Cavallari v. Office of Comptroller of Currency, s. 1370

• Citation: 57 F.3d 137
• Decision Date: 11 May 1995
• Docket Number: 1612,Nos. 1370,D,s. 1370
• Parties: Augustus I. CAVALLARI, Jr., Petitioner, v. OFFICE OF the COMPTROLLER OF THE CURRENCY, and Board of Governors of the Federal Reserve System, Respondents. ockets 94-4151, 94-4183.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 137

57 F.3d 137

Augustus I. CAVALLARI, Jr., Petitioner, v. OFFICE OF the COMPTROLLER OF THE CURRENCY, and Board of

Governors of the Federal Reserve System, Respondents.

Nos. 1370, 1612, Dockets 94-4151, 94-4183.

United States Court of Appeals, Second Circuit.

Argued March 23, 1995.

Decided May 11, 1995.

Chester J. Bukowski, Jr., Hartford, CT (Gordon, Muir & Foley, Peter C. Schwartz, Christopher L. Slack, of counsel), for petitioner.

Yvonne D. McIntire, Washington, DC (Office of the Comptroller of the Currency, Julie L. Williams, L. Robert Griffin, Rosa M. Koppel, Horace G. Sneed, of counsel), and Douglas B. Jordan, Washington, DC (Board of Governors of the Federal Reserve System, James V. Mattingly, Jr., Richard M. Ashton, and Katherine H. Wheatley, of counsel), for respondents.

Before: KEARSE, LUMBARD, and LEVAL, Circuit Judges.

LUMBARD, Circuit Judge:

Augustus I. Cavallari, Jr., petitions for review of a Decision and Order issued by the Comptroller of the Currency on July 28, 1994, and a Decision and Order issued by the Board of Governors of the Federal Reserve System on September 26, 1994. The Comptroller determined that Cavallari was an institution-affiliated party ("IAP") as defined by 12 U.S.C. Sec. 1813(u), and had recklessly disregarded a temporary cease and desist order issued by the Office of the Comptroller of the Currency ("OCC") to Summit National Bank in Torrington, Connecticut. The Comptroller ordered Cavallari to pay restitution of $554,903.83, plus interest, to the Federal Deposit Insurance Corporation ("FDIC") as receiver for the bank, pursuant to 12 U.S.C. Sec. 1818(b); and to pay a civil monetary penalty of $83,000, pursuant to 12 U.S.C. Sec. 1818(i). The Board, for similar reasons, prohibited Cavallari from any further participation in the affairs of any insured depository institution, pursuant to 12 U.S.C. Sec. 1818(e).

On appeal, Cavallari argues that (1) he was not an IAP; (2) he did not recklessly disregard an agency order; (3) the restitution order lacks foundation; (4) the prohibition order lacks foundation; and (5) the agency proceedings deprived him of his constitutional right to a jury trial. We deny the petition in part and remand to the Comptroller to determine the amount of restitution that Cavallari should make for Summit's losses.

I.

In September 1987, Richard D. Barbieri, Sr., John A. Corpaci, and Vinal Duncan purchased WQQW, a radio station in Waterbury, Connecticut. They were interested in purchasing another Waterbury station, WWCO, but federal regulations precluded their direct ownership of WWCO. Accordingly, they helped form the Winthrop Broadcasting Corporation to purchase WWCO. Winthrop's six shareholders were all friends or relatives of Barbieri, Corpaci, and Duncan. Barbieri's son, Richard, a 20% shareholder, served as Winthrop's president, while Duncan's son, Douglas, also a 20% shareholder, served as a vice president.

In September 1988, Summit National Bank loaned $600,000 to Winthrop. Winthrop used the funds to purchase WWCO and the 4.5 acre property on which it was located. Winthrop's capital at the time of the loan was only $1,000. The loan was secured by a first mortgage on the WWCO property and by the personal guaranties of five of Winthrop's six shareholders. The guarantors submitted financial statements from 1987-1989 showing a collective net worth in excess of $16,000,000. The 1989 statement of one guarantor, Ralph Carpinella--a vice president of Winthrop and a business partner of Barbieri, Corpaci, and Duncan--showed real estate assets valued at $26 million, and a net worth of roughly $14.3 million. In December 1988, Summit loaned Winthrop an additional $100,000. Although the loan was unsecured, the five guarantors of the original loan signed as co-makers.

In July 1990, Winthrop stopped payment on the two loans, which had outstanding principal balances of $564,357 and $50,000, respectively. In December 1990, Summit wrote to each of the five guarantors, demanding interest past due of over $40,000. Shortly thereafter, Barbieri and Corpaci sought a workout of the two loans on Winthrop's behalf. In January 1991, Summit engaged Cavallari--an attorney whom Summit frequently retained as independent contractor in connection with collections, workouts, and closings--to assist it in the workout of the Winthrop loans.

Barbieri was then under investigation by federal authorities regarding several loans he had obtained at various Connecticut banks. In addition, Summit itself was subject to a temporary order to cease and desist from transacting with Barbieri and his associates. The order, issued by the OCC on July 16, 1990, stated:

The Bank shall not approve, purchase, grant, make, or fund any loan or other extension of credit, as defined in 12 C.F.R. Sec. 215.3, to any of the following former or current officers or directors of Security Savings and Loan Association, Waterbury, Connecticut, or to their related interests as defined in 12 C.F.R. Sec. 215.2:

(a) Richard D. Barbieri

(b) Vinal S. Duncan

(c) John A. Corpaci

(d) Richard D. Barbieri, Jr.

In connection with the order, the OCC issued a Notice of Charges that, "[c]ontrary to safe and sound banking practices," Summit had extended credit to these persons "without regard for prudent lending principles."

Although Cavallari had not seen the contents of this order, he knew of its existence. Cavallari stated in a deposition: "I knew there was [sic] cease and desist orders, I didn't know what the contents were. I didn't think about it, to tell you the truth." Cavallari also was aware of Barbieri's legal problems. In September 1990, Cavallari had represented Summit in a meeting about certain troubled real estate loans made to Barbieri, Corpaci, and two associates. In his memorandum about that meeting, Cavallari noted that these borrowers were facing "regulatory and criminal problems." In December 1990--one month before Cavallari was retained to assist in the Summit workout--the Office of Thrift Supervision ("OTS") deposed him because of his role in obtaining, secretly on Barbieri's behalf, two substantial real estate loans from Security Savings and Loan. The OTS investigator specifically inquired: "Did a thought ever occur to you that you were perpetrating a fraud on [Security]?"

On February 26, 1991, pursuant to negotiations with Barbieri, Summit released the individual guarantors. In exchange, Summit received a guaranty from Comko, Ltd.--a corporation owned by Barbieri, Corpaci, and Duncan that was the parent corporation of WQQW--and a security interest in Comko's radio equipment. Cavallari, who had drafted the release, orally advised Summit's president, Raymond Cordani, that the release was in Summit's best interest. Cavallari also offered a written opinion, based on his review of Comko's security agreement, guaranty, and financing statement, "that the exchange of guaranties was in the best interest of the bank." Cavallari stated that "the individual guarantors are now subject to a great deal of litigation arising out of loans guaranteed to several other banks," while Comko "has pledged additional security which was not previously available to the bank." Cavallari concluded:

I feel that given the circumstances, the bank is in a far more secure position now that it has the Comko guaranty than it was when it was secured by the individuals. I feel quite comfortable having this guaranty with its additional security in lieu of the guaranties of the individuals which have been released.

This letter was read into the minutes of the loan committee's meeting, and placed in the Winthrop credit file.

When preparing this letter, Cavallari had assumed that the released guarantors also had provided personal guaranties for other loans that were then the subject of litigation. In fact, the released guarantors had not provided such guaranties. Moreover, Comko itself was not financially sound: its 1990 financial statement showed a net loss of almost $300,000, and a net worth of only $50,000. Cavallari had made no investigation of the guarantors' supposed liability exposure or of Comko's financial condition prior to execution of the release.

Following the exchange of guaranties, Barbieri negotiated a renewal and restructuring of the two Winthrop loans. In exchange, Summit received a first mortgage on land on Watertown Avenue in Waterbury, Connecticut owned by Barbieri, Corpaci, and Duncan. Cavallari drafted the agreement, which consolidated the loans into a single note and called for repayment over a five year period. After making three payments on the new note, Winthrop again defaulted. In February 1992, the FDIC declared Summit insolvent and took over as receiver.

On June 23, 1992, the OCC issued three Notices of Charges to Cavallari, Barbieri, and Cordani. Barbieri and Cordani entered into settlements with the OCC before the charges were heard.

In July 1993, the Winthrop loans had an outstanding balance of roughly $769,000, consisting of $597,000 in principal and $172,000 in unpaid interest. The OCC appraised the security for the loan as worth about $214,000. The OCC thus sought restitution of $554,903.83, the difference between the loan debt and the value of the security. The OCC also sought to impose a $250,000 civil monetary penalty against Cavallari and to prohibit his participation in further banking activity.

Administrative Law Judge ("ALJ") Walter Alprin, after a hearing held in August 1993, found that (1) Cavallari had participated in the loan renewal and in the exchange of guaranties; (2) Cavallari breached a fiduciary duty to Summit by "recommending the release and renewal without all the facts necessary to make a prudent determination"; (3) the exchange of guaranties was a "novation" that violated the cease and desist order; (4) Cavallari had recklessly engaged in an unsafe or unsound banking practice; and (5) Cavallari had caused a loss to Summit of at least $554,903.83. The ALJ...