Court Opinion

ID: 9470146
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:58:18.855823+00
Date Added: 2024-06-11T17:41:45.464115
License: Public Domain

TATE, Circuit Judge,
dissenting in part:
I concur with much of the majority’s opinion, but I respectfully dissent from its holdings (1) that the Comptroller erred in determining that, contrary to “safe and sound banking practices”, the respondent bank has been operating with inadequate capital, and (2) that the Comptroller was without authority to order recall of a loan to a bank officer in violation of the statutory limit then provided by 12 U.S.C. § 375a(2), because an amendment of the statute subsequent to the loan had increased the loan limit to an amount exceeding the earlier then-illegal loan.
1. “Unsafe and unsound” banking practices.
The Comptroller is authorized to issue cease and desist orders, after hearing and subject to judicial review, when a bank subject to his regulation “is engaged or has engaged ... in an unsafe and unsound practice in conducting the business of such bank.” 12 U.S.C. § 1818(b)(1). The majority correctly cites the jurisprudential test to the effect that unsafe and unsound banking practices encompass “conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder.” First National Bank of Eden v. Department of the Treasury, 568 F.2d 610, 611 n. 2 (8th Cir.1978) (emphasis added). “The Comptroller’s statutory duties require the closest monitoring and continuous supervision of these institutions [national banks]. Thus, the Comptroller’s discretionary authority to define and eliminate ‘unsafe and unsound’ conduct is to be liberally construed.” Independent Bankers Association of America v. Heimann, 613 F.2d 1164, 1168-69 (D.C.Cir.1979), cert. denied, 449 U.S. 823, 101 S.Ct. 84, 66 L.Ed.2d 26 (1980).
Here, the Comptroller found that the respondent bank’s capitalization ratio (ratio of equity capital to total assets) of 5.28 percent was an unsafe and unsound banking practice. The cease and desist order directed the Bank to adjust its equity and assets to a 7 percent ratio—i.e., to raise more capital, or to lend less so that the equity capital provided a safe and sound cushion. For reasons to be noted, I find to be supported by substantial evidence the Comptroller’s determination that the present 5.28 capitalization ratio of this bank is inadequate for safe and sound banking practice.
Once this determination is properly made, the remedy of requiring the proper rate (in this case, 7 percent) is left to the Comptroller’s broad discretion, to be set aside on judicial review only if arbitrary and capricious (see below). “ ‘[T]he relation of remedy to policy is peculiarly a matter for administrative competence’ ... [and the administrator’s] choice of sanction [is] not to be overturned unless the Court of Appeals might find it ‘unwarranted in law or ... without justification in fact.... ’” Butz v. Livestock Commission Company, 411 U.S. 182, 185-86, 93 S.Ct. 1455, 1458, 36 L.Ed.2d 142 (1973). “The law is fortunately sensible to recognize that in a highly technical area the evaluation of action and appropriate disciplinary sanction necessarily requires that the agency be vested with a wide range of discretion in the imposition of penalties .... Our review of the sanction imposed is confined to the inquiry of whether there has been an abuse of discretion.” Nadiak v. Civil Aeronautics Board, 305 F.2d 588, 593 (5th Cir.1962).
At least implicitly contrary to these principles, the majority seems to indicate that not only must the Comptroller prove that the present bank’s capitalization is inadequate, but that he must also prove that the rate of 7 percent required by him is appropriate (rather than, say, 6.8 percent or 5.8 percent). In my view, the majority errs in assuming that the Comptroller has the bur*689den of establishing a particular rate of capitalization, once that official has found the present capitalization ratio to be inadequate. Rather, under the standard of judicial review imposed upon us by statute, the burden is upon the respondent seeking judicial review to establish that the Comptroller-determined capitalization ratio is arbitrary or not supported by substantial evidence.
The bank-regulation statute specifically makes the Comptroller’s action subject to judicial review under the Administrative Procedure Act. 12 U.S.C. § 1818(h). No procedural irregularity, deprivation of constitutional right, or action in excess of statutory authority is complained of here. Therefore, under the terms of the Administrative Procedure Act, the Comptroller’s action in determining unsafe and unsound capitalization and in requiring increase to a 7 percent ratio may not be set aside unless “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or unless “unsupported by substantial evidence.” 5 U.S.C. § 706(2)(A), (E).
In my view, bound by this standard of judicial review, the Comptroller’s determination that the present bank’s capitalization ratio was unsafe and unsound is supported by substantial evidence, and neither his use of peer group analysis as an aid in determining the issue, nor (as earlier stated) the sanction imposed by him raising the capitalization ratio to a 7 percent ratio, was arbitrary or capricious and thus subject to judicial modification.
Insofar as the majority finds fault as a matter of law with the Comptroller’s use of peer group analysis—comparing the subject bank’s practices with those of comparable size and location—, I am unable to find that the Comptroller’s use of such was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). The Comptroller noted that he was aware of the limitations of peer group analysis and did not rely exclusively upon it, but he felt that evidence of the usual and customary practices of other banks under similar circumstances was relevant and admissible in attempting to establish a standard of care, an accepted evidentiary principle, and he found some support for concluding that the present bank was undercapitalized in the composite judgment of the bank’s peers as to a safe and sound level of capitalization as reflected by the risk experience of banks similar to the present bank.
I do not find arbitrary or capricious this use by the Comptroller of peer group analysis as probative (but not determinative) of a safe and sound level of capitalization for the present bank. I find unwarranted as a matter of law or as a substitute of judicial for administrative reasoning the conclusion of my brothers of the majority that, in the absence of further evidentiary connection of the levels of capitalization of peer group banks with (un)safe and (un)sound banking practices, the peer group analysis may not be used in (partial) support of the Comptroller’s finding that the present bank’s capital level, substantially below the peer group level, was unsafe and unsound.
Before turning to the substantial evidence issue, I should briefly note the respondent bank’s contention, in part accepted by the majority, that its level of capitalization was safe and sound because in fact it had operated profitably, with assets and liquidity sufficient for this purpose. In addition to relying upon specific deficiencies of the bank in planning for future needs, the Comptroller commented with regard to this argument: “Earnings performance, except over a very long period, can be a misleading indication of management quality. The imprudent manager may, with good fortune, produce the same results which the prudent manager may with far less risk exposure.” With regard to the bank’s contention that its capitalization was adequate for readily foreseeable needs, the Comptroller pointed out the accepted principle, supported by the agency’s expert, that a principal purpose of banking capital is to provide a cushion for “ ‘unanticipated’, ‘abnormal’, and ‘unexpected’ losses, i.e., those which are not readily predicted and foreseen by management”, and a cushion main*690tained in the common practice of banks in the respondent’s peer group.
Thus, the majority errs, as I see it, in disturbing the Comptroller’s non-arbitrary remedial sanction of requiring a 7 percent capitalization ratio, and in rejecting the Comptroller’s use of peer group analysis as a partial aid in determining what is a safe and sound ratio for a bank of the respondent’s size and location.
The majority also errs, in my opinion, in finding that substantial evidence did not support the Comptroller’s determination the bank’s present capitalization ratio is an unsafe and unsound banking practice, that, to be remedied, requires an increase thereof. In construing the evidence as a whole (principally three experts, one for the Comptroller and two academics for the bank), the majority admits that the Comptroller’s expert’s testimony on its face supports the finding and remedy. However, the majority then finds on the basis of the record as a whole certain deficiencies in this expert’s testimony and thus finds it deficient as substantial evidence, in my opinion, largely based on (although not specifically attributed to) the critique of this expert’s testimony and the views of the two experts offered by the bank in opposition to the Comptroller’s expert. In purporting to review the administrative record as a whole, the majority, I respectfully suggest, has substituted its judgment as to what is a safe and sound capitalization for that of the Comptroller, statutorily authorized to exercise broad discretion in this determination entrusted to his (not the court’s) expertise. The majority has in effect accepted the views of the two experts for the bank, whose testimony was specifically rejected by the Comptroller.1
The issue before us is whether, as to this particular bank, the Commissioner’s determination that it has an inadequate capitalization base is supported by substantial evidence. I am unable to agree with the majority’s holding that the Comptroller’s determination that the bank’s capital level was unsafe and unsound is not supported by substantial evidence. As the majority states, the reviewing court must not substitute its judgment for that of the agency, see Abilene Sheet Metal, Inc. v. NLRB, 619 F.2d 332, 337 (5th Cir.1980), but the majority nonetheless seems to weigh de novo the evidence of the expert witnesses upon which the Comptroller relies. We must determine only if the Comptroller made a reasonable finding, not the finding that we would reach independently, see id. at 338; the findings are unreasonable if there is no rational connection between the evidence as a whole and the findings. J.H. Rose Truck Line Inc. v. Interstate Commerce Comm’n, 683 F.2d 943, 948 (5th Cir.1982). I am unable to say, as does the majority, that there is no rational connection between the evidence in the administrative record and the Comptroller’s finding that the Bank had been operating with inadequate capital.
The majority objects primarily to the ALJ’s and the Comptroller’s reliance on the analysis of qualitative and quantitative factors of capital adequacy offered by the Comptroller’s expert, Vaez, who concluded that the Bank’s present level of equity capital presented “abnormal risk” to the institution and its depositors and shareholders. The majority emphasizes that Vaez’s testimony established that the qualitative characteristics of the bank—quality of management, assets, earnings and liquidity—are strong and that with respect to quantitative *691factors, the bank’s low peer group ranking for the equity capital to total assets ratio does not necessarily mean that the bank objectively has an unsafe or unsound capital level.
The majority ignores, however, the areas of Vaez’s evaluation upon which the Comptroller could have reasonably based its finding. First, the expert pointed to many qualitative weaknesses of the bank’s position—potential “problem assets” because 67% of the loans reviewed lacked adequate collateral or loan documentation, the absence of professional capital planning, poor quality of bank operating practices, management’s laxity in documentation—as well as the bank’s “obviously deficient” capital base for supporting the present and projected volume of business.2 No one of these qualitative factors would in itself support a finding that the bank is unsound, especially in light of the high ranking of the Bank in these areas in the Comptroller’s 1980 re- . view, but they certainly support the reasonableness of the Comptroller’s ultimate conclusion.
The majority primarily takes issue with the significance placed on the bank’s low peer group ranking among banks of similar size and the necessity of the seven percent equity capital to total assets ratio for maintaining a safe and sound capital structure.3 Although a low ranking (even, as here, in the bottom two percent) would not perhaps in itself indicate a violation, nevertheless, even considering the bank’s experts’ criticism of the significance of the ranking, the Comptroller could have reasonably relied on the quantitative factors testified to by the expert that contributed to the bank’s low ranking. The expert Vaez emphasized the decline of the bank’s ratio over a five year period while that of other peer banks in and outside Texas increased. In addition to a low relative standing, the bank’s performance with respect to asset growth in general (declining), risk asset growth (increasing), and overall capitalization ratio (declining), moved in an opposite, negative direction of the general trend of banks of its size, type and location.
I believe that the Comptroller could have made a reasonable connection between the bank’s past record in order to find at present an unsafe and unsound capital base, and that given the evidence in the entire record of particular qualitative and quantitative deficiencies, it could reasonably accept the expert Vaez’s conclusion that a seven percent capitalization ratio is necessary to cure this bank’s unsound condition. In reversing the Comptroller’s finding in this case, the majority reaches an independent determination of the merits.
2. Remedial Power to Order Call of Loan to Bank Officer Made in Violation of Law.
I also object to the majority’s interpretation of the Comptroller’s power to redress violations of the lending limits to its own officer, C.K. Wolf. 12 U.S.C. § 375a(2). While the majority found that the Comptroller properly directed the bank to correct the violation and to implement policies and procedures to ensure that future violations of section 375a(2) did not occur, it noted that the violation in this case was “corrected” by the amendment of section 375a(2) subsequent to the bank’s illegal loan that increased the lending limit to an amount greater than that of the Wolf loan. The majority thus observed that requiring the bank in this case to cancel the loan would be “punitive” and outside the intent of section 1818(b).
*692It seems to me well within the Comptroller’s remedial authority under section 1818(b) to order that the bank affirmatively correct its wrongdoing and “call in” an illegally-made loan, made at a time when, for example, interest rates or other lending considerations would have been different. We should not require the Comptroller to, in effect, “ratify” an illegal loan that becomes legal within 15 days because of a statutory change (although, of course, it would not necessarily be an abuse of discretion for the Comptroller not to order cancellation in every case).

Conclusion

With great respect for my esteemed brothers of the majority, I must nevertheless dissent in part from their persuasive opinion reached in the conscientious exercise of what they feel to be an appropriate (and I feel to be, an inappropriate) level of judicial review.

. The ALJ found the Comptroller’s expert more persuasive. The Comptroller himself, in his review, pointed out that the bank’s two academic experts had dealt with the capital adequacy in a largely abstract context and lacked the Comptroller’s expert’s extensive experience in evaluating the capital adequacy of particular banks. He further pointed out several views of these academics that ignored, as not relevant, factors previously considered of significance in sound banking practice, pointing out at least one “radical conclusion” substantially at variance with accepted thought. While the ALJ and the Comptroller may well have accepted the views of the bank’s experts, they did not do so. The issue before this court is whether the rejection is arbitrary and capricious or not supported by substantial evidence, and I find no reason suggested by the majority that the Comptroller’s rejection should be disturbed on review.

. The majority finds that Vaez employed an overstated asset growth rate projection in determining future equity shortfalls, whereas the expert’s testimony shows that even the present base was inadequate. (R.Vol. IX, p. 18).

. The majority also states that the significance of the equity capital to total assets ratio is misplaced in light of the bank expert Fraser’s dissatisfaction with the use of the standard and Comptroller Heimann’s observation that inadequate earnings, rather than undercapitalization, contributes to bank failures. In this case, however, the Comptroller endeavors to prevent unsafe or unsound conditions leading to bank failure, and the capitalization ratio was recognized by one of the bank’s experts as a “widely used” measure of the adequacy of the capital base. (R.Vol. XII, pp.. 79-80).