FDIC: 1984 - Docket No. FDIC-83-21k-A


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[¶5022] FDIC Docket No. FDIC 83-21K-A(1-30-84).

Civil money penalties assessed against bank directors for exceeding the lending limit and failing to comply with the collateral requirements of Regulation O and the Federal Reserve Act. The directors had a duty to inquire carefully into the terms of loans and to insure that the loans were proper and lawful. (This decision was affirmed by the U.S. Court of Appeals for the Sixth Circuit, 765 F.2d 569 (1985)).

[.1]Loans—Federal Reserve Act §23—Lending Limitations—Aggregation of Loans
Lending limits may be violated if more than one transaction can be construed as a loan.

[.2]Loans—Secured—Perfection of Security Interest
Loans to affiliates must be secured in order to ensure that a bank does not sustain a loss in the event of default. An unperfected security interest, although valid and enforceable against the debtor, will not give the bank priority against third parties.

[.3]Loans—Secured—Possession of Collateral
Perfection of a security interest in "instruments," such as stock, can generally only be accomplished by the secured party's taking possession of the collateral.

[.4]Directors—Duties and Responsibility—Delegation to Officers
Directors must exercise ordinary care in the management of the bank's affairs and may not merely rely on others to carry out their responsibilities.

[.5]Directors—Duties and Responsibilities—Inquiry into Credit Terms
Directors have a duty to inquire carefully into the terms of loans and to insure that the loans are proper and lawful.

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In the Matter of * * *, individually and
as a director and principal shareholder of
* * * an insured State nonmember bank;
and * * * , individually and as a director
and principal shareholder of * * * an
insured State nonmember bank; and * * * and * * *,
individually and as directors
of * * * , * * *, an insured State
nonmember bank.

DECISION AND ORDER
FDIC-83-21k-A
Pursuant to its authority under section 18(j)(3) of the Federal Deposit Insurance Act (12 U.S.C., §1828 (j)(3)), the Federal Deposit Insurance Corporation on February 7, 1983, issued a notice of assessment of civil money penalties against the abovenamed parties alleging violations of sections 22(h) and 23A of the Federal Reserve Act, as amended (12 U.S.C. §§375b and 371c), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215) by virtue of exceeding the lending limits and failing to comply with the collateral requirements therein. On May 24, 1983, a hearing in the matter was held in * * *. Thereafter, the parties filed proposed findings of fact, proposed conclusions of law, proposed orders, briefs and reply briefs. The Administrative Law Judge filed his Recommended Decision and Order on October 21, 1983 upholding the FDIC's charges and affirming the assessment of a penalty of $5,000 each against * * * and * * * and a $1,000 penalty against each of the other two Respondents.

FACTS

   On July 9, 1981, the Board of Directors of the Bank * * * , a state nonmember insured Bank, approved a $500,000 participation by the bank in a $2.1 million loan by another bank to * * * , who was then Chairman of the Board of Bank * * * and father of its two principal shareholders, Respondents * * * and * * *. Although not clarified at that time, the co-obligor and actual recipient of the loan proceeds was in fact * * * Company ("* * *"), an affiliated loan company of Bank * * *. At the time, * * * was also President and principal shareholder of * * *. The participation was proposed by * * * without any documentation or, apparently, any prior notice to the Directors. The participation was approved without detailed inquiry by the Directors, with Respondents * * * and * * * voting in favor and Respondent * * * abstaining.
   After approval of the participation, Bank * * * received the participation certificate, demand note and loan agreement. Its President, Respondent * * * , reportedly reviewed only the note and certificate, which contained no reference to * * *. However, the loan agreement which was executed by Respondent * * * clearly indicated that * * * , was to receive the loan proceeds by a check payable to * * * and * * * which * * * would then endorse over to * * *. Respondent * * * testified at the hearing that he did not read the agreement before disbursement of the proceeds.
   On August 27, 1981 Bank * * * Board approved another extension of credit, this time directly to * * * , in the amount of $750,000. Respondents * * * and * * * voted to approve this credit and Respondents * * * and * * * abstained because of their affiliation with * * *. The loan agreement provided that 270,100 shares of stock of a bank affiliated with Bank * * * would serve as collateral for this credit. However, Bank * * * did not actually obtain possession of this collateral because it was being held by yet another bank as security for a previous loan to the * * * interests.
   At the same Board meeting at which the $750,000 credit to * * * was approved, an "insider" loan to a related interest of Respondent * * * was also approved, with both Respondents * * * and * * * voting in favor thereof. However, Respondent * * * denied any trade-off or other connection between the two loans and there appears to be no direct evidence of such a "deal" in the record, although the Administrative Law Judge did find that companies owned by Respondent * * * did a considerable amount of business with Bank * * *.
   As a result of general concerns expressed to the FDIC by Respondent * * * about the overall quality of Bank * * * loan portfolio, including the loans made to * * * interests, an FDIC examiner visited Bank * * * on November 23, 1981. At this special visit, the FDIC examiner advised Respondents * * * and * * * (as well as Vice-President * * * ) that the combined total of the $500,000 loan to * * * and * * * and the $750,000 direct credit to * * * exceeded the Regulation O lending limits. Subsequently, {{4-1-90 p.A-194}}at the May 24, 1982 examination of Bank * * * , FDIC examiners cited these loans as violating both the lending limits and the collateral requirements of sections 22(h) and 23A of the Federal Reserve Act and Regulation O.
   At a June 10, 1982 Board meeting of Bank * * * , an FDIC examiner advised all four Respondents of the alleged violations set forth in the report of examination and informed the Board that he would recommend civil money penalties be assessed against Respondents. Four months later, on October 13, 1982, the FDIC examiner returned to the Bank * * * and, ascertaining that no corrective action had yet been taken, decided to recommend that the FDIC formally assess civil money penalties. On February 7, 1983, the FDIC initiated these administrative proceedings under section 18 (j)(3)(A) of the Federal Deposit Insurance Act, assessing $5,000 penalties against both * * * and * * * and $1,000 penalties against both Respondents * * * and * * *. After a hearing, the Administrative Law Judge issued a Recommended Decision and Order upholding the FDIC's charges in this case and affirming the penalties as assessed.

SECTION 23A AND REGULATION O LENDING LIMIT VIOLATIONS

[.1] Neither loan by itself violated the lending limits of the Federal Reserve Act and Regulation O as cited above. Only if both are construed as loans to * * * were such limits violated.
It is clear from the facts that both loans were made to * * * . As noted earlier, all of the proceeds from the first loan went to * * * since, as specified in the loan agreement, they were disbursed by a check which was payable to * * * and * * * and was required to be endorsed by * * * to * * *. Further, the proceeds from the second loan went directly to * * * and * * * was known to be the borrower for the full amount. Accordingly, it is concluded that the findings of lending limit violations are correct.

SECTION 23A COLLATERAL VIOLATIONS

FDIC submits that the loans were not secured by the kind and amount of collateral required by section 23A of the Federal Reserve Act. The security for the $500,000 loan participation consisted of bank stock, real estate and pledges of certain accounts receivables and floor plans made to * * * affiliates. Of these, only the bank stock was eligible security under section 23A. This bank stock proved to be inadequate under section 23A because the amount of Bank * * * pro rata interest in the stock was less than 120 percent of the amount of the extension of credit.
Regarding the second loan, Respondents dispute that the $750,000 * * * credit, as set up, violated the collateral requirements of section 23A. While acknowledging that the stock supposedly securing this credit was physically held by a * * * bank to secure its own previous loan to * * * , they nevertheless contend that section 23A requires only that a loan be "secured" and does not require that the security interest be perfected. Even assuming that Bank * * * had an unperfected security interest in the stock collateral under the circumstances of this case (which is far from clear), it is concluded that section 23A requires a perfectedsecurity interest.

[.2] As the Administrative Law Judge noted, section 23A requires that loans to affiliates be secured in order to ensure that the bank does not sustain a loss in the event of default. An unperfected security interest, although valid and enforceable against the debtor, will not give the bank priority against third parties. Under Section 9-301 of the Uniform Commercial Code as adopted by * * *, even the debtor's trustee in bankruptcy has priority over an unperfected security interest. (* * * Rev. Stat. §355.9-301)

[.3] Perfection of a security interest in "instruments", such as stock, can generally only be accomplished by the secured party's taking possession of the collateral (* * * Rev. Stat. §355.9-304). Bank * * * admittedly did not have actual possession of the stock which purportedly secured the * * * credit. The stock was in the possession of a * * * bank which held it to secure its own loan to * * *. The Uniform Commercial Code provides that when collateral "is held by a bailee, the secured party is deemed to have possession from the time the bailee receives notification of the secured party's interest." (* * * Rev. Stat. §355.9-305). * * * letter of September 2, 1981 to the * * * bank did not inform the * * * bank that Bank * * * had an interest in the stock to secure a $750,000 credit to * * * ; nor did it direct the * * * bank to release control of the stock to Bank * * * upon satis- {{4-1-90 p.A-195}}faction of * * * debt to the * * * bank. The letter merely directed the * * * bank to send the stock to * * *, which would "receive it for the Bank * * * ." There is no evidence that * * * Bank, which had a superior security interest in the stock received any notice of Bank * * * interest in the stock securing the $750,000 * * * credit. For these reasons, * * * letter to the * * * bank did not give Bank * * * constructive possession of the collateral, and thus did not create a perfected security interest. The * * * loan, therefore, violated section 23A collateral requirements because it was not securedas required thereby.

PENALTIES

   [.4—.5] As the Administrative Law Judge noted, Respondents generally contend that they acted in good faith in approving the loans and that the imposition of penalties is inappropriate. However, as directors, Respondents were required to exercise ordinary care in the management of the bank's affairs and could not merely rely upon others to carry out their responsibilities. Briggs v. Spaulding, 141 U.S. 132, 165-166 (1891); Lane v. Chowning, 610 F.2d 1385 (8th Cir. 1979); Heit v. Bixby, 276 F. Supp. 217 (E.D. Mo. 1967). Moreover, they had a duty to inquire carefully into the terms of the loans and to insure that the loans were proper and lawful. This they failed to do. They were also remiss for failing to correct the violations promptly after being advised of them by FDIC examiners.
   Respondent * * * contends that no penalty should be assessed against him primarily because he had no knowledge of the violations until June 10, 1982 when the FDIC examiner gave formal notice of the violations. However, as the Administrative Law Judge clearly indicates, this factor does not establish a valid defense. The record shows that * * * failed to exercise ordinary care in approving these large loans in question. He appears to have sat passively by and made no reasonable effort to ascertain the facts surrounding the loans. Had he done so, he would or should have detected the potential violations. Accordingly, it is concluded that the $1,000 penalty assessed against * * * is appropriate.
   Respondent * * * degree of culpability in these violations is also apparent in that * * * was President, Chief Executive Officer and a very substantial minority shareholder of Bank * * * . He had actual notice of the alleged lending limit violation at least as early as November 23, 1981 when an FDIC examiner made a special visit to Bank * * * to investigate * * * concerns about insider loans and loan quality generally. Moreover, he signed both loan agreements involved in this proceeding, which clearly set forth who was to get the loan proceeds and described what the collateral arrangements were. Also, there is at least an outside chance that Respondent * * * acquiescence in the two loans to the "* * * interests" which are involved here could conceivably have been some sort of a quid pro quofor Bank * * * loans to his own outside business interests, one of which was approved by the Bank * * * Board the same day as the $750,000 credit to * * * was approved. As stated earlier, however, the record does not appear to contain any direct evidence of such a trade-off.
On the other hand, counsel for Respondent * * * argues that * * * history of communications with regulatory authorities (including, in particular, his contacts with FDIC which gave rise to the investigation on which this proceeding is premised) diminish the degree of culpability attached to his involvement in approving and disbursing the loans in question and in failing to make more strenuous efforts to bring them into compliance after learning that FDIC regarded them as violative of insider lending limits and collateral requirements. Nevertheless, as the Administrative Law Judge noted, * * * initially approved both of the two loans in question without detailed inquiry. Further, despite his communications with the FDIC, he failed to take steps to obtain physical possession of the collateral securing the $750,000 loan, or to prevent further disbursements from being made. On balance, the $1,000 penalty assessed against Respondent * * * is appropriate under all the facts and circumstances of this case.
As for the $5,000 penalties assessed against Respondents * * * and * * *, these also seem appropriate. Since the * * * controlled both * * * and Bank * * *, as well as various other affiliated companies connected in one way or another with these two loans, they must have had far greater knowledge regarding the factual {{4-1-90 p.A-196}}background of these loans and far greater ability to control their form and substance and to correct the alleged violations than did Respondents * * * and * * *. Moreover, it seems clear that the loans in question were orchestrated by the * * * for the benefit of * * * -owned companies and, therefore, for their own ultimate benefit. Also, it is noted that * * * violated Regulation O by voting in favor of the $500,000 loan to * * * , of which he was President and majority shareholder.

EXCEPTIONS TO RECOMMENDED DECISION

Respondents filed a number of exceptions to the Administrative Law Judge's Findings of Fact, Conclusions of Law, and Order. These are discussed below and are rejected for the reasons stated.

Exceptions to Findings of Facts

   1. Respondent * * * objects to the characterization of him in Finding 3 as being Chief Executive Officer of Bank * * *. However, he himself stated at the hearing that he was Bank * * * 's Chief Executive Officer (Transcript, page 99, lines 3-4). In any event, the label is not important; his functions and involvement in the Bank's activities are the determinative factors.
   2. Respondents * * * and * * * and Respondent * * * object to the second sentence of Finding 10 which states that "loans normally presented to the board of directors for approval are a result of a loan application being filed with the bank (Ex. N)." These Respondents aver that it would be very unusual to have a loan application or documentation completed and presented to the Board for a decision on a loan. Nevertheless, copies of the minutes of Bank * * * board meetings (Ex. N) clearly state in numerous places that loan applications were submitted to the Board. In any event, Respondents misconstrue the statement in Finding 10. It says only that loans presented to the Board are "as a result of a loan application being filed with the bank." (Underlining added.) This is not a statement that the application is physically presented to the Board. The point here is that the normal procedure of having a loan application on file with the bank before the matter is submitted to the Board for approval was not followed as to the $500,000 participation loan to * * * and * * *.
   3. Respondent * * * objects to Finding 22 relating to the approval by Bank * * * Board of an "insider loan" to an outside business interest of Respondent * * * (with Respondents * * * and * * * voting in favor thereof) on August 27, 1981—the same day that the Board approved the $750,000 credit to * * * , Respondent * * * asserts that this Finding is irrelevant to any issue in the proceeding. The insider loan to a * * * interest is certainly relevant to his possible motivation for voting to approve the * * * credit, particularly in view of the fact that at the August 27, 1981 meeting the approval of the * * * credit followed immediately upon the approval of the * * * insider loan.
   4. Respondent * * * also objects to Finding 23 to the effect that "companies owned by * * * did a considerable amount of business with the bank." He claims that this finding is irrelevant to any issue in the proceeding. On the contrary, such dealings of Bank * * * with Respondent * * * 's outside business interests could conceivably have diluted his motivation to ask the necessary, penetrating questions that should have been asked about the $500,000 participation loan to * * * and * * * and $750,000 credit to * * *.
   5. Respondents * * * and * * * and Respondent * * * object to the third sentence of Finding 25 that "neither * * * , nor * * * entered into any security agreement with Bank * * * with respect to this stock." Respondents seem to take the position that all of the documentation submitted in connection with the $750,000 * * * loan was, when considered together, sufficient to constitute a "security agreement", and thus give Bank * * * at least an unperfected security interest in the stock. Respondents' contention that Bank * * * acquired even an unperfected security interest in the stock is doubtful. In any event, section 23A requires a perfected security interest, for the reasons discussed at length above. Therefore, the $750,000 * * * credit would have violated section 23A even if Bank * * * had acquired an unperfected security interest in the stock.
   6. Respondents * * * and * * * and Respondent * * * also object to Finding 28 which reads as follows:

The issue of the perfection of the security interest is discussed at length above. The financial condition of * * * and * * * is relevant to the issue of Respondents' motivation and good faith in approving the loans in question and to the degree of care exercised by them in this regard.
Respondents also suggest that the FDIC adopt their proposed Findings of Fact rather than those of the Administrative Law Judge. Their proposals are rejected because they do not accurately reflect the facts set forth in the record and summarized above.

Exceptions to Conclusions of Law and Order

Respondents take general exception to the Administrative Law Judge's Conclusions of Law and his Order on the grounds that they are arbitrary and capricious, inconsistent with applicable law, and unsupported by evidence in the record. This general exception is rejected. The recommended conclusions of law are in accord with applicable law and the Order is appropriate.

FINDINGS OF FACT AND
CONCLUSIONS OF LAW

Accordingly, the Board of Directors, after specifically considering all the factors cited in 12 U.S.C. §1828(j)(3), adopts all the findings of fact and conclusions of law of the Administrative Law Judge, and the bases therefor, as set forth in his Recommended Decision, which are hereby incorporated by reference as part of this decision.

ORDER

   The Board also adopts in full the proposed order of the Administrative Law Judge as contained in his Recommended Decision, which is incorporated herein by reference, as its Final Order. This Order shall become effective at the expiration of 30 days after the service of the Order upon Respondents.
   By order of the Board of Directors.
   Dated at Washington, D.C., this 30th day of January, 1984.

/s/ Hoyle L. Robinson
Executive Secretary

FDIC-83-21k-A

RECOMMENDED DECISION

   Burroughs Judge: The Federal Deposit Insurance Corporation ("FDIC") seek monetary penalties against directors of The Bank * * * Kentucky, pursuant to section 18(j)(3) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1828(j)(3). The action results from a Report of Examination of Bank * * * at the close of business on May 24, 1982, wherein it was determined that Bank * * * participation in a loan of $2,100,000 made by the * * * (" * * *."), * * *, and the subsequent extension of credit to * * * Ed: ("* * *") in the amount of $750,000 was in violation of sections 22(h) and 23A of the Federal Reserve Act, as amended (12 U.S.C. §§375b and 371c, respectively), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215), promulgated pursuant to section 22(h) of the Federal Reserve Act. The FDIC contends that the loan made by * * * Bank in the name of * * * was in reality a loan for the benefit of * * * , an affiliate of Bank * * *.
   On February 7, 1983, the Board of Directors of the FDIC issued a Notice of Assessment of Civil Money Penalties assessing a $5,000 penalty against * * * and * * *. A penalty of $1,000 was assessed against * * * and * * *. On February 24 and 25, 1983, letters were received by the Executive Secretary of the FDIC from counsel for the directors advising that they desired a hearing pursuant to section 308.69(b) of the FDIC's Rules of Practice and Procedures. A hearing was held in * * * , on May 24, 1983.
   The Bank * * * is an insured State nonmember bank. On July 9, 1981, the majority of stock was owned by * * * and his two sons, * * * and * * * . On that date, * * * {{4-1-90 p.A-198}}and * * * * * * , were directors of the bank. * * * , a minority stockholder, served as president of the bank. * * * was chairman of the board of directors of the bank.
   During a board of directors meeting held on July 9, 1981, * * * orally presented a request for a $500,000 participation by Bank * * * in a $2,100,000 loan being originated by * * * Bank. He informed the board that his father, * * * , was borrowing $2,100,000 from * * * Bank to buy some receivables (floor plan). * * * Bank was to retain $1,100,000 of the loan. The board of directors of Bank, * * * voted to approve the $500,000 loan participation. Directors * * * and * * * voted in favor. Director * * *, abstained. There was no documentation for the loan at the time the directors voted their approval. The board acted solely upon the representations made by * * *.
   Subsequent to the approval of the loan participation by the board of directors on July 9, 1981, and prior to the disbursement, copies of the loan participation certificate, demand note and loan agreement were received by Bank * * *.
   * * * , signed the loan participation agreement on behalf of Bank * * * on August 3, 1981, and disbursement of the funds were made by the bank on August 4, 1981. The loan participation agreement and demand note made no reference to * * *. The loan agreement stated that the agreement was between * * * and * * * Bank. The agreement reflects that the proceeds of the loan were to be paid by check to * * * and * * * , and * * * was to endorse the check to * * *.
   On August 27, 1981, the board of directors of Bank * * * approved an extension of credit to * * * , in the amount of $750,000. Directors * * * and * * * voted in favor of the loan. Directors * * * and * * * did not vote. The stock of * * * was owned by * * * and * * * was president of * * *.
   An agreement dated September 2, 1981, set forth the terms of the $750,000 extension of credit to * * * . It was accepted on behalf of * * * by * * *. * * *, accepted for Bank * * *. The agreement provided that 270,100 shares of stock of * * * would serve as collateral. The stock consisted of certificate number 135 for 166,800 shares, certificate number 136 for 52,900 shares and certificate number 137 for 50,400 shares. The stock was pledged to the * * * for a debt owed to that bank and was in possession of * * *. The stock was owned by * * * , and * * *. Bank * * * did not obtain possession of the stock.
   Proceeds of the $750,000 extension of credit were disbursed to * * * as follows:

Date	Disbursement
October 8, 1981	$200,000
November 9, 1981	$100,000
November 17, 1981	$315,000
November 20, 1981	$ 85,000
December 4, 1981	$ 50,000

On November 23, 1981, FDIC examiner * * * visited Bank * * * and informed respondents * * * and * * * that the * * * loans exceeded the lending limits of Regulation O.

SECTION 23A AND REGULATION O
LENDING LIMITS

   The question of whether loans to * * * exceeded the lending limits of sections 215.2(f) and 215.4(c) of Regulation O, 12 C.F.R. §§215.2(f) and 215.4(c), and sections 22(h)(l) and 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §§375b and 371c, respectively, is contingent on how the loan participation of $500,000 with the * * * Bank is treated. The minutes of the July 9, 1981 board of directors meeting indicate that * * * represented that the $2,100,000 loan being made by * * * Bank was to his father, * * *. The minutes make no reference to * * *, but do state that * * * is using the proceeds to buy some receivables (floor plan). The loan participation agreement between * * * Bank and Bank * * * makes no reference to * * *. The demand note for $2,100,000 was executed by * * *. The note makes no reference to * * *.
   A loan agreement was executed as part of the $2,100,000 loan by * * * Bank. This agreement was between * * * and * * * Bank. When the whole agreement is read, it is readily apparent that the proceeds of the $2,100,000 loan were to go to * * *. Considerable assets of * * * were pledged as collateral for the loan, and paragraph six of the agreement specifies that the distribution of the loan will be made by a check made payable to * * * and * * *. The agreement {{4-1-90 p.A-199}}further specifies that * * * will endorse the check over to * * *. In resolving this question, one must look at the substance of the whole transaction rather than the form. There is no doubt that the intended purpose of the loan was to transfer new capital into * * * . * * * was in substance simply a conduit for the funds.
   When the loan participation with the * * * Bank is treated as a loan to * * * , the total credit outstanding to * * * was as follows on the dates indicated:

	Outstanding
Date	Credit
7/25/81 to 10/7/81	$ 500,000
10/8/81 to 11/8/81	$ 700,000
11/9/81 to 11/16/81	$ 800,000
11/17/81 to 11/19/81	$1,115,000
11/20/81 to 12/3/81	$1,200,000
12/4/81 to 12/21/81	$1,250,000

Commencing with the disbursement of $315,000 on November 17, 1981, Bank * * * was in violation of the lending limit of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c (1976)¹and section 22(h)(1) of the Federal Reserve Act, 12 U.S.C. §375b(1), as implemented by sections 215.2(f).²and 215.4(c)³of Regulation O.

SECTION 23A COLLATERAL REQUIREMENTS

The FDIC submits that the $500,000 loan participation with the * * * Bank and the subsequent extension of $750,000 of credit to * * * were not secured by the kind and amount of collateral required to be provided by section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c(1976).⁴The $500,000 was part of the $2,100,000 loan made by * * * Bank. Security for the loan was held by * * * Bank and consisted of bank stock, real estate and pledges of certain accounts receivable and floor plan loans made to affiliates of * * *. Of the assets securing the loan, only bank stock constituted eligible collateral under section 23A. The loan agreement stated that the bank stocks had a book value of $1,196,110. There is nothing in the loan participation certificate or the

¹ Section 23A of the Federal Reserve Act (12 U.S.C. §371c), in pertinent part, provides:
No member bank shall (1) make any loan or any extension of credit to, or purchase securities under repurchase agreement from, any of its affiliates, or (2) invest any of its funds in the capital stock, bonds, debentures, or other such obligations in any such affiliate, or (3) accept the capital stock, bonds, debentures, or other such obligations of any such affiliate as collateral security for advances made to any person, partnership, association, or corporation, if, in the case of any such affiliate, the aggregate amount of such loans, extensions of credit, repurchase agreements, investments, and advances against such collateral security will exceed 10 per centum of the capital stock and surplus of such member bank, or if, in the case of all such affiliates, the aggregate amount of such loans, extensions of credits, repurchase agreements, investments, and advances against such collateral security will exceed 20 per centum of the capital stock and surplus of such member bank.

² Section 215.2(f) of Regulation, 12 C.F.R. §215.2(f) is as follows:
(f) The "lending limit" for a member bank is an amount equal to the limit on loans to a single borrower established by section 5200 of the Revised Statutes, 12 U.S.C. 84. This amount is 10 percent of the bank's capital stock and unimpaired surplus or any higher amount permitted by section 5200 of the Revised Statutes for the types of obligations listed therein as exceptions to the 10 percent limit. A member bank's capital stock and unimpaired surplus equals the sum of (1) the "total equity capital" of the member bank reported on its most recent consolidated report of any condition filed under 12 U.S.C. §1817(a)(3), (2) any subordinated notes and debentures approved as an addition to the member bank's capital structure by the appropriate Federal banking agency, and (3) any valuation reserves created by charges to the member bank's income.

³ Section 215.4(c) of Regulation O, 12 C.F.R. §215.4(c), is as follows:
Aggregate Lending Limit. No member bank may extend credit to any of its executive officers or principal shareholders or to any related interest of that person in an amount that, when aggregated with the amount of all other extensions of credit by the member bank to that person and to all related interests of that person, exceeds the lending limit of the member bank specified in section 215.2(f) above.

⁴ The collateral restrictions of section 23A of the Federal Reserve Act, 12 U.S.C. §317c (1976), are as follows:
   Within the foregoing limitations, each loan or extension of credit of any kind or character to an affiliate shall be secured by collateral in the form of stocks, bonds, debentures, or other such obligations having a market value at the time of making the loan or extension of credit of at least 20 per centum more than the amount of the loan or extension of credit, or of at least 10 per centum more than the amount of the loan or extension of credit if it is secured by obligations of any State or of any political subdivision or agency thereof: Provided. That the provisions of this paragraph shall not apply to loans or extensions of credit secured by obligations of the United States Government, the Federal intermediate credit banks, the Federal land banks, the Federal Home Loan Banks, or the Home Owners' Loan Corporation, or by such notes, drafts, bills of exchange, or bankers' acceptances as are eligible for rediscount or for purchases by Federal reserve banks. A loan or extension of credit to a director, officer, clerk, or other employee, or any representative of any such affiliate, shall be deemed a loan to the affiliate to the extent that the proceeds of such loan are used for the benefit of or transferred to the affiliate.
{{4-1-90 p.A-200}}record as a whole to show that any of the pledged assets were segregated so as to set aside only bank stock as security for Bank * * * participation in the loan. Bank * * * would have only a pro rata share of the total security. This means that the value of Bank * * * portion of the bank stock was less than 120 percent of the amount of the extension of credit—a clear violation of section 23A.
   Although it is undisputed that Bank * * * did not have physical possession of the stock, respondents argue that the $750,000 loan to * * * was secured within the meaning of section 23A. They do not question the fact that section 23A requires that loans to affiliates be secured. Section 23A is clear in this requirement. Respondents correctly point out that section 23A does not explicitly define "secured" and argue that the word should be defined as requiring an "agreement that creates or provides for a security interest." While conceding that the loan agreement does not specifically state it is a security agreement, it is argued that the agreement makes it plain that the parties intended to create a security interest in the stock.
   Respondent * * * concedes that the security agreement (his reference to the loan agreement) was not perfected but argues that "the transaction was nevertheless a securedone." Respondents * * * and * * * argue that whether or not the security interest is perfected does not affect the enforceability of the security interest as between the parties. The FDIC contends that the security interest must be perfected to be "secured" in the sense required by Section 23A. It then submits that Bank * * * did not have a perfected security interest for three reasons: (1) there was no security agreement; (2) the * * * Bank had possession of the stock certificates and had not agreed to act as agent for Bank * * * ; and (3) the first lienor was not notified of the existence or amount of any security interest on the part of Bank * * *.
   The language and purpose of section 23A is clear. Loans are required to be secured for the obvious purpose of protecting the bank against the possibility of a loss. Words in a legislative enactment that are not ambiguous, in the absence of a definition in the act itself, must be ascribed their accepted understood meaning. Palmer v. United States Civil Service Commission. 191 F.Supp. 495 (S.D. Ill. 1961). The word "secured" is not ambiguous. Something that is deemed secured is generally regarded as free from loss. The definition of secured advocated by respondents, i.e., an agreement that creates or provides for a security interest, would protect the bank against the debtor; however, the issue involves stock as collateral and is not simply the right between the two parties. The bank, under respondents' argument, could have superior rights between the parties but an inferior right as to third parties. Adopting respondent's definition would mean that a bank in such circumstances may or may not be protected, depending upon the rights of third parties. The word "secured" means exactly what it connotes and is not tempered by any modifying words that would permit the right of third parties to override the right of the bank. The bank must have superior position against all persons if the loan is to be secured. The rights of the bank in the collateral must be perfected if the loan is to be "secured" within the meaning of section 23A.
The lack of physical possession of the stock by the bank prevented the extension of credit from being secured within the intent of section 23A. Section 9-203 of the Uniform Commercial Code as adopted in * * * Rev. Stat. §335.9-203⁵provides that a security interest is not enforceable against the debtor or third parties unless (a) the collateral is in the possession of the secured party, or (b) the debtor has signed a security agreement which contains a description of the collateral. The general rule is modified by * * * Rev. Stat. §355.9-304, which provides that a security interest in instruments, other than instruments that constitute part of chattel paper, can be perfected only by possession. This includes a security interest in stock. The violation has been established.

⁵ * * * Rev. Stat. §355.9-203 provides, in pertinent part, as follows:
(1) Subject to the provisions of * * * 355.4-208 on the security interest of a collect bank and * * * 355.9-113 on a security interest arising under the Article on Sales, a security interest is not enforceable against the debtor or their parties unless
(a) The collateral is in the possession of the secured party; or
(b) The debtor has signed a security agreement which contains a description of the collateral and in addition, . . .
{{4-1-90 p.A-201}}
VOTING REGISTRATION OF SECTION
215.4(b) OF REGULATION O

During the board of directors vote on July 9, 1981, * * * voted in favor of approving the $500,000 loan participation in the $2,100,000 loan originated by * * * Bank. Since the loan was for the benefit of * * *, * * * was an interested party. He was a majority stockholder and president of * * *. The participation in the voting process by * * * was in violation of section 215.4(b) of Regulation O.⁶

PENALTY DETERMINATION

   The last question for determination involves the amount of penalty, if any, that should be assessed against the directors. Section 18(j)(3)(A) of the Federal Deposit Insurance Act, 12 U.S.C. §1828(j)(3)(A), empowers the FDIC to impose civil penalties against any person participating in the conduct of the affairs of an insured nonmember bank that violates any provision of section 23A or 22(h) of the Federal Reserve Act or any lawful regulation, such as Regulation O, promulgated pursuant to such authority.⁷Certain factors must be considered in determining an appropriate penalty. These factors specifically include the size of the financial resources, good faith of the insured bank or person charged, the gravity of the violation and the history of previous violations.⁸
   All of the respondents argue that they acted in good faith in approving the loans and that the imposition of penalties would be both inappropriate and an abuse of discretion. Directors * * * and * * * further argue that they had no knowledge on July 9, 1981, that the $500,000 loan proceeds would be transferred to * * *. In addition, * * * contends that he acted to take steps to correct the problem and that he had on several occasions met and communicated with the FDIC concerning the bank's financial transactions with the * * * related interests. * * * further states that he was unaware of any problem with either of the loans until the board of directors meeting held on June 10, 1982. The FDIC does not contend that * * * and * * * had actual knowledge of the fact that the $500,000 proceeds would be transferred to * * * but insists that their duty as a director necessitated a greater degree of care in administering the affairs of the bank. The question arises as to what degree of care is required by directors in administering the affairs of a bank.
   Directors of a bank are required to exercise ordinary care and prudence in the administration of the bank's affairs. Briggs v. Spaulding, 141 U.S. 132, 165-166. Lane v. Chouning, 610 F.2d 1385 (8th Cir. 1979). They have a duty to manage the bank and it is negligence to leave the management of its affairs entirely up to others. See Heit v. Bixby, 276 F. Supp. 217 (E.D. Mo. 1967). In Atherton v. Anderson, 99 F.2d 883, 888 (6th Cir. 1938), the court, in disposing of the argument by directors that they were uninformed of what was taking place, stated:

⁶ Section 215.4(b) of Regulation O provides, in pertinent part, as follows:
(1) No member bank may extend credit or grant a line of credit to any of its executive officers, directors or principal shareholders or to any related interest of that person in an amount that, when aggregated with the amount of all other extensions of credit and lines of credit by the member bank to that person and to all related interests of that person, exceeds, $25,000, unless (i) the extension of credit or line of credit has been approved in advance by a majority of the entire board of directors of that bank and (ii) the interested party has abstained from participating directly or indirectly in the voting.
(3) Participation in the discussion, or any attempt to influence the voting, by the board of directors regarding an extension of credit constitutes indirect participation in the voting by the board of directors of an extension of credit.

⁷ Section 18(j)(3)(A) of the FDIC Act (12 U.S.C. §1828(j)(3) (A)) provides:
Any nonmember insured bank which violates or any officer, director, employee, agent, or other person participating in the conduct of the affairs of such nonmember insured bank who violates any provision of section 371c or 375b of this title, or any lawful regulation issued pursuant thereto, shall forfeit and pay a civil penalty of not more than $1,000 per day for each day during which such violation continues. The penalty shall be assessed and collected by the Corporation by written notice. As used in this section, the term "violates" includes without any limitation any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation.

⁸ Section 18(j)(3)(B) of the FDIC Act (12 U.S.C. §1828(j)(3)(B)) provides:
In determining the amount of the penalty the Corporation shall take into account the appropriateness of the penalty with respect to the size of financial resources and good faith of the member bank or person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require.
{{4-1-90 p.A-202}}

   The directors in Atherton v. Anderson, supra, had contended that the president of the bank and the cashier had concealed the overdrafts from them.
   The analysis of able counsel makes the issue concerning the assessment of penalties a close one, however, the essential verities of the situation cannot be explained away. There remains an ineradicable conviction that the respondents did not exercise the ordinary care and prudence in the administration of the bank's affairs that is required of a director. The alleged lack of knowledge on the part of * * * and * * * on July 9, 1981, at the time of the vote on the $500,000 loan participation must be attributed to their own neglect in pursuing more facts about the loan. They did not exercise the degree of care demanded by the circumstances. * * * and * * * were aware that the * * * had many business interests. There is no evidence to indicate that either of them questioned any aspect of the loan as presented by * * *. They were informed by * * * that his father was to buy some receivables. Apparently, they were not concerned enough to ascertain if the purchase. of receivables involved any of the * * * controlled entities. It was the duty of * * * and * * * to know the facts surrounding the loan. Ignorance under such circumstances is not a valid defense. They cannot blindly rely upon another's representations where ordinary care would have revealed the truth.
   Respondents * * * and * * * do not argue that they had no knowledge that the loan proceeds were to go to * * * . Since they owned the stock of * * * and * * * served as president, it would be ludicrous for them to plead ignorance of all the facts. They obviously were aware that * * * was nothing more than a conduit. The manner in which the loan was arranged leads to the unmistakable conclusion that form was followed over substance in order to disguise the true facts. The reason for this concealment does not appear in the record.
   While the full facts were not pursued at the July 9, 1981, meeting, the loan documentation was received by Bank * * * prior to the disbursement of the funds on August 4, 1981. A reading of the loan agreement would have readily disclosed that the loan proceeds were to go to * * *. * * * testified that he did not see the loan agreement until after the $500,000 was disbursed. He acknowledged that he was presented with a review of what the documentation would be by * * * of the * * * (Tr. 75-76, 77) but stated that, when the time for disbursement came, he relied upon the representation by Mrs. * * * that the documents were in order (Tr. 75). There is no indication of what * * * revealed to him.
   The point is made that it would be unusual for any bank's board of directors to review the actual loan documentation. This statement is open to debate. The conclusion must depend upon the facts surrounding the loan. Where the details of a loan are presented orally, the loan is large in amount, involves officers or stockholders of the bank, and the details are unclear as to the exact collateral or the end result of the funds, it is clear that directors would be remiss in their duty if additional care was {{4-1-90 p.A-203}}not exercised. * * * and * * * were aware that * * * planned to transfer the funds to some person or entity since * * * informed them that his father planned to buy some receivables with the money. They also knew that the * * * were involved in additional business entities. A person exercising reasonable and ordinary care in administering the affairs of the bank would have pursued additional facts prior to approving the loan. Their lackadaisical attitude toward the loans certainly contributed to the violations.
   A reading of the minutes of the board of directors meetings from July 9, 1981, to November 11, 1982, inclusive, reflects that requests for loans presented to the board of directors were generally made after the person or entity had filed a loan application with the bank. Oral requests were highly unusual. While a loan application was not entered into evidence, it is safe to conclude that it requires more detailed information than required by the bank on the $500,000 loan participation. An oral request involving a loan of large sums of money to stockholders or officers of the bank should receive greater care than the normal loan application. A $500,000 loan should also receive more attention from the directors than a small loan.
   * * * represents that he "alone among the directors took numerous and extraordinary steps to seek correction of insider transaction problems at the Bank * * *." This representation is certainly not supported by the evidence of record. Much is made of the fact that * * * had several discussions with representatives of the FDIC, and that it was through these discussions that the FDIC commenced its initial review of Bank * * * financial transactions with * * * -related interests. The first visit occurred on October 8, 1981, with FDIC officials in Washington. The following day, he met with the Regional Director in * * *. The last visit apparently occurred on September 20, 1982 (Ex. A, B, C, D). A review of the memoranda prepared by FDIC officials as a result of the visits indicates that * * * expressed some concerns about the * * * family influence on bank affairs and was in hopes that the FDIC might take some regulatory action against the * * *. His motives for these visits are unknown. It appears he was desirous of having the FDIC aid him in his personal conflict with the * * *. He was a minority stockholder and obviously had some unresolved differences with the * * *.
   The actions leading to the violations in this case occurred on July 9, 1981, and August 27, 1981. The fact that * * * contacted the FDIC on October 8, 1981, does not erase the previous actions of the directors. It does not change * * * vote on the loans. If he were truly concerned, he could have voted "no" on approving the loans. At the meeting with the Regional Director for the FDIC on October 9, 1981, * * * stated that he felt the collateral on the $2,100,000 in loans was insufficient. The record is void of any action he took to seek corrective action. While he expressed his concern about loans to the * * * at the meeting on October 9, 1981, the record shows that a total of $550,000 was disbursed to * * * on November 9, 1981, November 17, 1981, November 20, 1981, and December 4, 1981. The record is void of any action he took to prevent these disbursements, or to seek possession on behalf of Bank * * * of the collateral pledged to secure the loan. On November 23, 1981, FDIC examiner * * * advised * * * and * * * that the outstanding loan balance to * * * was in violation of Regulation O. In spite of this clear warning, a further disbursement of $50,000 was made to * * * on December 4, 1981. Again, the evidence fails to reflect any action advocated by * * * to correct the violations.
   During the course of the FDIC examination of Bank * * * which resulted in the Report of Examination as of close of business on May 24, 1982, examiner * * * discussed his findings with * * *. On June 10, 1982, * * * informed the board of directors of the violations and that he would recommend civil money penalties be assessed against the directors. While * * * talked extensively over a period of several months about conditions at Bank * * * , he sought no corrective action by the board of directors. Talk is no substitute for action. His actions during the period up to the meeting on June 10, 1982, certainly do not reflect any "numerous and extraordinary steps" on his part to seek corrections of the violations.
   * * * argues that no penalty should be assessed against him since he knew nothing {{4-1-90 p.A-204}}concerning the violations until the board of directors meeting on June 10, 1982, at which time * * * informed the board he would recommend that civil money penalties be assessed. He points out that his responsibility as a member of the board of directors was to attend board meetings once a month and make decisions based on his business expertise and good judgment. He relied on the executives of the bank to carry out the details of any loans approved by the board of directors. Reliance upon officers or other directors to administer the affairs of a bank is not an absolute defense. See Heit v. Bixby, 276 F. Supp. 217 (E.D. Mo. 1967).
   * * * states that he voted for the $500,000 loan participation "on the assumption that $4,000,000 would be placed as security." The record does not indicate that he was concerned as to whether the kind of collateral being offered would qualify under section 23A of the Federal Reserve Act. Indeed, there is nothing to indicate that * * * or * * * had any inclination to question * * * concerning the transaction even though the request was made orally and details of the transaction were quite sketchy. His conduct concerning the transaction must be considered as passive. Since he relied on the representations of * * * without questioning any aspect of the loan, his argument that he had no knowledge must fall on deaf ears. He had the opportunity to learn the truth but, for whatever reason, declined to question any aspect of the transaction or to review any of the documentation after it was received by the bank. Where one is presented with an opportunity to learn the truth, he cannot ignore that opportunity and blindly rely upon another's representations where ordinary care would have revealed the truth. cf. FDIC v. Lauterbach, 626 F.2d 1327 (6th Cir. 1980).
   * * * further argues that the second loan was to * * * and that he had no way of knowing that this loan would be reclassified and "lumped" with the previous loan. He contends that the two transactions "were not later carried out as he voted for them." Details concerning the first loan were insufficient for him to assume that the collateral was appropriate to secure the loan or that the money was not flowing through * * * to some * * * related interests. The details concerning the loan to * * * showed that the stock pledged as collateral was pledged for a debt owed to the * * * Bank of * * * and that the stock was in the possession of the * * * Bank. There is nothing to indicate that Bank * * * was to get physical or constructive possession of the stock or that the value of the stock exceeded the debt owed * * * in a sufficient amount to adequately secure the debt to Bank * * *. The record simply reflects that * * * voted for the approval of the loans without exercising any care as to how the loans would be consummated. While it was not necessary for him to inspect the paper work, he had a duty to be more active in pursuing details during the discussions of the loans. He cannot passively sit by and then argue that he had no knowledge of any violations. His ignorance results from his own failure to actively pursue details concerning the loans. A director has a duty to investigate where investigation is necessary to protect the interests of shareholders. cf. DePinto v. Provident Security Life Insurance Co., 374 F.2d 37, 45 (9th Cir. 1967), cert. denied, 389 U.S. 822 (1967). * * * made no reasonable effort to ascertain the facts.
   Section 18(j)(3)(A) of the Act authorizes the FDIC to assess a $1,000 penalty per day for each day during which such violation continues. Since the violations continued for several months without correction, the penalties proposed by the FDIC are minimal and more than account for several mitigation factors in this case. These factors include the fact that the bank has not suffered in any way from the extension of credit; that, during the investigation, no effort was made to conceal facts surrounding the loans; and that there is no evidence of prior violations of insider transactions. A higher penalty is justified against * * * and * * *. They failed to advise the other board members of important features of the loans. In view of their ownership of * * *, they were obviously aware that their father was merely a conduit for the $2,100,000 loan of which Bank * * * agreed to participate to the extent of $500,000. The record fails to disclose why it was necessary to arrange the loan for * * * as though it was a loan to * * *. The form of the loan tended to disguise the true facts.
   After considering the factors specified by sect on 18(j)(3)(B) of the Act, the penalties proposed by the FDIC are sustained.

{{4-1-90 p.A-205}}
FINDING OF FACT

   1. The Bank * * *, ("Bank * * *"), is a corporation existing and doing business under the laws of the * * * having its principal place of business in * * *. Bank * * * is and was at all times pertinent to the proceeding an insured State nonmember bank (Tr. 23).
   2. * * * and * * * were at all times pertinent to the proceeding directors and principal shareholders of Bank * * * within the definition of the terms "director" and "principal shareholder" set forth at sections 215.2(c) and (j) of Regulation O, respectively (12 C.F.R. §§215.2(c) and (j)) (Ex. 1, at B; Ex. 2, at 30, 65–66; Ex. 4).
   3. * * * and * * * , were at all times pertinent to the proceeding directors of Bank * * * within the definition of the term "director" set forth at section 215.2(c) of Regulation O (12 C.F.R. §215.2(c)) (Ex. 2, at 30, 65, 66; Notice, at 2; * * * Answer, at 1). * * * was a minority shareholder and the chief executive officer of Bank * * * (Tr. 47, 99).
   4. * * * and * * * have at all times pertinent to this proceeding owned, respectively, one-third and two-thirds of the stock of * * * ("* * * ") (Ex. 2, at 72; Ex. 4; Tr. 13–14).
   5. * * * is an "affiliate" of Bank * * * as that term is defined by section 2(b) of the Banking Act of 1933, 12 U.S.C. §221a(b) (1976) (Ex. 1, at 12-a; Ex. 11, at 12-a and 12-a-1; Tr. 13). * * * father of respondents * * * and * * *, was an officer of * * * until his death subsequent to the actions of the board of directors of Bank * * * on July 9, 1981, and August 27, 1981 (Ex. 13, at 17–18; Tr. 165).
   6. On July 9, 1981, the board of directors of Bank * * * voted to approve a $500,000 participation in a $2,100,000 eighteen month loan originated by * * *. Directors * * * and * * * voted in favor of the participation (Ex. N; Ex. 2, at 65; Tr. 11, 13, 17, 37, 71–72, 114).
   7. The request for the loan participation and information pertaining to it were orally presented to the board by * * * (Ex. N; Tr. 37, 126–127, 164, 191). He presented the transaction as a loan to his father, * * * (Tr. 126, 165). No mention was made of * * * at the time the loan was presented (Tr. 165, 192).
   8. The July 9, 1981, minutes of the board of directors meeting contains the following comment concerning the loan participation (Ex. H):

   9. * * * was chairman of the board of directors of Bank * * * at the time the loan was approved on July 9, 1981 (Tr. 114, 131).
   10. There was no documentation available for review at the time the loan participation was approved on July 9, 1981 (Tr. 74, 132, 191). Loans normally presented to the board of directors for approval are as a result of a loan application being filed with the bank (Ex. N).
   11. The documents necessary for disbursement of the loan proceeds, including the loan agreement, were received by Bank * * * prior to disbursement of the funds on August 4, 1981 (Tr. 78, 80, 132).
   12. * * * executed a demand note dated July 25, 1981, for the $2,100,000 loan from * * * (Ex. 2, at 11; Tr. 26).
   13. The demand note and loan participation certificate make no reference to * * * (Ex. 2, pgs. 10, 11; Ex. H; Ex. I; Tr. 26).
   14. The loan agreement which is dated July 25, 1981, stated that it was between * * *, * * *, and * * *. Paragraph six of the agreement was as follows (Ex. 2, at 12–13):

DISTRIBUTION OF PROCEEDS OF NOTE will be made by Bank by check to * * * and * * *. Such check will be endorsed by * * * to * * *. {{4-1-90 p.A-206}}
15. Paragraph two of the loan agreement was as follows (Ex. 2, at 12–13):

SECURITY

A. * * * Floor Plans

B. * * * real estate

C. Bank stocks

   16. * * * signed the loan participation agreement on August 3, 1981 (Ex. 2, at 10; Tr. 12, 79). The funds were disbursed on August 4, 1981 (Ex. G).
   17. The book stock pledged as collateral for the loan by * * * had a book value of $1,196,110 (Ex. 2, at page 13; Tr. 15, 72). Bank * * * had a pro rata interest in the stock pledged as collateral (Ex. 2, at 10).
   18. * * * did not review the loan agreement prior to Bank * * * disbursing the $500,000 (Tr. 79).
   19. The $500,000 loan participation was outstanding from August 4, 1981, until at least December 21, 1982 (Ex. 10, at 2; Tr. 16, 80).
   20. On August 27, 1981, the board of directors of Bank * * * approved an extension of credit to * * * in the amount of $750,000 with directors * * * and * * * , voting in favor (Ex. 2, at 66; Tr. 16–17, 81). * * * and * * * abstained from voting on the loan since they were officers in * * * (Tr. 115, 135, 138). The loan was presented to the board by * * * (Tr. 171–172).
   21. The minutes of the board of directors meeting held on August 27, 1981, reflect the following facts concerning the * * * loan (Ex. 2, at 66; Ex. N):

sic

   22. The board of directors of Bank * * * on August 27, 1981, approved as an "insider transaction" an extension of credit to an interest of * * *, with * * * and * * * voting in favor (Ex. 2, at 66; Ex. N; Tr. 83).
   23. Companies owned by * * * did a considerable amount of business with the bank (Tr. 184-185).
   24. The $750,000 extension of credit to * * * was represented by a promissory note from * * * to Bank * * *. The note was signed by * * * , president, on behalf of * * * (Ex. 2, at 31; Ex. K). A loan agreement dated September 2, 1981, was executed by * * * on behalf of * * * and * * * , on behalf of Bank * * * (Ex. L; Ex. 2, 50–51).
   25. The $750,000 loan was to be secured by a one-third interest in 270,100 shares of stock in * * * (Ex. 2, at 31, 50-51; Ex. K; Ex. L). * * * did not own the stock that was to secure the debt. The stock was owned by * * * and by * * * (Tr. 88-89). Neither * * * nor * * * entered into any security agreement with Bank * * * with respect to this stock (Tr. 85–89).
   26. Examiner * * * visited Bank on November 23, 1981. He advised * * * and vice-president * * * that the outstanding balance extended to * * * was in violation of Regulation O (Ex. 2, 3; Tr. 18–19, 21, 22, 24-25, 115-116).
   27. The November 23, 1981, visit to Bank * * * was made as a result of some concern * * * , expressed to * * * supervisor (Tr. 25, 35–36).
   28. Bank * * * did not obtain physical or constructive possession of the stock that was to secure the $750,000 loan. The stock was pledged at the * * * and was in possession of that bank (Ex. N; Tr. 82). Prior to the first disbursement of the $750,000 loan to * * * Bank * * * acquired financial information {{4-1-90 p.A-207}}reflecting operating losses for * * * for the year ended April 30, 1981, in excess of its operating profits in the two preceding years (Tr. 84). During this approximate time period, * * * net worth declined by approximately one-half, being nearly $3,000,000 on December 31, 1980, and approximately $1,500,000 in July of 1981 (Ex. F; Tr. 126, 165).
29. Proceeds of the $750,000 loan were disbursed as follows (Ex. 2, at 54–58):

(a) October 8, 1981	$200,000
(b) November 9, 1981	$100,000
(c) November 17, 1981	$315,000
(d) November 20, 1981	$85,000
(e) December 4, 1981	$50,000
	$750,000

The check dated November 17, 1981, disbursing $315,000 of the $750,000 was signed by * * * (Tr. 98). 30. Bank * * * total credit outstanding to * * * was as follows (Ex. 2, at 3, 54–58; Ex. 10, at 2; Tr. 16):

July 25, 1981, to October 7, 1981	$500,000
October 8, 1981, to November 8, 1981	$700,000
November 9, 1981, to November 16, 1981	$800,000
November 17, 1981, to November 19, 1981	$1,115,000
November 20, 1981, to December 3, 1981	$1,200,000
December 4, 1981, to December 21, 1981	$1,250,000

30. (sic) During the course of the FDIC examination of Bank * * * which resulted in a Report of Examination as of close of business on May 24, 1982, examiner * * * discussed findings throughout the examination with president * * *, and vice-president * * *. No discussions were held with * * * (Tr. 9–10, 62).

   31. On June 10, 1982, * * * attended the board of directors meeting held on that date and discussed the alleged violations set forth in his Report of Examination as of the close of business on May 24, 1982. Directors * * * * * * and * * * , were present at the meeting. * * * informed the board that he would recommend that civil money penalties be assessed against the directors (Ex. N; Tr. 10, 18, 46, 67, 116).
   32. On October 13, 1982, examiner * * * returned to the Bank * * * to ascertain if corrective action had been taken (Ex. 2; Tr. 19, 20). Bank * * * had not obtained possession of the stock, and there had been no payments made on the loans (Ex. 2; Tr. 20).
   33. As a result of the October 13, 1982, visitation, examiner * * * proposed to the Regional Director, FDIC, that civil money penalties would be appropriate (Ex. 2; Tr. 21).
   34. The Regulation O lending limit is calculated as follows: Using the June 30, 1981, report of condition (total equity capital of $7,359,000), the lending limit on August 27, 1981, was ten percent of the sum of that amount and the reserve for loan losses on August 27, 1981 ($675,122), or $803,412 (Ex. 5, at 5; Ex. 12).
   35. Bank * * * "capital and surplus," within the meaning of section 23A of the Federal Reserve Act on November 17, 1981, was the sum of its total capital accounts ($7,564,332) less capital notes ($700,000), plus current earnings ($624,796) and its reserve for loan losses ($661,769) or $8,150,897 (Ex. 12).
   36. Bank * * * "capital and surplus," within the meaning of section 23A of the Federal Reserve Act on November 20, 1981, was the sum of its total capital accounts ($7,564,332) less capital notes ($700,000), plus current earnings ($635,495) and its reserve for loan losses ($661,769), or $8,161,596 (Ex. 12).
   37. Bank * * * "capital and surplus," within the meaning of section 23A of the Federal Reserve Act on December 4, 1981, was the sum of its total capital accounts ($7,564,332) less capital notes ($700,000), plus current earnings ($659,631) and its reserve for loan losses ($653,068) or $8,177,031 (Ex. 12).

CONCLUSIONS OF LAW

   1. The $500,000 extension of credit to * * * was made in violation of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c (1976), in that it was not secured by the kind and amount of collateral required to be provided.
   2. The disbursements of $315,000 on November {{4-1-90 p.A-208}}17, 1981, $85,000 on November 20, 1981, and $50,000 on December 4, 1981, violated section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c (1976), in that each of them, together with previous disbursements, exceeded ten percent ($815,090, $916,160, and $817,703, respectively) of Bank * * * capital and surplus on the respective dates ($8,150,897, $8,161,596, and $8,177,031).
   3. The $750,000 extension of credit to * * * was made in violation of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. §371c (1976), in that it was not secured by the kind and amount of collateral required to be provided.
   4. The $750,000 extension of credit to * * * was made in violation of the lending limit of section 215.2(f) of Regulation O, 12 C.F.R. §215.2(f), in violation of section 215.4(b) of Regulation O, 12 C.F.R. §215.4(c) and section 22(h)(1) of the Federal Reserve Act, 12 U.S.C. §375b(1) (Supp. V 1981).
   5. The $500,000 extension of credit to * * * was made in violation of section 215.4(b) of Regulation O, 12 C.F.R. §215.4(b) and section 22(h)(2) of the Federal Reserve Act, 12 U.S.C. §375b(2), in that * * * voted in favor of the loan.
   6. The violations set forth in paragraphs one through five occurred from the failure of directors * * * and * * * to exercise ordinary care and prudence in the administration of the affairs of Bank * * *.
   7. The violations were of such gravity that the following civil monetary penalties are warranted pursuant to section 18(j)(3)(A) of the FDIC Act, 12 U.S.C. §1828(j)(3)(A):

Director	Monetary Penalty
* * *	$5,000
* * *	$5,000
* * *	$1,000
* * *	$1,000

PROPOSED ORDER

Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the following ORDER be entered by the Board:
ORDERED: 1. That, by reason of violations determined against * * * , * * * , * * * and * * * individually, the following penalties are assessed against each of them pursuant to the provisions of section 18(j)(3)(A) of the Act, 12 U.S.C. § 1828(j)(3)(A):

Director	Assessed Penalty
* * *	$5,000
* * *	$5,000
* * *	$1,000
* * *	$1,000

2. That the civil monetary penalties assessed against each of the named individuals shall not be paid directly or indirectly by the Bank * * * but shall be paid directly by the individual against whom the penalty is assessed.
Dated this 21st day of October, 1983.

/s/ James D. Burroughs
Judge
1365 Peachtree Street, N.E.
Room 240
Atlanta, Georgia 30309
FTS: 257-4197
(404) 881-4197

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