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FDIC Enforcement Decisions and Orders |
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FDIC assessed civil money penalties against bank directors who received extensions of credit from the bank in excess of 15% of the bank's unimpaired capital and surplus in the form of unsecured loans, and in excess of 10% of the bank's unimpaired capital and surplus in the form of fully secured loans.
[.1] Practice and ProcedurePetitions to FDICTime For Filing Exceptions to Recommended DecisionTime of Filing
Exceptions to an ALJ's Recommended Decision must be filed within 20 days after the ALJ files the Recommended Decision. Failure to file exceptions within 20 days waives any objections a party might have.
[.3] Certificates of DepositLoan Security
[.4] Civil Money PenaltiesBurden of Proof
[.5] Civil Money PenaltiesLiabilityLending Limitations
[.6] Civil Money PenaltiesLiabilityLending Limitations
[.7] Civil Money PenaltiesLiabilityLending Limitations
[.8] LoansRenewal
[.9] Regulation ODefinitionsExtension of Credit
[.10] LoansCollateralReal Property
[.11] Regulation OLending LimitationsUnsecured Loans
[.12] Civil Money PenaltiesFDIC Authority to Assess
[.13] DefinitionsExecutive Officer
[.14] DefinitionsPrincipal Shareholder
[.16] DirectorsDuties and ResponsibilitiesDelegation to Officers
[.17] DirectorsDuties and ResponsibilitiesCorrection of Known Problems
[.18] Civil Money PenaltiesHearing
[.19] Practice and ProcedureEvidenceExpertise of Administrative Agencies
[.20] LoansSecuredPerfection of Security Interest
[.21] LoansSecuredPerfection of Security Interest
[.22] LoansSetoffRequirements for Exercise
[.23] Civil Money PenaltiesAmount of PenaltyStatutory Standard
In the Matter of * * * * * * individually
STATEMENT OF THE CASE
[.1] Neither FDIC-C&E nor the Bank filed any exceptions to the ALJ's proposed Findings of Facts, Conclusions of Law or Recommended Decision and Order. Such exceptions are required by the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.14(a), if a party's objections are to be preserved. Under the FDIC Rules of Practice and Procedures, if no exceptions are filed within 20 days after the ALJ issues his Recommended Decision, the parties are deemed to have waived any objections they might have had. 12 C.F.R. § 308.14(b). Since Respondents failed to file exceptions, any objections Respondents may have had to the ALJ's findings and recommendations have been waived.
[.2] These limits are not mere technicalities. They go to the heart of sound banking and safeguard against insider abuse. The longstanding restraint on the total percentage of a bank's assets that may be loaned to any borrower is one of the most well-known statutory provisions governing bank lending activities. Corsicana Nat'l Bank v. Johnson, 251 U.S. 68 (1919). This limit is of the utmost importance because it protects the safety and soundness of banks by restricting the impact of default by any individual borrower.
[.3] Mr. * * * also contended that the * * * credits were legally secured by certificates of deposit and therefore subject to the 25 percent lending limit.1 The ALJ analyzed the requirements to establish a security interest for the Bank and found the * * * credits were not secured within the meaning
ORDER TO PAY
RECOMMENDED DECISION AND ORDER
FEDERAL DEPOSIT INSURANCE CORPORATION
I. SUMMARY OF PROCEEDINGS
II. FINDING OF FACT
III. CONCLUSIONS OF LAW
A. General Conclusions of Law
[.4] 2. In an action for the imposition of civil money penalties under section 18(j) of the Act (12 U.S.C. § 1828(j)) for violations of section 22(h) of the Federal Reserve Act (12 U.S.C. § 375b) and Regulation O (12 C.F.R. Part 215), the FDIC has the burden of proving and otherwise establishing such violations by a preponderance of the evidence and not by clear and convincing evidence.
[.5.6] 9. The maximum aggregate amount of unsecured credit that may be extended by the Bank under section 215.4(c) of Regulation O (12 C.F.R. § 215.4(c)) to "executive officers" and "principal shareholders" and their "related interests" is an amount equal to 15 percent of the Bank's unimpaired capital and surplus ("the 15 percent unsecured lending limit of Regulation O"); and the maximum aggregate amount of secured credit that may be extended by the Bank to such persons and their "related interests" is an additional amount equal to 10 percent (resulting in a total of 25 percent) of the Bank's unimpaired capital and surplus ("the 25 percent secured lending limit of Regulation O"), provided that such additional credit (i.e., that portion equal to 10 percent of the Bank's unimpaired capital and surplus) is fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, which is equal to the amount of such additional credit.
[.7] 11. For purposes of applying the secured and unsecured lending limits of Regulation O, an "extension of credit" to Respondent * * * or Respondent * * * includes any loan or other extension of credit made by the Bank to a third party for which Respondent * * * or Respondent * * * is obligated as endorser or guarantor.
[.8] 12. For purposes of applying the secured and unsecured lending limits of Regulation O, and "extension of credit" to Respondent * * * or Respondent * * * in-
{{4-1-90 p.A-857}}cludes the renewal of a loan or other extension of credit previously made by the Bank to Respondent * * * or Respondent * * * or to a related interest of Respondent * * * or Respondent * * *.
[.9] 13. For purposes applying the secured and unsecured lending limits of Regulation O, an "extension of credit" to Respondent * * * or Respondent * * * includes the renewal of a loan or other extension of credit previously made by the Bank to a third party for which either Respondent * * * or Respondent * * * is obligated as endorser or guarantor.
[.10] 17. Loans or other extensions of credit made by the Bank to Respondent * * * or Respondent * * * or to their related interests, which are secured by real property or unlisted securities are not "secured" and must therefore conform with the 15 percent unsecured lending limit of Regulation O.
[.11] 18. Loans or other extensions of credit made by the Bank to Respondent * * * or Respondent * * * or to their related interests, are not "secured" and must therefore conform with 15 percent unsecured lending limit of Regulation O where the only property or collateral of the borrower held by the Bank is held for safekeeping only.
IV. DISCUSSION AND CONCLUSION
[.12] A. The Authority of FDIC to Impose Civil Money Penalties for Violations of the Lending Limit Prohibitions of Section 22(h) of Federal Reserve Act and Regulation O is Well Established
[.13] The lending limit prohibitions contained in section 215.4(c) of Regulation O (12 C.F.R. § 215.4(c)) apply to "executive officers" and "principal shareholders" and require the aggregation of all "extensions of credit" to such persons and their "related interests". The definition of "executive officer" and "principal shareholder" are contained in sections 215.2(d) and (j) of Regulation O (12 C.F.R. §§ 215.2(d) and (j)) and provide in applicable part:
[.15] Directors of banks must direct. The most common dereliction of duty by bank directors is the failure to maintain reasonable supervision and direction over the activities and affairs of the bank. The general fiduciary duty of a bank director was forcefully characterized by the Supreme Court in Briggs v. Spaulding, 141 U.S. 132 (1891):
[.17] The failure to heed notices and warnings of mismanagement and to take corrective action after knowledge of such mismanagement is a breach of fiduciary duty for which directors have been held accountable. In Ringeon v. Albinson, 35 F.2d 753 (D. Minn. 1929), the court found that the directors of a closed national bank had failed to take remedial action following repeated warnings by bank examiners, and held that such failure constituted actionable conduct. (Id. at 755.) In Atherton v. Anderson, 99 F.2d 883 (6th Cir. 1938), bank directors gave only perfunctory attention to supervisory warnings contained in reports of examination. This clearly contributed to the court's conclusion that the supervision by the bank's board was totally inadequate when it noted that a bank examination report presented "... about as gloomy a picture as can be imagined", and that a subsequent examination report "was, if possible, even more alarming." (Id. at 984.) [Emphasis added.] As a result, bank directors must respond to notices and warnings of mismanagement continued in supervisory reports of examination and take corrective action. See also, Depinto v. Providence Security Life Insurance Co., 374 F.2d 37, 45 (9th Cir. 1967).
[.19] Based upon the extensive training, education, professional experience and expertise of the FDIC examiners who testified in this action, great weight should be accorded to their analyses, opinions and conclusions regarding the issues in dispute and remedy of civil money penalties sought by the FDIC. In this regard, the courts have repeatedly expressed deference to the expertise of administrative agencies in formulating a remedy, such as an order requiring the payment of a civil money penalty, to effectuate the purpose and intent of the enabling statute. See, L.G. Balfour Company v. Federal Trade Commission, 562 F.2d 749 (D.C. Cir. 1977); and Groos National Bank v. Comptroller of the Currency, 573 F.2d 889 (5th Cir. 1978). In Groos, the Fifth Circuit Court of Appeals found that:
[.20] Perfection of a security interest under the Uniform Commercial Code is achieved one of three ways, depending upon the type of personal property involved: (a) perfection by possession; (b) automatic perfection (by attachment alone); and (c) perfection by filing. (§§ 11-9-302, 11-9-304 and 11-9-305, * * *) Accordingly, it is necessary to determine the treatment of certificates of deposit under the Uniform Commercial Code in order to determine the proper method of perfection of a security interest in such collateral. Section 9105(e) of the UCC specifically excludes a "certificate of deposit" from the definition of a "deposit account":
[.21] Section 9-304(1) of the UCC provides that a security interest in "instruments" can be perfected only by possession:
[.22] Setoff is well recognized common law concept and is rooted in ancient Roman law. See, Automatic Extension of Cross Demands: Compensation from Rome to California. 53 Calif. L. Rev. 224 (1965). In a banking context, certain requirements must be present before setoff may be exercised. Funds deposited in the bank must be owned by the depositor (American Trust & Banking Co. v. Boone, 29 S.E. 182 (Ga. 1897); and Citizens & Southern Nat. Bank v. Avco Financial Services, Inc., 200 S.E.2d 309 (Ga. App. 1973)); the deposit must create a valid debtor-creditor relationship between the bank and depositor (Darien Bank v. Clifton, 118 S.E. 641 (Ga. 1923); and American Surety Co. of New York v. Peoples Bank, (189 S.E. 414 (Ga. App. 1937)); there must be a mutuality of indebtedness between the bank and the depositor; and the debt of the depositor to the bank must be in default or otherwise due and owing (Cotton States Mutual Ins. Co. v. Citizens & Southern Nat. Bank, 308 S.E. 2d 199 (Ga. App. 1983)). See also, Friedland Properties, Inc. v. Citizens & Southern Nat. Bank, 251 S.E.2d 143 (Ga. App. 1978); First Nat. Bank of Gainesville v. Appalachian Industries, Inc., 247 S.E. 2d 422 (Ga. App. 1978); and Citizens & Southern Nat. Bank v. Weyerhauser Co. 262 S.E. 2d 485 (Ga. App. 1979). There is no evidence in the record that the last of these requirements has been satisfied.
D. The Amounts of the Civil Money Penalties Sought by the FDIC Against Respondents are Supported in Law and Fact
[.23] Section 18(j)(3)(B) of the Act (12 U.S.C. §1828(j)(3)(B) requires that certain factors be considered by the FDIC when it imposes civil money penalties for violations of section 22(h) of the Federal Reserve Act (12 U.S.C. §375(b) or Regulation O (12 C.F.R. Part 215) promulgated thereunder:
V. PROPOSED ORDERS
Based upon the foregoing I recommend that, the "Proposed Orders" set forth in Appendix E be adopted by the FDIC Board of Directors.
APPENDIX A
DESCRIPTIVE INDEX OF FDIC
APPENDIX B
CROSS-INDEX OF FDIC
APPENDIX C
CROSS-INDEX OF FDIC WITNESSES TO FDIC EXHIBITS
APPENDIX D
SUMMARY CHRONOLOGY OF SIGNIFICANT EVENTS
APPENDIX E
PROPOSED ORDERS
A. Respondent * * *
ORDER TO PAY
After taking into account the appropriateness of the penalty with respect to the financial resources and good faith of * * * , the gravity of the violations, the history of previous violations, and such other matters as justice may require it is:
Hoyle L. Robinson
B. Respondent * * *
ORDER TO PAY
After taking into account the appropriateness of the penalty with respect to the financial resources and good faith of * * * the gravity of the violations, the history of previous violations, and such other matters as justice may require it is:
Hoyle L. Robinson |
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Last Updated 6/6/2003 | legal@fdic.gov |