{{4-1-90 p.A-932}}
[¶5069] FDIC Docket No. FDIC 85-215e (7-17-86).
A bank director consented to removal from office and prohibition from further participation as a director and participant in the conduct of the bank's affairs. The director was responsible for extensions of credit representing 74.15% of total adversely classified loans, which is an unsafe or unsound banking practice.
[.1] Bank Examination—Purpose
The general purpose of a bank examination is to evaluate and rate a bank's capital adequacy, asset quality, management, earnings, and liquidity (`CAMEL').
[.2] Loans—Classification—Loss
Loans classified loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.
[.3] Loans—Classification—Substandard
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged.
[.4] Loans—Classification—Doubtful
Loans classified doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.
[.5] Assets—Transfer of
The shifting of assets usually involves selling loans from one bank to another or refinancing loans from one bank to another to keep these monies moving to avoid having to take losses or to avoid the detection of those assets by examiners or simply to enhance the financial statement or condition of the bank. The practice, although not illegal, is deemed an unsafe and unsound banking practice.
[.6] Lending and Collection Policy and Procedures—Borrower Ability to Repay
A bank that extends credit that is not adequately protected by the current sound worth and paying capacity of the borrower of the collateral pledged, is engaging or participating in unsafe or unsound banking practices.
[.7] Directors—Duties and Responsibilities—Correction of Known Problems
A director who approves loans that exceed a bank's legal lending limit and are in violation of state law, and who fails on acquiring knowledge of such violation to impose controls to assure that such practice is halted, has aided and abetted and/or participated in the violation an committed an unsafe and unsound banking practice.
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[.8] Directors—Duties and Responsibilities—Correction of Violations of Law
A director who has knowledge of the occurrence of a violation of law and unsafe and unsound banking practices breaches his fiduciary duty by failing to impose controls to assure that the violation is corrected and the practices are halted.
[.9] Prohibition, Removal, or Suspension—Disregard for Safety and Soundness
A director, who fails to impose controls to assure that known unsafe and unsound practices and a violation of law are halted has shown a continuing disregard for the safety and soundness of the bank and an unfitness to participate in the conduct of the affairs of any FDIC insured bank.
[.10] Directors—Duties and Responsibilities—Informing Directors of Risks— Disclosure
A director who is privy to information that shows the lack of trustworthiness of a potential borrower owes a fiduciary duty to disclose that information to the bank.
[.11] FDIC—Authority to Examine Banks
The FDIC is authorized to examine any insured bank and regulate almost every aspect of its dealings, and to issue pursuant to administrative proceedings cease and desist orders, orders suspending or removing directors or officers, and orders prohibiting persons from participation in the conduct of the affairs of an insured bank when FDIC concludes such orders are necessary to prevent and remedy violations of law and unsafe or unsound banking practices.
[.12] Prohibition, Removal, or Suspension—FDIC Authority to Order
The FDIC has discretion to formulate a decision (as to whether the circumstances warrant the initiation of a removal proceeding of a director or officer.
[.13] Administrative Proceedings—Purpose
Administrative proceedings are initiated to prevent irresponsible individuals from looting or otherwise wrecking insured banks and savings and loan associations through improper activities.
[.14] Unsafe or Unsound Banking Practice—Statutory Standard
An unsafe or unsound banking practice embraces any action, or lack of action, that is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds.
[.15] Prohibition, Removal, or Suspension—Disregard for Safety and Soundness
A bank director's responsibility for 74.15% of a bank's adversely classified loans demonstrates the director's participation in unsafe and unsound banking practices.
[.16] CAMEL Rating—"5"
Banks with a CAMEL rating of 5 have an extremely high probability of failure.
[.17] Directors—Duties and Responsibilities—Generally
Directors of banks generally owe a greater duty than other corporate officers and directors. This duty imposes several obligations on a bank director, and requires a bank director to disclose conflicts of interest, to avoid intentional misconduct and seizure of corporate opportunity, to act primarily for the benefit of the corporation, to be fair in all dealings that involve the corporation, and to refrain from competing with the corporation.
[.18] Cease and Desist Orders—Cessation of Violation
The FDIC need not establish that there is an unsafe or unsound banking practice or violation occurring at the moment of issuance of a Notice of Charges, or at the Hearing, or when the final cease and desist order is issued by the FDIC.
{{4-1-90 p.A-934}}
In the Matter of * * * Bank * * * Bank
(INSURED STATE NONMEMBER BANK)
STIPULATION AND CONSENT TO
THE ISSUANCE OF AN ORDER OF
PROHIBITION FROM FURTHER
PARTICIPATION
FDIC 85-215e
Subject to the acceptance of this STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("CONSENT AGREEMENT") by the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC"), it is hereby stipulated and agreed by and between a representative of the Legal Division of the FDIC and * * * ("Respondent") as follows:
1. On September 5, 1985, the Board issued to Respondent an AMENDED NOTICE OF INTENTION TO PROHIBIT FROM FURTHER PARTICIPATION ("NOTICE") pursuant to the provisions of Section 8(e) (1) and (2) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. 1818(e) (1) and (2). Pursuant to Section 8(e) (5) of the Act and Part 308 of the Rules of Practice and Procedure of the FDIC (12 C.F.R. Part 308), a hearing was held before Administrative Law Judge Paul S. Cross in * * *, beginning on October 15, 1985 and concluding on October 25, 1985.
The Respondent and counsel for the FDIC thereafter executed this STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("CONSENT AGREEMENT"), dated July 17, 1986 whereby, solely for the purpose of this proceeding, and without admitting or denying the allegations in the NOTICE, the Respondent consented to the imposition of an ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("ORDER") by the FDIC on the following terms:
a. Respondent would be prohibited for a period of three (3) years from participation in any manner in the conduct of the affairs of any bank insured by the FDIC without the prior written approval of the FDIC.
b. Respondent would be prohibited for a period of seven (7) years following the expiration of the three (3) year period referred to in Paragraph (a) of the CONSENT AGREEMENT from serving as a chief executive officer and/or director of any bank insured by FDIC without the prior written approval of the FDIC. As used in this paragraph and Paragraph (c) below, "chief executive officer" means the position of chief executive officer or such other position that the person holding it may exert influence and/or control, comparable to that influence and/or control that is generally associated with a chief executive officer and/or director, over the major management and/or policies of the bank.
(i) For purposes of this CONSENT AGREEMENT, "control" shall have the meaning as defined in Sections 215.2(b) (1) and 215.2(b) (2) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. 215.2(b) (1) and 215.2(b) (2)).
(ii) For purposes of this CONSENT AGREEMENT, "director" shall have the meaning as defined in Section 215.2(c) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. 215.2(c)) except the term "member shall be deleted from this definition.
c. If during the seven year period referred to in Paragraph (b) above, * * * decides to accept a position at a bank insured by the FDIC other than the position of chief executive officer and/or director, he shall provide the FDIC with written notice of his intention to accept such position and a description of the position sixty days before starting work at such bank.
(i) Such written notice shall be provided to the Director of Bank Supervision of the FDIC and the Regional Director of the FDIC for the Region in which the bank is located.
(ii) The giving of notice as required by Paragraph (c) shall not be considered a waiver on the part of the FDIC to enforce the provisions of this CONSENT AGREEMENT.
Respondent, solely for the purpose of this proceeding and without admitting or denying any alleged violation of law or regulation, unsafe or unsound banking practice, or other alleged act, omission or practice, hereby consents and agrees to the issuance and imposition of an ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("ORDER") by the FDIC. Respondent further stipulates and agrees that such ORDER shall be deemed to be an "order
{{4-1-90 p.A-935}}which has become final," as defined in Section 8(k) of the Act (12 U.S.C. 1818(K); and such ORDER shall become effective ten (10) days after its issuance by the FDIC; and that, following such effective date, such ORDER shall be fully enforceable pursuant to the provisions of Section 8(i) and 8(j) of the Act (12 U.S.C. 1818(i) and 1818(j)), subject only to the conditions set forth in Paragraph c of this CONSENT AGREEMENT.
3. In the event the FDIC accepts this CONSENT AGREEMENT and issues the ORDER, it is agreed that no action will be taken by the FDIC to enforce this CONSENT AGREEMENT in the United States District Court unless * * * violates or is about to violate, any provision herein.
Dated this 17th day of July, 1986
FEDERAL DEPOSIT INSURANCE
CORPORATION
LEGAL DIVISION
* * * * * *
Regional Attorney Respondent
ORDER OF PROHIBITION FROM
FURTHER PARTICIPATION
FDIC-85-215e
On September 9, 1985, the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") issued to * * * ("Respondent") an AMENDED NOTICE OF INTENTION TO REMOVE FROM OFFICE AND TO PROHIBIT FROM FURTHER PARTICIPATION ("NOTICE") pursuant to the provisions of Section 8(e) (1) and (2) of the Federal Deposit Insurance Act ("Act") (12 U.S.C. 1818(e) (1) and (2)).
The Respondent and counsel for the FDIC thereafter executed a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("CONSENT AGREEMENT"), dated July 17, 1986, whereby, solely for the purpose of this proceeding and without admitting or denying the allegations in the NOTICE, Respondent consented to the imposition of an ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("ORDER") by the FDIC.
The FDIC considered the matter, and determined that it had reason to believe that Respondent had engaged in activities which would warrant the issuance of an order pursuant to Sections 8(e) (1), (2) and (5) of the Act (12 U.S.C. 1818(e) (1), (2) and (5)). Thereupon, the FDIC accepted the executed CONSENT AGREEMENT and issued the following:
ORDER OF PROHIBITION FROM FURTHER PARTICIPATION
IT IS ORDERED that:
1. * * * is prohibited for a period of three (3) years from participation in any manner in the conduct of the affairs of any bank insured by the FDIC without the prior written approval of the FDIC.
2. * * * is prohibited for a period of seven (7) years following the expiration of the three (3) year period referred to in Paragraph 1 of the ORDER from serving as a chief executive officer and/or director of any bank insured by FDIC without the prior written approval of the FDIC. As used in this paragraph and Paragraph 3 below, "chief executive officer" means the position of chief executive officer or such other position that the person holding it may exert influence and/or control, comparable to that influence and/or control that is generally associated with a chief executive office and/or director, over the major management and/or policies of the bank.
(i) For purposes of this ORDER, "control" shall have the meaning as defined in Sections 215.2(b) (1) and 215.2(b) (2) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. 215.2(b) (1) and 215.2(b) (2)).
(ii) For purposes of this ORDER, "director" shall have the meaning as defined in Section 215.2(c) of Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. 215.2(c)) except the term "member" shall be deleted from this definition.
3. If during the seven year period referred to in Paragraph 2 above, * * * decides to accept a position at a bank insured by the FDIC other than the position of chief executive officer and/or director, he shall provide the FDIC with written notice of his intention to accept such position and a description of the position within sixty days before starting work at such bank.
i. Such written notice shall be provided to the Director of Bank Supervision of the
{{4-1-90 p.A-936}}FDIC and the Regional Director of Bank Supervision of FDIC for the Region in which the bank is located.
(ii) The giving of notice as required by Paragraph 3 shall not be considered a waiver on the part of the FDIC to enforce the provisions of this ORDER.
IT IS FURTHER ORDERED that this ORDER shall become effective ten (10) days after the date of its issuance and that it shall remain effective and enforceable except to the extent that, and until such as, any of its provisions shall have been modified, terminated, suspended, or set aside.
By direction of the Board of Directors.
Dated at Washington, D.C., this 12th day of August 1986.
/s/ Hoyle L. Robinson
Executive Secretary
RECOMMENDED DECISION AND
PROPOSED ORDER
FDIC-85-215e
Decided March 19, 1986
Proposed order of removal recommended for adoption by Federal Deposit Insurance Corporation.
* * *, * * * and * * * for Federal * * * and * * * for Respondent.
By Paul S. Cross, Administrative Law Judge.
I. SUMMARY OF PROCEEDINGS
On August 5, 1985, the Board of Directors of the Federal Deposit Insurance Corporation ("FDIC" or "Proponent") issued a Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") against * * * ("Respondent"), individually and as a director and participant in the conduct of the affairs of * * * Bank, * * * ("* * * Bank").
Based upon the FDIC's subsequent reconsideration of the facts in this case and a thorough review of the March 22, 1985 Report of Examination of * * * Bank, and affidavits of Examiner-in-Charge, * * * , Regional Director * * * and Review Examiner * * * the FDIC issued an Amended Notice of Intention to Remove From Office and to Prohibit From Further Participation, ("Amended Notice") against Respondent, individually and as a director and participant in the conduct of the affairs of * * * Bank, * * * and individually and as a director and chief executive officer and participant in the conduct of the affairs of * * * Bank, * * *.
The Amended Notice is the subject of the instant proceeding and was issued pursuant to the provisions of section 8(e) (1) (2) of the Federal Deposit Insurance Act ("FDI Act" or "Act") (12 U.S.C. § 1818(e) (1) (2)) and Part 308 of the FDIC's Rules of Practice and Procedures (12 C.F.R. Part 308). The Amended Notice charges Respondent * * * with having committed a violation of law, engaging or participating in unsafe and unsound banking practices in connection with the operation of * * * Bank, and of having breached his fiduciary duty as a director of * * * Bank. The Amended Notice further alleges that * * * Bank has suffered or will probably suffer substantial financial loss or other damage, and/or that the interests of its depositors could be seriously prejudiced by such violations, practices and/or breaches of fiduciary duty. The Amended Notice also charges that such violation, practices and/or breaches of fiduciary duty demonstrate a willful or continuing disregard for the safety and soundness of * * * Bank, and evidence Respondent's unfitness to participate in the conduct of the affairs of * * * Bank or to continue as a director or officer or participant in the conduct of the affairs of * * *.
On or about September 25, 1985, Respondent filed an Answer ("Answer") to the Amended Notice.
A hearing of the action was convened in * * *, before me beginning on October 15, 1985, and concluding on October 25, 1985. The hearing record consists of a transcript ("Tr.") of 9891 pages, Respondent * * *'s Exhibits numbering 1–49 ("R. Ex.") and FDIC exhibits numbering 1–40 ("FDIC Ex."), one ALJ Ex. (Tr. 89), a thirteen page Deposition of * * * , a protective order, Respondent's Prehearing Statement, and Petitioner's Motion for an Order Limiting the Scope of Administrative Proceeding.
II. FINDINGS OF FACT
A. General Findings
1. * * * Bank, a corporation existing and doing business under the laws of the State
1 The first IV volumes of the hearing transcript comprise 882 pages of testimony taken in * * * from October 15–18, 1985. A separate volume consisting of 107 pages covers the testimony of * * * taken in Washington, D.C. on October 25, 1985 ("10/25/85 Tr.").
{{4-1-90 p.A-937}}of * * * , and having its principal place of business at * * * , is and has been, at all times pertinent to the charges herein, an insured State nonmember bank. * * * Bank is subject to the Act (12 U.S.C. §§ 1811-1831d), the Rules and Regulations of the FDIC (12 C.F.R. Chapter III), and the laws of the State of * * *.
2. * * * Bank, * * *, a corporation existing and doing business under laws of the State of * * *, and having its principal place of business at * * * , is and has been, at all times pertinent to the charges herein, an insured State nonmember bank. * * * is subject to the Act (12 U.S.C. §§ 1811-1831d), the Rules and Regulations of the FDIC (12 C.F.R. Chapter III), and the laws of the State of * * *.
3. At all times pertinent to the charges herein, Respondent served as a director, officer or participant in the conduct of the affairs of * * * Bank and * * *. The FDIC has jurisdiction over * * * Bank, * * * , the Respondent, and the subject matter of this proceeding.
4. At all times pertinent to the transactions at issue here, Respondent * * * served as a member of the * * * Bank loan committee2 and its board of directors. (Tr. at 698, 699 FDIC Ex. 2).
5. During the time period in question here, Respondent was primarily employed by * * * , a corporation owned and controlled by * * *.3 Serving in that capacity, Respondent buys and sells banks at Mr. * * *'s pleasure. (Tr. at 676, 695).
6. Of the 17 transactions in question here, five (5) loans were adversely classified during the * * * state examination dated
July 26, 1984: * * * (FDIC Ex. 4; Tr. at 215–216).
7. The * * * direct loan, the * * * loan, the * * * loan, the * * * Loan, the * * * Partnership loan, and the * * * loan originated subsequent to the state examination of July 26, 19844 (FDIC Ex. 2; Tr. at 128–129).
8. The bulk of the adversely classified loans at issue here were made to * * *-related interests: * * *, * * * Corporation, * * * , * * * , * * * , * * * , * * * , * * * and * * *. Also three (3) loan participations (* * * , * * * and * * *) were purchased from the lead bank in the * * * banking chain, * * * Bank (FDIC Exs. 2, 12, 19, 26, 28; Tr. at 207–210, 235–236, 300; 10/25/85 Tr. at 68–71).
9. FDIC conducts periodic examinations of banks under its supervision. Depending upon the severity of problems in a bank, such examinations are conducted at least once every eighteen months, and if the bank is a problem institution it is examined once every twelve months. (Tr. at 35).
[.1] 10. The general purpose of a bank examination is to evaluate and rate a bank's capital adequacy, asset quality, management, earnings, and liquidity ("CAMEL"). The Uniform Financial Institutions Rating System reflects, in a comprehensive and uniform fashion, an institution's financial condition, compliance with laws and regulations and overall operating soundness. The CAMEL rating is based upon a scale of one through five in ascending order of supervisory concern. A rating of one (1) represents the highest rating and the lowest level of supervisory concern, whereas a five (5) rating represents the lowest, most critically deficient level of performance and therefore the highest degree of supervisory concern. (Tr. at 34; FDIC Ex. 10).
[.2—.4] 11. In the course of an examination of a bank, examiners review and classify loans or other assets of the bank and assign loan classifications of "loss," "substandard," and "doubtful." Loans classified
2 The authority to make loans is vested in the * * * loan committee and not in its full board of directors. (Tr. at 395). The board of directors ratifies the decisions made by the loan committee. (Tr. at 698). The two other members of the loan committee were * * * and bank president * * *. While serving on the * * * Bank loan committee Mr. * * * was also senior vice president and general counsel for * * * , a corporation owned and controlled by * * * (Tr. at 505, 540,
698–700, 725, 763, 780; FDIC Ex. 28). Aside from legal course-work in banking related matters Mr. * * * had no other banking education or experience and viewed his role as that of a legal advisor rather than financial advisor. Although not directly affiliated with * * * , bank president * * * approved all * * *-related loans at issue here and may well not have retained his position at the Bank had he in fact objected. (Tr. at 540). Clearly, Respondent was the primary lending official at * * * Bank.
3 * * * is a convicted felon who owns(ed), controls(ed) and/or influences(d) a number of banks in * * * and including * * *; (FDIC Ex. 24; Tr. at 43, 72, 294).
4 The * * * Loan was restructured on February 12, 1985. The other nine (9) loans are * * * , participation, * * * Corporation, * * * , * * * , and * * *
{{4-1-90 p.A-938}}Loss5 are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Loans classified Doubtful have all of the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. (Tr. at 53, 56, 62,
142–143; FDIC Ex. 11).
12. As a routine part of their examination duties, FDIC bank examiners necessarily are called upon to identify and report unsafe and unsound banking practices and recommend corrective action. (Tr. at 72–74).
13. Between ten and twenty-five percent (10–25%) of loans classified substandard usually wind up as loss. (Tr. at 529, 600, 855).
14. Once the examination process is completed the examiner-in-charge ("EIC") conducts an exit review with the bank's management officials and presents them with a management letter detailing the major findings of the examination. Shortly thereafter a meeting between FDIC regional officials, a state representative and the bank's board of directors is arranged. (Tr. at 36).
15. * * * Bank was examined by the FDIC as of the close of business March 22, 1985, by a group of six FDIC examiners under the direction of EIC * * *. (Tr. at 35, 37; FDIC Exs. 2, 3).
16. The examination of * * * Bank was conducted in accordance with published examination instructions, guidelines, standards and criteria. (Tr. 54; FDIC Exs. 2, 3, 10).
17. On April 29, 1985, a meeting of the * * * Bank board of directors and FDIC officials and a representative of the Office of Financial Institutions of the State of * * * was held in the * * * Regional Office of the FDIC to discuss the March 22, 1985 Report of Examination. (FDIC Ex. 26).
18. On August 7, 1985 FDIC issued a Notice of Charges and of Hearing pursuant to 12 U.S.C. § 1818(b) against * * * Bank. (FDIC Ex. 7).
19. On August 12, 1985 FDIC initiated termination of insurance proceedings against * * * Bank. (FDIC Ex. 6).
20. Respondent engaged or participated in unsafe or unsound banking practices by knowingly causing * * * Bank to extend credits which were inadequately protected by current sound worth and paying capacity of the borrowers or collateral pledged. (Tr. at 79, 318–319, 347–348, 495, 525, 562, 640, 670, 707, 759, 764, FDIC Exs. 2, 27, 34–39).
21. As of March 22, 1985, Respondent caused and/or allowed6 * * * Bank to make extensions of credit that were classified "Loss" in the amount of $573,000 (not including the * * * loan classified "Loss" in the amount of $506,000), "Doubtful" in the amount of $420,000, and "Substandard" in the amount of $1,349,000. (FDIC Exs. 2, 12, 13; Tr. at 70, 78, 86, 312).
22. These adversely classified loans represented 74.15 percent of total adversely classified loans of $3,165,000, and represented 146.9 percent of * * * Bank's total equity capital and reserves of $1,594,000. (FDIC Exs. 2, 13; Tr. 78).
23. Respondent was in a position to be aware of the credit weaknesses of the borrowers through his business associations with the borrowers and/or his involvement with other banks where a number of the borrowers had credits previously subject to adverse classification. Respondent was elected to the board of directors of the Bank on October 11, 1978 and at the date of examination (October 21, 1983) he was chairman of the board at the bank. He was also a director at * * * Bank from 1978 until 1984. Respondent worked at * * * Bank from 1978 until 1984. Respondent worked at * * * Bank in 1978 and at the time of the pertinent examination he was
5 This classification does not mean that the loan has absolutely no recovery or salvage value but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. (Tr. at 53).
6 Except for the * * * direct loan, Respondent is designated as the originating officer on all loan transactions at issue here. (FDIC Ex. 2). As the testimony of both EIC * * * and bank president * * * indicated, at the time of the examination the term "originated" was understood as meaning that an individual "recommended" that a loan be made or "put the borrower in contact with the bank." (Tr. at 56, 106–107, 391–392, 544). Despite repeated attempts at confusing this issue (Tr. at 545, 548–549) Respondent cannot absolve himself of his responsibility for the transactions at issue.
{{4-1-90 p.A-939}}chairman of the board, chief executive officer and president of the bank. (Tr. at 79, 318–320, 347–348, 495, 525, 562, 640, 670, 676, 695, 707, 759, 764; FDIC Exs. 22, 27, 34–39).
24. Because of Respondent's aforementioned conduct, * * * Bank has suffered or will probably suffer substantial financial loss or other damage, and/or the interests of * * * Bank's depositors could be seriously prejudiced. (10/25/85 Tr. at 26, 67, 69, 74; Tr. 49–50, 80, 82, 87, 219, 223–224, 234, 577, 581, 598; FDIC Exs. 2, 13).
25. As of the March 22, 1985 date of examination * * * Bank was on the brink of insolvency; its adjusted capital and reserves represented only 0.64% of the Bank's adjusted gross assets. (FDIC Exs. 2, 23, 28; Tr. at 80, 598; 10/25/85; Tr. at 26).
26. Because of the huge volume of inferior assets introduced by Respondent, the condition of the Bank has deteriorated significantly since 1982:
a. On February 26, 1982 * * * Bank was accorded a composite rating of two (2) by the FDIC.
b. At the state examination of the Bank dated July 27, 1984, * * * Bank was accorded a composite three (3) rating.
c. At the March 22, 1985 FDIC examination * * * Bank was accorded a five (5) rating. (FDIC Exs. 21, 22, 23, 28; Tr. at 82–86, 501, 695).
27. Respondent's conduct demonstrates his continuing disregard for the safety and soundness of * * * Bank, and evidences his unfitness to participate in the conduct of the affairs of * * * Bank, or to continue as a director, officer or participant in the conduct of the affairs of * * *.
28. The primary cause of bank failures is mismanagement. Fifty-seven (57) out of eighty-seven (87) of the banks which failed between January 1, 1985 and October 3, 1985 involved some type of credit administering deficiency and twenty-nine (29) out of eighty-seven (87) involved poor lending practices. (Tr. at 358–359).
[.5] 29. The shifting of assets usually involves selling loans from one bank to another or refinancing loans from one bank to another to keep these monies moving to avoid having to take losses or to avoid the detection of those assets by examiners or simply to enhance the financial statement or condition of the bank. The practice, although not illegal, is deemed an unsafe and unsound banking practice. (Tr. 298–299).
B. Findings Concerning The * * * Loans
30. * * * is a corporation in the nursing home, motel/hotel, and insurance business and is owned and controlled by * * *. (Tr. at 43, 559).
31. As early as 1976 * * * Bank purchased a participation in a loan to * * * from * * * Bank in * * *. (Tr. at 436).
32. That loan was renewed in December 1983/January 1984. (Tr. 437, 518, 554).
33. As of September 1984 that loan had an outstanding balance of $281,000.
34. Respondent claimed responsibility for that renewed participation loan (FDIC Exs. 2, 3; Tr. at 44).
35. The collateral used to secure this loan was 99,750 shares of * * * stock. (FDIC Ex. 2).
36. * * * is a subsidiary of * * * (FDIC Ex. 2).
37. The December 31, 1983 financial statement of * * * reflected an operating loss of $2,738,027. (FDIC Ex. 33; Tr. at 810).
38. Based on the condition of the parent company, * * * , as of March 22, 1985, EIC * * * deemed this collateral worthless. (FDIC Exs. 2, 33; TR. at 215), but this conclusion is not relevant to 1983 since * * * earned $3.4 million in 1983.
39. On September 28, 1984, * * * Bank made a loan to * * * in the amount of $275,000.7 (FDIC Ex. 2).
40. The loan proceeds were deposited in the account of * * * in an * * * bank and represented a loan to Mr. * * * from * * * to be used in land purchase transaction. (FDIC Ex. 2; Tr. at 763–768).
41. However, the land acquired with the loan proceeds was not pledged as collateral for the loan. (FDIC Ex. 2; Tr. at 805).
42. The * * * direct loan of $275,000 caused the total indebtedness of * * * to exceed the * * * state legal lending limit at that time. (FDIC Ex. 2).
7 This loan was originated by * * *, senior vice president and general counsel of * * * and * * * Bank director. (Tr. at 505).
{{4-1-90 p.A-940}}
43. As of March 22, 1985, the total indebtedness of * * * exceeded 50 percent of * * * Bank's capital and declared surplus, which totaled $990,000. (FDIC Ex. 2).
44. Respondent was aware that the $275,000 loan to * * * constituted a violation of state law. (Tr. at 48; 164).
45. Nevertheless, he seconded a motion approving the * * * transaction at the * * * Bank board of directors meeting held October 16, 1984, thereby ratifying the Bank's violation of section 259, title 6, of West's * * * Revised Statutes Annotated (* * * Rev. Stat. Ann. § 259 (1950)), which prohibits loans to any one borrower, directly or indirectly, from exceeding 50 percent of the bank's capital and declared surplus. (Tr. at 47, 49; FDIC Exs. 2, 9, 17).
46. It is a customary practice in the banking industry that loans in amounts which exceed a bank's legal lending limit are participated to another bank. (Tr. at 475, 485, 866).
47. Yet Respondent did not endeavor to participate out any portion of the * * * loan. (FDIC Ex. 2). Respondent also failed to oversee an accounting procedure at the Bank which would have solved the problems.
48. By approving the * * * transaction, Respondent engaged or participated in unsafe or unsound banking practices which resulted in a concentration of credit exceeding 25 percent of * * * Bank's total equity capital and reserves. (FDIC Ex. 2; Tr. at 48).
49. The loans outstanding to * * * as of March 22, 1985, totaled $506,000 and equaled 31.7 percent of * * * Bank's total equity capital and reserves of $1,594,000. (FDIC Ex. 2; Tr. at 48).
50. The * * * loans inured to the tangible benefit of Respondent's primary employer, * * *. (Tr. at 43, 559, 676, 695).
51. The * * * direct loan of $275,000 was secured by * * * stock, a subsidiary of * * * (Tr. at 45–46, 511–512, 769–770).
52. The primary asset of * * * was a receivable from the parent, * * * (Tr. at 46, 511–512, 769–770).
53. There was no cash on hand reflected in the * * * financial statement. (R. Ex. 38; Tr. at 47, 804).
[.6] 54. Respondent engaged or participated in unsafe or unsound banking practices by ratifying * * * Bank's extension of credit to * * * , a credit that was not adequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged. In fact, the pledged collateral was deemed "worthless". (FDIC Ex. 2; Tr. at 45–47).
55. The credit extended to * * * was classified Loss in the amount of $506,000 at the March 22, 1985 examination of * * * Bank. (FDIC Ex. 2).8 As of September 10, 1985, the Bank had charged off $442,000 of that amount. (FDIC Ex. 25.)
C. Findings Concerning The * * * Loan
56. On May 3, 1983, Respondent engaged or participated in unsafe or unsound banking practices by causing and/or allowing * * * Bank to extend unsecured credit to * * * Corporation in the amount of $100,000. (FDIC Ex. 15).
57. At the time Respondent introduced this loan to * * * Bank he was also serving as Secretary of the * * * Corporation. (FDIC Ex. 30; Tr. at 348, 525, 707).
58. * * * Corporation was formed in order to acquire 15,000 shares of stock in the * * * Bank * * *9 but that stock was not pledged as collateral for the $100,000 loan, rather it was pledged in another transaction at * * * Bank * * *. (Tr. at 708).
59. This debt was personally guaranteed by Respondent along with three other guarantors.10 (FDIC Ex. 14; Tr. at 459).
60. Although personally obligated on * * * indebtedness to * * * Bank, at no time was Respondent's guaranty released and he did not reimburse the Bank for the loan. (Tr. at 52; FDIC Ex. 14).
61. The financial statement of * * * utilized in making the loan showed that the total liabilities exceeded the firm's assets by $198,370.00. The corporation was "insolvent." (Tr. at 51, 707; FDIC Ex. 16).
62. This loan was classified Loss at the FDIC's March 22, 1985 examination of * * * Bank. (FDIC Ex. 2). Of the loan,
8 The * * * loan was also adversely classified by the Office of the Comptroller of the Currency ("OCC") in its 3/31/85 examination of * * * Bank. (FDIC Ex. 40, Tr. at 517–518, 870–871).
9 * * * Bank * * * is a part of the * * * banking chain. (FDIC Ex. 24; Tr. at 302).
10 Although the Bank allegedly extended this credit on the basis of the guarantees in question, none of the guarantees was ever honored, nor is it likely that they could have been honored given the March 1985 financial condition of the individual guarantors. (Tr. at 524–530, 708).
{{4-1-90 p.A-941}}$88,122 was paid by a third party, * * * as subsequently discussed and $20,000 has not been fully paid. (Tr. at 526–527; FDIC Ex. 25).
D. Findings Concerning The * * * Loan
63. At all times pertinent to these loan transactions * * * served as a * * * Bank attorney and as an attorney for * * * He also had an office at * * * headquarters. (Tr. at 55, 157, 221, 444, 626, 632, 708–709, 778,815).
64. This debt is represented by a note dated December 31, 1984 and is a consolidation of three other notes that originated in early to mid-1984. (FDIC Ex. 2). Of this loan $25,000 was charged off by the Bank. (FDIC Ex. 25). Also, another $25,000 portion of this loan was paid off by a third party who simply borrowed the money from * * * (Tr. 820). Further, as of September 10, 1985, $85,000 of this loan was still classified substandard. (FDIC Ex. 25).
65. The collateral for this loan consisted of farm machinery and equipment and a few shares of stock in * * * Bank * * * , some horse trailers, a boat, motors, etc. (FDIC Ex. 2; Tr. at 55).
66. Mr. * * * financial statement reflected heavy liabilities. (FDIC Ex. 2; Tr. at 55). His one time net worth of $500,000 and annual income of $250,000 was suspect because of a costly divorce and a dissolved law partnership. (Tr. 815–16).
67. Respondent knew or should have known that Mr. * * * had a previously classified loan at * * * Bank while he was an acting official at that institution and privy to its Report of Examination. (FDIC Ex. 27; Tr. at 316).
68. Given the obligor's financial condition and the lack of a realistic value for the collateral, this loan was accorded a Doubtful classification by Examiner * * * in his March 22, 1985 examination. (FDIC Ex. 2; Tr. at 56).11
E. Findings Concerning The * * * Loan
69. At all times relevant to the instant transaction, Mr. * * * was a vice president of * * *. (Tr. at 764).
70. This unsecured credit was based upon a financial statement dated February 15, 1983 and reflects heavy liabilities in the amount of $3.5 million which were still more than $1 million less than his assets according to the financial statement. (* * * Ex. 17).
71. This loan was classified Loss in the amount of $90,000 at the March 22, 1985 examination. (FDIC Ex. 2). Similar to the extinction of the * * * loan, this loan was repaid by * * * as is subsequently explained.
F. Findings Concerning The * * * Loan
72. This debt originated on December 14, 1982 at $200,000 and as of the March 22, 1985 examination the debt had not been reduced. (FDIC Ex. 2; Tr. at 57).
73. * * * is a bank holding company that holds * * * Bank * * * in * * * , another * * *-related interest. (FDIC Ex. 2; Tr. at 57).
74. The * * * loan was a participation purchased from * * * Bank in * * *.
75. This loan was also classified by the * * * State Examiners in July 1984. (FDIC Ex. 4; Tr. at 58).
76. Collateral for this loan consists of shares in Bank * * * , * * * , a subsidiary of the borrower. (FDIC Ex. 2; Tr. at 58).
77. As of the March 22, 1985 examination the debt was not fully secured and loss exposure was deemed substantial. Therefore, the loan was classified Doubtful in the amount of $200,000. (FDIC Ex. 2). As of the September 10, 1985, state visitation, $100,000 of this loan was charged off as loss and the $100,000 remainder was classified substandard. (FDIC Ex. 25).
G. Findings Concerning The * * * Loan
78. This is a participation purchased from * * * Bank * * * , a * * * institution, and the debt was restructured on February 12, 1985 under the name of * * * , a company formed to assume the debt of * * * , a bankrupt company. (FDIC Ex. 2; Tr. at 71–72; 522–523).
79. The loan was restructured under court order and * * * Bank did not obtain any additional security as a result. (Tr. at 522–523).
80. The maker of the note filed Chapter 11 Bankruptcy on February 11, 1984. (FDIC Ex. 4).
11 In a Doubtful classification there is significant loss but because it is difficult to determine a definitive amount one-half of a loan classified Doubtful is considered to be Loss. (Tr. at 56).
{{4-1-90 p.A-942}}
81. This loan was classified in the July 1984 * * * state examination (FDIC Ex. 4; Tr. at 60, 522, 592).12
82. Collateral for this particular loan is a supply vessel known as "Miss * * *" and was appraised at $3.8 million in 1981 and had only a present value of $2 million. In addition to the decreasing value of the collateral, average lease payments for such vessels have decreased, thus making the value of the vessel much less on an income basis than initially assigned. (FDIC Ex. 2; Tr. at 458).
83. Respondent knew or should have known that * * * (formerly * * *) had been classified at * * * Bank * * * and * * * Bank during his tenure at those institutions. (FDIC Ex. 27).13
84. At the March 22, 1985 FDIC examination this loan was classified as Substandard in the amount of $103,000. (FDIC Ex 2).
H. Findings Concerning The * * * Loan
85. Mr. * * * , at all times relevant to these proceedings, was an * * * officer. The loan proceeds were used to purchase * * * stock. (Tr. at 60–61, 466, 712, 759).
86. The * * * stock was held as collateral for the loan. (FDIC Ex. 2; Tr. at 61).
87. The loan to Mr. * * * was made prior to the bank's obtaining a financial statement from him. (FDIC Ex. 2; Tr. at 464, 760, 761, 787–788).
88. At the March 22, 1985 FDIC examination this loan was classified Loss in the amount of $88,000. (FDIC Ex. 2; Tr. at 61). Again this is a loan which was paid off by * * * as subsequently explained.
I. Findings Concerning The * * * Loan
89. On November 15, 1984 the Bank purchased a note from * * * acting as a trustee for himself, * * * , and * * * for $375,000. Approximately $1,000 in attorney's fees was added later, bringing the loan total to $376,000. (FDIC Ex. 2).
90. This out-of-territory note is from * * * Partnership, a * * * firm, payable to the above three individuals. The note had, as of the date of examination, a principle balance of $642,768. (FDIC Ex. 2).
91. The collateral for the note is a deed of trust covering a ranch in the vicinity of * * *. (FDIC Ex. 2).
92. Approximately $45,000 of the loan proceeds were used to reduce the debt owed by * * * , a debt also classified in this examination. (FDIC Ex. 2).
93. Additional loan proceeds were paid to * * * and * * * to purchase last out participations in the * * * debt. (FDIC Ex. 2).
94. This loan was classified Substandard in the amount of $376,000. (FDIC Ex. 2). However, it was paid off in September 1985 and produced total earnings of $1,000 in interest. (* * * Ex. 30).
J. Findings Concerning The * * * Loan
95. On July 11, 1983 * * * Bank purchased a $215,000 interest in a $519,421 loan participation at * * * Bank * * * , a * * *-related interest. (FDIC Ex. 2). (* * * Ex. 42).
96. Collateral for the loan to this bankrupt company is 100% of the stock of * * * , a * * * corporation. As of the date of the examination the collateral had not been released from the bankruptcy court and its sale was conjectural at best. (FDIC exs. 2, 4). Nothing else stood behind the loan, notwithstanding contentions of respondent to the contrary. (Tr. 63)
97. This same loan was classified by the * * * state examiners in July of 1984. (Tr. at 215 – 216; FDIC Ex. 4).
98. Respondent knew or should have known that * * * * * * loans had been previously classified during his tenure at Bank * * * and * * * Bank. (Tr. at 318; FDIC Ex. 27).
99. This loan was classified Substandard in the amount of $215,000. (FDIC Ex. 2). As of September 10, 1985, the loan was past due (FDIC Ex. 25).
K. Findings Concerning The * * * Loan
100. On September 13, 1983, * * * Bank purchased a $400,000 note of * * * from * * * Bank in * * * (FDIC Ex. 2).
101. The collateral for the loan was a mortgage in * * * subdivision, * * *. The lots were appraised at $15,000 each; however, as of the date of the March 22, 1985, examination the Bank had received only an average $4,608 for each of the 24 lots. Al-
12 This loan was also classified by the State at the lead bank. (Tr. at 592).
13 The precise date when this loan came to the bank is not clear. The fact that it apparently was subsequently renewed and restructured under a court order makes it improper to criticize * * * for the renewal of this loan, which now will take approximately 80 years to pay off. (Tr. 523; FDIC Ex. 2).
{{4-1-90 p.A-943}}though debt service was supposed to come from the sale of the lots, at the time of examination it appeared that in reality reduction was limited to periodic payments by the maker, with no specific correlation to the sale of the lots. (FDIC Ex. 2).
102. Although Mr. * * * had a $5.2 million net worth in 1984, the financial statement utilized in making the loan revealed that his assets were highly illiquid and failed to reveal a number of heavy contingent liabilities which, if reported, would have had a significant negative impact on his financial condition. (FDIC Ex. 2). On paper, he had a net worth in excess of $1.4 million when the loan was made in 1983. (* * * Ex. 19).
103. This particular loan was classified at the March 22, 1985 examination as Substandard in the amount of $119,000 and as Loss in the amount of $164,000. (FDIC Ex. 2). Subsequently, this loan was paid off.
L. Findings Concerning The * * * Loan
104. On March 24, 1983, * * * Bank purchased a loan participation from * * * Bank, * * * for $125,000. (FDIC Ex. 2).
105. Documents available in the Bank's files indicate collateral consisting of a $500,000 mortgage and a pledge of stock in * * * Bank * * * , the lead bank in the * * * chain. At the time of the examination, it was apparent that the collateral had been released and other collateral substituted and that the new collateral was in fact cross-pledged to another debt at the lead bank. Therefore, the collateral provided virtually no protection to the interest of * * * Bank. (FDIC Ex. 2; Tr. at 229, 474–480, 658).
106. Accordingly, this debt was classified at the March examination as Substandard in the amount of $4,000 and Loss in the amount of $96,000. (FDIC Ex. 2). Later, on September 10, 1985, the state classified this loan as $100,000 substandard. (FDIC Ex. 25). Subsequently the loan was restructured with new collateral (FDIC Ex. 25).
M. Findings Concerning The * * * Loan
107. This loan originated as a $120,000 loan but had been reduced to $60,000. The original note was secured by a mortgage on a house, but that collateral was released and the $60,000 remaining at the time of examination was unsecured. (FDIC Ex. 2; Tr. at 66).
108. The financial information available at the Bank on Mr. * * * lacked the necessary detail to properly analyze his ability to repay the loan. He was thought to be wealthy and his wife even wealthier. No attention was given toward asking the wife to cosign the note. (FDIC Ex. 2); Tr. 531).
Respondent knew or should have known that * * * had previously classified loans at the Bank * * *. (FDIC Exs. 27 and 35; Tr. at 318).
110. This loan was classified as Substandard in the amount of $60,000. (FDIC Ex. 2). As of September 10, 1985, $55,000 of the loan was substandard (FDIC Ex. 25), but now there is a payment schedule (* * * Ex. 30).
111. Mr. * * * loans were also classified by the OCC. (FDIC Ex. 40; Tr. at 871, 874–875).
N. Findings Concerning The * * *
112. $106,562 represented the remaining balance of a $400,000 participation purchased from the * * * Bank * * * on December 29, 1983. (FDIC Ex. 2). The purchase was taken because of * * * faith in * * * Bank. (Tr. 484). As of December 1984 that faith may have been reinforced by financial statements of * * * and * * * the guarantor of the loan. (* * * Ex. 15).
113. Collateral for the loan consisted of an assignment of insurance premium finance agreements and a continuing guarantee by * * *. (FDIC Ex. 2).
114. The collateral is cross-pledged to other debt of the guarantor at the lead Bank, thus diluting the value of the collateral. (FDIC Ex. 2).
115. At the time of the examination * * * Bank records did not contain financial information of Mr. * * *. (FDIC Ex. 2).
116. Accordingly, this loan was classified as Substandard in the amount of $107,000. (FDIC Ex. 2). As of September 10, 1985, the loan was substandard in the amount of $102,000, (FDIC Ex. 25); but $35,000 in interest has been paid. (* * * Ex 30).
O. Findings Concerning The * * * Loan
117. This loan is a $400,000 participation purchased from the lead Bank in * * * chain, * * * Bank * * *. (FDIC Ex. 2).
118. Security for the loan consisted of two mortgages on various parcels of real
{{4-1-90 p.A-944}}estate appraised in July of 1984 at $19.6 million. However, the same individual appraised the property in 1982 for $10.8 million and because such a rapid increase in value is unusual, the examiner expressed his doubt regarding the credibility of the appraisal. (FDIC Ex. 2).
119. A September 30, 1983 financial statement of the borrower reflects an insolvent condition. (FDIC Ex. 2).
120. Although the guarantor reflected a net worth of $5.8 million, his principle assets are a residence and property valued at $5.8 million and receivables from an affiliate totaling $743,800. (FDIC Ex. 2). He once was a wealthy man and apparently his image was sufficient for * * * and possibly other * * * Banks in financing * * *. (* * * Ex. 12; Tr. 200).
121. As of the end of July 1984 the collateral for this loan was heavily leveraged and the maker and guarantor were heavily in debt. Indebtedness of the company exceeded its assets 1.4 times. (FDIC Ex. 4).
122. The guarantor had leveraged himself to such an extent that the examiner doubted his capacity to repay the loan. (FDIC Ex. 2).
123. This loan was also classified by * * * state examiners in July 1984 and between the time of the state report and the FDIC report in March of 1984 the loan had not been reduced. (Tr. at 68).
124. Accordingly, this loan was classified Substandard in the amount of $340,000 and Doubtful in the amount of $60,000. As of September 10, 1985, * * * had charged off $30,000 of this loan (FDIC Ex. 25; Tr. 489 and 532), although the Bank still expects to be paid off according to * * *. (Tr. at 489).
P. Findings Concerning The * * * Loan
125. This loan for $120,000 was made by * * * Bank on October 11, 1983. (FDIC Ex. 2).
126. The debt was secured by a chattel mortgage on 74 head of cattle. At the time of the examination, the company was defunct and Bank management verified that only about half of the designated cattle were available for debt satisfaction. (FDIC Ex. 2; Tr. at 490).
127. This loan was classified Substandard in the amount of $25,000. (FDIC Ex. 2). As subsequently discussed, this loan was paid off by * * * from a loan made by * * * Bank * * * only July 19, 1985. (FDIC Ex. 25).
Q. Findings Concerning The * * * Loan
128. * * * is a colleague of Respondent and his uncle was * * * partner in * * * (Tr. at 495, 670).
129. Respondent introduced this $35,000 unsecured credit to the Bank on October 18, 1982. (FDIC Ex. 2; Tr. at 669–70).
130. At the time of the examination, the Bank did not have a current financial statement on file for the borrower. A subsequently acquired financial statement reflected a highly illiquid and leveraged position on the part of the borrower. (FDIC Ex. 2).
131. This loan was previously classified by * * * state examiners in July 1984. (Tr. at 215–216, 69; FDIC Ex. 4).
132. At the March 22, 1985 examination this loan was classified Loss in the amount of $35,000. (FDIC Ex. 2). After being carried for three years with no reduction, the loan was paid off by * * * (FDIC Ex. 25; Tr. 390, 671, 716).
Findings Re the * * * Payoffs
133. Subsequent to the March 22, 1985 examination * * * Bank * * * accepted 100 percent of * * * Bank's outstanding stock in full satisfaction of a $2.5 million stock loan to former * * * Bank chairman * * *. * * * a long time associate of * * * , defaulted on his stock loan and * * * Bank took the * * * stock in lieu of foreclosure proceedings. (RPF 245).
As part of the transaction, * * * purchased a number of loss loans from * * * Bank, including loans to * * * Corporation, * * * , * * * , * * * , and * * * (RPF 241).
Four out of five of the loans purchased by * * * were to * * *-related interests. (Rs. Memo at 38; Tr. at 718).
Respondent's payout figure for the * * * transaction is stated as $340,000. (RPF 241, 246). That figure was based upon approximations presented by * * * Bank VP * * * and not upon verified records. (Tr. at 846).
The loan from * * * Bank was extended to * * * despite the fact that he had a previously classified loan at * * * Bank in the amount of $637,000. (Tr. at 854–55; FDIC Ex. 34).
The $550,000 loan at * * * is currently classified Loss in the amount of $150,000
{{4-1-90 p.A-945}}and the balance considered Substandard. (Tr. at 862).
The * * * transaction was structured so that it removed uncollectable loans from * * * Bank and placed with them with * * * Bank. Despite Respondent's contention that there was a "good business reason" why * * * made the new loan, the fact is that Messrs * * * , * * * , and other creditors whom * * * represented as trustee were relieved of losing on these notes if * * * had declared bankruptcy. The notes taken out of * * * , e.g., * * *, * * * Corp., * * * , * * * and * * * were actually traded to * * * as trustee for the worthless * * * notes. Although the five notes were considered uncollectable, the chances of ever receiving any funds are greater from these close business associates than from * * *. Also, * * * Bank is now left with a loan that is of questionable collectability and is regarded as involving substantial loss. The burden of loss has been shifted from * * * to * * * with Messrs. * * * , * * * , and other creditors represented by * * * as trustee in improved positions.
III. CONCLUSIONS OF LAW
1. The FDIC has jurisdiction over the Bank, the Respondent and the subject matter of this proceeding and has authority to issue a Removal Order against Respondent pursuant to sections 8(e) (1) (2) and (5) of the Act.
[.7] 2. A director who approves loans which individually or in the aggregate exceed a bank's legal lending limit and are in violation of state law, and who fails upon acquiring knowledge of such violation, to impose controls to assure that such practice is halted, has aided and abetted and/or participated in the violation and committed an unsafe and unsound banking practice.
[.8] 3. A director, who has knowledge of the occurrence of a violation of law and unsafe and unsound banking practices, commits a breach of his/her fiduciary duty by failing to impose controls to assure that the violation is corrected and the practices are halted.
[.9] 4. A director, who fails to impose controls to assure that a known violation of law and unsafe and unsound practices are halted has evidenced a continuing disregard for the safety and soundness of the bank and has further evidenced his/her unfitness to participate in the conduct of the affairs of any FDIC insured bank.
[.10] 5. A director, who is privy to information which shows the lack of creditworthiness of a potential borrower, owes a fiduciary duty to disclose that information to the bank.
6. From September 28, 1984 through March 22, 1985, * * * Bank extended credit to * * * in amounts which exceeded the Bank's legal lending limit, in violation of section 259, title 6 of West's * * * Revised Statutes Annotated. (* * * Rev. Stat. Ann. §259 (1950)).
7. This extension of credit also exceeded 25% of the Bank's total equity and reserves and resulted in a concentration of credit which is an unsafe or unsound banking practice.
8. As of the March 22, 1985 date of examination the * * * extension of credit was not adequately protected by the current sound worth and paying capacity of the borrower or the collateral pledged. This is an unsafe or unsound banking practice.
9. Respondent was aware of these deficiencies but nevertheless ratified the transaction and did not endeavor to correct the problems posed by the * * * loans.
10. Respondent caused * * * Bank to extend a number of deficient credits which inured directly to his primary employer, * * * , and his related interests, thereby breaching his fiduciary duty to * * * Bank.
11. Respondent engaged or participated in unsafe or unsound banking practices by knowingly causing * * * Bank to extend credits which were inadequately protected by the current sound worth and paying capacity of the borrowers or the collateral pledged.
12. As of March 22, 1985, Respondent caused and/or allowed * * * Bank to make extensions of credit that were classified Loss in the amount of $573,000 (not including the * * * loan classified Loss in the amount of $506,000), Doubtful in the amount of $420,000, and Substandard in the amount of $1,349,000. These adversely classified loans represent 74.15 percent of total adversely classified loans of $3,165,000, and represent 146.9 percent of * * * Bank's total equity capital and reserves of $1,594,000.
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13. Respondent violated the law and participated in the unsafe or unsound banking practices described in paragraphs 6 through 12 above.
14. By his participation in the violation of law described in paragraph 6, 9 above, Respondent violated the law within the meaning of section 8(c) of the Act.
15. Respondent's failure to take appropriate action to effectively curb or otherwise curtail the violation of law and unsafe or unsound practices described above, constitutes a breach of his fiduciary duty as a director of the Bank.
16. Respondent's breach of fiduciary duty as a director of the Bank and his participation in the violation of law and unsafe or unsound practices described above demonstrates a continuing disregard for the safety and soundness of the Bank and further evidences his unfitness to participate in the conduct of the affairs of * * * Bank, or to continue as a director, officer or participant in the conduct of the affairs of * * *.
17. * * * Bank suffered substantial financial loss a a result of Respondent's breach of fiduciary duty and participation in the violation of law and unsafe or unsound practices described above. In addition, * * * Bank will probably suffer additional substantial financial losses as a result of Respondent's conduct.
18. Respondent's practices with regard to his introduction of a high volume of inferior assets to the bank is a ground for removal and prohibition from further participation in the conduct of * * * Bank, and * * * within the meaning of sections 8(e) (1) (2) of the Fedral (sic) Deposit Insurance Act (12 U.S.C. § 1818(e) (1) (2)).
Discussion and Conclusions
A. Statutory Authority of FDIC
[.11] The statutory scheme established by the Congress in the Federal Deposit Insurance Act, as amended, is a key part of a comprehensive system of federal insurance regulation of banks. 12 U.S.C. § 1811-1831d. Congress established the FDIC in 1933 in order to restore confidence in the banking system by establishing a system for the banks "under Government supervision and regulation * * * mutually [to] guarantee the deposits of each other." H.R. Rep. No. 150, 73d Cong., 1st Sess. 5, 6 (1933). FDIC is authorized to examine any insured bank and regulate almost every aspect of its dealings. Among its other regulatory powers. FDIC is authorized to issue, pursuant to administrative proceedings, cease-and-desist orders, orders suspending or removing directors or officers, and orders prohibiting persons from participation in the conduct of the affairs of an insured bank when FDIC concludes such orders are necessary to prevent and remedy violations of law and unsafe or unsound banking practice. 12 U.S.C. § 1818; First National Bank of Scotia v. United States, 530 F.Supp. 162, 166 (D.D.C. 1982).
The FDIC is responsible for the protection of the insurance fund against undue risk of loss. One of the principal supervisory tools to achieve that end is the bank examination, which seeks to identify practices that could result in losses to banks; and ultimately, perhaps, claims against the insurance fund. "The purpose of the bank examinations by the FDIC under 12 U.S.C. § 1820(b) is to prevent losses that would result in claims against the insurance fund." First State Bank of Hudson County v. United States, 599 F. 2d 558, 563 (3d Cir. 1979), cert. denied, 444 U.S. 1013 (1980).
B. Removal Under Section 8(e) Of The Federal Deposit Insurance Act
[.12] In the case of a federally insured state nonmember bank, section 8(e) (1) of the FDI Act imparts to the FDIC the discretion to formulate a decision as to whether the circumstances warrant the initiation of a removal proceeding of a director or officer. (12 U.S.C. § 1818(e) (1)). This section of the statute sets forth three (3) acts, any one of which presents the requisite threshold for the commencement of an 8(e) (1) action. They are as follows:
(1) the commission of a violation of law, rule, regulation or cease and desist order which has become final; or
(2) the engagement or participation in any unsafe or unsound practice in connection with the bank; or
(3) the commission or engagement in any act, practice or omission which constitutes a breach of said officer's or director's fiduciary duty.
Upon the occurrence of any one of these misdeeds, the FDIC must look to the effects which flow therefrom. The statute provides three consequences deemed to be of such serious import by Congress to justify a removal action:
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(1) the bank has suffered or will probably suffer substantial financial loss or other damage; or
(2) the interests of depositors could be seriously prejudiced by reason of one of the aforementioned acts; or
(3) the officer or director has received financial gain by reason of one of the aforementioned triggering actions.
Under section 8(e) (1) of the Act, the financial loss criterion sets forth two tests for its satisfaction. The first of these is actual financial loss which has previously occurred, and was caused by the subject officer or director. The second half of this standard measures the "probable" financial loss that the Bank will likely suffer as a result of the bank official's conduct. This loss must be "substantial" in nature. "Substantial financial loss means that the amount is substantial standing alone; not that the amount must be substantial as a percentage of the size of the institution." S. Rep. No. 323, 95th Cong., 1st Sess. 7 (1977).
Congress imposed an additional tier of criteria for the inception of a section 8(e) proceeding, mandating that the misdeeds and their attendant repercussions must either:
(1) involve personal dishonesty; or
(2) demonstrate a willful or continuing disregard for the safety or soundness of the bank.
In the instant action FDIC has not charged Respondent * * * with "personal dishonesty," nor is it required to do so.14 The wording of section 1818(e) (1) of the Act is in the disjunctive and does not mandate that FDIC establish personal dishonesty before issuing a notice or order under section 8(e).
Whenever, in the opinion of the appropriate Federal banking agency, any director or officer of an insured bank has committed any violation of law, rule, or regulation or of a cease-and-desist order which has become final or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has committed or engaged in any act, omission, or practice which constitutes a breach of his fiduciary duty as such director or officer, and the agency determines that the bank has suffered or will probably suffer substantial financial loss or other damage or that the interests of its depositors could be seriously or that the interests of its depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty or that the director or officer has received financial gain by reason of such violation or practice or breach of fiduciary duty is one involving personal dishonesty on the part of such director or officer, or one which demonstrates a willful or continuing disregard for the safety or soundness of the bank, the agency may serve upon such director or officer a written notice of its intention to remove him from office. (Emphasis added.).
12 U.S.C. § 1818(e) (1).
This statutory wording was adopted in 1978. Prior to that time the personal dishonesty standard governed. Congress recognized, however, that that standard "hampered the agencies in their efforts to take timely action to make certain that individuals whose actions are seriously damaging the institution may be removed from their positions." H. Rep. No. 95–1383, 95th Cong. 2d Sess. (1978) at 18. Congress therefore deliberately provided a less burdensome test authorizing "removal when an individual has evidenced personal dishonesty or has demonstrated willful or continuing disregard for the safety and soundness of the financial institutions." Id. (Emphasis in original). Congress endorsed the new standard and was fully aware that it allows agencies the opportunity to move against individuals who may not be acting in a fraudulent manner but who are nonetheless acting in a manner which threatens the soundness of their institutions." Id.
The willful or continuing disregard15 criteria were adopted with the idea that these two gauges of conduct would encompass those practices which though not fraudulent were deliberate and effectuated in the face
14 The FDIC has, in a number of cases other than the instant action, initiated removal proceedings against individuals absent a finding of personal dishonesty. (Tr. at 255, 359).
15 This phrase was recently held to establish two distinct standards of scienter; the "willfulness" element involves a deliberative intention, whereas "continuing" implies a lesser "degree of intent", suggestive of voluntary inattention or recklessness. Brickner v. Federal Deposit Insurance Corporation, 747 F.2d. 1198 (8th Cir. 1984).
{{4-1-90 p.A-948}}of an inauspicious outcome or were knowingly repeated over a period of time and threatened the safety and soundness of the bank or savings and loan association. H. R. REP. NO. 1383, 95th Cong., 2d Sess. 18, reprinted in 1978 U.S. CODE CONG. and ADM. NEWS 9273, 9290. The disjunctive language of the willful or continuing standards defines the scope of section 8(e) (1): in the case of willful conduct, it is that conduct which is practiced deliberately in contemplation of the results, and in the case of continuing conduct, it is that conduct which is voluntarily engaged in over a period of time with heedless indifference to the prospective consequences.
The "personal dishonesty" and "willful or continuing disregard" criteria just discussed are common to both sections 8(e) (1) and 8(e) (2). Section 8(e) (2) permits removal based upon a showing that the past conduct or practice of an individual led to "substantial financial loss or other damage" at another insured bank or business institution. This clause is virtually the same as that used in section 8(e) (1) as discussed above and may be given the same meaning.
The "financial gain" alternative in section 8(e) (1) was not, however, added to section 8(e) (2), rather 8(e) (2) requires that the individual evidence his "unfitness to continue as director or officer...[or]...to participate in the conduct of the affairs of such insured bank ...." The "unfitness" may be evidenced by the individual's past conduct or practice "which has resulted in financial loss or other damage." Thus, having caused "substantial financial loss or other damage" is sufficient to show "unfitness." Once this showing is made with respect to an individual's involvement in an "insured bank or other business institution" he/she may be removed from another bank.
The legislative history of the Financial Institutions Supervisory and Insurance Act ("FISIA") also reveals the burgeoning need for the enactment of statutes and regulations which provide federal banking agencies with a means of curbing practices destructive of financial institutions prior to their reaching the perilous conditions described under section 8(e).
Abusive self-dealing has been a significant contributing factor in more than half of all bank failures since 1960.... Even where the immediate result is not the bank's failure ... an insider transaction that is not effected on an arm's length' basis may lead to a diminution of the bank's earnings and an erosion of capital - thereby increasing the risk of loss to the depositors and minority shareholders, and ultimately perhaps to the deposit insurance fund. (Such) transactions constitute a diversion to insiders of resources that properly belong to all shareholders on a pro rate basis, as well as misallocation of a community's deposited funds.
BANK SUPERVISION, BANK DIRECTORS AND CONFLICTS OF INTEREST, 1977: Hearings on S. 71, S. 73, S. 895 and S. 1433 Before the Senate Comm. on Banking, Housing and Urban Affairs, 95th Cong., 1st Sess. 40 (1977) (Statement of George A. LeMaistre, Chairman, Federal Deposit Insurance Corporation).
In his statement before the House Committee on Banking and Currency in 1966, John E. Horne, Chairman of the Federal Home Loan Bank Board referred to FISIA, the source of the FDIC's section 8(e) powers, as the "...answer to the devastation that can be visited upon an institution by a faithless manager." FINANCIAL INSTITUTIONS SUPERVISORY AND INSURANCE ACT OF 1966: Hearings on S. 3158 and S. 3695 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess. 36 (1966). This answer has been recognized as a bestowal of power upon federal banking agencies to remove an officer or director from office and to prohibit such individual or any other person participating in the conduct of the affairs of an insured bank from such further participation in any insured bank.
The removal provisions [passed in 1966 as part of FISA] were designed to provide a remedy to prevent individuals from holding responsible positions where such individuals have evidenced dishonesty and breach of trust and whose activities should be severed from the institution with which they are associated [;]...their object is to protect the institutions, the depositors who invest their funds in the institutions, and the interests of the Government which underwrites the insuring agencies from the activities of those in fiduciary positions which may tend to undermine public confidence in the integrity of these insti-
{{4-1-90 p.A-949}}tutions. 3 U.S. Code Cong. & Admin. News, pp. 1532, 3538-5.
Federal Savings and Loan Insurance Corp. v. Hykel, 333 F. Supp. 1308, 1311 (E.D. Pa. 1971).
[.13] Under the Act, administrative proceedings are initiated to "prevent irresponsible...individuals from looting or otherwise wrecking insured banks and savings and loan associations through improper activities." S. Rep. No. 1482, 89th Cong., 2d Sess. 3 (1966).
This statute was enacted by Congress not because it was thought that "government officials should have more power," but rather for the benefit of depositors, both businessman and individual creditors of these financial institutions, and to perpetuate the stability of the banking system; in short, to decrease the necessity of the federal banking agencies exercise of another power - to terminate insurance. 112 CONG. REC. 24984 (1966).
C. Respondent Engaged Or Participated In Unsafe Or Unsound Banking Practices
The acts or practices which are deemed to be unsafe or unsound practices within the meaning of section 8(e) of the Federal Deposit Insurance Act (12 U.S.C. § 1818(e)) are not specified or otherwise identified in the Act; nor is the phrase "unsafe or unsound practice" defined in the statute.16 The phrase has, however, been in legislation applicable to FDIC for over fifty years. The precursor of the present section 8(a) of the Act (12 U.S.C. § 1818(a)), relating to the termination of insurance of an insured bank, referred to unsafe or unsound practices when enacted as part of the Banking Act of 1935 (Ch. 614, § 101(I), 49 Stat. 684, 690).
In 1966, Congress enacted FISIA, adding section 8(e) to the Federal Deposit Insurance Act and amending section 8(a) in several important respects. See 12 U.S.C. § 1818(a) and (e) (Supp. V. 1981). The legislative purpose in enacting this bill was to provide additional flexible and effective supervisory powers to the federal financial supervisory agencies, "within carefully guarded limits, in order to make sure that... banks and savings and loan associations... continue to serve the nation effectively and well." (S. Rep. No. 1482, 89th Cong., 2d Sess. 6 (1966)).
The legislative history of FISIA shows that Congress carefully considered the phrase "unsafe or unsound." By retaining the phrase in the final legislation, Congress concluded that the term "unsafe or unsound" was sufficiently clear and definite so as to be understood by those subject to its proscription. Both the Senate and House quoted with approval from a memorandum introduced by the then chairman of the Federal Home Loan Bank Board, John E. Horne, which explained the meaning of the term "unsafe or unsound" as it is used in the context of the regulation of the nation's financial institutions. (112 Cong. Rec. 24022 (bound ed. Oct. 4, 1966) (House); 112 Cong. Rec. 25416 (bound ed. Oct. 13, 1966) (Senate)). The concept of "unsafe or unsound banking practices" was described by then Chairman Horne as follows:
At the outset, it should be noted that the term "unsafe or unsound," as used in the cease-and-desist provisions of S. 3158, is not a novel term in banking or savings and loan parlance. The words "unsafe" or "unsound" as a basis for supervisory action appear in the banking or savings and loan laws of 38 states. For more than 30 years, "unsafe" or "unsound practices" have been grounds for removal under section 30 of the Banking Act of 1933, of a director or officer of a member bank of the Federal Reserve System. See 12 U.S.C. 77. It has been grounds since 1935 for the termination of insurance of a bank insured by the Federal Deposit Insurance Corporation.
However, despite the fact that the term "unsafe or unsound practices" has been used in the statutes governing financial institutions for many years, the Board is not aware of any statute, either Federal or State, which attempts to enumerate all the specific
16 The phrase "unsafe or unsound practices" is similar to the language in the Federal Trade Commission Act which states that unfair methods of competition and unfair or deceptive acts or practices are unlawful (15 U.S.C. § 45(a) (1)). When Congress enacted the Federal Trade Commission Act, it intentionally did not attempt to define that phrase or to enumerate the practices which were within its scope (S. Rep. No. 597, 63d Cong., 2d Sess. (1914); H.R. Rep. No. 1142, 63d Cong., 2d Sess., pp. 18–19 (1914)). Congress adopted a phrase which has no precise definition, but the meaning and application of which must be arrived at by the gradual process of inclusion and exclusion. Federal Trade Commission v. Keppel Bros., Inc., 291 U.S. 304, 312 (1934). Congress no doubt adopted a similar regulatory scheme in the Federal Deposit Insurance Act.
{{4-1-90 p.A-950}}acts which could constitute such practices. The concept of "unsafe or unsound practices" is one of general application which touches upon the entire field of the operations of a financial institution. For this reason, it would be virtually impossible to attempt to catalog within a single all-inclusive or rigid definition the board spectrum of activities which are embraced by the term. The formulation of such a definition would probably operate to exclude those practices not set out in the definition, even though they might be highly injurious to an institution under a given set of facts or circumstances or a scheme developed by unscrupulous operators to avoid the reach of the law. Contributing to the difficulty of framing a comprehensive definition is the fact that particular activity not necessarily unsafe or unsound in every instance may be so when considered in the light of all relevant facts. Thus, what may be an acceptable practice for an institution with a strong reserve position, such as concentration in higher risk lending, may well be unsafe or unsound for a marginal operation.
[.14] Like many other generic terms widely used in the law, such as "fraud," "negligence," "probable cause," or "good faith," the term "unsafe or unsound practices" has a central meaning which can and must be applied to constantly changing factual circumstances. Generally speaking, an "unsafe or unsound practice" embraces any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss of damage to an institution, its shareholders, or the agencies administering the insurance funds." (Emphasis added.)
FINANCIAL INSTITUTIONS SUPERVISORY AND INSURANCE ACT OF 1966: Hearings on S. 3158 and S. 3695 Before the House Comm. on Banking and Currency, 89th Cong., 2d Sess., at 49–50 (1966).
Courts have consistently held that a financial regulatory agency's discretionary authority to define and eliminate "unsafe or unsound" practices is to be "liberally construed." Independent Bankers Association of America v. Heimann, 613 F. 2d 1164, 1169 (D.C. Cir. 1979), cert. denied 449 U.S. 823 (1980). In Groos National Bank v. Comptroller of the Currency, 573 F. 2d 889 (5th Cir. 1978), the Fifth Circuit Court of Appeals noted that "[t] he phrase `unsafe or unsound banking practice' is widely used in the regulatory statutes and in case law, and one of the purposes of the banking acts is clearly to commit the progressive definition and eradication of such practices to the expertise of the appropriate agencies." Id. at 897. (Emphasis added.)
The FDIC's interpretation of the statute should prevail unless it is "demonstrably irrational." See Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 565 (1980). See also, Horizon Mutual Savings Bank v. FSLIC, 674 F. 2d 1312, 1316 (9th Cir. 1982).
In A. G. Becker, Inc. v. Federal Reserve Board, 693 F.2d 136 (D.C. Cir. 1982), cert. granted sub nom, Securities Industry Association v. Board of Governors of the Federal Reserve System, 464 U.S. 812 (1983), the court held that the Federal Reserve Board's interpretation of a statute it administered was entitled to even greater than usual weight because, inter alia, it was "responsible to bring enforcement actions to prevent member banks from engaging in `unsafe and unsound' banking practices"; and "the agency's decision applie[d] general, undefined statutory terms...to particular facts... [S]uch statutory drafting leave[s] the agency with the task of evolving definition on a case-by-case basis." Id. at 140–141 (Quoting Puerto Rico v. Blumenthal, 642 F.2d 622, 635 (D.C. Cir. 1980), cert denied sub nom, Puerto Rico v. Regan, 451 U.S. 983 (1981)). All of these considerations are present in the instant case, and demonstrate that the FDIC's interpretation of the "unsafe or unsound" language in section 8(e) should be given substantial weight.
The FDIC and the other federal banking agencies have determined that there are certain practices which are inherently unsafe or unsound banking practices and the courts have consistently sustained such determinations. Included in such practices have been: the accumulation of an excessively high volume of adversely classified loans and other assets, First National Bank of Eden v. Department of the Treasury, 568 F.2d 610, 611 n. 1 (8th Cir. 1978) (unsafe assets in the amount of 37% of the Bank's gross capital funds); Groos, supra, 892, 896 (high percentage of "high-risk" loans); making secured loans based on inadequate collateral, Bank of Dixie v. Federal Deposit Insurance Corporation, 766 f.2d 175, 176 (5th Cir. 1985); and making loans without regard for the borrower's ability to make repayment, Gulf Federal Savings and Loan
{{4-1-90 p.A-951}}Assoc. of Jefferson Parish v. Federal Home Loan Bank Board, 651 F.2d 259, 264 (5th Cir. 1981), cert. denied 458 U.S. 1121 (1982).
[.15] Respondent's responsibility for 74.15 percent of * * * Bank's adversely classified loans vividly demonstrates his participation in unsafe and unsound banking practices. (Tr. at 78, 259, 320).
D. Respondent's Conduct Evidences A Continuing Disregard For the Safety And Soundness Of The Bank
[.16] The record indicates that the condition of * * * Bank deteriorated significantly during Respondent's tenure at the institution. As discussed previously, supra at 8, deterioration has occurred most noticeably in the Bank's loan portfolio. Furthermore, under the Uniform Financial Institutions Rating System the Bank went from a two (2) rating in 1982 to a three (3) rating in 1984 and in 1985 was assigned an overall five (5) rating and individual five (5) ratings for its capital, asset quality, management, earnings and liquidity (CAMEL). Banks in this lowest category have an extremely high, probability of failure.
E. Respondent's Conduct Seriously Prejudiced The Interests Of The Bank's Depositors And Has Resulted In Substantial Financial Loss To The Bank
The legislative history of section 8(e) does not define the term "seriously prejudice the interests of the depositors." Clearly, however, any action which, if continued, may ultimately cause loss to the Bank would fall within the meaning of that term. This interpretation is supported by the definition of unsafe or unsound banking practice as it is found in the legislative history of section 8(e). The Horne Memorandum, previously cited, defined unsafe or unsound banking practice as "...any action, or lack of action, which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds." FINANCIAL INSTITUTIONS SUPERVISORY AND INSURANCE ACT OF 1966: HEARINGS ON S. 3158 and S. 3695 Before the House Committee on Banking and Currency, 89th Cong. 2d Sess. 49–50 (1966). Since the continuation of risk of loss flowing from any of these acts or failures to act may ultimately cause a bank to fail, a depositor's interest in such an institution would also be at risk.
Lending and collection practices that are contrary to normal and prudent banking standards expose a bank to risk of loss and, as such, are unsafe or unsound practices within the meaning of the Horne Memorandum. Respondent engaged in these practices as evidenced by his personal responsibility for approximately 74.15 percent of the adversely classified credits in * * * Bank. A loan is adversely classified because it is a loss to the bank or poses a risk of loss. All of the loans included within the classified credits for which Respondent is responsible contain one or more unacceptable lending or collection practices. EIC * * * testified why certain practices exposed the Bank to risk. These practices generally include lending without adequate financial information and adequate collateral, lending beyond the financial capacity of the borrowers, to concentrations of credit.
Here, Respondent initiated a large volume of adversely classified assets contrary to the standards of normal and prudent bank operation. The risk of loss to the depositors is obvious—the majority of the borrowers did not have the means to repay these "loans" personally, if, in fact, repayment was ever the intent of the transactions.
As evidenced by the huge volume of adverse loan classifications identified at the March 22, 1985 examination, Respondent's unsafe or unsound lending practices created a distressed loan portfolio containing both existing and probable future risk of loss to * * * Bank. As of March 22, 1985 an abnormally high percentage of the Bank's total loans were adversely classified and represented a deteriorating trend. The percentage of the Bank's loans adversely classified increased significantly from the 1982 FDIC examination as well as the 1984 state examination.
The total dollar amount of adversely classified loans as of March 22, 1985 was $1,509,000; Substandard; $549,000 Doubtful, and $1,107,000 Loss. These amounts are substantial standing alone and in relation to the size of the Bank.
F. Respondent Breached His Fiduciary Duty By Reason Of His Participation In Unsafe
{{4-1-90 p.A-952}}Or Unsound Banking Practices And Violation Of Law And Regulation
As a * * * Bank director, member of the board of directors, and member of its loan committee, Respondent owed a fiduciary duty to the Bank's depositors and shareholders not unlike that owed by officers and directors of a corporation to the company and its shareholders. Lane v. Chowning, 610 F.2d 1385, 1388 (8th Cir. 1980); State Banking Board v. Valley National Bank, 604 S.W.2d 415, 417 (Tex. Cir. App. 1980).
[.17] Fulfillment of Respondent's obligations to the Bank and its depositors and shareholders has been recognized as demanding particular scrutiny on the part of the Bank director to see that the public trust is kept intact. Gadd v. Pearson, 351 F. Supp. 895 (M.D. Fla. 1972). "Officers and directors of banking corporations generally owe a greater duty than other corporate officers and directors." Id. at 903. This duty imposes several obligations17 upon a bank director and requires a bank director to disclose conflicts of interest, to avoid intentional misconduct and seizure of corporate opportunity, to act primarily for the benefit of the corporation, to be fair in all dealings that involve the corporation, and to refrain from competing with the corporation. KAPLAN, Fiduciary Responsibility in the Management of the Corporation 31 BUS. LAW. 883 (1976). A bank director acting in his fiduciary capacity overseeing the funds of others may be said to be acting as a trustee, and said position necessitates "scrupulous good faith and candor". Black's Law Dictionary 753 (rev. 4th ed. 1972). A duty of loyalty pervades these responsibilities, and demands the absence of self-serving practices. Robert E. Barnett, RESPONSIBILITIES AND LIABILITIES OF BANK DIRECTORS § 112 (Federal Banking Law Reports No. 805, 1980).
In the case at bar, Respondent failed to execute these elements of his fiduciary duty. Though charged with the management of funds of depositors and shareholders, Respondent initiated and directed a series of transactions wherein these funds were diverted for the benefit of Respondent's primary employer, * * * and his related interests. The trustee-like position of a bank director who maintains custody of the funds of others, and who oversees their prudent investment requires the absence of even the appearance of a conflict of interest and does not allow for disregard of established safe and sound principles of banking.
Respondent's own witnesses stated that he had a duty to advise * * * Bank of those creditors whose loans were classified at other banks with which he had been associated. (Tr. at 528, 793). Respondent, however, did not do this despite the fact that he was privy to examination data indicating that loans to * * * (formerly * * *), * * * , * * * , * * * and * * * had been classified at Bank of * * * , * * * , or * * * Bank during his tenure at those institutions. (FDIC Ex. 27; Tr. at 314–319). Respondent breached his fiduciary duty to * * * Bank by not disclosing to the loan committee and/or the board of directors the lack of creditworthiness of those borrowers with whom he was familiar. (Tr. at 79, 320)
Judicial recognition of the duty of a bank director to exercise reasonable care in the supervision of bank officers is longstanding. This duty was forcefully stated in Briggs v. Spaulding, 141 U.S. 132, 165–66 (1891):
[W]e hold that directors must exercise ordinary care and prudence in the administration of the affairs of a bank, and that this includes something more than officiating as figure-heads. They are entitled under the law to commit the banking business, as defined, to their duly authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of want of knowledge of wrong-doing, if that ignorance is the result of gross inattention;.... (Emphasis added.)
The Eighth Circuit Court of Appeals in Brickner noted that:
Section 1818(e)(1) does not specifically define fiduciary duty and accords substantial discretion to the agency. The concept of fiduciary duty may, in differing circumstances, require fiduciaries to exercise varying degrees of vigilance and care. The FDIC has special expertise in the banking area, and extensive experience with the duties and responsibilities
17 Bank Directors have been held to have breached their fiduciary duty for: disregarding agency regulations (Bowerman v. Hamner, 250 U.S. 504 (1919)); failing to institute and secure a sound, supervised loan program (Gamble v. Brown, 29 F.2d 366 (4th Cir. 1928)); knowingly permitting violation of state statutes regulating banks (Bowerman; Atherton v. Anderson, 99 F.2d 833 (6th Cir. 1938)); and ignoring warnings from responsible sources (Prudential Trust Co. v. Brown, 271 Mass. 132, 171 N.E. 42 (1930).
{{4-1-90 p.A-953}}of bank officers and directors. The Board's conclusion that petitioners' conduct constituted a breach of their fiduciary duties as directors of the Bank...is, in the circumstances, entitled to deference on review by this court.
Brickner, supra at 1202.
No less deference should be accorded FDIC determinations in this administrative forum.
G. The Authority Of FDIC To Issue An Order Of Removal Is Not Affected By A Showing That The Practices, Violations, Conditions, Or Other Statutory Grounds Upon Which The Action Was Initiated Have Been Discontinued Or Corrected
Plaintiff's repeated allegations with respect to alleged subsequent improvements are factually and legally irrelevant to this administrative proceeding. The charges advanced in the FDIC Amended Notice are predicated upon Respondent's activities and conduct as of the March 22, 1985 Report of Examination.
In any litigation there must be a point of departure for determining the facts in issue. (Tr. 131). To require proof of continuing acts would result in the virtual paralysis of the fact-finding process. With respect to the regulatory duties of the FDIC, the point of departure is the bank examination. Section 10(b) of the Act (12 U.S.C. § 1820(b)) provides, in pertinent part: "Each examiner shall have power to make a thorough examination of all of the affairs of the bank and its affiliates, and shall make a full and detailed report of the condition of the bank to the Corporation." It is obvious that the FDIC cannot be aware of a bank's condition on a continuous basis, but must base its assessment upon a complete examination, conducted during a discrete period of time. FDIC has neither a statutory obligation nor the financial wherewithal to permanently assign a bank examiner to every problem bank so that he or she can monitor its activities on a daily basis.
The language of sections 8(e)(1) and (2) is worded in the past perfect tense and does not require proof of ongoing practices or conditions. Section 8(e)(1) provides that:
Whenever, in the opinion of the appropriate Federal banking agency, any director or officer of an insured bank has committed any violation of law, rule, or regulation or of a cease-and-desist order which has become final, or has engaged or participated in any unsafe or unsound practice in connection with the bank, or has committed or engaged in any act, omission, or practice which constitutes a breach of his fiduciary duty as such director or officer, and the agency determines that the bank has suffered or will probably suffer substantial financial loss or other damage or that the interests of its depositors could be seriously prejudiced by reason of such violation or practice or breach of fiduciary duty or that the director or office[r] has received financial gain by reason of such violation or practice or breach of fiduciary duty, and that such violation or practice or breach of fiduciary duty is one involving personal dishonesty on the part of such director or officer, or one which demonstrates a willful or continuing disregard for the safety or soundness of the bank, the agency may serve upon such director or officer a written notice of its intention to remove him from office. (Emphasis added.)
12 U.S.C. § 1818(e)(1).
Section 8(e)(2) provides that:
Whenever, in the opinion of the appropriate Federal banking agency, any director or officer of an insured bank, by conduct or practice with respect to another insured bank or other business institution which resulted in substantial financial loss or other damage, has evidenced either his personal dishonesty or a willful or continuing disregard for its safety and soundness, and, in addition, has evidenced his unfitness to continue as a director or officer and, whenever, in the opinion of the appropriate Federal banking agency, any other person participating in the conduct of the affairs of an insured bank, by conduct or practice with respect to such bank or other insured bank or other business institution which resulted in substantial financial loss or other damage, has evidenced either his personal dishonesty or a willful or continuing disregard for its safety and soundness, and, in addition, has evidenced his unfitness to participate in the conduct of the affairs of such insured bank, the agency may serve upon such director, officer, or other person a writ-
{{4-1-90 p.A-954}}ten notice of its intention to remove him from office or to prohibit his further participation in any manner in the conduct of the affairs of the bank. (Emphasis added.)
12 U.S.C. § 1818(e)(2).
[.18] It is thus clear that sections 8(e)(1) and (2) encompass practices and violations which have previously occurred; the agency need not establish that there is an unsafe or unsound practice or violation occurring at the moment of issuance of a Notice of Charges, or at the Hearing or when the final Cease and Desist Order is issued by the FDIC. Furthermore, since the record made at the hearing must establish the unsafe or unsound practices and violations specified in the Notice of Charges, ipso facto the scope of the hearing is determined by the Notice, and evidence of subsequent events or occurrences or conditions is not at issue.
Courts have consistently noted that the potential for resumption of the discontinued practices or violations that prompted agency action are particularly strong when corrective actions are taken only, after an agency has instituted enforcement action. Such is the case in the instant action.18
Two recent court decisions, Bank of Dixie v. Federal deposit Insurance Corporation, 766 F.2d 175 (5th Cir. 1985) and First State Bank of Wayne County v. Federal Deposit Insurance Corporation, 770 F.2d 81 (6th Cir. 1985), have specifically treated the question of the relevancy of actions taken subsequent to the institution of enforcement proceedings. In both cases, the position of the FDIC was affirmed and the evidence deemed irrelevant.
In Bank of Dixie, the bank sought review of a cease and desist order issued by the FDIC, contending that the FDIC's Board of Directors erred by failing to consider evidence of improvements in the bank's operating procedures. The Court disagreed and held that:
Determination of whether the offensive practices have actually been abandoned by the Bank is appropriately made through subsequent enforcement proceedings. Without its Cease and Desist Order, the FDIC has "no valid assurance that if [the Bank] were free of the [FDIC's] restraint it would not continue its former course." (Citations omitted.)
766 F.2d at 178.
In First State Bank of Wayne County, the bank sought review of a cease and desist order on the grounds that the FDIC could not order it to cease and desist from engaging in unsafe and unsound practices because the bank had voluntarily ceased those practices. The Court stated that even assuming arguendo that the bank had improved its loan policies, this was an insufficient reason to refuse to enforce a cease and desist order. The Court there held that:
With respect to an agency with injunctive authority quite similar to that possessed by the FDIC, this Court has stated: "Where an illegal trade practice is once proved against an enterprise, and is capable of being perpetuated or resumed, it may be presumed to have been continued, and an order may issue to prevent it, even upon a showing that it has been discontinued or abandoned." P. F. Collier & Son Corp. v. Federal Trade Commission, 427 F.2d 261, 275 (6th Cir.), cert. denied, 400 U.S. 926 (1970); see also Zale Corp. and Corrigan-Republic, Inc. v. Federal Trade Commission, 473 F.2d 1317, 1320 (5th Cir. 1973). See generally Hecht Co. v. Bowles, 321 U.S. 321, 327 (1944) ([T]he cessation of violations, whether before or after the institution of a suit by the [agency], is no bar to the issuance of an injunction....") In light of these principles, the Bank's challenge to the cease and desist order is without merit. (Parallel citations omitted.)
770 F.2d 83 (1985).
Even the fact that a loan made in violation of a statute is no longer in violation, due to a change in the law, does not prevent an agency from issuing a cease and desist order to insure future compliance with the statute by a bank. See First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 682–83 (5th Cir. 1983).
The issue of compliance or correction is properly considered once a final order has been issued by the FDIC and a United States District Court has issued an enforce-
18 Respondent acknowledged at the hearing that his collection activities at * * * Bank were directly attributable to the FDIC's commencement of removal proceedings against him. (Tr. at 628, 701). Other testimony at trial respecting developments occurring subsequent to the March 22, 1985 examination indicate that the "clean-up" efforts regarding * * * Bank's loan portfolio are primarily due to * * * Bank * * * acquisition of 100% of * * * stock on July 19, 1985. Under state law * * * only has two years in which to divest itself of * * *. Thus, an improved loan portfolio is necessary before the Bank can be sold. (Tr. at 539, 718, 848–849).
{{4-1-90 p.A-955}}ment decree. Only then may the issue be considered, either by the Board in future proceedings involving Respondent * * * or by a court in a contempt proceeding. See 12 U.S.C. § 1818(i)(1) and NLRB v. Ohmite Manufacturing Co., 557 F.2d 577, 579 (7th Cir. 1977).
Evidence of the alleged collection of monies on outstanding loans by the Bank which occurred subsequent to the March 22, 1985 Report of Examination, is irrelevant and immaterial to a determination as to whether Respondent previously engaged in conduct specified in sections 8(e)(1) and (2). The point of departure for this administrative proceeding is the March 22, 1985 Examination of Report. Although evidence subsequent to that time was admitted during the hearing, that evidence should be accorded no weight by this court.
Evidence of such isolated developments following the conclusion of an examination cannot be properly focused or placed in perspective vis-a-vis the condition of the Bank or quality of a Bank asset that was fully evaluated during the examination. For example, evidence may be introduced regarding a payment on an adversely classified loan in an effort to establish an improved classification of the loan. While such a payment, standing alone, may be viewed as a positive development, its significance cannot be properly evaluated without also knowing the full context and circumstances under which such payment was made. If the payment was funded by a loan at another financial institution, or was funded through a sale of assets of the borrower, it cannot be concluded that there has been any material or positive change in the creditworthiness of the borrower; and unless there is clear evidence that such creditworthiness has improved, no change in the assigned classification is warranted.
H. The Burden of Proof For The Issuance Of An Order Of Removal Requires Establishment Of The Elements Of Such Action By A Preponderance Of The Evidence.
Section 8(h) of the Act (12 U.S.C. § 1818(h)) requires that any hearing provided for under section 8 of the Act (except for hearings under section 8(g)(3)) "shall be conducted in accordance with the provisions of chapter 5 of title 5 of the United States Code." The applicable standard of proof is contained in Section 7(c) of the Administrative Procedure Act (5 U.S.C. § 556(d)), which provides:
A sanction may not be imposed or rule or order issued except on consideration of the whole record or those parts thereof cited by a party and supported by and in accordance with reliable probative, and substantial evidence.
It is well settled that the burden of proof contemplated under the Administered Procedure Act is the "preponderance of the evidence.19 The Supreme Court recently confirmed application of this standard in the context of an administrative disciplinary proceeding in Steadman v. Securities and Exchange Commission, 450 U.S. 91 (1981):
The language of the statute itself implies the enactment of a standard of proof. By allowing sanctions to be imposed only when they are "in accordance with...substantial evidence," Congress implied that a sanction must rest on a minimum quantity of evidence. The word "substantial" denotes quantity. The phrase "in accordance with... substantial evidence" thus requires that a decision be based on a certain quantity of evidence...The phrase "in accordance with" lends further support to a construction of § 7(c) as establishing a standard of proof...§ 7(c) provides that an agency may issue an order only if that order is "supported by and in accordance with...substantial evidence" (emphasis added). The additional words "in accordance with" suggest that the adjudicating agency must weigh the evidence and decide, based on the weight of the evidence, whether a disciplinary order should be issued. (Id. at 99–100; citations omitted and emphasis in the original).
Based upon this analysis, the court in Steadman concluded that the standard of proof adopted by the Administrative Procedure Act "...is the traditional preponder-
19 See, Sea Island Broadcasting Corp. of S.C. v. Federal Communications Commission, 627 F.2d 240, 243 (D.C. Cir.), cert. denied, 449 U.S. 834 (1980); Collins Sec. Corp. v. Securities Exchange Commission, 562 F.2d 820, 823 (D.C. Cir. 1977); 9 Wigmore, Evidence § 2498 (3d ed. 1940); and H.R. Rep. No. 1980, 79th Cong., 2d Sess. 37 (1946).
{{4-1-90 p.A-956}}ance-of-the-evidence standard." Id. at 103.20
I. The Testimony And Conclusions Of FDIC Witnesses Are Entitled To Weight
The following individuals were called as FDIC witnesses during the hearing: * * *, Examiner-in-Charge of the 1985 * * * State Bank examination, has sixteen years experience with the FDIC. (Tr. at 32–33). He testified that during his tenure as an examiner he has participated in over 400 bank examinations and that he has served as EIC in approximately 125. (Tr. at 33). Mr. * * * was recognized as an expert. (Tr. at 81).
* * *, Assistant Regional Director of the * * * Regional Office since June 1975, was also recognized as an expert. (Tr. at 243, 256).
* * * has been employed by the FDIC for some thirteen years and is currently a review examiner in the * * * Regional Office. (Tr. at 291).
* * * has worked for the FDIC for over seventeen years and is currently Assistant Director of the Division of Bank Supervision (Tr. at 354–355).
* * * is presently a commissioned bank examiner and has been with the FDIC since October 1961. (Tr. at 858).
Based upon the extensive training, education, professional experience and expertise of these witnesses, weight is given to their analyses, opinions and conclusions regarding the Bank's practices and financial condition.21 Specifically, I reject the contention of Respondent that these experts are engaged in a vendetta against * * * as to which Respondent is an innocent victim.
J. Respondent's Removal Is The Appropriate Remedy In This Case
Once it is found that a bank or an individual has engaged or is engaging in unsafe and unsound practices, or is violating or have violated a statute, rule or regulation, there must be an exercise of reasonable discretion in fashioning appropriate relief to halt the practices or violations, to prevent future abuses and to correct the effects of the practices or violations. First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 680 (5th Cir. 1983); del Junco v. Conover, 682 F.2d 1338, 1340 (9th Cir. 1982), cert. denied, 459 U.S. 1146 (1983); Groos, supra at 897. Given Respondent's conduct in the instant case his removal from * * * Bank and * * * is warranted. Also prior regulatory approval is warranted for any resumption of his banking activities.
V. CONCLUSION
For the reasons set forth above, and on the basis of the record in this proceeding, the FDIC has met its burden of proving the allegations contained in the Amended Notice by a preponderance of the evidence.22 The Administrative Law Judge recommends that the FDIC Board of Directors issue the proposed Order of Removal From Office and Prohibition From Further Participation attached as Appendix A.
Paul S. Cross, Administrative Law Judge, dated at Washington, DC, this 19th day of March, 1986.
APPENDIX A
ORDER OF PERMANENT REMOVAL
FROM OFFICE AND PROHIBITION
FROM FURTHER PARTICIPATION
FDIC-85-215e
Having found and concluded that Respondent, * * * ("Respondent"), individually and in his capacity as director and participant in the conduct of the affairs of * * * Bank, * * *, ("* * * Bank"), has committed, engaged in, or participated in violations of law, unsafe or unsound practices, and/or breaches of his fiduciary duty with respect to * * * Bank; and that by such conduct or practice, Respondent has
20 * * *, Regional Director of the * * * Regional Office, was called as an adverse witness by Respondent.
21 The holding in Steadman is significant, particularly in view of the severity of the sanctions imposed, which provided a permanent bar from affiliating with any investment advisory business and a one-year suspension from associating with any broker or dealer in securities. Because such sanctions resulted in a deprivation of livelihood, prior SEC decisions had held that the "clear and convincing evidence" standard must be applied. See, Collins supra. The Steadman decision, however, clearly established that the higher burden of proof in the "clear and convincing evidence" standard was not applicable. See, Seaton v. Securities and Exchange Commission, 670 F.2d 309 (D.C. Ch. 1982), where the D.C. Circuit held that the holding in Collins (requiring clear and convincing evidence) had been "rendered ineffectual by Steadman." Id. at 311. Finally, the Fifth Circuit in Huddleston v. Herman & MacLean, 640 F.2d 534 (5th Cir. 1981), held that the holding in Steadman applying the preponderance of the evidence standard of proof was "the appropriate burden of proof in an administrative proceeding." Id. [The court in Huddleston went on to hold, however, that a private action under SEC Rule 10b-5 was comparable a civil fraud action and required the higher burden of proof by clear and convincing evidence.]
22 Also see Appendix B.
{{4-1-90 p.A-957}}demonstrated a willful or continuing disregard for * * * Bank's safety and soundness; and that Respondent's conduct or practice has resulted in substantial financial loss or other damage to * * * Bank, and/or could seriously
