Opinion ID: 717547
Heading Depth: 2
Heading Rank: 2

Heading: The Harding and Reveruzzi Loans

Text: 25 Hutensky contends that the FDIC erred in finding that a prohibition order was warranted as a result of his involvement with the Harding and Reveruzzi loans. First, he argues that the FDIC erred in determining that he engaged in prohibited conduct within the meaning of § 1818(e)(1)(A). In addition, Hutensky claims that the FDIC's findings that he acted with willful disregard and personal dishonesty with respect to the two loans are unsupported by the evidence. We reject both of these contentions.
26 Under § 1818(e), in order for a prohibition order to be issued, there must be evidence that a party has engaged in prohibited conduct. One type of misconduct is where an institution-affiliated party has, directly or indirectly ... violated ... any law or regulation. § 1818(e)(1)(A). The term institution-affiliated party includes any director, officer, [or] employee ... of ... an insured depository institution and any other person as determined by the appropriate Federal banking agency (by regulation or case-by-case) who participates in the conduct of the affairs of an insured depository institution. 12 U.S.C. § 1813(u). 27 Section 215.4(b)(1) of Regulation O provides that [n]o member bank may extend credit ... to any of its ... directors ... or to any related interest of that person unless [t]he extension of credit has been approved in advance by a majority of the entire board of directors of that bank. Section 215.2(k) defines a [r]elated interest as a company that is controlled by a person. 6 Under § 215.3(f), [a]n extension of credit is considered made to a person covered by this part to the extent that the proceeds of the extension of credit are used for the tangible economic benefit of, or are transferred to, such a person. 28 In the present case, while Hutensky was a director of First Central, the bank made a $1,050,000 loan to Harding, who then transferred the proceeds to CityPlace, without the prior approval of First Central's board of directors. In addition, at the time that Hutensky was, for the purposes of Regulation O, a director of Central, 7 the bank granted a $500,000 loan to Reveruzzi, who then transferred the proceeds to B & H, without the prior approval of Central's board of directors. Accordingly, in both of these transactions, the banks extended credit, within the meaning of § 215.3(f), to entities that were related interests of Hutensky. Hutensky's failure to obtain prior board approval of these loans violated Regulation O. 29 Hutensky, nonetheless, argues that the FDIC misapplied the law of this Circuit in determining that the Harding and Reveruzzi loans violated Regulation O. He refers to our decision in United States v. Docherty, 468 F.2d 989 (2d Cir.1972), in which we held that, in the context of a criminal prosecution for willful misapplication of bank funds under 18 U.S.C. § 656, a transaction does not constitute an improper loan where the named borrower knew he was putting his own credit on the line, and it is not suggested that he lacked the means to repay. Id. at 995. Hutensky contends that we reaffirmed this holding in United States v. Castiglia, 894 F.2d 533 (2d Cir.), cert. denied, 498 U.S. 821, 111 S.Ct. 68, 112 L.Ed.2d 42 (1990), where we stated that [t]he key issue is whether the named borrowers fully understood and recognized their obligations to repay. Id. at 536. In Castiglia, we affirmed the conviction of a bank officer and other defendants under § 656 because the evidence demonstrated that the nominal debtors had been assured that the bank officer was responsible for repaying the loans. Id. at 537. 8 30 Hutensky argues that the named borrowers, Harding and Reveruzzi, recognized their obligations to repay the loans. Accordingly, Hutensky claims that each transaction should be viewed as two separate loans--one loan from the bank to a named borrower, and a second loan from the named borrower to a partnership involving Hutensky. As a result, he argues, there was no obligation to obtain the boards' prior approval of the transactions, and Regulation O was not violated. We disagree. Regulation O provides that [a]n extension of credit is considered made to a person ... to the extent that the proceeds ... are used for the tangible economic benefit of, or are transferred to, such a person. § 215.3(f) (emphasis added). This language does not tie a finding of an extension of credit to the nominal debtor's understanding of his repayment obligation or his ability to meet that obligation. Rather, it makes clear that an extension of credit includes a transfer of proceeds; there is no dispute that the proceeds of the Harding and Reveruzzi loans were transferred to related interests of Hutensky. Accordingly, we do not see any reason to apply caselaw construing § 656, a statute providing criminal penalties for misapplication of bank funds. Therefore, the FDIC properly determined that Hutensky violated Regulation O when he failed to obtain prior approval of the Harding and Reveruzzi loans. 9
31 In order for the FDIC to issue a prohibition order against a party, the party's violation, practice, or breach must involve[ ] personal dishonesty on the part of such party; or ... demonstrate[ ] willful or continuing disregard by such party for the safety or soundness of such insured depository institution. § 1818(e)(1)(C). We think that there is substantial evidence that Hutensky's conduct in relation to the Harding and Reveruzzi loans involved personal dishonesty. 32 The record shows that Hutensky was an attorney and a sophisticated businessman, and that he had been involved in numerous business projects. At the time of the Harding loan, Hutensky's venture, CityPlace, needed funds. In addition, at the time of the Reveruzzi loan, B & H was having cash flow problems. 10 As a result of the two loans, Hutensky's entities were able to obtain needed funds, without having to follow the formal approval process mandated by Regulation O. In Greenberg v. Board of Governors, 968 F.2d 164 (2d Cir.1992), we held that the record supported a determination of personal dishonesty, where two bank directors did not disclose to the bank's board of directors that they had a controlling interest in partnerships that received loans from the bank. Id. at 171. Similarly, the record here supports a finding of personal dishonesty. Hutensky failed to inform the First Central and Central boards of directors of his business relationship with the parties obtaining the loans, or that the proceeds of the loans would pass to entities he controlled. Even though in the present case, the proceeds were not directly lent to Hutensky's interests as in Greenberg, but instead first passed through Harding and Reveruzzi, Hutensky still was required under Regulation O to obtain prior approval of the loans. Hutensky bypassed the required procedures and received the benefit of the proceeds as a result of his actions, and, therefore, his conduct demonstrated personal dishonesty. 33 Hutensky, however, contends that he did not know that he was required under Regulation O to obtain prior approval of the loans. In respect to the Harding loan, Hutensky testified, I did not give a lot of thought, this wasn't pressed in my mind should I tell the board, not tell the board, what should I do. As to the Reveruzzi loan, Hutensky testified, Did I feel that I had an obligation? Again, I don't think I sat down and said, okay, Mr. Reveruzzi's borrowing money from Central Bank, I'm on the board at Cenvest, what are my obligations with regard to that. In Cavallari v. Office of the Comptroller of the Currency, 57 F.3d 137 (2d Cir.1995), we found that substantial evidence supported the finding that an attorney was culpable for disregarding a cease and desist order issued against a bank, even though the attorney claimed: I knew there was [sic] cease and desist orders, I didn't know what the contents were. I didn't think about it, to tell you the truth. Id. at 140 (alteration in original); cf. Greenberg, 968 F.2d at 171 (stating that the Board and the ALJ were well within their discretion in rejecting the [bank directors'] self-serving testimony that they had revealed their insider transactions to the bank's board of directors). In view of the evidence of Hutensky's extensive experience in law and business, the fact that his business interests received needed funds from the banks, and his willingness to forgo any consideration of whether these personally advantageous deals were consistent with his legal and fiduciary obligations, we agree with the FDIC that Hutensky's actions manifested personal dishonesty, despite his claims that he acted without culpability. 34