Amicus Curiae Brief — Alamo Bank of Texas v. United States

Supreme Court, U.S.

FILED

4 < _ SPANIOL, JR.

No. 89-785 oe on cae

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1989

ALAMO BANK OF TEXAS,

Petitioner,

Vs

UNITED STATES OF AMERICA,

Respondent.

On Petition for Writ of Certiorari

to the United States Court of Appeals

for the Fifth Circuit

BRIEF OF FINANCIAL INSTITUTIONS TRADE

ASSOCIATIONS AS AMICI CURIAE

IN SUPPORT OF THE PETITION

JOHN J. GILL III

General Counsel

AMERICAN BANKERS ASSOCIATION

Counsel of Record

Attorney for Amicus Curiae

AMERICAN BANKERS ASSOCIATION

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 663-5026

December 14, 1989

[Additional Counsel Listed on Inside Front Cover]

Ree SERN

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

MICHAEL F. CROTTY RoBerT W. Norcross, JR.

IRVING D. WARDEN TEXAS BANKERS ASSOCIATION

AMERICAN BANKERS ASSOCIATION 203 W. Tenth Street

1120 Connecticut Avenue, N.W. Austin, Texas 78701

Washington, D.C. 20036 (512) 472-8388

(202) 663-5028

JAMES W. PAULSEN

WENDY B. SAMUEL LIDDELL, SAPP, ZIVLEY,

Davip E. DANOVITCH ~~ -Hitt & LaBoon

THE NATIONAL COUNCIL OF 3500 Texas Commerce Tower

SAVINGS INSTITUTIONS Houston, Texas 77002

1101 15th Street, N.W. (713) 226-1185

Washington, D.C. 20005

(202) 857-3129 Attorneys for

Texas Bankers Association

RONALD R. GLANCZ “3

DRINKER, BIDDLE & REATH KAREN M. NEELEY

901 15th Street, N.W. INDEPENDENT BANKERS

Washington, D.C. 20005 ASSOCIATION OF TEXAS

(202) 842-8800 400 West 15th Street

Austin, Texas 78701

Attorneys for The National (512) 474-6889

Council of Savings Institutions

LEONARD J. RUBIN

JoNES, Day, REAVIS & POGUE

1450 G Street, N.W. ,

Washington, D.C. 20005

(202) 879-5400

Attorney for Independent

Bankers Association of America

QUESTION PRESENTED

Whether Congress, in the Bank Merger Act, in-

tended to impose flow-through criminal liability on a

surviving state bank for pre-merger crimes committed

by a national bank that disappeared in a merger of

the two banks.

TABLE OF CONTENTS

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TABLE OF AUTHORITIES. ..........ccccccccesceeeeeeeeeesereees

INTEREST OF THE AMICI CURIAE ..........ccccceeeeees

STATEMENT OF THE CASE ........ccccccsecceesseeeeeeneeees

REASONS FOR GRANTING THE WRIT ................+.

I. Whether The Bank Merger Act Imposes

II.

Flow-Through Criminal Liability On A Sur-

viving Bank For Pre- rimes Com-

mitted By Another Bank Is An Important

And Unsettled Question Of Federal Low

Which Should Be Decided By This Court ..

The Fifth Circuit Misapplied This Court’s De-

cision In Melrose Distillers, Inc. v. United

States, 359 U.S. 271 (1959), Which In Any

Event After Thirty Years Be Revis-

ited In Light Of The Enormous That

pony Occurred In Corporate And Sanking

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A. The Melrose Analysis ...........ssssseseeseeees

B. The Fifth Circuit’s Application of

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CONCLUSION ......,cccscsssssccnssseeeeeeeeeneeesessesersennneneneeees

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TABLE OF AUTHORITIES

CASES: saad

B a is I les v.

709 8. Ce 2909 (1989) nn? Dispoeal, Inc.

a ee

Melrose Distillers, Inc. v. United States, 359 U.S.

a passim

Oklahoma Natural Gas Company v. Oklahoma, 273

SG NN RN RY 10

Shaw v. North Pennsylvania R.R. Co., 101 U.S. 557

I Lettie Sac ceensnanienatnnnentnnnsanenaes 10

United States v. Alamo Bank of Texas, 880 F.2d

a 6,11-12

United States v. Monsanto, 109 S. Ct. 2657

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In THE

Supreme Court of the Gnited States

OcTOBER TERM, 1989

Petitioner.

No. 89-785

ALAMO Bank oF TEXAS.

UntTep STATES OF AMERICA.

On Petition for Writ of Certiorari to the United States

Court of Appeals for the Fifth Circuit

BRIEF OF FINANCIAL INSTITUTIONS TRADE

ASSOCIATIONS AS AMICI CURIAE

IN SUPPORT OF THE PETITION

458234

Calle

:

2

INTEREST OF THE AMICI CURIAE

The American Bankers Association is the largest

national trade association of the commercial banking

industry in the United States. It has members in each

of the fifty states and the District of Columbia, and

its members hold approximately ninety-five percent of

the domestic assets of the American banking industry.

associations. Its 500 members hold im excess of $50

billion in assets or approximately thirty-five percent

of the industry's total assets. The Bank Merger Act

was recently made applicable to thrift institutions. See

Pub. L. 101-73, § 221(2) (August 9, 1989).

3

this case. The imposition of criminal sanctions on an

innocent institution for violations of the Bank Secrecy

Act committed by an institution merged into the in-

nocent institution after the violations were committed,

but before indictment, simply is wrong. The interests

of the industry, its customers, and its regulators are

plainly implicated, moreover, because innocent share-

holders, depositors, borrowers, federal deposit insur-

ance agencies and taxpayers ultimately bear the cost

of severe penalties like those imposed on the innocent

bank in this case.

STATEMENT OF THE CASE

The amici curiae adopt Alamo Bank’s Statement of

the Case.

The decision of the Fifth Circuit in this case is the

first time any federal court has decided that the fed-

eral Bank Merger Act (12 U.S.C. § 214b) “saves” a

ion limits successor criminal liability to Bank Secrecy

Act violations, and a ruling imposing such liability

here might well be extended to numerous other crim-

inal offenses, whose penalties and statutes of limi-

tation were recently greatly increased by the Financial

Institutions Reform, Recovery and Enforcement Act

of 1989 (Pub. L. 101-78, Title IX) (“FIRREA’’). If

allowed to stand, this decision will open the doors to

prosecution and punishment of those who have com-

mitted no crimes. Not only is this fundamentally un-

just, but the public policy consequences for financial

institutions are so devastating and so important as

to warrant review by this Court. Even the mere threat .

of criminal sanctions is likely to deter legitimate ac-

quisitions rather than deter criminal acts.

In its Petition for a Writ of Certiorari at pp. 5-9,

the Petitioner has discussed the effects of the decision

below on the Federal Deposit Insurance Corporation

(“FDIC”) efforts to resolve the massive problems

caused by failed banks and thrifts. Petitioner’s dis-

cussion would also pertain to the Resolution Trust

Corporation (‘‘RTC’’) newly created by Title V of

FIRREA and whose mandate is to resolve insolvent

savings associations. The establishment of flow-

through liability would deter healthy banks from ac-

quiring a failed bank or thrift. As Petitioner has dem-

onstrated, acquisition of a failed bank or thrift by a

healthy institution is the most efficient and least costly

means for FDIC and RTC to dispose of a failed in-

stitution. Therefore, any action which discourages ac-

quisition of failed institutions by healthy ones

increases the drain on FDIC’s insurance funds and

the RTC Resolution Fund, and ultimately must be

borne by the taxpayers.

nani —e atte Wil sath, ‘emt Sess saan

Eat lla cae ta

Amici wholly concur in this argument and here

carry the analysis a step further.

The imposition of flow-through criminal liability on

an acquiring bank for crimes committed by the bank

it acquired would also deter acquisitions and mergers

of healthy financial institutions. Although the matter

of failing institutions is of critical current importance,

consolidation through acquisition and merger of

healthy institutions is a significant trend in the fi-

nancial services industry as well. During calendar

year 1988, 598 banks were converted into branches

through mergers and acquisitions (as Central was in

this case), far exceeding in number the two hundred

banks that failed in 1988.?

Since the result below, under the Fifth Circuit’s

reasoning, is compelled by a federal statute, there

appears to be no means by which a financial insti-

tution could prevent successor criminal liability by

contract or otherwise.

If a bank considering a merger or acquisition faces

exposure to criminal liability for acts of the acquired

institution and the collateral consequences to it under

state and federal law of a criminal conviction, it will

be deterred from making the acquisition. It is also

unlikely that a ‘‘due diligence” investigation would

reveal such past criminal] acts. In the instant case,

1 Testimony of James J. McDermott, Jr., Executive Vice Pres-

ident, Keefe, Bruyette & Woods, Inc., before the Committee on

Banking, Housing and Urban Affairs, U.S. Senate, 101st Cong.,

lst Sess., Oct. 5, 1989 (to be published as ‘Oversight Hearing

on the Condition of the Banking System’’).

* Board of Governors of the Federal Reserve System, 75th

Annual Report 232 (1988).

_ for example, the offenses occurred over three years

before the merger.

As Petitioner has cogently argued, nothing in the

Bank Secrecy Act, which Act the court below wholly

ignored, supports the imposition of criminal penalties

on the surviving bank in a merger. Your amici are

not apologists for financial institutions which fail to

carry out their legal obligations under the Bank Se-

crecy Act to report large cash transactions to the

Department of the Treasury. People and organizations

who violate the criminal laws of the United States

should be punished for their misdeeds. We appear

here only to emphasize the converse: People and or-

ganizations who do not violate the laws ought not to

be punished. To punish the innocent serves no good

public policy, and unnecessarily detracts from other

important national objectives.

II

The Fifth Circuit Misapplied This Court’s Decision In

Melrose Distillers, Inc. v. United States, 359 U.S. 271

(1959), Which In Any Event After Thirty Years Should

Be Revisited In Light Of The Enormous Changes That

Have Occurred In Corporate And Banking Law

The Fifth Circuit cites Melrose Distillers, Inc. v.

United States as the single precedent for its conclu-

sion that there can be “flow-through” criminal lia-

bility in this case, United States v. Alamo Bank of

Texas, 880 F.2d 828, 830 (5th Cir. 1989). We agree

with the lower court that Melrose Distillers is the

controlling precedent. However, the court below failed

to perform the analysis that Melrose requires. Instead,

it picks out from the Melrose opinion language which

was dicta when written, which was effectively dis-

claimed by this Court only last term, and would not,

in any case, justify the breadth of the Fifth Circuit’s

ruling. In any event, this Court should revisit Melrose

and successor criminal liability in light of the dramatic

changes in corporate and banking law.’

A. The Melrose Analysis

In Melrose, this Court noted that ‘‘ir the federal

domain, prosecutions abate both on the death of an

individual defendant ... and on the dissolution of a

corporate defendant ... unless the action is saved by

statute.” 359 U.S. at 272 (citations omitted).

There were three critical factors relied upon by the

Court in Melrose which moved this court to find flow-

through liability:

1. The corporations charged with crimes were

dissolved after the indictment was returned.

2. There was a statutory scheme which made ‘“‘it

clear that petitioners did not escape criminal

responsibility... .”’ Melrose, 359 U.S. at 272.

3. The corporations dissolved in Melrose became

divisions of a new corporation.

None of these factors is present here. The bank

merger in this case occurred on April 1, 1987, the

date on which Central National Bank surrendered its

charter and ceased to exist. The indictment was not

returned until December 17, 1987. There is nothing

in the record to suggest that this merger was an

artifice to avoid criminal liability. The post-indictment

*“This has been a period of great change and challenge in

the corporate law of depository institutions.” I. M. Malloy, The

Corporate Law of Banks (1988), at xviii.

dissolutions and reincorporation in Melrose, followed

by a motion to dismiss because of the dissolution,

suggested that the corporate reorganization in Mel-

rose was a sham transaction entered into in an at-

tempt to avoid prosecution.

The federal] statute relied on in Melrose, 15 U.S.C.

§§ 1, 2 specifically defined a person liable to prose-

cution thereunder to include corporations which ex-

isted under state law.‘ The two states whose laws

were at issue in Melrose, Delaware and Maryland, had

statutes which this Court interpreted as providing that

the corporations involved ‘‘existed”’ at the time they

were charged: with, and convicted of, the relevant

crimes. The statute alleged to ‘‘save” the prosecution

in this case, the Bank Merger Act, is not in any way

comparable to the state statutes at issue in Melrose.

The Maryland law specifically provided that a cor-

porate dissolution did not “‘abate any pending suit or

proceeding’ and the Delaware statute specifically kept

alive ‘‘proceedings” against dissolved corporations for

three years. Melrose, 359 U.S. at 278.

Here, by contrast, the Bank Merger Act provides

that surrender of the charter terminates the fran-

chise. The Act is totally silent as to abatement of

proceedings against dissolved national banks. It pro-

vides that ‘‘the resulting State bank shall be consid-

ered the same business and corporate entity as the

national banking association although as to rights,

‘ Here, the criminal statute in question, the Bank Secrecy Act,

imposes liability upon a “person willfully violating this subchap-

ter’ 31 U.S.C. §§ 5322(a) and (b). It does not, by its own terms,

npene Rely See ie ES ee

violating the law.

powers and duties the resulting bank is a State bank.”

12 U.S.C. § 214b. The legislative history of the Bank

Merger Act is quite clear as to its limited intent. The ©

purpose of the statute was to equalize the tax treat-

ment of bank mergers between cases in which the

surviving bank was a national bank and those in which

the surviving bank was a state bank. See S. Rep. No.

1104, 8lst Cong. 2d Sess., reprinted in 1950 U.S.

Code Cong. and Admin. News 3012, 3018.

Self-evidently, the state bank cannot be considered

the same as the national bank for all purposes, for

that would result in serious anomalies in the law. For

example, a national bank is automatically a member

of the Federal Reserve System, 12 U.S.C. § 222; but

a state bank is given a choice. It may or may not

choose to be a member of the Federal Reserve Sys-

tem. 12 U.S.C. § 321. But if the state bank is con-

sidered the same as the national bank for all purposes,

then the surviving state bank in a merger must, of

necessity, be a member of the Federal Reserve—thus

depriving the state bank of the option the law gives

it. Similarly, a national bank located in a small town

has the explicit statutory power to engage in the

insurance business. 12 U.S.C. § 92. A state bank in

a small town in Texas has no such right under the

state law. But if the state bank is considered the same

as the national bank for all purposes after a merger,

then the surviving state bank in a small town would

have the opportunity to sell insurance, even though

state law does not permit it.

The lower court has interpreted the words of the

Bank Merger Act, ‘‘same business and corporate ent-

ity’ so as to make a criminal of a bank which com-

mitted no crime. As such, the bank is entitled to fair

10

notice of that possibility. Hoffman Estates v. Flipside

Hoffman Estates, 455 U.S. 489 (1982). In addition to

that, it is a rule of statutory construction that statutes

in derogation of the common law are to be strictly

construed against changes in the common iaw. Shaw

v. North Pennsylvania R.R. Co., 101 U.S. 557, 565

(1879). As we have demonstrated, the common law

rule is that a criminal prosecution abates upon the

death of a natural person defendant or the dissolution

of a corporation. See, e.g., Oklahoma Natural Gas

Company v. Oklahoma, 273 U.S. 257, 259 (1927).

When Congress intends to provide for successor

liability, it knows how to do so. An example of such

a statutory exception is the Comprehensive Environ-

mental Response, Compensation and Liability Act of

1980, 42 U.S.C. §§ 9601-9657 (“CERCLA”), which

confers strict liability upon certain successors in in-

terest (called ‘‘Potentially Responsible Parties’

(‘“PRP”’’)) for the costs of cleaning up sites where

hazardous materials are released into the environ-

ment.’ This statute specifically sets forth the only

conditions under which a PRP is liable for such clean

up costs, 42 U.S.C. § 9607(b).

In addition, where Congress intends that the pen-

alty for commission of a crime be extracted from a

third party who has come into possession of the assets

of the criminal, it knows how to do that specifically

as well. An example is the Comprehensive Forfeitures

Act of 1984, 21 U.S.C. § 853, in which Congress im-

* For a comprehensive discussion of the imposition of liability

upon dissolved corporations under this statute, see Note, Cor-

porate Life After Death: CERCLA Preemption of State Corpo-

ration Dissolution Law, 88 Mich. L. Rev. 131 (1989).

tell

ll

posed forfeitures upon assets of some criminals, when

those assets are used in the commission of or derived

from the crimes in question. Such assets are subject

to forfeiture as of the time of the commission of the

act, so any person taking those assets with knowledge

that they might be subject to forfeiture is on fair

notice. See United States v. Monsanto, 109 S. Ct. 2657

(1989). The Comprehensive Forfeitures Act is limited

in scope and provides a number of affirmative defen-

ses to innocent third parties. Here, by contrast, the

civil statute, the Bank Merger Act, has no limits and

has no affirmative defenses for innocent third parties.

If it had been intended that the Act would impose

liability on third parties, such factors would undoubt-

edly have been included in the law.

Finally, in Melrose, this Court noted that the dis-

solved corporations continued to exist as divisions of

a new corporation and that there was no reason to

allow them to escape criminal] penalties. Essentially,

this Court found in Melrose that the same legal per-

sons who committed crimes continued to exist, despite

sham dissolutions, and could be punished for their

crimes. Here, by contrast, Central National Bank has

ceased to exist, and Alamo Bank should not be pun-

ished in its stead. There is no evidence of a sham

transaction. Quite the contrary, it is clear that the

dissolution of Central as an independent business ent-

ity took place in order to take advantage of a change

in state branch banking laws, not to avoid prosecu-

tion. (See Pet. for Writ. of Cert. at 3, n. 1).

B. The Fifth Circuit's Application of Melrose

The Fifth Circuit quotes Justice Douglas’ opinion

in the Melrose case as follows:

12

After dissolution [the dissolved corporations] sim-

ply became divisions of a new corporation under

the same ultimate ownership. In this situation,

there is no more reason for allowing them to

escape criminal penalties than damages in civil

suits. As the Court of Appeals noted, a corpo-

ration cannot be sent to jail. The discharge of its

liabilities whether criminal or civil can be effected

only by the payment of money.

880 F.2d at 830 quoting Melrose at 274.

Significantly, the court below omits a sentence

which precedes this quotation. Mr. Justice Douglas

made it eminently clear that the quotation was dicta

when he wrote that ‘‘Policy reasons look to the same

result.”” Melrose at 274 (emphasis added). In addition,

in the cited paragraph, Justice Douglas equated crim-

inal fines and civil damages in the context of cor-

porations because a corporation cannot go to jail. If

there is no difference between criminal fines and civil

damages, then the Eighth Amendment prohibition

against excessive fines would likewise protect

defendants against excessive civil damages. We know

that that is not true because the Court so held last

June in Browning Ferris Industries v. Kelco Disposal,

Inc., 109 S. Ct. 2909 (1989). There, the Court con-

cluded that there is a clear distinction between the

two in law and in fact. There are constitutional limits

upon the government which do not apply to private

parties.

Finally, even if Justice Douglas were correct in his

reasoning that it is acceptable to punish one corpo-

ration for the misdeeds of another, so long as the

same ultimate owners pay the price of the crime, the

Fifth Circuit here has not followed that limitation.

13

The scope of the Fifth Circuit’s decision is far broader

than would be allowed even by the dicta in the Mel-

rose case, because there is no indication that the re-

sult would be different in the case of two merging

banks which had absolutely no prior affiliation.* In

the court below, the U.S. Attorney argued that ‘‘the

issue of flow through liability does not turn on who

owned the pre-merger banks or the resulting banks”’

(Fifth Circuit Brief of the United States at 3, n. 1).

In affirming the conviction of Alamo for Central’s

crimes, the Fifth Circuit apparently agreed, placing

no limits upon its conclusion that, under the Bank

Merger Act as construed by the court, ‘‘Alamo is

CNB and it is CNB now named Alamo which is re-

sponsible for CNB’s actions and liabilities.’’ 880 F.2d

at 830.

In any event, if this Court is inclined to give Mel-

rose the reading that is the most generous to the

government (which it should not do, for the reasons

indicated above), it should grant the Petition for Writ

of Certiorari, and either narrow the Fifth Circuit’s

decision or vacate that decision and remand it to the

Fifth Circuit with instructions.

e and Central were subsidiaries of the same holding

14

For the reasons stated herein and in the Petition

for Writ of Certiorari, your amici, on behalf of their

rey alrgpeetiry ee

the Court to grant the aforementioned Petition.

Respectfully submitted,

Joun J. Guu Ol

MICHAEL F. Crorty

IrvVING D. WARDEN

AMERICAN BANKERS ASSOCIATION

1120 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 663-5028

Wenpy B. SAMUEL

Davip E. DanovrTcH

THE NATIONAL COUNCIL OF

SAVINGS INSTITUTIONS

1101 15th Street, N.W.

Washington, D.C. 20005

15

LEONARD J. RusBiIx

Jones, Day, Reavis & Pocve

1450 G Street, N.W.

Washington, D.C. 20005

(202) 879-5400

Attorney for Independent

Bankers Association of

America

RosBertT W. Norcross, Jr.

TEXAS BANKERS ASSOCIATION

203 W. Tenth Street

Austin, Texas 78701

(512) 472-8388

JAMES W. PAULSEN

LIDDELL, Sapp, ZivLEy, Hu &

LABOON

3500 Texas Commerce Tower

Houston, Texas 77002

(713) 226-1185

Attorneys for Texas Bankers

_ Association

KaREN M. NEELEY

INDEPENDENT BANKERS

ASSOCIATION OF TEXAS

400 West 15th Street

Austin, Texas 78701

(512) 474-6889

December 14, 1989