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FDIC Enforcement Decisions and Orders

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   [5026] FDIC Docket No. FDIC-83-152e and -83-153e (Consolidated Action) (7-9-84)

   FDIC removed bank officers and directors and prohibited them from further participation in the affairs of the bank for extending credit without disclosure to the entire board of directors, for granting unauthorized credit in excess of the bank's legal lending limit, and for failing to take effective action to prevent further extensions of unauthorized credit. (Further proceedings in FDIC-83-153e appear at [¶5117]; this decision was affirmed by the U.S. Court of Appeals for the Eighth Circuit, 747 F.2d 1198 (1984)).

   [.1] Directors—Duties and Responsibilities—Informing Other Directors
   Bank directors have a duty to inform their follow directors of dangers to the bank, and failure to do so is a breach of a director's fiduciary duty.

   [.2] Prohibition, Removal, or Suspension—Extending Unauthorized Credit
   Directors found to have breached their fiduciary duties must be removed not only from their positions as directors, but also from their positions as officers of the bank.

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   [.3] Unposted Debit—Check
   An unposted debit includes a check that would normally be posted against an individual's checking account but is not.

   [.4] Extension of Credit—Unposted Debit
   Unposted debits held by a bank for more than one business day become extensions of credit for the benefit of the account holder.

   [.5] Extension of Credit—Unsafe or Unsound Practices
   The extension of credit to a borrower through the practice of holding or failing to post or charge debit items against the borrower's record of account for two or more consecutive days is an unsafe or unsound banking practice.

   [.6] Extension of Credit—Improper Entries in Bank Records
   The extension of credit for the benefit of a borrower through the practice of making improper entries or failing to make entries on a bank's record of its correspondent account is an unsafe or unsound banking practice.

   [.7] Directors—Duties and Responsibilities—Correction of Violations
   Bank directors' failure to take appropriate action to effectively curb or otherwise curtail the violations of law and unsafe or unsound practices, and their failure to disclose all of the facts and circumstances surrounding such violation and unsafe or unsound banking practices to all members of the bank's board of directors for a period of six months, constitutes a breach of their fiduciary duties as bank directors, demonstrating a continuing disregard for the safety and soundness of the bank.

In the Matter of * * * and * * * BANK
OF * * * (INSURED STATE
NONMEMBER BANK)


DECISION AND ORDERFDIC-83-152e
and -83-153e
[Consolidated Action]

STATEMENT OF THE CASE

   These proceedings arise under Section 8(e)(1) of the Federal Deposit Insurance Act (the "Act") (12 U.S.C. § 1818(e)(1)). On July 5, 1983, the Federal Deposit Insurance Corporation ("FDIC" and "Proponent") issued Notices of Intention to Remove from Office against * * * and * * * ("Respondents"), pursuant to Section 8(e)(1) of the Act and Part 308 of the FDIC Rules of Practice and Procedures (12 C.F.R. Part 308). The Notices charged the Respondents, in their capacities as officers1 and directors of the Bank of * * * , (the "Bank") with engaging in unsafe or unsound banking practices, violations of law, or breaches of their fiduciary duties which evinced a willful or continuing disregard for the safety and soundness of the Bank. The Notices also alleged that the Bank had or probably would sustain substantial financial loss or other damage as a result of the Respondents' conduct. Respondents filed Answers on July 25, 1983, admitting certain allegations contained in the Notices, and denying others.
   A formal hearing was conducted from November 15 to November 23, 1983, in * * * , before Administrative Law Judge James P. Timony (the "ALJ"). The FDIC submitted a brief containing its proposed findings of fact, conclusions of law, and order on February 3, 1984. The Respondents also submitted their proposed findings of fact, conclusions of law, and brief on February 3, 1984. The FDIC submitted a reply brief on February 15, 1984; on the same date, the Respondents submitted their reply brief. On March 22, 1984, the ALJ issued his Recommended Decision; a copy is attached. The FDIC filed exceptions to the Recommended Decision on April 20,


1 At the time the Notices were issued, Respondent * * * held the office of Assistant Cashier and Respondent * * * that of Vice President of the Bank. During the summer of 1983, Respondent * * * resigned from his position as Assistance Cashier. Respondent * * * has continued to be Vice President, and both Respondents have continued as directors of the Bank. Findings of Fact, no. 117.
{{4-1-90 p.A-268}}1984; the exceptions filed by the Respondents are undated.

BACKGROUND

   Based on examinations, the FDIC alleged that the Respondents had demonstrated "a willful and/or continuing disregard" for the safety or soundness of the Bank, and had breached their fiduciary duties as officers and directors, as evinced in the following acts, practices, or omissions:

       (1) Beginning on or before March 9, 1982, and continuing until December 3, 1982, Respondents knew or should have known of overdrafts and other unposted debits granting unauthorized credit in excess of the Bank's legal lending limit to Bank customer * * *.
       (2) From on or before March 9, 1982 until December 3, 1982, Respondents failed to disclose the existence of the unauthorized extensions of credit to the entire board of directors of the Bank.
       (3) From March 9, 1982 until December 3, 1982, Respondents failed to take effective action to prevent the further extension of credit to * * * by the Bank.
   The Respondents essentially did not contest the facts upon which the charges were based, but took exceptions to the legal conclusions drawn therefrom. The Respondents argued that they had not breached their fiduciary duties by relying upon the representations of their then-fellow director, * * * , cashier of the Bank, who extended the credit to * * * that they had had no duty to notify the FDIC or the state regulatory authorities of * * * 's unauthorized extensions of credit; and that to have informed the other directors of * * * 's activities would not have prevented the loss to the Bank upon * * * 's default.
   The FDIC maintained that the loss to the Bank had been caused by the Respondents, either through breaches by Respondents of their fiduciary duties as officers and directors, or through their participation in unsafe or unsound practices or violations of law in operating the Bank. The FDIC accordingly requested that the Respondents be removed from their capacities both as officers and directors of the Bank, and that they be prohibited from further participation in any manner in the conduct of the affairs of the Bank.

ANALYSIS OF THE ALJ'S
RECOMMENDED DECISION

   There is no genuine dispute as to the facts in these proceedings. The fundamental issue is whether the remedy sought by the FDIC (removal of Respondents from their positions as both officers and directors of the Bank, and the barring of Respondents from further participation in the conduct of the affairs of the Bank) is appropriate to the facts and circumstances.
   The Respondents argued that their faith in and reliance upon Cashier * * * , who made all the unauthorized extensions of credit to * * * , was reasonable and prudent because * * * was their longtime friend and business associate. They disputed the allegation that they "knew or should have known" of * * * 's extensions of credit to * * * during the summer and fall of 1982. The Respondents denied the existence of a duty to notify the FDIC or * * * authorities about * * * activities. They asserted that they breached no duty in failing to inform the other directors of the unauthorized extensions of credit, because the other directors were incapacitated and inactive in the affairs of the Bank, and that to have informed them would have changed nothing. Finally, the Respondents took the position that the "willful or continuing disregard" standard of Section 8(e)(1) embodies but one standard of conduct; and that, regardless of whether one or two standards of conduct are addressed in that subsection, no "continuing disregard" on the part of the Respondents for the safety and soundness of the Bank has been demonstrated in these proceedings.
   The FDIC argued that the failure of the Respondents to take action effective to curb or curtail the extensions of credit in excess of the Bank's legal lending limit, and the failure of the Respondents to disclose the unauthorized extensions of credit to the other directors, constituted breaches of the Respondents' fiduciary duties. It was further contended by FDIC that the Respondents had participated in the illegal practices, largely by approving notes signed by * * * in excess of the lending limit to replace unposted debits. The FDIC took the position that "willful or continuing disregard" constitutes two distinct standards, with "continuing disregard" being a lower standard than "willful disregard", and that the Respondents, through their acts and {{4-1-90 p.A-269}}omissions, had demonstrated a "continuing disregard" for the safety and soundness of the Bank. As a result of the Respondents' continuing disregard for the Bank's safety and soundness, the FDIC alleged, the Bank had already suffered substantial financial loss and was likely to sustain additional losses.
   The ALJ's Recommended Decision is, in the main, in agreement with the positions advanced by the FDIC, with the important exception of the remedy proposed by Judge Timony.
   As a threshold matter, the ALJ addresses the dispute as to whether "willful or continuing disregard" is one or two standards of conduct. He concludes that two standards are involved, with "willful" being a higher standard than "continuing", but that even "continuing" disregard entails the necessity to prove knowledge (Recommended Decision, pp. 15–16).
   The ALJ then proceeds to review the facts. He notes that the Respondents had been warned about overdrafts and extensions of credit by an FDIC examiner in May, 1980. Specific criticisms of extensions of credit and overdrafts made to * * * were made by FDIC examiners in June and July, 1981. The Respondents had entrusted all extensions of credit to * * *. During 1981 and 1982, the Respondents knew of * * * 's continuing and ever-increasing extensions of credit to * * *. The Respondents confronted * * * repeatedly, but each time accepted his assurances and did nothing further to put a stop to the lending to * * *.
   By December, 1982, the total credit extended to * * * equalled sixty-seven percent of the Bank's capital and reserves. Neither the other directors nor the regulatory authorities were informed of the extensions of credit until December, 1982; the regulatory authorities were not told of the state of affairs until the examination of the Bank that month. The credit extended to * * * was all classified "loss" or "substandard" by the Bank by December 3, 1982. In February, 1983, the Respondents learned that the collateral which was supposed to secure the loans to * * * no longer existed, and that * * * had filed a petition for bankruptcy. As of August 5, 1983, the Bank was no longer accruing interest on its books.
   Judge Timony concludes that both Respondents failed in their fiduciary duties as directors by "continually disregarding the safety or soundness of the Bank which resulted in substantial loss to the Bank (Recommended Decision, p. 17); and that they "failed to give ordinary attention to their duties as directors of the Bank" (Recommended Decision, p. 18). The warnings of banking regulators in 1980 and 1981 called for "greatly increased vigilance" on the part of the Respondents. They had imprudently entrusted one man, * * * , with exclusive power to extend credit. They knew of * * * 's extensions of credit to * * * from August, 1981, to May, 1982, and knew or should have known of * * * 's continued extensions of credit during the summer and fall of 1982. The Respondents, nonetheless, allowed themselves to be misled by * * * "dozens of times" and "their gullibility endangered the Bank." (Recommended Decision, p. 18.)
   The ALJ sees no participation by the Respondents in illegality. The FDIC had argued that the Respondents had participated in illegal practices by approving notes signed by * * * in excess of the lending limit to replace unposted debits. The ALJ concludes that "(t)his was better than leaving the debits undocumented", once the credit had been extended (Recommended Decision, footnote 7, p. 20).
   The ALJ accepts the contention of the Respondents that the record does not show that telling the other directors would have stopped * * *. He agrees with the FDIC, however, that the Respondents did have a duty to inform the regulatory authorities "Once they determined that * * * 's activities endangered the security of the Bank, Respondents had a duty to draw the matter to the attention of stockholders as well as regulatory officials." (Recommended Decision, p. 19). In support of this conclusion, Judge Timony cites De Pinto v. Provident Sec. Life Insurance Co., 374 F.2d 37, 44 (9th Cir. 1967), cert. denied, 389 U.S. 822 (1967). Judge Timony finds that "Respondents' recklessness caused a substantial loss to the Bank," evincing a "continuing disregard" for its safety and soundness in violation of section (8)(e)(1). (Recommended Decision, p. 20).
   Administrative Law Judge Timony then states that the Respondents did not breach their duties as officers. He therefore recommends an order limiting their removal to {{4-1-90 p.A-270}}their capacities as directors, allowing the Respondents to remain as officers of the Bank of * * * . Observing that the case at hand demonstrates the risks inherent in a board of directors made up entirely of insiders, the ALJ also `encourages respondents to vote their stock in favor of outside directors." (Recommended Decision, p. 20.)

DECISION

   Upon review of the record as a whole in these proceedings, the FDIC's Board of Directors adopts that portion of the ALJ's Recommended Decision preceding the proposed remedy and order in its entirety, except as noted below. The FDIC's Board adopts the remedy and order2 requested by the FDIC, removing the Respondents from their positions as both officers and directors of the Bank, and prohibiting them from further participation in any manner in the conduct of the affairs of the Bank.
   The FDIC has established by overwhelming evidence that the Respondents abdicated their fiduciary duties and responsibilities in favor of Cashier * * * , a man who repeatedly demonstrated his untrustworthiness by continuing to extend large amounts of credit to a single Bank customer in excess of the Bank's legal lending limit. The Respondent knew that * * * was continually disobeying their orders to stop these extensions of credit; and, while they confronted him several times, each time they accepted his excuses and assurances and took no action to stop him.

   [.1] The FDIC's Board also finds that the Respondents breached their fiduciary duties in failing to inform the other two directors of * * * 's deeds before December, 1982. While the ALJ may be correct in assuming that Chairman * * * and President * * * would have taken no action to stop * * * , due to their various infirmities, this is no more than speculation, and does not excuse the Respondents from their duties to inform their fellow directors of the danger to the Bank.3
   The ALJ's conclusion that the Respondents' approval of the notes signed by * * * in excess of the lending limit to replace unposted debits was preferable to leaving the debits undocumented, once the credit had been extended, is supported by the testimony. (Transcript, pp. 723-724).
   In light of his conclusion that the Respondents' inattention to their duties, in failing to heed the warnings of FDIC examiners, in entrusting * * * with sole control of extensions of credit, and in failing to put a stop to * * * 's conduct, amounted to "recklessness" (Recommended Decision, p. 20), Judge Timony's conclusion that the Respondents should be allowed to continue as officers of the Bank is puzzling. The breach by the Respondents of their duties as directors is sufficient to justify their removal from all Bank offices held by them under Section 8(j) of the Act.

   [.2] Under Section 8(j), as the FDIC points out in its exceptions, one who has been removed from any office pursuant to Section 8(e) may not "serve... or act ... as a director, officer, or employee of any bank" without the prior written approval of the FDIC, under threat of criminal penalty. The removal of one found in violation of Section 8(e) from all offices held by him is thus explicitly contemplated by Section 8(j). Therefore, the removal of the Respondents not just from their posts as directors, but from their positions as officers as well, is the remedy called for in the law and appropriate to the facts and circumstances.
   Section 8(j) also renders inappropriate that portion of the ALJ's proposed order which, in the words of the Recommended Decision, "encourages respondents to vote their stock in favor of outside directors" (Recommended Decision, p. 20). Section 8(j) provides criminal penalties for any person removed from office under Section 8(e) who "votes for a director" without the prior written approval of the FDIC. Section 8(j) further provides that one removed under Section 8(e) may not "participate ... in any manner in the conduct of the affairs of the bank involved."
   Accordingly, the remedy and the order proposed by the ALJ, insofar as they call for removal as directors as the only sanction against the Respondents, are not adopted by the FDIC's Board of Directors.


2 As appropriately modified; see discussion of Order below.

3 Because the FDIC's Board finds that the Respondent breached their duties in failing to inform their fellow directors, the FDIC's Board does not reach the issue of whether the Respondents, had they tried and failed to secure corrective action by the Bank's full board of directors, would then have had a duty to inform the regulatory authorities of * * * 's activities.
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Findings of Fact

   The FDIC's Board of Directors adopts the Findings of Fact of the ALJ in their entirety.

Conclusions of Law

   The ALJ did not provide any specific conclusions of law in his Recommended Decision. Inasmuch as the ALJ supported the FDIC's position to the extent reflected in the FDIC's Proposed Conclusions of Law, save for paragraphs 5 and 6 and portions of paragraph 8 and paragraph 9, it is appropriate to accept the conclusions of law proposed by the FDIC, with appropriate modifications. Paragraph 5 and 6 and the following words in paragraph 8, "and their participation in the violations of law and unsafe or unsound practices described above," and in paragraph 9, "and participation in the violations of law and unsafe or unsound practices described above," should be omitted, as they pertain to the Respondent's approval of notes signed by * * * in excess of the lending limit to replace unposted debits, and are not supported by the ALJ's Findings of Fact.

Order

   The order proposed by the ALJ, which would allow the Respondents to retain their voting rights and their positions as officers, is rejected; and the FDIC's proposed order, which would strip the Respondents of their capacities as officers4 and directors and prohibit them from further participation in any manner in the conduct of the affairs of the Bank, is adopted, with the reference to participation in illegality stricken, for the reasons which appear in the above discussion.

EXCEPTIONS

   The parties submitted exceptions to the ALJ's Recommended Decision. A review and consideration of these exceptions follows.

Proponent's Exceptions

   The FDIC filed fairly lengthy exceptions to the Recommended Decision. Although these exceptions will not be discussed individually, the salient points of the FDIC's arguments will be presented and addressed here.
   The chief objection of the FDIC, reflected in the majority of its exceptions, is to the ALJ's finding that the Respondents did not breach their fiduciary duties as officers, and to his proposed retention of the Respondents in their capacities as officers. The FDIC further objects to the ALJ's recommendation as to the Respondents' voting rights. Because the FDIC has made a compelling argument as to the inappropriateness of the remedy proposed by the ALJ, the order proposed by the FDIC, as appropriately modified, has been adopted by the FDIC's Board of Directors.
   FDIC also takes exception to the ALJ's implied conclusion (by concluding that informing the other directors would have been ineffectual) that the Respondents had no duty to inform their fellow directors of * * * 's activities. The FDIC is correct in arguing that the hypothetical failure of the Respondents' fellow directors to take action to thwart * * * does not excuse the Respondents from their duty to inform them.
   The FDIC's argument that the Respondents engaged in and/or participated in the illegal extensions of credit is rejected for the reasons given by the ALJ in footnote 7, page 20, of his Recommended Decision, which are discussed earlier in this Decision and Order.

Respondents' Exceptions

   The Respondents dispute not the factual findings of the ALJ, but the conclusions he draws from them.
   The Respondents argue that their failure to put a stop to Cashier * * * 's illegal extensions of credit did not constitute a continuing disregard for the safety or soundness of the Bank. They concede the substantial loss to the Bank, but deny responsibility for it. The ALJ's discussion of the events, and the facts of the record itself, convincingly refute this bare assertion. The Respondents deny that they knew or should have known of * * * 's extensions of credit during the summer and fall of 1982, but do not point to any portion of the record in support of this claim.


4 Because Respondent * * * resigned his office (that of Assistant Cashier) before the administrative hearing, the Order removes him only from his directorship, but bars him from any further participation in the conduct of Bank affairs, as it does Respondent * * *.
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   The bulk of the Respondents' exceptions attempt to justify the Respondents' reliance upon Cashier * * * as "not unreasonable," because he was "a life-long friend, business associate, and co-owner of the Bank" (Respondents' Exceptions, p. 2). Their satisfactory relationship with * * * before the advent of the * * * line of credit "make their reliance on his continued representations reasonable" (Respondents' Exceptions, p. 4). Such continued reliance cannot be deemed reasonable, however, in light of * * * continued extensions of credit to * * * in defiance of the Respondents.
   The Respondents argue finally that their breaches of fiduciary duty, "if any, were not willful" (Respondents' Exceptions, p. 5). As outlined in the ALJ's Recommended Decision at pages 15 to 16, "willful disregard" is not required to establish a violation of section 8(e); proof of the alternate and lesser standard of "continuing disregard" is sufficient. That the Respondents evinced a continuing disregard for their fiduciary duties by failing to take any action to prevent substantial losses to the Bank is demonstrated abundantly by the facts in these proceedings.

FINDINGS OF FACT

   1. general findings
   1. The events in this case took place from June 1981 through 1982. (F. Stip. 1) Unless otherwise indicated the time period of these findings will be during that time.
   2. The Bank is a corporation doing business under the laws of * * * and has its place of business at * * *. (Notices para. 1; Answers para. 1)
   3. The Bank is an insured state-chartered bank, which is not a member of the Federal Reserve System, subject to the provisions of the Federal Deposit Insurance Act. (Notices para. 1; Answers para. 1)
   4. * * * , is a small community of six hundred people. The Bank of * * * is the only bank in * * * and supports the town. (Tr. 533-34, 537)
   5. The Bank of * * * had total assets at the time of the FDIC's December 3, 1982 examination of $19,505,000. (Ex. 7 p. 2) The Bank had 16 employees. (Tr. 748)
   6. From June 1981 through 1982 the board of directors of the Bank was comprised of respondents * * * and * * * , * * * (who was also president of the Bank), * * * (who was also cashier of the Bank), and * * * . Respondents * * * and * * * presently serve as directors of the Bank. (F. Stip. 3-5; Ex. 2 at B, Ex. 9A p. 1)
   7. The Bank is owned predominantly by members of the * * * and * * * families. The familial relationships and ownership interests of the various members of the board of directors are indicated in the following chart (Ex. 2 p. B):

names of thenumbers of sharesnumbers of shares
board membersowned outrightowned jointly
* * * , Chairman of the
Board, mother of respon-
dent * * *16173
* * * , Vice President59311
* * * , President, father
of respondent * * * and
uncle of Cashier * * *21220
* * * , Cashier762
* * * , Asst. Cashier760

   8. The Bank has 1,000 shares outstanding. (Ex. 2 p. 10) The * * * family owns 533 shares. (Ex. 2 p. 10, Ex. 18 p. A, Ex. 7 p. A) In the last election of directors, 835 shares were voted. (Ex. 2 p. 10)
   2. management of the bank
   a. * * *
   9. Pursuant to the Bank's bylaws "the active business management at this bank shall be in the hands of the Cashier, or during his absence or disability, the Assistant Cashier, under supervision of the {{4-1-90 p.A-273}} Board of Directors." (Ex. A p. 7; Article 2, Section 6)
   10. The Cashier of the Bank during 1981 and 1982 was * * *. In practice as well as pursuant to the bylaws, * * * , as cashier, had more authority over the day-to-day operations of the Bank than did its president or any other officer. (Tr. 525)
   11. * * * 's responsibility included being in charge of the loan functions of the Bank and in charge of its operations, including responsibility for computer and posting functions. (Tr. 526)
   12. * * * had twenty-two years of experience with the Bank, (Tr. 528) had been a member of the board of directors since January 1971, and had been the cashier since 1975. (Tr. 672)
   b. * * *
   13. * * * was the president of the Bank during 1981 and 1982. He had been associated with the Bank since 1946 and a member of its board of directors since 1955. (Ex. 2 p. B) * * * assumed the presidency of the Bank in 1971 from * * * , respondent * * * 's father. * * * had been the president of the Bank for thirty years. (Tr. 524)
   14. President * * * has been an alcoholic whose illness diminished his capacity to perform his functions within the Bank. (Tr. 534) He also suffered from diabetes and high blood pressure. (Tr. 704-05) During 1982, his title was "titular due to limited participation in daily affairs." (Ex. 7 p. A) He resigned on August 1, 1983. (Ex. 18 p. B)
   c. * * *
   15. * * * was the chairman of the board, elected to that position in January 1979 to replace her husband, * * * , who was sick and unable to attend meetings and later died. Mrs. * * * 's health was not good and she was "a director of convenience." Mrs. * * * is the mother of * * * and was eighty years old during 1982. (Ex. 2 p. B; Tr. 704, 729, 838, 1032)
   d. * * *
   16. * * * , a respondent herein, was born and raised in * * *. He graduated from high school in * * * , and has had no further formal education. After high school he entered the Air Force where he served for four years. (Tr. 661-62)
   17. Respondent * * * joined the Bank as an employee in 1961. (Tr. 662) He was already on the board of directors when he began his employment with the Bank. (Tr. 663) During 1981-82 he was vice president and his duties included management of the Bank's investments and securities. (Tr. 525) He was the fourth most active lending officer behind, in descending order, * * * , * * * , and * * *. (Tr. 527) At the time of the hearing, respondent * * * was fifty years old. (Ex. 7 p. B)
   e. * * *
   18. Respondent * * * is the son of the president, * * * , and a first cousin of Cashier * * *. He was raised in * * * , graduated from high school there and then obtained a B.S. degree in business administration from Northern State College of Aberdeen. Upon graduation, he returned to * * * and began work at the Bank. He worked for the Bank for about six months, at which time he took over the Bank's affiliated insurance agency. (Tr. 1005-07)
   19. Thereafter, respondent * * * spent approximately ninety percent of his time running the Bank's affiliated insurance agency and only ten percent of his time working within the Bank. (Tr. 525) He was elected to the board of directors of the Bank in 1975. (Tr. 1009) In its 1981 report, the FDIC noted that * * * is "not considered a factor in management." (Ex. 2 p. B) Although he was assistant cashier in title, he did not, in fact, take over management of the Bank in the absence of Cashier * * *. (Tr. 537) At the time of the hearing, respondent * * * was thirty-two years old. (Tr. 1004)
   3. management style
   20. Day-to-day management of the Bank of * * * has been informal. In the early and mid-1970s the then officers of the Bank, * * *, * * *, * * * and * * * would meet informally and intermittently either before or after work to discuss business. (Tr. 673, 745) No formal management meetings were held. (Tr. 673)
   21. Even these informal meetings trailed off in the late 1970s and on into the 1980s. During this latter period, as * * * 's disease got worse, the officers occasionally talked to one another about some things but each officer took care of his own duties. (Tr. 673-74, 746)
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   4. respondents and * * *
   22. * * * began his employment at the Bank six months before respondent * * * in 1961. (Tr. 671) * * * and * * * worked side by side for twenty-two years. Up until the events leading to this hearing, * * * never had any reason to doubt * * * integrity or ability. (Tr. 707, 740, 853) * * * considered * * * to be a friend. (Tr. 736)
   23. * * * was respondent * * * 's first cousin and * * * 's nephew. Respondent * * * and * * * were close in age and, prior to the events involved in this hearing, * * * considered * * * as close as anyone to being his brother. Their families socialized together and he and * * * hunted and fished together. Up until the events leading to this hearing, respondent * * * never had reason to doubt * * * 's integrity or ability. (Tr. 1017, 1033)
   5. extension of credit to * * *
   24. * * * was a customer of the Bank of * * *. Both respondents had known * * * all of his life. * * * is also a lifetime resident of * * *.
   25. Respondents first became aware of * * * as a client of the Bank in the middle 1970s. (Tr. 675, 1014) * * * dealt exclusively with * * * at the Bank and never contacted either of the respondents as bank employees. At that time * * * was a dairy farmer. Respondent * * * was first aware that * * * 's credit demands began to exceed those of a normal dairy farmer in 1979. (Tr. 676) * * * was then involved in a Holstein cattle export business. (Id.)
   26. * * * 's demand for credit began to exceed the lending limit of the Bank of * * * and loans in excess of the lending limit of the Bank were participated with * * * Bank of * * *. (Tr. 677)
   27. In 1982, * * * maintained a note in the approximate amount of the Bank of * * * 's lending limit. (Ex. 10C)
   28. In addition to the note, the Bank of * * * , through its cashier, * * * , extended additional credit to * * * by abnormal methods and amounts throughout 1982. * * * extended credit to * * * through unsafe practices including not posting debits, holding items in the * * *. Correspondent account and allowing checking account overdrafts for * * *. (Exs. 11–14; Tr. 287-92, 578, 684, 779, 1061-62; Ex. 22 at 1-2)
   29. At no time was credit ever extended in the first instance to * * * by either of the respondents. (Tr. 739, 1058) Credit extended to * * * was solely controlled by Cashier * * *. (Tr. 326)
   a. unposted debits

   [.3] 30. An unposted debit includes a check that would normally be posted against an individual's checking account but is not. (Tr. 39, 687-88)

   [.4] 31. Unposted debits held by a bank for more than one business day become extensions of credit for the benefit of the account holder. (Tr. 39–40)
   32. Respondent * * * was responsible for preparing return check slips in the Bank. Return check slips note returned checks and are processed by the Bank through its proof machine and posting room. (Tr. 686-88)
   33. A returned check in the amount of $29,000 was unusually high in the Bank of * * *. (Tr. 958-60)
   34. * * * was responsible for reviewing and disposing of unposted debits. (Tr. 326, 688)
   35. Credit extended through unposted debits prevents the board of directors from supervising compliance with a bank's legal lending limit. (Tr. 55-56)
   b. warnings of violations
   36. On May 19, 1980, the directors of the Bank, including respondents, signed a Memorandum of Understanding ("Memorandum") with the FDIC and * * * and agreed to control overdrafts and extensions of credit and to assure that the actions of Bank officers are reviewed and in conformance with adopted policies. (Notices para. 11(a); Answers para. 11(a); Ex. 4; Tr. 757-58)
   37. The FDIC Report of Examination of June 19, 1981 criticized the Bank's violations of lending limits, including the * * * line, and overdrafts. (Ex. 2 at 1 and 1a; Tr. 37, 44–45)
   38. Carrying unposted debit items for more than one business day was criticized in the June 19, 1981 Report. (Ex. 2 at 1-a-2 and 13-a; Tr. 40–41.) The Bank had extended credit to * * * in the form of notes and an unposted debit which totaled $172,557, an apparent violation of the Bank's legal lending limit under * * * law. (Notices para. 11(b); Answers para. 11(b); Ex. 2 at 1-a-2 and 1-c; Tr. 37)
   39. The findings of the June 19, 1981 examination were reviewed by the Bank's board of directors on July 14, 1981.

{{4-1-90 p.A-275}}
(Notices para. 11(b); Answers para. 11(b); Tr. 45)
   40. The FDIC Report of July 9, 1981 criticized the Bank's process of holding unposted debits for more than one business day. (Ex. 5 at 2; Tr. 54–55)
   41. The June 19, 1981 Report and the July 9, 1981 Report recommended that an audit for unposted items be adopted by the Bank. (Ex. 2 at 13(a), Ex. 5 at 2; Tr. 763, 769-71, 1110)
   42. After the June 19, 1981 examination and the July 9, 1981 examination, Director * * * requested that * * * cease extending credit to * * * through the unposted debit account. (Tr. 520)
   c. unposted debits—August 1981—February 1982
   43. On five occasions between August 26, 1981 and February 23, 1982, respondent * * * was aware of returned checks in unusually high amounts chargeable to the * * * checking account. (Ex. 24 at 3, 4, 7, and 8; Tr. 958-60)
   44. Respondent * * * reviewed the Bank's trial balance statement at least once a week. (Tr. 679, 775)
   45. In reviewing the trial balance statement, respondent * * * sometimes would check the unposted debit balance. (Tr. 679-82)
   46. A trial balance statement reflecting an unposted debit balance of $400,000 or more was considered high by respondent * * *. (Tr. 681, 776-78)
   47. The Bank's daily trial balance statement for the periods of February 12-16, 1982, February 19-26, 1982, and March 1-8, 1982, reflected total unposted debit items in amounts which exceeded $400,000. (Ex. 11A at 7-e, 8-d, 11-e, 12-e, 13-d, 14-d, 15-d, 16-e, 17-d, 18-e, 19-d, 20-e, 21-d, and 22-e)
   48. From February 5, 1982 through February 26, 1982, * * * extended credit to * * * in the form of unposted debits held for more than one day on a continuous basis in amounts ranging from a low of $88,000 on February 5, 1982 to a high of $418,781 on February 26, 1982. (Exs. 11A, 11E)
   49. Respondent * * * discovered the * * * unposted debit items in late February or early March of 1982. (Tr. 267, 682, 774)
   d. unposted debits—March 1982
   50. After discovering the * * * unposted debits, respondent * * * discussed the matter with respondent * * * periodically through 1982. (Tr. 734-35, 782, 1037)
   51. From March 1, 1982 through March 8, 1982, credit continued to be extended to * * * in the form of unposted debits in amounts ranging from a high of $418,781 on March 1, 1982 to a low of $296,688 on March 3 and 4 of 1982. On March 8, 1982, credit totaling $361,343 was extended to * * * in the form of unposted debits. (Exs. 11A, 11E)
   52. Before March 8, 1982, respondents knew that the * * * unposted debit items exceeded the amount of the Bank's legal lending limit. (Tr. 686, 1026)
   53. On or about March 8, 1982, respondent * * * requested that * * * obtain a note to cover the * * * unposted debit items and requested that * * * stop extending credit to * * * through the unposted debit account. (Tr. 682-84, 267, 782-83)
   54. As of March 8, 1982, loans and other extensions of credit to * * * aggregated $452,118, consisting of notes totaling $90,000, unposted debit items totaling $361,343, and overdrafts totalling $775. (F. Stip. 7; Ex. 10D, 11E, 13B, and 14)
   e. March note
   55. On March 9, 1982, a $350,000 loan represented by a note was extended to * * * ("March Note") and approved by the Bank's board of directors, including respondents, at a meeting held on the same day. The proceeds of the March Note were used to cover the * * * unposted debit items accumulated between February 5 and March 8, 1982. (Ex. 10A at 1a, 2a, 5, 6 and 7)
   56. As of March 9, 1982, loans and other extensions of credit to * * * aggregated $499,570, consisting of notes totaling $440,000 and unposted debits totaling $59,570. (F. Stip. 8; Ex. 10D, 11E, and 14)
   57. The total credit extended to * * * as of March 9, 1982 equalled 28.72% of the Bank's capital and reserves of $1,566,756. (F. Stip. 14 and 19)
   58. The lending limit for the Bank as of March 9, 1981 was $185,900. (Notices para. 3; Answers para. 3; L. Stip. 2; Tr. 686, 1024)
   59. It is customary practice that loans in amounts which exceed a bank's lending limit {{4-1-90 p.A-276}}are participated to another bank. (Tr. 670) Respondents, and Directors * * * and * * * , assumed that the March Note was going to be participated to the * * * Bank of * * * ("* * *"). (Tr. 508, 686, 804-05, 1024) No * * * did not participate in the March Note. (Tr. 994)
   f. correspondent bank
   60. On March 18, 1982, * * * extended credit to * * * through the Bank's correspondent account in the amount of $128,798.81, resulting from the payment of a loan participation at * * * Bank of * * * for which no charge was made to the * * * account at the Bank. (Ex. 12A at 1, 3, 4c and 5, Ex. 12G; Ex. 14; Tr. 151-52)
   61. In April or May of 1982, respondent * * * discovered the credit extended to * * * through the Bank's correspondent account at * * *. (Tr. 692-95)
   62. Respondent * * * discussed the correspondent account problem with respondent * * * , and respondents separately confronted * * * regarding the matter. (Tr. 697, 813-14, 1028, 1089-90, 1093)
   63. On May 14, 1982, * * * extended credit to * * * through the Bank's correspondent account in the amount of $37,285, representing a * * * deposit item which was not sent to the Bank's correspondent for collection. (Ex. 12C at 1, 2, 3b, 4 and 7; Ex. 12G/ Ex. 14; Tr. 158-62)
   g. unposted debits—March—June 1982
   64. On May 27, 1982, respondent * * * was aware of a returned check for $39,100 chargeable to the * * * checking account. (Pr. Ex. 24 at 9; Tr. 958-60)
   65. The Bank's daily trial balance for the periods of June 1-14, 1982 and June 18-30, 1982, reflected total unposted debit items in amounts which exceeded $400,000. (Ex. 11B at 4-d, 5-e, 6-d, 7-d, 8-d, 9-d, 10-d, 11-d, 15-d, 16-e, 17-d, 18-d, 19-d, 20-d, 21-e, 22-d and 23-f and g)
   66. From June 1 through June 9, 1982, * * * extended credit to * * * in the form of unposted debits held for more than one day on a continuous basis in amounts ranging from a low of $97,464 on June 1, 1982 to a high of $311,380 on June 9, 1982. (Ex. 11B, 11E)
   67. Respondent * * * discovered these * * * unposted debit items in June 1982 during a review of the Bank's daily trial balance statement. (Tr. 816-17)
   68. From June 10 through June 30, 1982, * * * continued to extend credit to * * * by unposted debits in amounts ranging from a high of $451,837 on June 22, 1982 to a low of $311,380 on June 10, 1982. On June 10, 1982, credit totaling $380,462 was extended to * * * in the form of unposted debits. (Ex. 11B, 11E)
   69. Respondents knew that the * * * unposted debit items exceeded the amount of the Bank's legal lending limit. (Tr. 702, 1094-95)
   70. About June 30, 1982, respondent * * * again requested that * * * stop extending credit to * * * through the unposted debit account. (Tr. 823-27, 1025) * * * told * * * not to worry about it, that the notes would be participated with * * * and that the indebtedness was secured by collateral in the form of cattle. * * * repeated this assurance over and over again to the respondents during 1982. (Tr. 682-86, 691-713, 727-28, 735-36, 756, 781-84, 796-99, 804-05, 822-30, 842-47, 1037-38)
   71. Respondent * * * again discussed these extensions of credit with respondent * * *. They discussed whether they should bring this matter to the attention of the two other members of the board. They determined not to do so out of concern for the other board members' health. * * * ; besides being an alcoholic, was on medication for high blood pressure and was seeking treatment for diabetes. The respondents also did not want to unnecessarily burden Mrs. * * * because of her age and health. (Tr. 704-05)
   h. July note
   72. On July 1, 1982, a $380,000 loan was extended to * * * ("July Note") and approved by the Bank's board of directors at a meeting held on July 13, 1982. The proceeds of the July Note were used to cover * * * unposted debits accumulated between June 1, and June 30, 1982. (Ex. 10B at 1-a, 2-a, 5, 6, 7-a, 7-d; Tr. 823-24)
   73. As of July 1, 1982, loans and other extensions of credit to * * * aggregated $986,084, consisting of notes totaling $820,000 and open items held in the Bank's correspondent account totaling $166,084. (F. Stip. 9)
   74. The total credit extended to * * * as of July 1, 1982 equalled 54.93% of the Bank's capital and reserves of $1,795,013. (F. Stip. 15 and 20)
{{4-1-90 p.A-277}}
   75. The lending limit of the Bank as of July 1, 1982 was $219,600. (Notices para. 3; Answers para. 3; L. Stip 3) Respondents * * * and * * * knew that the July Note exceeded the Bank's legal lending limit. (Tr. 702, 1094-95)
   76. The subject of participation of the March and July Notes was not discussed at the July 13, 1982 board of director's meeting. (Ex. 10B at 2. Tr. 831-32)
   77. The note register of the Bank did not indicate that the July Note was to be participated. (Ex. 10B at 3)
   78. Director * * * assumed that the July Note was going to be participated to * * * (Tr. 509)
   79. * * * did not participate in the July Note. (Tr. 994)
   i. * * * credit—July—August 1982
   80. About July 1982, respondent * * * again confronted * * * about the * * * credit extension. * * * pulled a .22 revolver from his desk drawer and said: "I can get rid of * * * [and] myself real fast and end all of your problems." (Tr. 705)
   81. On July 23, 1982, an FDIC examiner visited the Bank to review the status of previously classified loans. (Ex. 6; Tr. 59)
   82. Respondent * * * knew that the March and July Notes had not been participated, and expected the examiner to discover the irregularities in the * * * credit, but did not discuss the matter with him. (Tr. 61, 269-70, 734, 849-52)
   83. On July 27, 1982, a $103,633.15 loan was extended to * * * ("Renewal Note") and was approved by the Bank's board of directors at a meeting held on August 17, 1982. The Renewal Note was used to refinance and renew a prior $90,000 note plus accrued interest of $13,633.15. (Ex. 10C at 1-a, 2-a, 3, 4-a, and b; Tr. 109-11)
   84. As of July 27, 1982, the total loans and other extensions of credit extended by the Bank to * * * aggregated $1,040,162, and consisted of notes totaling $833,633, unposted debits totaling $38,440, items held in the correspondent account totaling $166,084 and $2,005 in checking account overdrafts. (Ex. 10D, 11C, 11E, 12G, 13B, 14)
   85. From July 1 through September 30, 1982, the Bank's legal lending limit was $219,600. (Notices para. 3; Answers para. 3)
   86. When the Renewal Note was approved by the board of directors, respondent * * * knew that the March and July Notes had not been participated. (Tr. 1126)
   87. Respondent * * * also discussed the matter with respondent * * * and they told * * * to arrange for * * * to come into the Bank and prepare a financial statement. (Tr. 1038; Ex. 6)
   88. * * * and * * * prepared a financial statement for * * *, dated August 23, 1982, which shows * * * 's assets as $1,576,300 worth of dairy cows and heifers and $214,000 worth of contract cattle. Together with other assets, these totaled $2,319,050. On the liability side of the ledger the financial statement showed the following as encumbrances of the livestock (Ex. B):

Bank of * * *$104,000
380,000
350,000
Bank of * * *410,000
Wire * * *34,455
* * *127,060
TOTAL$1,405,515

   89. Both respondents saw this financial statement and believed that collateral existed to support the extensions of credit detailed on the financial statement. (Tr. 717, 719)
   90. When they reviewed the August 23, 1982 * * * financial statement, respondents still believed that the March and July Notes were going to be participated. (Tr. 715, 863-64, 866-67, 1041)
   91. At the request of respondents, * * * a representative of * * * visited the Bank on August 26, 1982 to check * * * $ collateral and to review the August 23, 1982 * * * financial statement. He met with respondents and did not report any concern. (Tr. 1040-41, 981, 990-92)
   j. * * * credit—September—December 3, 1982
   92. On two occasions in September 1982, respondent * * * was aware of return check items in unusually high amounts chargeable to the * * * checking account. * * * prepared a $69,000 return item slip on September 20, 1982 and a $29,890 return item slip {{4-1-90 p.A-278}} on September 22, 1982. (Ex. 24 at 11 and 12; Tr. 958-60, 1129)
   93. On October 1, 1982, * * * extended credit to * * * in the form of an unposted debit held for more than one day in the amount of $81,294. The item, a check drawn by * * * dated September 24, 1982, remained unposted on December 3, 1982. (Ex. 11C at 7-a and 8-a, Ex. 11D and 11E)
   94. On October 1, 1982, * * * extended credit to * * * through the Bank's correspondent account, in the amount of $76,512, by failing to forward to its correspondent a debit item for which credit was given to the * * * account. (Ex. 12E at 1, 3, 4; Tr. 165-66)
   95. The $76,512 credit extended to * * * through the Bank's correspondent account remained outstanding on December 3, 1982. (Ex. 12G)
   96. As of October 1, 1982, loans and other extensions of credit to * * * aggregated $1,157,523, consisting of notes totaling $833,633, unposted debit items totaling $81,294, and open items in the Bank's correspondent account totaling $242,596. (F. Stip. 10)
   97. As of October 1, 1982, the Bank's legal lending limit was $220,300. (Notices para. 3; Answers para. 3; L. Stip. 4)
   98. As of October 1, 1982, the total credit of $1,157,523 extended to * * * equalled 4.70% of the Bank's capital and reserves. (F. Stip. 16 and 20)
   99. About October 19, 1982, respondent * * * was aware of a return check item for 30,347 chargeable to the * * * checking account. (Ex. 24 at 13; Tr. 959-60)
   100. On October 20, 1982, * * * extended credit to * * * in the form of an unposted debit held for more than one day in the amount of $38,347. The item, a check deposited to the * * * account and returned payment stopped, remained unposted on December 3, 1982. (Ex. 11C at 9-a and 10-Ex. 11D, 11E)
   101. Between October 20 and December 3, 1982 * * * extended credit to * * * by overdrafts in amounts ranging from a low $16,138 on October 20, 1982 to a high of $28,808 on December 3, 1982. (Ex. 13B)
   102. On November 12, 1982, * * * extended credit to * * * through the Bank's correspondent account, in the amount of 5,700, by failing to charge the * * * account for a wire transfer. (Ex. 12F, 12G; Tr. 197)
   103. The $6,700 credit extended to * * * through the Bank's correspondent account was outstanding on December 3, 1982. (Ex. 12G)
   104. On November 22, 1982, * * * extended credit to * * * by an unposted debit held for more than one day in the amount of $5,085.90. The item, a check deposited to the * * * account and returned payment stopped, remained unposted on December 3, 1982. (Ex. 11C at 11-a and 12-a, Ex. 11D, 11E)
   105. As of December 3, 1982, loans and other extensions of credit to * * * aggregated $1,236,464, consisting of notes totaling $833,633, unposted debit items totaling $124,727, open items in the Bank's correspondent account totaling $249,296, and overdrafts totaling $28,808. (F. Stip. 11)
   106. The legal lending limit of the Bank as of December 3, 1982, was $220,300. (Notices para. 3; Answers para. 3; L. Stip. 4)
   107. As of December 3, 1982, the total outstanding credit of $1,236,464 extended to * * * was 67.06% of the Bank's total capital and reserves. (F. Stips. 17 and 22; Tr. 193)
   108. As of December 3, 1982, the credit extended to * * * by the Bank violated the Bank's legal lending limit. (Tr. 247, 286-87, 577; Ex. 22 at 1; Ex. 7 at 6b)
   109. Neither respondent * * * nor respondent * * * disclosed the existence of the * * * credit problem to directors * * * and * * * until December of 1982. (Tr. 271, 511-12, 888-89, 1047) Nor did respondents disclose the problem to regulatory authorities until the FDIC examiner discovered it during the December 1982 examination. (Tr. 64-65)
   k. December 1982 FDIC examination
   110. On December 3, 1982, the FDIC began an examination of the Bank of * * *. At that time, FDIC examiners discovered all of the extensions of credit to * * * by * * *. (Ex. 14; Tr. 722-24)
   111. The FDIC examiner suggested that respondent * * * consider getting a note from * * * for credit extended. (Tr. 724)
   112. The FDIC examiner checked on the collateral supporting the credit and determined that all but 76 of the 1754 head of the cattle existed, having viewed 1323 with * * * and * * *. (Ex. 7 at 2-a-3 and 2-a-4)

{{4-1-90 p.A-279}}
   113. The respondents did not learn that the collateral which was supposed to secure the credit extended to * * * did not, in fact, any longer exist, until February of 1983 when they went to the * * * farm with the sheriff and tractors and trailers to load the cattle and * * * informed them he had filed for bankruptcy, and the cattle were gone. (Tr. 738-39, 1055-56)
   114. After discovering * * * 's extensions of credit to * * * , the FDIC called a special meeting of the board of directors of the Bank of * * * for January 7, 1983. At that meeting * * * , upon the request of the FDIC, resigned his positions with the Bank. (Tr. 907-14)
   115. Both respondents have continued to serve on the board of directors. (Tr. 737, 1053)
   116. Respondent * * * had responsibility with regard to hiring a new chief executive officer. He has continued with all of his prior job duties and has assumed additional duties helping with the lending function of the Bank. Respondent * * * has worked every day in the Bank except for a one week vacation. (Tr. 737)
   117. In the Summer of 1983 respondent * * * resigned his employment with the Bank and now works strictly in the affiliated insurance agency. He continues to serve on the board of directors. (Tr. 1053)
   118. As of December 3, 1982, approximately $361,000 of the * * * credit was classified "loss" and the balance of such credit adversely classified "substandard." (F. Stip. para. 23)
   119. * * * filed a bankruptcy petition on February 22, 1983. (Ex. 18 at 30-31; Tr. 597, 739)
   120. As of August 5, 1983, the total value of collateral supporting the * * * credit was $150,000 and an additional $728,000 of the * * * credit was classified "loss." (Tr. 600-01; Ex. 18 at 30-31)
   121. As of August 5, 1983, the Bank had not collected any interest on the March, June and Renewal Notes and was no longer accruing interest on its books. (Tr. 598-99; Ex. 10A at 2, 10B at 2, 10C at 2)

CONCLUSIONS OF LAW

   1. The FDIC has jurisdiction over the Bank, the Respondents and the subject matter of this proceeding and has authority to issue a Removal Order against Respondents pursuant to Sections 8(e)(1) and (5) of the Act.
   2. From February 5 through December 3, 1982, the Bank extended credit in amounts which exceeded the Bank's legal lending limit, in violation of Section 51-24-2 of * * *. Codified Laws Annotated ( * * * Codified Laws Ann. § 51-24-2 (1983)).

   [.5] 3. The extension of credit to a borrower through the practice of holding or failing to post to or charge debit items against the borrower's record of account for two or more consecutive days is an unsafe or unsound banking practice.

   [.6] 4. The extension of credit for the benefit of a borrower through the practice of making improper entries or failing to make entries on a bank's record of its correspondent account is an unsafe or unsound banking practice.

   [.7] 5. Respondents' failure to take appropriate action to effectively curb or otherwise curtail the violations of law and unsafe or unsound practices described above and their failures to disclose all of the facts and circumstances surrounding such violations and unsafe or unsound banking practices to all members of the board of directors of the bank for a period of six months, constitute breaches of their fiduciary duties as directors of the Bank.
   6. Respondents' breaches of fiduciary duties as directors of the Bank demonstrate a continuing disregard for the safety and soundness of the Bank.
   7. The Bank has suffered substantial financial loss as a result of Respondents' breaches of fiduciary duties. In addition, the Bank will probably suffer additional substantial financial losses as a result of Respondents' conduct.

ORDER OF REMOVAL

   Having found and concluded that Respondents * * * and * * * , in their capacities as directors of the Bank of * * * , * * * ("Bank"), have engaged in breaches of their fiduciary duties which evidenced a continuing disregard for the safety and soundness of the Bank, and
   Having found and concluded that by reason of Respondents' conduct the Bank has suffered and will probably suffer substantial financial loss and other damage, it is: {{4-1-90 p.A-280}} ORDERED, that Respondent * * * be, and hereby is, removed as director of the Bank and prohibited from further participation in any manner in the conduct of the affairs of the Bank.
   IT IS FURTHER ORDERED, that Respondent * * * be, and hereby is, removed as an officer and director of the Bank and prohibited from further participation in any manner in the conduct of the affairs of the Bank.
   This ORDER shall become effective thirty (30) days after service on Respondents and Bank and shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated at Washington, D.C. July 9, 1984.
   By direction of the Board.
/s/ Hoyle L. Robinson
Executive Secretary

FDIC-83-152e and FDIC-83-153e
RECOMMENDED DECISION
James P. Timony Administrative Law Judge

PRELIMINARY STATEMENT

   On July 5, 1983, the Federal Deposit Insurance Corporation issued Notices of Intention to Remove from Office * * * and * * * pursuant to the provisions of Section 8(e)(1) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. § 1818(e)(1)). The Notices charged the respondents, in their capacities as officers and directors of the Bank of * * * (the "Bank"), * * * with engaging in unsafe or unsound banking practices, violations of law or breaches of their fiduciary duty which evidenced a willful or continuing disregard for the safety and soundness of the Bank. The Notices further alleged that, as a result of respondents' actions and conduct, the Bank had or would probably sustain substantial financial loss or other damage.
   On July 25, 1983, respondents filed Answers to the Notices admitting certain allegations contained in the Notices and denying others. A prehearing conference resulted in the entry of an Order of October 3, 1983, consolidating the actions and incorporating stipulations of fact ("F. Stip. ____,") and stipulations of law ("L. Stip. ____, "). An Order of November 9, 1983, excluded evidence relating to a claim by the Bank against its insurer.
   The trial was held in * * * beginning on November 15, 1983 and concluding on November 23, 1983. The transcript ("Tr.") consists of 1,173 pages. There were 42 exhibits introduced by the FDIC numbered 1A through 26 (e.g., "Ex. 1"), and five exhibits introduced by respondents numbered A through E (e.g., "Ex. A").1

FINDINGS

   1. general findings
   1. The events in this case took place from June 1981 through 1982. (F. Stip. 1) Unless otherwise indicated the time period of these findings will be during that time.
   2. The Bank is a corporation doing business under the laws of * * * and has its place of business at * * *, * * *. (Notices para. 1; Answers para. 1)
   3. The Bank is an insured state-chartered bank, which is not a member of the Federal Reserve system, subject to the provisions of the Federal Deposit Insurance Act. (Notices para. 1; Answers para. 1)
   4. * * * , is a small community of six hundred people. The Bank of * * * is the only bank in * * * , and supports the town. (Tr. 533-34, 537)
   5. The Bank of * * * had total assets at the time of the FDIC's December 3, 1982, examination of $19,505,000. (Ex. 7 p. 2) The Bank had 16 employees. (Tr. 748)
   6. From June 1981 through 1982 the board of directors of the Bank was comprised of respondents * * * and * * * (who was also president of the Bank), * * * (who was also cashier of the Bank), and * * *. Respondents * * * and * * * presently serve as directors of the Bank. (F. Stip. 3-5; Ex. 2 at B, Ex. 9A p. 1)
   7. The Bank is owned predominantly by members of the * * * and * * * families. The familial relationships and ownership interests of the various members of the board of directors are indicated in the following chart (Ex. 2 p. B):


1 FDIC exhibits 19 and 20 were withdrawn.
{{4-1-90 p.A-281}}
names of thenumbers of sharesnumbers of shares
board membersowned outrightowned jointly
* * * Chairman of the Board,
mother of respondent16173
* * * Vice President59311
* * * President, father of re-
spondent * * * and uncle of
Cashier21220
* * * Cashier762
* * * Asst. Cashier760

   8. The Bank has 1,000 shares outstanding. (Ex. 2 p. 10) The * * * family owns 533 shares. (Ex. 2 p. 10, Ex. 18 p. A, Ex. 7 p. A) In the last election of directors, 835 shares were voted. (Ex. 2 p. 10)
   2. management of the bank
   a. * * *
   9. Pursuant to the Bank's bylaws "the active business management at this bank shall be in the hands of the Cashier, or during his absence or disability, the Assistant Cashier, under supervision of the Board of Directors." (Ex. A p. 7; Article 2, Section 6)
   10. The Cashier of the Bank during 1981 and 1982 was * * *. In practice as well as pursuant to the bylaws, * * * , as cashier, had more authority over the day-to-day operations of the Bank than did its president or any other officer. (Tr. 525)
   11. * * * 's responsibility included being in charge of the loan functions of the Bank and in charge of its operations, including responsibility for computer and posting functions. (Tr. 526)
   12. * * * had twenty-two years of experience with the Bank, (Tr. 528) had been a member of the board of directors since January 1971, and had been the cashier since 1975. (Tr. 672)
   b. * * *
   13. * * * , was the president of the Bank during 1981 and 1982. He had been associated with the Bank since 1946 and a member of its board of directors since 1955. (Ex. 2 p. B) * * * assumed the presidency of the Bank in 1971 from * * * , respondent * * * 's father. * * * had been the president of the Bank for thirty years. (Tr. 524)
   14. President * * * has been an alcoholic whose illness diminished his capacity to perform his functions within the Bank. (Tr. 534) He also suffered from diabetes and high blood pressure. (Tr. 704-05) During 1982, his title was "titular due to limited participation in daily affairs." (Ex. 7 p. A) He resigned on August 1, 1983. (Ex. 18 p. B)
   c. * * *
   15. * * * was the chairman of the board, elected to that position in January 1979 to replace her husband, who was sick and unable to attend meetings and later died. Mrs. * * *'s health was not good and she was "a director of convenience." * * * is the mother of * * * and was eighty years old during 1982. (Ex. 2 p. B; Tr. 704, 729, 838, 1032)
   d. * * *
   16. * * * , a respondent herein, was born and raised in * * *. He graduated from high school in * * * , and has had no further formal education. After high school he entered the Air Force where he served for four years. (Tr. 661-62)
   17. Respondent * * * joined the Bank as an employee in 1961. (Tr. 662) He was already on the board of directors when he began his employment with the Bank. (Tr. 663) During 1981-82 he was vice president and his duties included management of the Bank's investments and securities. (Tr. 525) He was the fourth most active lending officer behind, in descending order, * * * * * *, * * * , and * * *. (Tr. 527) At the time of the hearing, respondent * * * was fifty years old. (Ex. 7 p. B)
   e. * * *
{{4-1-90 p.A-282}}
   18. Respondent * * * is the son of the president, * * * , and a first cousin of Cashier * * *. He was raised in * * * , graduated from high school there and then obtained a B.S. degree in business administration from Northern State College of Aberdeen. Upon graduation, he returned to * * * and began work at the Bank. He worked for the Bank for about six months, at which time he took over the Bank's affiliated insurance agency. (Tr. 1005-07)
   19. Thereafter, respondent * * * spent approximately ninety percent of his time running the Bank's affiliated insurance agency and only ten percent of his time working within the Bank. (Tr. 525) He was elected to the board of directions of the Bank in 1975. (Tr. 1009) In its 1981 report, the FDIC noted that * * * is "not considered a factor in management." (Ex. 2 p. B) Although he was assistant cashier in title, he did not, in fact, take over management of the Bank in the absence of Cashier * * *. (Tr. 537) At the time of the hearing, respondent * * * was thirty-two years old. (Tr. 1004)
   3. management style
   20. Day-to-day management of the Bank of * * * has been informal. In the early and mid-1970's the then officers of the Bank * * * and * * * would meet informally and intermittently either before or after work to discuss business. (Tr. 673, 745) No formal management meetings were held. (Tr. 673)
   21. Even these informal meeting trailed off in the late 1970s and on into the 1980s. During this latter period, as * * * disease got worse, the officers occasionally talked to one another about some things but each officer took care of his own duties. (Tr. 673-74, 746)
   4. respondents and * * *
   22. * * * began his employment at the Bank six months before respondent * * * in 1961. (Tr. 671) * * * and * * * worked side by side for twenty-two years. Up until the events leading to this hearing, * * * never had any reason to doubt * * * integrity or ability. (Tr. 707, 740, 853) * * * considered * * * to be a friend. (Tr. 736)
   23. * * * was respondent * * * 's first cousin and * * * nephew. Respondent * * * and * * * were close in age and, prior to the events involved in this hearing, * * * considered * * * as close as anyone to being his brother. Their families socialized together and he and * * * hunted and fished together. Up until the events leading to this hearing, respondent * * * never had reason to doubt * * * integrity or ability. (Tr. 1017, 1033)
   5. extension of credit to * * *
   24. * * * was a customer of the Bank of * * *. Both respondents had known * * * all of his life. * * * is also a lifetime resident of * * *.
   25. Respondents first became aware of * * * as a client of the Bank in the middle 70s. (Tr. 675, 1014) * * * dealt exclusively with * * * at the Bank and never contacted either of the respondents as bank employees. At that time * * * was a dairy farmer. Respondent * * * was first aware that * * * 's credit demands began to exceed those of normal dairy farmer in 1979. (Tr. 676) * * * was then involved in a Holstein cattle export business. (Id.)
   26. * * * 's demand for credit began to exceed the lending limit of the Bank of * * * and loans in excess of the lending limit of the Bank were participated with * * * Bank of * * *. (Tr. 677)
   27. In 1982, * * * maintained a note in the approximate amount of the Bank of * * * lending limit. (Ex. 10C)
   28. In addition to the note, the Bank of * * * , through its cashier, * * * , extended additional credit to * * * by abnormal methods and amounts throughout 1982. * * * extended credit to * * * through unsafe practices including not posting debits, holding items in the * * * Correspondent account and allowing checking account overdrafts for * * * (Exs. 11–14; Tr. 287-92, 578, 684, 779, 1061-62; Ex. 22 at 1-2)
   29. At no time was credit ever extended in the first instance to * * * by either of the respondents. (Tr. 739, 1058) Credit extended to * * * was solely controlled by Cashier * * *. (Tr. 326)
   a. unposted debits
   30. An unposted debit includes a check that would normally be posted against an individual's checking account but is not. (Tr. 39, 687-88)
   31. Unposted debits held by a bank for more than one business day become extensions of credit for the benefit of the account holder. (Tr. 39–40)
   32. Respondent * * * was responsible for preparing return check slips in the Bank. Return check slips note returned checks and {{4-1-90 p.A-283}} are processed by the Bank through its proof machine and posting room. (Tr. 686-88)
   33. A returned check in the amount of $29,000 was unusually high in the Bank of * * *. (Tr. 958-60)
   34. * * * was responsible for reviewing and disposing of unposted debits. (Tr. 326, 688)
   35. Credit extended through unposted debits prevents the board of directors from supervising compliance with a bank's legal lending limit. (Tr. 55-56)
   b. warnings of violations
   36. On May 19, 1980, the directors of the Bank, including respondents, signed a Memorandum of Understanding ("Memorandum") with the FDIC and * * * and agreed to control overdrafts and extensions of credit and to assure that the actions of Bank officers are reviewed and in conformance with adopted policies. (Notices para. 11(a); Answers para. 11(a); Ex. 4; Tr. 757-58)
   37. The FDIC Report of Examination of June 19, 1981 criticized the Bank's violations of lending limits, including the * * * line, and overdrafts. (Ex. 2 at 1 and 1a; Tr. 37, 44–45)
   38. Carrying unposted debit items for more than one business day was criticized in the June 19, 1981 Report. (Ex. 2 at 1-a-2 and 13-a; Tr. 40–41). The Bank had extended credit to * * * in the form of notes and an unposted debit which totaled $172,557, an apparent violation of the Bank's legal lending limit under * * * law. (Notices para. 11(b); Answers para. 11(b); Ex. 2 at 1-a-2 and 1-c; Tr. 37)
   39. The findings of the June 19, 1981 examination were reviewed by the Bank's board of directors on July 14, 1981. (Notices para. 11(b); Answers para. 11(b); Tr. 45)
   40. The FDIC Report of July 9, 1981 criticized the Bank's process of holding unposted debits for more than one business day. (Ex. 5 at 2; Tr. 54–55)
   41. The June 19, 1981 Report and the July 9, 1981 Report recommended that an audit for unposted items be adopted by the Bank. (Ex. 2 at 13(a), Ex. 5 at 2; Tr. 763, 769-71, 1110)
   42. After the June 19, 1981 examination and the July 9, 1981 examination, Director * * * requested that * * * cease extending credit to * * * through the unposted debit account. (Tr. 520)
   c. unposted debits—August 1981—February 1982
   43. On five occasions between August 26, 1981 and February 23, 1982, respondent * * * was aware of returned checks in unusually high amounts chargeable to the * * * checking account. (Ex. 24 at 3, 4, 7, and 8; Tr. 958-60)
   44. Respondent * * * reviewed the Bank's trial balance statement at least once a week. (Tr. 679, 775)
   45. In reviewing the trial balance statement, respondent * * * sometimes would check the unposted debit balance. (Tr. 679-82)
   46. A trial balance statement reflecting an unposted debit balance of $400,000 or more was considered high by respondent * * * (Tr. 681, 776-78)
   47. The Bank's daily trial balance statement for the periods of February 12-16, 1982, February 19-26; 1982, and March 1-8, 1982, reflected total unposted debit items in amounts which exceeded $400,000. (Ex. 11A at 7-e, 8-d, 11-e, 12-e, 13-d, 14-d, 15-d, 16-e, 17-d, 18-e, 19-d, 20-e, 21-d, and 22-e)
   48. From February 5, 1982 through February 26, 1982, * * * extended credit to * * * in the form of unposted debits held for more than one day on a continuous basis in amounts ranging from a low of $88,000 on February 5, 1982 to a high of $418,781 on February 26, 1982. (Exs. 11A, 11E)
   49. Respondent * * * discovered the * * * unposted debit items in late February or early March of 1982. (Tr. 267, 682, 774)
   d. unposted debits—March 1982
   50. After discovering the * * * unposted debits, respondent * * * discussed the matter with respondent * * * periodically through 1982. (Tr. 734-35, 782, 1037)
   51. From March 1, 1982 through March 8, 1982, credit continued to be extended to * * * in the form of unposted debits in amounts ranging from a high of $418,781 on March 1, 1982 to a low of $296,688 on March 3 and 4 of 1982. On March 8, 1982, credit totaling $361,343 was extended to * * * in the form of unposted debits. (Exs. 11A, 11E)

{{4-1-90 p.A-284}}
   52. Before March 8, 1982, respondents knew that the * * * unposted debit items exceeded the amount of the Bank's legal lending limit. (Tr. 686, 1026)
   53. On or about March 8, 1982, respondent * * * requested that * * * obtain a note to cover the * * * unposted debit items and requested that * * * stop extending credit to * * * through the unposted debit account. (Tr. 682-84, 267, 782-83)
   54. As of March 8, 1982, loans and other extensions of credit to * * * aggregated $452,118, consisting of notes totaling $90,000, unposted debit items totaling $361,343, and overdrafts totaling $775. (F. Stip. 7; Ex. 10D, 11E, 13B, and 14)
   e. March note
   55. On March 9, 1982, a $350,000 loan represented by a note was extended to * * * and approved by the Bank's board of directors, including respondents, at a meeting held on the same day. The proceeds of the March Note were used to cover the * * * unposted debit items accumulated between February 5 and March 8, 1982. (Ex. 10A at 1a, 2a, 5, 6 and 7)
   56. As of March 9, 1982, loans and other extensions of credit to * * * aggregated $499,570, consisting of notes totaling $440,000 and unposted debits totaling $59,570. (F. Stip. 8; Ex. 10D, 11E, and 14)
   57. The total credit extended to * * * as of March 9, 1982 equalled 28.72% of the Bank's capital and reserves of $1,566,756. (F. Stip. 14 and 19)
   58. The lending limit for the Bank as of March 9, 1981 was $185,900. (Notices para. 3; Answers para. 3; L. Stip. 2; Tr. 686, 1024)
   59. It is customary practice that loans in amounts which exceed a bank's lending limit are participated to another bank. (Tr. 670) Respondents, and Directors * * * and * * * assumed that the March Note was going to be participated to the * * * Bank of * * * ("* * *"). (Tr. 508, 686, 804-05, 1024) * * * did not participate in the March Note. (Tr. 994)
   f. correspondent bank
   60. On March 18, 1982, * * * extended credit to * * * through the Bank's correspondent account in the amount of $128,798.81, resulting from the payment of a loan participation at * * * Bank of * * * for which no charge was made to the * * * account at the Bank. (Ex. 12A at 1, 3, 4c and 5, Ex. 12G; Ex. 14; Tr. 151-52)
   61. In April or May of 1982, respondent * * * discovered the credit extended to * * * through the Bank's correspondent account at * * *. (Tr. 692-95)
   62. Respondent * * * discussed the correspondent account problem with respondent * * *, and respondents separately confronted * * * regarding the matter. (Tr. 697, 813-14, 1028, 1089-90, 1093)
   63. On May 14, 1982, * * * extended credit to * * * through the Bank's correspondent account in the amount of $37,285, representing a * * * deposit item which was not sent to the Bank's correspondent for collection. (Ex. 12C at 1, 2, 3b, 4 and 7; Ex. 12G; Ex. 14; Tr. 158-62)
   g. unposted debits—March—June 1982
   64. On May 27, 1982, respondent * * * was aware of a returned check for $39,100 chargeable to the * * * checking account. (Pr. Ex. 24 at 9; Tr. 958-60)
   65. The Bank's daily trial balance for the periods of June 1-14, 1982 and June 18-30, 1982, reflected total unposted debit items in amounts which exceeded $400,000. (Ex. 11B at 4-d, 5-e, 6-d, 7-d, 8-d, 9-d, 10-d, 11-d, 15-d, 16-e, 17-d, 18-d, 19-d, 20-d, 21-e, 22-d and 23-f and g)
   66. From June 1 through June 9, 1982, * * * extended credit to * * * in the form of unposted debits held for more than one day on a continuous basis in amounts ranging from a low of $97,464 on June 1, 1982 to a high of $311,380 on June 9, 1982. (Ex. 11B, 11E)
   67. Respondent * * * discovered these * * * unposted debit items in June 1982 during a review of the Bank's daily trial balance statement. (Tr. 816-17)
   68. From June 10 through June 30, 1982, * * * continued to extend credit to * * * by unposted debits in amounts ranging from a high of $451,830 on June 22, 1982 to a low of $311,380 on June 10, 1982. On June 30, 1982, credit totaling $380,462 was extended to * * * in the form of unposted debits. (Ex. 11B, 11E)
   69. Respondents knew that the * * * unposted debit items exceeded the amount of the Bank's legal lending limit. (Tr. 702, 1094-95)
   70. About June 30, 1982, respondent * * * again requested that * * * stop extending credit to * * * through the unposted {{4-1-90 p.A-285}} debit account. (Tr. 823-27, 1025) * * * told * * * not to worry about it, that the notes would be participated with * * * and that the indebtedness was secured by collateral in the form of cattle. * * * repeated this assurance over and over again to the respondents during 1982. (Tr. 682-86, 691-713, 727-28, 735-36, 756, 781-84, 796-99, 804-05, 822-30, 842-47, 1037-38)
   71. Respondent * * * again discussed these extensions of credit with respondent * * *. They discussed whether they should bring this matter to the attention of the two other members of the board. They determined not to do so out of concern for the other board members' health. * * *, besides being an alcoholic, was on medication for high blood pressure and was seeking treatment for diabetes. The respondents also did not want to unnecessarily burden Mrs. * * * because of her age and health. (Tr. 704-05)
   h. July note
   72. On July 1, 1982, a $380,000 loan was extended to * * * ("July Note") and approved by the Bank's board of directors at a meeting held on July 13, 1982. The proceeds of the July Note were used to cover * * * unposted debits accumulated between June 1 and June 30, 1982. (Ex. 10B at 1-a, 2-a, 5, 6, 7-a, 7-d; Tr. 823-24)
   73. As of July 1, 1982, loans and other extensions of credit to * * * aggregated $986,084, consisting of notes totaling $820,000 and open items held in the Bank's correspondent account totaling $166,084. (F. Stip. 9)
   74. The total credit extended to * * * as of July 1, 1982 equalled 54.93% of the Bank's capital and reserves of $1,795,013. (F. Stip. 15 and 20)
   75. The lending limit of the Bank as of July 1, 1982 was $219,600. (Notices para. 3; Answers para. 3; L. Stip 3) Respondents * * * and * * * knew that the July Note exceeded the Bank's legal lending limit. (Tr. 702, 1094-95)
   76. The subject of participation of the March and July Notes was not discussed at the July 13, 1982 board of director's meeting. (Ex. 10B at 2-a; Tr. 831-32)
   77. The note register of the Bank did not indicate that the July Note was to be participated. (Ex. 10B at 3)
   78. Director * * * assumed that the July Note was going to be participated to * * * (Tr. 509)
   79. * * * did not participate in the July Note. (Tr. 994)
   i. * * * credit—July—August 1982
   80. About July 1982, respondent * * * again confronted * * * about the * * * credit extension. * * * pulled a .22 revolver from his desk drawer and said: "I can get rid of * * * [and] myself real fast and end all of your problems." (Tr. 705)
   81. On July 23, 1982, an FDIC examiner visited the Bank to review the status of previously classified loans. (Ex. 6; Tr. 59)
   82. Respondent * * * knew that the March and July Notes had not been participated, and expected the examiner to discover the irregularities in the * * * credit, but did not discuss the matter with him. (Tr. 61, 269-70, 734, 849-52)
   83. On July 27, 1982, a $103,633.15 loan was extended to * * * ("Renewal Note") and was approved by the Bank's board of directors at a meeting held on August 17, 1982. The Renewal Note was used to refinance and renew a prior $90,000 note plus accrued interest of $13,633.15. (Ex. 10C at 1-a, 2-a, 3, 4-a and b; Tr. 109-11)
   84. As of July 27, 1982, the total loans and other extensions of credit extended by the Bank to * * * aggregated $1,040,162, and consisted of notes totaling $833,633, unposted debits totaling $38,440, items held in the correspondent account totaling $166,084 and $2,005 in checking account overdrafts. (Ex. 10D, 11C, 11E, 12G, 13B, 14)
   85. From July 1 through September 30, 1982, the Bank's legal lending limit was $219,600. (Notices para. 3; Answers para. 3)
   86. When the Renewal Note was approved by the board of directors, respondent * * * knew that the March and July Notes had not been participated. (Tr. 1126)
   87. Respondent * * * also discussed the matter with respondent * * * and they told * * * to arrange for * * * to come into the Bank and prepare a financial statement. (Tr. 1038; Ex. B)
   88. * * * and * * * prepared a financial statement for * * *, dated August 23, 1982, which shows * * *'s assets as {{4-1-90 p.A-286}}$1,576,300 worth of dairy cows and heifers and $214,000 worth of contract cattle. Together with other assets, these totaled $2,319,050. On the liability side of the ledger the financial statement showed the following as encumbrances on the livestock (Ex. B):

Bank of * * *$104,000
Bank of * * *380,000
Bank of * * *350,000
Bank of * * *410,000
Wire * * *34,455
* * *127,060
TOTAL$1,405,515.08

   89. Both respondents saw this financial statement and believed that collateral existed to support the extensions of credit detailed on the financial statement. (Tr. 717, 719)
   90. When they reviewed the August 23, 1982 * * * financial statement, respondents still believed that the March and July Notes were going to be participated. (Tr. 715, 863-64, 866-67, 1041)
   91. At the request of respondents, * * *, a representative of * * * visited the Bank on August 26, 1982 to check * * * collateral and to review the August 23, 1982 * * * financial statement. He met with respondents and did not report any concern. (Tr. 1040-41, 981, 990-92)
   j. * * * credit—September—December 3, 1982
   92. On two occasions in September 1982, respondent * * * was aware of return check items in unusually high amounts chargeable to the * * * checking account. * * * prepared a $69,000 return item slip on September 20, 1982 and a $29,890 return item slip on September 22, 1982. (Ex. 24 at 11 and 12; Tr. 958-60, 1129)
   93. On October 1, 1982, * * * extended credit to * * * in the form of an unposted debit held for more than one day in the amount of $81,294. The item, a check drawn by * * * dated September 24, 1982, remained unposted on December 3, 1982. (Ex. 11C at 7-a and 8-a, Ex. 11D and 11E)
   94. On October 1, 1982, * * * extended credit to * * * through the Bank's correspondent account, in the amount of $76,512, by failing to forward to its correspondent a debit item for which credit was given to the * * * account. (Ex. 12E at 1, 3, 4; Tr. 165-68)
   95. The $76,512 credit extended to * * * through the Bank's correspondent account remained outstanding on December 3, 1982. (Ex. 12G)
   96. As of October 1, 1982, loans and other extensions of credit to * * * aggregated $1,157,523, consisting of notes totaling $833,633, unposted debit items totaling $81,294, and open items in the Bank's correspondent account totaling $242,596. (F. Stip. 10)
   97. As of October 1, 1982, the Bank's legal lending limit was $220,300. (Notices para. 3; Answers para. 3; L. Stip. 4)
   98. As of October 1, 1982, the total credit of $1,157,523 extended to * * * equalled 64.70% of the Bank's capital and reserves. (F. Stip. 16 and 20)
   99. About October 19, 1982, respondent * * * was aware of a return check item for $30,347 chargeable to the * * * checking account. (Ex. 24 at 13; Tr. 959-60)
   100. On October 20, 1982, * * * extended credit to * * * in the form of an unposted debit held for more than one day in the amount of $38,347. The item, a check deposited to the * * * account and returned payment stopped, remained unposted on December 3, 1982. (Ex. 11C at 9-a and 10-a, Ex. 11D, 11E)
   101. Between October 20 and December 3, 1982 * * * extended credit to * * * by overdrafts in amounts ranging from a low of $16,138 on October 20, 1982 to a high of $28,808 on December 3, 1982. (Ex. 13B)
   102. On November 12, 1982, * * * extended credit to * * * through the Bank's correspondent account, in the amount of $6,700 by failing to charge the * * * account for a wire transfer. (Ex. 12F, 12G; Tr. 197)
   103. The $6,700 credit extended to * * * through the Bank's correspondent account was outstanding on December 3, 1982. (Ex. 12G)
   104. On November 22, 1982, * * * extended credit to * * * by an unposted debit held for more than one day in the amount of $5,085.90. The item, a check deposited to the * * * account and returned payment stopped, remained unposted on December 3, 1982. (Ex. 11C at 11-a and 12-a, Ex. 11D, 11E)
   105. As of December 3, 1982, loans and other extensions of credit to * * * aggregated $1,236,464, consisting of notes totaling {{4-1-90 p.A-287}} $833,633, unposted debit items totaling $124,727, open items in the Bank's correspondent account totaling $249,296, and overdrafts totaling $28,808. (F. Stip. 11)
   106. The legal lending limit of the Bank as of December 3, 1982 was $220,300. (Notices para. 3; Answers para. 3; L. Stip. 4)
   107. As of December 3, 1982 the total outstanding credit of $1,236,464 extended to * * * was 67.06% of the Bank's total capital and reserves. (F. Stips. 17 and 22; Tr. 193)
   108. As of December 3, 1982, the credit extended to * * * by the Bank violated the Bank's legal lending limit. (Tr. 247, 286-87, 577; Ex. 22 at 1; Ex. 7 at 6b)
   109. Neither respondent * * * nor respondent * * * disclosed the existence of the * * * credit problem to directors * * * and * * * until December of 1982. (Tr. 271, 511-12, 888-89, 1047) Nor did respondents disclose the problem to regulatory authorities until the FDIC examiner discovered it during the December 1982 examination. (Tr. 64-65)
   k. December 1982 FDIC examination
   110. On December 3, 1982, the FDIC began an examination of the Bank of * * *. At that time, FDIC examiners discovered all of the extensions of credit to * * * by * * *. (Ex. 14; Tr. 722-24)
   111. The FDIC examiner suggested that respondent * * * consider getting a note from * * * for credit extended. (Tr. 724)
   112. The FDIC examiner checked on the collateral supporting the credit and determined that all but 76 of the 1754 head of the cattle existed, having viewed 1323 with * * * and * * *. (Ex. 7 at 2-a-3 and 2-a-4)
   113. The respondents did not learn that the collateral which was supposed to secure the credit extended to * * * did not, in fact, any longer exist, until February of 1983 when they went to the * * * farm with the sheriff and tractors and trailers to load the cattle and * * * informed them he had filed for bankruptcy, and the cattle were gone. (Tr. 738-39, 1055-56)
   114. After discovering * * *'s extensions of credit to * * * , the FDIC called a special meeting of the board of directors of the Bank of * * * for January 7, 1983. At that meeting * * * , upon the request of the FDIC, resigned his positions with the Bank. (Tr. 907-14)
   115. Both respondents have continued to serve on the board of directors. (Tr. 737, 1053)
   116. Respondent * * * had responsibility with regard to hiring a new chief executive officer. He has continued with all of his prior job duties and has assumed additional duties helping with the lending function of the Bank. Respondent * * * has worked every day in the Bank except for a one week vacation. (Tr. 737)
   117. In the Summer of 1983 respondent * * * resigned his employment with the Bank and now works strictly in the affiliated insurance agency. He continues to serve on the board of directors. (Tr. 1053)
   118. As of December 3, 1982, approximately $361,000 of the * * * credit was classified "loss" and the balance of such credit adversely classified "substandard." (F. Stip. para. 23)
   119. * * * filed a bankruptcy petition on February 22, 1983. (Ex. 18 at 30-31; Tr. 597, 739)
   120. As of August 5, 1983, the total value of collateral supporting the * * * credit was $150,000 and an additional $728,000 of the * * * credit was classified "loss." (Tr. 600-01; Ex. 18 at 30-31)
   121. As of August 5, 1983, the Bank had not collected any interest on the March, June and Renewal Notes and was no longer accruing interest on its books. (Tr. 598-99; Ex. 10A at 2, 10B at 2, 10C at 2)

DISCUSSION

   The FDIC initiated this removal action under 12 U.S.C. § 1818(e)(1). Proof has been narrowed to whether respondents have demonstrated a continuing disregard for the safety or soundness of the Bank.
   The parties join issue on only one question of law concerning the proof required to establish a violation of the statute, i.e., whether the demonstration of a "willful or continuing disregard" for the safety or soundness of the Bank constitutes two distinct standards, with "continuing disregard" being a lower standard than "willful disregard."
   Respondents argue that the legislative history of the statute and the language of {{4-1-90 p.A-288}} the statute implies that "willful or continuing disregard" is one standard.
   The statute does not appear to be ambiguous.2 "Willful disregard" is the more difficult standard to prove and requires greater proof of violation. Both, however, require some showing of knowledge of wrongdoing. The dictionary definition of "disregard" suggests voluntary in attention. So "continuing disregard" involves the necessity to prove knowledge.3
   The elements of proof under 12 U.S.C. § 1818(e)(1), about which the parties are otherwise in agreement, are as follows:

    I. (Actionable conduct)—An officer or director of an insured bank ("subject person") has
       a. committed a violation of law, rule or regulation, or
       b. committed a violation of a final cease and desist order, or
       c. engaged or participated in an unsafe or unsound practice, or
       d. committed or engaged in an act in violation of a fiduciary duty imposed on subject person in his capacity as officer or director, or
       e. failed to take action in violation of fiduciary duty imposed on subject person in his capacity as officer or director, and which
    II. (Character of conduct)—
       a. involves personal dishonesty, or
       b. demonstrates willful disregard for bank's safety or soundness, or
       c. demonstrates a continuing disregard for bank's safety or soundness, and
III. (Results of conduct) as a result of violation, practice or breach of fiduciary duty
       a. bank has suffered substantial loss or other damage, or
       b. bank will suffer substantial loss or other damage, or
       c. interest of the bank's depositors could be seriously prejudiced, or
       d. subject person received financial gain.
   1. the facts
   The record in this case demonstrates that both respondents have failed their fiduciary duty as directors by continually disregarding the safety or soundness of the Bank which resulted in substantial loss to the Bank.
   Respondents were made aware by regulatory authorities of the need to control overdrafts and extensions of credit in May 1980 (F. 36), and criticism was directed to overdrafts and violations of lending limits on the * * * line by the FDIC examination and report in June and July 1981. (Fs. 37-42)
   Respondent * * * was aware of five overdrafts by * * * from August 1981 to February 1982 (F. 43), and other unposted debits granting * * * unauthorized credit during that period. (Fs. 44–48) He discussed this matter with respondent * * * in late February or early March of 1982. (Fs. 49-50) They knew these unposted debit items exceeded the Bank's legal lending limit. (F. 52) They got Cashier * * * to obtain a note from * * * covering the unposted debit items and requested * * * to stop extending credit to * * * in this manner. (F. 53)
   * * * continued in March, April and May of 1982 to extend unauthorized credit to * * *. (Fs. 58–60, 63) Respondents discovered this and confronted * * *. (F. 62)
   In June 1982, * * * continued to extend unauthorized credit to * * *. (Fs. 65, 66, 68) Respondent * * * again requested * * * to stop extending credit to * * * through unposted debits. (F. 70) In July another note was extended to * * * by the Bank to cover the unposted debits accumulated in June 1982. (F. 72)
   Respondents knew or should have known that * * * was continuing to extend credit to * * * during the summer and fall of 1982. (Fs. 92-108) As they previously had done on many occasions, they confronted him with this unauthorized extension of credit. * * * continued to convince them that all he and * * * needed was more time, that the notes above the lending limit would be participated by * * * Bank of * * *, that the cows were good collateral and were going to be sold and the debts to the Bank would be paid. (Fs. 53, 62, 70) Respondents decided not to tell the other two directors about this problem. (F. 71) * * * mother was a "director of convenience," 80 years old and in poor health. (F.


2 Since the statute is not ambiguous there is no need to consider the legislative history of the statute. United States v. Oregon, 366 U.S. 643, 648 (1961).

3 FDIC counsel admitted as much. (Tr. 628-29)
{{4-1-90 p.A-289}}
15) * * * * * * was also ill. (F. 14) Respondents did not tell them until December 1982. Nor did respondents tell the Bank examiners. (F. 109)
   In August 1982, respondents told * * * to get a financial statement from * * * (F. 87) The financial statement showed plenty of collateral. It also showed that over $800,000 in notes to the Bank had not been participated by * * *, (F. 88)
   Respondents continued to believe that * * * had sufficient collateral. A representative of * * * visited * * * in August and did not report any concern to them. (F. 91) Even the FDIC examiner believed that * * * had all but 76 of the 1754 head of cattle. (F. 112) The examiner also, however, found all of the extensions of credit to * * * and in January of 1983, * * * resigned at the request of the FDIC. (F. 114) By the time respondents went to the * * * farm with the sheriff and tractors and trailers to load the cattle, * * * had filed for bankruptcy and the cattle were gone. (Fs. 113, 119)
   2. the law
   Respondents failed to give ordinary attention to their duties as directors of the Bank. Briggs v. Spaulding, 11 S. Ct. 924, 929-30 (1891). Directors of banks are ordinarily not required to adopt a system of espionage in relation to their cashier or to set a watch on all his actions unless any circumstance transpires to awaken a just suspicion. Id. at 934. Here, however, respondents received warnings which should have raised such suspicion. They had given exclusive power to extend credit to one officer, Cashier * * *. Such one man control must be guarded against. Atherton v. Anderson, 99 F. 2d 883, 888 (6th Cir. 1938) They were warned by bank examiners in the summer of 1981 about the need to control overdrafts and extensions of credit, and specifically about the violations of the lending limit in the * * * line. Such warnings called for "greatly increased vigilance on the part of the directors." Ringeon v. Albinson, 35 F. 2d 753, 755 (D. Minn. 1929).
   Respondents argue that they were reasonable in believing * * *; that he was trustworthy, being the nephew of the president and respondent * * * friend and cousin, as well as respondent * * * fellow worker for twenty years. It is not enough to confer management to an officer, however trustworthy, and then totally rely on his trustworthiness. It is "a well-known fact that a large proportion of the disasters which befall banking institutions come from the malfeasance of just such men." Gibbons v. Anderson, 80 F. 345, 349 (W.D. Mich. 1897). It was the respondents' duty to know to whom and upon what security the Bank's large lines of credit are given. Id. * * * and * * * convinced the participating bank representative and even the FDIC examiner that there were plenty of cattle for collateral. But respondents should have known better. They had been deceived by * * * dozens of times and their gullibility endangered the Bank. Respondents disregarded and abdicated their duty, continuing to allow the cashier to operate without control for a year and a half after they were warned of the * * * line problems, before * * * finally resigned at the request of the FDIC.
   Respondents argue that it would have done little good to tell the other two directors who were ill and incompetent.4 While the condition of the other directors perhaps shows the fallacy of having too many inside directors (either officers or those controlled by officers), I agree that the record does not show that this would have been an effective means to control * * *.5
   Respondents' fiduciary duty as directors did not stop there, however. They could have stopped * * * by informing the FDIC or state regulatory authorities. Respondents argue that they had no fiduciary duty to tell the regulatory authorities of the unsafe and unsound extensions of credit by * * *. The law is to the contrary. Once they determined that * * * activities endangered the security of the Bank, respondents had a duty to draw the matter to the attention of stockholders as well as regulatory officials. DePinto v. Provident Sec. Life Ins. Co, 374

4 Respondents argue that these removal actions are arbitrarily brought against only respondents and ask "Why weren't * * * and * * * the subject of similar removal actions?" (Reply Brief at 6) The FDIC had a reasonable basis for joining only the respondents in this consolidated action. FTC v. Universal-Rundle Corp, 387 U.S. 244, 251 (1967). Moog Industries, Inc. v. FTC, 355 U.S. 411, 413 (1958).

5 While * * * testified that he would have contacted regulatory authorities about * * * conduct (Tr. 522), he later testified he would have done the same thing that respondents did. (Tr. 532-33)
{{4-1-90 p.A-290}}F.2d 37, 44 (9th Cir. 1967), cert. denied, 389 U.S. 822 (1967).
   Respondents argue that as stockholders themselves they would not endanger their own Bank. Ringeon v. Albinson, supra, involved similar circumstances. There, a bank failed and some of the directors suffered most seriously. Bank examiners had warned the directors that conditions at the bank were not all right.
   As time went on, those directors vainly hoped, speaking generally, that things would work out right. Of course, such hope was not well founded. Banking business cannot be carried on as it was here, and work out right. It is bound, under the circumstances, to work out wrong. As men of ordinary sense, they should all have known this. For a considerable period of time...they did know it. Still the wrong continued. Additional credit was extended, when it was highly imprudent to do so. These loans were approved by the board of directors...
   (T)he bank in effect was being looted.
   (35 F.2d at 755)
   A principal purpose of the banking laws, is to hold and safekeep the money of depositors. Respondents' recklessness caused a substantial loss to the Bank,6 and depositors and other shareholders, as well as the community and many innocent people around about should be protected from this failure of wholesome and diligent supervision. Ringeon v. Albinson, 35 F.2d at 754.
   Respondents have violated 12 U.S.C. § 1818(e)(1) by the breach of their fiduciary duty as directors by demonstrating a continuing disregard for the Bank's safety and soundness, resulting in substantial loss to the Bank.7

REMEDY

   Respondents did not violate their duty as officers of the Bank. The order of removal therefore is limited to their capacity as directors.
   The record in this case demonstrates the deleterious condition which can result from having the board of directors of a bank consisting entirely of insiders—officers of the Bank or person controlled by officers. The order therefore also encourages respondents to vote their stock in favor of outside directors.
   A regulatory agency has wide discretion in choice of remedy deemed adequate to cope with unlawful practices. Jacob Siegel Co. v. FTC, 327 U.S. 608, 611 (1946). It must be allowed effectively to close all roads to the prohibited goal, so that its order may not be by-passed with impunity, FTC. v. Ruberoid Co., 343 U.S. 470, 473 (1952), for those who are caught violating the law must expect some fencing in. FTC v. National Lead Co., 352 U.S. 419, 431 (1957).
/s/ James P. Timony
Administrative Law Judge
March 22, 1984


6 Respondents' concede the substantial loss. (Brief at p. 17)

7 FDIC counsel also argue that respondents participated in the illegal practices, primarily by approving notes signed by * * * in excess of the lending limit to replace unposted debits. This was better than leaving the debits undocumented. Even the FDIC examiner said that this was prudent practice once the credit was extended. (Tr. 724)

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