Valley State Bank of Canton v. Farmers State Bank of Canton, s. 11238--11244

Citation213 N.W.2d 459,87 S.D. 614
Decision Date20 December 1973
Docket NumberNos. 11238--11244,s. 11238--11244
PartiesApplication of the Valley State Bank of Canton for Approval of its Articles of Incorporation and for Authority to Engage in Business. VALLEY STATE BANK OF CANTON and South Dakota State Banking Commission, Appellants, v. FARMERS STATE BANK OF CANTON, Respondent.
CourtSupreme Court of South Dakota

M. T. Woods, Woods, Fuller, Shultz & Smith, Sioux Falls, for appellant, Valley State Bank of Canton.

Michael J. McGreevy, Asst. Atty. Gen., Pierre, for appellant, South Dakota State Banking Commission; Kermit A. Sande, Atty. Gen., on the brief.

Samuel W. Masten, Canton, for respondent, Farmers State Bank of Canton.

HALL, Circuit Judge.

On September 13, 1971, a 'Notice of Intention to Organize and to File Articles of Incorporation with the State Banking Commission, for a State Bank under Chapter 51--17 SDCL' was filed with the State Banking Commission on behalf of appellant Valley State Bank of Canton, seeking a charter to open a banking service in Canton, South Dakota.

Pursuant thereto, the Banking Commission caused a 'Notice of Hearing' to be published in the legal newspaper of Lincoln County, South Dakota, and notified banks in the vicinity of Canton including the respondent Farmers State Bank of Canton, the sole bank in Canton, of a hearing on the application of the Valley State Bank for a state chartered bank at Canton, South Dakota.

On December 21, 1971, the Banking Commission held an adversary, adjudicative-type hearing to take testimony on appellant's application. Both appellant and respondent banks were allowed to present witnesses and conduct cross-examination. At the conclusion of the testimony, the respondent and appellant banks presented their proposed findings of fact and conclusions of law as required by the Banking Commission.

The Banking Commission subsequently issued its 'FINDINGS OF FACT, CONCLUSIONS OF LAW, RULING ON PROPOSED FINDINGS, AND DECISION', which showed a unanimous approval of appellant Valley State Bank of Canton's application. Copies of the findings, conclusions, ruling and decision were transmitted by letter to the attorneys of record.

The record in this case reflects that the Banking Commission at all times strictly adhered to its own rules and SDCL 1--26--1 through 1--26--40, the Administrative Procedure Act (hereinafter referred to as APA), in regard to notice, conduction of hearings and rulings. The rules of procedure utilized by the Banking Commission were specifically adopted June 30, 1971, in compliance with the APA. The Banking Commission followed its rules as to a 'contested case' and, at the time of the hearings, none of the parties objected to these procedures.

The Banking Commission's ruling of February 23, 1972, granted a charter to appellant Valley State Bank of Canton to operate a bank in Canton, and respondent Farmers State Bank of Canton filed a 'Petition For Review In Circuit Court' in Lincoln County on March 17, 1972.

On the review granted by the Circuit Court, the Farmers State Bank of Canton basically contended: The Banking Commission was bound by the APA; the application of appellant for a charter involved a "Contested case" within the meaning of SDCL 1--26--1(2); the respondent was a proper party to appeal under the APA; the appeal was timely; and, the Banking Commission's approval of a charter for appellant bank was not based upon 'substantial evidence' as defined by the APA and, therefore, clearly erroneous.

The appellants' resistance to the review by the Circuit Court was based on allegations that: The Banking Commission's action was not reviewable by the court because it involved a purely legislative function; the respondent was not a proper party to seek review; the Banking Commission was in no way controlled by the APA; the appeal was not timely; and, there was 'substantial evidence' to support the Banking Commission's approval of the charter.

The Circuit Court, relying on the contentions of the respondent Farmers State Bank of Canton, set forth above, reversed the Banking Commission's approval of the charter for the Valley State Bank of Canton, thus framing the questions presented on this appeal.

The activities of granting or revoking bank charters are legislative functions which have been delegated to the Banking Commission. SDCL 51--16, 51--17. The enabling legislation effective at the time of the application of appellant Valley State Bank of Canton, however, in part provided:

'The commission shall have the power to adopt all necessary rules and regulations not inconsistent with the laws of this state, for the management and administration of banks * * * over which it has jurisdiction * * * and to regulate its own procedure and practice, which Rules shall be promulgated Pursuant to chapter 1--26.' (emphasis added) SDCL 51--16--14; and

'The commission shall pass upon every application to organize a bank under the laws of this state * * * and the action of the commission on every such application shall be final, Subject to chapter 1--26 * * *.' (emphasis added) SDCL 51--16--15.

Because of these provisions in our statutes, the Banking Commission is not free to perform its functions in total disregard of the APA. The Banking Commission's rules of procedure must be adopted pursuant to the APA and, once adopted, acquire the force and effect of law. Public Utilities Commission of California v. United States, 1958, 355 U.S. 534, 78 S.Ct. 446, 2 L.Ed.2d 470; Paul v. United States, 1963, 371 U.S. 245, 255, 83 S.Ct. 426, 9 L.Ed.2d 292; Springborg v. Wilson and Company, 1955, 245 Minn. 489, 73 N.W.2d 433; Verbeten v. Huettl, 1948, 253 Wis. 510, 34 N.W.2d 803; Davis, Administrative Law Text, 126, 127 (3rd Ed. 1972).

The Banking Commission rules 30 and 31, adopted June 30, 1971, have the force and effect of law in the present case. These rules bind the Banking Commission as well as those coming before it. Pursuant to the command of the legislature (SDCL 51--16--14 and 51--16--15), the Commission adopted the above-cited rules to govern the process of granting new bank charters in "Contested case(s)". Following these rules, the Banking Commission caused notice to be issued to competitive financial institutions which may be thereby affected. The rules followed established an adjudicative, adversary hearing prior to the Banking Commission's ruling. In this quasi-judicial setting, proposed findings of fact and conclusions of law were required to be presented by the appellant and respondent banks, named as parties of record in the action.

The Banking Commission's final decision and rulings were based upon the above adjudicative procedure, but it is now argued that the Commission was not required to follow such procedure and the rules followed did not bind the Commission in any manner. It is then concluded that the proscriptions and results of the Commission's own rules, and those of the legislature, may be avoided because the Commission operates under delegated legislative authority.

It is illogical to say that the competing respondent bank has an interest of such importance it should be presented at a quasi-judicial, adjudicative hearing but that there was no possibility the respondent bank could be adversely affected or aggrieved by the decision and, thus, not entitled to appeal. Such incongruous reasoning spawns arbitrary and capricious governmental activity.

The Banking Commission is not excluded from the provisions of the APA. SDCL 1--26--1(1). It cannot be contended that the issuance of a bank charter does not fall within the definition of "License" as found in the APA. SDCL 1--26--1(3). Having been made a party of record, privy to an adjudicative hearing in which it was required to defend its interest against the appellant bank which was seeking a charter, the respondent became a "Party" within the meaning of SDCL 1--26--1(5) and the Banking Commission's rules 30 and 31. The phrase 'required by law,' found in SDCL 1--26--1(2), which establishes when the "Contested case" hearing is necessary, includes constitutional requirements of fair play, due process and Agency rules, as well as the requirements of statutory law. It must then be concluded that this was a "Contested case" because the Banking Commission, by its own procedure establishing the rules which required the adjudicative hearing, sought to determine some of the 'legal rights, duties, or privileges of a party' herein, the respondent Farmers State Bank of Canton. SDCL 1--26--1(2). See First Federal Savings & Loan Association v. Department of Banking, 1971, 187 Neb. 562, 192 N.W.2d 736, which adopted this reasoning; see also, Bryan v. Community State Bank of Bloomington, 1969, 285 Minn. 226, 172 N.W.2d 771; Hall v. Banking Review Board, 1961, 13 Wis.2d 359, 108 N.W.2d 543, adopting similar reasoning that the APA applies to granting bank charters contested by established banks and presents a "Contested case" which the APA controls. The respondent, being a party to a "Contested case", within the meaning of our statutes, and by Banking Commission rules entitled to its hearing, was thus entirely proper in presenting its appeal before the circuit court.

The cases provious in time to the APA no longer control when and how administrative decisions are reviewed by the courts. Newport National Bank v. Providence Institution for Savings, 1967, 101 R.I. 614, 226 A.2d 137. When the Administrative Procedure Act was passed, it did not codify existing administrative law but rather adopted its own substantive and procedural rules which must be adhered to. The APA which applied under legislative enactment (SDCL 51--16--14 and 51--16--15) and which the Banking Commission felt was applicable, as revealed in the exactness with which it was followed, must be carried out to its fullest extent. It cannot be fragmented. Selective or arbitrary utilization of only a portion of its features, chosen on an...

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