Patagonia Corp. v. Board of Governors of Federal Reserve System

Decision Date19 May 1975
Docket NumberNo. 73-2432,73-2432
Citation517 F.2d 803
CourtU.S. Court of Appeals — Ninth Circuit

Before ELY and CHOY, Circuit Judges, and WEIGEL, * District Judge.

ELY, Circuit Judge:

This case presents several difficult questions concerning the proper interpretation and application of the grandfather proviso that appears within section 4(a)(2) of the Bank Holding Company Act, as amended (hereinafter "the Act" ), now codified as 12 U.S.C. § 1843(a)(2) (1970). Section 4(a)(2) was enacted as a part of the Bank Holding Company Act Amendments of 1970 (hereinafter "the 1970 Amendments" ), Pub.L.No.91-607, 84 Stat. 1760.

Patagonia Corporation, the petitioner, is an Arizona based, one-bank holding company which on June 30, 1968, the date on which section 1843(a)(2) 1 grandfather rights accrued, owned 20.005 percent of the outstanding capital stock of the state-chartered Pima Savings and Loan Association of Tucson (hereinafter "Pima" ). Between June 30, 1968, and December 31, 1970, when the 1970 Amendments became effective, Patagonia increased its ownership of Pima to 100 percent by purchasing all of Pima's remaining outstanding stock. 2

Ruling that Patagonia's grandfather rights do not extend to the 79k percent of Pima's stock that the holding company acquired after June 30, 1968, the Board of Governors of the Federal Reserve System (hereinafter "the Board" ) has ordered Patagonia to divest that amount of Pima's stock before December 31, 1980. 38 Fed.Reg. 18411, 59 Fed.Res.Bull. 539 (1973). 3 Patagonia petitions for review of the Board's Order, invoking the jurisdiction of this court under 12 U.S.C. § 1848 (1970). We have concluded that the Board's Order must be vacated and the cause remanded for further administrative proceedings.

I. Statutory Background

For reasons that have been fully discussed elsewhere, 4 the Congress, by enacting the 1970 Amendments, subjected one-bank holding companies, i. e., those holding companies owning or otherwise controlling only one bank, to the same federal controls that had previously been established for multi-bank holding companies. It has thus been the principal result that since the effective date of the 1970 Amendments, both one-bank and multi-bank holding companies have been prohibited by statute from engaging in activities except banking and those non-banking activities that the Board has determined to be "so closely related to banking or managing or controlling banks as to be a proper incident thereto." 12 U.S.C. §§ 1843(a), (c)(8) (1970). The Board does not consider the activities normally conducted by savings and loan associations or institutions to be "related to banking." 5 12 C.F.R. §§ 225.4, 225.126(h) (1974).

Within section 1843(a)(2), however, Congress inserted a grandfather proviso for the purpose of creating a conditional exemption from the ban against non-banking activities for one-bank holding companies that had been in existence on June 30, 1968, but that were not subjected to federal control until 1970. 6 The pertinent statutory language, embodying both the generally applicable ban against non-banking activities and the grandfather proviso, reads as follows:

(a) Except as otherwise provided in this chapter, no bank holding company shall

(2) * * * after December 31, 1980, retain direct or indirect ownership or control of any voting shares of any company which is not a bank or bank holding company or engage in any activities other than (A) those of banking or of managing or controlling banks and other subsidiaries authorized under this chapter or of furnishing services to or performing services for its subsidiaries, and (B) (those determined by the Board to be banking-related): Provided, That a company covered in 1970 may also engage in those activities in which directly or through a subsidiary (i) it was lawfully engaged on June 30, 1968 * * * , and (ii) it has been continuously engaged since June 30, 1968 * * * .

12 U.S.C. § 1843(a)(2) (1970). Subject to two limitations, which are discussed below, the grandfather clause authorizes an eligible one-bank company to continue to engage in those non-banking activities in which it lawfully was engaged, either directly or through a subsidiary, on June 30, 1968, and in which it has continuously remained so engaged since that date.

The Congressional committees that drafted the 1970 Amendments noted two reasons for the Congressional decision to grandfather the on-going activities of eligible one-bank holding companies. First, the committee reports reveal that Congress was principally concerned that the one-bank holding company device might be employed to effect serious anti-competitive abuses in the future. Both the House and Senate committees agreed that they had seen little or no evidence that the one-bank holding companies that existed in 1970 had already engaged in serious anti-competitive practices. H.R.Rep.No.1747, 91st Cong., 2d Sess. 24 (1970) (1970 U.S.Code Cong. & Admin.News, pp. 5561, 5574-75) (conference report); S.Rep.No.1084, 91st Cong., 2d Sess. 4, 5 (1970) (1970 U.S.Code Cong. & Admin.News, pp. 5519, 5522, 5523). See Cameron Financial Corp. v. Board of Governors of the Federal Reserve System, 497 F.2d 841, 846-47 (4th Cir. 1974). Second, Congress noted that some one-bank holding companies, principally those in smaller cities, had existed for long periods of time and had provided services and opportunities for local communities that otherwise might not have been available. H.R.Rep.No.1747, supra at 23-24 (1970 U.S.Code Cong. & Admin.News at pp. 5574-75).

Congress was aware, however, that even the grandfathered activities of existing one-bank holding companies might, in the future, be conducted in ways that could frustrate the principal purposes of the Act. Accordingly, Congress attached two limitations to the section 1843(a)(2) grandfather proviso. First, a one-bank holding company may not expand its grandfathered activities through the acquisition of an interest in a "going concern" that also is engaged in the grandfathered business. Second, the statute empowers the Board to terminate a holding company's grandfathered activities if the Board finds, after notice and opportunity for a hearing, that such termination is necessary "to prevent undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices." 12 U.S.C. § 1843(a)(2) (1970). The Board may institute proceedings at any time to determine whether a holding company's grandfathered activities should be terminated; however, the statute specifically required the Board to initiate such proceedings by the end of 1972 for the grandfathered activities of each one-bank holding company that on December 31, 1970, controlled a bank that had assets in excess of $60 million. 7

II. Proceedings Before the Board

Before the Board, Patagonia strongly urged that the section 1843(a)(2) grandfather proviso entitles it to retain its full, 100 percent, ownership of Pima. Patagonia's argument was predicated on its claim that on June 30, 1968, it had the power to exercise a controlling influence over the management and policies of Pima, even though it owned only 20.005 percent of Pima's stock. Therefore, Patagonia argued, Pima was its subsidiary on June 30, 1968, as the word, "subsidiary," is defined in 12 U.S.C. § 1841(d)(3) (1970). Section 1841(d)(3), also added to the Act by the 1970 Amendments, defines a bank holding company subsidiary as

any company with respect to the management or policies of which such bank holding company has the power, directly or indirectly, to exercise a controlling influence, as determined by the Board, after notice and opportunity for hearing.

Section 1843(a)(2) grandfathers those non-banking activities in which eligible one-bank holding companies were engaged, either directly or through a subsidiary, on June 30, 1968. Patagonia asserted, consequently, that on the crucial date, it was engaged, through its subsidiary, Pima, in the business of operating a savings and loan institution. Patagonia concluded, therefore, that its savings and loan activities are grandfathered and that it was not barred by the Act from acquiring Pima's remaining outstanding stock.

Patagonia first apprised the Board of its claim to grandfather rights for its full ownership of Pima in an April, 1972, response to a Board inquiry about the holding company's ongoing grandfathered activities. Shortly thereafter, on July 3, 1972, and following informal consultations with the Board's staff, Patagonia filed with the Board a document styled as an application for a Board determination, pursuant to section 1841(d)(3), that on June 30, 1968, Patagonia had power to exercise a controlling influence over Pima. Patagonia's application provided information that as of the critical date, Patagonia owned 20.005 percent of Pima's capital stock and that Patagonia had placed three representatives on Pima's fifteen-member board of directors. The application further stated that as of June 30, 1968, Patagonia had already announced its intention to acquire additional Pima stock. Finally, Patagonia attached six affidavits to its application, three from the Patagonia members of Pima's board of directors and three from Pima directors whom Patagonia did not directly control. Each affiant stated his view as to the strength of Patagonia's influence over Pima's affairs. Patagonia noted in its application that it believed that it was entitled to a hearing on the controlling influence question but stated that such a hearing would be sought only if the Board's staff was of the preliminary view that Patagonia's power to exercise a controlling influence...

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