Community Bankers Ass'n v. Okl. Banking Bd.

• Decision Date: 30 March 1999
• Docket Number: No. 91,465.,91
• Citation: 1999 OK 24,979 P.2d 751
• Parties: COMMUNITY BANKERS ASSOCIATION OF Oklahoma, and Peoples National Bank, Checotah, Oklahoma, Protestants/Appellants, v. The OKLAHOMA STATE BANKING BOARD, Armstrong Bancshares, Inc., and Armstrong Bank, Vian, Oklahoma, Applicants/Appellees.
• Court: Oklahoma Supreme Court

979 P.2d 751

1999 OK 24

1999 OK 24

COMMUNITY BANKERS ASSOCIATION OF Oklahoma, and Peoples National Bank, Checotah, Oklahoma, Protestants/Appellants, v. The OKLAHOMA STATE BANKING BOARD, Armstrong Bancshares, Inc., and Armstrong Bank, Vian, Oklahoma, Applicants/Appellees.

No. 91,465.

Supreme Court of Oklahoma.

March 30, 1999.

Larry Derryberry, Stephen G. Solomon, Gary L. Levine, Derryberry, Quigley, Solomon

& Naifeh, Oklahoma City, Oklahoma, Charles A. Gall, Chet A. Fenimore, Jenkens & Gilchrist, Dallas, Texas, For Protestants.

Donald A. Pape, Melvin R. McVay, Jr., O. Dudley Gilbert, Phillips, McFall, McCaffrey, McVay & Murrah, P.C., Oklahoma City, Oklahoma, For Armstrong Bancshares, Inc. and Armstrong Bank.

Michael C. Turpen, Robert A. Mildren, Robert A. Nance, Riggs, Abney, Neal, Turpen, Orbison & Lewis, Oklahoma City, Oklahoma, For Oklahoma State Banking Board.

SIMMS, J:

¶ 1 In this appeal, Peoples National Bank of Checotah and the Community Bankers Association of Oklahoma seek our reversal of an Order of the Banking Board allowing Armstrong State Bank of Vian to establish a branch in Checotah through the vehicle of merging with an interim state bank organized and chartered by its holding company, Armstrong Bancshares, under the provisions of 6 O.S.Supp.1997, § 502(H). The issue before us today is whether that subsection allows a bank holding company to avoid the statutory restrictions on branch banking. We hold it does not and reverse the Order of the Banking Board.

¶ 2 The statute at issue, 6 O.S.Supp.1997, § 502(H) provides:

"Interim charters. A bank holding company or a multibank holding company may apply for and obtain an interim charter to organize an interim state bank for the purpose of facilitating the creation of a bank holding company, or acquiring or merging with an existing bank in accordance with the provisions of Section 502.1 of this title or the laws of the United States."

¶ 3 Interim banks, sometimes called "phantom banks" are shell corporations. They are not unique to Oklahoma banking law. Their use as a vehicle in merger and acquisition transactions for corporate reorganizations is well known for achieving business purposes such as assuring 100% ownership and control of corporations, forming bank holding companies, freezing out minority interest shareholders and qualifying for tax advantages.¹

I.

¶ 4 The facts of this matter are simple and undisputed. Peoples National Bank is a banking corporation duly organized under the laws of the United States and its main office is in Checotah, Oklahoma. Checotah is therefore a "banked" municipality. Community Bankers Association of Oklahoma is a non-profit corporation representing 110 state and national banks throughout the state which would be negatively affected by the Board's order. Both entities are "interested persons" under the statutes.

¶ 5 Armstrong Bancshares is an Oklahoma corporation and registered bank holding company under the Bank Holding Company Act of 1956 (12 U.S.C. §§ 1841, et seq.) with its principal office in Vian, Oklahoma. Armstrong Bank is a wholly owned subsidiary of Armstrong Bancshares and its main office is also in Vian. Vian is located in Sequoyah County and is approximately 40 miles from Checotah which is in McIntosh County.

¶ 6 In March, 1998, Armstrong Bancshares and Armstrong Bank (collectively Armstrongs) submitted a series of Applications to the Banking Department pursuant to 6 O.S. Supp.1997, § 502(H).² This was the first application under § 502(H) the Department had received in the 15 years the subsection had been in existence. Armstrong Bancshares first sought authority to establish and charter an interim state bank which would be wholly owned by Armstrong Bancshares and would to be known as the Checotah Interim Bank. Armstrong Bancshares also sought approval for a merger Agreement entered into by Armstrong Bancshares, Checotah Interim Bank and Armstrong Bank to immediately merge the proposed Checotah Interim Bank with Armstrong Bank. Armstrong Bancshares was the sole shareholder of both entities and alleged that the banks would have a common directorate and capitalization. Under the terms of the Agreement, the separate existence of Checotah Interim would cease when it was merged "with and into" Armstrong bank; Armstrong would be the "surviving bank," its existence, rights, powers, etc. would be unaffected by the merger and the "office of Checotah shall become a branch of Armstrong". Each existing share of Checotah stock would be converted into the right to receive one share of Armstrong Common Stock, the assets of Checotah were to pass to Armstrong Bank and it would be responsible for Checotah's debts existing at the time of merger.

¶ 7 Armstrong Bank filed an Application with the Department for a Certificate to convert the proposed Checotah Interim Bank into a branch of Armstrong Bank. Under the terms of that Application, the proposed branch would result from acquisition, it would be located in Checotah and called "Armstrong Bank, Checotah Branch."

¶ 8 A hearing on the Applications was held before the Board. In opposition, Peoples Bank and the Association argued that § 502(H) does not allow branching and that the branch sought by Armstrongs is violative of the provisions of the branching statutes. Following the submission of evidence, stipulations of fact and arguments of counsel for the parties, the Board granted the series of Applications, allowing the chartering and organization of the interim bank, its merger with Armstrong Bank and the establishment of the resulting bank from the merger as a branch of Armstrong Bank located in Checotah. The Board issued the following Conclusions of Law which are relevant here:

"1. The Commissioner and the Banking Board have jurisdiction over these matters pursuant to §§ 502(H), 502.1, 1103 and 501.1 of the Code. The requirements of the applicable Code provisions have been met.

2. The chartering of the Interim Bank by a bank holding company and merger of the interim bank with an existing bank subsidiary of the bank holding company is authorized by §§ 502(H), 502.1 and 1103 of the Code, as a bank for the purpose of merging with an existing bank, and there has been shown compliance with the requirements and restrictions of these provisions.

....

8. The Applications for Interim Charter, merger and Branch by acquisition were properly accepted for filing and the Application fulfills the requirements for applications and complies with §§ 502.1, 1103 and 501.1 of the Code.

....

10. The Application should be approved as submitted. The transactions described in the Application are permitted under Oklahoma law.

11. All statutory criteria for chartering a state bank were met by the Application and all factors considered by the Commissioner and Board in accordance with § 309(C) of the Code have been favorably fulfilled by the Applicant.

....

13. The proposed merger of the Interim bank with and into Armstrong Bank constitutes a valid merger transaction and a valid branch by acquisition of the Interim bank by Armstrong Bank, and as such, the proposed branch is a branch by acquisition pursuant to § 501.1(C) and (E), and not a de novo branch pursuant to § 501.1(A).

14. The proposed branch is not an unlawful de novo branch application by Armstrong Bancshares on behalf of Armstrong Bank.

15. The interim bank does not have to be open to the public for one business day before being acquired and converted to a branch as required by Banking Board Rule 85:1-1-2 defining "established" for purposes of § 501.1(C), since the rule only applies to acquisitions of branches, not banks, and this case involves an acquisition of a bank.

16. Approval of the application does not permit circumvention of the branching restrictions of the Banking code and do not create unlimited branching rights for banks. The interim bank merger branch transaction is an authorized transaction by a holding company and a bank."

¶ 9 Peoples Bank and the Association do not challenge the right of Armstrong Bancshares to organize and charter an interim bank and then merge it with its subsidiary, Armstrong Bank, in order to reorganize its corporate structure as it wishes. They argue only that the end product of the § 502.H merger, the surviving bank, cannot lawfully be established as a branch bank located in Checotah. They point out here, as they did before the Board, that the subject of branching is not even addressed in § 502(H), and they argue that the Order is in direct violation of branching prohibitions of the controlling statutes. Peoples Bank and the Association are correct.

II

¶ 10 Branch banking³ is permitted only where expressly authorized by statute and without explicit authority, branching is prohibited. Our branching provisions are restrictive and were meant to be so. Pursuant to the provisions of § 402(12) a bank is not permitted to exercise "by its directors, duly authorized officers or agents any powers to establish and operate branches except to the extent expressly permitted in §§ 501 through 506 ..." Oklahoma has traditionally been a "unit bank" state. From statehood until 1983, branch banking and multibank holding companies were entirely prohibited. Banks were limited to conducting business in a single facility which served the local community and local ownership was encouraged. In 1983, following the banking crisis of the time, the Legislature enacted a comprehensive statutory scheme which granted limited branching ability in expressly authorized circumstances.⁴

¶ 11 Two forms of branching are recognized. Where permitted, branching may be accomplished by a bank (1) establishing a new, or de novo, branch or (2) acquiring an existing bank through purchase. With exceptions not relevant here, a bank is limited by geographic and numerical restrictions in establishing a de novo branch. § 501.1(A) provides:

"1. Any bank may establish and perform any banking function at no more than two branch

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