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FDIC Enforcement Decisions and Orders |
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Civil Money Penalty assessed against principal shareholder and director and another director as a result of extensions of credit exceeding Bank's lending limitation and without full disclosure of Respondents' interests to Board of Directors. (This decision has been affirmed by the United States Court of Appeals, 958 F. 2d 1526.)
[.1] Practice and ProcedureEvidenceHearsay
[.2] Civil Money PenaltiesAmount of PenaltyPayment of Legal Fees
[.3] DirectorsDuties and ResponsibilitiesConflict of Interest
[.4] Civil Money PenaltiesAmount of PenaltyPersonal Gain
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In the Matter of
This proceeding was initiated on March 13, 1989, pursuant to the FDIC's Notice of Assessment of Civil Money Penalties, Findings of Fact and Conclusions of Law, Order To Pay, and Notice of Hearing ("CMP Notice") directed to Respondents Lowe and Spivey as well as the other directors of the International City Bank, Warner Robins, Georgia ("ICB"). The CMP Notice sought to impose civil money penalties of $75,000 and $7500 on Lowe and Spivey, respectively for violations of the lending limit, creditworthiness, and prior approval requirements of 12 U.S.C. §375b, as incorporated by 12 U.S.C. §1828(j), and Regulation O, 12 C.F.R. §215. Prior to the hearing, the FDIC settled with all of the Respondents except Lowe and Spivey.
I. BACKGROUND
Most of the facts in this case are not in dispute.1 At all pertinent times, Lowe was a director and principal shareholder of ICB and Spivey was a director. Beginning in January 1985, ICB extended loans in greater and greater amounts to Lowe or to entities in which Lowe had an interest. By March 1987, the loans to Lowe and his interests totalled $980,986 and exceeded ICB's lending limits by $480,067. In February 1988, the amount of outstanding credit to Lowe and his interests was $516,987. Extensions of credit or renewals of credit to Lowe and his interests occurred on practically a monthly basis.
II. THE ALJ'S DECISION
1. Regulatory Violations
The ALJ then turned to the calculation of the penalty. He noted the Congressional mandate in 12 U.S.C. 1828(j)(3)(B) that the penalty calculations take into account five factors: "the size of the financial resources and good faith of the. . .person charged, the gravity of the violation, the history of previous violations, and such other factors as justice may require" (R.D. 7). He also observed that the FDIC had adopted the "Interagency Policy Regarding the Assessment of Civil Money Penalties by the Federal Financial Regulatory Agencies" ("Interagency Policy"), 45 Fed. Reg. 59423 (Sept. 9, 1980), which emphasized the deterrent nature of the penalties and listed thirteen elements relevant to be considered in determining whether to initiate a civil penalty proceeding.
2. Calculation of Penalty
The ALJ's calculation of Spivey's penalty was based on two factors. He observed that the record evidence almost completely supported a reduction in Spivey's penalty (R.D. 15). He also concluded that "Spivey's violations will be appropriately punished by requiring him to pay legal fees in connection with this proceeding" (R.D. 14). Accordingly, the ALJ declined to assess a penalty against Spivey.
III. DISCUSSION
As stated above, the Board affirms the ALJ's Recommended Decision as modified herein. The Board largely agrees with the ALJ's factual findings; the disagreement is with his judgment as to the significance of those facts. The Board believes the violations at issue to be more serious than the ALJ found them to be, largely because the Board finds merit in Enforcement Counsel's exceptions relating to the calculation of the penalties for Lowe and Spivey.
[.1] Both parties have filed Exceptions to the Recommended Decision. Enforcement Counsel has taken exception to a number of findings of fact, most of which involve the ALJ's findings that the evidence did not disclose the occurrence of certain violations and a $50,000 loss on the Quintax II loan. Except as discussed below relating to the issue of whether Lowe's violations demonstrated a breach of fiduciary duty or reckless action, we affirm all of the ALJ's disputed factual findings for the reasons stated in the Recommended Decision.4
[.2] Both parties raise concerns with the ALJ's discussion of the significance of the fact that a party will incur legal fees in determining an appropriate CMP. The ALJ determined that the unavoidable costs of legal representation should be considered in fixing the CMP because legal fees bear on the statutory factor of the parties' financial resources available to pay the CMP (R.D. 8, 30). Because the ALJ found that Spivey's violations of Regulation O were not very significant, he determined that Spivey was adequately punished by having to pay legal fees and that he would not assess an additional CMP (R.D. 15). Enforcement Counsel objects that legal fees should not be considered at all. Respondent Spivey expresses concern that the ALJ's decision is unclear because he cannot determine whether or not he has been exonerated.
[.3] In the Board's view, the fiduciary duty of loyalty which bank directors owe their institution requires a bank director to investigate the possibility of a conflict of interest and be completely candid with his colleagues. When a bank director finds himself in a situation involving a conflict of interest, as here, it is incumbent on him to make complete disclosure in order to affirmatively avoid a conflict, even if such disclosure seems superfluous.
C. Gravity of the Violations
1. Assessing a Penalty for "technical
Respondents object to the assessment of a CMP for "technical violations" of Regulation O which do not involve some form of negligence or breach of fiduciary duty. This issue primarily affects Spivey. The ALJ refused to accept this contention (R.D. 2), and the Board agrees with that refusal.
2. Personal benefit from the Quintax
Enforcement Counsel disputes the ALJ's conclusion that Lowe received no personal benefit from the Quintax and Dublin Bond extensions of credit. The ALJ found that because Lowe did not directly receive any form of gain from these loans, he received no personal benefit (R.D. 1213). Enforce-
{{4-1-90 p.A-1537}} ment Counsel did not challenge the underlying factual finding, and the Board agrees with the ALJ that Lowe did not receive any direct personal gain.
[.4] Thus, the Board concludes that in considering the gravity of the violations, it is appropriate to consider: (1) whether the extension of credit was received directly or indirectly by a particular director or his interests, (2) whether that credit contained preferential terms or unfavorable features, and (3) whether the recipient of the credit somehow profited personally from the credit or the bank sustained a loss as a result of the credit (bearing in mind that certain preferential terms in a loan, such as a below-market interest rate, may represent a profit to the recipient).6In this case, it is clear that Lowe or his interests received a direct or indirect economic benefit, that the loans contained preferential terms, and that those facts weigh on the gravity of his violations.
D. History of Prior ViolationsThe
Enforcement Counsel takes exception to the ALJ's finding that there was no history of continuous Regulation O violations at ICB. The ALJ found (R.D. 14; F.F. No. 122 at R.D. 2728) that there had been previous violations. He concluded, however, that those violations were different from those at issue in this case (R.D. 14). Accordingly, he gave them little weight in calculating the penalty. However, the ALJ found and Respondents do not dispute that Regulation O violations had been cited in four out of five previous examinations. Thus, the Board finds that four out of the five previous examinations revealed Regulation O violations, including three prior approval and one lending limit violations. The Board concludes that these prior violations of Regulation O in four out of five prior examinations constitute a history of prior violations.
E. Other Matters as Justice RequiresThe Contention that the Terms "Unfavorable Features" are Unenforceably Vague
[.5] The Respondents allege that the terms "unfavorable features", as used to describe aspects of extensions of credit to directors and principal shareholders which violate Regulation O, 12 C.F.R. §215.4(a)(2), are unenforceably vague and violate the Due Process Clause of the Fifth Amendment of the United States Constitution. As set forth above, the ALJ identified three features of the Quintax loans which he found to be unfavorable: (1) they were unsecured, (2) they had out of state endorsers, and (3) Quintax had a negative net worth at the time of the loans (R.D. 67). The Respondents do not object to these findings of fact but complain that it is impossible for bank directors to ascertain prior to approving the loans which features might be deemed unfavorable because the language is allegedly so vague.
IV. CALCULATION OF THE PENALTY
Pursuant to 12 U.S.C. §1823(j) and 12 C.F.R. §215.11, the maximum possible penalty which could be assessed is $481,000 based on a possible $1000 per day penalty for 466 days of lending limit violations, thirteen prior approval violations at $1000 per violation, and two creditworthiness violations at $1000 per violation. The FDIC proposed an actual penalty of $75,000 for Lowe and $7500 for Spivey. $50,000 of the $75,000 penalty for Lowe reflected the alleged $50,000 loss to ICB from the Quintax II loan. The ALJ reduced the penalty for Lowe to $13,150 and declined to assess any penalty on Spivey. As noted above, the Board finds that the record reflects more serious violations than the ALJ recognized. Accordingly, the Board has independently considered the entire record in this proceeding in light of the statutory factors to determine the appropriate penalties in this case.
ORDER TO PAY CIVIL MONEY
The Board of Directors of the FDIC, having considered the entire record in this proceeding, including the briefs filed on behalf of Respondents and the FDIC, the ALJ's Recommended Decision and Order dated December 20, 1989, and exceptions to the Recommended Decision and Order filed by each party, and after taking into consideration the appropriateness of the penalties with respect to the financial resources and good faith of the Respondents, the gravity of the violations, the history of previous violations, and such other matters as justice may require, makes the following findings. The Board finds on the record before it that Respondents violated section 22(h) of the Federal Reserve Act (12 U.S.C. §375b) and sections 215.4(a)-(c) of the Regulation O promulgated thereunder (12 C.F.R. §215.4(a)-(c)).
/s/ Hoyle L. Robinson
In the Matter of
A Notice of Assessment of Civil Penalty was issued by the Federal Deposit Insurance Corporation ("FDIC" or "Petitioner") on March 13, 1989, alleging that R. Wayne Lowe and Jimmy A. Spivey ("Respondents")1violated certain prohibitions and requirements of Section 22(h) of the Federal Reserve Act ("Act"), 12 U.S.C. § 375b, and Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. §215. Respondents' Answers demurred as to the propriety of the penalties sought by Petitioner.
I. Alleged Violations
Petitioner is empowered to assess civil money penalties for certain violations of the Act committed by insured banks which are not members of the Federal Reserve System. 12 U.S.C. § 1828(j). In this proceeding, Petitioner alleges that Respondents have violated three different provisions of Section 22(h) of the Act and Regulation O: (1) the aggregate lending limit prohibitions, (2) the prior approval requirements and (3) the creditworthiness requirements.
A. Lending Limits
Section 22(h) of the Act, as implemented by Regulation O, establishes a limit on the aggregate extensions of credit which a nonmember insured bank may make to a principal shareholder and to such a person's related interests. 12 C.F.R. § 215.4(c). It is uncontested that International City Bank ("Bank") is a nonmember insured bank, that Lowe is a principal shareholder of the Bank and that Peachbelt Properties, Inc. ("Peachbelt") and Prime Time Properties, Inc. ("PTP") are his related interests. An "extension of credit" takes place (1) when a loan is made or renewed to a principal shareholder or his related interests or (2) when a loan is made, the proceeds of which are "used for the tangible economic benefit of, or are transferred to," a principal shareholder or to one of his related interests. 12 C.F.R. § 215.3. If the proceeds of a loan are transferred to a principal shareholder or his related interest, it is immaterial to the existence of an "extension of credit" that a third party may benefit from the loan. See Docket No. FDIC-85-2k, [1986] F.D.I.C. Enf. Dec. (P-H) ¶5063.
B. Prior Approval
Section 22(h) and Regulation O also prohibit an extension of credit greater than five percent of a bank's unimpaired capital and surplus to a principal shareholder and his related interests, unless the extension is approved in advance by a vote of a majority of the bank's board of directors in which the principal shareholder did not participate. 12 U.S.C. § 375b(2); 12 C.F.R. § 215.4(b).
C. Creditworthiness
Finally, Section 22(h) and Regulation O prohibit an extension of credit to the related interest of a principal shareholder where that extension involves "unfavorable features." 12 U.S.C. § 375b(3); 12 C.F.R. § 215.4(a). Petitioner alleges that the two indirect extensions of credit to Colonial (i.e., the Quintax I and II loans) violate this prohibition. To support this allegation, Petitioner requests two findings of fact which identify four purportedly unfavorable features shared by the Quintax loans.
II. Amount of the Penalty
Because Respondents committed violations of the Federal Reserve Act which render them liable for the payment of civil money penalties, the size of those penalties must be determined. Petitioner contends that Lowe should pay a penalty of $75,000, while Spivey should be assessed a penalty of $7,500. The maximum penalty which may be imposed in this case is limited by statute to $1,000 for each day during which a violation continued. 12 U.S.C. § 18(j)(3)(A). In determining the actual penalty to be imposed, Congress has mandated that:
A. Size of Financial Resources
It is uncontested that each Respondent has a personal net worth sufficient to enable him to pay the penalty that Petitioner has proposed. It is further uncontested that Petitioner has taken the size of Respondents' financial resources into account in assessing the penalties here at issue.
B. Good Faith
Petitioner has proposed two findings of fact relating to the issue of Respondents' good faith, both of which embody facts considered by the FDIC in setting the penalty proposed in this case. The requested finding that Lowe failed to advise the Bank's Board of Directors that the proceeds of the Quintax loans would be transferred to Colonial is both immaterial and misleading since Lowe was unaware at the time the Board voted on these loans that such transfers would take place.14Similarly, the other requested finding that Lowe did not advise the Board that the proceeds of an $185,000 bond issue by the Residential Care Facilities of the Elderly Authority of Dublin, Georgia ("Dublin bond issue") would be transferred to PTP does not establish a bad faith attempt at concealment since the Bank was and remained in possession of formal printed offering materials which disclosed the intended transfer of proceeds.15There is no evidence which would suggest that these documents were not available to the Board at the time it voted to acquire the Dublin bond issue. For the foregoing reasons, I decline to make either of the findings sought by Petitioner on this issue and adopt Respondents' proposed finding that Lowe was not shown to have acted deceptively or to conceal material facts from the Bank's Board of Directors.
C. Gravity of the Violation
Subsumed under the rubric of this statutory factor are Petitioner's requests for findings of fact setting forth the duration of the lending limit violations found herein, reiterating the fact that all or a portion of the proceeds of certain loans to third parties were transferred to Lowe's related interests and stating that the Bank lost money due to the violations found herein. It is uncontested that Petitioner considered these matters in arriving at the amount of the penalties proposed herein.
D. History of Prior Violations
Petitioner and Respondents have requested conflicting findings concerning this factor. In general, a history of violations establishes whether and to what extent a bank's management has been placed on notice concerning the kind of violations which are the basis for a civil money penalty action. Accordingly, earlier violations should be of the same type as those which underlie the penalty action. Moreover, historical violations need not have been personal to the individual charged, since that person may properly be charged with receipt of any notice given to the bank.
E. Other Matters As Justice May Require
Petitioner has requested three findings which fall within this category. All deal with the magnitude of Respondents' lending limit violations, and all will be adopted.
F. Analysis
Review of the five statutory factors, together with the regulatory considerations embodied in the Interagency Policy, requires the finding that there is an overwhelming amount of evidence in support of a reduction in the size of Spivey's penalty and virtually nothing in the record which would support leaving it at the level proposed by the FDIC. Upon consideration of the record as a whole, I find that Spivey's violations will be appropriately punished by requiring him to pay his legal fees in connection with this proceeding. No further penalty can be justified by rational analysis or supported by substantial evidence.
1. At all times relevant to this proceeding, the Bank was a commercial bank organized and existing under the laws of Georgia, having its principal place of business in Warner Robins, Georgia.
1. The Bank is subject to the Federal Deposit Insurance Act, 12 U.S.C. §§ 1811-1831d, the FDIC Rules and Regulations, 12 C.F.R. Ch. III, and the laws of Georgia.
After taking into account the appropriateness of the penalty with respect to the financial resources of each Respondent, the good faith of each Respondent, the gravity of each Respondent's violations, the history of previous violations in which each Respondent has been involved and such other matters as justice may require, it is:
/s/ Steven M. Charno |
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Last Updated 6/6/2003 | legal@fdic.gov |