Grubb v. F.D.I.C.

• Decision Date: 02 September 1994
• Docket Number: No. 92-9564,92-9564
• Citation: 34 F.3d 956
• Parties: Ronald J. GRUBB, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 956

34 F.3d 956

Ronald J. GRUBB, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent.

No. 92-9564.

United States Court of Appeals Tenth Circuit.

Sept. 2, 1994.

Submitted on the briefs: ^*

Terry W. Tippens, Greg A. Castro, Fellers, Snider, Blankenship, Bailey and Tippens, Oklahoma City, OK, for petitioner.

Ann S. Duross, Asst. Gen. Counsel, Colleen B. Bombardier, Robert D. McGillicuddy, Sr. Counsels, and Manuel A. Palau, Counsel, F.D.I.C., Washington, DC, for respondent.

Before WHITE, Associate Justice (Ret.), ^** ANDERSON and BALDOCK, Circuit Judges.

BALDOCK, Circuit Judge.

Petitioner Ronald J. Grubb appeals an order issued by the Board of Directors ("the Board") of the Federal Deposit Insurance Corporation ("the FDIC") removing him as a director of the Bank of Hydro, Hydro, Oklahoma ("the Bank") and prohibiting him from participating in the affairs of any insured depository institution, 12 U.S.C. Sec. 1818(e)(1), (7). We have jurisdiction pursuant to 12 U.S.C. Sec. 1818(h)(2), and we affirm.

I.

In 1981, Petitioner became the majority shareholder of the Bank and served as Chairman of the Board of Directors. As majority shareholder and Chairman of the Board, Petitioner exercised a controlling and dominant role in the Bank's lending activities. In 1985, the Bank became a source of regulatory concern due to a serious deterioration in its loan portfolio. Consequently, on November 29, 1985, the FDIC issued a cease and desist order which required the Bank, in pertinent part, to adhere to its loan policies and deny additional credit to any borrower with an uncollected loan classified as "doubtful" or a "loss." Bank examiners also requested that Petitioner remove himself from the Bank's lending activities. Thereafter, Petitioner resigned as Chairman of the Board but remained a director of the Bank.

Following the issuance of the cease and desist order, the Bank made a series of extensions of credit to Petitioner and his related business interests. The extensions of credit included: (1) a letter of credit issued to MGM Production Company ("MGM")--a company in which Petitioner held a one-third interest; (2) a loan and real estate transaction involving Falcon Production Company--another business interest of Petitioner; (3) personal loans issued to Petitioner; and (4) several overdrafts in Petitioner's checking accounts at the Bank. These extensions of credit were cited by bank examiners as exceeding the Bank's legal lending limits in violation of federal banking laws and regulations and resulted in the initiation of the instant removal action. The record reveals and we briefly describe the facts of each of these extensions of credit.

A. MGM Letter of Credit

In February 1986, Petitioner requested that the Bank issue a $265,000 irrevocable letter of credit on behalf of MGM for the benefit of Travelers Insurance Company ("Travelers"). The letter of credit backed a bond posted by Travelers as part of a lawsuit involving MGM. Petitioner personally guaranteed the letter of credit in the form of a "blank" promissory note and a "blank" guaranty agreement. On November 21, 1986, the FDIC informed Petitioner and the Bank that the letter of credit violated federal banking laws because MGM was an affiliate of the Bank and the letter of credit exceeded ten percent of the Bank's capital and surplus. Despite this warning, the Bank, with Petitioner's knowledge, issued replacement letters of credit in 1987 and 1988. Following the issuance of the 1987 letter of credit, the FDIC again informed Petitioner that the replacement letter of credit violated federal banking laws. Bank examiners also classified the letters of credit as "doubtful" based in part on Petitioner's weak financial condition.

On April 14, 1988, the Bank paid $235,801 on the letter of credit to Travelers when MGM lost an appeal in its lawsuit. At this point in time, the Bank's total extensions of credit to Petitioner and his related business interests exceeded, by $192,000, fifteen percent of the Bank's capital and surplus in violation of the Bank's lending limit. The Bank treated the $235,801 payment on the letter of credit as a loan to MGM and subsequently classified the loan as a "loss." In November 1991, Petitioner repaid the principal amount of the loan.

B. Falcon Production Loan

On December 31, 1985, Falcon Production Company borrowed $110,000 from the Bank for the stated purpose of purchasing a mineral lease from Petitioner. Petitioner signed a promissory note and collateralized the loan with a mortgage of mineral rights on property that he owned personally. Petitioner then used the proceeds of the Falcon loan to reduce the balance of a personal loan he had at the Bank. In July 1986, bank examiners classified the Falcon loan as "substandard".

On February 12, 1987, the Bank renewed the loan to Falcon, accepting as additional collateral a second mortgage on a 479-acre farm previously owned by Petitioner. ¹ At this point, the Bank's extensions of credit to Petitioner and his related business interests exceeded fifteen percent of the Bank's unimpaired capital and unimpaired surplus in violation of the Bank's lending limits.

On February 2, 1988, Falcon Production failed to make the principal and interest payments due on the loan. On February 22, 1988, the Bank took title to the farm via a deed in lieu of foreclosure and paid the first mortgage held by Equitable Life Assurance Society in the amount of $134,447. The Bank accounted for the acquired real estate by crediting the Falcon loan in the amount of $124,311 in past due principal and accrued interest and listed the property as Other Real Estate ("ORE") in the amount of $342,000. Petitioner testified he arranged the Falcon "ORE" transaction in part to allow the Bank to hold the real estate until he could reacquire it.

On February 17, 1988, five days prior to taking title to the Farm, the Bank disbursed funds to Falcon in the amount of $48,553 by depositing that amount into Falcon's account at the Bank. These funds were used to pay an overdraft which resulted when Petitioner wrote a check on the Falcon account to make payment on a personal loan at an affiliated bank. On February 22, 1988, the same day the Bank acquired the deed to the Farm, it also disbursed an additional $34,688 to Falcon, of which $34,000 was later transferred to the account of Ron Grubb Investments ("RGI") at the Bank. As of February 22, 1988, the Bank's extensions of credit to Petitioner, Falcon, and MGM exceeded fifteen percent of the Bank's unimpaired capital and unimpaired surplus in violation of federal banking regulations. Moreover, Petitioner knew as of February 1988 that the FDIC believed any additional extensions of credit would violate the Bank's lending limits.

C. Personal Loans

As well as issuing several loans to Petitioner's companies, the Bank had also issued personal loans to Petitioner in the amount of $330,000 which were subsequently classified as "substandard" in a 1985 bank examination because the loans were unsecured and Petitioner's financial net worth had declined. By April 1986, Petitioner had paid off these loans with the proceeds of the Falcon loan and a certificate of deposit which had previously secured the MGM letter of credit.

Subsequently, the Bank made four new extensions of credit to Petitioner: (1) a $75,000 loan on April 25, 1986; (2) a $150,000 loan on June 5, 1986, which was used to renew the principal and unpaid interest of the April 25, 1986 loan and to provide $73,884 in new funds; (3) a $100,000 loan on October 29, 1986, of which approximately $39,000 was used to pay Petitioner's overdrafts on another account with the Bank; and (4) a $250,000 loan on April 14, 1987, which consolidated the June and October 1986 loans. At the time these loans were made, the Bank's extensions of credit to Petitioner, MGM, and Falcon exceeded fifteen percent of the Bank's unimpaired capital and unimpaired surplus.

Following a bank examination conducted in July 1986, FDIC bank examiners informed Petitioner that the June 1986 loan exceeded the Bank's lending limits and had been adversely classified as "substandard." Thereafter, on July 23, 1986, Petitioner signed a security agreement pledging his interest in a judgment bond as security for the loan and the MGM letter of credit. Likewise, when the April 1987 loan was made, Petitioner granted the Bank additional collateral in the form of mortgages on a Texaco station in Clinton, Oklahoma and a condominium in Colorado. However, there is no indication in the record that the Bank ever perfected any security interest in either of the properties. At the 1987 bank examination, the April 1987 loan was classified as "doubtful".

In August 1988, Petitioner ceased making payments on the April 1987 loan and the Bank charged off as a loss $10,895 in accrued but uncollected interest. In June 1989, the Bank charged off as a loss the principal balance of $248,806 but later rebooked the loan with the permission of the Oklahoma State Banking Commissioner. In June of 1991, the principal of the April 1987 loan was repaid by Petitioner.

D. Checking Account Overdrafts

During 1986 and 1987, the Bank maintained checking accounts on behalf of Petitioner, MGM, and Falcon Production Company, and RGI. All of these accounts were overdrawn at various times between July 1, 1986 and November 30, 1987. The overdrafts constituted extensions of credit in violation of the Bank's lending limit and were not secured by acceptable collateral in violation of banking laws and regulations.

II.

On December 22, 1988, the FDIC initiated this administrative action seeking to assess a $50,000 penalty against Petitioner for various violations of federal banking laws resulting from the Bank's extensions of credit to Petitioner and his related business interests. As early as March 1989, the parties discussed possible settlement of the assessment notice. At a pre-hearing conference held on ...