Independent Community Bankers Ass'n of South Dakota, Inc. v. Board of Governors of Federal Reserve System

• Decision Date: 05 June 1987
• Docket Number: No. 85-1496,85-1496
• Citation: 820 F.2d 428,261 U.S.App.D.C. 20
• Parties: , 55 USLW 2671 INDEPENDENT COMMUNITY BANKERS ASSOCIATION OF SOUTH DAKOTA, INC., Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, First City Bancorporation of Texas, Inc., Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 428

820 F.2d 428

261 U.S.App.D.C. 20, 55 USLW 2671

INDEPENDENT COMMUNITY BANKERS ASSOCIATION OF SOUTH DAKOTA INC., Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent First City Bancorporation of Texas, Inc., Intervenor.

No. 85-1496.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 8, 1986.

Decided June 5, 1987.

Petition for Review of an Order of the Board of Governors of the Federal Reserve System.

Ronald G. Schmidt, Pierre, S.D., for petitioner. Leonard J. Ruben also entered an appearance, for petitioner.

James E. Scott, Atty., Board of Governors of the Federal Reserve System, with whom Richard K. Willard, Asst. Atty. Gen., Dept. of Justice, Richard M. Ashton, Associate General Counsel and Robert D. McGillicuddy, Atty., Bd. of Governors of the Federal Reserve System, Washington, D.C., were on the brief, for respondent.

Platt W. Davis, III, with whom Cathy A. Lewis and James R. Layton, Washington, D.C., were, on the brief, for intervenor.

Before WALD, Chief Judge, MIKVA, Circuit Judge, and LEIGHTON, ^* Senior District Judge.

Opinion for the Court filed by Circuit Judge MIKVA.

MIKVA, Circuit Judge:

Independent Community Bankers Association of South Dakota, Inc. ("ICBA") is a trade association representing chartered national and state banks located in South Dakota. It petitions this court to set aside an order of respondent, the Board of Governors of the Federal Reserve System (the "Board"), approving the acquisition of a newly chartered national bank located in South Dakota by First City Bancorporation of Texas, Inc. ("First City"). First City is a Texas corporation and bank holding company that conducts its activities primarily in Texas. It organized and acquired the new national bank to enable it to transfer its consumer credit card business to South Dakota. The fundamental question before this court is whether federal banking law, particularly the Bank Holding Company Act of 1956 ("BHCA"), 12 U.S.C. Sec. 1841 et seq. (1982), allows a bank holding company to acquire and operate a limited service national bank located outside the company's home state. Petitioner argues that it does not on two grounds. First, petitioner contends that the BHCA absolutely prohibits the Board from approving the acquisition of a national bank by an out-of-state bank holding company. Petitioner argues, alternatively, that even if the Board may approve such acquisitions generally, it is precluded from approving First City's proposed acquisition because the South Dakota statute authorizing the acquisition places restrictions on the operation of the acquired bank in contravention of federal law governing national banks. We reject petitioner's arguments and deny the petition.

I. BACKGROUND

In enacting the BHCA, Congress intended, among other things, to prevent overconcentration of national financial resources and possible abuses related to control of commercial credit. See Board of Governors of the Federal Reserve System v. Dimension Financial Corp., 474 U.S. 361, 106 S.Ct. 681, 684, 88 L.Ed.2d 691 (1986). To these ends, Congress vested the Board with regulatory authority over the acquisition of state and national banks by bank holding companies. The BHCA defines a bank as any institution organized under state or federal law which "(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). A bank holding company is defined as any corporation, partnership, business trust, association, or similar organization that owns or controls a bank or another bank holding company. 12 U.S.C. Secs. 1841(a)(1), (b). Under section 3 of the BHCA, a bank holding company must obtain approval of the Board before acquiring another bank or substantially all of the assets of another bank. 12 U.S.C. Sec. 1842. Section 3(c) specifies criteria to be considered by the Board in determining whether to grant approval of a proposed acquisition. 12 U.S.C. Sec. 1842(c).

To meet its goals, Congress also chose to rely in part on state regulation of the banking industry. See Iowa Independent Bankers v. Board of Governors of the Federal Reserve System, 511 F.2d 1288, 1291 (D.C.Cir.), cert. denied, 423 U.S. 875, 96 S.Ct. 144, 46 L.Ed.2d 106 (1975). In section 7 of the BHCA, Congress reserved to each state all powers and jurisdiction in effect before the statute's enactment. See 12 U.S.C. Sec. 1846. In addition, and of greater importance to this case, section 3(d) of the BHCA, known as the "Douglas Amendment," prohibits the Board from approving an application of a bank holding company to acquire any additional bank located outside of the state in which the bank holding company principally conducts its operations unless the state specifically authorizes the acquisition by an out-of- state bank holding company of a state bank located within the state's borders. See 12 U.S.C. Sec. 1842(d). Prior to 1956, bank holding companies were permitted to own banks across state lines. Congress, in enacting the Douglas Amendment, expressed its desire to allow each state to choose for itself whether to open its borders to out-of-state banks. See Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 47, 100 S.Ct. 2009, 2021, 64 L.Ed.2d 702 (1980).

For approximately sixteen years, no state enacted legislation lifting the Douglas Amendment's ban on interstate bank holding company expansion. Beginning in 1972, several states passed statutes permitting interstate bank acquisitions in limited circumstances or for specialized purposes. At present, twenty-eight states and the District of Columbia have adopted some type of "Douglas Amendment" statute. For example, several states have passed "grandfathering" legislation permitting expansion only of existing in-state banking operations by out-of-state bank holding companies. See, e.g., Iowa Independent Bankers, supra (sustaining Board approval of two interstate acquisitions under Iowa's grandfathering statute). Another type of statute authorizes out-of-state purchasers to acquire failing local banks. See, e.g., Wash.Rev.Code Sec. 30.04.230(4)(a) (Supp.1985). By far the most popular kind of Douglas Amendment statute permits the acquisition of in-state banks by out-of-state holding companies located within a defined geographic region, but only on a reciprocal basis. The Supreme Court recently held that the Massachusetts and Connecticut reciprocal acquisition statutes are "of the kind contemplated by the Douglas Amendment to lift its bar against interstate acquisition." Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve System, 472 U.S. 159, 173, 105 S.Ct. 2545, 2553, 86 L.Ed.2d 112 (1985). The least common kind of statute permits "unrestricted" entry by out-of-state bank holding companies. Finally, ten states have enacted so-called "special purpose" statutes such as the South Dakota statute at issue in this case. Generally, this kind of legislation permits out-of-state organizations to set up in-state banks that do not compete with locally controlled full-service banks. See id. at 164, 105 S.Ct. 2548 (noting that Delaware has adopted a special purpose statute).

In 1980, South Dakota enacted legislation designed to permit interstate bank acquisitions. In relevant part, South Dakota's banking law permits out-of-state bank holding companies to acquire "all or substantially all of the shares of a single new bank which is established under the laws of this state ... and a single new national bank which is to be located in this state." S.D.Codified Laws Ann. Sec. 51-16-40(a) (Supp.1986). The statute limits the operation of such acquired banks to a single banking office. It also requires that the office "be operated in a manner and at a location which is not likely to attract customers from the general public in the state to the substantial detriment of existing banks in the state." Id. Sec. 51-16-41. In addition, the statute makes all such interstate bank acquisitions subject to the approval of the South Dakota Banking Commission (the "Commission") and to any conditions that the Commission deems necessary. Id. Sec. 51-16-42.

On May 3, 1984, First City submitted a proposal to the Commission to acquire a new nationally chartered bank to be located in Sioux Falls and designed to engage primarily in offering bank credit card services to customers in states other than South Dakota. Petitioner appeared before the Commission in opposition to the proposal. The Commission authorized the proposed acquisition, subject to the conditions prescribed in the South Dakota statute, and rendered its final approval contingent on approval by the Comptroller of the Currency (the "Comptroller") and the Board. Shortly thereafter, the Comptroller granted preliminary approval for the requested national bank charter, thereby clearing the way for the final steps in organizing the bank. First City then applied to the Board under section 3(a)(3) of the BHCA to acquire all of the voting shares of the newly chartered national bank.

Petitioner intervened in the proceedings before the Board, opposing First City's application. ICBA contended that the Board's approval of First City's application would violate the Douglas Amendment. According to ICBA, the Amendment limits the acquisition of banks by out-of-state bank holding companies solely to state chartered banks and bars the interstate acquisition of national banks. Petitioner argued, alternatively, that even if the Douglas Amendment allows states to permit the acquisition of national banks, application of the South Dakota statute to national banks is unlawful. ICBA asserted that the statute offends federal banking law by imposing conditions and restrictions on the activities of the acquired national bank.

By order dated July 12, 1985, the Board approved First City's application. The Board observed that the prohibitions of the Douglas Amendm...