Florida Department of Banking and Finance, Petitioner, v. Board of Governors of the Federal Reserve System, Respondent.florida Bankers Association, and Sun Bank/palm Beach, Petitioners, v. Board of Governors of the Federal Reserve System, Respondent, 760 F.2d 1135 (11th Cir. 1985)

This action is a petition, pursuant to 12 U.S.C. § 1848, for review of an order of the Board of Governors of the Federal Reserve System (the Board). In its order,¹  the Board, acting pursuant to the Bank Holding Company Act of 1956 (as amended), 12 U.S.C. § 1841 et seq., approved the application of a New York bank holding company, U.S. Trust, to expand the nonbanking activities of its wholly owned Florida subsidiary (Trust Company).

The Bank Holding Company Act (the Act) constitutes a comprehensive federal framework for the supervision and regulation of bank holding companies--companies that control one or more banks. Section 2(c) of the Act contains the statutory definition of "bank." Bank is defined as any institution that: (1) accepts deposits that the depositor has a legal right to withdraw on demand, and (2) engages in the business of making commercial loans. 12 U.S.C. § 1841(c). Section 3 of the Act deals with a bank holding company's acquisition of banks. 12 U.S.C. § 1842(a). Under this section, a bank holding company may not acquire control of any additional bank without prior approval of the Board. Section 3(d) of the Act,²  commonly referred to as the "Douglas Amendment," prohibits the Board from approving the acquisition of any bank by a bank holding company whose principal operations are conducted in another state, unless the acquisition of the bank by an out-of-state bank holding company is expressly authorized by the statute laws of the state in which the bank to be acquired is located. 12 U.S.C. § 1842(d). In other words, the Douglas Amendment proscribes interstate bank acquisitions by bank holding companies unless the state where the bank to be acquired allows such acquisitions by statute. Section 4 of the Act deals with the regulation of nonbank activities. Section 4 generally prohibits a bank holding company from acquiring an entity engaged in nonbank activity. Section 4(c) (8) of the Act contains the principal exception to this prohibition. It authorizes board approval of acquisitions of nonbanking activities which are "closely related" to and a "proper incident" of banking. Section 5 of the Act confers certain enforcement powers upon the Board. Specifically, Sec. 5(b), 12 U.S.C. § 1844(b), authorizes the Board to issue regulations and orders to carry out the purposes of the Act and to prevent evasions of it.

U.S. Trust is a bank holding company whose sole commercial bank subsidiary is located in New York, New York. On November 8, 1983, U.S. Trust applied for the Board's approval of a proposal to expand the nonbanking activities of its nonbanking subsidiary in Florida. The proposed expansion included the acceptance of time and demand deposits (including checking accounts) and the making of consumer loans. U.S. Trust's Florida subsidiary had previously been established as a Florida chartered nondeposit trust company. This subsidiary had provided fiduciary, investment, advisory, and custody services to its clients in Palm Beach, Florida. In May of 1984, U.S. Trust completed the conversion of its state chartered trust subsidiary into a national association, called Trust Company. It is now U.S. Trust's only subsidiary in Florida. Trust Company continues to provide the above mentioned trust services, as well as the services now authorized by the Board's order. This conversion occurred with the approval of the United States Comptroller of the Currency. Specifically, the Comptroller approved the conversion of Trust Company into a nonbank on the express condition that Trust Company "not engage in the business of making commercial loans."

After the Board issued public notice of U.S. Trust's application, the Florida Department of Banking and Finance, the Florida Bankers Association, and the Sun Bank/Palm Beach filed comments and requested that the Board conduct a hearing on the U.S. Trust application.³ 

The Board issued its order approving U.S. Trust's application for Trust Company to operate as a nonbank on March 23, 1984. That order specified several conditions for approval of the application. U.S. Trust was ordered to not:

(1) operate Trust Company's demand deposit-taking activities in tandem with any other subsidiary or other financial institutions;

(2) link in any way the demand deposit and commercial lending services that define a bank under the Act; and

(3) have Trust Company engage in any transactions with affiliates, other than the payment of dividends to U.S. Trust or the infusion of capital by U.S. Trust into Trust Company, without the Board's approval.

Since these conditions precluded Trust Company from engaging in commercial lending, the Board found that Trust Company was not a "bank" within the meaning of Section 2(c) of the Act. The Board's order lamented that although "approval of this proposal presents a serious potential for undermining the policies of the Act, the Board is constrained by the definition of bank in the Act to approve the application." The Board further rejected the petitioners' request for an evidentiary hearing, deeming the issues in the application to be legal in nature not warranting a hearing on factual issues. All of petitioners' requests for reconsideration were denied by the Board. The Board also refused to stay its order. Although it sanctioned the U.S. Trust application, the Board was plainly unenthusiastic about the course it was adopting. The order itself contained a plea for Congressional action because:

if the nonbank concept, particularly as expanded by the interpretation of demand deposit adopted by the Tenth Circuit,⁴  becomes broadly generalized, a bank holding company or commercial or industrial company, through exploitation of an unintended loophole, could operate "banks" that offer NOW accounts and make commercial loans in every state, thus defeating congressional policies on commingling of banking and commerce, conflicts of interest, concentration of resources and excessive risk, or with respect to limitations on interstate banking. Congressional action thus is urgently needed to ensure that the policies of the Act are maintained. In this regard, the Board does not believe that any public policy would be served by grandfathering proposals such as this that occur subsequent to the introduction of legislation that would otherwise prohibit such transactions.

Thus, the Board, in the very order granting U.S. Trust's application, emphasized its prior opinions that "an institution that is chartered as a bank and that accepts transaction accounts from the public should be subject to the policies that Congress has established for banks in the BHC Act." Order at 3. See Citizens Fidelity Corp., 69 Federal Reserve Bulletin 556 (1983); Citicorp, 70 Federal Reserve Bulletin 921 (1984); Mellon National Corp., 70 Federal Reserve Bulletin 441 (1984).

On April 23, 1984, the Florida Department of Bank and Finance petitioned us for review of the Board's order. The Florida Bankers Association and Sun Bank/Palm Beach filed similar petitions. U.S. Trust and the Conference of State Bank Supervisors then filed motions to intervene as a respondent and as a petitioner, respectively. We granted these motions.

On its face, this appeal involves nothing more than a question of statutory interpretation. To state our problem so simply, however, is to belie its complexity. As we write, an avalanche of applications by bank holding companies seeking to establish hundreds of deposit-taking institutions across state lines is in progress.

The Board and U.S. Trust believe Congress' definition of a bank to be clear. They would have us rely on the well established principle of statutory construction that an agency or court cannot modify the clear language of a statutory provision. See, e.g., American Tobacco Company v. Patterson, 456 U.S. 63, 102 S. Ct. 1534, 71 L. Ed. 2d 748 (1982); Central Trust Company v. Official Creditors Committee, 454 U.S. 354, 102 S. Ct. 695, 70 L. Ed. 2d 542 (1982). Petitioners counter with the equally well established rule of statutory interpretation that courts ought not to apply the literal terms of a statute to reach a result contrary to the underlying policy of Congress. They rely on the many reported decisions where courts have gone beyond the face of the statute to ascertain congressional intent and purpose. See, e.g., United States v. American Trucking Association, 310 U.S. 534, 543, 60 S. Ct. 1059, 84 L. Ed. 1345 (1940);⁵  2A Sutherland, Statutes and Statutory Construction, Sec. 46.07 (C. Sands 4th ed. 1973).

In its order, the Board concluded that the Act's definition of bank in Sec. 2(c) did not permit a more expansive interpretation on which to deny the U.S. Trust application. In effect, the Board was persuaded to approve the U.S. Trust application by the argument that the Act is a comprehensive regulation of the banking industry with carefully defined terms. The Board was reluctant to look through the definition of bank to see the substance of the U.S. Trust application. Although we believe the words used by Congress to define bank to be clear in the sense that a meaning is intelligible, that is not tantamount to a decision that we should inquire no further. Literalism in statutory interpretation, when it is contrary to an express purpose of the Act, cannot be a talisman.

(a) The Changing Definition of Bank

Congress twice has amended the Act's definition of bank prior to the present controversy. In each prior case, the legislative history leaves no doubt that the purpose of the amendment was to delineate more clearly which institutions would be subject to regulation under the Act in light of the Board's experiences with regulation. The original 1956 Act defined bank in terms of the charter of the entity. This first definition included "any national banking association or state bank, savings bank, or trust company."⁶  Chapter 240, Sec. 2(c), 70 Statutes 133. In 1966 Congress amended the Act to provide a narrower definition of bank. This definition included only institutions "that accept deposits payable on demand."⁷  This amendment was specifically intended to exclude savings and industrial banks, thus leaving only commercial banks subject to the Board's regulation.⁸  As the Senate report stated, the deposit test has long been the accepted definition of what constitutes a commercial bank.

Section 2(c) of the Act [i.e. prior to its amendment in 1966] defines "bank" to include savings banks and trust companies, as well as commercial banks. The purpose of the Act was to restrain undue concentration of control of commercial bank credit, and to prevent abuse by a holding company of its control over this type of credit for the benefit of its nonbanking subsidiaries. This objective can be achieved without applying the Act to savings banks, and there are at least a few instances in which the reference to "savings bank" in the present definition may result in covering companies that control two or more industrial banks. To avoid this result, the bill redefines "bank" as an institution that accepts deposits payable on demand (checking accounts), the commonly accepted test of whether an institution is a commercial bank so as to exclude institutions like industrial banks and nondeposit trust companies.

Senate Report No. 1179, 89th Cong., 2d Sess. 7, reprinted in 1966 U.S.Code Cong. & Adm.News 2385, 2391. (emphasis added)

In 1970, Congress again amended the Act's definition of bank.⁹  This amendment, which is the definition presently before us, added the requirement that an entity make commercial loans, as well as accept demand deposits, to be a bank. 12 U.S.C. § 1841(c) (2), Public Law No. 91-607, Sec. 101(c), 84 Statutes 1762 (1970). The Report of the Senate Committee on Banking and Currency explained the 1970 amendment as follows:

The definition of "bank" adopted by Congress in 1966 was designed to include commercial banks and exclude those institutions not engaged in commercial banking, since the purpose of the Act was to restrain undue concentration of commercial banking resources and to prevent possible abuses related to the control of commercial credit. However, the Federal Reserve Board has noted that this definition may be too broad and may include institutions which are not in fact engaged in the business of commercial banking in that they do not make commercial loans. The committee, accordingly, adopted a provision which would exclude institutions that are not engaged in the business of making commercial loans from the definition of "bank."

Senate Report No. 1084, 91st Cong., 2d Sess., reprinted in 1970 U.S.Code Cong. & Ad.News 5519, 5541. Crucial to an understanding of our present problem is the widespread impression throughout Congress that the 1970 amendment was predicted to have an extremely narrow impact. As the legislative history reveals, in 1970 there was only one significant financial institution, the Boston Safe Deposit and Trust Company, that accepted demand deposits but made no commercial loans.¹⁰ (b) The Purpose of the Act

The legislative history reveals that Congress had three purposes in adopting the Act in 1956. The first two, which the Board and U.S. Trust acknowledge, were to prevent bank holding companies from (1) acquiring additional banks in a manner which would concentrate banking facilities within a particular area, and (2) combining under single control both banking and nonbanking enterprises in a manner which would enable holding companies to use bank deposits to finance unrelated nonbanking activities. It seems to us, however, that the Board and U.S. Trust ignore the third purpose of Congress, namely, to prohibit the creation of interstate deposit-taking networks by bank holding companies without specific state authorization.

Congress' desire to prevent bank holding companies from acquiring deposit-taking banks across state lines without state authorization was expressed dramatically in its adoption of the Douglas amendment.¹¹  That amendment, which remains essentially unaltered since the passage of the original Act, was designed to place federal power on the side of state control over banking. The Douglas amendment made the expansion of banking in a state by out-of-state bank holding companies subject to that state's direct and express approval. Such federal deference to state policies was made clear by Senator Douglas when he likened his amendment to the McFadden Act, 12 U.S.C. § 36. In the McFadden Act Congress prohibited national banks from establishing interstate branches (defined as any facilities which receive deposits or paychecks or make loans) unless state law expressly permitted state banks to establish intrastate branches.

With our examination of Congress' goals in adopting the Act behind us, we now consider the question of whether it is reasonable to conclude that Congress intended in 1970 to destroy the Douglas Amendment by adopting an amendment to the definition of bank which would permit bank holding companies to establish an unlimited number of deposit-taking banks across state lines without state approval. Merely to articulate this question in the light of the traditional Congressional concern that banking be subject to the local goals and policies of the states demonstrates the unreasonableness of the U.S. Trust position. We cannot persuade ourselves to employ literalism in statutory interpretation in order to bootstrap Congress' technical amendment of the definition of bank--after being told that the amendment would apply to only a single institution¹² --into a total emasculation of the long held policy giving states control over bank expansion. State control over banking, and the expansion and availability of branches, has been the consistent policy of Congress since passage of the Act in 1956. Viewed in historical perspective, state control over banking has been an important issue in American politics since the charter of the First Bank of the United States.¹³ 

There is no dispute that U.S. Trust will accept demand deposits and would therefore be a commercial bank within the commonly accepted test set forth in the 1966 amendment to the definition of bank. For Congress to have completely reversed its field only four years later and to have decided that all commercial banks accepting demand deposits would no longer be subject to the strictures of the Douglas amendment unless they also made commercial loans indicates a dramatic change of heart. Such a change of heart is usually accompanied by protracted debate in Congress. Indeed, the raison' d'etre of legislative history is to illumine such shifts in thinking on the part of Congress. However, not even U.S. Trust, let alone the Board, can glean from the legislative history of the 1970 amendment to Sec. 2(c) such a change in congressional intent.

We are reluctant to attribute to a technical amendment, in the absence of compelling legislative history, Congress' intention to abandon a central part of the policies leading to the passage of the 1956 Act. Without such expression on the part of Congress, the wholesale expansion of deposit-taking institutions across state lines cannot be justified in violation of the Douglas amendment. The more reasonable interpretation of the 1970 amendment is that Congress intended to exempt, much like it did with the Dupont Trust in 1956,¹⁴  a single intrastate institution--or perhaps the very few entities similarly situated--which could be excluded from regulation under the Act without giving rise to the kind of abuses which the Douglas amendment was designed to prevent.¹⁵ 

To have us avoid consideration of the Douglas amendment, and its policy of state control over bank expansion, U.S. Trust and the Board focus on Sec. 4(c) (8), which permits bank holding companies to acquire nonbanking activities that are closely related to banking. They argue that Congress' purpose in passing this provision was "to permit the introduction of new innovative competitive vigor into those markets which would benefit therefrom." House Report No. 1747, 91st Cong., 2d Sess. reprinted in 1970 U.S.Code Cong. & Ad.News 5561, 5568. U.S. Trust would have us rely upon the conclusion in the Board's opinion that "there is no evidence that consummation of this proposal would result in any conflicts of interest, unsound banking practices, or other adverse effects." Such a conclusion on the part of the Board must be tempered by an understanding that the majority of the Board voted to approve the U.S. Trust application because of their belief that they were constrained to do so by the literal definition of bank. As the dissent clearly stated:

although the majority feels compelled to approve the application on grounds that U.S. Trust Company does not come within the Board's broad definition of "bank," I would deny the proposal because it would have the practical effect of permitting a bank holding company to engage in interstate banking without express authorization of state law in a manner that would otherwise be prohibited by the Douglas Amendment.... Moreover, under section 4(c) (8) of the Act, the Board may deny a proposal if it determines that the adverse effects of the proposal are not outweighed by any public benefits associated with the proposal.

The dissent clearly believed that U.S. Trust urges a position that is plainly inconsistent with the purpose of the Douglas Amendment to prevent undue concentration of power and certain conflicts of interest. Even the majority, which felt constrained to approve the U.S. Trust application, was concerned that "if the nonbank concept ... becomes broadly generalized, a bank holding company ... through exploitation of an unintended loophole, could operate 'banks' ... defeating Congressional policies on interstate banking."¹⁶  Accordingly, we cannot accept U.S. Trust's argument that the fact that the Board approved its application, however reluctantly, ends any further inquiry on our part. Our duty is to review the decision of the Board and ascertain whether it has correctly followed the congressional policies expressed in the Act. We perceive the U.S. Trust application to be a violation of the Douglas Amendment; such a violation cannot be justified by the Board's power under Sec. 4(c) (8) to approve activities closely related to banking. Activities approved as closely related to banking have been the acquisition of brokerage services or the offering of credit life insurance, not the wholesale abandonment of one of Congress' chief goals in enacting the Bank Holding Company Act.

Additionally, we believe U.S. Trust's argument that its nonbank will have an innovative and competitive effect on the market for financial resources in Florida to be erroneous. Since U.S. Trust cannot make commercial loans in Florida from the deposits it attracts, it is patent that Florida's policy of having local money available for local development will be hindered. While it is true that funds can be secured from out-of-state--indeed from U.S. Trust in New York--such a policy is directly contrary to the accepted notion that local funding of local projects is a significant and important incident of state control over banking. It suffices that Florida has spoken clearly that it does not want out-of-state bank holding companies to establish banking operations in Florida.¹⁷  To approve the U.S. Trust application would destroy Florida's state policy to not allow the unfettered expansion of out-of-state bank holding companies. More importantly, such approval would also destroy the important federal policy embodied in the Douglas amendment--a federal policy which allows the state to choose for itself whether to open its borders to out-of-state banks.

(c) The Board's Power to Deny the U.S. Trust Application

We hold that the Board should have used its power under Sec. 5(b), 12 U.S.C. § 1844(b), to prevent evasion by U.S. Trust of the fundamental purposes of the Act. Section 5(b) expressly authorizes the Board "to issue such regulations and orders as may be necessary to enable it to administer and carry out the purposes of [the Act] and prevent evasions thereof." The rationale of the Third Circuit in Wilshire Oil Co. v. Board of Governors, 668 F.2d 732 (3d Cir. 1981), cert. denied, 457 U.S. 1132, 102 S. Ct. 2958, 73 L. Ed. 2d 1349 (1982), supports such a use of the Board's delegated authority under Sec. 5(b). Wilshire Oil Company's bank subsidiary, which accepted demand deposits and made commercial loans, notified its demand deposit customers that in the future it would reserve the right to require 14 days notice before any withdrawal could be made from their accounts. The bank, however, also notified its customers that it had no intention of exercising this right. In other words, the bank in practice continued to accept demand deposits and make commercial loans even though the depositors technically had no legal right to immediately receive their money. Thus, the bank argued it no longer met the definition of a bank in Sec. 2(c) because Congress in the 1970 amendments defined bank to require demand deposits and commercial loans. The Board had no trouble looking through the form of the bank's reorganization to its substance. The Board disregarded the technical nonconformity with the definition of bank and ruled that the subsidiary was still acting as a bank and was subject to the Act. While Wilshire is distinguishable in the sense that the bank was blatantly attempting to evade the Act, its rationale that the Board under Sec. 5(b) had the power to disregard the form of a reorganization and look to its substance supports a similar use of the Sec. 5(b) power by the Board in this case. The Board is Congress' custodian of the Act. In that capacity, it is charged with insuring compliance with Congress' goals even when Congress muddies the waters.

Since we have held that the Board should have used its authority under Sec. 5(b) to deny the U.S. Trust application, we express no opinion on the constitutionality of the Florida statute or the parties' contention that an evidentiary hearing was required by the Board prior to its action.

REVERSED.