del Junco v. Conover, 81-7466
| Citation | 682 F.2d 1338 |
| Decision Date | 30 July 1982 |
| Docket Number | No. 81-7466,81-7466 |
| Parties | Tirso del JUNCO, Walter L. Rasic, Andres Alonzo, Jr., C. V. Holder, Martin Castillo, Grace C. Quinn, Antonio E. Valle, Gilbert R. Vasques, Hal W. Brown, Jr., Petitioners-Appellants, v. C. T. CONOVER, * Comptroller of the Currency, Office of the Comptroller of the Currency, Department of the Treasury, Respondents-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Patrick McAdam, Iverson, Yoakum, Papiano & Hatch, Los Angeles, Cal., for petitioners-appellants.
Howard Neil Cayne, Arlington, Va., for respondents-appellees.
Petition for Review of an Order of the Comptroller of the Currency.
Before FLETCHER, PREGERSON and REINHARDT, Circuit Judges.
In December 1979, a periodic examination by the Comptroller of the Currency ("Comptroller") of the Los Angeles National Bank ("Bank") disclosed a possible violation of the provisions of 12 U.S.C. § 84. Section 84 limits the amount that a bank can lend to a single borrower to 10% of the bank's capital stock. 1 At issue was whether three of the Bank's loans were really to the same entity and whether, when added together, they exceeded the bank's legal lending limit.
The loans were to Rehbock Lewis ("Lewis"), President of Fame Furniture Co., Inc.; Fame Furniture Co., Inc. ("Fame"); and Ralph Ware ("Ware"), Treasurer of Fame. The chart below sets forth the date, borrower, and amount of each loan, as well as the legal lending limit of the bank at the time of each loan and the amount by which the loans, when aggregated, exceeded the legal lending limit: 2
The legality of the Lewis loan for $225,000 has never been at issue, as that loan did not exceed the legal lending limit of the bank when it was made. However, if the Lewis, Fame, and Ware loans could be aggregated, then the latter two loans would exceed the Bank's lending limit.
The Comptroller first requested the Directors of the Bank to indemnify the Bank for any losses sustained as a result of the two excess loans; the Directors refused. The Comptroller then began a formal cease and desist action against the Directors and the Bank by issuing a Notice of Charges. The Bank and Directors answered, and the Comptroller moved for summary judgment in an agency proceeding.
In the agency proceeding, the Bank and Directors admitted that they knew that the proceeds of the Fame and Lewis loans were to be used for the benefit of Fame. On these facts, the Administrative Law Judge (ALJ) ruled that it was proper to aggregate the Lewis and Fame loans so as to constitute a violation of 12 U.S.C. § 84. He also ruled, however, that an evidentiary hearing would be necessary to determine whether the proceeds of the Ware loan were actually used for the benefit of Fame, an element that had to be satisfied if the Ware loan could be added to the Fame loan. Such an evidentiary hearing was then held, and the ALJ determined that the Ware loan was used for the benefit of Fame. Accordingly, the ALJ recommended that the Comptroller issue a cease and desist order, that the Directors indemnify the Bank for the Fame and Ware loans, that the Bank recover costs of collection fees, and that the Bank recover Although the Comptroller agreed with the ALJ's findings, he disagreed as to the proper construction of section 84 with regard to reducing the Directors' liability. Both the Comptroller and the ALJ agreed that the potential liability of the Directors equalled $350,000, the sum of the two excess loans. The ALJ would have permitted the Directors to reduce their liability of $350,000 by offsetting a checking account of Fame and by selling bonds assigned as security to the Ware loan. The Comptroller, however, concluded that the Directors' potential $350,000 liability could not be reduced by the Bank's recoveries until the legal but unsecured Lewis loan had been fully repaid with interest. 3
attorneys' fees that it had paid for the Directors' defense.
The Directors then moved this court to stay the Comptroller's final judgment. This court denied the motion without prejudice. Next, the Directors filed an identical motion with the Comptroller, who denied the motion. The Directors now appeal the final judgment of the Comptroller.
1. What is the proper standard for reviewing the Comptroller's fashioning of a remedy?
2. Did substantial evidence support the Comptroller's finding that the proceeds of the loan made by the Bank to Ware were used for the benefit of Fame in violation of the lending limit imposed by 12 U.S.C. § 84?
3. Were the remedial measures required by the Comptroller appropriate to correct conditions resulting from the Directors' violation of 12 U.S.C. § 84?
I. STANDARD OF REVIEW.
The parties agree that a "substantial evidence" standard applies to judicial review of administrative findings. The parties are correct. See 5 U.S.C. § 706(2)(E).
The Comptroller has broad discretion to fashion a remedy. See Groos National Bank v. Comptroller of Currency, 573 F.2d 889, 897 (5th Cir. 1978). "Substantial evidence is required for the Comptroller's findings, but once the Comptroller finds a violation he may, within his allowable discretion, fashion relief in such a form as to prevent future abuses." Id. Similarly, he has broad discretion to cure the effect of a violation.
In reviewing the order that actually issued, we consider whether the affirmative action taken by the Comptroller was appropriate to correct the condition resulting from the Directors' violation of the banking laws. 4
II. THE COMPTROLLER'S FINDING IS SUPPORTED BY SUBSTANTIAL EVIDENCE THAT THE PROCEEDS OF THE LOAN MADE BY THE BANK TO WARE WERE USED FOR THE BENEFIT OF FAME IN VIOLATION OF THE LENDING LIMIT OF 12 U.S.C. § 84.
The regulation that implements the lending statute provides that "(o) bligations of a corporation must be combined with any other extension of credit the proceeds of which are used for the benefit of the corporation." 12 C.F.R. § 7.1310(c)(3) (1981) (emphasis added). The issue presented by this regulation is whether there was substantial evidence to support a finding that the $125,000 loan to Ware, the Treasurer of Fame, was "used for the benefit of the corporation."
The Comptroller found:
The hearing record clearly discloses the purpose and use of proceeds of the Ware loan. Mr. Ware, Fame's treasurer, testified that Fame's checking account at another bank was overdrawn. Accordingly, he and Mr. Lewis, Fame's president, went to the Bank to procure another loan. The Bank's vice president and senior lending officer, Mr. Jewett, informed Lewis and Ware that the Bank could not make an additional loan to Fame or to Mr. Lewis without violating the Bank's legal lending limit. Therefore, Mr. Ware's "name was used for the loan papers to borrow the money." Hearing Transcript 50-51. As agreed, the Bank put the Ware loan proceeds directly into Fame's corporate checking account. Hearing Transcript 51-52. See also Hearing Transcript 179-80, wherein Mr. Jewett testified that he knew the proceeds were "going to go through Mr. Ware to Fame." On these facts, the Comptroller agrees with the ALJ's finding and conclusion that the deposit of the Ware loan proceeds directly into Fame's corporate checking account shows that the proceeds were used for the benefit of Fame.
The evidence of the corporation's overdrawn account, the corporation's search for another loan, the action and knowledge of the Bank's lending officer, and the deposit of the loan proceeds directly into Fame's account is substantial enough to support the Comptroller's finding.
Thus, because sufficient evidence supported the finding that the Ware loan was for the benefit of Fame, that loan could be aggregated with other Fame loans to calculate whether an excess loan had been made.
III. THE REMEDIAL MEASURES REQUIRED BY THE COMPTROLLER WERE APPROPRIATE TO CORRECT CONDITIONS RESULTING FROM THE DIRECTORS' VIOLATION OF 12 U.S.C. § 84.
The Directors attack the remedy sought by the Comptroller in Article II of the cease and desist order. 5 The Directors argue that (a) indemnification is an improper remedy because the Directors did not "knowingly violate" the banking laws; (b) if indemnification is a proper remedy, then the Directors must be allowed to reduce their liability on the illegal loans by offsetting a checking account and selling collateral, even though the legal unsecured loan remains unpaid; (c) the Comptroller lacks authority to order that collection and attorneys' fees be paid to the Bank.
In the past, violations of the excess lending rule in 12 U.S.C. § 84 (1976) have been enforced through district court proceedings made possible by 12 U.S.C. § 93 (1976 & Supp. IV 1980). Section 93, which is derived from the National Bank Act of 1864, imposes liability on directors for knowingly violating or knowingly permitting violations Defendants argue, however, that 12 U.S.C. § 1818(b) imports the scienter requirement of § 93 when the Comptroller seeks to impose personal liability on bank directors for exceeding bank lending limits. We need not and do not resolve that question today. Even if the "knowingly" standard of 12 U.S.C. § 93 applies to an 1818(b) enforcement proceeding, we agree with the Comptroller that defendants are liable here.
of the banking laws. Here, however, the Comptroller, in an enforcement proceeding, is seeking to indemnify the Bank through the application of 12 U.S.C. § 1818(b)(1) (Supp. IV 1980). 6 Although in effect since 1950, section 1818(b)(1) was significantly amended in 1978 to extend the coverage of cease and desist orders, which had previously applied only to a bank, to include a bank's directors. On its face, § 1818(b)(1) requires no knowledge on the part of the wrongdoer. The provision simply allows the Comptroller "to take affirmative action to correct the
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