First Lincolnwood Corp. v. Board of Governors of Federal Reserve System, 76-1114

• Decision Date: 07 December 1976
• Docket Number: No. 76-1114,76-1114
• Citation: 546 F.2d 718
• Parties: FIRST LINCOLNWOOD CORPORATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 718

546 F.2d 718

FIRST LINCOLNWOOD CORPORATION, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent.

No. 76-1114.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 22, 1976.

Decided Dec. 7, 1976.

George B. Collins, Chicago, Ill., for petitioner.

Rex E. Lee, Asst. Atty. Gen., Michael H. Stein, Atty., Dept. of Justice, Washington, D. C., for respondent.

Before CLARK, Associate Justice (Retired), ^* FAIRCHILD, Chief Judge, and HASTINGS, Senior Circuit Judge.

HASTINGS, Senior Circuit Judge.

Petitioner First Lincolnwood Corporation, Lincolnwood, Illinois (First Lincolnwood), is a non-operating corporation organized under the laws of Illinois, for the purpose of becoming a bank holding company through the acquisition of the First National Bank of Lincolnwood, Lincolnwood, Illinois (Bank).

Petitioner seeks review of an order of respondent Board of Governors of the Federal Reserve System (Board or Federal Reserve Board), issued January 9, 1976, denying, on financial grounds, the application of First Lincolnwood to acquire the Bank.

The application was filed with the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956, 12 U.S.C. §§ 1841-1848, as amended (the Act), which makes it unlawful for a company to acquire control of a bank without first obtaining prior approval of the Board.

Section 1842(c) of the Act prescribes that in determining whether to approve an application, the Board is required to consider "the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served," as well as the competitive effects of the proposed transaction.

Section 1842(b) of the Act prescribes the following time limitation for Board consideration of an application to acquire control of a bank:

In the event of the failure of the Board to act on any application for approval under this section within the ninety-one day period which begins on the date of submission to the Board of the complete record on that application, the application shall be deemed to have been granted.

Section 1848 of the Act provides that "(a)ny party aggrieved by an order of the Board" may petition for review in a United States Court of Appeals, and that "(t)he findings of the Board as to the facts, if supported by substantial evidence, shall be conclusive."

THE ISSUES ON PETITION FOR REVIEW

1. Whether substantial evidence supports denial of petitioner's application to form a one-bank holding company on grounds of inadequate capitalization.

2. Whether the order of the Federal Reserve Board was issued within ninety-one days from the date of submission to the Board of the complete record on the application of the petitioner.

3. Whether the Federal Reserve Board complied with its own regulations governing applications for approval of the formation of a one-bank holding company.

BASIC FACTS

We first consider a statement of the basic facts and procedures underlying this petition for review.

On June 3, 1975, the Federal Reserve Bank of Chicago (Chicago Reserve Bank) accepted an application of First Lincolnwood to become a bank holding company through the acquisition of eighty per cent or more of the voting shares of the Bank. A voting trust controls the Bank through August 1, 1982.

A copy of the application was sent to the Comptroller of the Currency for his views and recommendations and to the Attorney General. The Attorney General did not respond. Notice of the application was also given to the several required federal and state agencies and was published in the Federal Register.

The Chicago Reserve Bank declined to exercise its delegated authority to act on the application, but forwarded the application to the board for its consideration and action because of the current capital position of the bank and its unsatisfactory debt structure.

The Comptroller of the Currency first ruled adversely on the application but later reconsidered and voted favorably on it.

First Lincolnwood holding company is essentially a restructuring of the Bank's ownership whereby the ownership of the Bank will be shifted from individuals now owning somewhat over eighty per cent of the 144,375 shares of common stock authorized and outstanding, to a corporation owned by the same individuals, with no real change in control or management. The holding company intended to acquire the bank stock now held by the voting trust (eighty per cent would be required for tax purposes), and the holding company would also acquire by purchase $1,500,000 in additional bank stock within one year of completion of the transaction to further capitalize the Bank.

The real purpose of the acquisition is that the holding company would assume a debt of $3,700,000 owed by the Bank's principals to Central National Bank, secured by the Bank's stock, with an annual interest charge of $260,000. This would permit the filing of a consolidated tax return which, in turn, would allow this interest deduction to be taken against the earned income of the Bank, with an ultimate increase in funds available to the Bank, as increased after tax earnings, of about $130,000.

The Bank had some early "adverse history" following the indictment of its then chairman and its former president in a case involving the manipulation of the stock on the American Stock Exchange. All parties now agree that the Bank's present management, headed by its chief executive officer, Mr. Harold Cohn, is outstanding and has converted the Bank to its now favorable condition.

Upon final consideration of the facts of record, the Federal Reserve Board denied the application. A copy of the Board's order is attached hereto as an Appendix to this opinion.

I

On the basis of our consideration of the record as a whole, together with the findings of the Board as set out in the attached Appendix, we have no difficulty in finding that there is substantial evidence to support the denial of petitioner's application.

The basic guidelines for consideration of this precise question are to be found in two thoroughly considered opinions authored by Judge Swygert of our court, First Wisconsin Bankshares Corp. v. Board of Governors of Federal Reserve System, 7 Cir., 325 F.2d 946 (1963), and Marine Corp. v. Board of Governors of Federal Reserve System, 7 Cir., 325 F.2d 960 (1963). We find these two cases to be dispositive of the first issue on this petition for review.

II

We find Judge Pell's opinion in Tri-State Bancorp, Inc. v. Board of Governors of Federal Reserve System, 7 Cir., 524 F.2d 562 (1975), to be instructive on the date the ninety-one day period begins to run in order to determine whether the application for approval of a bank holding company shall be deemed to have been granted. We have earlier herein set out the provisions of 12 U.S.C. § 1842(b).

In Tri-State, the court regarded the principal issue as being the proper construction of the statutory phrase "complete record." After reviewing the legislative history of the Act and various tangential decisions, the court held "that the 91-day period of § 1842(b) begins to run when the final material needed for the Fed's decision is received from the various interested sources outside the Fed, which ordinarily would be the applicant and governmental agencies other than the Fed. * * * (I)t is our view that the Congressional intent here was to define 'complete record' as meaning the facts upon which the agency would pass, not the internal documents relating to the process of that passing." 524 F.2d at 566.

Further, the court in Tri-State said: "The holding we have reached in this case, of course, does not mean that the submission of the complete record has occurred when the decisional process develops the need for further information which is thereupon requested. The completion of the record status is not reached until all factual data from external sources necessary for the decision has been actually submitted to the Fed." 524 F.2d at 567.

We are in accord with the holding in Tri-State that the ninety-one day period does not start to run until the final material needed for the Board's decision is received from various interested sources outside the Board. In the instant case the Board's action on January 9, 1976, was well within ninety-one days of the last submission to it by First Lincolnwood on November 8, 1975, of the third quarter financial statements of the Bank. This was completely relevant and necessary as the basis for calculation of the Bank's invested asset ratios which support the Board's denial. First Lincolnwood acquiesced completely in furnishing the third quarter figures.

First Lincolnwood argues that the ninety-one day period ran from the date of acceptance of its application by the Reserve Bank of Chicago. This is unrealistic and in conflict with Tri-State. Likewise, we find no merit in First Lincolnwood's attempt to extend the holding in Tri-State by contending that a submission, in order to be deemed necessary to a Board decision, must be noted in the Board's order in order for the submission to mark the start of the ninety-one day period.

We have considered other contentions of First Lincolnwood on the ninety-one day time limitation period and are not persuaded by them.

We hold, therefore, that under the facts of this case, the Board acted within ninety-one days of the submission of the complete record on the First Lincolnwood application.

III

Finally, First Lincolnwood contends that the Federal Reserve Board failed to comply with its own regulations for the approval of the formation of a one-bank holding corporation.

Under the Board's appropriate regulation concerning this issue, it is provided that:

Any application for the Board's approval of the formation of a company that controls only one bank shall be deemed to be approved forty-five days after the company has been informed by its Reserve Bank that said...