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4000 - Advisory Opinions

Sale of Partnership Interest in Subsidiary Owned Indirectly by Bank to New Company Formed Primarily by Minority of Directors of Bank Does Not Violate § 23A or Regulation O

FDIC-91-69 August 6, 1991 Gerald J. Gervino, Senior Attorney

Our New York Regional Office has forwarded to us your request for an opinion as to whether a proposed transaction involving your bank, certain partnerships it now owns, and a new company ("Company") to be formed primarily by a minority of the current directors of your bank is subject to regulation under § 23A of the Federal Reserve Act, 12 U.S.C. § 371c ("§ 23A''), or Regulation O of the Board of Governors of the Federal Reserve System, 12 CFR 215, as made applicable to insured nonmember banks by § 337.3 of our regulations, 12 CFR § 337.3 ("Regulation O''). At your request, we have also spoken with Mr. ***, your bank's outside counsel.

The transaction involves in excess of $7 million of real estate in the form of unsold shares of co-operative real estate units. This property was acquired through foreclosure on loans made by your bank. These shares are held by a partnership ("Realty Partnership") which is indirectly owned by your bank through two intermediary partnerships.

In order to reduce transfer taxes, this transaction is structured as a sale of a partnership interest to the company, rather than as a loan to the company. The company will receive a partnership interest in the Realty Partnership which owns the shares. It will contribute cash, receiving in return, a 49% or less interest in the proceeds of sale of the shares, as well as proposed management fees on litigation of the shares. You indicate that you feel the transaction might be viewed as a loan rather than a sale.

The Company will become general partner in the realty partnership. You point out that neither the directors who are partners of the company, nor the Company, will control your bank for purposes of § 23A. Further, your bank will not have a majority of common directors with the company. The Realty Partnership will continue to be deemed a subsidiary of your bank, since your bank will continue to own over 25% of its outstanding equity. Since it is a nonbank subsidiary, it will not be considered an affiliate for purposes of § 23A.

Whether viewed as a sale of a partnership interest to directors or a loan to the Company, we concur with your opinion that the restrictions of § 23A would not appear to apply to the transaction which you have outlined.

Your letter indicates that in your opinion the sale of the partnership interest to the bank's directors is tantamount to a loan and that the transaction is therefore subject to Regulation O. I have spoken with Pam LeCren in this respect. While we agree that any future extensions of credit made by the bank to the partnership are probably subject to Regulation O, the initial transfer of the partnership interest does not itself appear to give rise to an extension of credit as that term is defined in Regulation O. This transfer may or may not be subject to criticism for supervisory reasons. It does not appear to involve a violation of Regulation O.

The above opinion is based upon our understanding of the facts and circumstances which you have provided to us. If additional facts should become evident, the circumstances should change, or the applicable law or regulation were modified, the conclusions we have given may become incorrect.

If we have not completely answered your inquiry or you have any further questions, please write or call us.

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