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   [5199] In the Matter of Charles E. Baker, Community Bank, Granbury, Texas; Community Bank, Rockwall, Texas; Farmers & Merchants State Bank, Burleson, Texas; Docket No. FDIC-92-86e (7-27-93).

   FDIC Board adopts recommendation of ALJ and orders the removal and prohibition of a bank officer for participating in transactions for the benefit of his father, also a bank insider, in violation of Regulation O, and for engaging in unsafe or unsound banking practices, breaches of fiduciary duty, and conduct demonstrating personal dishonesty and willful disregard for the banks' safety and soundness.

   [.1] Removal and Prohibition—Violation of Regulation O
   Respondent's knowing participation in loans in excess of Regulation O lending limits, for the benefit of his father, was an unsafe or unsound practice, a breach of fiduciary duty and demonstrated personal dishonesty and willful disregard for the bank's safety and soundness.

In the Matter of
JAMES E. BAKER,
individually
and as an institution-affiliated
party of
COMMUNITY BANK
GRANBURY, TEXAS
and
COMMUNITY BANK
ROCKWALL, TEXAS
and
FARMERS & MERCHANTS STATE BANK
BURLESON, TEXAS
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-92-86e

INTRODUCTION

   This case is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") following a Recommended Decision by Administrative Law Judge Walter J. Alprin ("ALJ"), which recommends removing and prohibiting James E. Baker ("Respondent") from participating in the affairs of federally insured financial institutions. The Board concurs in and adopts the ALJ's Recommended Decision, findings of fact, and conclusions of law except as modified below.1
   On May 12, 1992, the FDIC issued a Notice of Intention to Remove from Office and/or to Prohibit from Further Participation ("Notice") against Charles E. Baker ("Baker"), Thomas W. Keating ("Keating"), and Respondent. Charles Baker and Thomas Keating agreed to the issuance of orders of removal and prohibition against them. Respondent remains as an adverse party.
   The Notice charged that the Respondent, Baker, and Keating engaged in a series of loan transactions for the benefit of Baker on February 20, 1991, at Community Bank, Granbury, Texas ("Granbury"), Community Bank, Rockwall, Texas ("Rockwall"), and Farmers & Merchants State Bank, Burleson, Texas ("Burleson"). The Notice further charged that the loans violated the lending limitations contained in Regulation O of the Board of Governors of the Federal Reserve System ("Regulation O"), 12 C.F.R. Part 215,2 promulgated pursuant to section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b, and made applicable to insured State nonmember banks by section 18(j)(2) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1828(j)(2), and section 337.3(a) of the FDIC Rules and Regulations, 12 C.F.R. § 337.3(a), and the lending limit contained in Article 7 of the Texas Banking Code, TEX. REV. CIV. STAT. ANN. art. 342–507.
   The Notice alleges that Respondent participated in violations of law or regulation,


1 Citations to the record shall be:
Recommended Decision ____ "R.D. at ____."
Transcript ____ "Tr. at ____."
FDIC Brief ____ "FDIC Br. at ____."

2 All citations to this Part and Part 337 pertinent to this proceeding are found in the 1992 edition of the Code of Federal Regulations.
{{9-30-93 p.A-2278}}unsafe or unsound banking practices, and breaches of fiduciary duty which resulted in loss to insured depository institutions, prejudice to their depositors, and financial gain to the Respondent. It is alleged that these actions demonstrated a willful or continuing disregard for the safety or soundness of the insured depository institutions. Based upon these allegations the Notice sought to prohibit Respondent from participation in the conduct of the affairs of any insured depository institution pursuant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e).
   Respondent filed an answer denying the charges and requesting a hearing. A hearing was held on December 7, 1992, in Dallas, Texas. The ALJ's Recommended Decision was submitted to the Board for final decision on May 12, 1993.

DISCUSSION

   [.1] The ALJ carefully analyzed each of the elements required to issue an order of removal and prohibition and made appropriate findings regarding the violations of Regulation O, unsafe or unsound banking practices and Respondent's breach of fiduciary duties, R.D. at 11–17;3 the financial loss or other damage to the banks involved or prejudice to depositors, R.D. at 18–19; and Respondents's personal dishonesty and willful and continuing disregard for the safety and soundness of the banks, R.D. at 19–22. The Board finds that each of the loans at issue was demonstrably for Baker's benefit, and not for the asserted purpose of long range investment in Community Bankers, Inc., stock, and adopts these findings of the ALJ.4

CONCLUSION

   The record establishes by a preponderance of the evidence that the elements of section 8(e) of the FDI Act, 12 U.S.C. § 1818(e), have been met. Accordingly, the Board will enter an Order of Prohibition from Further Participation against Respondent James E. Baker.5

ORDER OF PROHIBITION FROM
FURTHER PARTICIPATION

   For the reasons set forth above, the pursuant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e), the Board of Directors of the Federal Deposit Insurance Corporation hereby ORDERS that:
   1. James E. Baker shall not continue or commence to hold any office in, or participate in any manner in the conduct of the affairs of any insured depository institution, agency, or organization described in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   2. James E. Baker shall not solicit, procure, transfer, attempt to transfer, vote, or attempt to vote any proxy, consent, or authorization with respect to any voting rights in any insured depository institution, agency, or organization described in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   3. James E. Baker shall not violate any voting agreement with respect to any insured depository institution, agency, or organization described in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), previously approved by the appropriate Federal financial institutions regulatory agency without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   4. James E. Baker shall not vote for a director, or serve or act as an institution-affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. § 1813(u), of any insured depository institution, agency, or organization, described in section 8(e)(7)(A) of the FDI Act, 12 U.S.C.


3 The lending limitations under Texas law were less than the limitations under Regulation O. Therefore, each of the violations of Regulation O also constitutes a separate violation under Texas law.

4 The Board further agrees that Respondent's attempts to claim he was unaware of the true nature of the loans and transfers, particularly considering the haste in which they were accomplished, are not credible. R.D. at 19.

5 FDIC Enforcement Counsel filed an objection to the ALJ's Finding of Fact No. 21 which states that Respondent did not receive financial gain. A finding on this issue is not necessary to support the decision in this matter. Therefore, the Board does not adopt the ALJ's finding and make no alternative finding. Similarly, the Board does not address FDIC Enforcement Counsel's second exception because it is tangential to the holding.
{{9-30-93 p.A-2279}}§ 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   This ORDER shall become effective 30 days from the date of its issuance.
   The provisions of this ORDER shall remain in effect and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   By direction of the Board of Directors.
   Dated at Washington, D.C. this 27th day of July, 1993.
   /s/ Hoyle L. Robinson
   Executive Secretary

_______________________________________

RECOMMENDED DECISION

In the Matter of
James E. Baker,
individually and as an Institution-affiliated
party of
Community Bank
Granbury, Texas
Community Bank
Rockwall, Texas
Farmers & Merchants State Bank,
Burleson, Texas
Docket No. FDIC-92-86e
Walter J. Alprin, Administrative Law Judge:

I. STATEMENT OF THE CASE

   On May 12, 1992, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Remove Respondents Charles E. Baker (Baker), Thomas W. Keating (Keating), and James E. Baker (Respondent) from Office and/or to Prohibit them from further participation ("Notice"). After the issuance of the Notice, and without admitting or denying the allegations against them, Baker and Keating agreed to issuance of orders of removal and prohibition against them. Respondent remains as an adverse party.
   The Notice herein charges that Baker, Respondent's father, with the participation of Respondent and others, circumvented the lending limits imposed by law by indirectly obtaining the proceeds of loans made by financial institutions which he controlled to friends and relatives for Baker's benefit, in order to enable Baker to pay an overdue outstanding debt at another bank which was about to foreclose on the pledged collateral, the common stock of the Community Bank Inc. (CBI). CBI is the bank holding company owning all of the shares of financial institutions utilized in making the purportedly nominee loans. The loans are alleged to be sham and for Baker's benefit despite having been supposedly made to borrowers for their purchase of CBI and other bank common stock. The Notice seeks to have Respondent removed or prohibited by virtue of his alleged participation in the series of loan transactions on February 20, 1991, at Community Bank, Granbury, Texas ("Granbury"), Community Bank, Rockwall, Texas ("Rockwall"), and Farmers & Merchants State Bank, Burleson, Texas ("Burleson") for the benefit of his father. Respondent participated in the loan transactions as a lending officer, as a director of the banks, and as a borrower.
   On June 9, 1992, Respondent filed an answer denying the charges and requesting a hearing. A hearing in this matter was held on December 7, 1992, in Dallas, Texas.
   The Notice alleges unsafe and unsound banking practices, breaches of fiduciary duty, personal dishonesty, and willful and continued disregard for the safety and soundness of the banks, resulting in damage and financial loss to the banks or in financial gain to Respondent. The Notice further charges that the loans violated the lending limitations contained in Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215,1 promulgated pursuant to section 22(h) of the Federal Reserve Act, 12 U.S.C. § 375b, and made applicable to insured State nonmember banks by section 18(j)(2) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1828(j)(2), and sec-


1 Regulation O amended effective May 18, 1992, 57 Fed. Reg. 22,417-26 (1992) (to be codified at 12 C.F.R. Part 215). The amendments to this part are, for the most part, prospective, and do not form the basis for the cause of action in this case. Therefore, all citations to this part pertinent to this proceeding are to be found in the 1992 edition of C.F.R.
{{9-30-93 p.A-2280}}tion 337.3(a) of the FDIC Rules and Regulations, 12 C.F.R. § 337.3(a)2, and the lending limit contained in Article 7 of the Texas Banking Code, TEX. REV. CIV. STAT. ANN. art. 342&$150;507.

II. STATUTE AND REGULATIONS
INVOLVED

   The authority of the FDIC to remove officers and directors or institution-affiliated parties from an insured bank and to prohibit their future participation in the affairs of a federally insured financial institution is contained in 12 U.S.C. § 1818(e)(1), where the Respondent has:

    (A) violated a law or regulation, or engaged or participated in an unsafe or unsound banking practice or breached his fiduciary duties as a director or officer with respect to that bank;
    and
    (B) the bank has suffered or will suffer financial loss or other damage or the interests of the bank's depositors have been or could be prejudiced or the director or officer has received financial gain from the misconduct;
    and
    (C) the misconduct evidences personal dishonesty on the part of the director or officer or demonstrates a willful or continuing disregard for the safety and soundness of the bank.
(Underlining added.) In short, to impose the sanctions of removal or prohibition the FDIC must establish each of the following three criteria: 1) any one of three forms of misconduct, 2) any one of three forms of effect of the misconduct, and (3) either of two forms of culpability in engaging in the misconduct causing the effect.
   12 C.F.R. § 215 prohibits extensions of credit by member banks to officers and directors in excess of the lending limits. 12 C.F.R. § 215.3(f) provides:
    An extension of credit is considered made to a person covered by this part to the extent that the proceeds of the extension of credit are used for the tangible economic benefit of, or are transferred to, such a person.
   In addition, 12 C.F.R. § 215.2(f) establishes a lending limit of:
    ...15 percent of the bank's unimpaired capital and unimpaired surplus in the case of loans that are not fully secured, and an additional 10 percent of the bank's unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the loan.
Footnote 2 to 12 C.F.R. § 215.2(f) provides:
    Where State law establishes a lending limit for a State member bank that is lower than the amount permitted...the lending limit established by applicable State laws shall be the lending limit for the State member bank.
   The Texas Banking Commission Rules and Regulations, 7 TEX. ADMIN. CODE § 12.4(a), provides that:
    General Rule. Loans or extensions of credit to one person will be attributed to other persons for purposes of lending limit determinations under Texas Civil Statutes, Article 342–507, when:
      (1) the proceeds of the loans or extensions of credit are to be used for the direct benefit of the other person or persons (the term "direct benefit" shall include situations in which the proceeds of a loan or extension of credit to one person are to be loaned or contributed by such person to another person); or
      (2) the expected source of repayment for each loan or extension of credit is the same for each person.
III. FINDINGS OF FACT AND
DISCUSSION

   The following findings of fact all relate to the times pertinent to the charges of the Notice herein.

A. The Parties and the Financial
Institutions

   1. Granbury, Rockwall, and Burleson were insured nonmember State banks, incorpo-


2 Section 337.3 of the FDIC's Rules and Regulations was amended by 57 Fed. Reg. 7,647-49 (1992) (to be codified at 12 C.F.R. § 337.3(a)) (subsequently this amendment was corrected at 57 Fed. Reg. 28,457 (1992)), and also amended by 57 Fed. Reg. 17-847-51 (1992) (to be codified at 12 C.F.R. § 337.3(c)). The amendments to this part are effective May 18, 1992, and May 28, 1992, respectively; however, they are, for the most part, prospective, and do not form the basis for the cause of action in this case. Therefore, all citations to this section pertinent to this proceeding are to be found in the 1992 edition of C.F.R.
{{9-30-93 p.A-2281}}rated in the State of Texas, with principal offices at the locations mentioned. Stips. 1, 2 and 3.3
   2. Community Bankers, Inc. (CBI) owned 100 percent of the outstanding common stock of Granbury and of Rockwall. Supp. Stip. No. 1. Baker owned in excess of 25 percent of the outstanding common stock of CBI and of Burleson. Supp. Stip. No. 2.
   3. Baker was the chairman and controlling stockholder of Granbury, Burleson and Rockwall. Stip. No. 7 and Supp. Stip. No. 3. Respondent, Baker's son, was a director and officer of Burleson, and a director of Granbury and Rockwall. Stips. No. 8 and 10. Keating was a director and officer of Granbury and a director of Rockwall and Burleson (Stip. No. 9), and Meyer was an officer and director of Granbury and a director of Rockwall. Stip. No. 29.

B. Extensions of Credit On or About
February 20, 1991

   4. On or about February 20, 1991, Baker borrowed $500,000 from Granbury. Keating was the loan officer. Stip. No. 14. The stated purpose of the loan was "Business: Payoff Bonnet Bank." Stip. No. 15. Respondent was one of the Directors approving the loan. Supp. Stip. No. 24. The proceeds of the loan was wired to Baker's account at Burleson, account number 1195668. Stip. No. 16.
   5. On or about February 20, 1991, Barbara F. Baker, Baker's sister, borrowed $500,000 from Granbury. Keating was the loan officer. Stip. No. 17. Respondent was one of the Directors approving the loan. Supp. Stip. No. 23. The stated purpose of the loan was "Business: Business Expense," and it was secured by 16,666 shares of CBI. Stip. No. 18. Barbara F. Baker also borrowed $500,000 from Burleson. Respondent was the loan officer and approving Director. Stips. No. 20 and 21. The stated purpose of this loan was "Business: To purchase stock," and it was also secured by 16,666 shares of CBI. Stip. No. 21. Barbara F. Baker wrote a check payable to Baker, with the notation "To purchase stock," drawn on account number 0347485 at Granbury, in the amount of $1,000,000 payable to Baker. The check contained a notation, "To purchase stock." Stip. No. 23. On or about the same day Baker deposited by the check into his account at Burleson, account number 1195668. Stips. No. 23 and 24.
   6. On or about February 20, 1991, Keating borrowed $200,000 from Burleson. Respondent was the loan officer and an approving Director. Supp. Stips. No. 21 and 26. The stated purpose of the loan to Keating was to purchase 6,666 shares of CBI, and it was secured by the 6,666 shares of CBI. The proceeds of the loan to Keating were wire transferred to his account at Granbury, account number 9353981, and he wrote a check on that account in the amount of $200,000 payable to Baker, which was deposited to Baker's account at Burleson, account number 1195668. The check contained the notation, "Stock purchase 6,666 shares." Stips. No. 27, 28 and 29.
   7. On or about February 20, 1991, Meyer borrowed $200,000 from Burleson. Respondent was the loan officer and approving Director. Supp. Stips. No. 21 and 28. The stated purpose of the loan was to purchase 6,666 shares of CBI, and loan was secured by the 6,666 shares of CBI. Stip. No. 32. The proceeds of the loan were wire transferred to his account at Granbury, account number 0200190, and he purchased a cashier's check at Granbury, in the amount of $200,000 and payable to Baker, which was deposited to Baker's account at Burleson, account number 1195668. The cashier's check was for the purpose of purchasing stock in CBI. Stips. No. 33 and 34.
   8. On or about February 20, 1991, Respondent borrowed $200,000 from Rockwall. Stip. No. 35. The stated purpose of the loan was, "Business: Purchase Money," and it renewed an extension of credit at Rockwall in the amount of $113,000. It was secured by 1,841 shares of Burleson. Stip. No. 36. On or about the same day, Respondent wrote a check, on account number 1712298 at Burleson, in the amount of $200,000 payable to Baker. The check contained a notation, "Stock Purchase." This check cleared Respondent's account on the


3 Citations to Stipulations by and Between Federal Deposit Insurance Corporation and James E. Baker, which were marked as Judge's Exhibit Number 1, shall be as "Stip. No. ____." Citation to Supplemental Stipulations by and Between Federal Deposit Insurance Corporation and James E. Baker, which were marked as Judge's Exhibit Number 2, shall be as "Supp. Stip. No. ____." References to the hearing transcript shall be as "TR page number."
{{9-30-93 p.A-2282}}same day, leaving a negative account balance of ($111,723.40.) Stip. No. 38. Baker deposited the $200,000 check from Respondent into his account number 1195668 at Burleson, and 1,841 shares of Burleson were transferred from Baker to Respondent. Stip. No. 40.
   9. As a result of the above-mentioned loans, a total of $2,100,000 was deposited to account number 1195668 at Burleson in Baker's name. Stip. No. 41.

   C. Utilization of Loan Proceeds and Repayment of Keating and Meyer Loans

   10. On or about February 20, 1991, Baker was servicing a loan which had been in default since October 30, 1990, almost four months, at Bank One, Texas, N.A., of Forth Worth, Texas.4 TR. 21–22. The stock of Granbury, Rockwall and Burleson was pledged as collateral on the loan, and upon foreclosure CBI would be left as no more than a shell corporation. TR 44, 176–177. Also on or about that day, Baker wired $2,129,421.96 from his Burleson account to Bank One, Texas, N.A., Fort Worth, Texas. Stip. No. 45.
   11. On or about April 19, 1991, Respondent borrowed $390,000 from the Community Bank, Cleburne, Texas ("Cleburne"). Baker was the loan officer. This loan was secured by 6,000 shares of Burleson stock. Stip. No. 43. On or about the same date the proceeds of the loan were disbursed through a cashier's check in the amount of $390,000 payable to Respondent, which was deposited at Burleson to Baker's account. Stip. No. 45.
   12. On or about April 19, 1991, Baker wired $407,309.58 from his Burleson account to the accounts of Keating and Meyer at Granbury, each receiving $203,654.79, Stip. No. 46, the amount they had borrowed plus the interest then due Burleson. on or about the same day Keating and Meyer each wired $203,654.79 to Burleson to pay in full the balance due on their respective loans of February 20, 1991. Stip. No. 47.

   D. Misconduct of Respondent

   13. The first issue in considering removal and prohibition from further participation in the affairs of federally insured financial institutions is whether Respondent violated a provision of law or regulation, or engaged in unsafe and unsound practices, or breached his fiduciary duties as a director, as individually discussed below.
   a. Violation of Law or Regulation
   14. FDIC alleges that Respondent violated Regulation O, 12 C.F.R. §215.2(f) and .3(f), as a result of which named banks have granted extensions of credit attributable to Baker which exceeded permissible lending limits.
   (1) As of February 20, 1991, Burleson's and Granbury's lending limits were each $750,000. Stip. No. 48; Supp. Stip. 6. Baker held extensions of credit from Burleson in the net amount of $618,2955, TR. 39, which when added to the $500,000 extension of credit to Barbara Baker, the $200,000 extension of credit to Thomas Keating, and the $200,000 extension of credit to James Meyer, totalled $1,518,295 and exceeded the $750,000 Regulation O lending limits as of that date. In fact, any attributable extension of credit in excess of $131,705 would have that effect.
   (2) The loans by Burleson to Keating and Meyer each exceeded that amount. The loans were demonstrably for Baker's benefit, and not the "long range" investment which was the only reasonable purpose for the purported purchase of CBI stock. The Board of Governors of the Federal Reserve System had restricted payment of dividends by CBI, which had in fact never paid dividends since its inception. TR 168, 228. The market for purchase of CBI stock was extremely shallow, apparently limited to Baker's friends, relatives and employees. Baker was permitted to repurchase the stock in just two months time, at the purchase price plus the interest payable on the loans for Keating and Meyer to purchase. Keating's and Meyer's financial statements in making the loans to purchase indicated a lack of financial capability of servicing the loans without repurchase by Banker in the short term, or some other form of relief such as, as suggested by Keating, a cash gift or contribution from his father. TR 32, 35, 82–83, FDIC Ex. 110; TR 36–37, 82–83, FDIC Ex. 111. Such loans were clearly an extension of credit planned and used for the tangible economic benefit of, or transferred to, an officer and


4 References to One Bank, Bank One, MBank and, Bonnet Resources Corporation are interchangeable.

5 The actual testimony was that Charles Baker's debt equalled $686,337, but the testimony was based on page 6 of FDIC Exhibit 106 wherein it is also noted that there was a participation sold in the amount of $68,042 which leaves a balance of $618,295.
{{9-30-93 p.A-2283}}director, and hence in violation of Regulation O.6 Respondent was the loan officer for both of these loans, and in addition he voted as a Director in favor of these loans.
   (3) The facts relating to the loan by Burleson and by Granbury to Barbara F. Baker are in part unlike those to Keating and Meyer. When requested to resell the stock to Baker, Barbara F. Baker refused, giving every indication that the stock had been purchased for addition to her earlier holdings as a long term investment. Further, Barbara F. Baker clearly had sufficient means to service the loans, and has properly serviced them. In terms of attribution, however, the FDIC has held in a similar situation that the party selling the stock receives benefit from the extension of credit to the seller, and that:
    Moreover, loans do not violate section 215.4(c) only when the benefit which inures to covered persons is an intended one. Nothing in section 215.4(c) requires that the loans be part of a scheme designed to benefit covered persons. As long as covered persons benefit from a loan, it is subject to the lending limits of section 215.4(c).7
Baker had already borrowed $500,000 from Granbury, and the addition of Barbara F. Baker's loan of $500,000 would exceed Granbury's lending limit. Therefore, whether the transfer of stock was bona fide sales transaction or not, Barbara F. Baker's loans at Burleson and at Granbury are attributed to Baker and result in violations of Regulation O at each bank, in which Respondent participated.
b. Unsafe or Unsound Banking Practices
   15. FDIC alleges that Respondent engaged in unsafe and/or unsound banking practices by participating in several different transactions, as discussed below.
   16. An unsafe or unsound practice is generally understood to mean:
    ...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.8
Thus, "(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 regulatory agencies."9
   (1) Violation of Regulation O and the state lending limit is per se an unsafe or unsound act and a breach of a fiduciary duty. It has been said that:
    Problem banks and insider abuses have been virtually synonymous. Nothing appears more often on the fever charts of sick financial institutions than self-dealing ailments.10
       (2) Baker's $500,000 loan at Granbury, of which Baker was Chairman and Respondent was a Director and for which Respondent voted approval, though originally approved as a real estate loan, was unsecured at the time of the extension of credit. TR. 24, 136. Not only was the loan extended without collateral while Baker was having difficulty servicing his pre-existing debt at Bank One and in danger of losing his stock in the other banks, but the loan officer did not have the authority to offer a loan of that amount, TR. 136–137, and the loan was to the extent improper even though approved by the Directors. This extension of credit to Baker was contrary to prudent banking operations and was unsafe or unsound. Re-

6 Even if the proceeds of the loan had been for a bona fide stock purchase, the violation would have occurred. See the following subparagraph as to attribution based solely on "benefit."

7 In the Matter of ***, FDIC-84-23b, 1 P-H FDIC Enf. Dec. & Orders, ¶5061 (1986) at A-719, underlining added.

8 112 Cong. Rec. 26,474 (1966), First Nat'l Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674 (5th Cir. 1983), In the Matter of Paul E. Oberstar, 2 P-H FDIC Enf. Dec. & Orders ¶5171 (1991) at A-1835. Accord, First National Bank of Eden v. Comptroller of the Currency, 568 F.2d 610, 611 n.2 (8th Cir. 1978), that "Unsafe and unsound banking practices...encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operation which might result in abnormal risk or loss to a banking institution or shareholder." Cited in First National Bank of Bellaire v. Comptroller of the Currency, 697 F.2d 674, 685 (5th Cir. 1983).

9 Groos National Bank v. Comptroller of the Currency, 573 F.2d 889, 897 (5th Cir. 1978). See also, Independent Bankers Association v. Heimann, 613 F.2d 1164, 1168-69 (D.C. Cir. 1979).

10 H.R. Rep. No. 1383, 95th Cong., 2d Sess. 10–12, reprinted in 1978 U.S. Code Cong. & Ad. News 9273.
{{9-30-93 p.A-2284}}
    spondent participated in this unsafe and unsound transaction by his approval as Director. Supp. Stip. No. 23.
       (3). Loans to Keating and Meyer at Burleson, for the reasons stated above, are hereby found in addition to the attribution to Baker to constitute unsafe and unsound banking practices in which Respondent participated.
       (4). On February 20, 1991, Rockwall granted a $200,000 extension of credit to Respondent which renewed a pre-existing loan and was secured by Burleson stock. TR. 140–141. The loan to Respondent was an unsafe or unsound practice because the bank failed to obtain an independent evaluation of the collateral instead of relying on Respondent's appraisal. In approving a loan, collateral is relied as a secondary source of repayment. TR. 143. Failure to determine the value of the collateral prior to making the loan is considered contrary to generally accepted standards of prudent operation because it increases the possibility of loss. TR. 142. As a Director of Rockwall, Respondent owed a fiduciary duty to the depositors and shareholders to protect their interests and not to impose a risk of loss upon the bank, TR. 141, and his doing so constituted an unsafe and/or unsound banking practice.
       (5). While Barbara F. Baker's loans have been found to be attributable to Baker in terms of violations of Regulation O, there is nothing in the record to establish that the making of the loans, secured and serviced by the borrower, was unsafe or unsound.
   c. Breach of Fiduciary Duty
   17. The phrase "fiduciary duty" has for over ten decades been generally defined as the requirement that care be exercised "which ordinary prudent and diligent men would exercise under similar circumstances."11 Bank officials, however, have been subjected to a higher standard of duty, to act honestly, fairly, and for the best interests of the bank. It has been held that:
    "Generally, the duty requires that bank officials...act as prudent and diligent persons would act...complying with state and federal banking laws...(The duty) requires the proper supervision of subordinates...While this standard of care for bank directors and officers, like the standard of care in negligence cases, is expressed in constant terms, the nature of the duty varies according to the facts. The greater the authority of the director or officer, the broader the range of his duty; the more complex the transaction, the greater the duty to investigate, verify, clarify and explain."12
Respondent's obligation to investigate, verify, clarify and seek an explanation of the virtually simultaneous loans for Baker's benefit increased as the number and sources of the loans increased. From the above it is clear that each of Respondents' actions in facilitating the above loans and transfers attributable to Baker constituted increasingly serious violations of his fiduciary duty.

E. Effect of Misconduct

   18. The second issue in considering removal and prohibition from further participation in the affairs of federally insured financial institutions is whether any misconduct resulted in financial loss or other damage to the bank, or prejudice to depositors, or financial gain to Respondent, each of which is considered as follows.
   19. The effect of the violations of law or regulation, and of the breach of fiduciary duty found above, was a substantial loss to the banks involved.
   (1). Baker's loan of $500,000 from Granbury was renewed into two loans with balances of $323,436 and $85,498 as of January 10, 1992. Supp. Stip. No. 14. At the January 10, 1992, examination of Granbury, these loans were classified $358,934 Substandard and $50,000 Loss. Supp. Stip. No. 15.
   (b). The $195,680 balance of Respondent's $200,000 loan from Rockwall was classified Substandard at its examination as of July 1, 1991. Supp. Stip. No. 18. At its examination as of June 26, 1992, it was adversely classified $166,000 Substandard and $30,000 Loss. Supp. Stip. No. 19.
   (c) The $195,680 balance of Respondent's $200,000 loan from Rockwall was classified at the bank's examination as of July 1, 1991, as $166,000 Substandard, and was classified at the bank's examination as of


11 Briggs v. Spaulding, 141 U.S. 132, 152 (1891).

12 In the Matter of ***, FDIC-85-356e, 2 P-H FDIC Enforcement Decisions, A-1129, A1235 (March 1, 1988). underlining added.
{{9-30-93 p.A-2285}}June 26, 1992, as $166,000 Substandard and $30,000 Loss.
   20. The depositors of the banks specified above were prejudiced by adverse classifications and losses noted above.
   21. Respondent did not enjoy any financial gain as a result of his misconduct.

F. Culpability

   22. The final issue in considering removal and prohibition from participating in the affairs of federally insured financial institutions is that of culpability, and whether Respondent's actions manifest personal dishonest, or manifest willful or continuous disregard for the safety and/or soundness of the bank.
   24. "Personal dishonesty" is not statutorily defined. Case law has specifically found it not limited to "an intent to gain at the expense of others," and has provided a clear working explanation of its meaning as follows:

    ...it need not amount to civil fraud and could encompass a broad range of conduct. According to the Board, this conduct may include: a disposition to lie, cheat, or defraud; untrustworthiness; lack of integrity; * * * [or] want of fairness and [straightforwardness].'13
In the instant case, Respondent participated in each of the loans attributed to Baker, in the resulting violations of Regulation O and state lending limits, and engaged in unsafe or unsound practices both directly and indirectly as an originating loan officer and director. The undersigned finds Respondent's testimony that he was unaware of the true nature of the loans and transfers, particularly considering the unusual haste in which accomplished, not to be credible. At the hearing, state examiner Grant testified that during a meeting at the officers of the Texas Banking Department with various directors of Granbury, Burleson, and Rockwall present, including Respondent, he heard Baker's former wife say that everyone present was aware of the circumstances in which loans were granted, the use of the proceeds, and the ultimate source of repayment. Tr. 52. The undersigned finds that Respondent's conduct reflected at a minimum a want of fairness and straightforwardness. The facts of this case necessitate a finding that Respondent knew about and participated in the scheme to enable Baker to circumvent lending limits so that Baker could repay his loan at One Bank. Accordingly, the undersigned regretfully must find that Respondent acted with a lack of straightforwardness and trustworthiness, and thus a lack of sufficient integrity to be permitted to participate further in fiduciary relationships as are encompassed within the affairs of federally insured financial institutions.
   25. Pervasive throughout the entire matter is Respondent's argument that he considered the loans made merely for the purchase of stock. Respondent put it succinctly in testifying that:
       I'm not here to try to defend (Baker's) actions. When I—when I make a loan I am concerned about the ability of the individual to pay it back. When I make a car loan, my consideration is not what the dealer is going to use the money for, and I guess that's all I have to say.
This testimony does not relate to the circumstances here, and the concept it embraces, is wrong. In making a car loan, the lending institution is interested in what the borrower is going to do with the proceeds of the loan—is he or she going to use it to purchase a car, for the type of car and at the price indicated in the application. If the loan is a "floor plan loan" to a dealer, the lending is interested if the proceeds are utilized for the floor plan, and whether the floor plan is as indicated in the application. The point is that Respondent was a bank officer and director, and while even if his concerns may be somewhat limited when it comes to a bank customer who is no more than a bank customer, about whom he has no relevant knowledge other than that revealed in the loan documents, there is no such limitation when it comes to loans to insiders within the lending, or associated, financial institutions. Respondent's failure to question further, and to use the information which he already had, is the misplaced fulcrum in balancing his actions with his obligations, with his claim merely to be making a loan, rather than participating in violations of regulations, engaging in an unsafe and unsound banking practice, breaching a fiduciary duty, causing financial loss to the bank and to the interests of the depositors, indicating a per-

13 Van Dyke v. Board of Gov. of Federal Reserve System, 876 F.2d 1377, 1379 (8th Cir. 1989).
{{9-30-93 p.A-2286}}sonal dishonesty of a willful and continuing disregard for safety and soundness of the bank.
   26. A review of Respondents' participation in the discrete acts constituting violation of regulations, and in the discrete acts constituting unsafe and unsound banking practices, and in the discrete acts constituting breach of fiduciary duties as a bank director, adequately supports a finding that his actions were willful, and, though encompassing only a short period of time and towards a single purpose, constitute severable continuing violations in disregard of the safety and soundness of the banks involved.

G. Summary Recapitulation

   27. The undersigned has hereby made findings of fact as discussed above which lead to his conclusion that the Respondent has violated regulations, and participated in unsafe and unsound banking practices, and breached his fiduciary duties as a bank officer and director; that such misconduct has resulted in financial loss to the bank, and prejudice to the bank's depositors; and, that such misconduct evidences personal dishonesty, and a willful and continuing disregard for the safety and soundness of the banks involved. He further finds that this constitutes violation of 12 U.S.C. § 1818(e) so as to warrant removal and prohibition of the Respondent from further participation in the affairs of a federally insured financial institution.

IV. RECOMMENDED CONCLUSIONS
OF LAW

   In view of all the above, the following Conclusions of Law are hereby recommended:
   1. The Community Bank, Granbury Texas, the Community Bank, Rockwall, Texas, and the Farmers and Merchants State Bank, Burleson, Texas, are subject to the provisions of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. §§ 1811-1831t, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of Texas, and to the jurisdiction of the Federal Deposit Insurance Corporation.
   2. At all times pertinent to the charges herein, Charles Baker was a "director," "executive officer," and/or "principal shareholder" of Granbury, Rockwall and Burleson as those terms are defined in section 215.2(c), (d) and (j) of Regulation O, 12 C.F.R. § 215.2(c), (d) and (j).
   3. The loan of Community Bank, Granbury, Texas, to Barbara Baker is attributable to Charles Baker pursuant to section 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f), and to Section 12.4(a) of the Texas Banking Commission Rules and Regulations, 7 TEX. ADMIN. CODE § 12.4(a).
   4. The loans of Farmers & Merchants State Bank, Burleson, Texas, to Thomas Keating, James Meyer, and Barbara F. Baker are attributable to Charles Baker pursuant to section 215.3(f) of Regulation O, 12 C.F.R. § 215.3(f), and to Section 12.4(a) of the Texas Banking Commission Rules and Regulations, 7 TEX. ADMIN. CODE § 11.4(a).
   5. The loans attributable to Charles Baker violated Regulation O, 12 C.F.R. § 215.4(c), as exceeding the lending liabilities of the respective banks.
   6. Respondent's violations of Regulation O, 12 C.F.R. § 215.4(c), and noncollateralized insider loan, constituted unsafe and unsound banking practices.
   7. Participation by Respondent in violations of Regulation O, 12 C.F.R. § 215.4(c) and noncollateralized insider loan aforesaid constituted a breach of the fiduciary duties of a director or officer of the involved banks.
   8. As a result of Respondent's violations of Regulation O, 12 C.F.R. § 215.4(c), unsafe and unsound banking practices, and breach of fiduciary duties as a director or officer of the involved banks, each involved bank has suffered or will suffer financial loss or other damage.
   9. As a result of Respondent's violations of Regulation O, 12 C.F.R. § 215.4(c), unsafe and unsound banking practices, and breach of fiduciary duties as a director or officer of the involved bank, the interests of the banks' depositors have been or could be prejudiced.
   10. The Respondent's violations of Regulation O, 12 C.F.R. § 215.4(c), unsafe and unsound banking practices, and breach of fiduciary duties as a director or officer of the involved banks, evidences personal dishonesty on the part of Respondent.
   11. The Respondent's violations of Regulation O, 12 C.F.R. § 215.4(c), unsafe and unsound banking practices, and breach of fiduciary duties as a director or officer of the involved banks, demonstrates a willful and a continuing disregard for the safety and soundness of the involved banks.
{{10-31-93 p.A-2287}}

V. RECOMMENDED DECISION

   In consideration of the foregoing, the undersigned recommends a decision removing and prohibiting James E. Baker from participation in the affairs of federally insured financial institutions. A Proposed Order of Prohibition from Further Participation, in the form recommended and attached hereto, should issue against Respondent pursuant to the provisions of section 8(e) of the Act, 12 U.S.C. § 1818(e), prohibiting Respondent from further participation in the conduct of the affairs of Community Bank, Granbury, Texas, of Community Bank, Rockwall, Texas, and Farmers & Merchants State Bank, Burleson, Texas, and any other insured depository institution or organization listed in section 8(e)(7) of the Act, 12 U.S.C. § 1818(e)(7), without the prior written approval of the FDIC and such other appropriate Federal depository institution regulatory agency.
/s/ Walter J. Alprin
   Administrative Law Judge
   Office of Financial Institution Adjudication

PROPOSED ORDER OF REMOVAL
AND PROHIBITION FROM FURTHER
PARTICIPATION

   For the reasons set forth in the Decision in this proceeding, and pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e), the Board of Directors of the Federal Deposit Insurance Corporation hereby ORDERS that:
   a. James E. Baker shall be removed and not participate further in any manner in the conduct of the affairs of the banks or any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   b. James E. Baker shall not solicit, procure, transfer attempt to transfer, vote, or attempt to vote any proxy, consent, or authorization with respect to any voting rights in the banks of any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   c. James E. Baker shall not violate any voting agreement with respect to any insured depository institution, agency, or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), previously approved by the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   d. James E. Baker shall not vote for a director, or serve or act as an institution-affiliated party, as that term is defined in section 3(u) of the FDI Act, 12 U.S.C. § 1813(u), of the banks or any insured depository institution, agency, or organization, enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A), without the prior written consent of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the FDI Act, 12 U.S.C. § 1818(e)(7)(D).
   This ORDER shall become effective 30 days from the date of its issuance.
   The provisions of this ORDER shall remain in effect and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Dated at Washington, D.C. this ____ day of ____, 1993.
   By direction of the Board of Directors.
   /s/ Hoyle Robinson
   Executive Secretary

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