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{{4-1-90 p.A-1458}} Civil money penalty not assessed and removal not ordered. Loans made to chairman of the board and principal shareholder and to his related interests violated lending limitations. FDIC concluded that sanctions were inappropriate because, among other things, proceedings had already continued for more than 3 years, Respondent was no longer involved in banking, and Respondent had already paid a substantial civil money penalty for similar violations at an affiliated bank.
[.1] Regulation OGeneral ProhibitionsApproval by Board of Directors
[.2] Regulation OLending LimitationsUnsecured Loans
[.3] Regulation OLending LimitationsInstallment Consumer Paper
[.4] Regulation OLending LimitationStatutory Exceptions Strictly Construed
[.5] Regulation ODefensesRecovery of Charged Off Loan
[.6] Regulation OLoans to DirectorsApproved by Board of Directors
[.7] Civil Money PenaltiesAmount of PenaltyStatutory Standard
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In the Matter of I. Procedural History
The Federal Deposit Insurance Corporation ("FDIC") initiated this removal and prohibition action against * * * ("Respondent") on April 1, 1985, pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(e), and Part 308 of the FDIC Rules of Practice and Procedure ("FDIC Rules"), 12 C.F.R. Part 308, by issuing a Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Notice of Intention to Remove"). 12 U.S.C. §1818(e)(1) and (4). II. Discussion
At all relevant times, Respondent served as Chairman of the Bank's board of directors and was its principal shareholder, owning 72.95 percent of the common stock of the Bank's parent company. R.D. at 6.6 The Bank was, at all times relevant to this proceeding, an insured state nonmember bank subject to the FDI Act, 12 U.S.C. §§1811-31d, the FDIC Rules and Regulations, 12 C.F.R. Chapter III, and the laws of the State of * * * R.D. at 5. All of the violations of law and regulation which are the subject of these actions pertain to various loans and other extensions of credit made by the Bank to, or for the benefit of, Respondent and/or his related interests during the period between 1982 and 1984. For ease of reference, these transactions were identified during the hearing and discussed in the Recommended Decision under the following names:
[.1] A. Section 22(h) and Regulation O. B. Section 23A. Section 23A of the Act limits the amount of credit a bank may extend to a single affiliate to ten percent of the bank's capital and surplus, 12 U.S.C. §371c(a)(1)(A), and limits a bank's aggregate loans to affiliates to twenty percent of capital and surplus, 12 U.S.C. §371c(a)(1)(B). These lending limits apply to the extent that "the proceeds of the transactions are used for the benefit of, or are transferred to," an affiliate. 12 U.S.C. §371c(a)(2). C. Respondent's Liability. Liability for lending limitation violations of Regulation O and section 23A is ascertained by straightforward mathematical calculations. The Recommended Decision contains a tabular summary (the "Tabular Summary") which shows the aggregate amounts of the loans made by the Bank to Respondent and/or his related interests, as well as the Bank's total capital and surplus at the time each extension of credit was originated and as of September 28, 1984, the date of the relevant FDIC Examination Report (FDIC Ex. 1) (the "Examination Report") (which amount is reflected in the table as the "final balance"). R.D. at 3641.
[.2] Although the summary correctly reflects the amounts and dates of a majority of the extensions of credit (see exceptions, below), the ALJ erred in his use of the 25 percent limitation rather than the 15 percent limitation on lending for Regulation O purposes. Specifically, since none of the extensions of credit were secured by "readily marketable collateral," which would raise the limitation to a maximum of 25 percent (most of the collateral pledged was real estate, which fails to satisfy this test), the ALJ erred in not using the 15 percent lending limitation applicable to unsecured extensions of credit in calculating whether Respondent violated Regulation O. The Board therefore modifies the findings and conclusions in the Recommended Decision in all relevant respects to reflect the correct 15 percent limitation for the Regulation O violations.10
[.3] As to applicability of Regulation O, Respondent contended that certain exceptions to section 84 of the National Bank Act, 12 U.S.C. §84 (which contains the applicable lending limitations, as further implemented in Regulation O), were applicable, which serve to raise the lending limitation ceiling to levels in excess of the standard 15 percent on extensions of credit secured by certain types of collateral or arising out of certain situations. In particular, Respondent claimed that subsections (c)(8)(A) and (c)(8)(B) of 12 U.S.C. §84 apply here. Subsection (c)(8)(A) states: loans or extensions of credit arising from the discount of negotiable or non-negotiable installment consumer paper which carries a full recourse endorsement or unconditional guarantee by the person transferring the paper shall be subject to a maximum limitation equal to 25 per centum of such capital and surplus, notwithstanding the collateral requirements set forth in ... this section. Subsection (c)(8)(B) states:
The only evidence presented which supports Respondent's contention that the notes were sold at a discount and with recourse (and thus potentially subject to the exceptions contained in section 84) is Respondent's only testimony and that of Mr. * * *, a close confidant of Respondent who was also an official of the Bank and an employee of Respondent and/or his affiliates for over 20 years. Tr. at 1308-09, 1320. While Mr. * * * stated that he was the officer responsible for buying the consumer paper for a period of time at a discount of approximately 35 percent, the Board finds that the testimony is not consistent with the Bank's records and the Examination Report. While there is some conflicting evidence, we believe the greater weight of the credible evidence in this proceeding indicates that the Bank established and maintained a dealer reserve incident to the purchase of the * * * Consumer Paper. See Tr. at 1310-13; see also, testimony of * * * (former cashier of the Bank, who testified as to the dealer reserves established with respect to the * * * Consumer Paper), Tr. at 821-22. This evidence is inconsistent with the purchase of the paper at a "discount".
[.4] The Board also finds that Respondent has failed to show that subsection (c)(8)(B) is applicable here. While acknowledging that there was no "written certification" present, the ALJ apparently concluded that the Bank need only comply with one of the two requirements of this subsection in order to "be covered in substance by the statutory exception." R.D. at 34. The Board rejects this conclusion and holds that the statutory exceptions contained in section 84 must be strictly construed. Moreover, the Board finds that Respondent failed to satisfy even the first requirement of the exception; that is, he failed to show that the Bank's files or the knowledge of its officers concerning the financial condition of each maker of such consumer paper was reasonably adequate to permit the Bank to rely primarily upon each maker individually for repayment of such loan.
[.5] Respondent admits that * * * is an affiliate and related interest. He contents, however, that since the * * * was intended to serve, in part, as the headquarters of the Bank and since the extensions of credit to * * * did not result in a loss to the Bank, that the extensions of credit to * * * should not be aggregated with other extensions of credit to Respondent for Regulation O purposes. The ALJ apparently adopted this rationale, finding that since the amounts "charged off during the FDIC's criticism were subsequently entirely recovered through the sale of the building", and "in consideration of all that has occurred in this case, to find the * * * loan a violation of law would fly in the face of any notion of fairness, or negate any sense of a realistic view of events" and thus concluded that the violations should not be deemed "cognizable" for purposes of Regulation O. R.D. at 44.11 The Board concludes that the ALJ's findings in this respect are in error. The fact 3. * * * and * * * The Board affirms the ALJ's findings that FDIC enforcement counsel failed to carry its burden of proof by a preponderance of the evidence with respect to extensions of credit to * * * and * * * and the affiliation of those companies to Respondent. R.D. at 17, 31. Particularly with respect to * * *, however, the Board notes that although it is of the opinion that the transaction most likely "was for the `benefit' or `tangible economic benefit' of Respondent", it concurs with the ALJ that FDIC enforcement counsel did not satisfy its burden of proof with respect thereto. 4. Direct Loans to Respondent. [.6] Section 215.4(b) of Regulation O, 12 C.F.R. §215.4(b), requires that bank insiders obtain prior approval of a majority of the bank's board of directors for each extension of credit that exceeds the higher of $25,000 or 5 percent of the bank's capital and unimpaired surplus, or any extension of credit which in the aggregate exceeds $500,000. A review of the record in the proceeding indicates that the Bank's records are clear that Respondent did not abstain from voting on his personal line of credit with the Bank and, by so doing, violated Regulation O. See R.D. at 45. Minutes of the board of directors of the Bank dated January 10, 1984, FDIC Ex. 13, clearly state that the motion with respect to Respondent's personal line of credit was initiated by President * * * and seconded by * * *. FDIC Ex. 13 at 12. The only evidence presented to refute that statement was the uncorroborated testimony of Respondent, which is instrinsically self-serving. The Board therefore modifies the ALJ's findings in this regard and holds that Respondent also violated Regulation O by failing to obtain the proper prior approval of the bank's board for extension of credit received in his personal capacity. III. Conclusion [.7] The record in this case clearly establishes multiple violations of law and regulation by Respondent over at least a seventeen month period of time. Section 18 (j)(4)(A) of the FDI Act authorizes the FDIC to impose a maximum civil money penalty of $1,000 per day for each day during which a violation of section 22(h) or 23A of the Act, or any unlawful regulation promulgated thereunder, continues. In determining the amount of the civil money penalty, section 18(j)(4)(B) requires that certain factors be considered by the FDIC. Specifically, the FDIC must "take into account the appropriateness of the penalty with respect to 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 matters as justice may require." 12 U.S.C. §18(j)(4)(B). Since the ALJ found no violations by Respondent in his Recommended Decision, he made no findings with respect to the factors set forth above. Therefore, the Board is faced with the decision either to remand the case for further findings on the amount of the penalty to be assessed against Respondent, a process which would prolong indefinitely a proceeding which already has lasted over three and a half years at considerable cost, or, in the interest of justice, decline to assess a penalty and put an end to the proceeding. Particularly in light of the recent decision in FDIC-85-87k, in which the Board assessed against Respondent a penalty of $1.2 million for similar violations at an affiliated bank, the Board has determined that the punitive nature and deterrent effect of the imposition of a civil money penalty against Respondent has already been satisfied. Thus, while finding substantial violations of law and regulation, the Board has determined, in light of the totality of the circumstances discussed herein, that the interests of justice are best served by the Board's exercise of its discretion by declining to remand this case for further proceedings and further declining to assess an additional penalty against Respondent in this proceeding.
[.8] With respect to the section 8(e)(1) removal proceeding, the ALJ again made no findings as to whether Respondent engaged or participated in unsafe or unsound banking practices or other practices in violation of section 8(e)(1) since he "assume[d] that
{{4-1-90 p.A-1465}}these are all tied to the specific loan transactions complained of" and thus did not need to be addressed independently of his determination with respect to violations of laws or regulations. In light of the Board's findings of section 23A and Regulation O violations herein, it is faced with two alternativeseither to remand the case for further proceedings on the removal issue or to dismiss the action without prejudice. The Board is cognizant of the fact that remanding this action and reopening the record herein may forestall a resolution of this matter for an additional year or more and involve substantial additional costs and resources. * * * Bank has been closed for over two years and, to the Board's knowledge, Respondent currently is not actively involved in banking. Thus, since Respondent currently does not appear to pose a present threat to any bank, or to the banking industry generally, the Board has determined not to remand the case for further proceedings on the section 8(e)(1) action, but rather to dismiss the action without prejudice. If circumstances change in the future and it is determined that Respondent poses a threat to the banking industry, an action can be initiated under section 8(e)(2), 12 U.S.C. §1818(e)(2), on the basis of the evidence in this proceeding and in FDIC-85-87k.
In the Matter of
In the Matter of INITIAL DECISION I. SUMMARY OF PROCEEDINGS
The Federal Deposit Insurance Corporation ("FDIC") initiated this removal and prohibition action against * * * ("Respondent") on April 1, 1985, pursuant to Section 8(e) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. §1818(e)) and Part 308 of the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308) by issuing a Notice of Intention to Remove from Office and to Prohibit from Further Participation ("Removal Notice") and an Order of Suspension from Office and Prohibition from Further Participation on that same date,
{{4-1-90 p.A-1466}}pursuant to Sections 8(e)(1) and (4) of the Act (12 U.S.C. §§1818(e)(1) and (4)). II. THE ALLEGATIONS
In the Removal Notice, the FDIC asserts that Mr. * * *, both individually and in his capacity as a director, chairman of the board and principal stockholder of the * * * Bank, * * * ("Bank"): (1) violated law, rules and regulations; (2) engaged or participated in unsafe or unsound practices in the Bank's operations; and (3) engaged in acts, omissions, or practices amounting to a breach of fiduciary duty. III. FINDINGS OF FACT
The gravamen of the charges concerns whether Mr. * * * violated, or caused the violations of Section 215.4(c) of Regulation O (12 C.F.R. §215.4(c)) by repeatedly permitting extensions of credit to be made to him and his related interests, as defined in Section 215.2(k) of Regulation O (12 C.F.R. §215(k)), which exceeded the Bank's aggregate lending limits imposed by Section 215.2(f) of Regulation O (12 C.F.R. §215.2(f)). In addition to the "Regulation O" charges, the pleading documents also accuse Mr. * * * of violations of Section 23A of the Federal Reserve Act (12 U.S.C. §371(c)), made applicable to State nonmember banks by Section 18(j)(1) of the Act (12 U.S.C. §1828(j)(1).
4. Throughout this proceeding, Mr. * * * vigorously denied that loans made by the Bank to * * *, Inc., were loans made to him or his related interests. In support of this defense, Mr. * * * subpoenaed Mr. * * *, who gave the following pertinent testimony: 5. Mr. * * *, along with a Mr. * * *, had been in a partnership enterprise named * * *, which owned and managed numerous residential rental properties (tr. 928, 932, 937, 964; FDICX 1, pp. 2-a-3-4). In 1982, the partnership encountered "some bad financial problems", and needed to borrow more money from * * * Bank (tr. 29). To accomplish this, according to the witness, it became necessary to reorganize the partnership into a corporate format (tr. 936-37, 964). 6. Accordingly, * * *, a * * * corporation, was chartered on September 16, 1982 (tr. 923-23; RX 14). Its incorporators were Messrs. * * * & * * * and their respective wives. A total amount of 200 shares of stock were authorized. One hundred (100) of these were Class "A" voting shares, 25 of which were issued to each of the four incorporators. One hundred (100) Class "B" non-voting shares were also issued and distributed in the same manner (RX 14). The witness * * * testified that, to his knowledge, he never physically received any of these shares (tr. 2627). 4 "This was sometime back, but I believe the stock certificates were held in the bank's collateral file or credit file, whichever it may have been" (tr. 78). While his report contains no copy, "[t]here was some indication of that in one of the files I looked at" (tr. 82). "To the best of my recollection, there was stock certificates that I saw somewhere that were presented to me, shown to me, or whatever, at some point during the examination. I am not sure that it was in the collateral file; I am not sure that it wasn't in the collateral file. But I do believe that I saw stock certificates" (tr. 241). "I repeat that I believe, to the best of my recollection, that I did see stock certificates and/or an agreement to the effect enough to convince myself that they actually existed" (tr. 243). "I believe in my opinion, they were issued, based on the evidence that I was given during the examination" (tr. 244). "To the best of my recollection, I remember either seeing the shares or an agreement of some type in the file, or that was presented to me during the exam, to substantiate this fact, further substantiate the fact" (tr. 253). Although the witness was "not sure", "I believe I saw stock certificates and/or an agreement to that effect" (tr. 253). "I believe I testified it was either in the file, or showed to me by Mr. * * * or some one during the examination" (tr. 391). 7. As he understood it, the purpose of incorporating the * * * was to permit the Bank to have control over its business transactions, so as to protect the collateral position of the Bank on loans to * * * (928, 936-37, 956, 964)5 A central figure in making these arrangements was the President of * * * Bank, Mr. * * * (tr. 928, 930, 936, 1123).6 8. The witness * * * testified that he believed the Bank controlled him under the new procedures through the Secretary of the * * * corporation (tr. 933, 942, 956, 964, 1112, 1124). The original Secretary was a Mr. * * *, who resigned on November 2, 1983 (RX 25), being thereafter succeeded by Mr. * * * (tr. 933, 942, 1125; RX 16).7 9. According to Mr. * * *, it was originally intended to control * * *, Inc., directly through the Bank. He believes that at some point this concept was shifted to control over * * * by using another corporate device, * * *, Inc., whose exact name the witness had some trouble remembering (tr. 927-29, 937, 940-41, 956, 964, 1114-15). 10. Following the formation of the * * * corporation, the witness * * *, although President, testified that he left the entire operation to Mr. * * * (tr. 933, 966-67, 1123, 1134). However, approximately a year later, with repayments to the Bank seriously in arrears, Mr. * * * was called upon "to bail the thing out" (tr. 933). For some reason, Mr. * * * was allowed to be released from the financial obligations, with Mr. * * * assuming primary responsibility (RX 19, 969-72). 11. After Mr. * * *'s exit, Mr. * * *, still President, testified that he heard nothing about * * *'s affairs for approximately another year, while financial matters continued to deteriorate (tr. 941, 1135). It is clear from his testimony that he felt he was "drowning" (tr. 957). 12. At this juncture, testified Mr. * * *, Respondent * * * paid a visit to him at his office on a Saturday morning, with an eye towards working out a realistic repayment plan. During this meeting, Mr. * * * reached a "moral decision", admitting to Mr. * * * that he had been making "kick-back" payments to the Bank's President, Mr. * * *, in connection with certain real estate "deals", overdraft charges, appraisals and a portion of the money loaned by the Bank to * * * (tr. 959). Describing himself as a "credit junkie" (tr. 958), the witness referred to pressure from Mr. * * * to borrow even more money, nothwithstanding his over-extended status (tr. 960). Mr. * * * also executed an affidavit setting forth these allegations in detail (RX 17), which was read into the transcript (tr. 949-54).8 13. Mr. * * *, while professing ignorance of corporate details, testified that to his knowledge no shares of * * * stock were transferred to * * * Inc. by him (tr. 926, 929, 934, 943-44). He stated that he had never issued any shares to Respondent * * * and that Mr. * * * was never personally in any way involved with his corporation or business affairs (tr. 934); and that he had never made any payments of money to him (tr. 955). In fact, he testified that Mr. * * * was an "honest" man (tr. 959-60; see tr. 1127).9 14. Mr. * * * testified that during his tenure as Secretary of * * * (from September 1982 to October 1983), the only shares which were issued were those specified in RX 14, discussed supra (tr. 994; see tr. 992-96; RXs 23, 24). This witness was also able to shed some light upon the origin of the 5 It must be observed that Mr. * * *'s testimony concerning these arrangements was often confusing and difficult to follow. See tr. 927-29, 932-38, 940-42, 956-57 and other portions of the transcript containing his testimony. 6 Mr. * * *, at that time an * * * employee, was also involved in those arrangements (tr. 928, 936, 1116, 1119). 7 Mr. * * *, a certified public accountant, who appeared on Mr. * * *'s behalf, testified on this point that he had "held the title" of Secretary of * * * for about a one-year period "at the request of the attorney who drew up the corporation", Mr. * * * (tr. 992, 1004). He did this merely as a matter of formality and accomodation, and his letter of resignation recites that he had "no participation in the corporation and no knowledge concerning any of its activities" (RX 25; see tr. 992-96, 9991004). He stated that he was unaware of his succession by Mr. * * * (tr. 1005). 8 Mr. * * *'s testimony makes many colorful references to the financial woes attendant to his business enterprises (tr. 928, 933, 936-37, 941, 956, 960-61, 1126-27). 9 Mr. * * * was of the opinion that, rather than dominating his business subordinates, Mr. * * * may have given them "too much leeway" (tr. 1127). 15. According to Mr. * * *, an * * * corporation named * * *, Inc. was formed in * * * in 1976 to operate a loan office in * * *. The witness remembered that in 1981 or 1982 Mr. * * * closed the * * * office and desired to bring this corporation into * * * for use in business in that state. An attorney was engaged for this purpose, who apparently misunderstood instructions, and formed a new * * * corporation named * * * Inc. When Mr. * * * discovered the error and again approached the attorney, he was informed that the performance of the original request by him was not legally feasible (tr. 997). 16. Thus, to the knowledge of witness * * *, * * *, Inc. was never an operational entity, but was totally dormant. The witness never set up any books on it, never saw any books on it of any kind, nor saw "any bank statements on it or anything else" (tr. 997-98). Nor were any shares ever issued to it from * * *, Inc. while he was Secretary of the latter corporation (tr. 998). 17. The statements and testimony of Respondent * * * shed further light on the corporate status of * * *, Inc., and its alleged relationship with * * *, Inc. Throughout the hearing, he continued to flatly deny that * * * was "any related interest of any of my corporations, or to me personally, whatsoever" (tr. 2543). 18. As to the origin of * * *, Inc., Mr. * * * earlier identified the company as "a dormant corporation, formerly known as * * * in ", a loan company no longer in existence with no shares, assets, or liabilities (tr. 939-40). Later, after checking further, he admitted that both he and Mr. * * * has not been accurate on that point. An inquiry to the state of * * *, made at the time of the hearing by attorney * * * at Mr. * * *'s request, revealed the present existence of a corporation named * * * of * * *, Inc., described in the state's official records, as "Type Inactive" (tr. 2545-46; RX 50). 19. Mr. * * *'s explanation for the * * * imbroglio in this case was that the whole thing was an arrangement hatched by Messrs. * * * and * * *, purportedly to control the business activities of Mr. * * * to safeguard the Bank's financial position (tr. 939, 942, 2546, 2555; RX 51). Despite the intent, according to Mr. * * *, the arrangement never came to fruition, and * * * stock was never issued to * * * Inc. (tr. 939, 2547, 2553-55; RX 51).11 20. At first, Mr. * * * testified that he was unaware why the * * * arrangement had not been consummated (tr. 2547). Later, following a timely telephone call to Mr. * * *, and further testimony from Mrs. * * *, he remembered that he himself had put a stop to it, in an effort to preserve friendly personal relations between Mrs. * * * and Mrs. * * * arising from children/school associations (tr. 2659-71). 21. There is an additional piece of evidence bearing on the * * * matter, not previously discussed. It is a document located eight pages from the bottom of Examiner * * *'s work papers on the * * * loans (FDIC 2). It is entitled "Assignment Of Option Agreement", and is dated sometime (illegible) in December, 1983. It recites that on that day * * *the Partnershipcomposed of its Partners, the * * * and the * * *, appeared before a Notary and stated that on September 21, 1982, * * * of * * *, Inc. gave the * * * the option to purchase 50 shares of Class "A" (voting) stock in * * *, Inc. The document then goes on to recite that the * * * * * * in turn "[b]y these presents" was conveying this option to * * * and his wife * * *. 22. No explanation of this puzzling document appears in the record. It seems to say (1) that on September 21, 1982five days after the incorporation of * * *, Inc. * * *, Inc. held an option to purchase 50 shares of its Class "A" voting stock; and (2) that over a year later, the * * * (* * *, * * * and their wives) came before a Notary Pubic and averred that on September 21, 1982, * * * * * *, Inc. assigned this option to the Partnership; and (3) that sometime in December, 1983, the Partnership was giving over this option to Mr. * * * and his wife personally (who, according to the rec- 10 Mr. * * * identified himself as an independent certified public accountant, who performed accounting services for a number of business clients. He testified that he was in no way under the domination or control of Respondent * * * (tr. 990, 1003). Attesting to Mr. * * *'s good character, Mr. * * * outlined his accounting relationships with Respondent extending back to 1961. "During this time, I have always found him to be very open, honest and fair in his business dealings" (tr. 991; RX 22). 11 Mr. * * * testified that he executed the affidavit, RX 51, dated June 10, 1985, in response to a request from an attorney representing * * *, Inc. in bankruptcy proceedings (tr. 2551). 23. I have been unable to relate the events depicted in this "Assignment of Option Agreement" to what the remainder of the record evidences concerning the * * * affair. Since no witness appeared to explain its meaning, or where it fits in the overall picture, I can make no finding of fact based upon it. 24. Based upon the above review, I am constrained to find that the FDIC has not carried its burden of proof by a preponderance of the evidence concerning the alleged affiliation between Mr. * * * and * * * Inc., on loans made by the Bank to that corporation. 1. THE * * * STORY
25. As noted earlier, FDIC Examiner * * * testified that he received crucial information linking Mr. * * * and * * *, Inc., through the device of * * *, Inc., from Mr. * * *, President of * * * Bank. B. THE * * * TRANSACTION
45. It is charged that on July 1, 1983, Respondent * * * caused the Bank to extend credit to * * * and * * *, * * * and * * * and * * *, and * * *, in the amount of $806,000.14 It is alleged that the proceeds of this loan were used to purchase property which was leased on July 1, 1983 to * * * of * * *, Inc. ("* * *") in exchange for making all interest payments on the loan. It was further charged that * * * was a related interest of Respondent, and that the proceeds of the loan constituted a "tangible economic benefit" for him.
50. At this point, FDIC counsel explained that in the course of their trial preparation they had developed "three separate theories" of violation concerning the * * * transaction, requesting that they be allowed to make a "full showing" to demonstrate the "interrelationships involved here" (tr. 105-06; see 107-10).15 51. Following further argument (tr. 112-13, 258-59, 262-63), FDIC counsel identified their "three theories" as: 1) bank funds were used for the benefit of * * *, an * * * interest, in that these funds financed the acquisition of property which was subsequently leased to * * *; 2) bank funds were used to enable the "* * * Organization" to acquire property from third parties; and 3) bank funds were used to enable * * *, Inc., having acquired these properties, to "unload" such property to * * *, et al. (tr. 269-70). 52. Although FDIC counsel were accorded latitude to demonstrate the overall facts bearing upon the * * * transaction, it was ruled that all parties were to be bound by the charges set forth in the formal allega- 14 The original amount of this loan was some $1,305,000. A $500,000 "participation" was subsequently sold to Mr. * * *'s * * * Bank * * * (tr. 2596, 2673). 15 FDIC counsel: "This is a rather complicated transaction, probably the most complicated of the ones that we will be addressing today" (tr. 106). Counsel further described the transaction as "convoluted" (tr. 108). 53. Accordingly, Mr. * * * testified as to his version of the transaction, as near as he could make out from what was written in his report. At tr. 104-05 he stated that the proceeds of the loan went to * * *, and that the * * * group purchased the property from that entity. * * * paid $1,305,560.22 for the property on July 5, 1983, "the exact amount of the loan" made to the * * * group (tr. 104-05). At tr. 113-14 the witness testified that the loan to * * *, also of $1,305,560.22, originated on July 1, 1983; and that * * * * * * sold the property to the * * * group on that date "before it acquired title". At tr. 114 he indicated that the collateral was subsequently leased by * * * on July 8, 1983 to * * * for a one-year term "with payment limited to the interest on the debt", during which time * * * could purchase the property from * * * for $1,305,560.22, "the amount of the loan proceeds". 54. Mr. * * * at tr. 114, reiterated that the * * * group acquired the property in question from * * *. When asked where * * * obtained the purchase money, the witness responded that "[a]pparently the loan proceeds to * * * et al. went to * * * to purchase this property on 7/5the property which they had sold on 7/1 to * * * et al." (tr. 115). He then repeated his version of these vents to a confused Administrative Law Judge (tr. 115-17). Subsequently, he placed the date of the lease by * * * to * * * on July 1, 1983 (tr. 118).16 55. On cross examination, Mr. * * * denied testifying that the "loan was made to * * *, Inc.", although, "I did say I think the proceeds went" to that company (tr. 259). As to his awareness whether the loan already preexisted on the Bank's books "in the name of the * * * family", he responded "[n]ow that you mention it, I believe that may have come out at that time" (tr. 260), although he was not aware or did not remember whether the * * * loan balance was $1,305,000 (tr. 260). The witness indicated that he did not know how funds were channeled to * * * * * *, given the existence of a * * * loan and a new loan to * * * et al. (tr. 260-61). 56. When pressed further on the subject, the witness again explained his version (tr. 261-62);
58. The witness admitted that, so far as he could determine, the * * * individuals to whom the loan was made were legally responsible for repayment, not * * *. He testified that, although his report indicated otherwise, he had no present documentation that * * * was paying the interest on the loan. Nor did he have a copy of the lease agreement (tr. 270-71). Later, Mr. * * * explained that his report indicated that the payments under the lease from * * * to * * * was "to be the same as the amount of the interest on the debt" (tr. 379; see tr. 392). 59. The record's incoherence regarding the * * * transaction was not dispelled until the testimony of Respondent * * * * * *, late in the hearing. Mr. * * * testified that * * *, Inc., a wholly-owned affiliate, was in the rural development business. In addition, the company was engaged in property management (collecting rents, etc.) mostly for Mr. * * *'s sundry corporations (tr. 2584). It sometimes also handled properties of non-related enterprises, this aspect of its affairs characterized by Mr. * * * as "[a] little bit; very little for other people. We justit was set up to handle our own stuff" (tr. 2585). 60. Mr. * * * testified that the forty townhouses here involved, the collateral for the * * * loan, were built several years ago by an individual named * * * (tr. 2585). These properties were thereafter sold to certain friends of Mr. * * *, the * * * family (tr. 2587), with * * * Bank financing the transaction (tr. 2588). 61. There came a time when Mr. * * * became associated with Mr. * * * in the building business, and "[w]e were fixing to 16 Of the * * * group, Messrs. * * * and * * * had performed legal services for Mr. * * * and/or his enterprises, and Mr. * * * was President of Mr. * * *'s Bank of * * * (tr. 118-20, 2955). 62. However, the * * * group did want to exercise the option, according to Mr. * * *, for tax depreciation purposes (tr. 2587).17 The purchase price was $1,305,000, "which was exactly the amount of the option" (tr. 2588). The financing was also done at * * * Bank, the loan presently at issue in this case. Thus, the * * * loan was paid off, and the * * * purchasers became liable for making payments to the Bank on their new loan (tr. 2589). 63. Mr. * * *'s * * *, which had been managing the townhouses for the * * * owners, was approached by the * * * buyers to continue the management operations (tr. 2591). * * * agreed to do so, according to Mr. * * * (tr. 2582, 2591). 64. Under the management arrangement, * * * agreed to lease these homes from the * * * group. The amount of the lease was established as the amount of interest to be paid to the Bank by the * * * owners, plus an additional one percent (tr. 2589, 2592, 2589, 2596). The term of the lease was for one year, at the end of which * * * would have an option to buy the 40 townhouses for the amount of the outstanding loan, $1,305,000 (tr. 2590). 65. As it turned out, the enterprise was not profitable for Mr. * * * and * * *. Mr. * * *, Mr. * * *'s CPA, testified that over the 22-month period from July 1, 1983 to April 30, 1985, * * *' management of the * * * townhouse project resulted in a loss to * * * of just under $130,000 (tr. 1008; RX 26). The option to buy was accordingly never exercised by * * * (tr. 2590), and eventually * * * withdrew from the management operation, leaving this task to the * * * individuals themselves (tr. 2593). 66. Turning to the "three theories" of violation asserted by FDIC counsel, it must be said that there is no evidence to support theories two and three, viz., that bank funds were used to enable the "* * * Organization" to acquire property from third parties; or that bank funds were used to enable * * *, Inc., having acquired these properties, to "unload" such property to * * *, et al. (see tr. 269-70). Nor, upon analysis, is there reliable, probative evidence to support "theory" onethe allegation set forth in the formal charges. 67. My reading of the evidence outlined above is that the * * * loan was not a concocted device for the enrichment of Mr. * * *. The core fact is that the loan was made to the * * *, who were legally liable for its repayment, including interest charges. The fact that the lease to * * * was pegged to the amount of the interest paid by the * * * is an ancillary arrangement, not going to the heart of the questioned loan. Rather than revealing something sinister, the evidence shows, as near as I can determine, that the entire matter was a straightforward business arrangement, where all parties hoped to economically benefit. This affair nevertheless resulted in a loss to Mr. * * * of some $130,000. 68. Accordingly, FDIC counsel have failed to carry their burden of proving by a preponderance of the evidence that the * * * transaction was done for the "benefit" of, or "tangible economic benefit" of Respondent * * *.18 I have examined the legal citations provided, and can find no precedential support for the proposition advanced in the charges.19 C. THE * * * CONSUMER PAPER
69. In both the Removal and Assessment pleadings, for purposes of determining vio- D. * * *
76. At this point in the Initial Decision, I believe it is appropriate to insert the following chart. This chart sets forth a chronological analysis of what transpired financially concerning the alleged violations of Regulation O and Section 23A in this case. These data have been compiled to deliberately exclude the * * *, * * * and * * * Consumer transactions which, as heretofore discussed, do not constitute violations. Immediately following the chart, the loan of the Bank made to * * * is discussed.
IV. CONCLUSION
Factually, the * * * and * * * allegations have not been proven by a preponderance of the evidence.24The * * * * * *
Addendum
In resolving the above charges, I have not relied in any affirmative way upon the witnesses called to attest to Mr. * * *'s character. Nor have I relied at all upon the polygraph results presented by Respondent. The latter can, and might as well be, stricken from the record. |
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