Berniece Larimore, Sam M. Taylor, William G. Butcher, and Orville Bottrell v. C.T. Conover, Comptroller of the Currency , 775 F.2d 890 ( 1985 )

WESLEY E. BROWN, Senior District Judge.

Petitioners, past and present directors of the First National Bank of Mt. Auburn, Illinois, petition for review of a Decision and Cease and Desist Order issued by the Comptroller of Currency on May 11, 1984, pursuant to the provisions of 12 U.S.C. Sec. 1818(b)(1). The Comptroller’s Order followed a 1982 audit of the bank which disclosed that the board of directors had, in six instances, violated the provision of 12 U.S.C. Sec. 84 which imposed lending limits upon the bank. Under the terms of the Cease and Desist Order, the petitioner directors are required to indemnify the bank for all losses incurred on account of the excessive loans.

This Court has jurisdiction over the Petition for Review, with the power to affirm, modify, terminate, or set aside the Comp-trailer’s Order, pursuant to the provisions of 12 U.S.C. sect. 1818(h)(2).¹

The issues presented in this case include the question of whether or not 12 U.S.C.A. Sec. 1818(b)(1), which authorizes the Comptroller to order bank directors “to take affirmative action to correct the conditions resulting” from their violations of 12 U.S.C.A. Sec. 84, should encompass the requirement of proof of knowledge on the part of directors, a condition of liability found in 12 U.S.C.A. Sec. 93(a). In addition, the directors claim that the Order requiring restitution was not supported by substantial evidence; that the action of the Comptroller was arbitrary and capricious; and that the Comptroller had no jurisdiction over the director Bottrell, who resigned prior to entry of the Cease and Desist Order.

At all times relevant to these proceedings, Sec. 84 of 12 U.S.C. provided that the total obligations to any national bank of any person, partnership, association or corporation could not at any time exceed 10% of the amount of the capital stock of the bank actually paid in and unimpaired, and 10% of its unimpaired surplus fund.² Following an audit and report of bank examiners, which disclosed violations of the lending limits of Sec. 84, the Office of the Comptroller of Currency initiated Cease and Desist proceedings against the Bank and its Directors, pursuant to his authority under 12 U.S.C. Sec. 1818(b). That section, codified under the Federal Deposit Insurance Corporation, provides for termination of a bank’s status as an insured bank. Paragraph (b) of that section provides that:

“(b)(1) If, in the opinion of the appropriate Federal banking agency, any insured bank ... or any director, officer, employee, agent, or other person participating in the conduct of the affairs of such a bank is engaging or has engaged, or the agency has reasonable cause to believe that the bank or any directors ... or other person participating in the conduct of the affairs of such bank ... is violating or has violated ... a law, rule, or regulation ... the agency may issue and serve upon the bank or such director ... a notice of charges in respect thereof____”

* # * * * Sft

“In the event ... the agency shall find that any violation ... specified in the notice of charges has been established, the agency may issue ... an order to cease and desist from any such violation or practice. Such order may ... require the bank or its directors ... to cease and desist from the same, and, further, to take affirmative action to correct the conditions resulting from any such violation or practice.” (Emphasis supplied.)

The Cease and Desist Order on review here was entered on May 11, 1984, following hearing before an Administrative Law Judge. In issuing the Order, the Comptroller adopted some of the findings of the Administrative Law Judge, and made independent findings of fact and conclusions from the evidence adduced at the hearing, all to the effect that the directors had knowingly violated the provision of 12 U.S.C. Sec. 84 in approving loans to six different parties. The Bank was ordered not to lend money or to extend credit to any borrower in an amount exceeding the lending limits of Sec. 84, and the board of directors was ordered to “cause all loans or other extensions of credit which are in excess of the lending limitations provided in 12 U.S.C. Sec. 84 to be reduced to conforming amounts without loss to the Bank.” The Board was also required to adopt policies and procedures to prevent any recurrence of similar violations.

In addition, the Order required the Directors Bottrell, Butcher, Larimore, Mulberry and Taylor to indemnify the Bank, “up to their respective potential liability” for all losses that the Bank has or may incur as a result of excessive loans to the following bank customers: Bill Porter Construction Company; Twin County Trucking, Inc./Robert Varvel; Keith Montgomery; William Moore; John Thomas; and Dwight Thomas. The total potential liability for the individual directors is $1,084,883 for Bottrell, $744,053 for Butcher, $1,084,-883 for Larimore, $1,052,176 for Mulberry and $1,084,883 for Taylor.³

The factual background which led to the Cease and Desist Order is basically without dispute. The First National Bank of Mt. Auburn is a small, federally chartered bank located in Mt. Auburn, Illinois. In September, 1980, its board of directors consisted of Herbert Bottrell, Chris Gardner, Orville Bottrell, Berniece Larimore, Albert Mulberry and Sam Taylor. Orville Bottrell was President and the active manager of the bank, handling all loans and managing the investment portfolio of the bank. Berniece Larimore was the Cashier, and she was responsible for overall operations.

On September 9, 1980, the Office of the Comptroller began an examination of the bank, which led to the discovery that the bank’s board of directors had approved loans exceeding the limitations of Sec. 84 on two separate lines of credit to William Porter and Twin County Trucking/Robert Varvel. At that time the bank examiner discussed his findings with all of the directors, and they were told of the loan limit violations and of their potential liability on illegal loans. They were cautioned to exercise more supervision over loans. The examiner’s written report was discussed at a board meeting, and a copy was made available for all directors to review.

Within one month after the 1980 examination, the Porter and Varvel lines of credit were reduced to an acceptable level.

Starting in July, 1981, the board, using loan approval procedures followed from October, 1978, until July, 1982, once again approved a series of excessive loans to Porter and Varvel, as well as to four other parties, that violated the bank’s loan limits. Orville Bottrell, who acted as loan officer, actually made the loans and distributed the funds. At a later board meeting, which usually was held on the first Thursday of each month, a list of the loans made during the previous month was distributed to the directors. This list contained the name of the borrower, the • date of the loan, the amount of the loan and interest rate, and the due date. There was no information as to the total amount of all loans outstanding to the borrower, and no information concerning the bank’s lending limits under Sec. 84 appeared on the list.

In late 1980, Herbert Bottrell resigned as director, and was no longer a member of the board. Chris Gardner resigned his position as director in December, 1981. These two persons were not parties to the administrative proceedings below.

On January 7, 1982, the petitioner William G. Butcher was appointed to fill a vacancy on the board of directors, and he was reelected, along with other directors, on January 26, 1982.

The petitioner, Orville Bottrell, who was president of the bank, resigned that office on December 31, 1982, and he was not reelected as a director on January 25, 1983. The petitioner William Butcher became president of the bank upon Bottrell’s resignation, and he remained in that office at the time the petition to review was filed in this Court.

The amounts and character of the various loans which exceeded the limits of Sec. 84 are not disputed. In no way can the violations be said to have been “minimal”, or inadvertent. A second examination of the bank, completed on August 20, 1982, revealed excessive loans for Porter Construction, Twin County/Varvel, William Moore, Keith Montgomery, John Thomas and Dwight Thomas. A subsequent examination, completed on December 14,1982, as well as an informal audit conducted in April, 1983, revealed that these lines of credit, except for D. Thomas, remained in excess of the lending limits of Sec. 84. One example is the Porter Construction line which became excessive on July 3,1981 with the advancement of $11,000. Prior to that time, the balance on the Porter line of credit was $94,199. Thereafter, the balance on this line reached a total amount of $820,982, $543,624 of which were due to loans made after Mr. Butcher became a director.⁴ As of April, 1983, $477,320 of this line of credit had been charged off as loss. The Twin County/Varvel line became excessive on June 10, 1981, by a loan of $7,200. Prior to that date, the balance was $94,874. The line was eventually increased to $183,470, $145,501 of which was extended after Mr. Butcher joined the Board.

The evidence likewise established, without dispute, that all of the excessive loans were approved by the entire board, as it existed at the time the loans were made, with no abstentions or dissenting votes.⁵ 6 There was no evidence that any director inquired about or investigated the outstanding balances on any account, although that information was readily available to each director. From such evidence, the Comptroller determined that a violation of 12 U.S.C. Sec. 84 was a knowing violation “if a director deliberately refrains from investigating that which it was his duty to investigate, or if he otherwise should have known the facts which constitute a violation of law.” He further concluded that directors Larimore, Bottrell and Taylor knowingly approved extensions of credit, including standby letters of credit, to Porter, Twin County/Varvel, Moore, Montgomery, J. Thomas and D. Thomas, in violation of 12 U.S.C. Sec. 84, and that director Butcher, likewise knowingly approved extensions of credit, including letters by credit, subsequent to January 7, 1982, to these six bank customers.⁶

One of the oldest laws governing lending by national banks are the lending limitations set out in 12 U.S.C. Sec. 84, which dates back to 1864.⁷ Since 1864, directors who knowingly violate the limits have been personally liable under 12 U.S.C. Sec. 93 for losses sustained by the bank on excessive loans. See Corsicana Nat. Bank v. Johnson, 251 U.S. 68, 40 S.Ct. 82, 64 L.Ed. 141 (1919). Section 93 provides that if the directors knowingly violate, or knowingly permit any violation of laws regulating banking, all rights of the banking association “shall be thereby forfeited.” The violation is to be determined by a federal court in a suit brought for the purpose by the Comptroller before the bank is declared dissolved, and, “in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation.” In Corsicana, the Supreme Court recognized that a director’s liability under Sec. 93 (then Sec. 5329 U.S.Rev.Stat., Comp.Stat. Sec. 9831, 6 Fed.Stat.Anno.2d Ed. p. 873) for assenting to an excessive loan was not to be based upon mere negligence since a knowing and intentional act was required. This rule was subject to the qualification, however, that if a director “deliberately refrained from investigating that which it was his duty to investigate, any resulting violation of the statute must be regarded as ‘in effect intentional’ 251 U.S. at 71, 40 S.Ct. at 84, 64 L.Ed. at 147. See also, Anno. 119 L.R.Fed. 606.

Apart from the power of a Court to act under Sec. 93, whenever the Comptroller believes a bank director has violated statutory lending limits, he may as in the case here, initiate administrative enforcement proceedings under 12 U.S.C. Sec. 1818(b).⁸ If a violation is found, the Comptroller may order the bank, and its directors “to cease and desist” from the unlawful practice, and he may further order that affirmative action be taken “to correct the conditions resulting from any such violation or practice.” Section 1818(b)(1) has been construed by the Ninth Circuit to authorize orders requiring directors to compensate for losses incurred by reason of violations of a bank’s lending limits under Sec. 84. del Junco v. Conover, 682 F.2d 1338 (9 Cir.1982), cert. den. 459 U.S. 1146, 103 S.Ct. 786, 74 L.Ed.2d 993 (1983). There, as here, the directors argued that Sec. 1818(b) incorporates the scienter requirement of knowledge found in Sec. 93. The Court determined that even if the “knowingly” standard applies to an 1818(b) enforcement proceedings, (a question not determined)—the directors were liable because they had knowledge of the identity of the borrowers, knowledge that the proceeds were to be used by one company, and knowledge of the loan amounts and the bank’s loan limits. Apparently, these directors failed to aggregate the loans, as required by Sec. 84. In del Junco, the Court explicitly pointed out that “(directors of a national bank operate in an area closely regulated by federal law, and cannot maintain ignorance of the law as a defense.” 682 F.2d at 1342.

The Petitioners seek to distinguish the del Junco case upon the premise that actual knowledge was present there. The petitioners Butcher and Taylor in particular claim that they had no actual knowledge of the lending limits of the bank, and no knowledge that the loans exceeded those limits. Butcher and Taylor claim that they had no prior experience as bankers, no knowledge of any letters of credit issued by Bottrell, and Taylor claims that as an “outside” director, he was entitled to rely upon the expertise of other bank officers, and had no duty to inquire as to the status of each loan applicant.

The standards of review of the Comptroller’s action are established by statute and numerous decisions. Section 1818(h)(2) of Title 12 U.S.C. provides that review of the Comptroller’s orders shall be “as provided in Chapter 7 of Title 5.” Title 5, Sec. 706 governs our review of agency actions:

“To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.

“The reviewing court shall—

(2) hold unlawful and set aside agency action, findings and conclusions found to be—

(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

Hí 5k H*

(E) unsupported by substantial evidence in a case ... otherwise reviewed on the record of an agency hearing provided by statute____”

The Comptroller’s factual findings are to be upheld if supported by substantial evidence. del Junco v. Conover, supra, 682 F.2d at 1340. Because of the Comptroller’s regulatory expertise, his choice of remedies under Sec. 1818 “will not be disturbed except when the exercise is arbitrary, capricious or contrary to law.” First Nat. Bank of Lamarque v. Smith, 610 F.2d 1258, 1264 (5 Cir.1980).

Following our review of the administrative record, and the evidence summarized above, we determine that the Comptroller’s finding that the directors “knowingly” violated the lending limits of Sec. 84 is supported by substantial evidence. We further find that the Comptroller’s choice of remedy in requiring the directors to compensate the bank for any losses caused by approval of excessive loans was not an arbitrary or capricious choice of remedy in that there is a clear, rational basis for a remedy which corrects the financial harm that results from the directors’ unlawful conduct. The violations here were not minimal oversights or a mere failure to implement obscure banking regulations. As bank directors, the petitioners were responsible for conducting the business of the association in a safe and sound manner and in accordance with law. The directors had been previously warned of the need to comply with loan limits by the Office of Comptroller during the 1980 audit. There were no special exemptions for “new directors”, or for “outside directors” with respect to their obligations to conduct the affairs of their bank in a lawful manner.

Petitioner Bottrell contends that because he is no longer a director or officer of the bank, he is not subject to the jurisdiction and orders of the Comptroller under the provisions of 12 U.S.C. Sec. 1818, since he is not a “person participating in the conduct of the affairs” of the bank. Such contention is without merit. While Bottrell was not reelected as a director on January 25, 1983, he was served with the amended Notice of Charges which initiated these proceedings on December 17, 1982, prior to the end of his term. All of the evidence establishes that he was an active director of the bank when all of the violations occurred and that he was the person who actually made all the excessive loans. The plain language of Sec. 1818 authorizes the Comptroller to issue orders against “directors ... and other persons participating in the conduct of the affairs” of the bank— not solely “current directors.” Bottrell is without doubt subject to the provisions of Sec. 1818, and he can not avoid his responsibility under the law simply by resigning before a hearing was conducted on the charges.

The Order of the Comptroller is Affirmed.

1 . "Any party to the (administrative) proceeding, or any person required by an order issued under this section to cease and desist from any of the violations or practices stated herein, may obtain a review of any order ... by the filing in the court of appeals of the United States for the circuit in which the home office of the bank is located ... a written petition praying that the order of the agency be modified, terminated, or set aside____ Upon the filing of such petition, such court shall have jurisdiction ... to affirm, modify, terminate, or set aside, in whole or in part, the order of the agency.”

2 . Sec. 84 has since been amended and different standards now prevail.

3 . The differences in liability are attributable to the directors’ various terms of office, and/or attendance at directors’ meetings when certain loans were approved.

4 . The balances include standby letters of credit issued after January 7, 1982.

5 . Since director Mulberry was absent from the July and August, 1981 board meetings, he was not held accountable for loans approved in his absence.

Mulberry died after the Cease and Desist Order was made. His estate has been relieved of liability, and it is not a party to this review.

6 . It was stipulated that Butcher is not liable for any unlawful extensions of credit which occurred prior to his election as a member of the board of directors.

7 . R.S. Sec. 5200 derived from the Act of June 3, 1864, c. 106, Sec. 29, 13 Stat. 108, the National Bank Act.

8 . The Comptroller supervises the entire national banking system under the provisions of 12 U.S.C. Sec. 1, et seq. He has the power to charter national banks, examine their status, remove directors, and regulate all of the bank's dealings. See Independent Bankers Ass’n v. Heimann, 613 F.2d 1164, 1168 (D.C.Cir.1979), cert. den. 449 U.S. 823, 101 S.Ct. 84, 66 L.Ed.2d 26 (1980).