested not receiving Noto 2 until two days before the hearing. Schwartz explained that the FDIC had had trouble locating the document and that the FDIC had produced the entire document except for additions from Washington D.C. which could not be included because they were privileged. The officers moved for dismissal or a continuance. The ALJ denied the dismissal and stated that the motion for continuance would be taken under advisement. He told petitioners to reurge the motion after the FDIC rested if they needed extra time to prepare their defense because of the late compliance by the FDIC with the discovery request.
On June 28, the FDIC released the rest of Noto 2, "Noto 3." Noto 3 was the same document as Noto 2, but it included an additional one-and-a-half pages. The excised section revealed that the regional office had recommended penalties of $25,000 against Dazzio and $1000 against the other four officers. The document was signed by Schwartz in his capacity as Senior Regional Attorney for the FDIC. 3 An FDIC examiner further testified that no changes had been made to this document in Washington.
The officers again moved for dismissal on the ground that they would have subpoenaed the FDIC regional staff members mentioned in Noto 3 who recommended the lower penalties if they had received the complete memorandum earlier. 4 The ALJ denied the motion.
That same day, the FDIC Washington review examiner, Mr. H. Ronald Hoch, appeared as a witness for the FDIC. He testified on the violations that had occurred, on the penalties that were appropriate, and on his recommendation for the appropriate dollar amount of penalties that should be assessed. The ALJ ordered the FDIC to produce all documents in camera that Hoch had relied on in preparing his testimony. The FDIC had expressed concern that the documents requested were privileged. The FDIC refused to produce the documents. The ALJ eventually dismissed Hoch from the stand for this reason, and he largely discredited Hoch's testimony in his recommended decision.
On January 22, 1988, the ALJ issued his Recommended Decision to the FDIC Board. In it he concluded that Dazzio was an "executive officer" within the meaning of Regulation O so that the Bank officers clearly had violated the "overline" provisions of Sec. 215.4(c). 5 The ALJ found, however, that the FDIC had failed to prove a violation under Sec. 215.4(a). He based this decision on the fact that the FDIC failed to show that the loan involved "preferential terms" under Sec. 215.4(a)(1), a finding he found crucial to proving a violation at all under Sec. 215.4(a). He recommended a $10,000 penalty against Dazzio and a $1000 penalty against each of the other directors based on the "overline" violation.
Petitioners and the FDIC enforcement counsel filed exceptions to the ALJ's decision. Petitioners asserted that the ALJ should have dismissed the suit because the FDIC had violated the petitioners' due process rights, the ALJ had found incorrectly that Dazzio was an executive officer, and the ALJ had inappropriately assessed money penalties. The FDIC asserted in its exceptions that the Sec. 215.4(a) violation was improperly dismissed and the provisions governing it were improperly construed, that the ALJ improperly limited the scope of the evidence under Sec. 215.4(a) to evidence available at the time the loan was made, and the ALJ erred in discrediting the testimony of Hoch as an expert witness.
On May 24, 1988, the FDIC Board issued its decision. The Board agreed with the ALJ that the officers of the...
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