Court Opinion

ID: 4157992
Source: CourtListenerOpinion
Date Created: 2017-04-05 00:01:46.283875+00
Date Added: 2024-06-11T12:09:20.957007
License: Public Domain

Case: 14-60911      Document: 00513939685         Page: 1    Date Filed: 04/04/2017

           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT     United States Court of Appeals
                                                                                    Fifth Circuit

                                                                                   FILED
                                      No. 14-60911                               April 4, 2017
                                                                                Lyle W. Cayce
                                                                                     Clerk
G. HARRISON SCOTT; JOHNNY C. CROW; SHARRY R. SCOTT,

               Petitioners

v.

FEDERAL DEPOSIT INSURANCE CORPORATION,

               Respondent

                       Petition for Review of an Order of the
                      Federal Deposit Insurance Corporation
                                 FDIC No. 12-276K
                                 FDIC No. 12-277K
                                 FDIC No. 12-278K

Before BARKSDALE, GRAVES, and HIGGINSON, Circuit Judges.
PER CURIAM:*
       G. Harrison Scott, Johnny Crow, and Sharry Scott petition for review of
a final order by the Federal Deposit Insurance Corporation (“FDIC”) Board of
Directors. The FDIC Board found that Petitioners violated Regulation O of the
Federal Reserve Board (“Regulation O”), 12 C.F.R. § 215, when the Bank of

       * Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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                                 No. 14-60911
Louisiana made improper loans and failed to collect overdraft fees from Bank
insiders. For the following reasons, we DENY Scott, Crow, and Scott’s petition.

                               BACKGROUND
      On October 22, 2013, the FDIC initiated the present action against Scott,
Crow, and Scott, individually, and as institution-affiliated parties of the Bank
of Louisiana. In order to promote compliance with fiduciary obligations, the
FDIC is empowered to impose civil money penalties (“CMPs”) on bank directors
for their violations or their bank’s violations of law or regulation. See Lowe v.
FDIC, 958 F.2d 1526, 1534-35 (11th Cir. 1992). At the time of the violations at
issue in this case, the three Petitioners were bank directors: G. Scott was
President of the Bank, Chairman of the Board of Directors, and a member of
the Executive Committee. Crow and S. Scott were members of the Board of
Directors and the Executive Committee.
      In its Notice of Assessment of Civil Money Penalties (“Notice”), the FDIC
alleged that Scott, Crow, and Scott violated Regulation O when the Bank of
Louisiana made, and then renewed, loans to Director K, which “involve[d] more
than the normal risk of repayment.” See 12 C.F.R. § 215.4(a).
      In October 2009, Director K submitted a loan application to the Bank
seeking $75,000 in “working capital” to bring current three outstanding loans
from 2008 totaling approximately $500,000. At the time of the loan application,
Director K was 81 days past due on the 2008 loans. In addition, he had been
30 days or more past due on the loans on 26 occasions, and he had been
assessed late fees 35 times.
      On his application, Director K estimated his annual income as $157,788
based on previous tax returns. He also disclosed $75,000 in credit card debt.
As collateral, Director K listed: (1) an assignment of interest in the New
Orleans Community Housing Development Corporation; (2) an assignment of
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fees in two cases being handled by his law firm; and (3) a first mortgage on a
condominium, which had previously been valued at $825,000 and $875,000.
The mortgage, however, was already pledged as collateral for his 2008 loans.
In addition, the appraisals of the condominium submitted by Director K were
over two years old and dated from before the 2008 financial crisis. The Bank of
Louisiana Board did not obtain an independent appraisal of the condominium’s
value as of October 2009.
      According to his credit report, Director K was more than 120 days past
due and $42,412 in arrears on a mortgage loan held by a different bank, and
between 31 and 60 days past due on two revolving credit lines totaling $7,841.
After reviewing Director K’s loan application, Petitioner G. Scott wrote a memo
to the Bank Board, questioning, “[i]f [Director K] cannot pay current loan for
$100,000, interest only, how can he pay interest on new loan?” Nonetheless,
the Bank Board and Loan Committee approved Director K’s $75,000, 8 percent
interest-only loan with the principal due at maturity six months later.
      The day after the Bank Board approved the $75,000 loan, Director K
made payments totaling $75,000 on one of the 2008 loans. Over the following
year, Director K was past due on the 2008 and 2009 loans on 20 occasions. In
July 2010, Director K applied for, and was granted a renewal of, each of the
2008 and 2009 loans, payable on July 30, 2011.
      The FDIC’s Notice also alleged further Regulation O violations regarding
Officer P. According to the Notice, the Bank failed to charge Officer P overdraft
fees on two occasions in December 2010 and January 2011. See 12 C.F.R. §
215.4(e). In addition, the Bank approved a loan to Officer P and his wife in July
2011, which was greater than $100,000 and secured by a second mortgage in
violation of Regulation O. See 12 C.F.R. §§ 215.5(c)(4) and 337.3(c)(2).
      On February 28, 2014, following discovery, the FDIC moved for partial
summary disposition against Scott, Crow, and Scott, asserting no genuine
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issue of material fact regarding the Regulation O violations. On March 27,
2014, an Administrative Law Judge (“ALJ”) granted the FDIC’s motion for
partial summary disposition and subsequently conducted a one-day hearing in
New Orleans, LA, to consider evidence regarding the amount of the CMPs to
be imposed. On July 2, 2014, the ALJ issued a 29-page Recommended Decision
recommending that each Petitioner be assessed a CMP of $10,000. The FDIC
Board of Directors adopted the ALJ’s recommendations on November 18, 2014.
Petitioners seek review of the FDIC Board’s final order.

                         STANDARD OF REVIEW
      “[T]he findings of the FDIC Board are to be set aside only if found to be
unsupported by substantial evidence on the record as a whole.” Bullion v.
FDIC, 881 F.2d 1368, 1372 (5th Cir. 1989). “Substantial evidence is such
relevant evidence a reasonable person would deem adequate to support the
ultimate conclusion.” Grubb v. FDIC, 34 F.3d 956, 961 (10th Cir. 1994). The
FDIC’s standard for summary disposition is similar to the standard for
summary judgment. See 12 C.F.R. § 308.29(a); see also In re Cirino, 2000 WL
1131919, at *23 (FDIC 2000). Consequently, we review a grant of summary
disposition as if it were a grant of summary judgment. See Abbott v. Equity
Group, Inc., 2 F.3d 613, 618 (5th Cir. 1993) (articulating the summary
judgment standard). “The remedies or penalties directed by the agency are not
to be disturbed unless they constitute an abuse of discretion or are otherwise
arbitrary and capricious.” Bullion, 881 F.2d at 1372.

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                                      DISCUSSION
         Scott, Crow, and Scott present four issues for our review. 1 They contend
that the FDIC Board’s findings regarding the approval of loans to Director K
and Officer P and the failure to assess overdraft fees to Officer P are
unsupported by substantial evidence. They also claim that the FDIC abused
its discretion and was arbitrary and capricious by assessing each Petitioner a
$10,000 CMP. Finally, they argue that the ALJ improperly resolved contested
facts at the summary disposition stage. None of Petitioners’ arguments are
persuasive.

    I.      Loans to Director K involved more than a normal risk of
            repayment

         Under Regulation O, “[n]o member bank may extend credit to any insider
of the bank . . . unless the extension of credit . . . [d]oes not involve more than
the normal risk of repayment or present other unfavorable features.” See §
215.4(a)(1)(ii); see also Bullion, 881 F.2d at 1374. “The Board’s analysis for
finding more than the normal risk of repayment or other unfavorable features
looks to whether an objective lender at the time the loan was made would have
extended the credit based on the available information at that time.” Bullion,
881 F.2d at 1374.
         In Bullion, we found a higher than normal risk of repayment based on
the following factors:
               [1] [T]he lack of documentation as to the loan and also the
               collateral which was before the officers when they made the
               decision to fund the loan, [2] the overvaluation of the assets
               to support the loan, [3] the borrower and the guarantor’s

1Scott, Crow, and Scott briefed a fifth issue: whether the FDIC Executive Secretary erred by
denying their motion for reconsideration. However, we lack jurisdiction to consider that issue
because their petition for review does not specify it. See Fed. R. App. P. 15(a) (requiring that
a petition for review must “specify the order or part thereof to be reviewed”).
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                potential inability to repay the loan based on the then
                available financial information, and [4] the interest rate set
                was 25% less than the prime rate.

Id. at 1374-75. Though we did not provide a specific formula to determine
whether an objective lender would have extended credit, we stated: “The
availability of cash to pay off the loan should have been one of the primary
considerations of the officers approving the loan.” Id. at 1375.
          Here, a majority of the factors that we identified as determinative in
Bullion are also present: (1) Director K’s loan application did not show that he
could cover his monthly debt service obligations given his approximate
monthly income—$13,149—and his monthly debt payment—$14,770; (2)
Director K was chronically delinquent in servicing his debts; and (3) Director
K pledged collateral for which the Bank had not obtained current appraisals
even though the most recent appraisals dated from before the 2008 financial
crisis.
          Scott, Crow, and Scott contend that the loan to Director K did not involve
a higher than normal risk of repayment because: (1) the loan was eventually
repaid in full; and (2) the appraised value of the condominium offered to secure
the loan exceeded the value of the loans. However, we agree with the FDIC
Board that these facts alone do not establish a genuine dispute of material fact
regarding the issue. First, evidence that a loan is eventually repaid has no
bearing on whether a loan involved a higher than normal risk of repayment.
See Bullion, 881 F.2d at 1374 (defining the relevant inquiry as “whether an
objective lender at the time the loan was made would have extended credit”).
Second, while the value of pledged collateral is relevant to any loan
determination, it is hardly dispositive, especially when a potential borrower
has not shown “availability of cash to pay off the loan” and a bank is faced with
insufficient “documentation as to . . . the collateral.” Id. at 1374-76. Because

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Petitioners have not raised a genuine dispute of material fact regarding
whether the loan to Director K involved a higher than normal risk of
repayment, we find that the FDIC Board’s grant of summary disposition was
warranted. See 12 C.F.R. § 308.29(a).

   II.     Officer P is an “executive officer” within the meaning of
           Regulation O

         As a preliminary matter, Petitioners concede that they are liable under
Regulation O if Officer P is an “executive officer.” Regulation O states:
              Executive officer of a company or bank means a person who
              participates or has authority to participate (other than in the
              capacity of a director) in major policymaking functions of the
              company or bank, whether or not: the officer has an official
              title; the title designates the officer an assistant; or the
              officer is serving without salary or other compensation. The
              chairman of the board, the president, every vice president,
              the cashier, the secretary, and the treasurer of a company or
              bank are considered executive officers, unless the officer is
              excluded, by resolution of the board of directors or by the
              bylaws of the bank or company, from participation (other
              than in the capacity of a director) in major policymaking
              functions of the bank or company, and the officer does not
              actually participate therein.

12 C.F.R. § 215.2(e)(1).
         Here, Scott, Crow, and Scott do not contest that Officer P was a vice
president. In addition, they acknowledge that Officer P was not “excluded, by
resolution of the board of directors or by the bylaws of the bank or company,
from participation . . . in major policymaking functions of the bank or
company.” Id. Given that “every vice president . . . [is] considered [an] executive
officer[] unless . . . excluded, by resolution of the board of directors or by the
bylaws of the bank or company, from participation . . . in major policymaking

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functions of the bank or company,” Officer P is an “executive officer” within the
meaning of the regulation. Id. (emphasis added).
      Scott, Crow, and Scott contend that Officer P should not be considered
an executive officer because they submitted declarations “averring that Officer
P did not participate in or have the authority to participate in major
policymaking functions at the Bank.” However, their argument is not
supported by the plain language of Regulation O. Given that Petitioners have
not shown that Officer P was excluded from major policymaking functions by
resolution of the board of directors or by the bylaws of the bank or company,
we conclude that he is an executive officer. See id.

   III.   The FDIC did not abuse its discretion in assessing civil
          money penalties

      Any insured depository institution or institution-affiliated party that
violates Regulation O shall forfeit and pay a CMP of not more than $7,500 for
each day during which such violation continues. See 12 U.S.C. § 1818(i)(2)(A);
12 C.F.R. § 308.132(c)(3)(i) (2013). The FDIC must consider the following
mitigating factors when determining an appropriate CMP amount: (1) the size
of Respondents’ financial resources; (2) the good faith of Respondents; (3) the
gravity of the violations; (4) the history of previous violations; and (5) such
other matters as justice may require. See 12 U.S.C. § 1818(i)(2)(G). The FDIC
must also perform a 13-factor analysis found in the Interagency Policy
Regarding the Assessment of CMP’s by the Federal Financial Institutions
Regulatory Agencies, 63 Fed. Reg. 30226 (May 28, 1998).
      Here, the ALJ held a hearing on April 16, 2014 to determine an
appropriate CMP amount. Prior to that hearing, Scott, Crow, and Scott each
stipulated that they had the financial capacity to pay the $10,000 CMP
requested by the FDIC. After considering the five mitigating factors and
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performing the required 13-factor analysis based on evidence presented at the
hearing, the ALJ found that, even though the length of the violations—
spanning over 22 months—could have generated a penalty of over $5 million,
a $10,000 CMP for each Respondent was appropriate. Given that the CMP
amount was within the statutory range and the ALJ correctly considered the
mitigating factors and 13-factor Interagency Policy Analysis, the FDIC Board’s
assessment of a $10,000 CMP for each Respondent did not constitute an abuse
of discretion and was not arbitrary and capricious.

   IV.   The Administrative Law Judge did not improperly resolve
         contested factual issues

      Petitioners contend that the ALJ improperly resolved contested factual
issues by disregarding relevant evidence, making credibility determinations,
and ignoring new evidence after the close of summary disposition. After
reviewing the record, we agree with the ALJ that Petitioners did not present
evidence, demonstrating a genuine dispute of material fact. See 12 C.F.R. §
308.29(a). Furthermore, the FDIC Board properly found that Petitioners could
not proffer new evidence not originally presented before the ALJ after the close
of summary disposition. See § 308.39(b)(2) (“No exception need be considered
by the Board of Directors if the party taking exception had an opportunity to
raise the same objection, issue, or argument before the administrative law
judge and failed to do so.”). Thus, the ALJ did not improperly resolve contested
factual issues.

                               CONCLUSION
      For the reasons stated above, the petition is DENIED.

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