Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve System, 87-1365

• Decision Date: 21 June 1988
• Docket Number: No. 87-1365,87-1365
• Parties: , 57 USLW 2011 NORTHEAST BANCORP, INC. and Richard D. McDaniel, Petitioners, v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

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849 F.2d 1499 270 U.S.App.D.C. 370, 57 USLW 2011 NORTHEAST BANCORP, INC. and Richard D. McDaniel, Petitioners,
v.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Respondent. No. 87-1365. United States Court of Appeals,
District of Columbia Circuit. Argued March 28, 1988.
Decided June 21, 1988.

C. Westbrook Murphy, Washington, D.C., for petitioners.

Robert D. McGillicuddy, Atty., Bd. of Governors of the Federal Reserve System, with whom Richard K. Willard, Asst. Atty. Gen., and Richard Ashton, Associate Gen. Counsel, Bd. of Governors of the Federal Reserve System, Washington, D.C., were on the brief, for respondent.

Before SILBERMAN and WILLIAMS, Circuit Judges, and DAVIS, ^* Circuit Judge, United States Court of Appeals for the Federal Circuit.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

In July of 1987, the Board of Governors of the Federal Reserve System, which oversees bank holding companies, approved the application of Northeast Bancorp, Inc. to become a bank holding company by acquiring eighty percent or more of the outstanding voting shares of First National Bank of North East (the "Bank"), in North East, Maryland. In separate letters to Northeast and to Richard D. McDaniel, however, the Board indicated its order of approval was contingent upon Northeast's earlier letter to the Board indicating McDaniel would not serve as an officer, director, or employee of Northeast. In the

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Board's view, McDaniel's preclusion was compelled by a Consent and Stipulation between McDaniel and the Comptroller of the Currency, under which McDaniel's participation in the affairs of the Bank was generally prohibited. The Board concluded the stipulation was a removal order and that the Federal Deposit Insurance Act, 12 U.S.C. Secs. 1811-1831d (1982), made such a removal automatically applicable to participation in the affairs of a bank holding company. McDaniel and Northeast seek review of this condition the Board placed on approval. We uphold the Board's interpretation of both the Consent and Stipulation and the Federal Deposit Insurance Act. We therefore deny the petition for review.

I.

In the course of a routine examination of First National Bank of North East in 1983, the Office of the Comptroller of the Currency, the regulatory agency in charge of national banks, 12 U.S.C. Sec. 1813(q)(1), found evidence that Richard D. McDaniel had participated in a number of transactions with the Bank that violated banking laws. The Comptroller consequently initiated proceedings against McDaniel, seeking to remove him from his positions as Chairman of the Board and Chief Executive Officer of the Bank, and to impose civil fines on him. Those proceedings were terminated when McDaniel and the Comptroller reached a settlement in May of 1986.

The Consent and Stipulation embodying that agreement stated it was entered into "before the adjudication or finding on any issue of fact or law and without McDaniel admitting or denying any wrongdoing" and that McDaniel waived his rights to hearing, findings of fact, and judicial review in relation to the Consent and Stipulation. It provided in part that McDaniel would retire from his officer and director positions by April 30, 1987, that as of that date he would not "participate in the conduct of the affairs" of the Bank except in a limited advisory capacity, that he would not vote for directors of the Bank, and that he would pay a fine of $7,500. The Consent and Stipulation further provided:

The Comptroller agrees not to interpose an objection to Bank's application to form a bank holding company as that term is defined in 12 U.S.C. Sec. 1841, or to McDaniel's service as a director, officer, or employee, or participation in the conduct of the affairs of a bank holding company. (emphasis added).

But McDaniel agreed that the prohibitions of his participation in the affairs of the Bank would be "enforceable against McDaniel to the same extent as a final Order issued pursuant to 12 U.S.C. Secs. [sic] 1818(e)."

In March of 1986, before entry of the Consent and Stipulation, Northeast had submitted to the Board of Governors an application--naming McDaniel as Chairman and President--to become a bank holding company and acquire the shares of the Bank. See 12 U.S.C. Sec. 1842(a). The Board requested and received the full administrative record of the Comptroller's proceedings. The Board then informed Northeast that it considered the Consent and Stipulation a removal order pursuant to 12 U.S.C. Sec. 1818(e), which allows the Comptroller to remove directors or officers of national banks for violations of law or unsound practices. The Board therefore concluded that the agreement, together with the provisions of the Federal Deposit Insurance Act, barred McDaniel's participation in the bank holding company. Northeast disagreed, acknowledging that the Board had authority under section 1818(e) to remove an officer or director of a bank holding company, but contending the Board was required in such circumstances to proceed independently, providing notice and hearing as required by that statute, rather than relying on "an unproved allegation by another federal bank agency or the terms of a settlement agreement." Northeast nevertheless amended its application, striking McDaniel's name.

The Board expressed dissatisfaction with this modification, since it did not preclude McDaniel's future involvement. Northeast and McDaniel replied they were not "interested

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in putting any restrictions" on McDaniel's involvement, and requested that the Board continue its review of the application. The Board thereafter issued an order approving the application, 73 Fed.Res.Bull. 725, pursuant to its authority under the Bank Holding Company Act, 12 U.S.C. Secs. 1841-1850, on July 2, 1987. Although the order did not refer to McDaniel, the Board did inform Northeast and McDaniel by separate letters that the approval was conditioned on Northeast's amendment of its application excluding McDaniel. ¹ The Board's imposition of its condition--that McDaniel take no part in the affairs of the bank holding company--is based on two separate assertions of legal authority. The first is the Board's duty under the Bank Holding Company Act when entertaining applications to "take into consideration the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served." 12 U.S.C. Sec. 1842(c). The Board also, however, relies on the independent legal effect of the Consent and Stipulation, which it treats as a Comptroller's removal order under section 1818(e)(5) and which, pursuant to section 1818(j)(ii), therefore forbids McDaniel's service as a director, officer, or employee of any bank without "prior written approval of the appropriate Federal banking agency." (emphasis added). According to the Board, an amendment to section 1818(b)(3) applies section 1818(j) to bank holding companies and thereby precludes McDaniel's service as an officer of a bank holding company without the Board's approval (just as prior to its passage a person subject to a Comptroller's removal order would have been barred from service as an officer of a state member bank without approval of the Board).

Petitioners assert that a Comptroller's order removing a bank officer does not automatically bar the order's target from service as a bank holding company officer. The Board must, according to petitioners, grant the subject a hearing and, based on that hearing, issue its own removal order. Even if the Board were correct as to its interpretation of the interrelationship between the statutes, petitioners alternatively maintain that the Consent and Stipulation is not a section 1818(e)(5) removal order.

II.

We consider first the question of statutory interpretation (assuming for purposes of analysis that the stipulation is properly regarded as a removal order). The Comptroller of the Currency has responsibility for regulation of federally chartered banks, the FDIC for state banks not members of the Federal Reserve System but which are federally insured, and the Federal Reserve Board for state banks which are insured and are members of the system. 12 U.S.C. Sec. 1813(q). In addition, the Board, under the Bank Holding Company Act,...