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From Antitrust Law Daily, August 26, 2014

For tying purposes, a bank holding company isn’t a bank

By Richard A. Roth, J.D.

The Bank Holding Company Act’s prohibition on anticompetitive bank tying arrangements applies to banks, not bank holding companies, according to the federal district court in Louisville, Kentucky. The court found that calling a holding company a bank in a complaint doesn’t make it a bank (Williams v. Porter Bancorp, Inc., August 22, 2014, Heyburn II, J.).

The plaintiffs—two businessmen and their businesses—claimed that in early 2008 the bank had them “over a barrel” and declined to renew a $4.25 million loan, which they could not pay off, unless they agreed to assume a pizza restaurant’s $24,000 debt to the bank and take over the restaurant. They also were required to hire the bank to pick up the restaurant’s daily deposits, at a cost of $150 each week.

When the 2008 economic downturn left the businessmen unable to repay the renewed loan, which had risen to $5.25 million, the bank twisted their arms once again, they complained. This time, they were compelled to assume another customer’s bad $66,000 loan, buy real estate owned by the bank for more than its market value, and take out a line of credit to complete the development of the property.

Tying arrangements. The purpose of the Bank Holding Company Act’s anti-tying provisions (12 U.S.C. §1972) is to prohibit anticompetitive practices that force customers to accept or provide a service or product, or refrain from doing business with a third party, as a condition of obtaining the bank product or service they want, the court stated. The businessmen claimed that the bank violated the ban when it compelled them to invest in the restaurant, buy the property, and assume other debts as a condition of renewing their loan. They also claimed the bank’s holding company violated the ban.

“A bank shall not in any manner extend credit . . .” based on any prohibited condition, according to the statute. The statute says nothing about what holding companies can do, the court pointed out. The distinction is made clear further down in the section, where banks specifically are prohibited from requiring customers to engage in described deals with bank holding companies, he said.

A holding company cannot be liable for illegal tying under 12 U.S.C. §1972, the court concluded.

Holding company as bank. The businessmen, however, argued that when deciding a motion to dismiss a complaint, the judge has to assume that the allegations in that complaint are true. Since they alleged in their complaint that the holding company was a bank, the court had to assume it was.

The judge disagreed, saying he could rely on undisputed public records supplied by the holding company that showed the contrary. The Federal Reserve Board’s records showed that the holding company was, indeed, a holding company rather than a bank, and the businessmen did not dispute those records. That allowed the judge to reject the claim that it was a bank.

The case is No. 3:13-CV-1166-H.

Attorneys: Laurence John Zielke (The Zielke Law Firm) for Jonathan C. Williams, Mobile Home Sales of Central Kentucky, LLC, Fayette Aviation, Inc., Star Lite Development, LLC, Food Service of Lexington, Inc., and Georgetown Mobile Estates, LLC. Jasmine L. Hardin for PBI Bank, Inc.

Companies: PBI Bank, Inc.; Porter Bancorp, LLC

MainStory: TopStory Antitrust KentuckyNews

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