Skip to main content

B-200951 L/M, DEC 16, 1982

B-200951 L/M Dec 16, 1982
Jump To:
Skip to Highlights

Highlights

HOUSE OF REPRESENTATIVES: THIS IS IN RESPONSE TO YOUR REQUEST FOR OUR OPINION ON SEVERAL LEGAL ISSUES CONCERNING A LOAN BY THE NATIONAL CONSUMER COOPERATIVE BANK (NCCB) TO THE DUNBAR NO. 1 COOPERATIVE HOUSING CORPORATION. WE CONCLUDE THAT DUNBAR NO. 1 WAS LEGALLY ELIGIBLE TO RECEIVE THE NCCB LOAN. THERE WERE VIOLATIONS OF THE NCCB CONFLICT OF INTEREST RULES IN CONNECTION WITH THE DUNBAR LOAN. NCCB IS GOVERNED BY A BOARD OF DIRECTORS CONSISTING OF 15 MEMBERS. THREE OF WHOM ARE APPOINTED BY THE PRESIDENT WITH THE ADVICE AND CONSENT OF THE SENATE. NCCB IS AUTHORIZED TO MAKE AND SERVICE LOANS. WAS ORIGINALLY OPERATED AS A COOPERATIVE BUT WAS ACQUIRED BY PRIVATE INVESTORS IN 1947. THE DUNBAR NO. 1 COOPERATIVE HOUSING CORPORATION WAS INCORPORATED AS A NOT-FOR-PROFIT COOPERATIVE HOUSING CORPORATION UNDER THE LAWS OF NEW YORK.

View Decision

B-200951 L/M, DEC 16, 1982

PRECIS-UNAVAILABLE

FERNAND J. ST GERMAIN, HOUSE OF REPRESENTATIVES:

THIS IS IN RESPONSE TO YOUR REQUEST FOR OUR OPINION ON SEVERAL LEGAL ISSUES CONCERNING A LOAN BY THE NATIONAL CONSUMER COOPERATIVE BANK (NCCB) TO THE DUNBAR NO. 1 COOPERATIVE HOUSING CORPORATION.

AS DISCUSSED IN DETAIL HEREAFTER, WE CONCLUDE THAT DUNBAR NO. 1 WAS LEGALLY ELIGIBLE TO RECEIVE THE NCCB LOAN. AT THE SAME TIME, THERE WERE VIOLATIONS OF THE NCCB CONFLICT OF INTEREST RULES IN CONNECTION WITH THE DUNBAR LOAN.

BACKGROUND

THE NATIONAL CONSUMER COOPERATIVE BANK ACT, PUB.L. NO. 95-351 (APPROVED AUGUST 20, 1978), 92 STAT. 499, 12 U.S.C. SEC. 3001 ET. SEQ., CREATED THE NCCB TO ENCOURAGE THE DEVELOPMENT OF NEW AND EXISTING COOPERATIVES THAT WOULD BE ELIGIBLE FOR SPECIALIZED CREDIT AND TECHNICAL ASSISTANCE FROM NCCB AND TO ENCOURAGE BROAD-BASED OWNERSHIP, CONTROL, AND ACTIVE PARTICIPATION BY MEMBERS IN ELIGIBLE COOPERATIVES. 12 U.S.C. SEC. 3011. NCCB IS GOVERNED BY A BOARD OF DIRECTORS CONSISTING OF 15 MEMBERS, THREE OF WHOM ARE APPOINTED BY THE PRESIDENT WITH THE ADVICE AND CONSENT OF THE SENATE. THE REMAINING MEMBERS OF THE BOARD MUST BE ELECTED BY THE HOLDERS OF VARIOUS CLASSES OF STOCK. 12 U.S.C. SEC. 3013. NCCB IS AUTHORIZED TO MAKE AND SERVICE LOANS, COMMITMENTS FOR CREDIT, AND GUARANTEES; TO FURNISH FINANCIALLY RELATED SERVICES AND TECHNICAL ASSISTANCE; AND TO PARTICIPATE WITH ONE OR MORE OTHER FINANCIAL INSTITUTIONS IN LOANS OR GUARANTEES. U.S.C. SEC. 3012(13).

IN OCTOBER 1980, FRANCES LEVENSON, A VICE-PRESIDENT OF THE NEW YORK BANK FOR SAVINGS (NYB), AND A MEMBER OF THE BOARD OF DIRECTORS OF NCCB, SUBMITTED A WRITTEN "PRELIMINARY REQUEST" TO NCCB VICE-PRESIDENT DAVID JAMESON SOLICITING NCCB'S PARTICIPATION IN A PERMANENT MORTGAGE LOAN FOR THE DUNBAR APARTMENTS. THE DUNBAR APARTMENTS, A 536 UNIT APARTMENT COMPLEX, WAS ORIGINALLY OPERATED AS A COOPERATIVE BUT WAS ACQUIRED BY PRIVATE INVESTORS IN 1947, WHEN NYB BECAME THE MORTGAGEE. BETWEEN 1975 AND 1980, THE DUNBAR APARTMENTS SUFFERED CONSIDERABLE DETERIORATION AND DEFERRED MAINTENANCE; IN 1978 NYB ACQUIRED OWNERSHIP IN LIEU OF FORECLOSURE ON THE MORTGAGE LOAN. FN1

INCIDENT TO THIS REQUEST, THE DUNBAR NO. 1 COOPERATIVE HOUSING CORPORATION WAS INCORPORATED AS A NOT-FOR-PROFIT COOPERATIVE HOUSING CORPORATION UNDER THE LAWS OF NEW YORK. THE PURPOSES OF DUNBAR NO. 1 INCLUDE THE ACQUISITION OF ALL OR PART OF THE DUNBAR APARTMENTS IN ORDER TO MAKE THEM AVAILABLE TO SHAREHOLDERS AS A RESIDENTIAL PROPERTY. THE INCORPORATORS OF DUNBAR NO. 1 WERE MEMBERS OF A LAW FIRM CONTACTED BY NYB'S LEGAL COUNSEL TO REPRESENT TENANTS OF THE DUNBAR APARTMENTS.

ON DECEMBER 15, 1980, THE BOARD OF DIRECTORS OF NCCB APPROVED A $5.2 MILLION LOAN TO DUNBAR NO. 1. ON MARCH 19, 1981, DUNBAR NO. 1 ACCEPTED THE $5.2 MILLION LOAN AND, THEREAFTER, PURCHASED NCCB STOCK. ON JULY 2, 1981, THE NCCB DISBURSED A PORTION OF THE $5.2 MILLION LOAN TO DUNBAR NO. 1. AT THE SAME TIME, THE DUNBAR APARTMENTS WERE SOLD TO SEVENTH AVENUE, INC., A NEW YORK CORPORATION ORGANIZED AND WHOLLY-OWNED BY NYB. ON THE SAME DAY, OWNERSHIP OF THE APARTMENTS WAS SOLD TO DUNBAR NO. 1. FURTHERMORE, INCIDENT TO THE DUNBAR TRANSACTION, NYB ACQUIRED 100 SHARES OF SEVENTH AVENUE, INC., AND SEVENTH AVENUE ACQUIRED 10 SHARES OF DUNBAR NO. 1. WE ARE INFORMED THAT FRANCIS MCIVER, AN ASSISTANT VICE-PRESIDENT OF NYB, WAS AT THAT TIME THE PRESIDENT OF SEVENTH AVENUE INC., AND ALSO PRESIDENT OF DUNBAR NO. 1.

WHILE THE INFORMATION BEFORE US SUGGESTS THAT THERE WAS SOME TENANT INTEREST IN THE FORMATION OF A COOPERATIVE FOR THE DUNBAR APARTMENTS, NO TENANTS WERE DIRECTLY INVOLVED IN THE FORMATION, OR HAD ANY OWNERSHIP INTEREST IN, DUNBAR NO. 1 AT THE TIME NCCB MADE THE LOAN TO DUNBAR NO. 1.

CONCERN HAS BEEN EXPRESSED OVER THIS NCCB LOAN BECAUSE OF THE LACK OF ACTUAL TENANT PARTICIPATION IN DUNBAR NO. 1 AT THE TIME IT WAS CHARTERED AND BECAUSE THE APPARENT MOVING FORCE BEHIND THE FORMATION OF DUNBAR NO. 1 WAS NYB, WHOSE INVESTMENT AS MORTGAGEE OF THE DUNBAR APARTMENTS IS SUBSTANTIAL. FURTHERMORE, OBVIOUSLY NYB WOULD BENEFIT FROM THE NCCB LOAN TO DUNBAR NO. 1 SINCE, WE ARE INFORMED, THE PROCEEDS OF THE LOAN WERE TO BE USED TO UPGRADE THE DUNBAR APARTMENTS AND BECAUSE SEVENTH AVENUE, NYB'S WHOLLY OWNED SUBSIDIARY, IS THE SOLE OWNER OF DUNBAR NO. 1. PRIOR TO THE LOAN COMMITMENT FROM NCCB, THE APARTMENTS HAD DETERIORATED; NYB AS MORTGAGEE HAD DEFERRED DEBT SERVICE, FUNDED OPERATING DEFICITS AND ALLOWED ONLY EMERGENCY REPAIRS; AND NYB HAD INVESTED APPROXIMATELY $5 MILLION IN THE DUNBAR APARTMENTS INCIDENT TO ITS CONSOLIDATED FIRST BUILDING LOAN MORTGAGE. AT THIS TIME THE APPRAISED VALUE OF THE APARTMENTS WAS APPROXIMATELY $2 MILLION.

UPON CLOSING OF THE $5.2 MILLION NCCB LOAN, NCCB DISBURSED A PORTION OF THE LOAN PROCEEDS TO DUNBAR NO. 1, WHICH USED THESE PROCEEDS TO REPAY NYB FOR ADVANCES UNDER ITS FIRST MORTGAGE LOAN FOR THE DUNBAR APARTMENTS; TO PAY NYB FOR ADVANCES MADE UNDER A SECOND MORTGAGE LOAN; AND TO PURCHASE NCCB STOCK. IT WOULD APPEAR THAT THE EFFECT OF THE NCCB LOAN, AT LEAST IN THE SHORT RUN, WAS TO ALLOW NYB TO RECOVER A SUBSTANTIAL PORTION OF ITS INVESTMENT IN THE DUNBAR APARTMENTS AND TO DISTRIBUTE A PORTION OF THE RISK OF LOSS FROM THE HIGHLY LEVERAGED PROPERTY TO NCCB.

FURTHER, THE LACK OF ACTUAL TENANT OR CONSUMER INVOLVEMENT IN THE FORMATION OF DUNBAR NO. 1 AND THE ABSENCE OF SUCH PARTIES, APART FROM THE LAW FIRM RETAINED TO ACT AS THE INCORPORATORS OF THE COOPERATIVE, IN THE ESTABLISHMENT OF THE PRICE OR THE TERMS AND CONDITIONS OF THE SALE OF THE APARTMENTS TO DUNBAR NO. 1, RAISES A QUESTION WHETHER THE INTERESTS OF THOSE PARTIES WHO WILL EVENTUALLY BECOME SHAREHOLDER RESIDENTS IN DUNBAR NO. 1 WERE ADEQUATELY PROTECTED.

SPECIFIC LEGAL QUESTIONS HAVE BEEN RAISED CONCERNING THE ELIGIBILITY OF DUNBAR NO. 1 FOR NCCB ASSISTANCE UNDER THE ACT. A LEGAL QUESTION ALSO HAS BEEN RAISED AS TO WHETHER FRANCES LEVENSON'S INVOLVEMENT IN THE LOAN, SINCE SHE WAS THEN A MEMBER OF NCCB'S BOARD OF DIRECTORS AND A VICE- PRESIDENT OF NYB, VIOLATED THE NCCB CONFLICT OF INTEREST RULES.

IN PREPARING OUR OPINION ON THE LEGAL QUESTIONS RAISED BY THE DUNBAR LOAN, WE HAVE REVIEWED DOCUMENTS RELEVANT TO THE LOAN, AND HAVE RECEIVED SEVERAL SUBMISSIONS FROM THE NCCB GENERAL COUNSEL WHICH SUPPORT THE LEGALITY OF THE LOAN. WE WERE NOT ASKED TO ADDRESS, NOR DO WE IN FACT EXPRESS AN OPINION ON, THE SOUNDNESS OF NCCB'S DECISION TO EXTEND A LOAN TO DUNBAR NO. 1. OUR DECISION, THEREFORE, IS LIMITED TO THE COOPERATIVE'S ELIGIBILITY TO RECEIVE A LOAN, AND WHETHER THE NCCB CONFLICT OF INTEREST RULES WERE VIOLATED.

AS DISCUSSED IN DETAIL HEREAFTER, WE CONCLUDE THAT DUNBAR NO. 1 WAS ELIGIBLE AS A MATTER OF LAW TO RECEIVE THE NCCB LOAN. ALSO, WE CONCLUDE THAT MS. LEVENSON'S INVOLVEMENT IN THE LOAN VIOLATED THE NCCB CONFLICT OF INTEREST RULES.

QUESTION 1: SECTION 105(A) OF THE NATIONAL CONSUMER COOPERATIVE BANK ACT REQUIRES, AMONG OTHER THINGS, THAT TO BE ELIGIBLE FOR AN NCCB LOAN, A COOPERATIVE BE CHARTERED OR OPERATED TO FURNISH GOODS, SERVICES OR FACILITIES PRIMARILY FOR THE BENEFIT OF ITS MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS OF SUCH GOODS, FACILITIES OR SERVICES. WAS THE DUNBAR NO. 1 COOPERATIVE ELIGIBLE UNDER SECTION 105(A) AT THE TIME IT RECEIVED ITS NCCB LOAN EVEN THOUGH IT LACKED ANY PARTICIPATION BY DUNBAR TENANTS OR OTHER POTENTIAL ULTIMATE CONSUMERS OF THE DUNBAR COOPERATIVE'S FACILITIES?

ANSWER: YES. THE NCCB TAKES THE POSITION THAT IN ORDER TO SATISFY SECTION 105(A), A COOPERATIVE WHICH IS NOT YET OPERATIONAL NEED ONLY BE CHARTERED FOR THE PURPOSE OF FURNISHING GOODS, FACILITIES, ETC., FOR MEMBERS WHO ARE ULTIMATE CONSUMERS; IT IS NOT NECESSARY THAT POTENTIAL CONSUMERS PARTICIPATE IN THE FORMATION OF SUCH A COOPERATIVE. WE CONCLUDE THAT THE BANK'S POSITION IS REASONABLE IN VIEW OF THE OVERALL CONTEXT AND OBJECTIVES OF THE ACT.

DISCUSSION: SECTION 105(A) OF THE NATIONAL CONSUMER COOPERATIVE BANK ACT, 12 U.S.C. SEC. 3015(A), ESTABLISHES THE REQUIREMENTS THAT A COOPERATIVE MUST MEET IN ORDER TO BE ELIGIBLE FOR NCCB ASSISTANCE. SECTION 105(A) PROVIDES:

"FOR THE PURPOSE OF ALL TITLES OF THIS ACT, SUBJECT TO THE LIMITATIONS OF SUBSECTION (D) OF THIS SECTION, AN ELIGIBLE COOPERATIVE IS AN ORGANIZATION CHARTERED OR OPERATED ON A COOPERATIVE, NOT-FOR-PROFIT BASIS FOR PRODUCING OR FURNISHING GOODS, SERVICES OR FACILITIES, PRIMARILY FOR THE BENEFIT OF ITS MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS OF SUCH GOODS, SERVICES, OR FACILITIES, OR A LEGALLY CHARTERED ENTITY PRIMARILY OWNED AND CONTROLLED BY ANY SUCH ORGANIZATION OR ORGANIZATIONS, IF IT -

"(1) MAKES SUCH GOODS, SERVICES OR FACILITIES DIRECTLY OR INDIRECTLY AVAILABLE TO ITS MEMBERS OR VOTING STOCKHOLDERS ON A NOT-FOR-PROFIT BASIS;

"(2) DOES NOT PAY DIVIDENDS ON VOTING STOCK OR MEMBERSHIP CAPITAL IN EXCESS OF SUCH PERCENTAGE PER ANNUM AS MAY BE APPROVED UNDER THE BYLAWS OF THE BANK;

"(3) PROVIDES THAT ITS NET SAVINGS SHALL BE ALLOCATED OR DISTRIBUTED TO ALL MEMBERS OR PATRONS, IN PROPORTION TO THEIR PATRONAGE, OR SHALL BE RETAINED FOR THE ACTUAL OR POTENTIAL EXPANSION OF ITS SERVICES OR THE REDUCTION OF ITS CHARGES TO THE PATRONS, OR FOR SUCH OTHER PURPOSES AS MAY BE AUTHORIZED BY ITS MEMBERSHIP NOT INCONSISTENT WITH ITS PURPOSES;

"(4) MAKES MEMBERSHIP AVAILABLE ON A VOLUNTARY BASIS, WITHOUT ANY SOCIAL, POLITICAL, RACIAL, OR RELIGIOUS DISCRIMINATION AND WITHOUT ANY DISCRIMINATION ON THE BASIS OF AGE, SEX, OR MARITAL STATUS, TO ALL PERSONS WHO CAN MAKE USE OF ITS SERVICES AND ARE WILLING TO ACCEPT THE RESPONSIBILITIES OF MEMBERSHIP, SUBJECT ONLY TO LIMITATIONS UNDER APPLICABLE FEDERAL OR STATE LAWS OR REGULATIONS;

"(5) IN THE CASE OF PRIMARY COOPERATIVE ORGANIZATIONS RESTRICTS ITS VOTING CONTROL TO MEMBERS OR VOTING STOCKHOLDERS ON A ONE VOTE PER PERSON BASIS (EXCEPT THAT THIS REQUIREMENT SHALL NOT APPLY TO ANY HOUSING COOPERATIVE IN EXISTENCE ON MARCH 20, 1980, WHICH DID NOT MEET SUCH REQUIREMENT ON SUCH DATE) AND TAKES POSITIVE STEPS TO INSURE ECONOMIC DEMOCRACY AND MAXIMUM PARTICIPATION BY MEMBERS OF THE COOPERATIVE INCLUDING THE HOLDING OF ANNUAL MEETINGS AND, IN THE CASE OF ORGANIZATIONS OWNED BY GROUPS OF COOPERATIVES, PROVIDES POSITIVE PROTECTIONS TO INSURE ECONOMIC DEMOCRACY; AND

(6) IS NOT A CREDIT UNION, MUTUAL SAVINGS BANK, OR MUTUAL SAVINGS AND LOAN ASSOCIATION. ..."

AS DESCRIBED PREVIOUSLY, THE DUNBAR NO. 1 COOPERATIVE CORPORATION WAS NOT FORMED BY TENANTS OF THE DUNBAR APARTMENTS OR ANY OTHER PERSONS WHO ARE REPRESENTED TO BE POTENTIAL RESIDENTS OF THE DUNBAR COOPERATIVE, I.E., ULTIMATE CONSUMERS OF THE FACILITIES TO BE FURNISHED BY DUNBAR NO. 1. DUNBAR NO. 1 LACKED ANY PARTICIPATION BY POTENTIAL ULTIMATE CONSUMERS AT THE TIME IT RECEIVED ITS LOAN FROM NCCB.

DOES THE ABSENCE OF ANY "MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS" AT THIS STAGE MAKE DUNBAR NO. 1 INELIGIBLE FOR AN NCCB LOAN? THE NCCB GENERAL COUNSEL MAINTAINS THAT IT DOES NOT, REASONING AS FOLLOWS: FIRST, THE ACT AND ITS LEGISLATIVE HISTORY CLEARLY ENVISION THAT NCCB WILL ASSIST IN THE FORMATION OF NEW COOPERATIVES (THE GENERAL COUNSEL REFERS TO THESE AS "EMBRYONIC" COOPERATIVES), RATHER THAN LIMITING ITS LENDING TO COOPERATIVES THAT ARE ALREADY OPERATIONAL. SECOND, "MEMBERS OR VOTING STOCKHOLDERS" OF A COOPERATIVE, REFERRED TO IN SECTION 105(A) OF THE ACT, IS A TECHNICAL CONCEPT WHICH HAS MEANING ONLY IN THE CONTEXT OF AN OPERATIONAL COOPERATIVE. ACCORDING TO THE GENERAL COUNSEL, THE CONCEPT OF "MEMBERS OR VOTING STOCKHOLDERS" HAS NO APPLICATION AT THE TIME A NEW COOPERATIVE IS FORMED; THE SPONSORS OR INITIAL INCORPORATORS OF A NEW COOPERATIVE ARE NOT THE SAME AS "MEMBERS OR VOTING STOCKHOLDERS." THUS IT IS IMMATERIAL THAT THERE ARE NO SUCH MEMBERS OR STOCKHOLDERS AT THE TIME AN "EMBRYONIC" COOPERATIVE RECEIVES AN NCCB LOAN.

THE ESSENTIAL CONSIDERATION AT THIS STAGE, ACCORDING TO THE GENERAL COUNSEL, IS THAT THE COOPERATIVE'S CHARTER BE DRAFTED SO AS TO ASSURE THAT THE REQUIREMENTS OF SECTION 105(A), INSOFAR AS THEY PERTAIN TO THE OPERATION OF THE COOPERATIVE, WILL BE MET ONCE THE COOPERATIVE BECOMES OPERATIONAL. THE GENERAL COUNSEL'S LETTER TO US OF OCTOBER 14, 1982, OBSERVES IN THIS REGARD:

"IN DETERMINING WHAT CONGRESS INTENDED BY DIRECTING THAT THE BANK MAKE LOANS TO ORGANIZATIONS WHICH 'WILL HAVE' SOUND STRUCTURES IN THE FUTURE, BUT ARE NOW NEW OR 'FLEDGLING COOPERATIVES,'

REFERRING TO H.R.REP. NO. 311, 95TH CONG., 1ST SESS. 10 (1977) THE BANK HAS FOUND THE CONCEPT OF 'EMBRYONIC COOPERATIVE' ESSENTIAL. THE LEGAL DOCUMENTATION ASSOCIATED WITH SUCH COOPERATIVES IS, IN ALL RESPECTS, IDENTICAL TO THAT FOR ANY OTHER COOPERATIVE. THE LIMITED DIVIDEND, PATRONAGE, ECONOMIC DEMOCRACY AND NET SAVINGS CONCEPTS DISCUSSED ABOVE ARE REFLECTED IN THEIR ARTICLES OF ORGANIZATION AND BYLAWS AS THEY ARE FOR MATURE COOPERATIVES. MOST LIKELY THEY HAVE AN INITIAL BOARD COMPOSED OF THE PEOPLE WHO ORIGINATED THE COOPERATIVE IDEA BUT ARE NOT NECESSARILY THOSE WHO WILL USE ITS SERVICES. IN ALL CASES WHERE WE HAVE DETERMINED THEM ELIGIBLE UNDER SECTION 105 OF THE BANK ACT, 12 U.S.C. SEC. 3015, THEY ALSO HAVE A PLAN FOR THE TURNOVER OF EFFECTIVE CONTROL OF THE ENTITY TO ULTIMATE CONSUMERS OF THEIR GOODS, SERVICES OR FACILITIES, WHEN SUCH PERSONS ARE IDENTIFIED AND DO, IN FACT, CONSUME THE GOODS, SERVICES OR FACILITIES. THE SOLE DIFFERENCE IS THAT, AT THE TIME THEY ARE FORMED, AND PERHAPS FOR SOME TIME THEREAFTER, THEY HAVE FEW IF ANY ULTIMATE CONSUMER MEMBERS. AS IS PLAIN FROM THE LANGUAGE OF THE STATUTE, CONGRESS INTENDED SUCH ORGANIZATIONS TO PARTICIPATE IN THE BANK'S PROGRAM."

IT IS WELL-ESTABLISHED THAT THE INTERPRETATION OF A STATUTE BY THE AGENCY RESPONSIBLE FOR ITS ADMINISTRATION IS ENTITLED TO GREAT DEFERENCE AND WILL BE ACCEPTED IF IT HAS A REASONABLE BASIS AND IS NOT PLAINLY ERRONEOUS. SEE, E.G., UDALL V. TALLMAN, 380 U.S. 1, 16 (1965); 2A SUTHERLAND STATUTORY CONSTRUCTION SEC. 49.05 AT 238-239 (3D ED. 1973). WE CONCLUDE THAT THE NCCB GENERAL COUNSEL'S INTERPRETATION AS TO THE ELIGIBILITY OF "EMBRYONIC" COOPERATIVES UNDER SECTION 105(A) MEETS THIS STANDARD AND MUST THEREFORE BE ACCEPTED.

IT IS ABUNDANTLY CLEAR FROM THE LANGUAGE AND LEGISLATIVE HISTORY OF THE ACT THAT CONGRESS INTENDED TO ALLOW THE BANK TO ASSIST COOPERATIVES NOT YET IN OPERATION. AS NOTED PREVIOUSLY, SECTION 105(A) ITSELF DEFINES AN ELIGIBLE COOPERATIVE AS AN ORGANIZATION "CHARTERED OR OPERATED" IN THE PRESCRIBED MANNER. SECTION 2 OF THE ACT, 12 U.S.C. SEC. 3001, RECITES A CONGRESSIONAL FINDING THAT CONSUMER COOPERATIVES "HAVE BEEN HAMPERED IN THEIR FORMATION AND GROWTH" BY LACK OF ACCESS TO ADEQUATE CREDIT AND TECHNICAL ASSISTANCE. SECTION 101(1) OF THE ACT, 12 U.S.C. SEC. 3011(1) SPECIFICALLY PROVIDES THAT THE BANK SHALL -

"ENCOURAGE THE DEVELOPMENT OF NEW AND EXISTING COOPERATIVES ELIGIBLE FOR ITS ASSISTANCE BY PROVIDING SPECIALIZED CREDIT AND TECHNICAL ASSISTANCE; ..."

IN THE SAME VEIN, AND TENDING TO CONFIRM A PROSPECTIVE APPROACH TO ELIGIBILITY DETERMINATIONS, SECTION 108(A) OF THE ACT, 12 U.S.C. SEC. 3018(A), AUTHORIZES THE BANK TO MAKE LOANS TO AN ELIGIBLE ORGANIZATION IF IT DETERMINES, AMONG OTHER THINGS, "THAT THE APPLICANT HAS OR WILL HAVE A SOUND ORGANIZATIONAL AND FINANCIAL STRUCTURE ...".

THE LEGISLATIVE HISTORY EXPRESSLY CONFIRMS THE INTENT TO ASSIST COOPERATIVES THAT ARE NOT YET OPERATIONAL:

"THE LEGISLATION PROPOSES TO ESTABLISH A BANK WHICH WILL MAKE LOANS TO NEW, EXISTING AND EXPANDING COOPERATIVES ..."

H.R.REP. NO. 1454, PART 1, 94TH CONG., 2D SESS. 6 (1976). A SENATE REPORT SPECIFICALLY REFERS TO FINANCING FOR -

"... THE CONSTRUCTION OF NEW PROJECTS, THE ACQUISITION OF EXISTING HOUSING FOR CONVERSION TO COOPERATIVE OWNERSHIP, INCLUDING NECESSARY REHABILITATION, IMPROVEMENT, REPAIR OR MODERNIZATION." S.REP. NO. 795, 95TH CONG., 2D SESS. 19 (1978).

WE ALSO FIND SUPPORT FOR THE NCCB GENERAL COUNSEL'S ASSERTION THAT SECTION 105(A) DOES NOT REQUIRE THAT "MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS" BE IN EXISTENCE AT THE TIME A NEW COOPERATIVE RECEIVES A LOAN. WHILE THIS PHRASE IS NOT SPECIFICALLY DEFINED IN THE ACT, THE SUBSTANTIVE PROVISIONS ESTABLISHING MEMBERSHIP ATTRIBUTES AND VOTING RIGHTS FOR AN ELIGIBLE COOPERATIVE CLEARLY APPLY TO ORGANIZATIONS THAT ARE OPERATIONAL. FN2 REFERRING TO THESE PROVISIONS AND GENERAL CONCEPTS OF MEMBERSHIP IN A COOPERATIVE, THE GENERAL COUNSEL'S LETTER TO US OF NOVEMBER 9, 1982, STATES:

"MEMBERSHIP IN AN ELIGIBLE HOUSING COOPERATIVE INVOLVES PATRONAGE, PATRONAGE REFUNDS, VOTING RIGHTS AND STOCK OR OTHER EVIDENCE OF MEMBERSHIP CAPITAL. THESE CONCEPTS ARE EMBODIED IN SECTION 105 OF THE BANK ACT. MEMBERS OF A CONSUMER COOPERATIVE ARE THOSE WHO BY VIRTUE OF THEIR MEMBERSHIP PATRONIZE THE COOPERATIVE, I.E., DO BUSINESS WITH THE COOPERATIVE. IN A HOUSING COOPERATIVE MEMBERSHIP ENTITLES THE MEMBER TO OCCUPY A UNIT IN THE COOPERATIVE. AS OWNER-OCCUPANTS OF A UNIT, MEMBERS ARE 'ULTIMATE CONSUMERS' OF THE FACILITIES MADE AVAILABLE BY THE COOPERATIVE. INITIAL INCORPORATORS ARE NOT 'MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS OF THE FACILITIES' UNLESS THEY HAVE PURCHASED SHARES IN AND EXECUTED OCCUPANCY AGREEMENTS WITH THE COOPERATIVE."

THUS, TO INTERPRET SECTION 105(A) AS REQUIRING THAT CONSUMER "MEMBERS OR VOTING STOCKHOLDERS" IN THE SENSE DESCRIBED ABOVE BE IN EXISTENCE AT THE TIME A LOAN IS MADE WOULD MAKE IT EXTREMELY DIFFICULT, AT BEST, FOR THE BANK TO MAKE LOANS TO SUPPORT THE DEVELOPMENT OF NEW COOPERATIVES - A PURPOSE CLEARLY ENVISIONED BY THE ACT. IN FACT, AS THE NCCB GENERAL COUNSEL POINTS OUT, SUCH AN INTERPRETATION WOULD EFFECTIVELY PRECLUDE LOANS TO DEVELOP NEW HOUSING COOPERATIVES IN NEW YORK AND CALIFORNIA SINCE THESE STATES HAVE LAWS WHICH REQUIRE COOPERATIVES TO HAVE FINANCING IN PLACE BEFORE THEY CAN MARKET SHARES AND THEREBY ESTABLISH "MEMBERSHIP" IN THE SENSE OF SECTION 105(A). IN THESE STATES, EVEN IF THE INITIAL SPONSORS OR INCORPORATORS OF A NEW HOUSING COOPERATIVE WERE TENANTS OF A FACILITY TO BE CONVERTED OR OTHER POTENTIAL RESIDENTS THEY COULD NOT QUALIFY AS "MEMBERS OR VOTING STOCKHOLDERS" UNDER SECTION 105(A).

GIVEN THE CONSIDERATIONS DISCUSSED ABOVE, WE ACCEPT THE BANK'S INTERPRETATION THAT SO LONG AS AN "EMBRYONIC" COOPERATIVE IS CHARTERED TO MEET THE REQUIREMENTS OF SECTION 105(A) - INCLUDING THE PURPOSE OF "PRODUCING OR FURNISHING GOODS, SERVICES OR FACILITIES, PRIMARILY FOR THE BENEFIT OF ITS MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS" - IT QUALIFIES FOR NCCB ASSISTANCE. VIEWED FROM THIS PERSPECTIVE, THE IDENTITY OF THE INITIAL SPONSORS OR INCORPORATORS OF THE COOPERATIVE IS LEGALLY IMMATERIAL. THEY NEED NOT BE, AND ORDINARILY WOULD NOT BE, "MEMBERS OR VOTING STOCKHOLDERS WHO ARE ULTIMATE CONSUMERS."

MOREOVER, THE ACT DOES NOT IMPOSE ANY REQUIREMENTS IN TERMS OF SPONSORS OR INCORPORATORS OF A COOPERATIVE, AS DISTINCT FROM THE EVENTUAL CONSUMER MEMBERS. INDEED, WE HAVE FOUND NO INDICATION IN THE ACT OR ITS LEGISLATIVE HISTORY THAT CONGRESS ANTICIPATED THIS POTENTIAL DISTINCTION. IN VIEW OF THE BROAD PURPOSES OF THE ACT, WE BELIEVE THAT THE BANK COULD IMPOSE ADMINISTRATIVE REQUIREMENTS FOR PARTICIPATION BY POTENTIAL CONSUMERS IN THE FORMATION OF COOPERATIVES. HOWEVER, THE BANK HAS NOT DONE SO AND, IN OUR VIEW, IS NOT COMPELLED TO DO SO AS A MATTER OF LAW. IT IS EVEN POSSIBLE THAT IN PRACTICE SUCH REQUIREMENTS MIGHT INHIBIT, RATHER THAN FOSTER, THE DEVELOPMENT OF COOPERATIVES.

QUESTION 2: DOES THE INVOLVEMENT OF THE NEW YORK BANK FOR SAVINGS IN THE FORMATION OF DUNBAR NO. 1 VIOLATE SECTION 105(A)(6) OF THE ACT, WHICH PROHIBITS A MUTUAL SAVINGS BANK FROM BEING AN ELIGIBLE COOPERATIVE?

ANSWER: NO.

DISCUSSION: AS DESCRIBED PREVIOUSLY, THE NEW YORK BANK FOR SAVINGS (NYB) WAS INTIMATELY INVOLVED IN THE FORMATION OF THE DUNBAR NO. 1 COOPERATIVE. IN EFFECT, NYB IS DUNBAR NO. 1'S SOLE STOCKHOLDER. WE UNDERSTAND THAT NYB IS A MUTUAL SAVINGS BANK.

SECTION 105(A)(6) OF THE ACT PROVIDES THAT AN ELIGIBLE COOPERATIVE CANNOT BE A CREDIT UNION, MUTUAL SAVINGS BANK, OR MUTUAL SAVINGS AND LOAN ASSOCIATION. IT COULD BE ARGUED THAT NYB AND DUNBAR NO. 1 ARE IN SUBSTANCE ONE ENTITY FOR PURPOSES OF CONSIDERING THE APPLICABILITY OF SECTION 105(A)(6). HOWEVER, EVEN IF THEY ARE SO VIEWED, WE DO NOT BELIEVE THAT A VIOLATION EXISTS. AS NOTED IN RESPONSE TO QUESTION 1, THE CENTRAL FACTOR IN DETERMINING THE ELIGIBILITY OF AN "EMBRYONIC" COOPERATIVE IS ITS CHARTER; THE IDENTITY OF THE INITIAL INCORPORATORS IS NOT MATERIAL. DUNBAR NO. 1'S CHARTER PROVIDES THAT CONTROL WILL BE VESTED IN ITS CONSUMER MEMBERS. MOREOVER, IT IS, OF COURSE, CHARTERED TO OPERATE AS A HOUSING COOPERATIVE - NOT A MUTUAL SAVINGS BANK. ACCORDINGLY, THERE IS NO BASIS TO CONCLUDE THAT NYB'S ROLE IN THE FORMATION OF DUNBAR NO. 1 VIOLATES EITHER THE LETTER OR SPIRIT OF SECTION 105(A)(6).

QUESTION 3: SECTION 114 OF THE ACT, 12 U.S.C. SEC. 3024, REQUIRES NCCB'S CONFLICT OF INTEREST RULES TO BE NO LESS STRINGENT IN EFFECT THAN EXECUTIVE ORDER 11222 -

"... IN PROHIBITING PARTICIPATION OR ACTION OR THE USE OF INSIDE INFORMATION FOR PERSONAL ADVANTAGE ON ANY MATTER INVOLVING A CORPORATION, TRUST, PARTNERSHIP, OR COOPERATIVE ORGANIZATION IN WHICH A BOARD MEMBER, OFFICER, OR EMPLOYEE HOLDS A SUBSTANTIAL FINANCIAL INTEREST OR HOLDS A POSITION AS BOARD MEMBER OR SENIOR OFFICER, THE ACTIVITIES OF WHICH ORGANIZATION MIGHT BE RELEVANT TO, BE COMPETITIVE WITH, OR BE INCONSISTENT WITH THE OBJECTIVES OF ANY BANK CREATED UNDER THIS ACT."

DO THE CONFLICT OF INTEREST RULES ADOPTED BY THE BOARD OF DIRECTORS OF NCCB MEET THE REQUIREMENTS OF THE ACT?

ANSWER: YES. A REVIEW OF EXECUTIVE ORDER 11222 AND NCCB'S CONFLICT OF INTEREST RULES SHOWS THEY ARE SUBSTANTIALLY SIMILAR AND IN MOST INSTANCES ALMOST IDENTICAL. WHERE DIFFERENCES DO EXIST, THE NCCB RULES ARE NO LESS STRINGENT IN EFFECT THAN EXECUTIVE ORDER 11222. IN SOME INSTANCES THE NCCB RULES ARE MORE SPECIFIC THAN EXECUTIVE ORDER 11222 IN PROHIBITING CERTAIN ACTIVITIES. WHERE A RULE SET OUT IN EXECUTIVE ORDER 11222 IS NOT MENTIONED SPECIFICALLY IN THE NCCB RULES, OTHER NCCB RULES WOULD PRECLUDE THE ACTIVITIES SPECIFICALLY BARRED BY THE RULE IN EXECUTIVE ORDER 11222.

DISCUSSION: BELOW IS A PARALLEL TABLE OF EXECUTIVE ORDER 11222 AND THE NCCB RULES DEALING WITH THE SAME SUBJECT MATTER. A BRIEF ANALYSIS OF THOSE NCCB RULES DIFFERING FROM THE COMPARABLE PROVISION IN EXECUTIVE ORDER 11222 FOLLOWS THE TABLE.

TABLE

EXECUTIVE ORDER 11222 NCCB RULE SEC. 201(A)(1) 6(A) AND (D); 2(A)(B) AND (E) 201(A)(2) 6(A) AND (D); 2(A)(B) AND (E) 201(A)(3) 6(A) AND (D); 2(A)(B) AND (E) 201(B)(1); (2); (3) 6(D)(1); (2); (3); (4); (5) 201(C)(1) 5(A)(1) 201(C)(2) 5(A)(2) 201(C)(3) 5(A)(3) 201(C)(4) 5(A)(4) 201(C)(5) 5(A)(5) 201(C)(6) 5(A)(6) 202 6(B) 203(A) 4; 6(A) 203(B) 6(C) 302 7(A) 303 7(B) 304 --- 305 7(C) --- 7(D)

SECTIONS 201(A)(2) AND (A)(3) OF EXECUTIVE ORDER 11222 PROVIDE THAT NO EMPLOYEE WILL DIRECTLY OR INDIRECTLY SOLICIT OR ACCEPT ANY LOAN FROM ANY CORPORATION REGULATED BY THE EMPLOYEE'S AGENCY OR HAVING INTERESTS THAT MAY BE SUBSTANTIALLY AFFECTED BY PERFORMANCE OF THE EMPLOYEE'S OFFICIAL DUTIES. WHILE NCCB'S CONFLICT OF INTEREST RULES DO NOT INCORPORATE THIS LANGUAGE THEY DO PROHIBIT DIRECT OR INDIRECT FINANCIAL INTERESTS THAT CONFLICT SUBSTANTIALLY, OR APPEAR TO CONFLICT SUBSTANTIALLY, WITH AN EMPLOYEE'S BANK DUTIES AND RESPONSIBILITIES. SEE SECTIONS 4, 5(A)(1) AND (A)(4), AND 6(A) OF THE NCCB RULES.

SECTION 201(B) OF EXECUTIVE ORDER 11222 AUTHORIZES AGENCIES TO PROMULGATE SUCH EXCEPTIONS TO SECTION 201(A) "AS MAY BE NECESSARY AND APPROPRIATE" IN VIEW OF THE NATURE OF THEIR AGENCY'S FUNCTIONS. SECTIONS 6(D)(1), (2), AND (3) OF THE NCCB RULES PARALLEL THE EXCEPTIONS SET OUT IN SECTIONS 201(B)(1), (2), AND (3) OF EXECUTIVE ORDER 11222, BUT SECTIONS 6(D)(4), (5) AND (6) OF THE NCCB RULES AUTHORIZE THREE ADDITIONAL EXCEPTIONS COVERING SUCH THINGS AS SCHOLARSHIPS, ACHIEVEMENT AWARDS, AND GIFTS OF NOMINAL INTRINSIC VALUE (PENS, CALENDARS, ETC).

SECTION 5(B) AND (C) OF THE NCCB RULES HAVE NO PARALLEL IN EXECUTIVE ORDER 11222. APPARENTLY THEY WERE DESIGNED TO SATISFY THE REQUIREMENT IN SECTION 114 OF THE ACT THAT THE BOARD OF DIRECTORS PUBLISH RULES PROHIBITING PARTICIPATION OR ACTION ON MATTERS INVOLVING A CORPORATION IN WHICH AN EMPLOYEE HOLDS A SUBSTANTIAL FINANCIAL INTEREST WHERE THE ORGANIZATION'S ACTIVITIES MIGHT BE RELEVANT TO, COMPETITIVE OR INCONSISTENT WITH THE OBJECTIVES OF NCCB. 12 U.S.C. SEC. 3024.

SECTION 304 OF EXECUTIVE ORDER 11222 PROHIBITS -

"... AN ADVISER CONSULTANT OR OTHER SPECIAL GOVERNMENT EMPLOYEE FROM USING HIS POSITION IN ANY WAY TO COERCE, OR GIVE THE APPEARANCE OF COERCING, ANOTHER PERSON TO PROVIDE ANY FINANCIAL BENEFIT TO HIM OR PERSONS WITH WHOM THE EMPLOYEE HAS FAMILY, BUSINESS, OR FINANCIAL TIES."

NCCB'S CONFLICT OF INTEREST RULES DO NOT CONTAIN AN IDENTICAL PROVISION, BUT DO PROVIDE IN SECTION 7(A) THAT:

"EACH BOARD MEMBER OR OTHER SPECIAL EMPLOYEE SHALL REFRAIN FROM ANY USE OF BANK OFFICE WHICH IS MOTIVATED BY, OR GIVES THE APPEARANCE OF BEING MOTIVATED BY, THE DESIRE FOR PRIVATE GAIN FOR THE EMPLOYEE OR OTHER PERSONS OR ORGANIZATIONS WITH WHICH HE OR SHE IS ASSOCIATED."

THIS PROVISION EFFECTIVELY PRECLUDES THE ACTIVITIES PROSCRIBED BY SECTION 304. FN3

FINALLY, SECTION 7(D) OF NCCB'S CONFLICT OF INTEREST RULES REQUIRES MEMBERS OF NCCB'S BOARD OF DIRECTORS TO DISQUALIFY THEMSELVES FROM DECISIONS WHICH POSE OR APPEAR TO POSE A CONFLICT OF INTEREST. EXECUTIVE ORDER 11222 DOES NOT CONTAIN AN IDENTICAL PROVISION. THE NCCB RULE IS IN THE SPIRIT OF EXECUTIVE ORDER 11222 AND IS IN FACT MORE SPECIFIC.

QUESTION 4: DID A VIOLATION OF NCCB'S CONFLICT OF INTEREST RULES OCCUR WITH RESPECT TO THE DUNBAR LOAN TRANSACTION?

ANSWER: YES. SECTION 7(A) OF THE NCCB CONFLICT OF INTEREST RULES REQUIRES MEMBERS OF THE BOARD OF DIRECTORS TO REFRAIN FROM ANY USE OF THEIR OFFICE WHICH IS OR APPEARS TO BE MOTIVATED BY THE DESIRE FOR PRIVATE GAIN FOR THAT MEMBER OR FOR OTHER PERSONS OR ORGANIZATIONS WITH WHICH THE MEMBER IS ASSOCIATED. FRANCES LEVENSON, A VICE-PRESIDENT OF NYB, CONTACTED DAVID JAMESON, VICE-PRESIDENT OF NCCB, WHILE SHE WAS A MEMBER OF NCCB'S BOARD OF DIRECTORS, TO REQUEST NCCB'S PARTICIPATION IN A PERMANENT MORTGAGE LOAN FOR THE DUNBAR APARTMENTS. SHE ALSO DISCUSSED VARIOUS ASPECTS OF THE DUNBAR LOAN TRANSACTION WITH TWO NCCB EMPLOYEES WHILE THE LOAN WAS BEING PROCESSED AT NCCB.

FOR THE 2 YEARS PRECEDING THE LOAN REQUEST, NYB HAD DEFERRED DEBT SERVICE, FUNDED ONLY OPERATING DEFICITS AND EMERGENCY REPAIRS, AND, AT THE TIME OF THE REQUEST, HELD A $4.9 MILLION FIRST MORTGAGE ON THE DUNBAR APARTMENTS. FUNDING WAS NECESSARY IN PART TO BRING THE APARTMENTS BACK TO AN ACCEPTABLE STATE OF REPAIR. THUS NYB WOULD BENEFIT FROM AN NCCB LOAN FOR THE DUNBAR APARTMENTS INSOFAR AS SUCH A LOAN WOULD REDUCE NYB'S IMMEDIATE FINANCIAL BURDEN, PROVIDE CAPITAL TO UPGRADE THE APARTMENTS, AND PROTECT NYB'S INVESTMENT. FURTHERMORE, THE NCCB EMPLOYEES WITH WHOM FRANCES LEVENSON DISCUSSED VARIOUS ASPECTS OF THE DUNBAR LOAN TRANSACTION SHOULD HAVE KNOWN THAT SHE WAS A BOARD MEMBER, AND THAT THEIR OBJECTIVITY MIGHT BE AFFECTED, OR AT LEAST MIGHT APPEAR TO HAVE BEEN AFFECTED. THESE CIRCUMSTANCES, WE THINK THE NCCB CONFLICT OF INTEREST RULES WERE BREACHED SINCE IT COULD APPEAR THAT MS. LEVENSON WAS USING HER POSITION ON THE BOARD TO SECURE PRIVATE GAIN FOR NYB, THE ORGANIZATION EMPLOYING HER AS A SENIOR OFFICER. WE POINT OUT, HOWEVER, THAT WE HAVE SEEN NO EVIDENCE THAT THE IMPARTIALITY OR INTEGRITY OF THE DUNBAR LOAN TRANSACTION WAS IN FACT ADVERSELY AFFECTED BY THIS DEPARTURE FROM THE NCCB CONFLICT OF INTEREST RULES.

DISCUSSION: SECTION 114 OF THE NATIONAL CONSUMER COOPERATIVE BANK ACT, 12 U.S.C. SEC. 3024, PROVIDES IN APPLICABLE PART:

"THE BOARD OF DIRECTORS SHALL ADOPT AND PUBLISH ITS OWN CONFLICT OF INTEREST RULES WHICH SHALL BE NO LESS STRINGENT IN EFFECT THAN THE FEDERAL EXECUTIVE CONFLICT OF INTEREST RULES CONTAINED IN EXECUTIVE ORDER NUMBERED 11222 IN PROHIBITING PARTICIPATION OR ACTION ... FOR PERSONAL ADVANTAGE ON ANY MATTER INVOLVING A CORPORATION, ... OR COOPERATIVE ORGANIZATION IN WHICH A BOARD MEMBER, OFFICER, OR EMPLOYEE HOLDS A SUBSTANTIAL FINANCIAL INTEREST OR HOLDS A POSITION AS BOARD MEMBER OR SENIOR OFFICER, THE ACTIVITIES OF WHICH ORGANIZATION MIGHT BE RELEVANT TO ... THE OBJECTIVES OF ANY BANK CREATED UNDER THIS ACT ..."

SECTION 7(A) OF THE NCCB CONFLICT OF INTEREST RULES PROVIDES THAT EACH BOARD MEMBER SHALL:

"... REFRAIN FROM ANY USE OF BANK OFFICE WHICH IS MOTIVATED BY, OR GIVES THE APPEARANCE OF BEING MOTIVATED BY, THE DESIRE FOR PRIVATE GAIN FOR THE EMPLOYEE OR OTHER PERSONS OR ORGANIZATIONS WITH WHICH HE OR SHE IS ASSOCIATED." FN4 SECTION 5 OF THE RULES PROVIDES:

(A) EACH REGULAR EMPLOYEE OF THE BANK SHALL AVOID ANY ACTION OR PARTICIPATION IN BANK BUSINESS, WHETHER OR NOT SPECIFICALLY PROHIBITED BY THESE RULES, WHICH MIGHT RESULT IN OR CREATE THE APPEARANCE OF A CONFLICT OF INTEREST, INCLUDING:

(2) GIVING PREFERENTIAL TREATMENT TO ANY RELATED ORGANIZATION, BENEFICIARY ORGANIZATION OR PERSON:

(4) LOSING INDEPENDENT AND IMPARTIALITY IN PARTICIPATING OR ACTING ON BANK MATTERS;

(6) ADVERSELY AFFECTING THE CONFIDENCE OF THE PUBLIC IN THE INTEGRITY OF THE BANK." FN5

BY DECISION DATED DECEMBER 11, 1980, NCCB'S OFFICE OF GENERAL COUNSEL ISSUED A CONFLICT OF INTEREST OPINION DEALING WITH PRELIMINARY NEGOTIATIONS BETWEEN FRANCES LEVENSON, DAVID JAMESON, AND CHARLES BILLAND, CONCERNING NCCB'S PURCHASE OF EXISTING FHA INSURED LOANS HELD BY NYB. FN6 AT THE TIME OF THESE NEGOTIATIONS, FRANCES LEVENSON WAS A MEMBER OF NCCB'S BOARD OF DIRECTORS, AT THE SAME TIME SHE WAS A VICE PRESIDENT OF NYB. DAVID JAMESON AND CHARLES BILLAND WERE BOTH REGULAR EMPLOYEES OF NCCB. WITH RESPECT TO FRANCES LEVENSON'S PARTICIPATION IN THIS LOAN TRANSACTION, THE OFFICE OF GENERAL COUNSEL ISSUED A CONFLICT OF INTEREST OPINION AND RECOMMENDED A COURSE OF CONDUCT FOR MS. LEVENSON. THE TEXT OF THAT ADVICE IS ATTACHED AS APPENDIX A, AND MARKED "CONFIDENTIAL."

OUR INFORMATION INDICATES THAT FRANCES LEVENSON, WHILE A VICE PRESIDENT OF NYB AND A MEMBER OF NCCB'S BOARD OF DIRECTORS, WAS A PARTICIPANT IN THE ARRANGEMENTS LEADING UP TO THE ISSUANCE OF THE $5.2 MILLION LOAN FOR THE DUNBAR APARTMENTS. INITIALLY, MS. LEVENSON SUBMITTED A "PRELIMINARY REQUEST" TO DAVID JAMESON, VICE-PRESIDENT, NCCB, BY CORRESPONDENCE DATED OCTOBER 31, 1980, SOLICITING NCCB'S PARTICIPATION IN A "PERMANENT MORTGAGE LOAN ON THE DUNBAR APARTMENTS." FURTHERMORE, CONTACT OCCURRED BETWEEN MS. LEVENSON AND DEBRA YOGODZINSKI, AN ATTORNEY AT NCCB, DURING THE PERIOD BETWEEN DECEMBER 15, 1980, AND MARCH 5, 1981. THIS CONTACT APPARENTLY CONSISTED OF DISCUSSIONS ON WHETHER NCCB RECEIVED THE DOCUMENTS NEEDED TO DETERMINE WHETHER DUNBAR NO. 1 WAS A COOPERATIVE ELIGIBLE TO RECEIVE FINANCIAL ASSISTANCE FROM NCCB. FRANCES LEVENSON AND CHARLES BILLAND, VICE PRESIDENT, NCCB, ALSO HAD SOME CONVERSATIONS RELATIVE TO THE DUNBAR LOAN BETWEEN MARCH 5, 1981, (THE DATE THE NCCB-DUNBAR LOAN COMMITMENT WAS ISSUED) AND JULY 2, 1981, WHEN THE LOAN TRANSACTION WAS SETTLED. WHILE WE ARE NOT AWARE OF THE SUBSTANCE OF THESE DISCUSSIONS, BOTH PARTIES HAVE INFORMED NCCB'S GENERAL COUNSEL IN WRITING THAT THEY CONDUCTED NO NEGOTIATIONS CONCERNING THE TERMS AND CONDITIONS OF THE LOAN. FINALLY, THE MINUTES OF THE DECEMBER 15, 1980, MEETING OF THE NCCB BOARD OF DIRECTORS, WHICH INDICATE THE BOARD APPROVED THE DUNBAR LOAN, ALSO SHOW THAT, WHILE FRANCES LEVENSON WAS PRESENT AT THIS MEETING, SHE WAS NOT PRESENT DURING DISCUSSION NOR DID SHE CAST A VOTE ON THE DUNBAR LOAN. SHE WAS ALSO PRESENT BUT DID NOT PARTICIPATE IN THE CLOSING OF THE LOAN TRANSACTION WHEN FINAL NEGOTIATIONS RELATIVE TO THE NYB-NCCB PARTICIPATION AGREEMENT TOOK PLACE.

IN OUR VIEW, FRANCES LEVENSON'S ASSOCIATION WITH THE DUNBAR LOAN TRANSACTION FROM THE TIME IT WAS SUBMITTED UNTIL THE CLOSING OF THE LOAN, AND HER CONTACTS WITH NCCB EMPLOYEES DURING NEGOTIATION OF THE LOAN, CONSTITUTED A VIOLATION OF SECTIONS 5 AND 7(A) OF NCCB'S CONFLICT OF INTEREST RULES. WE VIEW THE NCCB RULE IN SECTION 7(A) AS REQUIRING MS. LEVENSON TO HAVE WITHDRAWN COMPLETELY FROM THE NCCB-NYB DUNBAR LOAN TRANSACTION.

AS IN THE CASE OF THE FHA INSURED LOANS DISCUSSED IN THE DECEMBER 11 DECISION OF NCCB'S GENERAL COUNSEL'S OFFICE, MS. LEVENSON WAS DEALING WITH AN NCCB EMPLOYEE TO ARRANGE A LOAN BENEFICIAL TO BOTH NYB AND NCCB. HER LETTER OF OCTOBER 31, 1980, CLEARLY INDICATES NYB HAD A CONSIDERABLE INVESTMENT IN THE APARTMENTS, THAT IT WAS IN FINANCIAL TROUBLE AND THAT $6 MILLION WAS NECESSARY TO BRING THE PROPERTY BACK TO ACCEPTABLE STANDARDS. NCCB PARTICIPATION WOULD PROVIDE NEEDED CAPITALIZATION FOR THE DUNBAR APARTMENTS TO UPGRADE AND PROTECT NYB'S INVESTMENT IN THE PROPERTY. THUS, IT COULD APPEAR THAT MS. LEVENSON WAS USING HER POSITION AS A MEMBER OF NCCB'S BOARD OF DIRECTORS TO ARRANGE A LOAN FOR THE DUNBAR APARTMENTS, AND THAT HER ACTIONS WERE MOTIVATED BY THE DESIRE FOR PRIVATE GAIN FOR NYB, THE ORGANIZATION WITH WHICH SHE IS ASSOCIATED.

FINALLY, DISCUSSIONS ABOUT A FINANCIAL TRANSACTION BETWEEN REGULAR NCCB EMPLOYEES AND A MEMBER OF NCCB'S BOARD OF DIRECTORS WHO ALSO IS A SENIOR OFFICER OF AN ORGANIZATION THAT WOULD BENEFIT FROM THE TRANSACTION CONSTITUTES A DEPARTURE FROM SECTIONS 5(A)(2) AND 5(A)(6) OF NCCB'S CONFLICT OF INTEREST RULES. SUCH DISCUSSIONS PLACE NCCB EMPLOYEES IN AN ACTUAL OR APPARENT CONFLICT OF INTEREST SITUATION: THAT OF GIVING PREFERENTIAL TREATMENT TO THE BOARD MEMBER, THEREBY ADVERSELY AFFECTING THE PUBLIC'S CONFIDENCE IN THE INTEGRITY OF NCCB. WHILE IN FACT NO SUCH PREFERENTIAL TREATMENT MAY EXIST, AND WE HAVE NO EVIDENCE THAT ANY DID, SUCH ACTIVITIES BY NCCB EMPLOYEES NONETHELESS ARE PROSCRIBED BY NCCB'S CONFLICT OF INTEREST RULES.

FN1 SUBSEQUENTLY, OWNERSHIP WAS TRANSFERRED TO A NEIGHBORHOOD-BASED PARTNERSHIP, THE ROBIN-DUNBAR CORPORATION, BUT THE MORTGAGE WAS RETAINED BY NYB.

FN2 THESE PROVISIONS ARE FOUND PRIMARILY IN SECTIONS 105(A)(1) THROUGH (A)(5) OF THE ACT.

FN3 THE DEFINITION OF "SPECIAL EMPLOYEE" USED IN EXECUTIVE ORDER 11222 INCLUDES GENERALLY ANY EMPLOYEE OR OFFICER IN THE EXECUTIVE OR LEGISLATIVE BRANCH EMPLOYED NOT MORE THAN 130 DAYS EACH YEAR. THE DEFINITION OF "SPECIAL EMPLOYEE" UNDER NCCB'S CONFLICT OF INTEREST RULES IS SUBSTANTIALLY THE SAME.

FN4 "ASSOCIATION" OR "ASSOCIATED WITH" MEANS: ... (2) THAT THE PERSON IS A PAID EMPLOYEE OR HOLDS A POSITION AS A BOARD MEMBER OR OTHER SENIOR OFFICER WITH AN ORGANIZATION." NCCB CONFLICT OF INTEREST RULES, SECTION 2(A).

FN5 "REGULAR EMPLOYEE" MEANS ANY EMPLOYEE OR OFFICER OF THE BANK OTHER THAN A SPECIAL EMPLOYEE. A "SPECIAL EMPLOYEE" IS ANY BOARD MEMBER, CONSULTANT, TEMPORARY OR INTERMITTENT EMPLOYEE WHO IS EMPLOYED NOT MORE THAN 130 DAYS A YEAR. NCCB CONFLICT OF INTEREST RULES, SECTIONS 2(D) AND 2(G).

FN6 WE DO NOT KNOW WHETHER THE FHA INSURED LOANS HELD BY NYB, AND THE NEGOTIATIONS WHICH GAVE RISE TO THIS OPINION, INCLUDE SPECIFICALLY THE DUNBAR LOAN TRANSACTION. JACK CHESSON, THE NCCB ATTORNEY WHO RENDERED THIS DECISION, INFORMS US THAT HE MAY HAVE BEEN ADDRESSING THE DUNBAR LOAN REQUEST IN THIS DECISION, BUT HE IS NOT CERTAIN. THEREFORE, FOR PURPOSES OF THIS DISCUSSION, WE WILL TREAT THE DUNBAR TRANSACTION AS A SEPARATE ISSUE NOT COVERED BY THIS NCCB DECISION.

GAO Contacts

Office of Public Affairs