Appeal from a judgment of the United States District Court for the District of Connecticut (Cabranes, J. upholding the constitutionality of a Connecticut statute which regulates the manner and extent to which bank holding companies may establish offices in the State of Connecticut. Affirmed.
Before: KEARSE, CARDAMONE and PIERCE, Circuit Judges.
Appeal by Sears, Roebuck & Co. ("Sears") and five of its financial service subsidiary companies, Allstate Insurance Company ("Allstate"), Allstate Life Insurance Company ("Allstate Life"), Allstate Enterprises, Inc. ("AEI"), Coldwell, Banker & Company ("Coldwell Banker"), and Dean Witter Reynolds Inc. ("Dean Witter"), from a judgment of the United States District Court for the District of Connecticut, Jose A. Cabranes, Judge, upholding the constitutionality of a Connecticut banking statute, Conn. Gen. Stat. Ann. § 36-5a(a)-(d) (West Supp. 1986), (the "Act"), which regulates the manner and extent to which bank or savings and loan holding companies may establish offices in the State of Connecticut.*fn1 Appellants have
Three subsections of the Act, section 36-5a(b), (c) and (d), are in issue here. Generally, these provisions establish a regulatory scheme that affects all banks and savings and loan associations ("S&L"), corporations that own one or more banks or S&L's, and the non-banking subsidiaries of such corporations. The Act requires these organizations to obtain permission from Commissioner of the Connecticut Department of Banking ("Commissioner") prior to opening any office in Connecticut. Subsection (b) establishes a general prohibition precluding these organizations from engaging in "banking business", which is defined under the subsection as including the following activities: "receiving deposits, paying checks, lending money and any activity which is determined by the Commissioner to be so closely related to banking as to be a proper incident thereto", without the permission of the Commissioner.*fn2
Subsection (c) provides six exceptions to the general prohibition of subsection (b), three of which are relevant here. The first exception allows the subsidiaries of banks, stock S & L's, mutual saving banks or mutual S & L's organized under the laws of Connecticut or having their principal place of business located in the State of Connecticut to open offices without the permission of the Commissioner. Conn. Gen. Stat. Ann. § 36-5a(c)(3)(West Supp. 1986). This exception to the applicability of the general prohibition against "banking business" is available as long as the subsidiary's activity is limited to one or more of the functions which its parent organization may carry on directly through the exercise of its express or implied powers under state law.
The second such exception is a grandfather provision relieving all "holding companies" and their subsidiaries from the statute's application for all offices that were authorized and in fact engaged in banking business prior to June 1, 1984. Id. § 36-5a(c)(4).*fn3
The final relevant exception to the application of the general prohibition against "banking business" is stated in subsection (d) and is incorporated by reference into subsection (c). Id. § 36-5a(c)(6). Under this exception firms that are otherwise precluded from opening offices engaged in banking business in Connecticut are allowed to open two such offices per year in Connecticut provided that those offices do not engage in "deposit services". Deposit services are defined by subsection (d) to include "deposits, withdrawals, advances, payments and transfers of funds to or from a deposit account." Under subsection (d), the Commissioner is authorized to charge a fee covering the cost of processing applications by these restricted organizations to engage in "banking business" and has established such fee to be $1,000.
The facts of this controversy are undisputed as the case was presented to the district judge upon cross-motions for summary judgment with a joint statement of facts. Sears is a New York corporation with its headquarters in Chicago. Appellant AEI is a wholly owned subsidiary of Sears and its wholly owns the Sears Savings Bank (formerly known as the Allstate Savings and Loan Association), a California chartered stock thrift institution organized and existing under the laws of California. Therefore, Sears qualifies as a "holding company" under the Act because of its controlling interest in the Sears Savings Bank as a wholly owned second-tier subsidiary.*fn4
On August 2, 1984, the Commissioner notified Sears of the Act's requirements and requested that Sears provide sufficient information for his determination as to whether two Sears Financial Network centers ("SFN centers") fell within subsections (b) or (d) of the statute. SFN centers generally combine the activities of agents of Allstate and representatives of Dean Witter and Coldwell Banker in order to offer their respective products and services in a central location, typically within a Sears retail outlet. The products offered at SFN centers include the various lines or property, liability, life and health insurance and other products marketed by Allstate and Allstate Life; the dissemination and acceptance of loan applications for AEI; residential real estate brokerage services available through Coldwell Banker; and securities brokerage, principal trading domestic and foreign investment banking, and related services through Dean Witter. Sears contemplated the establish of two SFN centers, one in West Hartford and another in Waterford, Connecticut, apparently without knowledge of the application requirement or the prohibitions contained in the Act.
After the filing this suit for declaratory judgment in the United States District Court for the District of Connecticut to challenge the constitutionality of the Act, but prior to judgment, Sears applied under subsection (b) to the Commissioner on October 11, 1984 to authorize the two SFN centers and a Sears retail store as offices of a "holding company" which are not to be engaged in banking business. Approval as to the retail store was granted by the Commissioner on November 4, 1984, but, on December 28, 1985, the Commissioner determined that the SFN centers would be involved in banking business and that certain activities of the SFN centers would constitute deposit services. More specifically, the Commissioner found that:
Within the broad array of financial services provided at a Financial Network are numerous activities which fall within the definition of banking business in section 36-5a(b) of the General Statutes. Such activities include, but are not limited to, the processing of loan applications for Allstate Enterprises, Inc., which loans money for the purchase of automobiles, boats and recreational vehicles and makes second mortgage loans to Connecticut through Coldwell Banker Residential Group. JA-41.
The Commissioner also found that two of Dean Witter's services constituted "deposit services" that are prohibited by subsection (d) of the Act: (1) the brokering of certificates of deposit for various financial institutions, and (2) the "Sweep Account" feature of the Active Assets Account ("AAA") program offered by Dean Witter. The brokering services that the Commissioner characterized as deposit service involved Dean Witter's brokering of certificates of deposit offered by various financial institutions, including Sears Savings Bank, and the brokering of Sears Money Market Savings Accounts offered by Sears Savings Bank. The AAA program offered by Dean Witter provided a group of integrated financial services that included a margin account capability that would allow an owner of an AAA account to buy and sell securities on cash basis or on credit. More importantly for purposes of the statute, an owner of an AAA account might also elect to have the funds in his account that were not used for a specific investment purpose automatically invested in one of Sears Savings Bank's "Super NOW" accounts. Dean Witter also acts as agent for an owner who wishes to use the funds deposited in this "Sweep Account." The Commissioner conditioned approval of the SFN centers upon the discontinuation of both these activities. Hence, the Commissioner indicated that he would grant approval pursuant to subsection (d) for the application apropos the two SFN center conditioned upon two requirements, (1) that Sears not engage in deposit services at the SFN centers and (2) that Sears submit a $1,000 fee for the processing of each application under subsection (d).
Subsequently, Sears filed numerous applications seeking the Commissioner's approval of various offices of Sears subsidiary companies. On January 9, 1985, Sears filed applications pursuant to subsection (b), for, inter alia, two offices of Allstate Enterprises Mortgage Corporation ("AEMC") for the purpose of making first mortgage loans on commercial and residential property in Connecticut. The Commissioner rejected these applications by letter dated January 17, 1985, finding that the offices of AEMC would be engaged in banking business and directing that the applications be filed pursuant to subsection (d). No such applications have been filed.
As a result of these and other applications by Sears or subsidiaries between September of 1984 and March of 1985, the Commissioner has unconditionally approved 91 of 95 applications by Sears and its subsidiaries. Through these determinations, the Commissioner has found that general merchandise retail operations, catalog operations, credit-sale operations, and service to retail and catalog customers at Sears retail stores would not enable Sears or any of its subsidiaries to engage in banking business in Connecticut. The Commissioner also determined that residential and commercial real estate brokerage and related services provided primarily by Coldwell Banker did not constitute banking business as long as these activities did not include mortgage banking, mortgage lending, or acceptance of loan applications. In addition, the Commissioner determined that the activities of Sears' various insurance subsidiaries did not enable Sears or any subsidiary of Sears to engage in banking business. Finally, the Commissioner determined ...