Lindquist & Vennum v. Federal Deposit Insurance , 103 F.3d 1409 ( 1997 )

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. § 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
2
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. § 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).
3
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. § 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. §
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
4
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
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.
5
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).
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.
6
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 purchase3 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
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.
7
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.
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.
8
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
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.
9
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.
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.
10
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 O9 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
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. § 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. § 375b(1) (1988).
11
After careful review, we believe the FDIC's findings that individual
petitioners caused to be made and accepted insider loans
12
are supported by substantial evidence on the record as a whole. Regulation
O at 12 C.F.R. § 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. § 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
13
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
14
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
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.
15
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. § 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. §
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
16
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.
§ 1818(e).
2. The Cease-and-Desist Order
Under 12 U.S.C. § 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
17
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. § 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. § 1817(j)(16), while violators of 12
U.S.C. § 375b and Regulation O may be similarly penalized under 12 U.S.C.
§ 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. §
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
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.
18
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
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.
19
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
20
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
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.
21
than a minimal financial loss to a bank. 12 U.S.C. § 1813(u)(4).15 The
FDIC further found that the violation of law
15
12 U.S.C. § 1813(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. § 1813(u)(4)(1988).
22
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. § 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
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. § 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. § 300.083, subd. 1(e)
(1985).
23
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
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.
24
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.
25
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.
26