Mid America Bancorporation v. Board of Governors

• Decision Date: 18 December 1980
• Docket Number: Civ. No. 4-80-546.
• Citation: 523 F. Supp. 568
• Parties: MID AMERICA BANCORPORATION, INC., and Irwin L. Jacobs, Plaintiffs, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Defendant.
• Court: U.S. District Court — District of Minnesota

523 F. Supp. 568

MID AMERICA BANCORPORATION, INC., and Irwin L. Jacobs, Plaintiffs, v.BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Defendant.

Civ. No. 4-80-546.

United States District Court, D. Minnesota, Fourth Division.

December 18, 1980.

Thomas J. Sexton, Winthrop, Weinstine & Sexton, St. Paul, Minn., for plaintiffMid America Bancorporation, Inc.

Melvin I. Orenstein, J. Kevin Costley, and Steven J. Johnson, Lindquist & Vennum, Minneapolis, Minn., for plaintiffIrwin L. Jacobs.

Thomas K. Berg, U. S. Atty., Minneapolis, Minn., and Neal D. Peterson, Gen. Counsel, Herbert A. Biern, Senior Counsel, and Neal D. Peterson, Asst. Gen. Counsel, Board of Governors of the Federal Reserve System, Washington, D. C., for defendant.

MacLAUGHLIN, District Judge.

This matter is before the Court on a motion by plaintiffs Mid America Bancorporation ("Mid America") and Irwin L. Jacobs("Jacobs") to enjoin administrative proceedings commenced by defendantBoard of Governors of the Federal Reserve System("Board").The hearing on the motion for preliminary injunction was consolidated with the trial on the merits pursuant to Federal Rule of Civil Procedure 65(a)(2).The Board has moved to dismiss plaintiffs' motion for lack of subject matter jurisdiction, for failure to state a claim, or, in the alternative, for summary judgment.

STATEMENT OF THE CASE

Mid America is a multibank holding company organized and doing business under the laws of the State of Minnesota.Its principal place of business is in Minneapolis.Mid America owns virtually all the voting shares of seven banks located in the Minneapolis banking market.It is registered as a bank holding company under 12 U.S.C. § 1844(a), and is subject to the Board's examination and supervisory authority over bank holding companies, 12 U.S.C. §§ 1844(c)and1818(b)(3).

Plaintiff Jacobs is a director of Mid America and currently owns approximately 87 percent of its outstanding common stock.He began acquiring Mid America stock in September, 1978, when he purchased 36 percent of the outstanding Mid America stock through a tender offer.In October of 1979, Jacobs entered into an option contract with four major shareholders of Mid America stock.These four shareholders were members of the Richards family, and they controlled approximately 54 percent of the total stock then outstanding.The option contract provided that the Richards family had entered into an agreement with Mid America whereby Mid America would redeem their stock, and that if the redemption were to be blocked by regulatory action, then Jacobs would have the option to purchase their stock for the same price.The purchase price of the stock was set at $16 per share, for a total of $7,500,000.

On November 21, 1979, Mid America filed a notice of the redemption with the Board pursuant to Regulation Y, 12 C.F.R. § 225.6.¹After an analysis of the proposal, the Board advised Mid America that the proposed increase in Mid America's indebtedness was excessive, would unduly burden the earnings and capital of Mid America's subsidiary banks, and would constitute an unsafe and unsound condition.The Board informed Mid America that it would initiate cease and desist proceedings under 12 U.S.C. § 1818(b) to block the transaction if Mid America proceeded with its plan.Rather than abandoning the redemption and directly purchasing the stock as provided in the option contract, Jacobs continued to pursue possibilities for completing a redemption² by attempting to determine what level of debt would be acceptable to the Board.Between November of 1979 and March of 1980, the Board staff and representatives of Mid America and Jacobs discussed amendments to the redemption proposal to make it acceptable to the Board from the standpoint of the safety and soundness of the bank holding company and its subsidiary banks.

On February 6, February 21, and March 12, 1980, Mid America and Jacobs forwarded to the Board amendments to Mid America's Regulation Y notice regarding the proposed redemption of its shares.The amendments contained a debt repayment schedule showing a 10 year amortization of the redemption debt and eight written commitments by Mid America and Jacobs.The amendments stated that the personal commitments of Jacobs were made "to ensure the ability of Mid America to serve as a source of financial strength for its subsidiary banks subsequent to the Redemption ...."Exhibit C-2 to Complaint, at 3.The commitments by Mid America and Jacobs were as follows:

(a) Jacobs agreed to purchase $1.5 million of new common stock of Mid America with the proceeds of the stock sale to be used to reduce immediately Mid America's bank borrowings associated with the stock redemption from $7.5 million to $6 million.

(b) Jacobs agreed to convert a $1.5 million Mid America note held by Jacobs Bag Company, a company owned and controlled by Jacobs, to Mid America common stock.

(c) Jacobs agreed to guarantee to Mid America that it would receive not less than $1 million by December 31, 1981, from the sale of certain foreclosed property held by Mid America, the after-tax proceeds of which Mid America would use to retire a portion of the $6 million debt that it incurred as a result of the stock redemption transaction.

(d) In the event that Mid America was unable to pay the $6 million in debt in accordance with a 10-year payment schedule submitted as part of the Regulation Y notice, Jacobs agreed to loan Mid America up to an aggregate amount of $3 million as needed, the proceeds of which would be used to service the $6 million loan should Mid America fail to meet its obligation in accordance with the 10-year payment schedule.Should any advance for this purpose remain outstanding more than two years, Jacobs then agreed to accept new common stock of Mid America for an aggregate purchase price equal to the outstanding advances.

(e) Mid America agreed not to declare or pay any corporate dividends unless its parent company debt to equity ratio was less than .3:1.

(f) Until the $6 million of debt was paid in full, Mid America agreed that it would not cause any dividends to be paid from its subsidiary banks that would cause their respective capital accounts to fall below 8 per cent of assets.

(g) Subject to regulatory approval, Mid America agreed to purchase and Jacobs agreed to sell, at book value, the $35 million Valley National Bank of North Mankato, Minnesota, owned by Jacobs.

(h) Mid America agreed not to require its subsidiary banks to pay management or other fees that are not reasonable in relation to the services rendered by Mid America.

See Exhibits C-2, C-3 and C-5 to Complaint.The amendments also included a provision that the commitments of Mid America and Jacobs would terminate upon the earliest of (1) Mid America achieving a debt to equity ratio of 30 percent; (2) payment in full of the debt Mid America incurred to effect the redemption (including all accrued interest); or (3) consent by the Board.

The Board initially disapproved the amended proposal.After more correspondence, and in reliance upon the commitments made by Mid America and Jacobs, the Board decided not to prohibit the proposed stock redemption transaction.In a letter dated April 10, 1980, the Board restated the commitments and made its approval contingent upon fulfillment of the commitments.It stated:

With respect to the personal committments sic of Mr. Jacobs, the Board of Governors expects Mr. Jacobs to maintain his financial affairs in a manner sufficient to permit the complete fulfillment of all personal committments made to the Board of Governors in connection with this transaction.Any failure by Mr. Jacobs to fulfill his committments to the extent required will be viewed by the Board of Governors as a disregard for the safety and soundness of the Holding Company and as a basis for formal supervisory action under the Financial Institutions Supervisory Act of 1966, as amended.Likewise, any deviation from the committments made by the Holding Company with regard to the affairs of its subsidiary banks or its own corporate practices may result in the initiation of formal supervisory action.

Exhibit H to Affidavit of Mathisen, at 3.The Board's letter approving the redemption transaction did not mention the termination provision.

Mid America consummated the stock redemption on April 15, 1980.As a result of the stock redemption, Jacobs' percentage of ownership of Mid America's outstanding voting stock increased from 36 percent to 87 percent.Within a short time, Jacobs announced that he intended to terminate his investment in Mid America.On May 2, 1980, Jacobs met with his personal staff and stated that he intended to either sell his Mid America stock or sell the subsidiary banks and liquidate Mid America.He cited rising interest rates and the high carrying costs of debt financed acquisitions as the reason for his decision.Jacobs announced his decision to the presidents of the subsidiary banks on May 23, 1980, and offered these presidents a period of time to propose offers to purchase.

By the end of July, 1980, Mid America had executed sales agreements for the sale of the stock of the seven subsidiary banks.Jacobs had also executed an agreement for the sale of Valley National Bank, the bank he had committed to transfer to Mid America under the stock redemption agreement.Mid America also filed a liquidation plan pursuant to section 337 of the Internal Revenue Code.Under the plan of liquidation, all of Mid America's debt, including the debt incurred in the stock redemption, would be paid from the $23 million it would realize from the sale of its subsidiary banks.The balance would be distributed to Mid America's shareholders.

After the execution of the purchase agreements, each individual purchaser filed an application under the Change in Bank Control Act, 12 U.S.C. § 1817(j), with the appropriate federal bank regulatory agency.³These applications were...