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FDIC Enforcement Decisions and Orders

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   [5233] In the matter of John F.Higgins, State Bank of Westchester, White Plains, N.Y., Docket No. FDIC-94-60e (5-28-96).

   FDIC issues order of prohibition against respondent who failed to participate in proceeding in which administrative law judge found that he engaged in unsafe and unsound banking practices and breached his fiduciary duty.

   [.1] Hearings—Failure to Appear
   12 U.S.C. § 1818(e)(4)—under which a respondent who fails to appear at a hearing is deemed to have consented to an order of prohibition—is not operative if a respondent fails to receive actual or constructive notice of the time and place that the hearing is to be held.

   [.2] Answer—Mailing
   Although respondent may not have received all documents filed in administrative proceeding, he was not prejudiced thereby and has, by his failure to respond to any documents that he received, waived any rights to object to any deficiencies in service.

   [.3] Answer—Failure to File—Prohibition, Removal, or Suspension
   Respondent's failure to appear or defend himself in administrative proceeding clearly demonstrates an intentional disregard of, or willful failure to follow, the FDIC's procedural requirements.

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   [.4] Default Orders
   Even when a decision on the merits is issued, it is appropriate to make a alternative finding of default based on respondent's failure to appear at the hearing.

In the Matter of
JOHN F. HIGGINS,
President and Director of
STATE BANK OF WESTCHESTER
(N/K/A RELIANCE BANK)

WHITE PLAINS,
NEW YORK
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-94-60e

INTRODUCTION

   This uncontested matter is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") following a Decision Recommending Issuance of Order Prohibiting Further Participation in the Affairs of Federally Insured Depository Institutions (the "Recommended Decision")1 by Administrative Law Judge Walter A. Alprin (the "ALJ"), an order reopening the record and remanding to the ALJ, and a supplemental ruling by the ALJ on remand.
   After an uncontested hearing on the record, the ALJ recommended that John F. Higgins ("Respondent"), formerly president and a director of State Bank of Westchester (now known as Reliance Bank), White Plains, New York (the "Bank"), be prohibited from participating in the affairs of federally insured financial institutions. The FDIC Executive Secretary, pursuant to delegated authority, reopened and remanded the record, instructing the ALJ to ascertain whether Respondent had received various documents filed in this matter, including notices that would have informed him of the date and place of the hearing. On remand the ALJ found that Respondent did have actual notice of this proceeding, including the date and place of hearing. The ALJ further found that there was no evidence of good cause for Respondent's failure to file an answer, appear at the hearing, or otherwise participate in any manner in this proceeding.
   Following a thorough review of the entire record (including the portion created on remand),2 the Board concurs in and adopts the ALJ's Recommended Decision, as supplemented by the additional discussion below, and incorporates the Recommended Decision herein by reference.

BACKGROUND

   On July 12, 1994, the FDIC issued a Notice of Intention to Prohibit From Further Participation (the "Notice") 3 seeking to prohibit Respondent from participating in the affairs of federally insured financial institutions, pursuant to the provisions of section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1818(e).4 The Notice was sent to Respondent by certified mail, return receipt requested, at 24 Roslyn Lane, New City, New York 10956 (the "New City Address"), under cover of a letter advising him:

    You are required to file an answer to the Notice within 20 days of receipt of the Notice. Failure to file an answer is deemed a waiver of the right to appear at a hearing and to contest the allegations of the Notice and may result in a final, enforceable order prohibiting your further participation in any manner in the conduct of the affairs of any bank insured by the FDIC,

    1 References to the Recommended Decision herein shall be designated "R.D." followed by the appropriate page number.

    2 References to the transcript of the hearing in this matter shall be designated "Tr.", followed by appropriate page number(s). References to the exhibits admitted at the hearing in this matter shall be designated "Ex." followed by the appropriate letter (A, B, or C) or number (1 through 16).

    3 The Notice also sought to prohibit Oscar Lindskog and John F. Fitzgerald, also former officials of the Bank, from participating in the affairs of federally insured financial institutions. Mr. Lindskog and Mr. Fitzgerald subsequently stipulated to the issuance of an Order of Prohibition From Further Participation, leaving Respondent as the sole remaining respondent in this proceeding.

    4 The Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No. 101-73, § 907, 103 Stat. 183 (1989) ("FIRREA") amended in some respects the grounds for issuance of removal and prohibition orders under section 8(e). Because Respondent's activities as alleged in the Notice took place prior to the enactment of FIRREA, his conduct is measured by the substantive requirements of the pre-FIRREA version of section 8(e), 12 U.S.C. § 1818(e).
    {{6-30-96 p.A-2764}}any other federally insured depository institution, or any organization listed in section 8(e)(7) of the Act.
Ex. A,p. 1. Respondent signed the return receipt for the package containing the cover letter and Notice, which indicated that Respondent received the package on July 25, 1994. Ex. B. Notwithstanding his actual receipt of the Notice, Respondent did not file an answer, timely or otherwise, nor did he enter an appearance or otherwise participate in any manner in this proceeding.
   A formal evidentiary hearing was held by the ALJ on January 24, 1995, in New York, New York, at which FDIC Enforcement Counsel presented its prima facie case concerning the charges against Respondent. An FDIC senior examination specialist testified and numerous exhibits were introduced by FDIC Enforcement Counsel, including the transcript of a deposition of Respondent taken in 1991, during the investigation preceding this action, at which Respondent was represented by counsel. Respondent did not attend or participate in the hearing. After the hearing, FDIC Enforcement Counsel filed proposed findings of fact, conclusions of law, and a supporting memorandum of law.
   On June 5, 1995, the ALJ issued the Recommended Decision, which concluded that Respondent, as president, lending officer, and a member of the Bank's board of directors, engaged in unsafe or unsound banking practices and breached his fiduciary duty by (i) making imprudent loans,5 and (ii) failing to properly supervise Oscar Lindskog, a less experienced Bank officer who himself made many imprudent loans. R.D. at 8–14. The ALJ found that these practices and breaches on the part of Respondent resulted in substantial financial loss to the Bank, in an amount exceeding $5,000,000 (R.D. at 15), and evidenced Respondent's willful and continuing disregard for the safety and soundness of the Bank. R.D. at 16–17. Accordingly, the ALJ recommended that the Board issue a final order prohibiting Respondent from participating in the affairs of federally insured financial institutions. Neither party filed exceptions to the ALJ's Recommended Decision.
   After reviewing the record, on October 20, 1995, the FDIC Executive Secretary, pursuant to delegated authority and upon the advice and recommendation of the General Counsel, issued an Order to Reopen Record and Remand (the "Order to Reopen") in this matter. The Order to Reopen explained that, while Respondent had evidently received the Notice initiating this proceeding, it was not clear whether he had received actual or constructive notice of subsequent papers filed and/or issued in this case, including the ALJ's orders setting the date, time, and place of the hearing in this matter. Accordingly, the Order to Reopen directed that the record be reopened and remanded to the ALJ: (1) to establish whether Respondent received actual notice of all orders and other formal proceeding documents following the Notice, particularly notice of the hearing date and location; and (2) if Respondent did not, requiring that further efforts be made, and documented, to effect actual or constructive service upon Respondent of a reissued notice of hearing date and place, and/or a motion for entry of a default order, and/or such other pleadings or others as the ALJ may consider appropriate in the circumstances.
   On February 13, 1996, the ALJ forwarded to the Executive Secretary a letter responding to the Order to Reopen, together with correspondence between the ALJ and FDIC Enforcement Counsel (with copies to Respondent) regarding Respondent's address. In that letter the ALJ found that Respondent had actual notice of the date and place of hearing, and that there was no good cause for Respondent's failure to appear or defend himself in this matter in any way. Accordingly, the ALJ recommended issuance of final decision by the Board.

DISCUSSION

   The Board concurs in and adopts the ALJ's Recommended Decision.
   This is an uncontested proceeding. The record shows that Respondent received actual notice of the proceeding by signing the return receipt for the certified mail package containing the Notice. Exs. A and B. Both the cover letter accompanying the Notice and the Notice itself advised Respondent of the requirement that he file an answer within 20 days, and the cover letter advised that


5 Although the Recommended Decision only discusses in detail three loans originated by Respondent himself (R.D. at 8–10), it is clear that the ALJ also considered many additional loans made by Respondent and alleged in the Notice to constitute unsafe or unsound practices or breaches of fiduciary duty or both. See R.D. at 15, no. 10 and citations therein.
{{6-30-96 p.A-2765}}failure to answer could result in issuance of a prohibition order. Ex. A. Nevertheless, Respondent filed no answer.
   Rather than file a motion seeking a default judgment, however, FDIC Enforcement Counsel requested and was granted an opportunity to present a prima facie case on the merits at a formal evidentiary hearing. Again, Respondent failed to appear at the hearing or otherwise defend himself in this action.

   [.1] Although a respondent who fails to appear at a hearing is deemed to have consented to issuance of an order of prohibition, 12 U.S.C. § 1818(e)(4), the Order to Reopen noted that this section could not be deemed operative if a respondent failed to receive actual or constructive notice of the time and place that the hearing is to be held. Accordingly, the Order to Reopen directed the ALJ to ascertain whether Respondent received actual or constructive notice of the time and place of the hearing. The ALJ found on remand that Respondent had received such notice, and the Board concurs in that conclusion.
   The issue of notice arose in the first place because it appears that several documents issued by the ALJ, in the initial phase of this proceeding after issuance of the Notice, were sent to Respondent by regular mail at the New City Address, but were returned by the post office as undeliverable.6 In addition, on November 7, 1994, the ALJ sent the Order Establishing Hearing to Commence on January 24, 1995 (the "Initial Hearing Notice"), to Respondent at the New City Address by first class mail. Although the record does not show whether the Initial Hearing Notice was returned by the post office as undeliverable, it is possible that it was not received by Respondent because it postdated by several months the other items returned as undeliverable, and it appears that Respondent had a new address by that date.
   Specifically, in September 1994, FDIC Enforcement Counsel learned that Respondent was apparently no longer receiving mail at the New City Address, but was residing and receiving mail at an address in Nanuet, New York (the "Nanuet Address"). See letters from FDIC Enforcement Counsel Stephen Miller to the ALJ dated November 16, 1995, and December 28, 1995. Although Respondent may not have received notice of the earlier matters ruled on by the ALJ, the record supports the conclusion that Respondent received actual notice of the date, place, and time of the hearing in this matter. On December 9, 1994, the ALJ issued a Notice of Hearing Location (the "Final Hearing Notice") setting forth the date, time, and location of the hearing to be held in this matter on January 24, 1995. According to the certificate of service, the Final Hearing Notice was sent to Respondent by first class mail at the Nanuet Address. It appears that, commencing not later than December 1, 1994,7 all papers in this proceeding—including the Final Hearing Notice and the ALJ's Recommended Decision—were sent to Respondent at the Nanuet Address. Given the fact that Respondent or his wife apparently signed return receipts for certified mail delivered to the Nanuet Address as early as September or October 1994 and as late as December 6, 1995 (see letters from FDIC Enforcement Counsel Stephen Miller to the ALJ dated November 16, 1995 and December 28, 1995 and attachments thereto), it is reasonable to conclude that Respondent had actual notice of all proceedings in this matter, with the possible exception of papers filed between issuance of the Notice on July 15, 1994, and the Prehearing Order issued December 1, 1994.8

   [.2] While it is unfortunate that Respondent may not have received documents filed in this matter after issuance of the Notice but prior to December 1, 1994, the Board finds under the circumstances of this case


6 Those documents are the Notice of Designation, Provisional Procedural Schedule, and Convening of Scheduling Conference by Telephone to be Held on August 12, 1994, issued by the ALJ on July 18, 1994; the Report of Conference and Order Rescheduling Conference by Telephone for September 12, 1994, issued by the ALJ on August 15, 1994; and the Report of Conference and Order Extending Time in Which Respondent Fitzgerald Has to File Answer to September 26, 1994, issued by the ALJ on September 12, 1994.

7The certificates of service on the Order on Requirements of Prehearing Submissions issued by the ALJ on December 1, 1994 (the "Prehearing Order") and subsequent filings show that the ALJ commenced serving Respondent at the Nanuet Address on December 1, 1994.

8 The Order to Reopen suggested that sending items to Respondent by first class mail after return of some items as undeliverable was not a method of service "reasonably calculated to give actual notice." The record on remand, however, supports the conclusion that mailing documents to Respondent's Nanuet Address by first class mail was not only "reasonably calculated to," but did result in, giving actual notice to Respondent.
{{6-30-96 p.A-2766}}that Respondent was not prejudiced thereby, and has by his conduct completely waived any rights he may have had to object to any deficiencies in service.9 It seems clear that he received the Notice explaining the charges against him; the Final Hearing Notice advising of the date, time, and place of the hearing; FDIC Enforcement Counsel's proposed findings of fact, conclusions of law, and brief; the Recommended Decision; the Order to Reopen; and all correspondence generated after the Order to Reopen.

   [.3] Notwithstanding his receipt of these documents, Respondent failed to answer, failed to enter an appearance, failed to participate in the hearing, and failed to communicate with the ALJ in any manner at any time. Respondent's conduct, therefore, clearly demonstrates an intentional disregard of, or willful failure to follow, the FDIC's procedural requirements as noted in several earlier default cases. See In the Matter of Harold Dean Ingram, FDIC-92-343k, 2 P-H FDIC Enf. Dec. ¶5217, at A-2471 (August 2, 1994); In the Matter of Billy Gene Humphrey, Jr., FDIC-93-55e, 2 P-H FDIC Enf. Dec. ¶5207, at A-2346 (November 23, 1993); In the Matter of George W. Glover, FDIC-93-54e, 2 P-H FDIC Enf. Dec. ¶5206, at A-2343 (November 23, 1993).
   Unlike the respondents in those default cases, however, the Respondent in this case had additional opportunities to contest the allegations because the ALJ permitted FDIC Enforcement Counsel to put on a prima facie case. Thus, the ALJ reviewed the evidence submitted and made his findings and conclusions, set forth in the Recommended Decision, on the merits. The Board finds that the evidence of record fully supports the issuance of a prohibition order against Respondent on the merits.

   [.4] Even when a decision on the merits is issued, as was done in the instant case, it is appropriate to make an alternative finding of default. See In the Matter of Hiram L. Fong, Jr., FDIC-94-81e, 1 P-H FDIC Enf. Dec. ¶5230, at A-2749 (December 1, 1995); In the Matter of Chul Song, FDIC-92-140e, 92-350k, 2 P-H FDIC Enf. Dec. ¶5214, at A-2444 (May 17, 1994). Based upon Respondent's failure to appear at the hearing in this matter, the Board expressly makes an alternative finding that Respondent has defaulted.10

CONCLUSION

   After a thorough review of the record in this proceeding, and for the reasons set forth above, the Board adopts the ALJ's Recommended Decision, as supplemented herein.

ORDER OF PROHIBITION

   Accordingly, the Board, having considered the entire record in this proceeding, HEREBY ORDERS that, without the prior written approval 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), John F. Higgins is hereby prohibited from:

       a. participating in any manner in the conduct of the affairs of any financial institution or organization enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818 (e)(7)(A);
       b. soliciting, procuring, transferring, attempting to transfer, voting or attempting to vote any proxy, consent or authorization with respect to any voting rights in any financial institution enumerated in section 8(e)(7)(A) of the FDI Act, 12 U.S.C. § 1818(e)(7)(A);
       c. violating any voting agreement previously approved by the appropriate federal banking agency; or
       d. voting for a director, or serving as an institution-affiliated party.
   IT IS FURTHER ORDERED, that this ORDER shall become effective upon the expiration of thirty days after its service. The provisions of this ORDER will remain effective 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 action of the FDIC.
   Dated at Washington, D.C., this 28th day of May, 1996.


9 Because Respondent utterly failed to respond to any documents that were received by him, the Board finds it unnecessary to decide what remedial course of action would have been appropriate if Respondent had chosen to enter an appearance in this matter at some juncture. The Board does not, however, mean to minimize the importance of taking all reasonable steps to ensure that a respondent receives all papers filed in a proceeding. The Board does suggest that additional steps be taken to ensure actual notice in future actions if mail addressed to a respondent is returned as undeliverable.

10The Board also notes that, pursuant to 12 C.F.R. § 308.39(b), Respondent is deemed to have waived his right to object to the Recommended Decision by virtue of his failure to file any exceptions thereto.
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   By direction of the Board of Directors.
In the Matter of
JOHN F. HIGGINS
PRESIDENT AND DIRECTOR OF
STATE BANK OF WESTCHESTER
(N/K/A RELIANCE BANK)
(Insured State Nonmember Bank)
Docket No. FDIC-94-60e
DECISION RECOMMENDING ISSUANCE OF ORDER PROHIBITING FURTHER PARTICIPATION IN THE AFFAIRS OF FEDERALLY INSURED DEPOSITORY INSTITUTIONS

(Issued June 5, 1995)
WALTER J. ALPRIN
Administrative Law Judge
Office of Financial Institution Adjudication
Washington, D.C.
TABLE OF CONTENTS
I. Procedural History
II. Statement of the Case
III. Jurisdiction
IV. Discussion of Law and Facts
    A. Issues
    B. Prohibition
      1. Statutory Overview
      2. Misconduct
        a. Unsafe or Unsound Practices
        b. Unsafe or Unsound Loans Originated by Respondent
        c. Respondent's Relationship With Lindskog
        d. Unsafe or Unsound Loans Originated by Lindskog Under Respondent's Supervision
        e. Breach of Fiduciary Duty
      3. Effect of Misconduct
      4. Culpability
        a. Personal Dishonesty
        b. Willful or Continuing Disregard
V. Conclusions of Law VI. Summary and Recommendation
VII. Proposed Prohibition Order Certificate of Service

I. PROCEDURAL HISTORY

   On July 12, 1994, the Federal Deposit Insurance Corporation ("FDIC") issued a Notice of Intention to Prohibit Oscar Lindskog ("Lindskog"), John F. Fitzgerald ("Fitzgerald"), and John F. Higgins ("Respondent"), individually and as former officers, directors, and institution-affiliated parties of State Bank of Westchester, n/k/a Reliance Bank, White Plains, New York ("Bank"), from further participation in the affairs of Federally insured depository institutions ("Notice"). The Notice was issued pursuant to the provisions of section 8(e)1 of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e), and Part 308 of the FDIC's Rules of Practice and Procedure, 12 C.F.R. Part 308. Lindskog and Fitzgerald each stipulated to the Issuance of an Order of Prohibition From Further Participation leaving Higgins as the remaining respondent.
   Respondent failed to file an answer to the charges, timely or otherwise.2 Pursuant to 12 C.F.R. § 308.19(c), failure to answer constitutes a default and a waiver to appear and contest the allegations in the Notice, but at Enforcement Counsels' request to put a prima facie case on the record, upon notice to Respondent a hearing was held on January 24, 1995, in New York, New York. Respondent did not appear. Enforcement Counsel submitted its brief on April 12, 1995. Respondent filed no brief, and no reply briefs were filed.

II. STATEMENT OF THE CASE

   Respondent is charged with engaging in unsafe or unsound banking practices and with breaching his fiduciary duty as a director and officer of the Bank, through his lax lending and supervisory practices, as a result of which the Bank suffered substantial losses.


1 Sections 903 and 904 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Pub. L. No. 101-73, § 907, 103 Stat. 183 (1989), merged the removal and prohibition authority of Sections 8(e)(1) and (2) of the Act into a unified Section 8(e)(1), 12 U.S.C. § 1818(e)(1); added a new Section 8(e)(6) of the Act to expand the types of activities prohibited by a removal order, 12 U.S.C. § 1818(e)(6); and added a new Section 8(e)(7) of the Act to give industry wide application to removal and prohibition orders issued by the Federal bank regulatory agencies (here, the FDIC), 12 U.S.C. § 1818(e)(7). Because the unsafe or unsound practices, and breaches of fiduciary duty alleged in the Notice arose prior to the enactment of FIRREA. Respondent's conduct is measured by the substantive requirements of the pre-FIRREA version of Section 8(e)(1) of the Act, 12 U.S.C. § 1818(e)(1); and, unless otherwise noted, all references to Section 8(e) of the Act herein are recited to the pre-FIRREA version.

2 A copy of the Notice was sent by certified mail and the receipt was signed by Mr. Higgins. (FDIC Ex. B) Respondent has shown no good cause for his failure to answer the charges.
{{6-30-96 p.A-2768}}Enforcement Counsel allege that Respondent extended credit improperly, exceeded his lending authority, failed to obtain appraisals of collateral, and used stale or incomplete financial information to evaluate loan applications. In addition, Respondent is charged with unsafe and unsound banking practice, and the breach of his fiduciary duty, in failing to supervise Lindskog, a lending officer, resulting in substantial losses to the Bank. Enforcement Counsel allege that the total loss sustained by the Bank due to Respondent's improper origination of loans and his lack of supervision exceeds five million dollars. Tr. 76–77.

III. JURISDICTION

   At all times pertinent to this proceeding the Bank was a corporation existing and doing business under the laws of the State of New York, having its principal place of business in White Plains, New York. FDIC Ex 2; Admitted Fact at paragraph 1 of the Notice pursuant to 12 C.F.R. § 308.21.3
   At all such times the Bank was an insured State nonmember bank, subject to the Act, 12 U.S.C. §§ 1811-t, the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of New York. A.F. ¶ 1.
   At all such times Respondent was as an officer and director of the Bank and was an "institution-affiliated party" as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and for purposes of section 8(e)(7), 8(i) and 8(j) of the Act, 12 U.S.C. §§ 1818 (e)(7), 1818(i) and 1818(j). A.F. ¶ 6.

IV. DISCUSSION OF LAW AND FACTS

A. ISSUES

   The primary issue is whether Respondent's conduct justifies the institution of a Prohibition Order. This determination depends on whether Respondent engaged in unsafe or unsound banking practices or breached his fiduciary duty. If so, Respondent should be prohibited from further participation in affairs of Federally insured depository institutions.

B. PROHIBITION

1. Statutory Overview

   Pursuant to 12 U.S.C. § 1818(e)(1), banking regulatory agencies are authorized to remove directors and officers from an insured bank and to prohibit their further participation in the affairs of a Federally insured financial institution. A removal and/or prohibition order may issue where it is found that a director or officer 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) as a result of the violation, practice, or breach, the bank has suffered or will suffer substantial4 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.
   Accordingly, the ultimate fact issues are whether there have been established each of the following three criteria: 1) "misconduct" pursuant to §1818(e)(1)(A), 2) "effect" of such misconduct pursuant to subparagraph (B), and "culpability" under subparagraph (C).5

2. Misconduct

a. Unsafe Or Unsound Practices

   The phrase "unsafe or unsound practices" is not defined in section 8(b) of the Act, 12 U.S.C. § 1818(b). The statute also does not specify practices which are deemed to be unsafe or unsound. However, the phrase has been commonly defined as follows:

    ...[T]he term "unsafe or unsound practices" has a central meaning which can and must be applied to constantly chang-

3 Hereafter "A.F. ¶" will be the abbreviation for: Admitted fact, paragraph number of the Notice pursuant to 12 C.F.R. § 308.21.

4 Emphasis is added here as a reminder of the pre-FIRREA standard used in this instance as a result of Respondent's conduct prior to 1989. The intent of FIRREA is to strengthen or broaden enforcement powers of the Federal regulators of depository institutions. Thus, while a "substantial" financial loss was required to be proven prior to FIRREA, in other cases instituted after FIRREA the loss need not be proven to be substantial.

5 Oberstar v. FDIC, 92-2919 (8th Cir. 1993).
    {{6-30-96 p.A-2769}}ing 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 or damage to an institution, its shareholders, or the agencies administering the insurance fund.
Financial Institutions Supervisory Act of 1966: Hearings on S. 3158 Before the House Committee on Banking and Currency, 89th Congress., 2nd Sess., at 49–50 (1966).6

Unsafe Or Unsound Loans Originated By Respondent

   Respondent served as president, lending officer, and member of the board of directors of the Bank from August, 1986 until June 2, 1989, (AF, ¶ 3), and the Bank's chief operating officer from March, 1987 to June 2, 1989. Respondent had a lending authority of $500,000 for unsecured credits and $750,000 for secured credits. FDIC Ex. 14, p. 6; Tr 59.
   Respondent originated three loans to William Mulderig and his related interests which evidence Respondent's lax lending practices and resulting loss to the Bank. On or about July 28, 1987, Respondent extended an unsecured loan in the amount of $70,000 without a determination of the borrower's capacity to repay. Tr. 78; FDIC Ex. 16. The Bank credit file indicated that Respondent had determined that no financial statement was needed due to Respondent's knowledge of Mulderig's near term cash flow position and his other business interests. Despite failing to determine whether the borrower was credit-worthy and despite no reduction on the principal amount, the loan was renewed two or three times. Tr. 85–86. The Bank ultimately lost $69,768 of the $70,000 advanced. Id.
   On of about December 17, 1987, Respondent extended credit in the amount of $400,000 to Mulderig's related interest, Stowe Standard Bred Breeders, a new business involving raising and breeding horses. Tr. 79. Mulderig submitted a financial statement on the day the loan was originated revealing his only asset to be four horses valued at $1,590,000. This valuation of the horses was based on anticipated future winnings and breeding fees. Tr. 80. The credit file failed to provide where the horses were located or by what financial resources they were to be maintained. Tr. 80.
   This business was a speculative venture in which its net worth depended on anticipated future winnings that might never materialize. Despite the risky nature of the business, Respondent failed to verify the worth of the only asset, the horses. When the Bank eventually tried to collect on the delinquent loan, the horses initially could not be located. Tr. 81. After the horses had been located it was discovered that the loans had been improperly filed and that the names of the horses did not correspond to the names on the Bank's UCC filings. Id. The Bank ultimately lost $300,000 of the $400,000 advanced.
   On or about February 11, 1986, Respondent extended credit to Mulderig on behalf of Georgetown Bluffs Association in the amount of $900,000. Tr. 81–82. The purpose of the loan was to pay off the first mortgage on an apartment building in Highland Falls, New York and for capital improvements to convert the apartments into a condominium. Tr. 82 Fifty per cent of the loan was immediately sold to another institution leaving Georgetown Bluffs Association with a $450,000 loan from the Bank. Mulderig independently appraised the value of the twenty-four units to be approximately $1.9 million, on the basis of conversion to condominiums and sale within an 18 month period. Respondent failed to verify the appraisal and failed to determine the worth of the property in its present form as apartments. The apartments were never converted into condominiums because Mulderig could not obtain the proper approval. The Bank sustained a $110,000 loss of the $450,000 advanced.7 Tr. 83.
   Respondent's careless lending practices are even more questionable in light of his knowledge of Mulderig's past failure to pay debts.


6 See also First National Bank of Eden v. Department of the Treasury, 568 F.2d 610, 611 (8th Cir. 1978) ("Comptroller suggests that these terms encompass what may be generally viewed as conduct deemed contrary to accepted standards of banking operations which might result in abnormal risk or loss to a banking institution or shareholder.")

7 The Bank took back the remaining balance of $340,000 as a first mortgage which was passed on to Bank's successor, Reliance Bank. Tr. 83. The balance of the loan at the time of the hearing was in excess of $300,000 and the ultimate loss Reliance Bank will sustain has not yet been determined. Id.
{{7-31-95 p.A-2770}}
Respondent was familiar with Mulderig as a borrower when Respondent was a loan officer at Nanuet National Bank before coming to State Bank of Westchester ("Bank").8 By Respondent's own admission Mulderig did not timely pay his debts and had to be contacted by bank personnel. Tr. 92-93; FDIC Ex. 15. Lindskog, a former loan officer at Nanuet and Bank, believes Nanuet National Bank sustained a loss of approximately one million and a half dollars due to Mulderig's delinquency. Tr. 94-96; FDIC 11. The record also indicates that Lindskog became concerned when Respondent began making loans to Mulderig at the Bank and stated during his deposition that it was not unusual for Mulderig to be overdrawn by one million dollars at the Bank. Tr. 94; FDIC 11.

c. Respondent's Relationship With Lindskog

   Respondent and Lindskog worked together at three different institutions: Bankers Trust Company for three years, Nanuet National Bank for seven years, and at the Bank for two years.9 In each instance, Respondent was Lindskog's immediate supervisor. FDIC Ex. 11 pp. 10-12.
   Lindskog has a $25,000 lending authority limit at Nanuet National Bank. Tr. 42-44. The limit is a means of protecting the institution against loss and is based on an individual's lending experience. Id. FDIC National Bank Examiner Butler testified at hearing that a $25,000 lending limit does not convey a great deal of confidence in a persons' lending authority. Id. After Lindskog was employed by the Bank, Respondent approved a dramatically increased lending authority for Lindskog of $250,000 unsecured lending and up to $500,000 secured lending. Tr. 45, 59; FDIC Ex. 14, p. 6.
   The evidence admitted at hearing shows that loans originated by Lindskog caused a loss representing approximately 37 per cent of the Bank's total capital and reserves. Tr. 47. The net charge-off as of 1993 of the risky loans originated by Lindskog totaled $3,494,707. Id.; FDIC Ex. 12. Twenty two of the thirty six Lindskog loans listed as unsafe or unsound were a complete loss without any principal reduction or recovery. Tr. 47–48; FDIC Ex. 12.
   The agency attributes the losses to Respondent for his failure to supervise Lindskog and to limit or reduce the substantial loss. The Bank's loan policy, approved October 14, 1986, established that the President of the Bank was responsible for the loan review function. FDIC Ex. 13, pp. 7–8. Therefore, Respondent's responsibilities included monitoring the loan portfolio, implementing and administering the guidelines set forth in the Bank's loan policy as well as establishing and maintaining sound credit and documentation procedures and an internal loan review. Id.

d. Unsafe Or Unsound Loans Originated by Lindskog While Supervised by Respondent

   Many of the loans originated by Lindskog were made without regard to financial analysis, without proper documentation and without any regard to internally approved lending policies or lending limits. The loans described below are a few instances of Lindskog's lax lending practices.
   On or about May 12, 1988, the unsecured loans to Thomas Duke were consolidated totaling $295,000 and thereby exceeding Lindskog's lending authority of $250,000. Tr. 49. Before being consolidated, the loans had been renewed fifteen times without a principal reduction or verification or confirmation on the value of assets reflected on the borrower's selfprepared and self-valued financial statement indicating an amount in excess of $10 million dollars. Tr. 49–50. The Bank ultimately lost $235,000 of the $295,000 advanced.
   On or about May 12, 1988, Lindskog extended credit in the amount of $375,000 to East 22nd Restaurant Corporation guaranteed by Thomas Duke and his sister, Patricia Duke. The purpose of the loan was to provide money to open a restaurant on East 22nd Street in New York City. Tr. 51. As collateral, the Bank obtained a mortgage on the Duke residence at 9 Bevin Road in Asharoken, New York. Id. Lindskog failed to obtain financial information from Patricia Duke or perform a lien search or obtain an appraisal on the Bevin Road prop-


8 Respondent Higgins was employed at Nanuet National Bank during the period 1977-1986 as a Senior Lending Officer and as a Senior Vice President in charge of lending. FDIC Ex. 15, pp. 7, 9–10.

9 Lindskog was employed at Bankers Trust Company during the period 1974-1977, at Nanuet National Bank from 1979-1986, and at the Bank from August 1986 to November 1988. FDIC Ex. 11, pp. 5–11. Respondent was employed at: Bankers Trust Company during the period 1973-1977, Nanuet National Bank during the period 1977-1986, and Bank from August 1986 to June 2, 1989. FDIC Ex. 15, pp. 7, 9–10.
{{6-30-96 p.A-2771}}erty. Tr. 51–52. When the loan became delinquent and the Bank tried to acquire the collateral, it was discovered that the Dukes had no equity in the property and the Bank had no legal recourse. Id.
   One of the more flagrantly imprudent loans originated by Lindskog involves four borrowers. In 1988, Lindskog extended credit to Edward and Raymond Miller, Richard Petrucelli and Stanley Chessick individually in the amount of $400,000 for a total of 1.6 million. Tr. 54. Each of the borrowers was a partner in a business called LMP Associates and each valued their interest in the company as having a worth in excess of $12 million. Id. At the time the credit was originated, the borrowers submitted a financial statement out of date by two years. Id. The financial statement indicated that LMP Associates had total assets of approximately $6 million and total liabilities of approximately $6 million, showing no equity in the company. The financial statement contradicted the borrowers' assertion that the company was worth $48 million. Despite these glaring inconsistencies, Lindskog failed to determine the actual worth of the business or establish a repayment schedule. Tr. 55.
   Part of the loan to the four borrowers, $600,000, was to be paid from the sale of a building owned by One New Haven Avenue Associates. Tr. 55. Although Lindskog visited the building, he did not obtain an appraisal or credit report or determine whether the borrower had any equity in the building. The Bank lost all of the aggregated 1.6 million dollar loans. In each of the $400,000 loans to the individuals, Lindskog exceeded his unsecured lending authority of $250,000.
   The few instances described above are only a sampling of the loans originated by Lindskog showing more than simply poor judgment, and ultimately cost the bank a total of $3,494,707. In each instance, proper supervision by Respondent could have limited the damage incurred by Lindskog's egregious loan practice. In fact, it was Respondent's duty as president pursuant to the Bank policy to adequately review and monitor these loans.

e. Breach of Fiduciary Duty

   The Board of Directors of the FDIC has established the parameters of the fiduciary duty expected of directors under the requirements of section 8(e) of the Act as follows:

       [B]ank directors and officers have a fiduciary duty to the bank to act diligently, prudently, honestly, and carefully in carrying out their responsibilities and must ensure their bank's compliance with state and federal banking laws and regulations. Docket No. FDIC-87-61e, 2 P-H FDIC Enf. Dec. ¶ 5113 at A-1243 (1988); Docket No. FDIC-85-356e, 2 P-H FDIC Enf. Dec. ¶ 5112 at A-1235 (1988). This duty requires the proper supervision of subordinates, a knowledge of state and federal banking laws, and the constant concern for the safety and soundness of the bank, id. at A-1235. "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," id. at A-1235.
In the Matter of Ronald J. Grubb, Bank of Hydro, Hydro, Oklahoma, FDIC-88-282k and FDIC-89-111e, 1 FDIC Enforcement Decisions and Orders (P-H) ¶ 5181 at A-2030, 2031 (August 25, 1992).
   As president, lending officer, and director, Respondent had a fiduciary duty to the Bank to act in its best interests and protect against loss. Rather than minimizing loss to the institution, Respondent maximized the harm through his persistently reckless and improper lending practices in addition to his lack of supervision of his subordinates. Respondent extended unsecured credit without determining if borrowers were credit-worthy and without obtaining appraisals and exceeded his lending authority. In addition, Respondent utterly failed to monitor and review the Bank's loan portfolio. As president and Lindskog's immediate supervisor, Respondent owed a duty to the Bank to put a stop to the persistently egregious and unsafe or unsound practices in which Lindskog engaged.

3. Effect of Misconduct

   The issue under the "effects" portion of the prohibition analysis is whether, as a result of Respondent's misconduct, the Bank suffered or will likely suffer substantial financial loss or other harm to the interests of its depositors, or whether Respondent received a financial gain. The undersigned finds that the effect of Respondent's misconduct is a loss to the Bank of $5,254,213.00.10


10 Losses due to loans originated by Respondent personally total $1,759,506.00 and losses due to loans originated by Mr. Lindskog total $3,254,213.00. Tr. 71, 76; FDIC Ex. 12; FDIC Ex. 16.
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4. Culpability

   The final issue to be determined is whether Respondent's actions manifest either personal dishonesty, or willful or continuing disregard for the safety and soundness of the bank. Personal dishonesty also includes a disposition to lie, cheat, defraud, misrepresent, or deceive, or a lack of straightforwardness and a lack of integrity.11

a. Personal Dishonesty

   The facts presented demonstrate that Respondent engaged in flagrant banking misconduct, but not that he lied, defrauded, or stole from the institution or others. However, the facts presented indicate a complete disregard for the limits of his position or even common sense limits of loan making which impugns Respondent's integrity and raises serious questions of whether he was acting in a straightforward manner. Enforcement Counsel does not argue that Respondent acted with personal dishonesty, and accordingly the undersigned makes no finding on the issue but specifies that he might consider similar conduct in some other matter to constitute evidence of personal dishonesty.

b. Willful Or Continuing Disregard

   The applicable standard for issuing a section 8(e) order of prohibition requires a determination that the Respondent's conduct involved either personal dishonesty, or willful, or continuing disregard for the safety and soundness of the Bank. 12 U.S.C. § 1818(e) (1982). Neither the Act nor its legislative history defines "willful or continuing disregard." The FDIC and the courts have interpreted "willful disregard" and "continuing disregard" to provide two distinct and alternative standards for removal and/or prohibition. In Brickner v. Federal Deposit Insurance Corporation, 747 F.2d 1198, 1202–1203 (8th Cir. 1984), the Court ruled that:

       [A]lthough "continuing disregard" may require some showing of knowledge of wrongdoing, it does not require proof of the same degree of intent as "willful disregard."
Id. at 1203. The Court in Van Dyke v. Board of Governors of Federal Reserve System, 876 F.2d 1377 (8th Cir. 1989) clarifies the term "willful disregard" as follows:
       "Willful disregard" has been defined as deliberate conduct which exposed the bank to "abnormal risk of loss or harm contrary to prudent banking practices."
   The record here is replete with instances evidencing both Respondent's continuing, and of his deliberate, and hence willful disregard for safety and soundness of the Bank. The Respondent engaged in extensive imprudent lending practices at the Bank which resulted in substantial financial losses. The record clearly demonstrates that the Respondent knew or should have known of the poor quality of the extensions of credit originated by him. For instance, extending credit to William Mulderig, whose loans had been classified as loss at another institution with which he had been associated must be construed as a willful or continuing disregard for the safety and soundness of the Bank unless there has been shown a supporting change in financial circumstances which, in this instance, was not done. With over 36 years experience as a lending officer and as Senior Lending Officer of the Bank who co-authored the Bank's written loan policy, Respondent failed to assess the abnormal risk of financial loss or damage to the Bank. In fact, he failed to take any action to correct the situation or to halt what had developed into a definite pattern of unsafe or unsound lending practices as described above.
   Respondent's willful and continuing disregard for the safety and soundness of the Bank is further demonstrated by reference to the Respondent's duties and responsibilities with respect to the loans originated by Lindskog. The Respondent had direct knowledge that Lindskog's banking experience was in operations and not in lending. The Bank's lending policy established that the Respondent was responsible for carrying out the loan review function. Yet, Respondent permitted Lindskog to engage in extensive imprudent lending practices at the Bank which resulted in losses of $3,494,707.

V. CONCLUSIONS OF LAW

   1. The Bank is and was at all times pertinent to this proceeding subject to the Act, 12 U.S.C. §§ 1811 et seq., the Rules and Regulations of the FDIC, 12 C.F.R. Chapter III, and the laws of the State of New York.
   2. The Bank is an "insured depository institution" as that term is defined in section 3(c)(2) of the Act, 12 U.S.C. § 1813(c) (2)(1989).


11 Van Dyke v. Bd. of Gov. of Federal Reserve System, 876 F.2d 1377 (8th Cir. 1989).
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   3. Respondent was a director, and officer, an "institution-affiliated party" as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u)(1989).
   4. The approval by a bank officer and director of extensions of credit which are not protected by the current sound worth and paying capacity of the recipient and which are not protected by the collateral pledged constitutes an unsafe or unsound banking practice.12 Respondent engaged or participated in unsafe or unsound practices by knowingly causing the Bank to extend credit which was inadequately protected by the current sound worth and paying capacity of the recipients and which was not protected by the value of the collateral pledged.
   5. Respondent's failure to take appropriate action to eliminate the unsafe or unsound practices in the extensions of credit originated by his subordinate constitutes a breach of the Respondent's fiduciary duty as a director of the Bank.
   4. The burden of proof for the issuance of an order under section 8(e) of the Act, 12 U.S.C. § 1818(e), requires the establishment of the statutory elements by a preponderance of the evidence.13 The Petitioner, through Enforcement Counsel, have demonstrated by a preponderance of the evidence all of the statutory criteria for issuance of a prohibition order against Respondent under 12 U.S.C. § 1818(e).

VI. SUMMARY AND RECOMMENDATION

   A supervising agency, in this matter the FDIC, is authorized to issue orders prohibiting persons from further participation in the conduct of the affairs of any Federally insured depository institution when such orders are necessary to remedy violations of the applicable statutory provisions. The record of this proceeding clearly demonstrates that Respondent engaged in conduct and practices at the Bank which constitute unsafe or unsound practices and breaches of fiduciary duty, and which resulted in substantial financial losses to the Bank. As a result of the definite pattern of unsafe or unsound practices and breaches of fiduciary duty, the Respondent demonstrated both a willful and a continuing disregard for the safety and soundness of the Bank. It is recommended that a Final Order similar in form to the attached be entered prohibiting Respondent from further participation in the affairs of Federally insured depository institutions.

ORDER PROHIBITING RESPONDENT HIGGINS FROM FURTHER PARTICIPATION IN THE AFFAIRS OF FEDERALLY INSURED DEPOSITORY INSTITUTIONS

   1. John F. Higgins is hereby prohibited, without the prior written approval of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D), from:

       (a) participating in any manner in the conduct of the affairs of any financial institution or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A);14
       (b) soliciting, procuring, transferring, attempting to transfer, voting, or attempting to vote any proxy, consent or authorization with respect to any voting rights in any financial institution enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A);
       (c) violating any voting agreement previously approved by the appropriate Federal banking agency; or
       (d) voting for a director, or serving or acting as an institution-affiliated party.
   2. This ORDER will become effective ten (10) days after its issuance. The provisions of this ORDER will remain effective 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 ____, 1995.
   Pursuant to delegated authority.
12 In RE Clark, Docket No. FDIC-89-199e, 1 P-H FDIC Enf. Dec. & Orders, ¶ 5162, A-1613 (1991).


13 Steadman v. Securities and Exchange Commission, 450 U.S. 91 (1981). In the Matter of James G. Welk, Docket No. FDIC-91-201e, 1 P-H Enf. Dec. & Orders, ¶ 5186, A-2102 (1992)


14 Subsection (b)(8), as referenced in section 8(e)(7)(A)(ii), has been redesignated as subsection (b)(9).

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