# OCC Interpretive Letter No. 735: Letter approves the application of a national bank to establish an OREO operating subsidiary and make investments through an operating subsidiary in one or more limited liability companies in conjunction with other participants in a loan secured by real property to acquire title to, manage, operate, develop, and improve OREO property. (07/15/96)

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT0735

## Section

- **Citation:** OCC Interpretive Letter No. 735
- **Heading:** Letter approves the application of a national bank to establish an OREO operating subsidiary and make investments through an operating subsidiary in one or more limited liability companies in conjunction with other participants in a loan secured by real property to acquire title to, manage, operate, develop, and improve OREO property. (07/15/96)
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / Letter approves the application of a national bank to establish an OREO operating subsidiary and make investments through an operating subsidiary in one or more limited liability companies in conjunction with other participants in a loan secured by real property to acquire title to, manage, operate, develop, and improve OREO property. (07/15/96)

## Text

Office of the Comptroller of the Currency
Interpretive Letter #735
Published in Interpretations and Actions August 1996
12 U.S.C. 24(7)
July 15, 1996
Gregory K. Thoreson
Assistant Secretary
First National Bank of Maryland, D.C.
555 13th Street, N.W.
Washington, D.C. 20004
Re: Notice of First National Bank of Maryland, D.C., of Intent to Establish an Operating Subsidiary
Pursuant to 12 C.F.R. 5.34 to Become a Member of a Limited Liability Company - Application Control
No. 95-NE-08-0020
Dear Mr. Thoreson:
This is in response to the operating subsidiary notice ("Notice") filed by First National Bank of
Maryland, D.C., ("the Bank" or "FNB, D.C.") with the OCC pursuant to 12 C.F.R. 5.34. We have now
completed our review and your notice is hereby approved, as described herein.
Facts
On July 18, 1995, the Bank filed an operating subsidiary notice ("Notice") of its intent to establish a new
operating subsidiary to acquire, manage and sell real property conveyed to it as security for or in
satisfaction of debts previously contracted ("DPC"). As originally proposed, the operating subsidiary
would hold a 58.6 percent interest in a limited liability company ("LLC") chartered under the laws of the
District of Columbia. The LLC would acquire a single piece of property from the Bank and a co-lender.
The Bank subsequently notified the OCC that it would not proceed with the proposed transaction.
However, in a letter to the OCC dated December 14, 1995, the Bank requested that its Notice be
considered notification of the Bank's intent to establish one or more operating subsidiaries
("Subsidiaries") to acquire title to and hold OREO property. Currently, the Bank has no authority to
establish an OREO operating subsidiary. The Bank also seeks approval to make investments through an
operating subsidiary, in one or more LLCs in conjunction with other participants in loans secured by real
property. Additional information and clarification of the proposal was requested from the Bank
"Subsidiaries") to acquire title to and hold OREO property. Currently, the Bank has no authority to
establish an OREO operating subsidiary. The Bank also seeks approval to make investments through an
operating subsidiary, in one or more LLCs in conjunction with other participants in loans secured by real
property. Additional information and clarification of the proposal was requested from the Bank. In a
letter dated May 16, 1996, the Bank further amended its Notice and provided additional clarification of
its proposal as follows.
The Bank is a participant in a series of real estate secured loan transactions ("Participation Loans"). The
Bank owns either approximately a 58 percent or 42 percent interest in each of the Participation Loans.
Interpretive Letter #735
(1 of 6)

The Participation Loan documents provide that participants representing at least 60 percent of the
outstanding balance must consent to any foreclosure or other action with respect to the debt or collateral
securing such loan. Therefore, neither the Bank nor the other participants can control the disposition of
the collateral securing any Participation Loan without the other party's consent. In the event the
participants in any such Participation Loan deem it necessary to acquire the real estate securing such
loan, the Bank seeks approval to do so through one or more limited liability companies. The Bank states that its investment in the LLCs, whether majority (58 percent) or minority
(42 percent), will be non-controlling. The Bank has represented that the Bank and its Subsidiaries will
report on a consolidated basis and that the Subsidiaries' investment in each of the LLCs will be accounted
for by the equity method of accounting
her participants or members of the LLCs are not
yet known.> The Bank states that its investment in the LLCs, whether majority (58 percent) or minority
(42 percent), will be non-controlling. The Bank has represented that the Bank and its Subsidiaries will
report on a consolidated basis and that the Subsidiaries' investment in each of the LLCs will be accounted
for by the equity method of accounting. Management of the LLC will be vested in its members and the
LLC Operating Agreement will require a supermajority vote (60 percent) approval of the members for all
LLC actions. Therefore, even if the Bank were to hold a 58 percent interest in the Participation Loan and
membership interest in a LLC, it would not be able to control the management of the LLC.
Analysis
A national bank may engage in activities that are part of or incidental to the business of banking by
means of an operating subsidiary. 12 C.F.R. 5.34(c). To qualify as an operating subsidiary, the parent
bank must own at least 80 percent of the voting stock of the corporation. A national bank is authorized to make, arrange,
purchase or sell loans or extensions of credit secured by liens on interests in real property. See 12 U.S.C.
371. A national bank may acquire real estate and other property or assets securing a loan, manage and
operate those assets, and employ any reasonable means to avoid the loss of its extensions of credit within
the parameters of 12 U.S.C. 29, and the applicable rulings concerning retention of real estate. See
Interpretive Letter No. 657 (March 31, 1995), reprinted in [Current] Fed. Banking L. Rep. (CCH) 83,605.
It is also well established that national banks have the authority to purchase, hold, and convey DPC
property. See 12 U.S.C. 29 (Third)
e means to avoid the loss of its extensions of credit within
the parameters of 12 U.S.C. 29, and the applicable rulings concerning retention of real estate. See
Interpretive Letter No. 657 (March 31, 1995), reprinted in [Current] Fed. Banking L. Rep. (CCH) 83,605.
It is also well established that national banks have the authority to purchase, hold, and convey DPC
property. See 12 U.S.C. 29 (Third). Moreover, the OCC has held that a national bank can own an interest
in a LLC which will manage and dispose of the bank's DPC assets. See Unpublished Letter by Law
Department Assistant Director William Glidden, April 8, 1994 ("1994 Glidden Letter"). Therefore, the
Bank may establish operating subsidiaries to hold OREO property either directly or through a LLC.
Your letter raises the issue of the authority of a national bank to make a non-controlling majority and
minority investment in a LLC. In approving a national bank's majority participation in a LLC, the OCC
has looked at whether the underlying activities are permissible under 12 U.S.C. 24(Seventh) as part of or
incidental to the business of banking, whether the national bank is shielded from unlimited liability for
the acts of the LLC, and whether the national bank has the power to influence and, if necessary,
withdraw from membership in the LLC in the event the LLC engages in activities which are
impermissible for national banks. Separately, in a variety of circumstances the OCC has permitted
national banks to own, either directly, or indirectly through an operating subsidiary, a minority interest in
an enterprise. The enterprise might be a limited partnership, a corporation, or in more recent examples, a
limited liability company. In a recent interpretive letter, the OCC concluded that national banks are
legally permitted to make a minority investment in a LLC provided four criteria or standards are met. See
Interpretive Letter No. 692, (November 1, 1995), reprinted in [Current] Fed. Banking L. Rep. (CCH)
81,007, and No. 694 (Dec
a limited partnership, a corporation, or in more recent examples, a
limited liability company. In a recent interpretive letter, the OCC concluded that national banks are
legally permitted to make a minority investment in a LLC provided four criteria or standards are met. See
Interpretive Letter No. 692, (November 1, 1995), reprinted in [Current] Fed. Banking L. Rep. (CCH)
81,007, and No. 694 (Dec. 13, 1995), reprinted in [Current] Fed. Banking L. Rep. (CCH) 81,009.
See also Letter
of Steven J. Weiss, Deputy Comptroller, Bank Organization and Structure, (December 27, 1995
unpublished) ("Weiss Letter"). These standards, which have been distilled from our previous decisions in
the area of permissible minority investments for national banks and their subsidiaries are: (1) The
activities of the entity or enterprise in which the investment is made must be limited to activities that are
part of, or incidental to, the business of banking; (2) The investing bank must be in a position to prevent
the enterprise or entity from engaging in activities that do not meet the foregoing standard; (3) The bank's
loss exposure must be limited, as a legal and accounting matter, and the bank must not have open-ended
liability for the obligations of the enterprise; and (4) The investment must be convenient or useful to the
bank in carrying out its business and not a mere passive investment unrelated to that bank's banking
business
engaging in activities that do not meet the foregoing standard; (3) The bank's
loss exposure must be limited, as a legal and accounting matter, and the bank must not have open-ended
liability for the obligations of the enterprise; and (4) The investment must be convenient or useful to the
bank in carrying out its business and not a mere passive investment unrelated to that bank's banking
business.
Despite the fact that the Bank, through its Subsidiaries, may own a 58 percent interest in the LLCs, the
investment will still be considered a "non-controlling" investment for purposes of legal and accounting
treatment because of the way the LLCs will be operated and managed, i.e., a 60 percent supermajority
approval of the members is required for all LLC actions. Therefore, the analysis for these transactions
will be essentially the same as it was in Interpretive Letter No. 692 and the Weiss Letter.
Applying these four standards to the facts presented, I conclude, as discussed below, that the Bank's
proposal satisfies these four standards and that the proposed activities may be conducted through an
operating subsidiary pursuant to 12 C.F.R. 5.34.
1. The activities of the enterprise in which the investment is made must be limited to activities that
are part of, or incidental to, the business of banking.
The acquisition, management and sale of real property conveyed to the Bank as security for or in
satisfaction of debts previously contracted, either directly or through an operating subsidiary, is an
activity that is part of or incidental to the business of banking under 12 U.S.C. 24(Seventh). It is well
established that national banks have the authority to purchase, hold and convey DPC property. See 12
U.S.C. 29 (Third). National banks also have the ability to make, arrange, purchase or sell loans or
extensions of credit secured by liens on interests in real property. See 12 U.S.C. 371
is an
activity that is part of or incidental to the business of banking under 12 U.S.C. 24(Seventh). It is well
established that national banks have the authority to purchase, hold and convey DPC property. See 12
U.S.C. 29 (Third). National banks also have the ability to make, arrange, purchase or sell loans or
extensions of credit secured by liens on interests in real property. See 12 U.S.C. 371. In addition, a
national bank may acquire real estate and other property or assets, securing a loan, manage and operate
those assets, and employ any reasonable means to avoid the loss of its extensions of credit within the
parameters of 12 U.S.C. 29, and the applicable rulings concerning the retention of real estate. See
Interpretive Letter No. 657, reprinted in Fed. Banking L. Rep. (CCH) at 83,605 (March 31, 1995). The
OCC has previously held that a national bank can own an interest in a LLC which will manage and
dispose of the bank's DPC assets. See 1994 Glidden Letter. Thus, the proposed activities of the LLCs, the
purchase of and conveyance of real property, including DPC property, are permissible activities for
national banks. Moreover, the amended Notice provides that the articles of organization and Operating
Agreements of the LLCs will provide that the LLCs will only engage in activities permissible for
national banks. Accordingly, this criteria is satisfied.
2. The bank must be able to prevent the enterprise from engaging in activities that do not meet the
foregoing standard.
This is an obvious corollary to the first standard. It is not sufficient that the LLC's activities are
permissible at the time the bank initially purchases LLC membership shares; they must also remain
permissible for as long as the bank retains an ownership interest in the LLC.
Interpretive Letter #735
(3 of 6)
ent the enterprise from engaging in activities that do not meet the
foregoing standard.
This is an obvious corollary to the first standard. It is not sufficient that the LLC's activities are
permissible at the time the bank initially purchases LLC membership shares; they must also remain
permissible for as long as the bank retains an ownership interest in the LLC.
Interpretive Letter #735
(3 of 6)

Under District of Columbia law, unless the articles of organization provide otherwise, a LLC may
exercise "all powers necessary or convenient to effect any or all of the purposes for which the limited
liability company is formed...". D.C. CODE ANN. 29-1303 (1991).
The amended Notice provides that the draft Operating Agreement will be amended to provide that the
LLCs will only engage in bank permissible activities and that the operating subsidiaries will be able to
withdraw from a LLC and require the LLC to commence winding up its business and liquidate its
property in the event it engages in activities impermissible for national banks. Accordingly, this standard
will be satisfied provided the Operating Agreements confirm that the Bank will only engage in activities
that are part of, or incidental to the business of banking, and that the Bank will withdraw from the LLCs
in the event the LLCs engage in activities that are inconsistent with this standard.
3. The bank's loss exposure must be limited, as a legal and accounting matter, and the bank must
not have open-ended liability for the obligations of the enterprise.
Loss Exposure from a Legal Standpoint
A primary concern of the OCC is that national banks should not be subjected to undue risk. Where an
investing bank will not control the operations of the entity in which the bank holds an interest, it is
important that a bank's investment not expose it to unlimited liability. Such is the case here
ave open-ended liability for the obligations of the enterprise.
Loss Exposure from a Legal Standpoint
A primary concern of the OCC is that national banks should not be subjected to undue risk. Where an
investing bank will not control the operations of the entity in which the bank holds an interest, it is
important that a bank's investment not expose it to unlimited liability. Such is the case here. As a legal
matter, investors in a District of Columbia LLC will not incur liability with respect to the liabilities or
obligations of the LLC solely by reason of being a member or manager of the LLC -- even if they
actively participate in the management or control of the business. D.C. CODE ANN. 29-1314(b) (1991).
This limited liability feature is what differentiates LLCs both from general partnerships, where all
partners are generally liable for the debts of the partnership, and from limited partnerships, which must
have at least one general partner who is personally liable for the obligations of the
partnership.
You have represented that the amended Operating Agreements will shield the Bank from any liability for
the obligations of the LLCs. See May 16, 1996 Notice at p. 4; July 17, 1995 Notice at p.3. You have also
represented that FNB, D.C.'s risk of loss exposure for any debts, liabilities or potential depreciation of the
value of assets of the LLCs will be limited to its investment in the LLC. The authority to manage and
control the business affairs of the LLC will be vested in the members of the LLC. The Operating
Agreement will require a supermajority vote of 60 percent for all actions to be taken by the LLC
sented that FNB, D.C.'s risk of loss exposure for any debts, liabilities or potential depreciation of the
value of assets of the LLCs will be limited to its investment in the LLC. The authority to manage and
control the business affairs of the LLC will be vested in the members of the LLC. The Operating
Agreement will require a supermajority vote of 60 percent for all actions to be taken by the LLC. Thus,
the Bank's loss exposure for the LLCs' liabilities will be limited by statute and the Operating Agreement.
Loss Exposure from an Accounting Standpoint
In assessing a bank's loss exposure as an accounting matter, the OCC has previously noted that the
appropriate accounting treatment for a bank's 20-50 percent ownership share or investment in a LLC is to
report it as an unconsolidated entity under the equity method of accounting. Under this method, unless
the bank has extended a loan to the entity, guaranteed any of its liabilities or has other financial
obligations to the entity, losses are generally limited to the amount of the investment shown on the
investor's books. See generally, Accounting Principles Board, Op. 18 19 (1971) (equity method of
accounting for investments in common stock). Interpretive Letter 692, supra.
In this case, the Bank's investment will be made through its Subsidiaries and will amount to either
approximately 58 or 42 percent of the total membership interest in an LLC. Where a subsidiary owns
Interpretive Letter #735
(4 of 6)
or's books. See generally, Accounting Principles Board, Op. 18 19 (1971) (equity method of
accounting for investments in common stock). Interpretive Letter 692, supra.
In this case, the Bank's investment will be made through its Subsidiaries and will amount to either
approximately 58 or 42 percent of the total membership interest in an LLC. Where a subsidiary owns
Interpretive Letter #735
(4 of 6)

over 50 percent in the LLCs, they generally are not able to use the equity method of accounting. Thus,
the Subsidiaries' ownership of more than a 50 percent interest in an LLC raises a presumption of control
over the LLC. The Bank or its Subsidiaries would, under the general rule, be required to report with the
LLC on a consolidated basis.
The Bank has stated, however, that the Bank and its Subsidiaries will report on a consolidated basis and
that the Subsidiaries' investment in each of the LLCs will be accounted for by the equity method of
accounting. The Bank believes, and its auditors will opine, that the equity method of accounting is
appropriate in this instance because the Subsidiaries will not have a controlling voting interest or control
over the management of the LLCs. A supermajority
vote of 60 percent will be required for all actions taken by the LLCs. In addition, as noted above, the
agreements governing the LLCs and District of Columbia law limit members' losses to their capital
investment and, therefore, the Subsidiaries and the Bank will not have open-ended liability for the
obligations of the LLCs. Therefore, the third standard is satisfied.
4. The investment must be convenient or useful to the bank in carrying out its business and not a
mere passive investment unrelated to that bank's banking business
and District of Columbia law limit members' losses to their capital
investment and, therefore, the Subsidiaries and the Bank will not have open-ended liability for the
obligations of the LLCs. Therefore, the third standard is satisfied.
4. The investment must be convenient or useful to the bank in carrying out its business and not a
mere passive investment unrelated to that bank's banking business.
A national bank's investment in an enterprise or entity that is not an operating subsidiary of the bank
must also satisfy the requirement that the investment have a beneficial connection to the bank's business,
i.e., be convenient or useful to the investing bank's business activities, and not constitute a mere passive
investment unrelated to that bank's banking business. "Necessary" has been judicially construed to mean
"convenient or useful". See Arnold Tours, Inc. v. Camp, 472 F.2d 427, 432 (1st Cir. 1972). The provision
in 12 U.S.C. 24(Seventh) relating to the purchase of stock, derived from section 16 of the Glass-Steagall
Act, was only intended to make it clear that section 16 did not authorize speculative investments in stock.
See Letter of Stephen R. Steinbrink, Senior Deputy Comptroller, Bank Supervision Operations
(November 15, 1995, unpublished). Therefore, a consistent thread running through our precedents
concerning stock ownership is that it must be convenient or useful to the bank in conducting that bank's
banking business. The investment must benefit or facilitate that business and cannot be a mere passive or
speculative investment.
The Bank has stated that the proposed investment in the LLCs is intended to support and facilitate the
Bank's authority to acquire, hold and convey OREO property to protect the value of real property which
serves as collateral for a loan. The investment in the LLCs provides the Bank with an opportunity to
protect its interest in an efficient and cost-effective manner
ive or
speculative investment.
The Bank has stated that the proposed investment in the LLCs is intended to support and facilitate the
Bank's authority to acquire, hold and convey OREO property to protect the value of real property which
serves as collateral for a loan. The investment in the LLCs provides the Bank with an opportunity to
protect its interest in an efficient and cost-effective manner. The use of an LLC to acquire title to OREO
property is a reasonable and convenient method for the Bank to hold an investment in which it has a
security interest.
Overall, the Bank's investment in the LLCs is related its business and would be convenient and useful to
it in carrying out its banking business. Therefore, the fourth standard is satisfied.
Conclusion
For the reasons discussed above, the Bank's investment in the LLCs through the operating subsidiaries
satisfies the four standards for a national bank's majority and minority, non-controlling investment in a
LLC. Therefore, the Bank's operating subsidiary notification is approved subject to the following special
conditions:
Interpretive Letter #735
(5 of 6)

(1) the LLCs and the operating subsidiaries may engage only in activities that are part of or
incidental to the business of banking;
(2) the Bank, through the operating subsidiaries, will have veto power over any activities and
major decisions of the LLCs that are inconsistent with condition number one, or will withdraw
from the LLCs in the event they engage in an activity that is inconsistent with condition number
one;
(3) the Bank will account for the investment in the LLCs under the equity method of accounting;
and
banking;
(2) the Bank, through the operating subsidiaries, will have veto power over any activities and
major decisions of the LLCs that are inconsistent with condition number one, or will withdraw
from the LLCs in the event they engage in an activity that is inconsistent with condition number
one;
(3) the Bank will account for the investment in the LLCs under the equity method of accounting;
and
(4) the operating subsidiaries and the LLCs will be subject to OCC supervision and examination.
Please be advised that all conditions of this approval are "conditions imposed in writing by the agency in
connection with the granting of any application or other request" within the meaning of 12 U.S.C. 1818.
If you have any questions, please contact Nancy Cody, National Bank Examiner, Corporate Activity at
(202)874-5060 or Susan L. Blankenheimer, Senior Attorney, Bank Activities and Structure Division at
(202)874-5300.
Sincerely,
/s/
Julie L. Williams
Chief Counsel
Interpretive Letter #735
(6 of 6)

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT0735. Check the current official text before relying on it. Not legal advice.