LINQUIST & VENNUM v FDIC
No. 95-3203
Lindquist & Vennum, *
*
Petitioner, *
*
v. *
*
Federal Deposit Insurance *
Corporation, *
*
Respondent. *
No. 95-3226
Wayne Field, *
*
Petitioner, *
*
v. * PETITIONS FOR REVIEW OF FEDERAL
* DEPOSIT INSURANCE CORPORATION.
Federal Deposit Insurance *
Corporation, *
*
Respondent. *
No. 95-3256
Richard D. Donohoo, Craig R. *
Mathies, Cheryl C. Godbout- *
Bandal, *
*
Petitioners, *
*
v. *
*
Federal Deposit Insurance *
Corporation, *
*
Respondent. *
No. 95-3284
Bruce A. Rasmussen, Bruce A. *
Rasmussen & Associates, Ltd., *
*
Petitioners, *
*
v. *
*
Federal Deposit Insurance *
Corporation, *
*
Respondent. *
Submitted: October 21, 1996
Filed: January 8, 1997
Before FAGG, HEANEY, and HANSEN, Circuit Judges.
HEANEY, Circuit Judge.
Petitioners seek review of an order of the Federal Deposit
Insurance Corporation (FDIC) prohibiting Richard D. Donohoo and
Craig R. Mathies from further participation in the banking
industry; directing all petitioners to cease and desist from
violating the Change in Bank Control Act of 1978 (CBCA), 12 U.S.C.
SS 1817(j) (1988), and engaging in self-dealing and insider
transactions; ordering the individual petitioners to pay civil
monetary penalties for statutory and regulatory violations; and
ordering petitioners to reimburse Capital Bank for legal fees paid
to two law firms on behalf of the individual petitioners.
Petitioners describe their activities as an honest effort to save
Capital Bank through recapitalization. The FDIC characterizes the
effort as a devious attempt to gain control of Capital Bank at the
expense of the majority shareholders in violation of the CBCA and
Regulation O. Petitioners, who claim that the FDIC's determination
was based on an improper interpretation of federal law and
unsupported by the record, may be treated essentially as two sets
of parties: five individuals who played various roles in Capital
Bank and the sale of shares in the bank (individual petitioners);
and two law firms that advised the individual petitioners in the
sale of the Capital Bank shares and represented the bank in a
subsequent lawsuit arising from the sale (law firm petitioners).
We enforce the portion of the FDIC's decision and order that
imposes sanctions on the individual petitioners for unsafe and
unsound banking practices and that requires petitioner Rasmussen to
pay the outstanding balance and interest on a loan from People's
Bank. We modify the order as it applies to reimbursement to
Capital Bank for legal fees in the Wenzel Lawsuit, and deny
enforcement of the order as it applies the FDIC's cease-and-desist
authority to the law firm petitioners.
I. STANDARD OF REVIEW
We review the order of the FDIC pursuant to the Administrative
Procedure Act (APA), 5 U.S.C. SS 706 (2) (1988), and enforce the
order if the FDIC made no errors of law and if its findings of fact
are supported by substantial evidence on the record as a whole.
Oberstar v. FDIC, 987 F.2d 494, 503 (8th Cir. 1993). We review
issues of law de novo. Seidman v. OTS, 37 F.3d 911, 924 (3d Cir.
1994). Substantial evidence is "such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion."
Culbertson v. Shalala, 30 F.3d 934, 939 (8th Cir. 1994). We may
not substitute our judgment for that of the FDIC. Citizens to
Preserve Overton Park, Inc. v. Volpe,
401 U.S. 402, 416
(1971). If
an agency considered a recommendation by an Administrative Law
Judge (ALJ), we review the ALJ's recommendation as part of the
record and require an agency to show that it gave the
recommendation "attentive consideration" if the agency departs from
it. Simon v. Simmons Foods, Inc., 49 F.3d 386, 389-90 (8th Cir.
1995).
II. UNSAFE AND UNSOUND BANKING PRACTICES
A. Change in Bank Control Act Violations
We consider first whether the individual petitioners violated
the CBCA by acting in concert in the issuance and purchase of 7,000
new shares of Capital Bank without obtaining prior regulatory
approval. The CBCA provides:
(1) No person, acting directly or through or in concert
with one or more persons, shall acquire control of any
insured depository institution through a purchase . . .
of voting stock of such insured depository institution
unless the appropriate Federal banking agency has been
given sixty days' prior written notice of such proposed
acquisition . . . .
12 U.S.C. SS 1817(j)(1). The control of a bank is "the power,
directly or indirectly, to . . . vote 25 per centum or more of any
class of voting securities of an insured depository institution."
12 U.S.C. SS 1817(j)(8)(B). The FDIC found that all of the
petitioners violated the CBCA.
1. Petitioners Donohoo, Mathies, Godbout-Bandal, and Rasmussen
Donohoo and Mathies were the primary actors in the issuance,
sale, and purchase of the new Capital Bank shares and the subject
of the FDIC's prohibition order. The ALJ found that in May 1988,
they purchased 24.9% of the outstanding stock of Capital Bank's
holding company, Capital City Corporation (CCC) from George Heaton.
Heaton had purchased 99% of CCC from the Wenzel family in 1981 for
consideration that included an $800,000 note Heaton was obligated
on to the Wenzels (Wenzel note). In addition to the shares,
Donohoo and Mathies purchased an option to buy the rest of Heaton's
CCC shares for $1,025,000, financed by loans of $500,000 from
Midway Bank (Midway loan) and $127,680 from People's State Bank in
Winthrop, Iowa, and by assuming $400,000 liability on the Wenzel
note. Following the purchase, Donohoo and Mathies became directors
and officers of both CCC and Capital Bank. By January 1989,
Donohoo and Mathies controlled Capital Bank's board of directors
after replacing the previous directors with their own selections.
Godbout-Bandal became involved in the effort to gain control of the
bank as an investor in the attempt by Donohoo and Mathies to
purchase a majority interest in CCC in 1988 and 1989. Rasmussen
was a director, executive officer, and principal shareholder of
Capital Bank.
We believe that, with respect to the individual petitioners,
the FDIC properly interpreted the CBCA, and substantial evidence on
the record as a whole supports the FDIC's finding that individual
petitioners acquired control of Capital Bank through a concerted
effort in violation of the CBCA. The percent of Capital Bank's
shares acquired by petitioners in sum exceeded the statutory
definition of control.(1) The individual petitioners argue that there
is no evidence of their "acting in concert" to acquire control of
the bank because there was no formal agreement between them--such
as a proxy assignment, purchase and sale agreement, voting
agreement, cross-pledge, collateral guaranty, or cross-guaranty--
and because the individual petitioners did not all know every other
investor. These findings are not prerequisites for a determination
that the group acted in concert. Even absent a formal agreement,
the shares of individuals may be considered together for
determining control. FDIC v. Annunzio, 524 F. Supp. 694, 699 (N.D.
W.Va. 1981); see also Wellman v. Dickinson, 682 F.2d 355, 363 (2d
Cir. 1982) (to find concerted effort, an agreement need not be
written and may be informal, and group activity may be proven
circumstantially); SEC v. Savoy Indus., 587
F.2d 1149 (D.C. Cir. 1978). Further, persons acting in concert
need not know each other. Blumenthal v. United States,
332 U.S.
539, 557
(1947). Not only would petitioners' approach contradict
statutory support for findings based on circumstantial evidence, it
would also limit the effect of the CBCA to only the least
sophisticated perpetrators of illegal bank takeovers.
Evidence supporting the FDIC's conclusion that the individual
petitioners worked in concert abounds. Beginning in May 1988,
Donohoo and Mathies established the investment group that included
Godbout-Bandal and Rasmussen to finance the exercise of their CCC
stock options, and the money invested came primarily from loans to
the investors from Capital Bank. When foreclosure on the loan for
which Capital Bank's stock served as collateral could not be
stalled any longer, Donohoo and Mathies decided to issue new stock
in Capital Bank and sell it directly to the members of their
investment group. Donohoo and Mathies knew all of the participants
in the plan prior to its genesis. Although the previous,
unsuccessful effort by individual petitioners to acquire Capital
Bank's holding company would not support a finding of concerted
effort by itself, combined with other evidence on the record,(2) it
provides circumstantial evidence of the group's intent to gain
control of Capital Bank. See Wellman, 682 F.2d at 363; cf. Herman
& MacLean v. Huddleston,
459 U.S. 375, 390
n.30 (1983)
("circumstantial evidence can be more than sufficient" in civil
cases).
Donohoo's acknowledgement that the CBCA applied to the Capital
Partners effort and his statement that the group had "gotten
together" to save Capital Bank through the stock issuance and
purchase(3) further reveal that individual petitioners intended to act
in concert to acquire control of the bank. Most of the individual
petitioners accepted financing from Capital Bank or its affiliates,
which were controlled by Donohoo and Mathies, in close proximity to
their purchases of "investment units" in Capital City Corporation
from Donohoo and Mathies.(4) Prior to the sale of the 7,000 new
Capital Bank shares, the FDIC indicated its belief that the group
was acting in concert, and warned individual petitioners
that their purchase of the shares would violate the CBCA.
Nonetheless, they proceeded with the purchase. Moreover, after the
individual petitioners held the new shares for almost two-and-a-
half years, they sold the shares collectively as a "majority
interest," making a substantial profit.(5)
Individual petitioners alternatively argue that they are
shielded from liability for CBCA violations by their reliance on
counsel's advice in proceeding with the purchase of the new Capital
Bank shares despite the FDIC's warning. This argument similarly
fails. A person may not willfully and knowingly violate the law
and escape liability by claiming to have followed the advice of
counsel. Williamson v. United States,
207 U.S. 425, 453
(1907);
United States v. Poludniak, 657 F.2d 948, 959 (8th Cir. 1981).
Although petitioners argue that they did not act willfully or
knowingly in violating the CBCA, the record supports the FDIC's
finding that petitioners were aware of the illegality of their
actions after receipt of a clear warning of the FDIC's position
that the stock purchase violated the CBCA.
Petitioners also contend that they should escape punishment
entirely or receive de minimis sanctions for CBCA violations
because they acted to save Capital Bank and saved taxpayers
millions of dollars. This argument does not relate to whether the
FDIC properly found CBCA violations. The requirements of the CBCA
are straightforward. The condition of a bank or the motives of
prospective stock purchasers may be relevant in determining whether
to grant approval for a change in control of the bank, but they do
not bear on the issue of whether the provisions of the CBCA were
violated.
Finally, individual petitioners claim that they should be
spared sanctions for their conduct because they paid a fair price
for the Capital Bank shares and because they offered to rescind the
transaction when the FDIC indicated it would challenge the
purchase. Although the FDIC found that individual petitioners paid
less than book value for the shares,(6) the finding is irrelevant as
to whether petitioners violated the CBCA. Likewise, the fact that
petitioners offered to reverse the stock sale and purchase provides
no additional pertinent information other than to demonstrate that
petitioners were belatedly willing to appreciate the legal
determination of the FDIC after the threat of sanctions became
imminent.
2. Petitioner Field
Petitioner Wayne C. Field separately appeals from the order of
the FDIC. Field, like Godbout-Bandal, was an investor in the
attempted takeover of CCC prior to his purchase of new shares of
Capital Bank. He claims that, regardless of whether the other
individual petitioners violated statutory or administrative
regulations, the FDIC had no basis for finding that he had done so.
Field argues that because his role in the matter was simply that of
an innocent investor, he was not guilty of violating the CBCA. We
uphold the FDIC's order with respect to Field.
Reviewing the FDIC's order under the same standard as
articulated above, the record on the whole provides enough evidence
to support the FDIC's finding that Field participated in the effort
to gain control of Capital Bank in violation of the CBCA. The FDIC
adopted the ALJ's findings that Field had extensive experience in
banking, that he was aware of the CBCA, and that he knew that the
acquisition of the bank was subject to regulatory approval.
Statements by Field recognizing the CBCA's applicability to the
transaction strongly support those conclusions.(7) The FDIC also
relied on evidence of Field's participation in previous attempts by
Donohoo and Mathies to gain control of Capital Bank and acceptance
of improper loans from the bank in the process.(8) Moreover, Update
Reports from Capital Bank and other correspondence between
petitioners gave Field notice that the group would be purchasing a
majority of Capital Bank's shares and that such a purchase would
require administrative approval.
B. REGULATION O VIOLATIONS AND OTHER UNSAFE AND UNSOUND BANKING
PRACTICES
In addition to violating the CBCA, the FDIC found that the
individual petitioners violated Regulation O(9) by obtaining insider
loans on several occasions and that the loans were made on
preferential terms with inadequate collateral and with an above-
normal repayment risk. It also found that Capital Bank's board of
directors, controlled by Donohoo and Mathies, authorized employment
agreements and bonus payments for Donohoo and Mathies that
constituted unsafe and unsound banking practices and exposed
Capital Bank to substantial losses. It finally found that Donohoo
and Mathies made false statements to bank examiners.
1. Insider Loans
After careful review, we believe the FDIC's findings that
individual petitioners caused to be made and accepted insider loans
are supported by substantial evidence on the record as a whole.
Regulation O at 12 C.F.R. SS 215.4 specifically provides that a
bank may not extend credit to officers, directors, or principal
shareholders unless the extension of credit is "made on
substantially the same terms . . . as, and following credit
underwriting procedures that are not less stringent than, those
prevailing at the time" for other persons. 12 C.F.R. SS 215.4
(1988). In addition, the loan must be approved by a majority of
the disinterested directors. Id.
The FDIC found that a November 18, 1988 loan to Leonard
Misenor, an officer of Capital Bank, was not made on substantially
the same terms as loans to others and that the proceeds were then
used for Donohoo's and Mathies' benefit to reduce their
indebtedness on the Midway loan and the Wenzel note. Moreover, no
provision was made for periodic payment of principal, the
collateral was inadequate, and the proceeds were not used for the
intended purposes.
The FDIC found that an unsecured loan to Bruce A. Rasmussen in
the sum of $100,000 by People's Bank, which was controlled by
Donohoo, violated Regulation O because it exceeded five percent of
the capital and unimpaired surplus of People's Bank and did not
receive prior approval of a majority of the People's Bank Board of
Directors. It further found that the proceeds of the loan were
used to purchase stock in Capital Bank and that this purchase
benefited Donohoo.
The individual petitioners concede that a July 25, 1990 loan
to the Pentagon Parks Association (PPA) in the sum of $480,000, of
which $200,000 was used by Godbout-Bandal to finance her purchase
of stock in Capital Bank, violated section 215.4(a)(1) of
Regulation O. They assert, however, that any penalty should be de
minimis because the violation was inadvertent, resulted in no loss
to Capital Bank, and was immediately corrected. They also urge us
to consider the lack of any history of similar violations by
Godbout-Bandal. The FDIC found that the loan to PPA violated the
CBCA through attribution to Donohoo and Mathies and constituted an
unsound and unsafe banking practice as an attempt to use capital
from Capital Bank to give the bank a capital infusion.
The FDIC found that loans to Field violated section 215.4(b)
of Regulation O because each of the loans exceeded five percent of
Capital Bank's capital and unimpaired surplus, did not receive
prior approval of a majority of the board of directors, and were
used for purposes other than stated in the credit file--to purchase
stock in Capital Bank. Field's argument that he was only drawing
on an existing line of credit is not supported by the record. The
only evidence supporting the existence of a line of credit was
Field's own testimony and a letter referring to an expired line of
credit to Field. Moreover, Field had insufficient funds in his
accounts at the time of his purchases of CCC investment units
without the infusion of funds from Capital Bank.
2. Employment Agreements and Bonuses
We believe that the FDIC finding that Donohoo, Mathies, and
Rasmussen engaged in unsafe and unsound banking practices in
creating employment agreements and bonuses for Donohoo and Mathies
was supported by substantial evidence on the record as a whole. On
May 25, 1989, the Capital Bank board of directors--consisting of
Donohoo, Rasmussen, and Brooks Hauser--authorized employment
agreements with Donohoo and Mathies. Among other provisions, the
original agreement and its amendments required Capital Bank to pay
Donohoo and Mathies an amount equal to twice their highest annual
salary plus bonuses and benefits if they were terminated for any
reason other than breach of fiduciary duty. The agreements also
required Capital Bank to pay them a total of $370,000 upon change
in control of the bank. The agreement, after its amendment,
exposed the bank to a potential liability of $630,000 or 22% of the
bank's capital. On July 13, 1990, Donohoo and Mathies caused
Capital Bank to pay each of them a bonus of $10,000. The bonuses
were not authorized by the board of directors of the bank and were
used by Donohoo and Mathies to help fund their purchases of stock
in the bank.
3. Misrepresentations to Bank Examiners
We believe substantial evidence on the record as a whole
supports the FDIC finding that Donohoo and Mathies intentionally
deceived federal and state bank examiners with respect to the
purpose, use, and terms of a loan transmitted to Leonard Misenor in
their effort to obtain control of CCC. The FDIC found that Donohoo
knew the purpose and use of the loan, as well as the preferential
terms given to Misenor; and he omitted the loan from its proper
reporting locations on the Officer's Questionnaire associated with
the 1989 examinations of Capital Bank's operations. Further, the
FDIC found that both Donohoo and Mathies allowed Misenor to
misrepresent the purpose of the loan to FDIC examiners on two
occasions and improperly assisted Misenor in improving the
condition of the loan to avoid a "substandard" rating for bank
examination purposes.
C. THE FDIC SANCTIONS
Based on the violations it found, the FDIC ordered each of the
individual petitioners to pay civil money penalties, prohibited
Donohoo and Mathies from participating in future banking
activities, and assessed other penalties.(10) We hold that the
findings of the FDIC on these matters are supported by substantial
evidence on the record as a whole and that the remedies imposed on
the individual petitioners are within the informed discretion of
the FDIC.
Our circuit has recognized that Congress strengthened the
FDIC's already strong enforcement powers in the Financial
Institutions Recovery, Reform and Enforcement Act of 1989, Pub. L.
No. 101-73, 103 Stat. 183 (1989) (FIRREA). Oberstar v. FDIC, 987
F.2d 494, 499 (8th Cir. 1993). Through its congressionally granted
powers, the FDIC may prohibit further participation in the banking
industry if an institution-affiliated party has: (1) violated a
law, regulation, cease-and-desist order, or participated in an
unsafe or unsound practice or breached a fiduciary duty; (2) as a
result, exposed a bank to financial loss, caused prejudice to the
bank's depositors, or received financial or other benefits; and (3)
committed the violation, practice, or breach with personal
dishonesty or a willful or continuing disregard for the safety or
soundness of the bank. 12 U.S.C. SS 1818(e)(1) (1988). The FDIC
may also impose significant civil monetary penalties on
institution-affiliated parties for violations based on the gravity
of the violation and other limitations. 12 U.S.C. SS
1818(i)(2)(A)-(D) (1988).
1. The Prohibition Order
To support its order prohibiting Donohoo and Mathies from
further participation in the banking industry, the FDIC must show
substantial evidence of their misconduct, the harm or threat of
harm to the banking institution, and culpability on the part of the
prohibited parties. The FDIC's above findings, which are properly
supported by the record, demonstrate that Donohoo and Mathies
engineered an effort illegally to gain control of a federally-
insured bank. Moreover, in their effort, Donohoo and Mathies
participated in several Regulation O violations and other unsafe
and unsound banking practices, many of which were designed to
profit them directly.
The record properly supports the findings that Donohoo and
Mathies were aware of the wrongfulness of their actions and
disregarded the likely detrimental effect on Capital Bank.
Therefore, the FDIC's prohibition order with respect to Donohoo and
Mathies was authorized under 12 U.S.C. SS 1818(e).
2. The Cease-and-Desist Order
Under 12 U.S.C. SS 1818(b)(1), the FDIC may order a qualified
party to cease and desist from activities that are unsafe and
unsound with respect to a federally-insured bank, or from violating
other laws or FDIC orders. As our circuit has recognized, the FDIC
need only show proof of misconduct to exercise its power to order
a party to cease and desist from that misconduct. Oberstar, 987
F.2d at 502. We believe that, after conducting the proper
procedures for notice and hearing under the statute, the FDIC
properly issued the cease-and-desist order with respect to all of
the individual petitioners.
With respect to the law firm petitioners, we do not find
substantial evidence on the record as a whole to support the FDIC's
finding that the law firm petitioners acted knowingly or recklessly
in the commission of unsafe and unsound banking practices. On the
contrary, the scant evidence on this issue shows that the attorney
for Capital Bank was without knowledge of critical facts or
deliberately misled about those facts when issuing his advice
regarding the transactions related to this action. We therefore
refuse to enforce the FDIC's cease-and-desist order as it relates
to the law firm petitioners.
3. The Civil Monetary Penalties
The FDIC's authority to impose civil monetary penalties on
institution-affiliated parties of up to $1,000,000 per day rises
from three statutory provisions. The provisions differentiate the
FDIC's ability to impose sanctions based on the level of
culpability properly attributed to the offending party. Under 12
U.S.C. SS 1818(i), the FDIC is empowered to impose monetary
penalties generally. Violators of the CBCA may be assessed
monetary penalties under 12 U.S.C. SS 1817(j)(16), while violators
of 12 U.S.C. SS 375b and Regulation O may be similarly penalized
under 12 U.S.C. SS 1828(j)(4). After giving notice and conducting
the proper hearing, the FDIC may assess civil monetary penalties
for the above infractions, taking into account statutorily-
recognized mitigating factors. See 12 U.S.C. SS 1818(i)(2)(G).
The FDIC Board adopted civil monetary penalties that both
required the individual petitioners to pay the amount each received
from the illegal takeover of Capital Bank and a penalty recommended
by the ALJ.(11) Despite various objections raised by the individual
petitioners, we believe the FDIC properly considered all mitigating
factors and properly calculated the amount of profit received by
each individual petitioner. The penalties assessed by the FDIC are
therefore substantially supported by evidence on the record as a
whole and based on proper interpretations of the relevant statutory
provisions.
4. Loan No. 4100-29836
The FDIC further ordered petitioner Rasmussen to pay the
unpaid balance of and interest on Loan No. 4100-29836 drawn from
People's Bank on July 30, 1990. We believe the FDIC's findings are
substantially supported by evidence on the record viewed as a
whole, and its order is not arbitrary, capricious, or otherwise
contrary to law.
D. THE WENZEL LAWSUIT
The Lindquist & Vennum law firm represented Capital Bank in
the issuance and sale of the 7,000 new Capital Bank shares.(12) As a
result of the issuance and purchase of the 7,000 new voting shares
of the bank stock, the Wenzel family, who had a continuing
financial interest in Capital Bank, brought an action in Minnesota
state court against Donohoo, Mathies, and Rasmussen; the new
investors, including Field and Godbout-Bandal; and Capital Bank for
breach of fiduciary duty. The law firm petitioners advised Capital
Bank that payment of attorneys' fees by the bank in defense of
itself and of the individual petitioners who had acted on behalf of
Capital Bank was proper. Both Lindquist & Vennum and Bruce A.
Rasmussen & Associates accepted legal fees from Capital Bank for
defending the bank and individual petitioners in the Wenzel
lawsuit.
In the Wenzel suit, the jury found that Donohoo, Mathies, and
Rasmussen had breached a fiduciary duty to the Wenzels; that the
three acted within the scope and course of their bank employment;
and that Donohoo and Mathies, as stock pledgers, breached a
separate duty to the Wenzels. The jury further found that the
Wenzels were entitled to damages of $500,000 from Donohoo, $23,600
from Rasmussen, and no damages from Capital Bank.
Thereafter, the state court entered a judgment notwithstanding
the verdict against Capital Bank, as well as Donohoo and Mathies,
based on the jury's finding that Donohoo and Mathies acted within
the scope of their employment with Capital Bank when they breached
their duty to the Wenzels. The court further held Capital Bank
vicariously liable to the Wenzels because the bank benefited from
the infusion of capital resulting from the issuance and sale of the
new shares. After the FDIC rendered its opinion that the
indemnification by Capital Bank of the individual petitioners was
improper, the Minnesota Court of Appeals affirmed the finding of
joint and several liability against Donohoo, Rasmussen, and Capital
Bank. It held that the jury's finding that Donohoo and Mathies
were acting within the scope of their employment with the bank
sufficiently justified the district court's order for judgment
notwithstanding the verdict. The law firm petitioners represented
all defendants before the state court and the appellate court with
Capital Bank paying all attorneys' fees associated with the case.
On September 9, 1992, the FDIC issued notice of charges and a
temporary cease-and-desist order prohibiting Capital Bank from
indemnifying the individual petitioners in the Wenzel lawsuit,
prohibiting the individual or law firm petitioners from accepting
any proceeds from Capital Bank indemnifying the individual
petitioners, and requiring the individual petitioners to reimburse
Capital Bank for the bank's expenses incurred in defending itself
in the Wenzel lawsuit. The individual and law firm petitioners
filed an action in the United States District Court to stay the
FDIC's temporary cease-and-desist order. The district court
granted the stay only insofar as the order required the individual
petitioners to reimburse Capital Bank for the bank's expense in
defending itself in the action.(13)
Following an evidentiary hearing, the ALJ in the FDIC
proceedings recommended only that the law firm petitioners be
ordered to cease and desist from representing Donohoo and Mathies
on their counterclaims in the Wenzel lawsuit and to reimburse
Capital Bank for any legal fees expended on the counterclaims. He
refused to recommend that the law firm petitioners refund the legal
fees that had been paid by Capital Bank for representation in the
Wenzel lawsuit.
The FDIC rejected the ALJ's findings on this matter, however,
finding that the law firm petitioners knowingly and/or recklessly
participated in breaches of fiduciary duties and unsafe or unsound
practices in connection with Capital Bank's indemnification of the
individual petitioners and by accepting all legal fees and expenses
from the Wenzel lawsuit solely from Capital Bank.(14) The FDIC
ordered the law firm petitioners to refund all legal fees paid by
Capital Bank. It based its decision on its finding that the law
firm petitioners were "institution-affiliated parties" that had
knowingly or recklessly participated in a violation of law that
caused more than a minimal financial loss to a bank. 12 U.S.C.
SS 1813(u)(4).(15) The FDIC further found that the violation of law
involved an opinion of the law firm petitioners that
indemnification of the individual petitioners by Capital Bank was
proper without knowing or determining whether Capital Bank had
complied with section 300.083 of the Minnesota Statutes. Under
that section, the determination of eligibility for indemnification
must, under certain circumstances, be made by "special legal
counsel."(16) Minn. Stat. SS 300.083, subd. 6(3) (1985). The FDIC
made no finding with respect to any other violations of law.
On appeal, the law firm petitioners primarily argue that the
FDIC erred in holding that the law firm petitioners knowingly or
recklessly violated a law or participated in breaches of fiduciary
duty and unsafe or unsound practices.(17) The decision of the FDIC is
premised on its belief that the real parties in interest in the
Wenzel lawsuit were the individual petitioners rather than Capital
Bank. Certainly the individual petitioners--particularly, Donohoo,
Mathies, and Rasmussen--were real parties in interest. Capital
Bank, however, was also a defendant in the Wenzel action and, as
the Minnesota state court determined, was subject to vicarious
liability because Donohoo and Mathies acted within their scope of
employment for the benefit of Capital Bank. Wenzel v. Mathies, 542
N.W.2d 634, 642 (Minn. Ct.App. 1996). Although the FDIC issued its
decision before the Minnesota Court of Appeals did, the fact
remains that Capital Bank had been joined as a defendant in the
Wenzel action, and the law firms reasonably determined that Capital
Bank could be subject to joint and several liability with respect
to the Wenzel lawsuit.
Therefore, there is no merit to the FDIC's claim that the law
firm petitioners knowingly or recklessly ignored the district
court's order. In fact, at the hearing on the matter, the district
court recognized that legal fees might well be paid by Capital Bank
in its own defense with the secondary effect of benefiting the
individual petitioners. We thus reject the FDIC's findings and
adopt those of the ALJ on this issue.
There remains the question of whether the cited Minnesota
statutes were violated. We think not. Had indemnification
occurred, the statutes would obviously have been violated because
there was no special counsel as that term is defined in the
statute. But here, because the expenditures made by the law firm
in defense of the Wenzel lawsuit were for the benefit of Capital
Bank, the state indemnification statutes did not become operative.
Capital Bank was not a nominal defendant, but rather it had a real
interest in the outcome of the lawsuit.
The FDIC relies on Cavallari v. Comptroller of Currency, 57
F.3d 137 (2nd Cir. 1995), to support its position. We do not
believe that case is particularly helpful. In that case, the court
found that Cavallari, a lawyer, recklessly asserted that an
exchange of guaranties was in the best interest of one of the
parties without considering whether the exchange violated a
temporary cease-and-desist order issued by the Office of
Comptroller of the Currency against the bank. Id. at 142-43. It
found that Cavallari: (1) gave no consideration to whether an
exchange of guaranties contravened the terms of the temporary
cease-and-desist order of which he was aware; (2) made no effort to
ascertain the actual liability exposure of the release guarantors
or the worth of the alternate guaranties; and (3) was aware that an
officer of the corporation, who substituted his own corporation's
guaranty for the personal guaranties of friends and family members,
was under investigation relating to several fraudulent
transactions. Id. Here, the law firm petitioners reasonably
decided that Capital Bank would be subject to joint and several
liability if the Wenzels were successful in their lawsuit. We
therefore refuse to enforce the order of the FDIC insofar as it
requires the law firm petitioners to refund to Capital Bank all of
the fees it charged Capital Bank for representation in the Wenzel
lawsuit. We modify the order requiring the individual petitioners
to reimburse Capital Bank for legal fees incurred in the Wenzel
lawsuit to require only individual petitioners Donohoo and Mathies
to reimburse Capital Bank for attorneys' fees paid solely for the
counterclaims brought in the Wenzel lawsuit.
III. CONCLUSION
For the foregoing reasons, we agree with the FDIC's findings
with respect to individual petitioners in the sale and purchase of
the new Capital Bank shares and petitioner Rasmussen's obligation
to People's Bank. We disagree with the FDIC's findings and
interpretation of law regarding the law firm petitioners' role. We
disagree in part and agree in part with the FDIC's findings
relating to the attorneys' fees paid in the Wenzel lawsuit. We
enforce the portion of the FDIC's order that imposes penalties and
prohibitions upon the individual petitioners for unsafe and unsound
banking practices. We also enforce the portion requiring
petitioner Rasmussen to pay the outstanding balance and interest on
Loan No. 4100-29836 to People's Bank, and requiring petitioners
Donohoo and Mathies to reimburse Capital Bank only for attorneys'
fees associated with their counterclaims in the Wenzel lawsuit. We
refuse to enforce the FDIC's order as to the law firm petitioners.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
**FOOTNOTES**
(1)
Donohoo and Mathies purchased 2,100 shares or 15.2% of the
bank's shares. Field and Godbout-Bandal each bought 2,100 shares
or 15.2%. Rasmussen purchased the remaining 700, which equalled
approximately 5%. In total, the group purchased approximately
50.6% of the bank's outstanding shares.
(2)
Petitioners called their effort to purchase Capital City
Corporation "Capital Partners." Capital Partners is also the title
of a demand deposit account at Midway used by Mathies and Donohoo
to deposit investments made by the group and to make payments on
the Midway loan and the Wenzel note. Although petitioners argue
the naming of the account had no significance, the FDIC found that
the name and use of the account showed a common scheme among the
investors, who surely intended to get something in return for their
financial contributions. The Capital Partners Account accompanies
a volume of evidence supporting the FDIC's findings.
(3)
On December 28, 1989, Donohoo advised the FDIC by letter of
his plan to recapitalize Capital Bank once the "change in control
has been approved" under the provisions of the CBCA. (Letter from
Donohoo to the FDIC (December 28, 1989).) While testifying at the
administrative hearing, Donohoo indicated that they were "[a]cting
together," (Trial Tr. at 1573), and described the stock purchasers
as "a group of guys that have gotten together" to "save" the bank,
(Trial Tr. at 1475-76.) In addition, documentary evidence obtained
from a loan file at Midway Bank showed that Donohoo and Mathies
advised Midway that they had a group of investors who were
interested in purchasing control of Capital Bank.
(4)
On November 18, 1988, Capital Bank loaned $76,000 to Leonard
C. Misenor's parents. The same day, Misenor, who was an executive
officer of Capital Bank, transferred $73,000 to Donohoo and Mathies
for an "investment unit." Misenor is not a petitioner in this
action. Charges against Misenor were withdrawn following a
settlement between Misenor and the FDIC.
On December 20, 1988, Brooks Hauser purchased an investment
unit for $50,000. Four days later, Capital Bank renewed a $400,000
loan to Hauser, who was a director of Capital Bank. On January 20,
1989, the bank's board, Donohoo, Mathies, Rasmussen, and Hauser,
reaffirmed a $650,000 line of credit for Hauser. The next Monday,
Hauser transferred $96,000 to Donohoo and Mathies for an investment
unit. Hauser is not a party to this action. Hauser did not
participate in the issuance, sale, and purchase of the new Capital
Bank shares because he had consented to an order prohibiting him to
participate in the affairs of a federally-insured financial
institution issued by the Office of Thrift Supervision in early
1990.
Several other improper loans were made to the members of the
Capital Partners group, particularly to the individual petitioners
in this case. See infra note 8 and Part II.B.1.
(5)
Donohoo and Mathies each realized a gain of $925,554,
Rasmussen made $23,608, Godbout-Bandal made $120,800, and Field
made $295,012.
(6)
The 7,000 shares of new stock were issued on July 30, 1990.
The price was $142.86 per share. As of that date, the book value
of the then outstanding stock was $328.71 per share. Immediately
after the issuance of these new shares, the value of the existing
shares was reduced to $231 each, while the value of the newly
issued stock increased to $231 per share.
(7)
In a September 14, 1989 letter to Leonard Misenor, Mr. Field
stated:
As to my investment in Capital Bank stock this is
subject to the Change of Control of ownership in the
Bank, I made an investment at the time, if control is
approved I expect to be issued stock.
(Letter from Wayne Field to Leonard C. Misenor (Sept. 14, 1989).)
(8)
On November 14, 1988, the day before Midway Bank would have
foreclosed on Capital Bank for a default on the Midway loan, Field
took out a $256,000 loan from Capital Bank. He then transferred
$73,000 to Donohoo and Mathies for an investment unit.
On April 7, 1989, Field borrowed an additional $434,000 from
Capital Bank, including $234,000 to renew his previous loan and a
$200,000 advance. The same day he transferred $60,000 to Donohoo
and Mathies for an investment unit.
(9)
Regulation O provides guidelines that apply to a bank's loans
to insiders to prevent insider abuse of bank funds. It requires
that insider loans be made on the same terms as extensions of
credit to other bank customers, that they be approved by a majority
of the disinterested members of the bank's board, and that they
meet other restrictions. Regulation O is codified chiefly at 12
U.S.C. SS 375b and 12 C.F.R. pt. 215. Section 375b provides in
part:
(2)
No member bank shall make any loan or
extension of credit in any manner to any of its
executive officers or directors, or to any person
who directly or indirectly or acting through or in
concert with one or more persons owns, controls,
or has the power to vote more than 10 per centum
of any class of voting securities of such member
bank . . . unless such loan, line of credit, or
extension of credit is approved in advance by a
majority of the entire board of directors with the
interested party abstaining from participating
directly or indirectly in the voting.
12 U.S.C. SS 375b(1) (1988).
(10)
The FDIC also directed the individual petitioners to cease
and desist from violating the CBCA and engaging in self-dealing and
ordered them to reimburse Capital Bank for legal fees paid to
Lindquist & Vennum and Rasmussen & Associates on behalf of the
individual petitioners.
(11)
The ALJ initially recommended that the individual petitioners
reimburse Capital Bank for the profit they received on its stock.
The FDIC Board properly determined that the reimbursement would
provide an unwarranted windfall to the bank's new owner, and
therefore ordered the amount of profit to be paid in civil monetary
penalties.
(12)
On July 30, 1990, Lindquist & Vennum gave an oral opinion to
the bank's board of directors followed by a written opinion to the
FDIC that the plan to issue the new shares would not violate the
CBCA and no notice under that Act was necessary. The law firm
prepared the documents necessary to issue and sell the shares. It
was aware of the fact that the FDIC believed that the stock
transaction would violate the CBCA, but did not change its advice
to the bank or to the individual petitioners and did not advise the
bank to file the required notices for a change in control. On
January 28, 1991, the FDIC notified the law firm that it was
prepared to recommend that civil monetary penalties be assessed
against the firm for violating the CBCA. Notwithstanding the
notification, the FDIC imposed no civil monetary penalties on
Lindquist & Vennum for violating the CBCA.
(13)
The district court did not, however, prohibit the FDIC from
ordering the individual petitioners to reimburse the bank after an
administrative hearing on the issue. The court concluded that
ordering the payments was improper in the context of a temporary
order drafted ex parte.
(14)
The legal fees paid by Capital Bank in the Wenzel lawsuit
amounted to $260,866, including fees generated by the counterclaims
brought by Donohoo and Mathies.
(15)
12 U.S.C. SS1813(u)(4) defines the term "institution-
affiliated party" to include:
(4)
any independent contractor (including any attorney,
appraiser, or accountant) who knowingly or recklessly
participates in --
(A) any violation of any law or regulation;
(B) any breach of fiduciary duty; or
(C) any unsafe or unsound practice,
which caused or is likely to cause more than a minimal
financial loss to, or significant adverse affect on, the
insured depository institution.
12 U.S.C. SS 1813(u)(4)(1988).
(16)
The statute provides:
All determinations whether indemnification of a person
is required . . . and whether a person is entitled to
payment or reimbursement of expenses . . . shall be made:
(3)
(If a quorum of non-party directors, or a
majority vote of two or more non-party members of
a board committee designated by a majority of the
board cannot be reached) by special legal counsel
. . . .
Minn. Stat. SS 300.083, subd. 6(a) (1985). "Special legal counsel"
is "counsel who has not represented the corporation or a related
corporation, or a director, officer, employee, or agent whose
indemnification is in issue." Minn Stat. SS 300.083, subd. 1(e)
(1985)
.
(17)
In addition to its primary claim that the FDIC erred in
interpreting the law at issue, Lindquist & Vennum claims that its
right to due process of law was violated. Because we agree that
the FDIC erred in its application of the Minnesota statute, we need
not reach the law firm's due process claim.