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FDIC Enforcement Decisions and Orders |
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Civil money penalties assessed against bank directors for exceeding the lending limit and failing to comply with the collateral requirements of Regulation O and the Federal Reserve Act. The directors had a duty to inquire carefully into the terms of loans and to insure that the loans were proper and lawful. (This decision was affirmed by the U.S. Court of Appeals for the Sixth Circuit, 765 F.2d 569 (1985)).
[.1]LoansFederal Reserve Act §23Lending LimitationsAggregation of Loans
[.2]LoansSecuredPerfection of Security Interest
[.3]LoansSecuredPossession of Collateral
[.4]DirectorsDuties and ResponsibilityDelegation to Officers
[.5]DirectorsDuties and ResponsibilitiesInquiry into Credit Terms
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FACTS
On July 9, 1981, the Board of Directors of the Bank * * * , a state nonmember insured Bank, approved a $500,000 participation by the bank in a $2.1 million loan by another bank to * * * , who was then Chairman of the Board of Bank * * * and father of its two principal shareholders, Respondents * * * and * * *. Although not clarified at that time, the co-obligor and actual recipient of the loan proceeds was in fact * * * Company ("* * *"), an affiliated loan company of Bank * * *. At the time, * * * was also President and principal shareholder of * * *. The participation was proposed by * * * without any documentation or, apparently, any prior notice to the Directors. The participation was approved without detailed inquiry by the Directors, with Respondents * * * and * * * voting in favor and Respondent * * * abstaining.
SECTION 23A AND REGULATION O LENDING LIMIT VIOLATIONS
[.1] Neither loan by itself violated the lending limits of the Federal Reserve Act and Regulation O as cited above. Only if both are construed as loans to * * * were such limits violated.
SECTION 23A COLLATERAL VIOLATIONS
FDIC submits that the loans were not secured by the kind and amount of collateral required by section 23A of the Federal Reserve Act. The security for the $500,000 loan participation consisted of bank stock, real estate and pledges of certain accounts receivables and floor plans made to * * * affiliates. Of these, only the bank stock was eligible security under section 23A. This bank stock proved to be inadequate under section 23A because the amount of Bank * * * pro rata interest in the stock was less than 120 percent of the amount of the extension of credit.
[.2] As the Administrative Law Judge noted, section 23A requires that loans to affiliates be secured in order to ensure that the bank does not sustain a loss in the event of default. An unperfected security interest, although valid and enforceable against the debtor, will not give the bank priority against third parties. Under Section 9-301 of the Uniform Commercial Code as adopted by * * *, even the debtor's trustee in bankruptcy has priority over an unperfected security interest. (* * * Rev. Stat. §355.9-301)
[.3] Perfection of a security interest in "instruments", such as stock, can generally only be accomplished by the secured party's taking possession of the collateral (* * * Rev. Stat. §355.9-304). Bank * * * admittedly did not have actual possession of the stock which purportedly secured the * * * credit. The stock was in the possession of a * * * bank which held it to secure its own loan to * * *. The Uniform Commercial Code provides that when collateral "is held by a bailee, the secured party is deemed to have possession from the time the bailee receives notification of the secured party's interest." (* * * Rev. Stat. §355.9-305). * * * letter of September 2, 1981 to the * * * bank did not inform the * * * bank that Bank * * * had an interest in the stock to secure a $750,000 credit to * * * ; nor did it direct the * * * bank to release control of the stock to Bank * * * upon satis-
{{4-1-90 p.A-195}}faction of * * * debt to the * * * bank. The letter merely directed the * * * bank to send the stock to * * *, which would "receive it for the Bank * * * ." There is no evidence that * * * Bank, which had a superior security interest in the stock received any notice of Bank * * * interest in the stock securing the $750,000 * * * credit. For these reasons, * * * letter to the * * * bank did not give Bank * * * constructive possession of the collateral, and thus did not create a perfected security interest. The * * * loan, therefore, violated section 23A collateral requirements because it was not securedas required thereby.
PENALTIES
[.4.5] As the Administrative Law Judge noted, Respondents generally contend that they acted in good faith in approving the loans and that the imposition of penalties is inappropriate. However, as directors, Respondents were required to exercise ordinary care in the management of the bank's affairs and could not merely rely upon others to carry out their responsibilities. Briggs v. Spaulding, 141 U.S. 132, 165-166 (1891); Lane v. Chowning, 610 F.2d 1385 (8th Cir. 1979); Heit v. Bixby, 276 F. Supp. 217 (E.D. Mo. 1967). Moreover, they had a duty to inquire carefully into the terms of the loans and to insure that the loans were proper and lawful. This they failed to do. They were also remiss for failing to correct the violations promptly after being advised of them by FDIC examiners.
EXCEPTIONS TO RECOMMENDED DECISION
Respondents filed a number of exceptions to the Administrative Law Judge's Findings of Fact, Conclusions of Law, and Order. These are discussed below and are rejected for the reasons stated.
Exceptions to Findings of Facts
1. Respondent * * * objects to the characterization of him in Finding 3 as being Chief Executive Officer of Bank * * *. However, he himself stated at the hearing that he was Bank * * * 's Chief Executive Officer (Transcript, page 99, lines 3-4). In any event, the label is not important; his functions and involvement in the Bank's activities are the determinative factors.
Exceptions to Conclusions of Law and Order
Respondents take general exception to the Administrative Law Judge's Conclusions of Law and his Order on the grounds that they are arbitrary and capricious, inconsistent with applicable law, and unsupported by evidence in the record. This general exception is rejected. The recommended conclusions of law are in accord with applicable law and the Order is appropriate.
FINDINGS OF FACT AND
Accordingly, the Board of Directors, after specifically considering all the factors cited in 12 U.S.C. §1828(j)(3), adopts all the findings of fact and conclusions of law of the Administrative Law Judge, and the bases therefor, as set forth in his Recommended Decision, which are hereby incorporated by reference as part of this decision.
ORDER
The Board also adopts in full the proposed order of the Administrative Law Judge as contained in his Recommended Decision, which is incorporated herein by reference, as its Final Order. This Order shall become effective at the expiration of 30 days after the service of the Order upon Respondents.
/s/ Hoyle L. Robinson
FDIC-83-21k-A
RECOMMENDED DECISION
Burroughs Judge: The Federal Deposit Insurance Corporation ("FDIC") seek monetary penalties against directors of The Bank * * * Kentucky, pursuant to section 18(j)(3) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1828(j)(3). The action results from a Report of Examination of Bank * * * at the close of business on May 24, 1982, wherein it was determined that Bank * * * participation in a loan of $2,100,000 made by the * * * (" * * *."), * * *, and the subsequent extension of credit to * * * Ed: ("* * *") in the amount of $750,000 was in violation of sections 22(h) and 23A of the Federal Reserve Act, as amended (12 U.S.C. §§375b and 371c, respectively), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215), promulgated pursuant to section 22(h) of the Federal Reserve Act. The FDIC contends that the loan made by * * * Bank in the name of * * * was in reality a loan for the benefit of * * * , an affiliate of Bank * * *.
On November 23, 1981, FDIC examiner * * * visited Bank * * * and informed respondents * * * and * * * that the * * * loans exceeded the lending limits of Regulation O.
SECTION 23A AND REGULATION O
The question of whether loans to * * * exceeded the lending limits of sections 215.2(f) and 215.4(c) of Regulation O, 12 C.F.R. §§215.2(f) and 215.4(c), and sections 22(h)(l) and 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §§375b and 371c, respectively, is contingent on how the loan participation of $500,000 with the * * * Bank is treated. The minutes of the July 9, 1981 board of directors meeting indicate that * * * represented that the $2,100,000 loan being made by * * * Bank was to his father, * * *. The minutes make no reference to * * *, but do state that * * * is using the proceeds to buy some receivables (floor plan). The loan participation agreement between * * * Bank and Bank * * * makes no reference to * * *. The demand note for $2,100,000 was executed by * * *. The note makes no reference to * * *.
Commencing with the disbursement of $315,000 on November 17, 1981, Bank * * * was in violation of the lending limit of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c (1976)1and section 22(h)(1) of the Federal Reserve Act, 12 U.S.C. §375b(1), as implemented by sections 215.2(f).2and 215.4(c)3of Regulation O.
SECTION 23A COLLATERAL REQUIREMENTS
The FDIC submits that the $500,000 loan participation with the * * * Bank and the subsequent extension of $750,000 of credit to * * * were not secured by the kind and amount of collateral required to be provided by section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c(1976).4The $500,000 was part of the $2,100,000 loan made by * * * Bank. Security for the loan was held by * * * Bank and consisted of bank stock, real estate and pledges of certain accounts receivable and floor plan loans made to affiliates of * * *. Of the assets securing the loan, only bank stock constituted eligible collateral under section 23A. The loan agreement stated that the bank stocks had a book value of $1,196,110. There is nothing in the loan participation certificate or the
During the board of directors vote on July 9, 1981, * * * voted in favor of approving the $500,000 loan participation in the $2,100,000 loan originated by * * * Bank. Since the loan was for the benefit of * * *, * * * was an interested party. He was a majority stockholder and president of * * *. The participation in the voting process by * * * was in violation of section 215.4(b) of Regulation O.6
PENALTY DETERMINATION
The last question for determination involves the amount of penalty, if any, that should be assessed against the directors. Section 18(j)(3)(A) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(j)(3)(A), empowers the FDIC to impose civil penalties against any person participating in the conduct of the affairs of an insured nonmember bank that violates any provision of section 23A or 22(h) of the Federal Reserve Act or any lawful regulation, such as Regulation O, promulgated pursuant to such authority.7Certain factors must be considered in determining an appropriate penalty. These factors specifically include the size of the financial resources, good faith of the insured bank or person charged, the gravity of the violation and the history of previous violations.8
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1. The Bank * * *, ("Bank * * *"), is a corporation existing and doing business under the laws of the * * * having its principal place of business in * * *. Bank * * * is and was at all times pertinent to the proceeding an insured State nonmember bank (Tr.
23).
The check dated November 17, 1981, disbursing $315,000 of the $750,000 was signed by * * * (Tr. 98).
30. Bank * * * total credit outstanding to * * * was as follows (Ex. 2, at 3, 5458; Ex. 10, at 2; Tr. 16):
30. (sic) During the course of the FDIC examination of Bank * * * which resulted in a Report of Examination as of close of business on May 24, 1982, examiner * * * discussed findings throughout the examination with president * * *, and vice-president * * *. No discussions were held with * * * (Tr. 910, 62).
31. On June 10, 1982, * * * attended the board of directors meeting held on that date and discussed the alleged violations set forth in his Report of Examination as of the close of business on May 24, 1982. Directors * * * * * * and * * * , were present at the meeting. * * * informed the board that he would recommend that civil money penalties be assessed against the directors (Ex. N; Tr. 10, 18, 46, 67, 116).
CONCLUSIONS OF LAW
1. The $500,000 extension of credit to * * * was made in violation of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c (1976), in that it was not secured by the kind and amount of collateral required to be provided.
PROPOSED ORDER
Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the following ORDER be entered by the Board:
2. That the civil monetary penalties assessed against each of the named individuals shall not be paid directly or indirectly by the Bank * * * but shall be paid directly by the individual against whom the penalty is assessed.
/s/ James D. Burroughs |
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Last Updated 6/6/2003 | legal@fdic.gov |