First Bank v. State, Dept. of Regulatory Agencies, Div. of Banking

• Decision Date: 22 April 1993
• Docket Number: No. 92CA0386,92CA0386
• Citation: 852 P.2d 1345
• Parties: FIRST BANK, a State Bank; Edward V. Lohman, David E. Lohman, Richard V. Lohman, and such other shareholders of First Bank of Colorado Springs as may hereinafter elect to join in such action, Plaintiffs-Appellants, v. STATE of Colorado, DEPARTMENT OF REGULATORY AGENCIES, DIVISION OF BANKING; Ralph E. Mires, State Bank Commissioner; and all members of the Colorado State Banking Board, Defendants-Appellees. . V
• Court: Colorado Court of Appeals

Page 1345

852 P.2d 1345

FIRST BANK, a State Bank; Edward V. Lohman, David E Lohman, Richard V. Lohman, and such other shareholders of First Bank of Colorado Springs as may hereinafter elect to join in such action, Plaintiffs-Appellants, v. STATE of Colorado, DEPARTMENT OF REGULATORY AGENCIES DIVISION OF BANKING; Ralph E. Mires, State Bank Commissioner; and all members of the Colorado State Banking Board Defendants-Appellees.

No. 92CA0386.

Colorado Court of Appeals Div. V.

April 22, 1993.

Eason, Sprague & Wilson, P.C., Richard L. Eason, Eugene M. Sprague, Denver, Duitch & Ogawa, P.C., Dean T. Ogawa, Colorado Springs, for plaintiffs-appellants.

Gale A. Norton, Atty. Gen., Raymond T. Slaughter, Chief Deputy Atty. Gen., Timothy M. Tymkovich, Sol. Gen., Richard H. Forman, Senior Asst. Atty. Gen., Denver, for defendants-appellees.

Opinion by Judge BRIGGS.

Petitioners, First Bank and certain former directors and shareholders (collectively the Bank), appeal the judgment of the district court affirming the order of the Colorado State Banking Board (Board). In its order, the Board denied the Bank's request to rescind the Board's earlier order for possession and liquidation of First Bank's assets. The Bank contends the Board misapplied statutory procedures and violated the Bank's right to due process. We affirm.

First Bank was a state commercial bank chartered under § 11-3-110, C.R.S. (1987 Repl.Vol. 4B). In April of 1989, the Division of Banking in conjunction with the Federal Deposit Insurance Corporation (F.D.I.C.) conducted an examination of First Bank. That investigation disclosed that First Bank was inadequately capitalized. Therefore, on June 9, 1989, pursuant to § 11-3-104, C.R.S. (1987 Repl.Vol. 4B), the Board issued a notice of impairment and order to levy an assessment.

First Bank filed suit, challenging this order. The suit was dismissed upon the parties' stipulation that the Board would rescind the June 9, 1989, order and conduct another examination of First Bank independent of F.D.I.C.

The new examination again revealed First Bank's adjusted capital was negative. The examiner also concluded that First Bank's capital position had deteriorated since the April examination.

Consequently, the Board on August 8 issued another notice of impairment and order to levy an assessment. This order required the shareholders to inject $2.6 million in capital into First Bank, and it was to charge-off its loans classified as "losses" and "doubtful," pursuant to Board regulation, on or before September 13, 1989. The Board also notified First Bank that if it did not comply with the order "the [Board] may proceed to take action pursuant to [Colo.Sess. Laws 1989, ch. 93, § 11-5-102 at 539] or the bank may offer the shares of the defaulting stockholders for sale at public auction at a price which shall not be less than the amount of the assessment and the cost of the sale."

On September 7, First Bank requested an extension of time to comply with the order. The Board, by its letter of September 11, notified First Bank, its directors, and its attorney that it had granted an extension until October 5, 1989. The letter also stated in relevant part:

If the required capital is not raised by the close of business on October 5, 1989, the Board will proceed to conduct a hearing pursuant to [Colo.Sess. Laws 1989, ch. 93, §§ 11-5-102(1) and 11-5-102(3)(b) at 539].... During the hearing, representatives for [the Bank] will be provided an opportunity to show cause as to why the Board should not take immediate possession of the Bank and liquidate the Bank.

The Division of Banking on September 15 conducted another examination. The examiners determined that First Bank's capital had continued to deteriorate. The Board sent a letter to First Bank and its directors in conjunction with the examiner's report. The letter stated in pertinent part:

The examination indicates continued deterioration in the quality of the Bank's assets and underscores that the survival of the Bank is dependent upon immediate capital contribution.

....

This [report] may assist you in preparing for the hearing scheduled on October 6, 1989.

First Bank failed to inject the requisite amount of capital by October 5. A hearing had been scheduled for the next day to determine whether the commissioner should take possession of First Bank and liquidate its assets. Notice had been provided to First Bank and all its officers and directors, who together owned 88% of the outstanding capital stock.

The parties receiving notice appeared by counsel, who objected to the sufficiency of the notice under Colo. Sess. Laws 1989, ch. 92, § 11-2-103(8) at 507. Counsel argued that the Board had failed to provide notice to the remaining stockholders and secured creditors.

In response, the Board declared a recess in the proceedings, allowing for the state attorney general representing the Board to research the Bank's objections, and then engaged in informal discussions with counsel and bank representatives. These proceedings were recorded and transcribed.

The Board chair commenced by inquiring about information regarding the condition of First Bank and any plans for recapitalization or otherwise meeting the capital call which had expired the prior day.

A colloquy then took place among the chairman and other members of the Board, the Bank's counsel, and one of the directors present. The topics included ranged from the status of loans and the capital to the prospects for sale. The questionable status of certain significant outstanding loans had not improved. The Bank continued to insist, as it had in past discussions, that it was able to continue operating day-to-day and no emergency existed, but the Board made clear it was unpersuaded.

The Bank presented a letter of intent to purchase which had been faxed the day before from an out-of-state banker. It indicated the purchase was contingent on, among other things, the purchaser obtaining 100% financing and pursuing "due diligence." The Board expressed its concern with the contingent nature of the commitment. The Board was also concerned that First Bank's capital had continued to deteriorate, that a holder of 44% of First Bank's stock was insolvent and therefore had no ability to pay the capital assessment necessary to comply with the Board's August order, and that only a few small shareholders had paid their assessments.

At the end of the discussion, the board determined that it would not conduct a formal hearing pursuant to § 11-2-103(8) because of concerns there had not been compliance in all respects with the requirements for notice. Prior to adjourning, the chairman stated in pertinent part:

[B]efore closing I would like, for the record, to deliberate on what [the Bank's attorney] has brought out and determine if in fact an emergency condition does exist. I think there is ample evidence to suggest that is a distinct possibility, and I would just ask the Board if it would be their pleasure, if we could go into Executive Session for deliberations on the issue, whether extraordinary circumstances and an emergency may exist, and for us to give deliberations to that yet today while we are all here.

The Board then convened in the executive session, which was also recorded and transcribed. All members quickly agreed that First Bank's capital status had continued to deteriorate, that there were a substantial number of unsecured deposits in First Bank resulting in a significant risk to the depositors, in addition to a substantial impact to the F.D.I.C. by the continued erosion through operating losses not related to specific loans. The Board also found that the likelihood that First Bank would obtain the necessary capital to continue operating and meeting the demands of its depositors was extremely unlikely. The Board concluded that extraordinary circumstances existed requiring immediate action.

On the same day, Friday, acting pursuant to Colo.Sess. Laws 1989, ch. 93, § 11-5-105(3) at 540, the state bank commissioner took possession of First Bank and appointed the F.D.I.C. as liquidator. The F.D.I.C. executed a purchase and assumption agreement with another bank, which opened for business on Monday.

Within ten days the Bank applied to the Board seeking rescission of the Board's order. Three days of hearings were held on this request on October 31, 1989, November 30, 1989, and January 23, 1990. The Board denied the Bank's request to rescind. That denial was appealed to the district court, which affirmed the Board's action. The Bank has appealed that ruling to us.

I.

The Bank's first contention is that the Board exceeded its statutory authority by failing to provide proper notice and a hearing prior to seizing and liquidating First Bank. We disagree.

The Board's actions were taken prior to the 1990 amendments to §§ 11-2-103(8) and 11-5-102(3)(b). See Colo.Sess. Laws 1990, ch. 79, § 11-2-103(8) at 652 and Colo.Sess. Laws 1990, ch. 79, § 11-5-102(3)(b) at 663. Section 11-2-103(8) as then in effect provided in relevant part:

With respect to any ... proceeding to discuss or approve voluntary or involuntary liquidation actions under article 5 of this title, ten days' notice by certified mail, return receipt requested, and hearing shall be provided to the bank and any person affected in advance of any action taken by the banking board. In cases found by the banking board to involve extraordinary circumstances requiring immediate action, the banking board may take such action without notice or hearing, but shall promptly afford a subsequent hearing upon application to rescind the action taken. (emphasis added)

The Bank contends that the reference to "take such action without notice or hearing" refers to holding "proceedings to discuss or approve" liquidation, but not the actual liquidation. The Bank argues that ten days notice was therefore still required prior to the sale of First Bank's assets, and as a result, the Board...