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FDIC Enforcement Decisions and Orders |
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FDIC orders termination of institution's insured status because its continued operation in an unsafe and unsound condition, without realistic prospects for significant improvement in its capital condition, poses an undue risk to the insurance fund.
(This order was terminated by order of the FDIC, dated 8-30-91; see ¶9002.)
[.1] Practice and Procedure""Exceptions to Recommended Decision"" Oral Argument
[.2] Loans""Classification""Examiner's Opinion
[.3] Practice and Procedure""Evidence""Examiner's Opinion
[.4] Officers and Directors""Guaranty""Value
{{10-31-91 p.A-1734}}
In the Matter of
This is a proceeding initiated by the Federal Deposit Insurance Corporation ("FDIC") to terminate the insured status of Anderson County Bank, Clinton, Tennessee (the "Respondent," the "Bank," or the "Insured Institution") pursuant to section 8(a) of the Federal Deposit Insurance Act (the "FDI Act"), 18 U.S.C. 1818(a). Following examination of the Respondent as of July 24, 1989 ("Examination I"), the FDIC made findings of unsafe and unsound practices and/ or condition and on March 29, 1990, issued its notice of Intention to Terminate Insured Status, Findings, and Order Setting Hearing ("Notice"). Thereafter, the FDIC and the Commissioner of Financial Institutions for the State of Tennessee examined the Respondent as of the close of business July 27, 1990 ("Examination II").
On February 15, 1991, FDIC Enforcement Counsel filed a Request to Reopen Record, to which Respondent filed a Response on February 27, 1991. FDIC Enforcement Counsel requests that the Board include in the record in this case FDIC Exhibits Nos. 16 and 17.
Respondent submitted a Motion for Post-
[.1] The grant of a request for post-hearing oral argument is an extraordinary matter within the discretion of the Board. 12 C.F.R. § 308.17. The Board has previously discussed those circumstances in which it would grant such a request. See, In the Matter of Harold Hoffman, 1 P-H FDIC Enf. Dec.¶ 5140; FDIC Docket No. FDIC-85-42b, 2 P-H FDIC Enf. Dec. ¶5062. After considering the Respondent's request and the opposition of the FDIC, the Board finds that none of those circumstances arises in the instant case. The factual and legal arguments are fully set forth in the parties' submissions. Thus, oral argument will not aid the Board in this matter, and the Respondent will not be prejudiced by the lack of oral argument. Accordingly, the Board denies Respondent's request for oral argument.
The ALJ recommends that the Notice be dismissed and that the Board "exercise its discretion and not order termination of federal deposit insurance . . . ." R. D. at 23. He reaches this recommendation in spite of his findings that "the Bank is in an unsafe and unsound condition within the meaning of 12 C.F.R. § 325.3,. . .given its material and significant financial weaknesses." Id. The ALJ is apparently able to reconcile the contradiction between this finding and his ultimate conclusion by finding that there is a sufficient probability that the Bank's capital will increase to an acceptable level, [in the near future], so as not to pose an undue threat to the insurance fund. R. D. at 16, 23.
The Respondent is a community bank founded in 1987. It has approximately $25.5 million in assets. With one exception, it has never had positive earnings.3 Tr. at 4950. As a result of Examination I, Respondent was found to have serious capital problems. Its primary capital to Part 325 total assets was a negative 1.44 percent and its adjusted primary capital to adjusted Part 325 total assets was a negative 1.82 percent. R. D. at 2; Tr. at 1316; FDIC Ex. No. 1. The examination also found significant problems concerning the high level of classified assets, liquidity, and management. Id. These findings led to issuance of the Notice.
B. The FDIC's Contentions
The FDIC argues that although certain im-
C. The Respondent's Contentions
Respondent recognizes that at the time of Examination I "there were a number of serious problems with the bank." Resp. Br. at 2. However, it argues that by Examination II, "the Bank had shown such willingness to address its problems and such a dramatic improvement in its management and financial condition, that a termination of its insured status is not warranted." Id. at 3. The Bank asserts that the equipment collateral and Guaranty provide a sufficient reduction in the risk of repayment of the * * * credit to warrant the classification of "Substandard" as opposed to "Doubtful." It contends that it is now a viable institution which does not present a risk to the insurance fund.
There is little disagreement between the parties regarding the condition of the Bank at the time of Examination I. The Board adopts the ALJ's Findings of Fact Nos. 4, 5, 7, 9, 11, 13, and 15, related to the 1989 Examination. The parties agree that improvement in the condition of the Bank was made during the year between examinations. They diverge, however, over the extent of the improvement and the ultimate issue of whether the Insured Institution is presently viable.
A. Deference Due FDIC Examiners
[.2] The ALJ recognized that, under Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986), an ALJ "may not substitute his own subjective judgment for that of the examiner, but may set aside the classification if it is without objective factual basis or is shown to be arbitrary and capricious." R. D. at 10, citing 783 F.2d at 1583. He also notes that the examiner's classifications are "predictive judgments ... which should be dispositive of the issue which is at the core of a bank's viabilitythe strength or weakness of its assets." R. D. at 11. Additionally, he states that while "the facts upon which an examiner bases his judgment can be tested for accuracy," the loan classification "stands or falls on whether it is `outside the zone of reasonableness.'" Id. However, the ALJ fails to follow his own description of the requirements of Sunshine.
[.3] In order to correctly classify the * * * credits, the examiners had to determine whether there was a risk of nonpayment, and where, on the relative scale of classification nomenclature, that risk fell. Contrary to the opinion of the ALJ, expertise in litigation, bankruptcy, or appraisal of specialized government surplus property is not necessary.9 The examiners did not have to assess whether there was a 20%, a 50%, or a 90% chance of success in the litigation over the collateral or over the escrow fund. It is sufficient that experience and common sense have shown that litigation is risky, no matter how strong the litigant's claim. Another component of the risk of nonpayment is the likelihood of sale of the collateral. In evaluating this element, the examiners had to consider whether the collateral was readily available for sale, whether a sale had special problems, e.g. contamination, and whether there is a general or a limited market for the collateral, etc. The examiners did not have to determine if the collateral had a value of $500,000, $750,000 or $1 million, or whether litigation over title to the collateral would be resolved in 3 years, 4 years, or 5 years. It is enough to determine risk of nonpayment to know that it is not now available, that availability is contingent upon resolution of litigation, that sale of the property has special problems, and that the market for such property has special problems, and that the market for such property is limited. All of these are facts found in the record. Finally, in assessing the risk of nonpayment, the examiners had to evaluate the availability of repayment from another source. In making this evaluation they had to deter-
B. The Guaranty
Under the pressure of a capital call from the State of Tennessee, on December 12, 1989, a group of the Bank's directors and their relatives entered into the Guaranty with the Bank to guarantee receipt by the Bank of $1,000,000 in payments on the * * * debt by September 30, 1990. The express purpose for the Guaranty was the guarantors' "desire to prevent failure of the Bank and any personal liability on their part attendant to such failure." In the event the $1,000,000 was not paid by September 30, 1990, the obligation of the guarantors converts to an unsecured term promissory note with the principal payable in ten yearly installments commencing September 30, 1991. The unsecured promissory note incorporates by reference all of the terms and conditions of the Guaranty. Both the Guaranty and the promissory note contain conditions whereby the guarantors would be released from liability if:
[.4] Several factors dilute the effectiveness of this Guaranty. First, by the admission of the guarantors, it was entered into with the intent to protect themselves, rather than the Bank. Second, the guarantors quite candidly admit they do not expect to pay the Bank pursuant to the Guaranty, but rather from the proceeds of the sale of the collateral. Third, because the guarantors control the Bank's board of directors, the guarantors are able to change its terms, essentially at will. Fourth, and most significant, the conditions quoted above are designed to provide the guarantors with an insurance policy against directors and officers liability in the event they lose control of the Bank, by placing federal regulators in the untenable position of having to choose between having the Bank paid off on the credit, or relinquishing as yet unknown claims against the guarantors. The Board will not allow a respondent
[.5] Ordinarily, the Board determines whether to terminate the insured status of an institution based upon evidence presented up to and including a hearing. Such determination is, of necessity, based upon a "snapshot" in time. Any other way of proceeding would be administratively unfeasible. The Board finds that the evidence presented at the hearing in this matter is sufficient to conclude that termination of the Bank's insured status is appropriate. As discussed above, however, the parties agreed to the submission of additional exhibits following the hearing, which the Board has taken into consideration. In addition, because the record contained information notifying the Board that a hearing related to resolution of ownership of the escrow account was to be held during the Board's deliberation, and because of the nature of the ALJ's recommendation, the Board on its own motion requested and received in evidence post-hearing submissions of both parties. 12 C.F.R. § 308.05. This evidence provides additional support for the Board's conclusion.
Thus, the most current evidence obviates the premise of the ALJ's recommendation. The insurance fund can not be at risk for three to five years awaiting the outcome of this complex litigation. The evidence supports the ALJ's findings that the Bank's capital to asset ratio at 3.29 is still too low for the Insured Institution; the Bank has negative earnings; the classified assets are too high; the Bank still suffers from significant problems; and the Bank has material and significant financial weakness.15 R. D. at 15 and 16. The Board adopts these findings. The Board also concurs with the conclusion of the ALJ that the Bank is in an unsafe or unsound condition within the meaning of 12 C.F.R. § 325.3. R. D. at 15, 23. Further, the Board concurs with the ALJ's conclu-
IT IS HEREBY ORDERED, that the insured status of Anderson County Bank, Clinton, Tennessee, is terminated effective as of the close of business sixty days from the date of this Order.
_____, 1991
There may be included in such notice, with the written approval of the FDIC, any additional information or advice the Bank may deem desirable.
In the Matter of
The Respondent is a community bank (about $25.5 million in assets) located in a small town northwest of Knoxville, Tennessee. The Bank was formed in 1987.
Counsel for the FDIC argues that "in challenging the authority of the FDIC to terminate the insurance of a financial institution for purposes of protecting the insurance fund, the burden of proof lies with the challenging party when the validity of the action is questioned." (FDIC Brief 31) They further state that "the burden (of proof) is on the Bank to show that the FDIC's action is arbitrary and capricious, and that the FDIC is without a reasonable basis for finding the Bank is engaged in unsafe or unsound conduct." (Ibid.)
This case principally concerns how to treat the various aspects of the * * * credit, the first of which is its classification as doubtful. A second, but related, question concerns the likelihood that the credit will be paid, including recovery of previously taken losses. Accepting the doubtful classification
Counsel for the FDIC argue that the examiners' doubtful classification and their conclusions that any collection from collateral is too problematical to be a factor must be given deferential consideration, citing Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986).
Of particular concern in this matter is the change in facts since the 1990 examination. Specifically, the * * * credit was found doubtful in part because the individuals who had guaranteed it were also on the * * * credit and it was thought that as a result they did not collectively have sufficient cash flow to honor the guarantee. Since the hearing, the building has been sold and the * * * note has been paid in full, which not only takes that credit off of the Bank's books but also relieves the * * * of that additional obligation. Further, since the examination, the guarantee has been converted to a promissory note.
1. The Respondent, Anderson County Bank, Clinton, Tennessee (herein the Respondent or the Bank), is an insured depository institution as the term is defined in Section 3(c) of the Federal Deposit Insurance Act, 12 U.S.C. § 1811, et seq., and is a corporation existing and doing business under the laws of the State of Tennessee (Joint Stipulation).
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Last Updated 6/6/2003 | legal@fdic.gov |