Hammond v. Comptroller of Currency
| Decision Date | 03 March 1995 |
| Docket Number | No. 94-2495-EEO.,94-2495-EEO. |
| Citation | 878 F. Supp. 1438 |
| Parties | Phillip J. HAMMOND, Plaintiff, v. COMPTROLLER OF the CURRENCY, Administrator of National Banks, Defendant. |
| Court | U.S. District Court — District of Kansas |
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William M. Modrcin, Dennis L. Davis, Cheryl Bloethe Linder, Hillix, Brewer, Hoffhaus, Whittaker & Wright, L.L.C., Kansas City, MO, for plaintiff.
Anthony J. Steinmeyer, Jacob M. Lewis, William Bowden, Jr., Washington, DC, for defendant.
This is an action to review the decision of the Office of the Comptroller of the Currency ("OCC") disapproving the proposed appointment of petitioner Phillip J. Hammond to the positions of president, chief executive officer, and member of the board of directors of First National Bank of Shawnee Mission ("First National"), in Fairway, Kansas.1 The OCC based its disapproval on the ground that Hammond lacked the necessary integrity to head First National because it determined that Hammond, while president of another bank, had conditioned the approval of a loan for a bank customer upon that customer's purchase of certain real estate, in violation of 12 U.S.C. § 1972. 12 U.S.C. § 1972(1)(A) prohibits a bank from extending credit "on the condition or requirement that the customer shall obtain some additional credit, property, or service" from the bank.
Section 914 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. § 1831i(a), provides that an insured depository institution must provide thirty days advance notice to the "appropriate Federal banking agency" (for national banks, the appropriate agency is the OCC) of the proposed addition of any director to the board, or employment of any individual as senior executive officer, if the depository institution: (1) has been chartered less than two years; (2) has undergone a change in control within the preceding two years; or (3) is not in compliance with the minimum capital requirement applicable to the institution or is otherwise in a "troubled condition." The institution may not hire a senior executive officer or add an individual to its board of directors if the banking agency issues a notice of disapproval prior to the end of the thirty-day period beginning on the date the agency receives notice of the proposed hiring or addition. See 12 U.S.C. § 1831i(b). The standard for disapproval is set forth in 12 U.S.C. § 1831i(e):
The appropriate Federal banking agency shall issue a notice of disapproval with respect to a notice submitted pursuant to subsection (a) if the competence, experience, character, or integrity of the individual with respect to whom such notice is submitted indicates that it would not be in the best interests of the depositors of the depository institution or in the best interests of the public to permit the individual to be employed by, or associated with, the depository institution or depository institution holding company.
On March 18, 1993, the board of directors of First National filed with the OCC a notice that they were proposing to hire Hammond as the bank's president, chief executive, and member of the board of directors. Upon receipt of the notice, the OCC sent out inquiries to various state and federal agencies asking if they had any comments on Hammond. In response, the Federal Deposit Insurance Corporation ("FDIC") informed the OCC that it had obtained a sworn statement from Allen B. Sander that "indicated Mr. Hammond was involved in at least one apparent tying arrangement in violation of 12 U.S.C. 1972" while he was employed as president of Country Hill Bank ("Country Hill") of Lenexa, Kansas. The FDIC furnished to the OCC Sander's October 14, 1992, deposition, which described Sander's tying allegations in full.
According to Sander's deposition, in the spring of 1989 he submitted an application to Country Hill for a loan for his company, Shamrock Service Vending Co. ("Shamrock Vending"), to purchase Mid-America Refresh, Inc. ("Mid-America"), a vending company. Hammond initially informed Sander that the loan had been turned down. A week or two later, however, Hammond contacted Sander again to say that the bank had an office building (located at 465 Parker Street in Olathe, Kansas) that they needed to "take care of, get rid of or get handled," and if Sander was willing to buy the building in a foreclosure sale, the bank "would be interested in making him a loan for the vending company." According to Sander, he was told that the purchase price for the office building would be $600,000, and that the bank would be willing to provide 100% financing.
Sander drove by the Parker Street building once before he purchased it, but did not go inside, because he did not have a key. According to Sander, "everybody agreed" that the price for the building "was high ... very high," but he "felt like we were in this `you scratch my back, I'll scratch yours' situation." There was absolutely no question "whatsoever" in Sander's mind that he had to purchase the Parker Street building in order to obtain the loan to do the Mid-America deal. Sander stated that Hammond also told him that if the loan for the vending company were approved, "the building has to close before you close on your vending company."
Ultimately, Country Hill loaned Sander's company, Shamrock Vending, a total of $1,825,000 in connection with the Mid-America acquisition, $600,000 of which was to purchase the Parker Street property.
For several years, Sander and Shamrock Vending were able to stay current on the loan, despite the losses on the Parker Street property, which Sander estimated at five to six thousand dollars a month. Then, in the spring of 1991, after Hammond had left Country Hill, things got "very tight," and Sander asked whether an $80,000 certificate of deposit Shamrock. Vending had pledged for collateral could be released so that he could pay off some of the debts he owed to Country Hill. The bank agreed, but on the condition that Sander sign a general release of all claims he or Shamrock Vending may have had against Country Hill.
The release of the certificate of deposit eased the pressure on Shamrock Vending for a while, but the mild winter of 1991-1992 hurt vending sales, and Sander began to talk to other banks about refinancing Shamrock Vending's debt. The "stumbling block," as he explained, "was the Parker building." According to Sander:
Anytime anyone looked at me, you know — the vending company, you know, on paper looks okay. The Parker building here you throw them both together it's not a pretty sight; and it worried the banks and it was declined by two banks; and finally Oak Park Bank said that they could work with me but not on the Parker building, you know, they didn't want to be involved in that.
Sander explained that "you rehash the story a couple of times to a couple of people, bankers, attorneys, and friends, they say, `You know, something isn't right here; something is wrong.'" After asking Country Hill several times to take back the building in order to allow him to refinance the vending company loan, Sander retained an attorney.
Sander confronted Phil Forrest, Hammond's successor at the bank, and suggested that the Parker Street transaction was not right and that the bank should take the property back. According to Sander, Forrest "blew up" and stated that the transaction was a "completely legit deal." As Sander told it, Forrest said to him that "if Phil Hammond misrepresented something to you about the transaction or you misunderstood something, that was totally Phil Hammond, nothing to do with the board or anything like that; and if Phil Hammond did misrepresent something to you, we will go after him because we did nothing wrong." Forrest also specifically denied that anything had been tied together. However, after Sander made clear that he was prepared to sue the bank, Country Hill settled. The bank took back the Parker Street building and credited Shamrock Vending $500,000 on its loan with the bank, thereby allowing the company to transfer its loan to Oak Park.
The OCC initiated an investigation of the charges against Hammond contained in Sander's affidavit. On April 13, 1993, the OCC interviewed Hammond for approximately three hours. At that time, Hammond "could not recall many of the specifics involved in the financing extended to Mr. Sander." As a result, a week later, OCC officials wrote Hammond a six-page letter asking a number of follow-up questions concerning the Sander loan. In response to the interview and the follow-up request, Hammond provided additional information. He continued to maintain, however, that even after reviewing the documents in his possession, he could "not remember," among other things, (1) whether Sander contacted him about the vending company purchase before Hammond asked Sander if he was interested in purchasing the Parker Street property, (2) when Hammond first became aware Sander wanted to make the vending company purchase, and (3) why the loan committee minutes make no reference to the connection between the two loans.
After reviewing Hammond's additional responses, and further investigating the facts surrounding the Sander loan, the OCC, on April 29, 1993, issued a nine-page letter informing Hammond that his application to head First National had been disapproved. The OCC informed Hammond that its disapproval was based on the agency's "conclusion that, while serving as president of Country Hill Bank, Lenexa, Kansas, you engaged in a loan transaction with Mr. Allen B. Sander which resulted in a violation by Country Hill Bank of the anti-tying provisions of 12 U.S.C. § 1972." The OCC explained to Hammond: "your participation in this transaction reflects...
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