First Nat. Bank of Gordon v. Department of Treasury, Office of Comptroller of Currency, 89-2246

• Citation: 911 F.2d 57
• Decision Date: 06 August 1990
• Docket Number: No. 89-2246,89-2246
• Parties: The FIRST NATIONAL BANK OF GORDON, Gordon, Nebraska, a national banking association, Petitioner, v. DEPARTMENT OF the TREASURY, OFFICE OF THE COMPTROLLER OF THE CURRENCY, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 57

911 F.2d 57

The FIRST NATIONAL BANK OF GORDON, Gordon, Nebraska, a national banking association, Petitioner, v. DEPARTMENT OF the TREASURY, OFFICE OF THE COMPTROLLER OF THE

CURRENCY, Respondent.

No. 89-2246.

United States Court of Appeals,

Eighth Circuit.

Submitted Feb. 12, 1990.

Decided Aug. 6, 1990.

I. Thomas Bieging, Englewood, Colo., for petitioner.

Jonathan E. Taylor, L. Robert Griffin, Rolph E. Sharpe, Larry J. Stein, Joseph F. Colantuno, Washington, D.C., for respondent.

Before ARNOLD and BOWMAN, Circuit Judges, and HUNTER, ^* Senior District Judge.

ARNOLD, Circuit Judge.

This appeal comes to us from a cease-and-desist order issued by the Comptroller of the Currency against the First National Bank of Gordon in Gordon, Nebraska, a national banking association. The Comptroller found that the bank was in violation of law in several respects: (1) it had made loans to a single borrower, the Oglala Sioux Tribe, in excess of the loan limit contained in 12 U.S.C. Sec. 84; (2) it had filed an untrue report of condition, in violation of 12 U.S.C. Sec. 161(a); and (3) it had committed unsafe and unsound banking practices, resulting in a level of "classified loans" in excess of 260% of its gross capital. The cease-and-desist order issued by the Comptroller purported to be effective immediately, and contained, among other things, a direction to the bank that it not extend any further credit to borrowers whose outstanding loans had been criticized by the Comptroller, unless failure to extend such credit "would be substantially detrimental to the best interests of the bank...."

With respect to the alleged lending-limit violation, the bank contends that it proved that its loans to the Tribe, though they did exceed in amount 15% of the bank's unimpaired capital and surplus, were within at least one exemption to the statutory prohibition established by regulation of the Comptroller. In the alternative, the bank argues that the procedure followed by the Comptroller's office in deciding that this statute had been violated was so unfair as to deprive it of due process of law in violation of the Fifth Amendment. The bank also argues that 12 U.S.C. Sec. 161(a)--having to do with reports of condition--was not violated, because its officers and directors who signed the reports of condition in question reasonably believed that they were accurate. Further, the bank contests the finding that it was guilty of any unsafe and unsound banking practice, arguing that the large number of questioned loans on its books were due not to any of its own practices, but rather to a generalized economic downturn in the area. Finally, the provisions of the cease-and-desist order itself are contested: the bank argues that the order cannot be made effective sooner than 30 days after its issuance, ¹ and that the provision prohibiting further extensions of credit to certain borrowers in the absence of special conditions was an abuse of discretion.

We affirm in part, reverse in part, and remand for further proceedings in accordance with this opinion.

I.

We address first the issues under 12 U.S.C. Sec. 84. This statute provides in pertinent part as follows:

(a) Total loans and extensions of credit

(1) The total loans and extensions of credit by a national banking association to a person outstanding at one time and not fully secured, as determined in a manner consistent with paragraph (2) of this subsection, by collateral having a market value at least equal to the amount of the loan or extension of credit shall not exceed 15 per centum of the unimpaired capital and unimpaired surplus of the association.

As noted above, the borrower in question is the Oglala Sioux Tribe, which had been a good customer of the bank for some years. Absent any applicable exceptions, this bank's lending limit under the statute was stipulated to be $670,690. Total loans to the Tribe, however, amounted to $1,205,126, in excess of the lending limit by $534,436. Whether the statute was violated depends upon the applicability of certain exceptions established by regulation.

One of these exceptions appears in 12 C.F.R. Sec. 32.5(d) (1989). This regulation has to do with loans to "foreign governments, their agencies, and instrumentalities." It provides, in essence, that loans to agencies or instrumentalities of foreign governments will be accounted for, so to speak, separately from loans to those governments themselves if they meet both of the following tests at the time the loan is made:

(i) the borrower has resources or revenue of its own sufficient over time to service its debt obligations ( [the] "means" test); [and]

(ii) the purpose of the loan or extension of credit is consistent with the borrower's general business ( [the] "purpose" test).

12 C.F.R. Sec. 32.5(d). The regulation further provides, 12 C.F.R. Sec. 32.5(d)(2), that "[i]n order to show that the 'means' and 'purpose' tests have been satisfied, a bank shall, at a minimum, assemble and retain in its files" certain listed documents. Here, it is agreed that this documentation requirement has not been satisfied. Accordingly, the bank, which has the burden of proof of establishing its entitlement to an exception from the statutory requirement, has not succeeded in showing that it is entitled to the "means and purpose" exception.

The bank also contends, however, and has argued all along, that it is entitled to the exception contained in 12 C.F.R. Sec. 32.109 (1989), having to do with loans to "a State or political subdivision." This regulation reads as follows:

Sec. 32.109 Loans to or guaranteed by general obligations of a State or political subdivision.

(a) A loan or extension of credit to a bank customer which is guaranteed or fully secured by a "general obligation" of any State or political subdivision thereof, within the meaning of 12 CFR 1.3(g), is not considered an obligation of the customer for purposes of 12 U.S.C. 84. The lending bank should obtain the opinion of competent counsel that the guarantee or collateral is a valid and enforceable obligation of the public body.

(b) A loan or extension of credit to a State or political subdivision thereof is not subject to any limitation based on capital or surplus if the loan or extension of credit constitutes a "general obligation" of the State or political subdivision within the meaning of 12 CFR 1.3(g). The lending bank should obtain the opinion of competent counsel that the loan or extension of credit is a valid and enforceable obligation of the borrower.

At the hearing before the administrative law judge, the Comptroller contended that this exception was not applicable on two grounds: (a) that the Tribe was not analogous to a state or political subdivision; and (b) that, even if it were, it did not possess the necessary powers of property taxation as required by 12 CFR Sec. 1.3(g). That portion of the regulations defines the phrase "general obligation of any State or any political subdivision thereof" as "an obligation supported by the full faith and credit of an obligor possessing general powers of taxation, including property taxation." At this stage of the proceedings, the Comptroller did not suggest that the full-faith-and-credit requirement had not been met. The ALJ held in favor of the bank that the Sec. 32.109 exception applied.

Then, for the first time, the Comptroller's office took the position, in its exceptions to the ALJ's recommended decision, that the Sec. 32.109 exception did not apply because the full faith and credit of the Tribe had not been pledged in support of the questioned loans. Apparently, the Comptroller decided to abandon the position consistently taken by his office in the past that Indian tribes simply cannot qualify as states or political subdivisions for purposes of the regulation. He also abandoned the contention that the Tribe did not possess the requisite powers of taxation, and that issue appears no longer to be in dispute. The Comptroller did insist, however, that the bank had not shown that the Tribe's full faith and credit had been pledged, and that the ALJ's recommendation applying the Sec. 32.109 exception should be rejected for this reason. The bank immediately objected to what it characterized as the injection of a new issue. Full faith and credit, it argued, had been conceded all along, at least as a practical matter, and the Comptroller should not be allowed to contest it without giving the bank an opportunity to produce new evidence and make appropriate legal arguments. The bank moved to strike that portion of the Comptroller's exceptions which argued that the full-faith-and-credit requirement of Sec. 32.109 had not been met. The Comptroller denied the motion to strike, but gave the bank ten days within which to supply new evidence or legal arguments.

The bank availed itself of this opportunity and submitted, among other things, the following documents: an affidavit of the Tribe's president that the obligations of the Tribe were intended to be supported by its full faith and credit, and an opinion from counsel for the Tribe that the loans in question were "general obligations." The Comptroller, in his final decision, held this evidence insufficient to establish the exception and rejected the ALJ's recommendation, holding instead that the Sec. 32.109 exception did not apply. The Comptroller took the position that the bank's showing on the full-faith-and-credit issue was lacking because it failed to address the following issues of fact, among others:

Whether the tribal treasurer was authorized to commit the full faith and credit of the Tribe to support the loans.

Whether the tribal president was authorized to commit the full faith and credit of the Tribe to support the loans.

Whether any tribal legislative act had pledged the Tribe's full faith and credit.

Whether tribal members had authorized commitment of the Tribe's resources to support the bank loans.

The basis of counsel's opinion...