



banks                                                               



TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN





NO. 03-94-00378-CV





Texas Coastal Bank, Pasadena, Texas and First Bank of Deer Park,

Deer Park, Texas, Appellants


v.


Finance Commission of the State of Texas, Appellee





FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT

NO. 93-10813, HONORABLE MARY PEARL WILLIAMS, JUDGE PRESIDING





	Appellants Texas Coastal Bank and First Bank of Deer Park ("the Banks") appeal
from a judgment entered by the trial court, which affirmed appellee Finance Commission's ("the
Commission") cease and desist orders issued by the Commissioner of Banking.  The
Commissioner issued the orders based on her conclusion that the Banks had exceeded their lending
limits and conducted business in an unsafe and unsound manner.  By eleven points of error, the
Banks appeal.   We will affirm the trial court's judgment.


BACKGROUND

	In December of 1991, examiners from the Federal Reserve Bank of Dallas
examined the records of Texas Coastal Bank, and the FDIC began an investigation of First Bank
of Deer Park.  These investigations revealed that each bank had loaned large amounts of money
to Jerry and Jean Moore and to eighteen corporations controlled by Jerry Moore ("the
corporations").  The examiners concluded that each bank had exceeded its legal lending limit (1) and
that the loans constituted an unsafe and unsound concentration of credit. (2)  The federal examiners
subsequently notified the Texas Department of Banking of their findings and conclusions.  The
Department ultimately reached the same conclusions as the federal examiners.  The Banking
Commissioner then issued cease and desist orders, which the Finance Commission affirmed.  The
Banks sought judicial review, and the trial court affirmed the Commission's decision.
	The Banks appeal by eleven points of error, arguing that the Commission exceeded
its statutory authority, the Commission's conclusions are not supported by substantial evidence
in the record, the Commission acted arbitrarily and capriciously, and the Commission violated the
Banks' federal and state due process rights.


DISCUSSION

	In points of error one, two, three, five and six, the Banks raise various challenges
under the Administrative Procedure Act to the Commission's conclusions concerning the Banks'
legal lending limits violations.  See Tex. Gov't Code Ann. § 2001.174(2)(B), (E), (F) (West 1995)
(hereinafter "APA").  The Banks contend that the Commission exceeded its statutory and
regulatory authority, its orders were not supported by substantial evidence, and it acted arbitrarily
and capriciously in ordering the Banks to reduce the amount of credit concentrated in Moore and
the corporations.
	Under Article 342-507 of the Banking Code, "[t]he total loans and extensions of
credit by a state bank to a person outstanding at one time may not exceed twenty-five per cent
(25%) of its capital and certified surplus."  Texas Banking Code, Tex. Rev. Civ. Stat. Ann. art.
342-507(b) (West Supp. 1995) (hereinafter "Banking Code").  The article specifically defines the
term "person" to include a corporation.  Id. § (a)(2).  The parties do not dispute that if the loans
were aggregated, the amount of the aggregated loans would exceed the legal lending limit for each
bank--more than ten times the legal limit for Texas Coastal and seventeen times the amount Deer
Park is legally allowed to lend to one borrower.  Therefore, the principal dispute in this cause
concerns whether the loans were properly aggregated and attributed to Moore.
	Article 342-507 grants the Banking Commissioner the authority to "prescribe rules
to administer and carry out this Article."  Banking Code art. 342-507(d).  In 1986, the Banking
Commissioner promulgated rules for assessing whether loans to one person should be attributed
to another:


(a)	General rule.  Loans or extensions of credit to one person will be attributed
to other persons for purposes of lending limit determinations under [Article
342-507] when:

	(1)	the proceeds of the loans or extensions of credit are to be used
for the direct benefit of the other person or persons (the term
"direct benefit" shall include situations in which the proceeds of
a loan or extension of credit to one person are to be loaned or
contributed by such person to another person); or

	(2)	the expected source of repayment for each loan or extension of
credit is the same for each person.


7 Tex. Admin. Code § 12.4(a) (1994) (hereinafter "TAC") (emphasis added).  An affirmative
finding as to either the direct benefit test or the expected source of repayment test will support the
aggregation and attribution of loans under section 12.4.  
	In their first, second, and third points of error, the Banks contend that the
Commission has created new rules for loan aggregation that exceed its statutory authority because
the rules go beyond the "sole applicable loan limitations" provided for in Article 342-507 and
section 12.4 of the Administrative Code.  Banking Code art. 342-507(c); 7 TAC § 12.4(a). 
Although the Commissioner may "prescribe rules to administer and carry out [Article 342-507]
. . . or to establish limits or requirements other than those specified in this Article," Banking Code
art. 342-507(d), the Commissioner must follow the APA's rulemaking procedures.  See APA §§
2001.021-.038.  The Banks argue that the Commissioner and the Commission failed to follow
previously promulgated rules in determining whether the loans should be aggregated because they
applied an indirect benefit test and ignored the requirement to consider what the Banks viewed as
the expected source of repayment.  See 7 TAC § 12.4(a).
	The Commission responds that it did not promulgate new standards for loan
attribution, but instead applied the direct benefit and expected source of repayment tests.  The
Commission's findings and conclusions indicate that the Commission relied on the section 12.4
tests in analyzing whether the Banks had exceeded their legal lending limits.  Because the
Commission actually used these tests, we conclude that neither the Commissioner nor the
Commission promulgated new standards for loan aggregation and applied them to the Banks in
excess of its statutory authority.  We overrule the Banks' first, second, and third points of error.
	The Banks' fifth and sixth points of error allege that substantial evidence in the
record does not support the Commission's conclusions that Moore received a direct benefit and
that Moore was the expected source of repayment.  In performing a substantial evidence review,
appellate courts accord much deference to an administrative agency's expertise.  "The true test
is not whether the agency reached the correct conclusion, but whether some reasonable basis exists
in the record for the action taken by the agency."  Texas Health Facilities Comm'n v. Charter
Medical--Dallas, Inc., 665 S.W.2d 446, 452 (Tex. 1984).  We must uphold the agency's decision
if the evidence is such that reasonable minds could have reached the same conclusions that the
agency reached.  Id. at 453.  The evidence may actually preponderate against the agency's
decision, yet constitute substantial evidence.  Lewis v. Metropolitan Sav. & Loan Ass'n, 550
S.W.2d 11, 13 (Tex. 1977).  A reviewing court is not permitted to substitute its judgment for that
of the agency.  Texas State Bd. of Dental Examiners v. Sizemore, 759 S.W.2d 114, 116 (Tex.
1988), cert. denied, 490 U.S. 1080 (1989).  "The findings, inferences, conclusions, and decisions
of an administrative agency are presumed to be supported by substantial evidence, and the burden
is on the contestant to prove otherwise."  Charter Medical, 665 S.W.2d at 453 (citing Imperial
Am. Resources Fund, Inc. v. Railroad Comm'n, 557 S.W.2d 280, 286 (Tex. 1977)).  If the record
evidence would support either an affirmative or negative finding, we must affirm the agency's
decision.  Auto Convoy Co. v. Railroad Comm'n, 507 S.W.2d 718, 722 (Tex. 1974).
	The Banks argue in their fifth point of error that the record does not contain
substantial evidence to support the conclusion that Moore received a direct benefit.  The evidence
concerning the loans is as follows.  Between June 28, 1991 and October 9, 1991, First National
Bank of Bellaire, the originating bank, made one loan to Jerry Moore and his wife, Jean, and a
series of loans to the corporations.  Moore, a shopping center developer, created the corporations
and selected certain shopping centers he owned to be sold to the corporations as part of an estate
planning strategy. (3)
	The Banks purchased participation in the loans from First National, relying upon
the recommendations of C.R. Vickery and G. Warren Coles.  Vickery was senior chairperson of
the Board at First National and chairperson of the board at Deer Park.  Coles, who had experience
as a real estate appraiser, served as president and chairperson of the board at First National and
as chairperson of the board at Texas Coastal.  After Moore selected the shopping centers to be
conveyed to the corporations, Vickery determined that a maximum of $2.5 million could be
loaned to each corporation.  Because First National's legal lending limit was $1 million, the loans
had to be participated out to other banks.
	Coles and Vickery visited the centers, performed appraisals, and concluded that
each property's market value exceeded the proposed loan amount.  Coles then telephoned the
Banks' presidents and recommended that each participate in the loans.  Based upon this
recommendation, each president decided to participate without reviewing any documentation or
performing any independent analysis of the loans.  At the time the loans were made to the
corporations, the Moores were the sole shareholders. (4)  With this record evidence in mind, we now
turn to the Commission's application of the direct benefit and expected source of repayment tests.
	The Banks assert that Moore received only an indirect benefit from the loans to the
corporations because there was a reasonably equivalent exchange of value, i.e., the shopping
centers for the loan proceeds.  Indeed, the Banks argue that Moore received less than a reasonably
equivalent exchange of value because he sold the centers for less than their market values;
therefore, the corporations received a direct benefit while Moore suffered a detriment. (5)
	The Banks' argument is premised on identical "direct benefit" language found in
the Code of Federal Regulations.  12 C.F.R. § 32.5(a)(1) (1994).  In interpreting this language,
the Office of the Comptroller of the Currency (OCC) determined that a direct benefit accrues
when loan proceeds are transferred "to another person without a reasonably equivalent exchange
of value."  54 Fed. Reg. 43398, 43410 (Oct. 24, 1989) (emphasis added).  The Federal Register,
however, also explicitly mandates that the "OCC retains authority to require attribution, under the
general benefit rule, in other situations when warranted by the facts and circumstances."  Id.
(emphasis added).  In a similar fashion, Article 342-507(d) gives the Banking Commissioner
discretion to determine if "a loan putatively made to a person shall . . . be attributed to another
person."  Banking Code art. 342-507(d).  Therefore, the Commission correctly asserts that
application of the direct benefit test is not limited solely to examining whether there was an
equivalent exchange of value.
	The Commission argues that the record contains substantial evidence to support its
determination that Moore directly benefitted from the loan transactions.  Because the Moores were
both the seller of the centers and the corporations' sole shareholders, the Commission contends
that Moore received a direct benefit.  The record indicates that Moore received $20,228,010 in
loan proceeds as a result of the sales of the shopping centers, he continued to own the shopping
centers because Moore and his wife were the corporations' sole shareholders at the time the loans
were made, and Moore was released from direct liability on a prior outstanding debt of
$20,906,021. (6)
	We conclude that substantial evidence in the record supports the Commission's
determination that Moore received a direct benefit.  See Charter Medical, 665 S.W.2d at 452-53. 
The Banks' contention that Moore received no direct benefit because he sold the centers to the
corporations for less than market value is undermined by the fact that Moore stood on both sides
of the transactions as buyer and seller, and benefitted from the loan proceeds. (7)  We overrule the
Banks' fifth point of error.
	In their sixth point of error, the Banks contend that the Commission's conclusion
that Moore was the expected source of repayment is not supported by substantial evidence in the
record.  See 7 TAC § 12.4(a)(2).  The Banks specifically argue:  "Section 12.4(a) requires an
inquiry into the lender's expectations when the loans are made.  It also requires that the
repayments were expected to come from the same source.  The State brushed aside both core
requirements.  It relied on evidence that did not even exist when the Loans were made, and
therefore could not have affected expectations when the Loans were initiated. . . . "  The Banks
correctly assert that, similar to the direct benefit analysis, the relevant time period for determining
the expected source of repayment is when the loans were made.  Therefore, we must decide
whether substantial evidence supports the Commission's conclusion that Moore was the expected
source of repayment at the time the loans were approved.
	The record contains evidence that Moore negotiated the loans on behalf of the
corporations, and that Moore and his wife personally guaranteed each loan.  Under the banking
regulations, however, loans are not attributed to a guarantor for determination of lending limit
violations simply because of the individual's status as guarantor.  See 7 TAC § 12.2 (primary
obligor's failure to perform "shall not result in any lending limit violation on behalf of the
guarantor").  We must examine whether the Banks considered Moore as the source of repayment
even in the absence of any corporation's nonperformance.
	At the time of the loan transactions, the Moores were the corporations' sole
shareholders.  Ninety percent of the corporations were formed within one week of their respective
loan approvals; ten corporations were formed either the day before or the same day as their
respective loans were granted.  The Federal Reserve Bank analyzed the cash flow of the shopping
centers using information available to, but not analyzed by, the Banks at the time they granted the
loans.  The Federal Reserve's analysis indicated that more than half of the shopping centers had
a negative cash flow when the loans were made.  The loans have been serviced by J.J.M.
Management, Inc., a corporation wholly owned by the Moores, which advances money to the
corporations to service the debt.  The Moores are obligated to repay any money that the
corporations cannot reimburse to J.J.M.
	In addition, the files for these loan transactions were incomplete at the time most
of the loans were approved.  The Banks argue that this inadequate documentation provides
insufficient evidence to support the conclusion that the Banks looked to Moore as the expected
source of repayment.  They contend that the Commission erroneously refused to focus on
Vickery's and Coles's subjective expectations at the time the loans were approved.  The Banks
predicate their contention on Vickery's and Coles's testimony that they personally investigated the
loan transactions and concluded that each loan would perform, and urge that Vickery's and
Coles's statements about their expectations of the source of repayment are the only reliable
sources of information regarding those expectations.
	The Commission, however, questioned the adequacy of Vickery's and Coles's
appraisals of the properties.  Coles did not have tax, lease, or cash flow information when he
performed some of the appraisals, and was unable to present any documentation showing how he
determined the centers' values because he had discarded all calculations used in formulating his
appraisals.  Coles testified that he was unaware of whether the corporations were liquid, of the
amount of each corporation's cash flow, of whether the corporations were subsidiaries of another
company, and of the identity of the borrowing corporations until a few days before the loans were
closed.  He testified that he knew Moore was the president of each corporation, and that Moore
had promised that each center would have sufficient cash flow to service its debt.  When
questioned whether he would believe documentation about cash flow that contradicted Moore's
statements, Coles replied, "I rely on his statement as to what the cash flow will be."
 	The evidence clearly conflicts.  Vickery and Coles testified that they considered the
corporations as the expected source of repayment.  The Commission, however, presented evidence
of the lack of documentation and information that Vickery and Coles possessed about the
corporations and the insufficiency of corporate cash flow to service the debt.  The Commission
apparently placed little credence in Vickery's and Coles's statements because they did not
adequately investigate the corporations.  This lack of investigation supports the Commission's
conclusions that Vickery and Coles viewed Moore as the expected source of repayment because
the Banks lacked sufficient information to determine whether the corporations were a good credit
risk.  The supreme court has noted:  "Resolution of factual conflicts and ambiguities is the
province of the administrative body . . . .  The reviewing court is concerned only with the
reasonableness of the administrative order, not its correctness."  Firemen's & Policemen's Civil
Serv. Comm'n v. Brinkmeyer, 662 S.W.2d 953, 956 (Tex. 1984) (emphasis added).  Given that
there is evidence to support either an affirmative or negative finding on the expected source of
repayment, we conclude that the Commission's conclusion is supported by substantial evidence. 
See Auto Convoy Co., 507 S.W.2d at 722. (8)  The Banks' sixth point of error is overruled.
	The Banks argue in their eighth and ninth points of error that the Commission
violated the due process requirements of the United States Constitution and the Texas Constitution
in its application of the direct benefit and expected source of repayment tests.  U.S. Const. amend.
XIV; Tex. Const. art. I, § 19.  In their eleventh point of error, the Banks contend that because
the cease and desist orders will force them to sell the loans at drastically reduced prices, the
Commission has deprived them of their property without due process, i.e., notice of the
aggregation standards to be applied. The Banks assert that the Commission fashioned new
standards without providing notice to the Banks that it would apply an indirect benefit test and
would ignore the "expected" in the expected source of repayment test.  We disagree.  Based on
our examination of the record, the Commission clearly relied on the section 12.4 tests in
determining that the loans should be aggregated and attributed to Moore.  See Banking Code art.
342-507(d); 7 TAC § 12.4(a).  The Banks were not subjected to new regulatory requirements
without notice.  Points of error eight, nine, and eleven are overruled.


CONCLUSION 

	The record contains substantial evidence to support the Commission's determination
that the loans were attributable to Moore under both the direct benefit and expected source of
repayment tests.  See APA § 2001.174(2)(E); 7 TAC § 12.4(a)(1), (2).  We therefore uphold the
Commission's conclusion that the Banks violated the lending limit laws.  Because the
Commission's cease and desist orders can be upheld on this basis, we need not address the Banks'
fourth, seventh, and tenth points of error concerning the Commission's conclusion that the loans
constituted an unsafe concentration of credit.  The judgment of the trial court is affirmed.


   					Mack Kidd, Justice
Before Justices Aboussie, Jones, and Kidd
Affirmed
Filed:   March 29, 1995 
Publish 
1.        The legal lending limit is the maximum amount of money that a bank may lend to
one borrower.  Texas Coastal's legal lending limit is $500,000 and Deer Park's is
$550,000.
2.        Concentration of credit concerns whether a bank's lending practices are dangerously
concentrated in one industry, type of business, or geographical area.
3.        The Commission insinuates that Moore created the corporations to circumvent the
Banks' legal lending limits.  The rules governing the loans at issue here, however, do not
require an examination of Moore's subjective intent or the propriety of his actions.  We
are limited to determining whether Moore received a direct benefit from the loans or
whether the Banks expected Moore to be the source of repayment.  Therefore, we decline
to address whether Moore created the corporations as part of a scheme to avoid the
Banks' legal lending limits.
4.        The Moores transferred portions of the stock to their two children after the loans had
been approved.  
5.        The Commission notes that the record contains conflicting evidence regarding
whether the corporations actually bought the properties for less than market value.  The
Commission questioned the appraisals of David Caldwell, an outside appraiser who is a
friend of Moore's.  Many of Caldwell's appraisals were incomplete at the time that the
loans were made; the Banks made loans to corporations owning only portions of
subdivided centers, yet the loan files for those centers reflected rentals on the entire
center; Caldwell's appraisals were based on projected rentals rather than actual rentals;
and the centers' insurance coverage was inadequate to cover the appraised values of the
properties.  
6.        Michael Mancusi, managing director of a financial institutions consulting firm,
testified about the transactions:

The benefits of these loans--the proceeds of the loans accrued to the benefit of
one individual, and that was Mr. and Mrs. Moore. . . .  [T]he Moores
received, as I recall, somewhere in the neighborhood of 20 million or more of
the proceeds of these loans to repay outstanding liens on the loans at the time
these new loans were made and also for other purposes. . . .  This individual
owned these assets and set up separate corporations to take title to them . . .
and sold the assets to these corporations that he set up which he in turn owns
or owns with his family.  Then the benefits--I mean, the loan proceeds pass
back to the Moores.
7.        Furthermore, the testimony on market value is disputed, and we conclude that there
is substantial evidence to support a finding by the Commission that the properties were
not conveyed to the corporations at less than market value. 
8.        The Banks also argue that the record lacked substantial evidence to support the
Commission's determination that the expected source of repayment was the same for each
corporation.  See 7 TAC § 12.4(a)(2).  They argue that the Commission relied solely on
evidence that J.J.M. Management had been managing the corporations, and that the
Commission disregarded corporate separateness in examining the expected source of
repayment.  In general, a corporation and its shareholders must be treated as separate legal
entities.  See Commonwealth v. Davis, 168 S.W.2d 216, 222-23 (Tex. 1942), cert. denied,
320 U.S. 210 (1943).  The Banks urge that we conclude that the Commission disregarded this
principle of corporate separateness.

        The Commission contends that corporate separateness is an entirely different issue from
whether the Banks violated their legal lending limits.  They note that attribution of the loans to
Moore under the expected source of repayment test does not affect the corporations' legal
liability for the loans.  The aggregation rules are merely methods to determine whether the
Banks have truly diversified their risk; they do not alter the corporate status of the borrower or
the protection of its shareholders from individual liability if the corporation defaults.  We
agree.  By including corporations in the definition of "person" under Article 342-507 and
section 12.2, the attribution rules are clearly intended to be applied to corporations.  See
Banking Code art. 342-507(a)(2); 7 TAC § 12.2.  The Commission did not violate tenets of
corporate separateness in concluding that Moore was the expected source of repayment of the
loans.

