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   [5162A] In the Matter of Daniel R. Cartier, Docket No. FDIC-90-153jj(1-15-91).

   FDIC denies Section 32 application to serve as director or officer of a troubled institution. Applicant had defaulted on personal loans from the institution and an affiliate; Board found this to reflect adversely on his character and integrity. Designation of the institution as "troubled" for purposes of Section 32 does not require a completed examination and final report; information obtained in a current examination is sufficient.

   [.1] FDI Act Section 32—"Troubled Institution"—Designation
   FDIC interpretation of "most recent report" to mean most current and accurate information, rather than a complete and final report, is accorded great deference. Agency's designation of institution as "troubled" based on an examination in progress was proper.

   [.2] FDI Act Section 32—"Troubled Institution"—Notice
   Section 32 regulations require only that notification to a troubled institution be based on a "visitation, examination or report of condition," not that it specifically {{9-30-91 p.A-1634.1}}identify the "visitation, examination, or report of condition" on which the agency bases its determination. Institution was not prejudiced by absence of specific reference in the notice.

   [.3] FDI Act Section 32—Character and Integrity—Loan Defaults
   Applicant's failure to honor his personal obligations to Bank—until after he received Notice of Disapproval to serve as Bank's CEO—is sufficient basis for FDIC to determine that he lacks the requisite character and integrity to head a troubled institution.

In the Matter of
DANIEL R. CARTIER
VERONA EXCHANGE BANK
VERONA, ILLINOIS
(Insured State Nonmember Bank)
DECISION AND ORDER

I. INTRODUCTION

   This proceeding arises out of an application, dated May 21, 1990 ("Application"), by Daniel R. Cartier ("Applicant" or "Cartier") submitted to the Chicago Regional Office of the Division of Supervision of the Federal Deposit Insurance Corporation ("FDIC") under section 32(a) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1831i, seeking approval to be employed as a director and as chief executive officer of the Verona Exchange Bank, Verona, Illinois ("Verona"), a troubled institution.1 The Chicago Regional Office issued a Notice of Disapproval of Notification of Addition of a Director and/or Employment of a Senior Executive Officer ("Notice of Disapproval") disapproving the Application on June 19, 1990, based on a determination that Cartier lacked the statutory prerequisites to become a senior official of Verona. On July 9, 1990, the FDIC's Division of Supervision received appeals from the Notice of Disapproval from the Applicant and Verona, both of which appeals were subsequently denied.
   The Applicant requested and received a hearing before a presiding officer ("Presiding Officer"). The Presiding Officer recommended that this Application be denied after finding, based on a preponderance of the evidence on the record as a whole, that the Applicant lacked the "competence, experience, character, or integrity" required of a section 32 applicant and that this Applicant's service as chief executive officer of Verona would not be in the best interests of Verona or the public. The Presiding Officer found that over a period of years, Cartier failed to meet his payment obligations on personal loans he had obtained from Verona and the * * *, formerly an affiliate of Verona. Accordingly, the Presiding Officer concluded that the FDIC Chicago Regional Office was justified in denying Cartier's request to serve as director or senior executive officer of Verona.
   After a review of the entire record of this proceeding, the Board of Directors ("Board") of the FDIC adopts and incorporates herein by reference the Presiding Officer's Recommended Decision and denies Applicant's section 32 Application.

II. BACKGROUND

A. Application

   On May 21, 1990, a Notification of Addition of a Director or Employment of a Senior Executive Officer from Daniel R. Cartier and Verona Exchange Bank was submitted to the FDIC Chicago Regional Office. The FDIC's Chicago Regional Director ("Regional Director") disapproved the Application on June 19, 1990, based on a review of the Applicant's competence, experience, fitness of character, and integrity under section 32(e). The Regional Director informed both Verona and the Applicant that based on the Applicant's unfavorable history of loans to Applicant by Verona and * * *, the proposed association of Mr. Cartier and Verona would not be in the best interests of the depositors of the Bank or of the public.

B. Appeal

   The Applicant and Verona appealed the


1 Although the Application did not specify the office sought by Cartier, FDIC Enforcement Counsel represent in a post hearing submission that the Applicant, given his majority ownership of Verona, seeks the position of Chief Executive Officer while retaining the services of Verona's current president Gerald Knudson.
{{9-30-91 p.A-1634.2}}decision of the Regional Director. On or about August 10, 1990, the Applicant and Verona were notified of the decision of the Director of the Division of Supervision not to reverse the disapproval of June 19, 1990. Thereafter, the Applicant requested a hearing pursuant to section 308.97 of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.97.

C. Hearing

   A hearing was held in Minneapolis, Minnesota on September 26 and 27, 1990. At the commencement of the hearing, the Applicant and Verona made an oral motion to dismiss on the grounds that the FDIC allegedly did not comply with the requirements of section 303.14 of the FDIC Rules and Regulations, 12 C.F.R. § 303.14(a)(4)(iv), in notifying Verona that it had been designated a "troubled" bank. The facts relating to the FDIC's notification of Verona are as follows.
   During the course of a regularly scheduled full-scope examination of Verona, on March 16, 1990, FDIC Examiner-In-Charge James C. Watkins and Assistant Examiners Sandra Knezevich and Scott Ramsdale met with the Applicant and Gerald Knudson, President of Verona. At that meeting, Mr. Watkins advised Cartier and Knudson that the FDIC Chicago Regional Office considered Verona to be in a "troubled condition." A letter to that effect was sent to the Bank on March 22, 1990. The Presiding Officer found that the FDIC gave Verona notification that it had been designated a "troubled bank" as required by law and the regulations and denied the motion subsequent to the hearing.
   At the hearing, five witnesses testified, including the Applicant. Further, posthearing submissions were filed by the FDIC and the Applicant under instructions from the Presiding Officer.2 On November 30, 1990, the Presiding Officer issued his recommendation that the June 19, 1990, Notice of Disapproval of Daniel R. Cartier as senior executive officer of Verona be continued.

D. The Presiding Officer's Recommended
Decision

   In reaching his recommendation, the Presiding Officer focused on two issues: the adequacy of notification to the Bank of the designation of Verona as a "troubled" institution and Cartier's failure to meet the statutory prerequisites to serve as director or senior officer of Verona. The Presiding Officer concluded that the FDIC Chicago Regional Office had complied with the necessary regulatory procedures in notifying Verona that it was in a "troubled condition," and that the Division of Supervision was justified in finding that the Applicant lacked the statutory prerequisites to warrant approval of his Application.
   In analyzing the issue of Verona's designation as "troubled" and the subsequent notice given to the Bank, the Presiding Officer acknowledged that, pursuant to 12 C.F.R. § 303.14(a)(4)(iv), the term "troubled condition" means any insured nonmember bank that is: (1) informed in writing; (2) by the Regional Director or designee; (3) that it is designated a troubled bank; (4) based on a visitation, examination, or report of condition. Contrary to the assertions of the Applicant that the Regional Director's letter of March 22, 1990, should have identified the specific visitation, examination, or report of condition on which the "troubled condition" determination was made, the Presiding Officer concluded that this did not bear on the validity of the notice given to the Bank. See Recommended Decision of Presiding Officer Fisher, November 30, 1990 ("R.D.") at 13.
   The Presiding Officer found that the purpose of the regulation requiring written notice is to insure that notice is in fact given and that specification of the visitation or examination is intended to make the Bank aware of the basis for the FDIC's determination. See R.D. at 13. The record of the hearing shows that Verona had been in-


2 Enforcement Counsel for the FDIC took the position that the Presiding Officer lacked the authorityunder section 308.98(b)(2) and (6) of the FDIC Rules of Practice and Procedures, 12 C.F.R. § 308.938(b)(2) and (6), to require the parties to submit post-hearing briefs in a section 32 proceeding. While preserving its objection, the FDIC did submit post-hearing documents.
   Section 308.98(b)(7) provides that upon the request of the applicant afforded the hearing, the record shall remain open for five business days following the hearing for the parties to make additional submissions to the record, 12 C.F.R. § 308.98(b)(7). To the extent that the Presiding Officer's rulings are not inconsistent with the time limits and do not delay the proceedings, the Board concludes that the regulations allow the Presiding Officer discretion to request submissions, including memoranda, to aid his decisionmaking. The Presiding Officer's request for post-hearing submissions was, therefore, appropriate.
{{9-30-91 p.A-1634.3}}formed of the problems which provided the basis for the "troubled condition" determination and that the examiners had held meetings with Verona regarding those problems. Tr. at 356, 426.
   In analyzing the FDIC's denial of Cartier's Application, the Presiding Officer relied on the statute which permits disapproval where the competence, experience, character, or integrity of the individual indicates that it would not be in the best interest of the depositors of the bank or of the public to permit the individual to serve. 12 U.S.C. § 1831(i). The Presiding Officer noted that there was evidence that Mr. Cartier had always paid loan obligations to institutions other than Verona and * * * when due and was well qualified, based on his background and experience, to assume the position sought. However, notwithstanding the favorable evidence, the Presiding Officer concluded that the Applicant's failure to make the payments on his loans over a period of years at Verona and * * * was sufficient reason for the FDIC to determine that approval of the section 32 application was not in the best interests of the Bank or the public.

III. DISCUSSION

   Based upon a thorough review of the testimony, the documentary evidence, the briefs and arguments of the parties, and the Presiding Officer's Recommended Decision, the Board agrees with the Presiding Officer's findings of fact and conclusions of law. The Board, therefore, adopts the Presiding Officer's Recommended Decision.

A. Applicant's Pre-hearing Motion

   The Applicant placed in the record an oral Motion to Dismiss arguing that the FDIC's denial of his Application was invalid. The motion was denied by the Presiding Officer. Specifically, the Applicant contended: (1) the FDIC's determination that the Bank was in a "troubled condition" failed to meet the statutory requirements of 12 U.S.C. § 1831(i)(a) since the FDIC's determination was not based on the completed examination report dated March 31, 1989, but rather on findings generated during the examination still in progress in March 1990; (2) the FDIC failed to comply with the requirements of 12 C.F.R. § 303.14(4)(iv) in notifying Verona it was a "troubled institution" and thus the Bank was not subject to the requirements of section 1831(i). Additionally, the Applicant contended that Verona was not actually in a "troubled condition" on March 22, 1990.

   [.1] Section 32 of the FDI Act provides that one basis for the designation of a "troubled institution" is determined by the agency on the basis of the institution's "most recent report of condition or report of examination or inspection." 12 U.S.C. § 1831(i)(a). The implementing regulations at section 303.14(a)(4) of the FDIC Rules of Practice and Procedures, define "troubled condition" as any insured nonmember bank that: (i) has been assigned a composite rating by the FDIC of 4 or 5 under the Uniform Financial Institutions Rating System...; (ii) is subject to a proceeding initiated by the FDIC for termination or suspension of deposit insurance; (iii) is subject to a written agreement which requires action to improve or maintain the safety and soundness of the institution...; or (iv) is informed in writing by the regional director...based on a visitation, examination, or report of condition, that it has been designated a "troubled institution" for the purposes of § 303.14. 12 C.F.R. § 303.14(a)(4)(i)-(iv) (emphasis added).
   Courts have held that the regulations of an administrative agency should be construed in a manner consistent with the purpose of the regulation and the underlying statute. Crandon v. United States, 110 S.Ct. 997, 1001 (1990). See also Automotive Parts Rebuilders Ass'n v. E.P.A., 720 F.2d 142, 159, n. 66 (D.C. Cir. 1983). Any conceivable discrepancy between section 32 and section 303.14(a)(4)(iv) is eliminated by comparing that section with the plain language of section 32 and its legislative history. First of all, Congress instructed the Federal banking agencies to prescribe regulations defining the term "troubled condition." 12 U.S.C. § 1831(i)(f). Further, the Conference Report accompanying the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Public Law No. 101-73, 103 Stat. 183 ("FIRREA"), indicates that the conferees intended that the agencies, in developing such regulations, not define the term "troubled" "too narrowly." Joint Explanatory Statement of the Committee of Conference, H.R. Conf. Rep. No. 222, 101st Cong., 1st Sess. 442 (1989).
   In light of the broad statutory mandate {{9-30-91 p.A-1634.4}}and the authority to define "troubled condition" specifically delegated to the agency, the words "most recent" can reasonably be interpreted to indicate an intent on the part of the drafters of section 32 to require only that the agency use the most current, accurate information available to establish whether an institution is in a troubled condition. The purpose of section 32 would not be served by a delay in the designation of an institution as troubled until an examination is completed and the report is in final form, particularly when the problems of an institution become apparent early on in an examination. Moreover, the more severe the problems are at an institution, the longer the examination process is likely to require and the greater the need for remedial steps. The pendency of the examination process should not create a window of opportunity for the installation of an unqualified or otherwise undesirable individual as an officer of an institution in a troubled financial condition.
   It is a well-established principle that an agency's interpretation of the statute it administers is entitled to great deference. Consolidated Edison v. U.S. Dept. of Energy, 870 F.2d 694, 696 (D.C. Cir. 1989); Bailey v. Federal Intermediate Credit Bank, 788 F.2d 498, 499–500 (8th Cir. 1986). "Troubled condition" is broadly defined in section 303.14(a)(4)(iv), and the FDIC interprets "most recent report" as used in section 32 to include an examination in progress. It would be contrary to Congress' stated intent to hold that the FDIC lacks jurisdiction in the present case because the March 22, 1990, letter informing Verona of its troubled status was based on information obtained that very month during a regularly scheduled examination, rather than on information in the last completed FDIC report of examination.

   [.2] The Applicant also contends that the FDIC lacked authority to deny his Application because it did not comply with its own rules and regulations under 12 C.F.R. § 303.14(a)(4)(iv) in that the March 22, 1990 letter did not specifically identity the "visitation, examination, or report of condition" on which Verona's troubled status determination was based. However, section 303.14(a) (4)(iv) does not require that notification to the troubled institution state whether it is a "visitation, examination, or report of condition" which forms the basis for the designation, but requires only that the regional director make his or her determination based on a "visitation, examination, or report of condition." Nor is the regional director required to specifically refer to subsection 303.14(a)(4)(iv) when informing the institution of its troubled condition.
   Section 303.14(a)(4)(iv) requires only that the regional director designate the institution to be "a
troubled institution' for purposes of § 303.14," and the FDIC complied with this regulation in its March 22, 1990, letter by stating,

       Implementing regulations for Section 32 are Section 303.14 and Subpart L of Part 308 of the Federal Deposit Insurance Corporation's Rules and Regulations. Your bank is considered to be in a "troubled condition."
Furthermore, the Board agrees with the reasoning of the Presiding Officer that no evidence presented at the hearing indicated that Verona was prejudiced by the absence of specific reference to the examination or that representatives of Verona were not fully aware of the problems which brought about the determination. The Board also affirms the Presiding Officer's conclusion that the FDIC was justified in finding Verona to be a troubled institution. See R.D. at 7–8.

B. Denial of the Application

   The record appears to indicate that with the exception of the Applicant's unfavorable history of loan defaults with Verona and its former affiliate, * * *, Cartier has honored his loan obligations to other institutions and that he is otherwise qualified for the position sought at Verona. The Presiding Officer considered this evidence favorable to Cartier but decided, nevertheless, that the loan defaults at Verona and * * * were sufficient reasons for the FDIC to find that he did not possess the competence, experience, character, and integrity to permit him to serve at Verona.
   The evidence establishes that the Applicant obtained a loan from Verona on November 13, 1984, for $50,000.00. On February 28, 1990, the FDIC's Report of Examination of Verona revealed that this unsecured loan was outstanding in the amount of $35,000 and was classified
Loss." The last renewal of the loan had occurred on October 15, 1986, and was evidenced by a Business Note indicating that Cartier was to pay Verona quarterly payments of $2,500.00 during 1987, $4,000.00 during 1988, and $6,000.00 during 1989, {{9-30-91 p.A-1634.5}}with the final payment due October 15, 1989. See FDIC Exhibit No. 10.
   Cartier also borrowed $50,000.00 from * * * on an unsecured promissory note dated August 13, 1983. No principal reductions on this note occurred prior to September 30, 1986, when it was renewed with an established payout schedule over the next three years. In the Report of Supervisory Activity from the Office of the Comptroller of the Currency on * * *, dated November 21, 1988, this loan was classified as "Loss" in the amount of $47,500.00. See FDIC Exhibit No. 3.
   The Applicant sold his interest in the * * * ("Holding Company"), which owned both Verona and * * *, back to the Holding Company through a stock redemption agreement on April 15, 1986, for cash and a promissory note.3 The Applicant also sold stock of his own accounting firm to the Holding Company, again for cash and a promissory note. Apparently, the Applicant relied on a provision in these notes which permitted the Holding Company to make payments to Verona and * * * rather than to himself directly. Late and erratic payments made on the Verona Note were primarily (all except one $2,500.00 payment) made by the Holding Company.4 On March 23, 1990, Cartier acquired a controlling interest in Verona through foreclosure on Verona stock, pledged as collateral for the Holding Company's obligations to him related to the sale of the stock in his accounting firm and his interest in the Holding Company.
   Considerable testimony was given during the hearing regarding whether Cartier's failure to pay the notes at Verona and * * * stemmed from an inability to pay, based on an illiquid asset position, or a refusal to pay the loans because the Holding Company had not performed on its obligations to him. Tr. 73, 155, 241-7, 394, 398, 451, 458-9. On the sale of his stock back to the Holding Company, the Applicant relied on income projections made by * * *, the majority shareholder and chairman of the Holding Company. The evidence also indicated, however, that the Holding Company was in a strained financial position at the time Cartier extended credit to it. Moreover, Cartier had an outstanding relationship with * * *, who had been an accounting firm partner with the Applicant for thirteen years prior to the resale of stock to the Holding Company. As a knowledgeable businessman, Cartier assumed the risk of the Holding Company's nonpayment to him or, on his behalf, to Verona and * * *. Applicant was at all times the primary obligor on his debts to Verona and * * * and remained fully liable for their repayment. To the extent that he failed to do so, the Regional Director determined that this failure reflected on the Applicant's lack of integrity.
   Regardless of whether the Applicant refused or was unable to pay these particular loans, the Presiding Officer noted the fact that they became delinquent.5 Moreover, after receiving the Notice of Disapproval to serve as a senior official at Verona, the Applicant did pay the Verona loan in full, which suggests that he had the capacity to repay the loan at an earlier date, but chose not to, until it appeared that the debt interfered with his desire to become chief executive officer of Verona. The Regional Director determined that this fact reflected on the Applicant's character and integrity since the legal obligation to perform on the loan should have been fulfilled prior to and without the coercive effect of the FDIC's disapproval.

   [.3] In light of this record, the Board agrees with the Presiding Officer's analysis and his conclusion that the Applicant's failure to meet his payment obligations on the loans at Verona and * * * constitutes a sufficient basis for the FDIC to deny his application to serve as a director and chief executive officer of Verona for failure to meet the statutory requirement of competence, character, experience, or integrity.


3 The Applicant was part owner of Verona between 1980 and September 1983, during which time the Holding Company purchased Verona, and the Applicant's interest was converted into an interest in the Holding Company. The Applicant's sale of stock on April 15, 1986, involved a redemption of Holding Company stock, with the resulting debt being secured by stock of Verona and

4 The FDIC's 1990 Report of Examination also showed that the Verona Note was 935 days delinquent as calculated by Verona and placed on nonaccrual status since October 2, 1987.

5 The evidence of record also presents the appearance that the Applicant may have gained an undue advantage resulting from his financial relationship to a Holding Company with control of two sister depository institutions and his relationship with * * * in obtaining renewals of his loan obligations, delaying his loan repayments, and ultimately selling his stock interest back to the Holding Company at a profit.
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IV. CONCLUSION

   Section 32 is one regulatory means by which the FDIC maintains and promotes the safety and soundness of insured depository institutions. Section 32 allows the FDIC to screen individuals who seek to manage the affairs of particular institutions which have been newly chartered, have recently changed control, and/or are in a troubled condition. Senior executive positions at such institutions carry with them great fiduciary responsibility to the depositors and to the public. Therefore, an individual's competence, experience, character, or integrity is evaluated in relation to the particular institution involved, the specific position in which the Applicant seeks to be employed and any special needs of that institution.
   The Board does not necessarily find that the Petitioner lacks the business acumen of judgment necessary to serve as a director or senior executive officer of any depository institution. Nor does the Board find that the Applicant's loan defaults were necessarily due to malfeasance through a "refusal" to pay. However, in reviewing the record, the Board concludes that in this situation, Applicant's default on loans, together with the total lack of any acceptable justification for the nonpayment, reflects adversely on Cartier's character and integrity to serve as the chief executive officer of this troubled institution. Therefore, the Board agrees with the Recommended Decision of the Presiding Officer and concludes that the denial of Mr. Cartier's application under section 32 should be sustained.

ORDER

   The Board of Directors of the Federal Deposit Insurance Corporation, having considered the entire record in this proceeding, hereby adopts the recommendation of the Presiding Officer to deny the appeal of Daniel R. Cartier.
   ACCORDINGLY, IT IS HEREBY ORDERED THAT, the Notification of Addition of Director and/or Employment of Senior Executive Officer, submitted by Daniel R. Cartier and the Verona Exchange Bank on May 21, 1990, be and is hereby denied.
   IT IS FURTHER ORDERED, that the Executive Secretary, or his designee, is instructed to execute and serve copies of this Decision and Order on counsel for all parties, on the Presiding Officer, and on the Commissioner of Banks and Trust Companies for the State of Illinois.
   By direction of the Board of Directors.
   Dated at Washington, D.C., this 15th day of January, 1991.
/s/ Hoyle L. Robinson
Executive Secretary

RECOMMENDED DECISION

   Upon consideration of the record Petitioners (1) have failed to show that Federal Deposit Insurance Corporation's ("FDIC") finding that Verona Exchange Bank ("Bank") was a troubled institution or that FDIC's letter of disapproval did not meet the requirements of the statute and regulations, and (2) have failed to show that Cartier possesses the competence, experience, character and integrity to permit him to serve as director or senior executive officer of the Bank.
   Notice of Disapproval of Notification of Addition of a Director and/or Employment of a Senior Executive Officer continued until further notice.
   John F. Bonner III for Petitioners
   John S. Stevens and Donna K. Meredith for Federal Deposit Insurance Corporation

INTRODUCTION

   Pursuant to authority vested in the Executive Secretary by section 308.98 of the FDIC's rules and regulations I was designated as presiding officer by letter dated September 10, 1990, to conduct the hearing in this proceeding and to submit a recommendation to the Board of Directors of the FDIC. The hearing was held in Minneapolis, Minnesota on September 26 and 27, 1990.
   This matter arose when on May 21, 1990 the Verona Exchange Bank Verona Illinois ("Verona" or "Petitioner") and Daniel R. Cartier ("Cartier" or "Petitioner") submitted to FDIC a Notification of Addition of a Director or Employment of a Senior Executive Officer under 12 USC 1831i. After consideration the Regional Director of the Chicago Regional Office on June 19, 1990 issued a Notice of Disapproval based on unfavorable findings under that statute.
   Verona and Cartier thereafter requested reconsideration of FDIC's Notice of Disapproval which was denied and they subsequently requested a hearing.

BACKGROUND

   Prior to September 30, 1983 Cartier was {{9-30-91 p.A-1634.7}}part owner of Verona at which time it was purchased by * * *, of which Cartier was also part owner. The holding company also owed the * * *.
   On August 13, 1983 Cartier borrowed $50,000 from Grand Ridge on an unsecured promissory note. There were no principal reductions on the note prior to September 30, 1986 when it was renewed, unsecured, with a payout schedule over the next 3 years.
   On November 13, 1984 Cartier borrowed $50,000 from Verona on an unsecured basis to repay indebtednesses to other banks. No principal reductions were made on that note prior to November 5, 1986 when it was renewed for the 7th time (as indicated on the face of the note) on an unsecured basis with quarterly payments to be made over the next 3 years. Cartier contends it had not been renewed 7 times. (Cartier Exh 3, Tr. 444-50)
   On April 15, 1986 Cartier sold his interest in the holding company back to the holding company through a stock redemption agreement. He was to be paid $43,225 cash and receive a promissory note for $363,132 payable over approximately 5 years. Cartier's accounting firm also sold its stock to the holding company for $6775 cash and a promissory note for $56,868, the note later being signed over to Cartier. Cartier also received a pledge agreement whereby he acquired a second lien on the stock of the * * * and the Verona Exchange Bank.
   Cartier's note at Verona was placed on non-accrual status on November 2, 1987 and classified loss on the 1988 and 1990 FDIC examination reports. Irregular payments were made to Verona by the holding company pursuant to provisions of the note which permitted the holding company to make payments to Verona and * * * instead of Cartier.
   Cartier's note at * * * was classified loss in the report of the Comptroller of the Currency of November 21, 1988. The bank charged off $47,500 or the original $50,000 on December 31, 1988.
   On March 15, 1990 Cartier and the holding company entered into an agreement whereby Cartier would acquire the Verona stock be agreeing on a deed in lieu of foreclosure. FDIC was advised of this action.
   At a meeting on March 16, 1990, while Verona was being examined, between Mr. Watkins, the examiner in charge, the president of Verona and Cartier, the examiner informed them that FDIC considered the bank to be in a troubled condition.
   On March 22, 1990 FDIC Regional Director sent a letter to Verona advising it that the bank was considered to be in a troubled condition and that written notification was required for any addition to the board of directors (FDIC Exh 17)
   On May 7, 1990 FDIC received Notification of Addition of a Director or Employment of a Senior Executive Officer in incomplete form and on May 21, 1990 FDIC received another substantially complete notification from Verona (FDIC Exh 1).
   On June 19, 1990 FDIC notified Verona and Cartier that the notification was disapproved based upon unfavorable findings with respect to the statutory factors. (FDIC Exh 8 and 9). Reconsideration was denied and this hearing ensued.

PETITIONERS' MOTION TO DISMISS

   In the opening statement counsel for petitioners verbally placed in the record a motion to dismiss based on the position that FDIC did not comply with the requirements of the fourth sub-part of 12 CFR 303.14 (4)(iv); specifically, the FDIC did not give Verona notification that it had been designated a troubled bank as is required by the regulations. (Tr. 5–10) That motion was denied subsequent to the hearing.

STATUTE AND REGULATIONS
INVOLVED

   The issues in the case involve a federal statute and certain FDIC regulations.
   The statute involved is 12 USC 1831(i) which provides, in part:

    (a) An insured depository institution... shall notify the appropriate Federal banking agency of the proposed addition of any individual to the board of directors or the employment of any individual as a senior executive officer of such institution...at least 30 days before such addition or employment becomes effective, if the insured depository institution ...
   (1) has been chartered less than 2 years in the case of an insured depository institution;
   (2) has undergone a change in control within the preceding 2 years; or
{{9-30-91 p.A-1634.8}}
   (3) is not in compliance with the minimum capital requirement applicable to such institution or is otherwise in a troubled condition, as determined by such agency on the basis of such institution's...most recent report of condition or report of examination or inspection.
       (b) An insured depository institution... may not add any individual to the board of directors or employ any individual as a senior executive officer if the appropriate Federal banking agency issues a notice of disapproval of such addition or employment before the end of the 30-day period beginning on the date the agency receives notice of the proposed action pursuant to subsection (a).
   One involved regulation is 12 CFR 303.14(4)(iv) which provides in pertinent part:
   (4) The term "troubled condition" means any insured nonmember bank that:
       (iv) Is informed in writing by the regional director (Division of Supervision) of the region in which the institution is located ("appropriate regional director") or his or her designee, based on a visitation, examination, report of condition, that it has been designated a "troubled institution" for the purposes of § 303.14.
   Another involved regulation is 12 CFR 308.95 which provides:
   The Board or its designee may issue a notice of disapproval with respect to a notice submitted by a state nonmember bank pursuant to section 32 of the Act, 12 USC 1831i, where:
       (a) The competence, experience, character, or integrity of the individual with respect to whom such notice is submitted indicates that it would not be in the best interests of the depositors of the state nonmember bank to permit the individual to be employed by or associated with such bank; or
       (b) The competence, experience, character, or integrity of the individual with respect to whom such notice is submitted indicates that it would not be in the best interests of the public to permit the individual to be employed by, or associated with, the state nonmember bank.

PETITIONERS CONTENTION THAT
FDIC DID NOT COMPLY WITH
THE STATUTE AND REGULATIONS

   Petitioners contend that there are three reasons why FDIC's disapproval of Cartier is invalid.
   First, they allege that Verona was not a troubled bank as contemplated under 12 USC 1831(i). Petitioners contend that the statute limits its application to those circumstance only where FDIC has properly made the determination that a bank was in a troubled condition based upon an up-to-date written report of condition or a report of examination of condition. Petitioners state that FDIC did not make its determination based upon any report of condition, examination report or inspection report. Rather, Petitioners contend that the determination was made upon the sole basis of a review examiners conversation with a field examiner who had not yet completed his examination. Therefore, states Petitioners, the determination, as a matter of law, could not subject the bank to the notice requirements of the statute so FDIC lacked authority to deny Verona's addition to the board.
   Second, Petitioners argue that FDIC's letter to the bank was not legally sufficient to bring the bank within the definition of "troubled condition" since it does not expressly state that the determination was based on a visitation, examinations or report of condition, which is required by § 303.14(4)(iv).
   Petitioners argue that while the March 22, 1990 letter from the Regional Director contains elements of the first 3 requirements, it completely failed to satisfy the fourth requirement, pointing out that it did not indicate which violation, examination or report of condition its determination was based on. They point out that it did not even purport to be based on any visitation, examination or report of condition, but that it resulted solely from one telephone call with a bank examiner who had not completed his examination. Petitioners contend this is insufficient to satisfy the requirements of § 303.14(4) (iv), stating that the statute and regulations are applicable only where FDIC has made the "troubled bank" determination strictly in accordance therewith.
   Third, counsel for Cartier goes to great length to point out even if FDIC had made a legal determination that Verona was a troubled bank and had given proper notice to Verona, that Cartier is an outstanding busi- {{9-30-91 p.A-1634.9}}nessman, has held and continues to hold very responsible positions at several other banks; that he has always paid his debts on time except here where the examiner agreed that Cartier's financial statement did not indicate there were funds available; that at all times the holding company had the right to service the two notes by applying sums owed to Cartier; and that he processes the competence, experience, character and integrity to permit him to hold the positions of director and senior executive officer at Verona.
   FDIC argues that its determination that Verona was in a troubled condition meets the requirements of the statue and regulations. It points out that its examiner advised Cartier and * * * President of Verona, at a meeting on March 16, 1990 that the FDIC Regional Office considered Verona to be in a troubled condition and that a letter to that effect was sent to the bank on March 22, 1990. (FDIC Exh 8 and 9).
   FDIC also contends that Cartier's foreclosure on Verona stock represented a change of control requiring notice by the bank.

ISSUES

   Thus, there appears to be primarily two issues to be decided; (1) has FDIC complied with the intent of Congress and the regulations in its finding that Verona was a troubled bank and its subsequent notice of Verona, and if so (2) does Cartier possess the competence, experience, character and integrity to permit him to be employed and associated with Verona.

DISCUSSION

   The books are replate with decisions regarding a government agency's authority and discretion in discharging its reponsibilities.
   The U.S. Supreme Court has long held that when faced with a question of statutory construction, it gives great deference to the interpretation given the statute by the agency charged with its administration. U.S. v. Moore (1878) 24 L.Ed. 588. Its interpretation of its own regulations implementing a statute should be accepted absent some obvious repugnance to the statute Anderson Bros. v. Valencia (1981) 68 L.Ed. 2d 783. Its interpretation will be upheld unless it is irrational or unreasonable. CBS v F.C.C. (1981) 69 L.Ed. 2d
   The purpose of creating FDIC was to stabilize and to promote the stability of banks. In discharging that responsibility the courts have been prone to give FDIC, and other regulators of financial institutions, wide discretion which will not be disturbed except where it is arbitrary, capricious or contrary to law. First Nat'l. Bk. v. Smith (5th Cir 1980) 610 F2d 1258. In re Franklin Nat'l. Bk. (E.D. NY 1974) 381 F.S. 1390. Goos Nat'l Bk. v. C. of C. (5th Cir 1978) 573 F2d 889.
   Where, as here, the statute is new, the courts have said "[d]eference is particularly appropriate where the administration practice at stake involves a contemporaneous construction of a statute by the men charged with the responsibility of setting its machinery in motion, of making its part work efficiently and smoothly while they are yet untried and new...The construction of a statute by those charged with its execution should be followed unless there are compelling indications that it is wrong..." FDIC v. Sumner Fin. Corp. (5th Cir. 1971) 451 F2d 898.

EVIDENCE

   Testimony by witnesses and exhibits submitted were directed toward the issues mentioned above, whether FDIC has complied with the law in its findings and notice to Verona and whether Cartier possesses the competence, experience, character and integrity to permit him to occupy the positions sought. The FDIC presented two witnesses and Petitioners presented two witnesses in addition to Cartier.

FDIC WITNESSES

   Stanley J. Hermie testified for FDIC. Hermie is a review examiner in the Chicago Regional Office of FDIC and has been employed by FDIC for fifteen years.
   Hermie testified that he is responsible for reviewing reports of examination for the region in which Verona is located, that he had reviewed the examinations and other documents relating to that bank and the notification filed by Verona on May 21, 1990. He testified regarding the 935 day delinquency of Cartier's loan at Verona (Tr. 99); that there was evidence indicating that Cartier refused to make payments because the holding company had failed in its obligations to him (Tr. 73, FDIC Exh 5); that FDIC documents indicated that Cartier was also financially unable to pay (Tr. 155, 291); and {{9-30-91 p.A-1634.10}}Cartier's handling of his loans at Verona and * * * relate to his character and integrity. (Tr. 102) Hermie Testified that satisfactory performance at other banks was considered by FDIC but that Cartier's handling of the Verona and * * * loans was sufficient to find unfavorably on Cartier's notification. (Tr. 208)
   Hermie pointed out that the holding company had diverted its cash to entities within the control group, rather than service its bank stock note (Tr. 305), but that Cartier's loan to the holding company without knowledge of that company's financial condition and without control over its cash flow would inpute Cartier's competence. (Tr. 315). He testified that the fact Cartier paid the Verona loan in full after foreclosing on the stock factored into his opinion as to whether Cartier should be disapproved. (Tr. 351).
   He further testified that FDIC's letter of notification to Verona dated March 22, 1990 (FDIC Exh 17) was based on FDIC files on Verona, on reports of condition on Verona and it was sent after Examiner Watkins informed Assistant Regional Director Webster about conditions at the bank. (Tr. 530-4)
   James C. Watkins also testified for FDIC. Watkins is an examiner for FDIC, having been employed for over nine years.
   Watkins testified that while examining Verona Cartier came to the bank where they met and discussed the change of control notice requirement, the notice regarding the addition of a director or senior executive officer, and that FDIC considered Verona to be a troubled institution (Tr. 356,426).
   He atestified regarding the Verona and * * * loans stating Cartier explained his lack of performance was to "place leverage on the holding company to make payment to him" (Tr. 394, 429); that his Assistant Regional Director had told him that he considered the bank to be in a troubled condition based on the prior examination report and the preliminary findings at that time (TR. 426) and that on March 16, 1990 he informed the President of Verona and possibly other directors "that the Chicago Regional Office considers the institution to be in a troubled condition.;; (Tr. 496).
   Regarding the condition of the bank, Watkins testified that FDIC was concerned back in the 1989 examination as well as the 1990 examination about conditions such as the bank's capital, its earnings, dividend payouts, out-of-territory loans, insider loans and insufficient loan reserves (Tr. 505-9).

VERONA AND CARTER WITNESSES

   Gerald R. Knudson, has been President of Verona since May 1988 and testified that Verona's earnings in 1988 were $192,000 (1.02 of assets) of which it paid out 85 to 90 percent in dividends, and in 1989 earnings were approximately $174,000 with less than 85 percent paid out. He testified the bank now has a camel rating of 3, with some portions being rated a 2; that at the examination 16.5 percent of capital was classified and as of August 31, it was down to 4.25 percent of capital. Knudson testitied that he had talked with Cartier about his loan from time to time and Cartier indicated that he did not have the funds for payment "as a result of not receiving his payments from the holding company." (TR. 241-7)
   K. Patrick Kruchtan, Clear Lake, Minnesota, also testified for Cartier. Mr. Kruchten has had a consulting company since 1970 with clients of 50 to 60 banks, and is a shareholder and Chairman of the Board at Chicago State Bank, a director at Staples State Bank and at Liberty Savings, St. Cloud, Minnesota. He has known Cartier for 6 or 7 years, has worked with him for mutual clients and has high regard for Cartier's abilities. He testified that Cartier had helped him with a banking problem which he could not do himself, that he had "pleaded with him to come on the board of the bank so I would have his advise on a regular basis" (Tr. 259). Kruchten testified that Cartier has an outstanding reputation, has great insight in financial matters and it was basically on Cartier's recommendation that he decided to proceed with the purchase of a problem bank.
   Daniel R. Cartier testified on his own behalf. Cartier is 43 years old, holds a bachelors degree in accounting and is a CPA. He worked for the * * * firm from 1973 to September 1985. Since that date he has had his own CPA firm in St. Paul, Minnesota. His services consist of planning and preparation of tax returns for banks and holding companies, preparing annual reports, change of control applications and he works on bank acquisitions. In addition Cartier now holds, after foreclosure, controlling interest in the * * * , 15 percent of the * * * holding company of * * * and is a director at * * *. He is also Vice president at * * *.
   Cartier testified regarding his loans at * * * {{9-30-91 p.A-1634.11}}and Verona, stating that his assets were illiquid, the holding company failed to make payments to him on its obligations and he was therefore unable to make the payments as provided in the notes. (Tr. 451) Cartier denied that he told Examiner Watkins that he refused to make payment because the holding company had failed to pay him. (Tr. 458-9) He said the term "refuse to pay" may have been mentioned in the context of the holding company's refusal to pay him but he never at any time refused his obligations to the banks. (Tr. 458) He testified of meeting with Examiner Watkins regarding his loans and that he agreed to pay them as soon as possible.
   He also testified that Thomas Benshop, former owner of the holding company, prepared a debt service schedule (Cartier Exh 4) on the holding company in 1986, which indicated the company could service that $400,000 indebtedness to him and his CPA firm, and in October 1989 when it became clear that the payments were not going to be made he began the initial steps to protect his interests through foreclosure. (Tr. 454)

FDIC FINDINGS AND NOTICE THAT
VERONA WAS A TROUBLED BANK

   Under 12 USC 1831(i) an insured nonmember bank must notify FDIC at least 30 days before adding a director or employing a senior executive officer if the bank is in a troubled condition, as determined by FDIC on the most recent report of condition, report of examination or inspection of the bank.
   Under 12 CFR 303.14(4) the term "troubled bank" is stated to mean a bank that is (1) informed in writing (2) by the Regional Director or designee (3) that it is designated a troubled bank (4) based on a visitation, examination or report of condition.
   The Regional Director's letter of March 22, 1990 advises Verona that it "is considered to be in a
troubled condition'" but does not specify the visitation or examination on which that determination was based. Examiners had been in the bank and were examining it as of February 28, 1990 and they had spoken with both the Verona President and Cartier advising them of FDIC's determination. (Tr. 354-7, FDIC Exh 2) Based on the testimony and other evidence it appears that FDIC was justified in finding that Verona was a troubled institution. But petitioners argued that FDIC did not follow the law and regulations in giving notice to Verona. The Regional Director's letter should have included the visitation, examination or report of condition on which the "troubled condition" determination was made, however I do not believe that omission to be crucial to the validity of the notice given to the bank. It was not necessary, as suggested by Petitioners, that the examination be completed before a determination is made. It is often determined long before the completion of an examination, that a bank has great problems and, indeed, many banks have been found to be insolvent and closed by regulators before the completion of an examination.
   It appears that the purpose of the regulation that notice be in writing is to insure that notice is in fact given and the requirement of specifying the visitation or examination is to make certain that the bank is aware of the basis on which FDIC made its determination.
   There was no testimony or other evidence presented at the hearing indicating that Verona was prejudiced by omission of reference to the examination or that it was not fully aware of its problems which brought about the determination. The record clearly showed that Verona had been aware of its problems as shown in the examinations and that the examiners had held meetings with Verona regarding those problems. An agency's action will not be upset because of harmless error. McCulloch Interstate Gos v. FPC (10th Cir 1976) 536 F2d 910. County of Del Norte v. U.S. (9th Cir 1984) 732 F2d 1462.
   Therefore it appears that the FDIC notice to Verona complies with the intention of the statute and the regulations and is a legally valid notice to Verona.

FDIC'S DETERMINATION THAT
CARTIER SHOULD
NOT SERVE AS DIRECTOR OR SENIOR
EXECUTIVE OFFICER

   As stated above 12 USC 1831(i) provides that a director or senior executive office may be disapproved if the competence, experience, character or integrity of the individual indicates that it would not be in the best interest of the depositors of the bank or of the public to permit the individual to serve.
   At the hearing there was considerable testimony presented to the effect that Cartier had been active for many years as a prac- {{9-30-91 p.A-1634.12}}ticing certified public accountant and as an officer and director of banks.
   As noted above, Kenneth Kruchten, who acts as consultant to 50 to 60 banks, is Chairman of the Board at Chicago State Bank, and director at other banks, testified on behalf of Cartier (Tr. 254). For promptness and reliability he feels Cartier stands above others and for competency he ranks Cartier at the "very top of the list." (Tr. 257)
   Cartier presented copies of twelve letters of recommendation to the Chicago Regional Director, all from vary substantial citizens. (Cartier Exh 5) Without exception those letters all contain glowing comments regarding Cartier's integrity, competence, experience, character and leadership. Those comments are based on services rendered by Cartier, working relationships and partnerships with him.
   In the absence of issues surrounding Cartier's loans at Verona and * * * the testimony and other evidence presented at the hearing indicate that Cartier is well qualified to assume the positions sought at Verona. So are those activities at Verona and * * * such that he should be denied the opportunity of serving?
   FDIC exhibit No. 10 contains a copy of Cartier's note to Verona dated October 15, 1986 for $50,000. The face of the note indicates that it is renewal number seven. There was considerable testimony as to whether Cartier's failure to pay the Verona and * * * loans was due solely because he was in an illiquid position or also because of his refusal in light of the holding company's failure to make its payments to him. Cartier insisted the only reason Verona and * * * were not paid was because of his illiquidity. (Tr. 459) He denied that he had "refused" to make payment. (Tr. 458) Mr. Knudson, President of Verona, understood that Cartier did not have the financial ability to make payment as a result of not receiving payment from the holding company, although the company had received in excess of $100,000 annually from the bank. He pointed out when the bank filed suit "in accordance with our loan policy" Cartier then arranged to pay off the entire principal and interest with no loss to the bank. (Tr. 247-50)
   The record indicates that although these loans were unsecured Cartier had depended upon payments from the holding company with which to pay them and while the holding company received regular dividends from the bank much of its cash was diverted to * * *'s owner, and other control group entities leaving no funds to pay Cartier. (Tr. 305, FDIC Exh 14) Evidence was produced indicating that Cartier has always paid other lending obligations to other institutions when due or prior to their due dates. (Tr. 463, 471, Cartier Exh 5)
   In support of FDIC's disapproval (FDIC Exh 8), Examiner Hermie took the position that "satisfactory performance at other banks is considered but the fact that the loans at Verona and * * * were handled in such a poor manner was sufficient to find unfavorably on Mr. Cartier's notification." (Tr. 208) He contended that when there is no secondary repayment source available it relates to the person's competence in handling his fiances. (Tr. 210) He testified that Cartier informed him at the meeting at the bank that his lack of performance "was a refusal to pay to try and place leverage on the holding company" (Tr. 394, 398), and that regardless of whether it was a refusal or just inability to pay, it "impacted unfavorably on his competence, integrity and character." (Tr. 155-6) He contends that "with the * * * loan being charged off in 1988 and the Verona loan being classified loss, it was sufficient to deny the notification." (Tr. 183)
   In a letter of recommendation on behalf of Cartier dated July 18, 1990 from Robert H. Preston, Attorney, Minnetonka, Minnesota to Regional Director Masa (Cartier Exh 2) Mr. Preston, in addition to highly complimentary remarks regarding Cartier, states that he is aware of the Verona debt and "part on my advise, Mr. Cartier has not paid the Verona Exchange Bank...to encourage and leverage the former owner of the bank to honor his obligations...to Mr. Cartier ..." Mr. Preston goes on to state: "to the best of may knowledge, and in my experience but for the obligations owed to the Verona Exchange Bank and its sister bank... Mr. Cartier has in all other cases paid his obligations according to their terms and better."
   Cartier was well represented by counsel who argued that when a debtor is unable to pay merely because his assets are illiquid it does not adversely reflect on his integrity, competence, experience or character, pointing out that Cartier has always honored every prior lending obligation and that * * * has given Cartier a commitment for a loan for {{9-30-91 p.A-1634.13}}$857,500 in order to satisfy the debt owed that bank by the holding company and secured by the Verona stock. (FDIC Exh 1)
   Cartier's financial statement dated March 31, 1990 shows a net worth of over $700,000 (FDIC Exh 1) but regardless of whether there was a refusal to pay the loans or Cartier just did not have the funds available for payment, it is obvious that he was having great difficulty in servicing them. Other loans at other institutions during this time were current in payment of principal and interest.
   There is a crisis today in our banking and thrift institutions and laws have been enacted to enable, and indeed require, the regulators to deal with those problems. In discharging those responsibilities the law gives the regulators discretion so long as their decisions are not arbitrary, capricious or contrary to law.
   In this instance the Chicago Regional office determined that Verona was in a trouble condition, it informed Verona of that finding, and based primarily on Cartier's unfavorable lending relationships with Verona and * * * it made a finding that Cartier should not be permitted to serve as director or senior executive officer. At the hearing FDIC established a prima facie case supporting its disapproval of Cartier, shifting the burden of proof to Cartier and Verona or proving Cartier's qualifications under the law for holding the positions sought.
   In spite of Petitioners' impressive evidence regarding Cartier's abilities and reputation, in view of the record regarding his failure to service his loans over a period of years at Verona and * * *, I believe the action taken by the Regional Office comes within the guidelines laid down by the courts.
   It is therefore recommended that the notice of disapproval be continued.
   November 30, 1990
/s/ Myers N. Fisher
Presiding Officer

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