Florida Dept. of Banking and Finance v. Board of Governors of Federal Reserve System

• Decision Date: 20 May 1985
• Docket Number: 84-3270,Nos. 84-3269,s. 84-3269
• Citation: 760 F.2d 1135
• Parties: FLORIDA DEPARTMENT OF BANKING AND FINANCE, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent. FLORIDA BANKERS ASSOCIATION, and Sun Bank/Palm Beach, Petitioners, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1135

760 F.2d 1135

FLORIDA DEPARTMENT OF BANKING AND FINANCE, Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent.

FLORIDA BANKERS ASSOCIATION, and Sun Bank/Palm Beach, Petitioners, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent.

Nos. 84-3269, 84-3270.

United States Court of Appeals Eleventh Circuit.

May 20, 1985.

S. Craig Kiser, Carl B. Morstadt, Fla. Dept. of Banking & Finance, Tallahassee, Fla., for petitioner.

James F. Bell, Jones, Day, Beavis & Pogue, Arthur E. Wilmarth, Jr., Washington, D.C., for intervenor-petitioner.

James A. Michaels, Richard M. Ashton, Office of Gen. Counsel, Bd. of Governors of Federal Reserve System, Washington, D.C., for respondent.

Bowman Brown, Shutts & Bowen, Miami, Fla., Vaughn C. Williams, Skadden, Arps, Slate, Meagher & Flem, New York City, for intervenor-respondent.

On Review of an Order of the Board of Governors of the Federal Reserve System

Before RONEY and TJOFLAT, Circuit Judges, and BROWN ^*, Senior Circuit Judge.

John B. BROWN, Circuit Judge:

I. Overview

This action is a petition, pursuant to 12 U.S.C. Sec. 1848, for review of an order of the Board of Governors of the Federal Reserve System (the Board). In its order, ¹ the Board, acting pursuant to the Bank Holding Company Act of 1956 (as amended), 12 U.S.C. Sec. 1841 et seq., approved the application of a New York bank holding company, U.S. Trust, to expand the nonbanking activities of its wholly owned Florida subsidiary (Trust Company).

II. The Legislative Framework

The Bank Holding Company Act (the Act) constitutes a comprehensive federal framework for the supervision and regulation of bank holding companies--companies that control one or more banks. Section 2(c) of the Act contains the statutory definition of "bank." Bank is defined as any institution that: (1) accepts deposits that the depositor has a legal right to withdraw on demand, and (2) engages in the business of making commercial loans. 12 U.S.C. Sec. 1841(c). Section 3 of the Act deals with a bank holding company's acquisition of banks. 12 U.S.C. Sec. 1842(a). Under this section, a bank holding company may not acquire control of any additional bank without prior approval of the Board. Section 3(d) of the Act, ² commonly referred to as the "Douglas Amendment," prohibits the Board from approving the acquisition of any bank by a bank holding company whose principal operations are conducted in another state, unless the acquisition of the bank by an out-of-state bank holding company is expressly authorized by the statute laws of the state in which the bank to be acquired is located. 12 U.S.C. Sec. 1842(d). In other words, the Douglas Amendment proscribes interstate bank acquisitions by bank holding companies unless the state where the bank to be acquired allows such acquisitions by statute. Section 4 of the Act deals with the regulation of nonbank activities. Section 4 generally prohibits a bank holding company from acquiring an entity engaged in nonbank activity. Section 4(c)(8) of the Act contains the principal exception to this prohibition. It authorizes board approval of acquisitions of nonbanking activities which are "closely related" to and a "proper incident" of banking. Section 5 of the Act confers certain enforcement powers upon the Board. Specifically, Sec. 5(b), 12 U.S.C. Sec. 1844(b), authorizes the Board to issue regulations and orders to carry out the purposes of the Act and to prevent evasions of it.

III. The U.S. Trust Application

U.S. Trust is a bank holding company whose sole commercial bank subsidiary is located in New York, New York. On November 8, 1983, U.S. Trust applied for the Board's approval of a proposal to expand the nonbanking activities of its nonbanking subsidiary in Florida. The proposed expansion included the acceptance of time and demand deposits (including checking accounts) and the making of consumer loans. U.S. Trust's Florida subsidiary had previously been established as a Florida chartered nondeposit trust company. This subsidiary had provided fiduciary, investment, advisory, and custody services to its clients in Palm Beach, Florida. In May of 1984, U.S. Trust completed the conversion of its state chartered trust subsidiary into a national association, called Trust Company. It is now U.S. Trust's only subsidiary in Florida. Trust Company continues to provide the above mentioned trust services, as well as the services now authorized by the Board's order. This conversion occurred with the approval of the United States Comptroller of the Currency. Specifically, the Comptroller approved the conversion of Trust Company into a nonbank on the express condition that Trust Company "not engage in the business of making commercial loans."

IV. Action of the Board

After the Board issued public notice of U.S. Trust's application, the Florida Department of Banking and Finance, the Florida Bankers Association, and the Sun Bank/Palm Beach filed comments and requested that the Board conduct a hearing on the U.S. Trust application. ³

The Board issued its order approving U.S. Trust's application for Trust Company to operate as a nonbank on March 23, 1984. That order specified several conditions for approval of the application. U.S. Trust was ordered to not:

(1) operate Trust Company's demand deposit-taking activities in tandem with any other subsidiary or other financial institutions;

(2) link in any way the demand deposit and commercial lending services that define a bank under the Act; and

(3) have Trust Company engage in any transactions with affiliates, other than the payment of dividends to U.S. Trust or the infusion of capital by U.S. Trust into Trust Company, without the Board's approval.

Since these conditions precluded Trust Company from engaging in commercial lending, the Board found that Trust Company was not a "bank" within the meaning of Section 2(c) of the Act. The Board's order lamented that although "approval of this proposal presents a serious potential for undermining the policies of the Act, the Board is constrained by the definition of bank in the Act to approve the application." The Board further rejected the petitioners' request for an evidentiary hearing, deeming the issues in the application to be legal in nature not warranting a hearing on factual issues. All of petitioners' requests for reconsideration were denied by the Board. The Board also refused to stay its order. Although it sanctioned the U.S. Trust application, the Board was plainly unenthusiastic about the course it was adopting. The order itself contained a plea for Congressional action because:

if the nonbank concept, particularly as expanded by the interpretation of demand deposit adopted by the Tenth Circuit, ⁴ becomes broadly generalized, a bank holding company or commercial or industrial company, through exploitation of an unintended loophole, could operate "banks" that offer NOW accounts and make commercial loans in every state, thus defeating congressional policies on commingling of banking and commerce, conflicts of interest, concentration of resources and excessive risk, or with respect to limitations on interstate banking. Congressional action thus is urgently needed to ensure that the policies of the Act are maintained. In this regard, the Board does not believe that any public policy would be served by grandfathering proposals such as this that occur subsequent to the introduction of legislation that would otherwise prohibit such transactions.

Thus, the Board, in the very order granting U.S. Trust's application, emphasized its prior opinions that "an institution that is chartered as a bank and that accepts transaction accounts from the public should be subject to the policies that Congress has established for banks in the BHC Act." Order at 3. See Citizens Fidelity Corp., 69 Federal Reserve Bulletin 556 (1983); Citicorp, 70 Federal Reserve Bulletin 921 (1984); Mellon National Corp., 70 Federal Reserve Bulletin 441 (1984).

V. Appeal to the Eleventh Circuit

On April 23, 1984, the Florida Department of Bank and Finance petitioned us for review of the Board's order. The Florida Bankers Association and Sun Bank/Palm Beach filed similar petitions. U.S. Trust and the Conference of State Bank Supervisors then filed motions to intervene as a respondent and as a petitioner, respectively. We granted these motions.

VI. Decision

On its face, this appeal involves nothing more than a question of statutory interpretation. To state our problem so simply, however, is to belie its complexity. As we write, an avalanche of applications by bank holding companies seeking to establish hundreds of deposit-taking institutions across state lines is in progress.

The Board and U.S. Trust believe Congress' definition of a bank to be clear. They would have us rely on the well established principle of statutory construction that an agency or court cannot modify the clear language of a statutory provision. See, e.g., American Tobacco Company v. Patterson, 456 U.S. 63, 102 S.Ct. 1534, 71 L.Ed.2d 748 (1982); Central Trust Company v. Official Creditors Committee, 454 U.S. 354, 102 S.Ct. 695, 70 L.Ed.2d 542 (1982). Petitioners counter with the equally well established rule of statutory interpretation that courts ought not to apply the literal terms of a statute to reach a result contrary to the underlying policy of Congress. They rely on the many reported decisions where courts have gone beyond the face of the statute to ascertain congressional intent and purpose. See, e.g., United States v. American Trucking Association, 310 U.S. 534, 543, 60 S.Ct. 1059, 84 L.Ed. 1345 (1940); ⁵ 2A Sutherland, Statutes and Statutory Construction, Sec. 46.07 (C. Sands 4th ed. 1973).

In its order, the Board concluded that the Act's definition of bank in Sec. 2(c) did not permit a more expansive interpretation on which to deny the U.S. Trust application. In effect, the Board was persuaded to approve the U.S. Trust...