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   [5251] In the Matter of Billy Proffitt, individually and as an institution affiliated party of Tennessee State Bank, Gatlinburg, Tennessee (Insured State Nonmember Bank) FDIC Docket No. 96-105e (10-6-98). (Proffitt's petition for review was denied by the United States Court of Appeals for the District of Columbia Circuit, 200 F.3d 855. His petition for rehearing en banc was also denied, 208 F.3d 1066.) (This order was modified by order of the FDIC dated 11-2-05.; see ¶16,443.)

   [.1] Prohibition, Removal or Suspension—Misconduct
   A violation of any law or regulation is sufficient to satisfy the misconduct element required by section 8(e) of the Federal Deposit Insurance Act, 12, USC 1818(e), and is satisfied in this case because respondent breached his fiduciary duty under Tennessee law and violated the Bank's policies.

   [.2] Fiduciary Responsibilities—Conflict, affirmative duty to disclose    Respondent breached his fiduciary duty under federal law by failing to make disclosures to the Bank and Bank customer regarding his conflict of interests.

   [.3] Prohibition, Removal, or Suspension—Culpability
   Respondent's personal dishonesty and willful disregard for the Bank's safety and soundness evidence the requisite culpability necessary to sustain an action under section 8(e).

   [.4] Statute of Limitations—Removal proceedings
   The statute of limitations provisions of 28 USC 2462 do not apply to the removal actions under section 8(e) of the FDI Act, which are remedial in nature rather than punitive.

   [.5] Prohibition, Removal, or Suspension—Misconduct
   Misconduct alone does not trigger an 8(e) action. Intentional or deliberate conduct that is likely to cause a loss to the institution or gain to the individual is required, acts that cannot be tolerated because they are incompatible with safe and sound banking.

   [.6] Prohibition, Removal, or Suspension—Cause Accrues when all elements of action exist
   A cause of action for removal under section 8(e) does not accrue until all three elements of the action exist. Here, the elements did not coalesce until the Bank suffered a loss at the reinstatement of the judgment by the Tennessee Supreme Court.

In the Matter of
BILLY PROFFITT,
Individually, and as an
institution affiliated
party of
TENNESSEE STATE BANK
GATLINBURG, TENNESSEE
(Insured State Nonmember Bank)
DECISION AND ORDER
FDIC-96-105e

   This case is before the Board of Directors ("Board") of the Federal Deposit Insurance Corporation ("FDIC") on the Recommended ("Decision") of administrative Law Judge Arthur L. Shipe (the "ALJ"), dated February 12, 1998, that would remove Billy Proffitt ("Respondent" or "Proffitt") from his position as a director of Tennessee State Bank, Gatlinburg, Tennessee (the "Bank"), and prohibit him from further participation in the conduct of the affairs of any insured financial institution pursuant to section 8(e) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. §1818(e). As set forth below, the Board affirms the Decision, largely on the grounds set forth therein.

BACKGROUND

A. Procedural History

   On December 18, 1996, the FDIC, pursuant to section 8(e) of the FDI Act, issued a Notice of Intention to Remove From Office and to Prohibit From Further Participation ("Notice") against Respondent, individually and as an institution-affiliated party of the Bank. Respondent contested the Notice, and the case was assigned to the ALJ for a hearing. After some discovery disputes, the Executive Secretary denied Respondent's Motion for Interlocutory Review pursuant to delegated authority, and the parties filed cross-motions for summary disposition.
   In the Decision dated February 12, 1998, the ALJ granted the FDIC's motion and denied Respondent's motion. The ALJ's Decision recommended Respondent's removal and prohibition from banking. On March 12, 1998, Respondent filed his exceptions to the Decision. Thereafter, on April 1, 1998, the FDIC's Office of the Executive Secretary submitted the matter to the Board for a final decision.
   Because the case involves an important issue of first impression before the FDIC—the applicability of a statute of limitations to proceedings brought pursuant to section 8(e) of the FDI Act—which affected all of the banking agencies, the Executive Secretary, on May 22, 1998, pursuant to delegated authority, issued an Order reopening the record to permit further briefing on the issue including an invitation to the other banking agencies—the Office of Thrift Supervision ("OTS"), the Office of the Comptroller of the Currency ("OCC"), and the Board of Governors of the Federal Reserve System ("Federal Reserve")—to submit amicus briefs if they so desired.1 The Office of the Executive Secretary received those briefs on or before July 10, 1998.

B. Undisputed Facts

   Most of the facts in this matter are undisputed.2 Respondent is the majority shareholder and director of Tennessee State Bancshares, the majority shareholder of the Bank. R.D. 6. He serves on the Bank's board of directors but is apparently not a fulltime employee of the Bank. R.D. 6.
   In July 1989, Charles and Nancy Boling approached Bank president Tommy Bush to obtain financing for the acquisition of a hotel in bankruptcy, the Glenstone Lodge (the "Lodge"). R.D. 6. At a board meeting during that month, the concept of the loan was informally presented and, because financing the entire amount of the loan would violate the Bank's loan-to-one-borrower limit, the board authorized Bush to approach other lenders to see if financing for the full amount of the loan could be arranged. R.D. 6, 9, 14. These efforts failed and, after several months, Bush gave up, although it was understood that the Bolings remained interested in buying the Lodge. R.D. 14.
   Late in the year, some businessmen organized a group (the "Foley Group") for the purpose of buying the Lodge, and they asked Proffitt to join. R.D. 6, 14. He did so in late December. R.D. 6, 14. Apparently, at the time, Proffitt informed Bush that he had been approached, but not that he had joined. R.D. 15. He also asked Bush whether the Bolings' loan was active, and Bush said it was not active. R.D. 15. It is not clear whether Bush understood at that time that Proffitt had joined the group. The group subsequently made unsuccessful offers to the bankruptcy trustee early in 1990. R.D. 6, 10.
   Meanwhile, on January 30, 1990, the Bolings submitted a revised loan request, and, on March 7, 1990, the Board met to consider it. R.D. 7, 10. At the meeting, prior to presenting the loan package, Bush asked any board member with an interest in the Lodge to leave the room.3 R.D. 7, 10. Proffitt did not speak up or leave the room. R.D. 7, 10. He received a copy of the loan package and write-up sheet. R.D. 7, 10. During the meeting, he made some notes on the documents. R.D. 11. With Proffitt voting, the board unanimously approved the loan up to the loan-to-one-borrower limit. R.D. 7, 11. On March 21, 1990, the Bank issued a commitment letter, and, in the meantime, the Bolings attempted to secure other financing for the balance of the amount needed. R.D. 11.
   In early March, the first lienholder on the Lodge obtained court approval to foreclose, and a foreclosure sale was scheduled for March 30. R.D. 6–7. On March 27, Charles Boling held a meeting with Bush to discuss plans to secure other financing. R.D. 7, 11. Proffitt attended the meeting. R.D. 7, 11. After Boling left the meeting, Proffitt stated to Bush that he was a member of the Foley Group, and Bush suggested that he advise the Bolings of the fact. R.D. 11. Proffitt did not do so. R.D. 11.
   The Bolings successfully secured other fi-


1 The Board is grateful to the parties and amici for the excellent quality of the briefs provided. Those briefs underscore for the Board the complexity of the issues involved. Oral argument is unnecessary in this case and the Board denies Respondent's request and affirms the ALJ's decision to deny oral argument.

2 For convenience, this Section only relies on facts found by the ALJ to which Respondent has not taken exception. "R.D." references are to the ALJ's Decision.

3 Several board memebers were in the hotel/motel business.
nancing. On March 30, they and all members of the Foley Group except Proffitt attended the foreclosure sale. R.D. 7, 12. Early on that morning, Proffitt called Bush to ask whether "there was a race on." R.D. 12. Bush responded that there was. R.D. 12.
   At the sale, bidding proceeded incrementally until the Bolings reached their maximum bid of $3.4 million. R.D. 7, 12. The Foley Group then bid $3.405 million and acquired the Lodge. R.D. 7, 12.
   That night, for the first time, the Bolings learned that Proffitt was part of the Foley Group. R.D. 12. On July 12, 1990, they filed a lawsuit against the Bank, Bush, and Proffitt claiming, inter alia, breach of fiduciary duty, fraud, negligent misrepresentation, and breach of confidentiality. R.D. 7, 13. The compliant requested compensatory and punitive damages. R.D. 13.
   On February 17, 1992, the Tennessee trial court rendered a decision finding liability and awarding damages. R.D. 8. The Tennessee appellate court reversed, and the case went to the Tennessee Supreme Court. R.D.8. In a decision rendered in 1994, the Court found that the Bank and Proffitt were liable for breach of fiduciary duty and that their conduct was fraudulent. Boling v. Tennessee State Bank, 890 S.W.2d 32 (Tenn. 1994). The Court, however, concluded that the conduct did not proximately cause the Bolings' lack of success. Nonetheless, the Court found that the Bank's and Proffitt's breach of their duty of confidentiality damaged the Bolings, and it upheld an award of compensatory damages for the costs of bid preparation ($14,825) and an award of $250,000 punitive damages against the Bank and $250,000 against Proffitt.

C. The Recommenced Decision

   The ALJ addressed two issues in his Decision. The first was whether the statute of limitations contained in 28 U.S.C. §2462 barred the proceeding.4
After concluding that section 2462 was inapplicable, the ALJ addressed the merits of, and upheld, the removal and prohibition action.
   The ALJ rejected the argument that section 2462 barred the action for two reasons. First, he viewed section 2462 as being in conflict with 12 U.S.C. §1818(i)(3).5 R.D. 2–3. In his view, "it would be an anomaly if regulatory authorities were deemed to have greater authority over separated persons than over those in active service." R.D. 2. As he understood the effect of Respondent's argument, if two bankers committed a sanctionable offense and five years later one resigned, under section 1818(i)(3), the former banker would be subject to proceedings for another six years, whereas the active banker would be "immune from" proceedings. Id. Accordingly, he concluded that 12 U.S.C. §1818(i)(3) fell within the first clause of section 2462 exempting from its scope actions for which Congress has "otherwise provided."
   The ALJ also concluded that even if section 2462 applied, the claim giving rise to the proceeding did not arise until 1996 when the Bank paid the state court judgment and conduct resulted in a loss to the Bank. R.D. 3. Accordingly, he found that the proceeding would have been timely under section 2462. Id.
   Turning to the merits, the ALJ upheld the removal and prohibition, finding that the evidence satisfied the following three elements of a section 1818(e) action: (1) violative conduct, (2) a loss suffered by the Bank as a result of the conduct, and (3) the requisite culpability—personal dishonesty or willful or continuing disregard for the safety and soundness of the affected institution.
   The ALJ had no difficulty in concluding that Respondent's failure to disclose his involvement in the Foley Group and his participation in the March 7, 1990, board meeting and the March 27, 1990, meeting with


4 28 U.S.C. § 2462 provides that:
   Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil
   fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years
   from the date when the claim first accrued if, within that same period, the offender or the property is found
   within the United States in order that proper service may be made thereon.

5 12 U.S.C. § 1818(i)(3) provides that:
   The resignation, termination of employment or participation, or separation of an institution-affiliated party
   (including a separation caused by the closing of an insured depository institution) shall not affect the jurisdiction
   and authority of the appropriate Federal banking agency to issue any notice and proceed under this Section
   against any such party, if such notice is served before the end of the 6-year period beginning on the date such
   party ceased to be such a party with respect to such depository institution (whether such date occurs before, on,
   or after August 9, 1989).
Mr. Boling violated his fiduciary duty to the Bank and its customers, the Bolings. R.D. 14–18. The ALJ also found that it was beyond dispute that the Bank suffered losses because of Respondent's conduct. R.D. 18. Finally, the ALJ concluded that it was "personally dishonest for Respondent to remain at the meeting where the Bolings' loan was being reviewed after being told that anyone with an interest in the matter should excuse himself." Id. He also opined that Respondent's actions in joining the Foley Group and his continuing participation in it manifested a willful disregard for the safety and soundness of the Bank. Id. Accordingly he upheld the removal and prohibition.

D. Respondent's Exceptions

   Respondent filed exceptions to the ALJ's Decision addressing both the merits and statute of limitations issues. With regard to the merits, Respondent did not challenge most of the factual findings. Instead, he argued: (1) persons at the Bank were aware of Respondent's involvement in the Foley Group; (2) Respondent's vote in favor of the Bolings' loan at the March 1990 board meeting absolves him because the approval of the loan provided a benefit to the Bolings; and (3) he joined the Foley Group in late 1989 when the Bolings' loan request was dormant. Respondent also took exception to the ALJ's finding that the loss to the Bank was due to his activity as opposed to that of the Bank's chairman and objected to what he regarded as the ALJ's incorrect reliance on the state court decisions. Finally, Respondent believes that the ALJ improperly analyzed the culpability element in finding both personal dishonesty and willful disregard without the facts disclosing some form of scienter.
   Respondent's statute of limitations exceptions urge, contrary to the ALJ's conclusion, that section 2462 is applicable to section 8(e) proceedings. Respondent also challenges the ALJ's alternative holding that the action was timely under section 2462 because no loss to the Bank occurred prior to 1996. In Respondent's view, losses to the Bank began in 1990 with the payment of legal fees as a result of the lawsuit.

DISCUSSION

   For the reasons set forth below, the Board affirms the Decision of the ALJ removing and prohibiting Respondent. For the most part, the Board agrees with the ALJ's fact-finding and reasoning. The ALJ's disposition of the merits raises issues that require only a brief discussion. However, because of the importance of the statute of limitations issue to the banking agencies, this Decision and Order will address that issue in more detail.

I. The Merits

   The violation committed by Respondent represents a particularly egregious breach of his duties as a banker. A section 1818(e) action requires proof of three elements: (1) misconduct, (2) an effect caused by the misconduct, and (3) culpability. See generally Grubb v. FDIC, 34 f.3d 956, 961 (10th Cir. 1994); Seidman v. OTS, 37 F.3d 911, 929 (3rd Cir. 1994); Cavallari v. OCC, 57 F.3d 137, 144 (2nd Cir. 1995); Greenberg v. Board of Governors of the Federal Reserve System, 968 F.2d 164, 170 (2nd Cir. 1992); Oberstar v. FDIC, 987 F.2d 494, 499 (8th Cir. 1993). The Board believes that the record amply demonstrates the existence of all three elements and that Respondent's exceptions are groundless.
   In considering the first element, the Board concludes that the crucial facts are undisputed. After Respondent joined the Foley Group in late 1989, two events occurred that form the necessary predicate for his removal and prohibition. First, when the Bank's board took up the Bolings' loan request at the March 7, 1990, board meeting, Respondent neither left the room when Bank president Bush requested that any board member interested in the property at issue leave the room, nor did he disclose that interest even after being told to do so. As a result, he received a copy of the loan package and voted on the loan.
   Second, on March 27, 1990, he remained in president Bush's office while Bush discussed certain aspects of the Bolings' plan to purchase the Lodge. Again, he kept the Bolings in the dark about his membership in the Foley Group and interest in the Lodge.6

   [.1]The misconduct required by section


6 Because Respondent's actions at these two meetings constitute misconduct within the meaning of section 1818(e), whatever dispute there may be concerning the propriety of Respondent's joining the Foley Group in late 1989 is not material to the outcome of the case.
1818(e) can be a violation of "any law or regulation." 12 U.S.C. §1818(e)(1)(A)(i). In this case, the Tennessee state courts had no difficulty in concluding that Respondent had breached his fiduciary duty under Tennessee law and had violated the Bank's own internal policies. 890 S.W.2d at 35–36. See also Tenn. Stat. Ann. §48-18-301.

   [.2]Similarly, under federal law it is clear that Respondent breached his fiduciary duty. As this Board explained in In the Matter of Lowe and Spivey, 2 FDIC Dec. & Ord. (Aspen Law and Business) ¶ 5153 at A-1536 (April 16, 1990), aff'd, 958 F.2d 1526 (11th Cir. 1992):

    In the Board's view, the fiduciary duty of loyalty which bank directors owe their institution requires a bank director to investigate the possibility of a conflict of interest and be completely candid with his colleagues. When a bank director finds himself in a situation involving a conflict of interest, as here, it is incumbent on him to make complete disclosure in order to affirmatively avoid a conflict, even if such disclosure seems superfluous.
There can be little argument that Respondent failed to make appropriate disclosures at the two meetings, and indeed, once he became involved in the Foley Group, he should have completely recused himself from any dealings with the Bolings or their loan. He had a clear conflict of interest with both the Bolings and the Bank and, as the ALJ found, R.D. 15–16, owed a fiduciary duty to both. Thus, the violation of law in this case is patent.7
   The second element, whether Respondent's misconduct has caused a loss to the institution or resulted in a benefit to Respondent, is not disputed by Respondent. His only exception is a contention that the Bank's liability was based on improper conduct by Bank president Bush. Bush's role, however, was minor compared to Respondent's. Respondent was the Bank official who joined the group competing with the Bank's customers and then failed to make proper disclosures and recuse himself from any meetings involving the customers' loan request. Thus, his responsibility for the outcome of this matter is of a greater order of magnitude from Bush's.

   [.3]Finally, Respondent's culpability could not be more clear. His questioning of Bush at the time he joined the Foley Group in late 1989 concerning the status of the Bolings' loan, R.D. 15, reveals his understanding that he would place himself in a potential conflict of interest situation if their request were resubmitted. For him to remain at the March 7, 1990, meeting after president Bush invited board members with an interest in the Lodge to leave the room can only be described as personally dishonest or in willful disregard of the Bank's safety and soundness. See Greenberg, 968 F.2d at 171 (failure to disclose parties' interests constitutes personal dishonesty); Van Dyke v. Board of Governors of the Federal Reserve System, 876 F.2d 1377, 1379 (8th Cir. 1989)(actions involving fraud and lack of integrity demonstrate personal dishonesty); Cavallari, 57 F.3d at 145 (willful conduct where action "evidences utter lack of attention to an institution's safety and soundness"). Similarly, his conduct in remaining at Bush's meeting with Mr. Boling on March 27, 1990, evinces the same culpability. Id. The violations of fiduciary duty involved were obviously not inadvertent or technical. See Oberstar, 987 F.2d at 502–03.8 Indeed, the Tennessee Supreme Court upheld an award of punitive damages against him because it concluded that his conduct was fraudulent. 890 S.W.2d at 36–37. Accordingly, the Board concludes that the ALJ correctly found Respondent's actions to be personally dishonest and to evidence a willful disregard for the Bank's safety and soundness.
   In sum, the ALJ correctly found that the record demonstrated all three elements necessary to sustain a removal and prohibition


7 It is no excuse that others on the Board may have known of Respondent's conflicts. It is Respondent's personal obligation to avoid conflicts of interest and he did not do so here. Nor as the ALJ found, does his vote to approve the Bolings' loan absolve him of the fiduciary duty violations.

8 Although Respondent relies heavily on the Oberstar case in his exceptions, he totally fails to explain how his misconduct was inadvertent or technical. Given his sophistication as a businessman, the Board is skeptical that an innocent explanation could exist. Cf. Hutensky v FDIC, 82 F.3d 1234, 1241 (2nd Cir. 1996)(failure by a sophisticated businessman to disclose interests and use required approval procedure for loans from which he benefited demonstrates personal dishonesty). By asking Bush before joining the Foley Group whether the Bolings' loan request was still active, R.D. 15, it was clear that he understood the implications of his actions. His reference to the question of whether he viewed the Bolings' loan as a loan on proposed collateral other than the Lodge is not credible and explains nothing. The Bolings sought the loan to purchase the Lodge, a matter in which he had a direct, personal, and conflicting interest.
action. Therefore, the Board affirms his Decision on this issue.

II. Statute of Limitations

   As set forth above, the ALJ concluded that this action was not time-barred for two reasons. First, he determined that the only applicable statute of limitations was 12 U.S.C. §1818(i)(3), and that it displaced 28 U.S.C. §2462. Thus, in the ALJ's view, the only action that would be time-barred would be one brought more than six years after an institution-affiliated party left an institution. Since Respondent was still a director of the Bank, in the ALJ's view he remained subject to a proceeding pursuant to section 1818(e). Second, the ALJ determined that even if section 2462 applied, the FDIC's claim under section 1818(e), for purposes of that section, did not accrue until the Bank paid the state court judgment in 1996, thus rendering timely an action brought later that year.
   After carefully considering the ALJ's reasoning, the Board adopts his conclusion but not all of his reasoning. First, the Board believes that section 2462 does not apply to this case because a procedure for removal under section 1818(e) is a remedial rather than a penal proceeding.9 Second, even if section 2462 applies, the Board finds that Enforcement Counsel initiated this matter within the five-year limitations period provided by section 2462.

   [.4]A. Section 2462 does not Apply to Removal and Prohibition Actions.
   The Board believes that section 2462 is inapplicable to removal actions under section 1818(e). By its terms, section 2462 only applies to "civil fine[s], penalt[ies] and forfeiture[s], pecuniary or otherwise." A removal action is a remedial action; one that is designed to protect and preserve the banking industry. See United States v. Hudson, 14 F.3d 536, 542 (10th Cir. 1994), aff'd, 118 S. Ct. 488, 496 (1997).
   As the Federal Reserve and the OTS point out in their amicus briefs, a number of courts construing section 2462 and its predecessors have concluded that it has no application to actions for equitable or remedial relief. E.g., Meeker & Co. v. Lehigh Valley, R.R., 236 U.S. 412, 423 (1915)(construing predecessor statute); Johnson v. SEC, 87 F.3d 484, 491 (D.C. Cir. 1996); Mississippi Dept. of Economic Development v. U.S. Dept. of Labor, 90 F.3d 110, 113 (5th Cir. 1996); FEC v. Christian Coalition, 965 F. Supp. 66, 71 (D.D.C. 1997). See also Holmberg v. Armbrecht, 327 U.S. 392, 396 (1946)("[t]raditionally and for good reasons, statutes of limitations are not controlling measures for equitable relief.").
   Section 1818(e)'s removal and prohibition is manifestly a form of equitable or remedial relief in the nature of an injunction. Indeed, the FDIC's Manual of Examinations describes the FDIC's cease and desist, removal and prohibition, and termination of insurance powers as its "primary corrective tools." Id. at §9.3. A removal order under section 1818(e) has two effects that render it similar to an injunction or other equitable relief. First, it restores the status quo ante at the affected institution by removing the party whose misconduct has injured or will threaten the institution. See, e.g., Johnson, 87 F.3d at 491 (agency action "to restore the status quo ante" not subject to section 2462). Second, it preserves the status quo at other institutions by precluding that party from becoming affiliated with another institution and engaging in misconduct.
   The Supreme Court's recent decision in United States v. Hudson, 118 S.Ct. 488 (1997) supports the Board's view that a removal and prohibition order under section 1818(e) is remedial. There, the Court stated that "neither money penalties nor debarment have historically been viewed as punishment." 118 S.Ct. 495. The Board also notes that the appeals court that rendered the judgment affirmed by the Supreme Court in Hudson stated that a prohibition order is "solely designed to protect the integrity of the banking industry by purging the system of corrupt influences" and is "solely remedial." United States v. Hudson, 14 F.3d at 542.
   In Johnson, the D.C. Circuit determined that a six-month suspension and censure of a broker for failure to supervise a subordinate employee was a "penalty" within the meaning of section 2462. First, the court determined that for purposes of section 2462,


9 The Board does not address the argument that recent Supreme Court cases warrant reconsideration of the cases that first applied section 2462 to administrative proceedings. Accordingly, the Board assumes for purposes of the following discussion that section 2462 applies to proceedings that are not remedial.
a "penalty" was a "form of punishment . . . which goes beyond remedying the damage caused to the harmed parties by the defendant's action." Id. at 488. Next, the court concluded that the sanctions "clearly resemble[d] punishment." Id. The court held that they "would less resemble punishment if the SEC had focused on Johnson's current competence or the degree of risk she posed to the public" but concluded that the sanctions were imposed primarily "for past dereliction" rather than because of present danger to the public. Id. at 489-90. Finally, the court concluded that the sanctions were not remedial and therefore outside of the ambit of section 2462 because they were not designed to restore the status quo ante.
   Under the test articulated by Johnson, a section 8(e) removal and prohibition is not a penalty. The Board has already discussed its remedial nature. In light of the provision's remedial purpose, as the Federal Reserve notes in its amicus brief, it bears emphasizing that the statute necessarily is directed to the current threat presented by an individual. Where the requisite elements are present, Congress has determined that a current threat exists because of the possibility of further misconduct and normally requires that the individual be banned for life from the entire banking industry. 12 U.S.C. §1818(e)(7)(A). The Board has underscored this aspect of the remedial statutory purpose in In the Matter of ****, Nos. FDIC-83-252b&c, FDIC-84-49b, FDIC-84-50e, 1 FDIC Enf. Dec. & Ord. ¶ 5049 at A-588-89 (1985). In that case, in overturning an ALJ's recommended decision the Board observed that:
    No one has an inherent right to be a banker. The Board does not "balance" the individual banker's private rights against the public interest. The Board is obligated to act in the public interest. When the statutory criteria for removal have been met as they have in this case . . . the Board orders removal. In doing so the Board acts to protect the Bank, its depositors, the exposure of the FDIC insurance fund, and the integrity of the nation's financial system regardless of whether individuals may be personally affected.Id.

   [.5]Section 8(e) is not triggered by mere misconduct alone. Rather, that conduct must cause or be likely to cause a loss to the institution or result in a gain to the individual and must evince a significant culpability, i.e., some form of intentional or deliberate conduct as is present in this case. In contrast to the negligent supervision at issue in Johnson, the wrongdoing addressed by section 8(e) is generally more serious and egregious, and of the type that by its very nature would render an individual unfit for continued service anywhere in the banking industry. Section 8(e) is designed precisely to protect the industry from the sort of dishonesty and willingness to place personal gain above the bank's interest exhibited by Respondent in this case. It addresses acts that by their very nature are totally incompatible with safe and sound banking and simply cannot be tolerated because of the continuing threat they pose to the institution and the industry.
   Individuals who have demonstrated such proclivities necessarily present a continuing threat to their institutions that requires removal and prohibition. Moreover, the provision's remedial purpose of protecting the banking industry is underscored, as the Federal Reserve points out, by the fact that the removal is normally permanent and an individual may only participate in banking after a removal and prohibition by obtaining the written consent of the banking agency that issued the order. 12 U.S.C. §1818(e)(7)(B). Congress made clear that the prerequisite to such consent was a demonstration of such rehabilitation that the banking agency is able to conclude that the individual no longer represents a current threat. See 1989 U.S.C.C.A.N. 86, 264 (House Rept.); 432, 479 (Conf. Rept.). Thus, the current-threat-oriented and remedial nature of the removal and prohibition sanction stands in sharp contrast with the suspension sanction in Johnson.10
   Nor does section 8 lack any indication of congressional intent regarding limitations, as was the case with the SEC statute under review in Johnson. Section 1818(i)(3) (quoted at fn.5 above) provides that federal banking regulators have six years to bring section 8(e) actions against individuals who have left the banking industry. As the ALJ observed, "it would be an anomaly if regulatory authorities were deemed to have greater

10 Honesty in banking is so important that removal is warranted whenever dishonesty is discovered even if it occurs outside of the banking context. See Hendrickson v. FDIC, 113 F.3d 98 (7th Cir. 1997)(removal and prohibition based on misconduct while working for a coin and precious metals dealership).
authority over separated persons than over those in active service." R.D. 2.
   In sum, the Board is persuaded that section 2462 does not apply to section 8(e) proceedings. Because a section 8(e) removal and prohibition action is intrinsically remedial, remedies a present danger, and can be brought "whenever" the statutory conditions are satisfied, no "statute of limitations" applies to such proceedings. See Johnson, 87 F.3d at 489 n. 7, 491. How ever, as we discuss below, even if section 2462 does apply here, this case, was timely filed.

   [.6]B. The Action For Removal Was Timely Under Section 2462.
   A cause of action for removal under section 1818(e) has three elements—misconduct, effect, and culpability. The ALJ correctly found that a cause of action for removal under section 1818(e) does not accrue until all three elements of the action exist. The ALJ found that the "effects" elements did not come into existence until after the Tennessee Supreme Court reinstated the judgment against the Bank and the Bank actually paid the judgment.
   Section 1818(e) provides several alternatives for establishing the effect of misconduct. Nothing requires the agency to go forward on any alternative without regard to the strength of its merits. Here, Enforcement Counsel certainly could have earlier filed a removal action based on an allegation that the Bank "will probably" suffer financial loss or other damage, but as the ALJ noted, that was not the claim that was actually filed in this case. Instead, Enforcement Counsel filed an alternative action requiring proof that the Bank "has suffered" financial loss or other damage. The elements of that claim did not coalesce until the Bank had suffered the loss, and that did not occur until the payment to the Bolings was finally adjudged fixed, certain, due and owing, i.e., when the judgment against the Bank was reinstated by the Tennessee Supreme Court in 1994.11 The Board cannot agree with the ALJ's findings that the loss did not occur until the Bank actually paid the judgment in 1996 because that would allow the occurrence of loss under section 1818(e) to be dictated by the business decision of the Bank. The Board also rejects February 17, 1992, the day when the Tennessee trial court ruled in favor of the Bolings, as the date that the Bank incurred the loss in this case. The subsequent reversal by the Tennessee appellate court demonstrates that the 1992 decision did not fix the Bank's losses and vindicates Enforcement Counsel's decision to await final court action before initiating a "has suffered" proceeding under section 8(e). Because the action brought in this case did not accrue until 1994, the initiation of this proceeding on December 18, 1996, fell within section 2462's five-year limitations period, assuming section 2462 applies.

CONCLUSION

   For the foregoing reasons, the Board affirms the ALJ's Decision removing and prohibiting Respondent.

ORDER

   Pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e), it is hereby ORDERED, that:

       1. Billy Proffitt shall not participate in any manner in the conduct of the affairs 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); and
       2. Billy Proffitt 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 financial institution, agency, or organization enumerated in section 8(e) (7)(A) of the FDI Act, 12 U.S.C. §1818(e)

    11 In his exceptions, Proffitt contends that the "effects" element was satisfied in December 1990 when the Bank began paying the legal fees it incurred in connection with its ultimately unsuccessful defense of the Bolings' lawsuit. The Board does not agree. The incurring of legal fees is a normal and presumptively proper cost of doing business for a bank. Therefore, the payment of such fees standing alone cannot be assumed to be enough to support a removal action that is based, like this one, on actual loss to the institution. Once coupled with other non-neutral indicia of loss, however, such as in this case a judgment of improper and illegal behavior, the presumption that the legal fee payments are a routine cost of doing business drops away. Thus, while legal fees can certainly be part of the "loss" that is proved to sustain a removal order, a "has suffered" action should not be instituted solely on the strength of legal fee payments. Since absent some unusual circumstances such payments do not on their own justify instituting a removal proceeding, they cannot be deemed to trigger accrual of such an action.
    (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); and
       3. Billy Proffitt 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), 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); and
       4. Billy Proffitt 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), 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).
   The ORDER will become effective thirty (30) days from the date of its issuance.
   The provisions of this ORDER will remain effective and in force 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 6th day of October, 1998.
   Robert E. Feldman
   Executive Secretary
{{12-31-98 p.A-2978}}
In The Matter of
BILLY PROFFITT,
individually and as an
institution-affiliated
party of
TENNESSEE STATE BANK
Gatlinburg, Tennessee
(Insured State Nonmember Bank)
RECOMMENDED DECISION
FDIC 96-105e

On Motions For Summary Disposition

I. Motion of Respondent

   On July 8, 1997, Respondent Billy Proffitt filed a motion for summary disposition in this matter, together with a request for oral argument on the issues presented. The FDIC submitted a response to Respondent's motion and request on August 1, 1997. Respondent filed a motion for permission to file a sur-reply, along with a proffered sur-reply on August 12, 1997. FDIC filed an opposition to Respondent's requested permission to submit a sur-reply on August 15, 1997.
   Respondent's request to file a sur-reply is hereby granted. His motion for summary disposition is denied for the reasons stated below. The request for oral argument is denied as unnecessary in view of the extensive pleadings that have been submitted.
   Respondent seeks summary dismissal of this action on the grounds that it is barred by the statute of limitations contained in 28 U.S.C. §2462, and the further ground that the Notice instituting the proceeding was issued without proper authority.
   Section 2462 reads as follows:

    Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.
   As the parties are aware, this Administrative Law Judge has ruled in other proceedings that section 2462 does not govern proceedings brought pursuant to 12 U.S.C. §1818, which is involved here. These rulings were predicated, in part, upon the conflicting provisions of section 1818(i)(3). See e.g. In the Matter of John Henderson, Jr., OTS AP 95-22, Prehearing Order on Motion for Summary Disposition, dated May 13, 1996; In the Matter of United Savings Association of Texas, OTS AP 95-40, Prehearing Order on Motion for Summary Disposition, dated February 27, 1997. These rulings have not been reversed by the agency, and no court has reached contrary conclusions.
   Section 1818(i)(3) provides:
    (3) Notice under this section after separation from service. The resignation, termination of employment or participation, or separation of an institution-affiliated party (including a separation caused by the closing of an insured depository institution) shall not affect the jurisdiction and authority of the appropriate Federal banking agency to issue any notice and proceed under this section against any such party, if such notice is served before the end of the 6-year period beginning on the date such party ceased to be such a party with respect to such depository institution (whether such date occurs before, on, or after August 9, 1989).
   I have been unable to perceive how section 2462 can coherently be applied to section 1818 cases in view of section 1818(i)(3). Although section 1818(i)(3) refers only to persons separated from service it would be an anomaly if regulatory authorities were deemed to have greater authority over separated persons than over those in active service. Under such an interpretation, if Bankers A and B jointly commit a sanctionable offense, and five years thereafter Banker A resigns from the bank, he would be subject to possible administrative sanctions for the next six years, while Banker B, though equally culpable, would be immune from such possible sanctions.
   Respondent argues that section 2462 should be applied to active persons for punitive sanctions, but not for remedial sanctions. This contention is based on the theory that section 2462 applies only to punitive sanctions. He argues further that prohibition is a punitive sanction and thus is subject to the limitation of section 2462. Respondent suggests that section 1818(i)(3) applies to all sanctions, remedial or punitive. It is claimed that this interpretation would accord appropriate effect to both provisions.
   However, the upshot of this interpretation would still be that Banker A in the above example, who may no longer be engaged in banking, could be "prohibited" from banking, while Banker B, still active in the bank, would be immune from removal. It is concluded an interpretation of these statutes which yields such bizarre results is unreasonable as well as unnecessary.
   Any interpretation which would attempt to avoid these unseemly effects by holding that section 2462 in any manner overrides section 1818(i)(3) would reduce the latter to a nullity. As a matter of statutory construction this too is quite unwarranted. Section 1818(i)(3) is the latest enacted. It is the most specific. To give a reasonable construction to both provisions requires that section 1818(i)(3) be deemed to fall under the clause in section 2462 stating, "Except as otherwise provided by Act of Congress." Cf. Johnson v. S.E.C., 87 F.3d 484, 492, n. 15 (D.C. Cir. 1996).
   Section 1818(i)(3) otherwise provides. Thus, the issue of whether section 2462 applies to the commencement of administrative actions in the absence of that provision, an issue on which there is conflicting authority, need not be resolved.
   In view of this conclusion it is also unnecessary to determine whether section 2462 would govern removal and prohibition actions if otherwise applicable. However, it is my opinion that even if section 2462 governed section 1818 proceedings, including removal and prohibition actions brought under section 1818(e), it would not bar this proceeding.
   By its terms, section 2462 requires that any action subject thereto must be "commenced within five years from the date when the claim first accrued. . ." (Emphasis supplied)
   A critical element in the instant action is the claim that Respondent's conduct resulted in a loss to the bank. This did not occur until a judgment was paid by the bank in 1996, at a date well within the five years preceding issuance of the Notice instituting this proceeding. Although it might have been possible earlier to have drafted a Notice within the requirements of section 1818(e), based on other matters, such a Notice is not before us. The Notice under review could not have been issued before the actual loss to the bank occurred. That event determines when the "claim first accrued." See e.g., City of Philadelphia v. Lieberman, 112 F.2d 424, 428 (3rd Cir. 1940) ("The cause of action accrues when the damage is sustained by the plaintiff, not when the causes are set in motion ultimately producing injury as a consequence"); Empire Institute of Tailoring v. United States 161 F. Supp. 409, 410 (Ct. of Claims 1958) ("A claim first accrues on the date when all events have occurred which fix liability, if any, of the United States, and entitles the claimant to sue thereon").
   Respondent's contentions that this action was commenced without proper authority is based on 12 C.F.R. §303.9(d)(3), which provides, in part, that the authority to issue a Notice seeking removal may be exercised only upon the concurrent certification by the Associate General Counsel for Compliance and Enforcement that the allegations contained in the Notice, if proven, constitute a basis for the issuance of the notice. . ." This certification was not produced during discovery, and it was not included on the FDIC's log of privileged documents.
   Respondent sought through discovery a wide array of documents pertaining to the procedures followed and the deliberations by FDIC officials that led to the issuance of the Notice instituting this proceeding. However, upon a motion to limit production of documents by the FDIC the only document ordered produced in this category was the delegation of authority by the Director of the Division of Supervision to the associate director to issue the Notice. Rule 303.9(d)(1) requires any such delegation to be in writing. That document was produced.
   Respondent argues, however, that the section 303.9(d)(3) certification should also have been produced. This was not the interpretation placed on the order by the FDIC, nor was it my intended meaning.
   It is true, as Respondent contends, that agencies are required to follow their own rules. It is also true that they are presumed to do so. The issue presented here is whether it must be ascertained if Rule 303.9(d)(3) was followed in the issuance of the Notice now in question. It is my conclusion that this is not an issue to be pursued in the absence of any basis to assume that appropriate procedures were not followed. For the reasons indicated, the failure of FDIC Enforcement to produce the certificate in discovery or to list it on the privilege log does not suggest that the document does not exist. Since FDIC was under no order to produce the document, there was no reason to do so, or to assert a privilege against its production.
   Although, as stated, agencies are under a duty to follow their own rules, it does not follow that whether they have done so in this instance must be determined here. In the circumstances presented, it is my conclusion that no rights of Respondent have been violated by the absence from the record of the subject certificate.

II. Motion of FDIC

   On July 2, 1997, the FDIC filed a motion for summary disposition of this matter. Respondent replied in opposition to FDIC's motion on August 1, 1997, and included a request for oral argument on the matter.
   The allegations in this proceeding concern the purchase of a hotel by a group of investors, which included Respondent. Purchase of the hotel was also simultaneously being sought by existing customers of the Bank, Charles and Nancy Boling. The FDIC claims, among other things, that Respondent engaged in or participated in unsafe and unsound practices, and breached his fiduciary duty as an officer and/or director of the Bank in connection with this transaction.
   The FDIC seeks an order which would remove Respondent from participation in the affairs of the Bank, and would prohibit his participation, without prior regulatory approval, in any financial institution or organization described in 12 U.S.C. §1818(e) (7)(A).
   Section 308.29(a) of the Rules of Practice states:

    (a) In general. The administrative law judge shall recommend that the Board of Directors issue a final order granting a motion for summary disposition if the undisputed pleaded facts, admissions, affidavits, stipulations, documentary evidence, matters as to which official notice may be taken, and any other evidentiary materials properly submitted in connection with a motion for summary disposition show that:
         (1) There is no genuine issue as to any material fact; and
         (2) The moving party is entitled to a decision in its favor as a matter of law.
   The FDIC maintains that there is no genuine issue as to any material fact in this proceeding, and that it is therefore entitled to a decision in its favor as a matter of law.
   In his Answer to the Notice the Respondent admitted, among others, the following allegations:
       1. At all times pertinent to this proceeding, the Bank was a corporation existing and doing business under the laws of the State of Tennessee, having its principal place of business at Gatlinburg, Tennessee. The Bank is and has been, at all times pertinent to this proceeding, an insured State nonmember bank, subject to the Act, 12 U.S.C. §1811-1835; the Rules and Regulations of the FDIC, 12 C.F.R Chapter III, and the laws of the State of Tennessee.
       2. At all times pertinent to the charges herein, the Respondent was a Director of the Bank.
       3. At all times pertinent herein Tennessee State Bancshares, Inc., Gatlinburg, Tennessee ("Holding Company") owned 98.55 percent of the Bank's common stock.
       4. At all times pertinent to the charges herein, the Respondent was a principal shareholder of the Bank by virtue of his ownership of 59.69 percent of the Holding Company's common stock.
       5. At all times pertinent to the charges herein, the Respondent has been 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 sections 8(e)(7), 8(i) and 8(j) of the Act, 12 U.S.C. §1818(e)(7), 1818(i) and 1818(j).
       6. The FDIC has jurisdiction over the Bank, the Respondent, and the subject matter of this proceeding.
   In Respondent's motion for summary deposition, considered above, he submitted the following statement of facts as undisputed.
       1. Proffitt is the majority shareholder of Tennessee State Bancshares, Inc., which, in turn, is the majority shareholder of Tennessee State Bank, ("Bank"). Proffitt serves on Bank's Board of Directors.
       2. In July, 1989, Charles and Nancy Boling ("the Bolings") approached L. Tommy Bush ("Bush"), president of Bank about the Bank financing their attempt to acquire a hotel located in Gatlinburg, Tennessee, known as the Glenstone Lodge ("the Glenstone").
       3. In 1989, the Glenstone was involved in a bankruptcy proceeding in the United States Bankruptcy Court for the Eastern District of Tennessee, and the trustee in bankruptcy was searching for a purchaser for the Glenstone.
       4. The concept of this loan was discussed with the Bank's board of directors ("Board") in July, 1989, and it was the general consensus of the Board that Bush could pursue this loan.
       5. In late November or early December, 1989, Proffitt was approached by some other Gatlinburg businessmen about joining their group to acquire the Glenstone. The group was known as the "Foley Group." Proffitt joined the Foley Group in late 1989. Subsequently, the Foley Group submitted a bid to the bankruptcy trustee on the Glenstone which was rejected.
       6. In early March, 1990, Sevier County Bank, the holder of the first mortgage on the Glenstone obtained Bankruptcy Court approval to foreclose on the Glenstone. A foreclosure sale was scheduled for March 30, 1990.
       7. On March 7, 1990, Bush presented to the Board a revised loan package for the Bolings in connection with their proposed acquisition of the Glenstone. Prior to this presentation, Bush requested that any Board member interested in the Glenstone leave the room. Respondent did not leave the room and was handed a copy of the loan package submitted by the Bolings. Due to Bank's lending limits, Bank could only lend the Bolings $1,250,000, despite the fact that their loan request was $4,000,000. The Bank's Board, including Proffitt, voted unanimously in favor of approving the loan to the Bolings.
       8. On March 27, 1990, Mr. Boling informed Bush and Proffitt that he obtained the additional financing he required from a bank in Kentucky.12
       9. After this conversation on March 27, 1990, Proffitt told Bush that he was a member of the Foley Group which was also interested in bidding on the Glenstone and that perhaps he should not have remained in Bush's office during the conversation with Mr. Boling.
       10. A foreclosure sale on the Glenstone was held on March 30, 1990. The only two bidders present at the foreclosure sale other than Sevier County Bank were the Bolings and the Foley Group, represented by Kevin Foley. Proffitt did not attend the sale. Bidding opened at $3.2 million and proceeded incrementally. The Bolings bid

    12 As discussed below this may not be completely accurate. Final approval from the Kentucky bank had not been received.
    up to $3.4 million, and the next bid made was that of the Foley Group for $3,405,000, which was the highest bid. No further bids were received, and the Foley Group was, thus, the successful bidder.
       11. The Bolings and the Board, including Proffitt, met to discuss the Bolings' loan request involving the Glenstone on April 20, 1990. At that meeting, the Bolings said that they did not know that Proffitt was involved in the Foley Group.
       12. On July 12, 1990, the Bolings sued the Bank, Proffitt and Bush, alleging breach of confidentiality, breach of fiduciary duty, fraudulent and negligent misrepresentation, and breach of good faith and fair dealings in connection with their loan request for the acquisition of the Glenstone.
       13. The FDIC had knowledge of the filing of this lawsuit because the FDIC files produced in discovery in this case included a copy of the newspaper article regarding this lawsuit along with a notation indicating the date of receipt was July 18, 1990.13
       14. On February 17, 1992, the Sevier County Chancery Court rendered judgment against the Bank and Respondent and decreed as follows:
         1. The Plaintiff [the Bolings] are awarded judgment for compensatory damages in the amount of $30,000 against the Defendants, Tennessee State Bank, jointly and severally.
         2. The Plaintiffs are awarded judgment for punitive damages against the Defendant Tennessee State Bank in the amount of $250,000.
         3. The Plaintiffs are awarded judgment for punitive damages against the Defendant Billy Proffitt in the amount of $250,000.
       15. The judgment of the Sevier County Chancery Court was appealed to the Court of Appeals for the Eastern Section. The Court of Appeals reversed the judgment of the Chancery Court and dismissed the Bolings' complaint. Subsequently, an appeal was taken to the Tennessee Supreme Court. On November 28, 1994, the Supreme Court issued its judgment and Memorandum Opinion. The judgment of the Supreme Court reversed the judgment of the Court of Appeals, affirmed the trial court's award of compensatory damages (although it reduced those compensatory damages to $14,825), affirmed the trial court's award of punitive damages against Tennessee State Bank in the amount of $250,000 and the award of punitive damages against Billy Proffitt in the amount of $250,000.
       16. The judgment in favor of the Bolings was satisfied subsequent to the Supreme Court's ruling.
   The FDIC submitted with its motion a proposed statement of materials facts as to which there is no genuine issue. Respondent has taken no issue with the following alleged statements of fact:
       1. On or about July 7, 1989, Charles and Nancy Boling (the "Bolings"), customers of the Bank, verbally approached L. Tommy Bush ("Bush"), the Bank's president, regarding the Bank's possible financing of the Bolings' acquisition of a hotel known as the Glenstone Lodge ("Glenstone") located in Gatlinburg, Tennessee.
       2. On July 7, 1989, the Bolings initially discussed a loan request in the amount of $4,500,000.
       3. On July 7, 1989, Bush expressed an interest in financing the Bolings' acquisition and asked the Bolings to provide certain financial data regarding the purchase and operation of the Glenstone.
       4. On July 7, 1989, Bush informed the Bolings that, because the Bank's lending limit to a single borrower was $1,250,000, Bush would have to find other banks to participate in the loan.
       5. In July of 1989, the Glenstone was then the subject of a Chapter 7 bankruptcy proceeding before the United States Bankruptcy Court for the Eastern District of Tennessee.
       6. The Glenstone trustee, John Newton ("Newton"), was actively seeking purchasers for the Glenstone.
       7. On July 12, 1989, the Bolings provided financial data regarding the Glenstone project to Bush. The financial data included the Bolings' personal financial

    13 The FDIC does not agree with this statement, but it is not a material fact insofar as the instant motion is concerned.
    statements, estimates of the costs for renovation and repairs, working capital needs, and estimates of gross income, cash flow, and profitability.
       8. On July 12, 1989, the [Bank's] Board [met] and expressed an interest in extending the Bolings' requested loan and told Bush to pursue the financing.
       9. After the July 12, 1989, meeting between Bush, the Bolings, and Carriere, [their accountant] when Bush explained the Bank's lending limits to a single borrower, both Bush and the Bolings sought participants for the Bolings' proposed loan.
       10. In late November or early December 1989, Respondent was approached by Bud Lawson and Kevin Foley ("Foley"), two Gatlinburg businessmen, about participating with them and two other area businessmen, Tom McNerney and Jerry Hays, in acquiring the Glenstone. (This group of individuals is hereinafter collectively referred to as the "Foley Group.")
       11. On December 17, 1989, the Foley Group's attorney, C. Dan Scott ("Scott"), addressed a letter to each member of the group acknowledging that Foley asked him to represent a proposed partnership. Scott drafted and distributed partnership articles, a contract for sale, and a management agreement, all related to the Glenstone acquisition.
       12. On or about December 18, 1989, the Foley Group established a corporation known as The Glenstone Lodge, Inc., for the sole purpose of acquiring the Glenstone.
       13. On or about December 18, 1989, Respondent and the other four members of the Foley Group each agreed to subscribe to 20 percent of the stock of The Glenstone Lodge, Inc., in exchange for future capital contributions of $250,000 each.
       14. The Articles of Incorporation of The Glenstone Lodge, Inc., the corporation formed by the Foley Group, were not filed within the Tennessee Secretary of State's office until April 2, 1990.
       15. On December 18, 1989, Kevin Foley, as Trustee on behalf of the Foley Group, obtained a $3,000,000 commitment letter from a branch of First Tennessee Bank, N.S., Memphis, Tennessee, for a loan to use in connection with their acquisition of the Glenstone.
       16. Pursuant to the terms of the December 18, 1989, commitment letter, Respondent would be required to personally guarantee the loan.
       17. Between December, 1989, and March 30, 1990, the Foley Group made several offers to Newton, the bankruptcy trustee, to acquire the Glenstone. In one such offer made on February 16, 1990, Foley, as Trustee for the entire Foley Group, executed a Contract For Sale of the Glenstone.
       18. On January 30, 1990, the Bolings submitted a revised loan request to Bush, lowering the loan request to $4,000,000.
       19. On March 7, 1990, Bush formally presented the revised Bolings' loan package for the first time to the Bank's Board.
       20. On March 7, 1990, prior to presenting the loan package, Bush requested that any Board member interested in the Glenstone leave the room.
       21. On March 7, 1990, Respondent did not leave the room and received a copy of the Bolings' loan package.
       22. On March 7, 1990, the Bolings' loan package was given to each Board member along with a loan write-up sheet.
       23. On March 7, 1990, Respondent reviewed the Bolings' loan package and circled the Bolings' projected purchase price14 and the amount reserved for working capital, renovations, and repairs.
       24. On March 7, 1990, Respondent made two handwritten notes concerning the collateral on the loan write-up sheet attached to the Bolings' loan package, initialed the comments, and voted for the loan.
       25. On March 7, 1990, the Board unanimously approved a loan to the Bolings for $1,250,000, the Bank's legal lending limit to one borrower, thereby requiring the Bolings to obtain the balance of their loan request elsewhere.
       26. In early March 1990, the Glenstone's first mortgage holder, Sevier County Bank, Sevierville, Tennessee

    14 Although Respondent does not specially dispute this statement, he points out with respect to the preceding assertion, which is not included here, that the document in question does not contain a purchase price.
    ("Sevier County Bank") obtained bankruptcy court approval to foreclose.
       27. A foreclosure sale of the Glenstone was scheduled for March 30, 1990.
       28. On March 15, 1990, the Board adopted a written ethics policy entitled "A Matter of Principles" which requires, among other things, the Bank officials disclose to the Board potential conflicts of interest.
       29. On March 21, 1990, based upon the Board's approval obtained at the March 7, 1990, Board meeting, the Bank issued a written loan commitment to the Bolings for $1,250,000.
       30. On March 27, 1990, Respondent remained in Bush's office throughout [a meeting in which Charles Boling discussed with Bush the Bolings plans to secure additional financing to acquire the Glenstone.]
       31. After Charles Boling left the meeting on March 27, 1990, Respondent told Bush he was a member of the Foley Group.
       32. After the meeting on March 27, 1990, Bush advised Respondent to inform the Bolings about his membership in the Foley Group, but Respondent did not do so.
       33. On the morning of March 30, 1990, prior to the foreclosure sale, the Bolings and Bush met at Lanning Wynn's office.
       34. Lanning Wynn was the Bank's attorney hired by Bush to conduct a title search on the Glenstone property and prepare the necessary loan closing documents on behalf of the Bank.
       35. At the meeting on March 30, 1990, Lanning Wynn informed the Bolings of a prior lien in the amount of $100,000 recorded against the property in favor of the Internal Revenue Service.
       36. Due to this prior recorded lien, the Bolings decided to lower their maximum bid at the sale to $3,400,000.
       37. Also on the morning of March 30, 1990, the Foley Group was meeting with their attorney, Dan Scott, at his office.
       38. While at Scott's office on March 30, 1990, Respondent called Bush at Wynn's office and inquired whether "there was a race on."
       39. On March 30, 1990, in response to Respondent's inquiry about whether "there was a race on," Bush said "yes."
       40. Around 10:45 a.m. on March 30, 1990, the Bolings and all members of the Foley Group, except Respondent, each arrived at the site of the foreclosure sale.
       41. At the foreclosure sale conducted on March 30, 1990, Sevier County Bank, the foreclosing creditor, opened the bidding at approximately $3,200,000.
       42. After the opening bid by Sevier County Bank, the Foley Group,through Foley, and the Bolings, through their real estate agent, David Hayes ("Hayes"), were the only remaining bidders.
       43. After Sevier County Bank's opening bid, the bidding proceeded incrementally between the Bolings and the Foley Group until the Bolings made their maximum bid of $3,400,000.
       44. After the Bolings made their maximum bid of $3,400,000, the Foley Group bid $3,405,000.
       45. On the night of March 30, 1990, the Bolings discovered that Respondent was the fifth member of the Foley Group when Alan Bowman, the manager of the Glenstone, called the Bolings to inform them that Respondent had been introduced that night at the Glenstone as one of the hotel's new owners.
       46. On April 20, 1990, the Bank's Board, including Respondent, and Bush met with the Bolings to review what had happened with respect to the Glenstone and the Bolings' loan request.
       47. On April 20, 1990, Respondent admitted that he had withheld the fact that he was a member of the Foley Group from the Bank, Bush, the Board, and the Bolings.
       48. On July 12, 1990, the Bolings sued the Bank, Respondent, and Bush alleging breach of confidentiality, breach of fiduciary duty, fraudulent and negligent misrepresentation, and breach of duty of good faith and fair dealing in connection with the loan request for the acquisition of the Glenstone.
       49. In the lawsuit filed on July 12, 1990, the Bolings sought compensatory and punitive damages.
       50. The Bank's ethics policy, "A Matter of Principles," provides, in part, that customer information is property of the Bank and is confidential; it may be used only for legitimate Bank purposes; the expectation of privacy is fundamental to business relationships; the information must not be used to further private interests or for personal gain; and use of the information can result in civil and criminal penalties for the employee and the Bank.
       51. The Tennessee Supreme Court specifically found that the duty breached by Respondent and the Bank was "incident to a confidential relationship between the parties and the violation of that relationship was fraudulent."
       52. Tennessee corporate law, TCA §48-18-301, sets forth the general standards for director conduct. This section requires a director to discharge his duties in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, in a manner the director believes is in the best interest of the corporation.
       53. During the bidding process at the foreclosure sale, the Bolings attempted to pay the Foley Group $50,000 to stop bidding.
       54. In response to the Bolings' offer to stop bidding, the Foley Group offered the Bolings $30,000 for their expenses if they would stop bidding.

III. Discussion of Facts and Law

   Section 1818(e) of the governing statute contains several explicit elements that must be present for the exercise of removal and prohibition authority by the regulatory agencies. The issue to be determined upon a motion for summary disposition where removal and prohibition is sought is whether those statutory elements have been established by material facts as to which there is no genuine dispute. It is my conclusion, based on the foregoing statements of fact, that the requisite showing has been made here.
   The first statutory requirement for removal and prohibition of an affiliated person is violative conduct, which is clearly present here. Such conduct included violations of law, unsafe and unsound practices, and breach of fiduciary duties.
   In July 1989, Charles and Nancy Boling, who were existing customers of the Bank, approached the Bank's president, Tommy Bush, to seek a loan for the purpose of purchasing a hotel known as the Glenstone, which was for sale in Gatlinburg, Tennessee. The amount of the loan sought was $4,500,000. However, because of the loan-to-one-borrower restriction, the maximum amount the Bank could loan to one customer was $1,250,000. Thus, the loan could only be obtained with the participation of other lenders.
   The Bolings furnished to Bush necessary information to support the loan, including financial statements, estimates of the costs for renovation and repairs, working capital, estimates of gross income, cash flow and profitability.
   Bush presented the concept of the proposed loan to the Bank's Board of Directors at a meeting on July 12, 1989, at which Respondent was present. The Board did not consider the matter as a formal loan application, but it gave its approval, without any dissent being expressed, to Bush to approach other lenders in order that the entire full loan amount could be financed. Despite his considerable efforts Bush was unable to secure other participants in making the loan. By September 1989, his efforts on behalf of the Bolings ceased out of frustration.
   For reasons not stated, the Bolings retrieved the supporting information provided to Bush in support of the loan. However, their interest in buying the hotel remained alive.
   In late November or early December, Respondent was approached by other investors eliciting his interest in joining a group, which came to be identified as the Foley Group, to be organized for the sole purpose of buying the hotel in question. Later in December Respondent joined the Foley Group by pledging to invest $250,000, and by becoming a guarantor on a loan the group obtained from a Memphis bank.
   Respondent informed Bush that he had been approached by the Foley Group, but he did not inform Bush that he had actually become a part of that group. None of these matters was disclosed to the Bolings.
   Respondent attempts to justify his action of joining the Foley Group on the grounds that the Bolings were no longer actively seeking a loan at the Bank. It is not disputed, however, that they were still interested in acquiring the hotel if financing could be arranged.
   Respondent submitted an affidavit with his reply to the FDIC motion relating his version of the events under review. He states therein, "Gatlinburg, Tennessee, is a small community, and it was well known in the community that the Bolings were interested in purchasing the Glenstone." Exhibit A. In his reply, Respondent further states: "Although Boling would continue [after September 1989] to come in the Bank and talk about purchasing the Glenstone, Bush did nothing further for the Bolings until January, 1990."
   In his affidavit, referenced above, Respondent avers:

    In fact, I informed Bush that I had been approached to become a member of the Foley Group in December 1989, and I specifically, asked whether the Bolings' loan was still active. Mr. Bush told me that it was not active at that time.
   Thus, the undisputed facts are that the Bolings remained interested in purchasing the Glenstone, and continued to discuss that interest with Bush during December 1989. Although their request to the Bank may not have been "active at that time," the Bolings, having already received a favorable response to their request, could be expected to rely on that response in the future, if necessary, to complete a loan package involving other lenders.
   In the face of this undisputed situation, Respondent, by joining the Foley Group embarked on a course of conduct diametrically contrary to the known interests of the Bolings, who were existing customers of the Bank, and for all practical purposes approved borrowers for a loan to purchase the involved property.
   Respondent denies that he relied on, or examined, the information developed by the Bolings to support their loan request. It cannot be denied that he knew, before joining the competing Foley Group that the Bolings were willing to borrow $4.5 million to purchase the Glenstone, and that Bush, the Bank president, and loan officer on the request, thought that it would be beneficial to the Bank to participate in that loan. If the Foley Group, and Respondent, succeeded in their endeavor to purchase the hotel, the Bolings and the Bank would fail to achieve the expected benefits to them as a result of its purchase by the Bolings.
   The Supreme Court of Tennessee affirming the lower court opinion, held that where a "fiduciary relationship exists between a bank and its customer, the bank is under a duty to disclose relevant material facts regarding the transaction, and concealing of or failure to disclose the facts at issue is fraudulent." Charles McNary Boling and wife Nancy Carr Boling v. Tennessee State Bank, et al., 890 S.W. 2d 32, 35 (1994). A fiduciary relationship between the Bank and the Bolings was created when they disclosed to the Bank their confidential information. The fraud, insofar as the Bolings are concerned, was not in using information supplied by them, but in failing to disclose relevant facts to them.
   Respondent attempts to argue that the fiduciary relationship and corresponding duty only existed between the Bank and the Bolings, and did not extend to him as a director. However, because of his position in the Bank, and since he was the only person there with full knowledge of his activity, the duty of disclosure necessarily devolved on him.
   Equally serious, was Respondent's breach of duty to the Bank. As the FDIC Board of Directors has stated:
    [T]he fiduciary duty of loyalty which bank directors owe their institution requires a bank director to investigate the possibility of a conflict of interest and be completely candid with his colleagues. When a bank director finds himself in a situation involving a conflict of interest, as here, it is incumbent on him to make complete disclosure in order to affirmatively avoid a conflict, even if such disclosure seems superfluous.
In the Matter of R. Wayne Lowe and Jimmy A. Spiney, FDIC Enforcement Decisions and Orders ¶ 5153 at p. A-1536 (1990).
   Respondent disclosed to Bush in December 1989, that he had been approached by the Foley Group. He did not disclose that to other directors. He made no disclosure at that time to anyone that he had become a member of the Foley Group.
   It was clearly Respondent's duty to inform the Bolings, before the fact, of his proposed participation in the Foley Group, and unless they evinced no further interest in the subject property, to forego the proffered opportunity. His failure to do so constituted a breach of his fiduciary duty to the Bolings, as well as to the Bank, and as the FDIC points out, was violative of a Tennessee statute, §48-18-301.
   In January 1990, the Bolings approached Bush with a revised loan request for $4.0 million instead of $4.5 million as originally proposed. On March 7, 1990 Bush formally presented the revised request to the Bank's Board of Directors, and recommended that the Bank participate to the maximum extent allowed, or $1.25 million.
   Prior to his presentation, Bush requested that any Board member having any interest in the matter excuse himself from the meeting. Although the Foley Group was actively engaged in efforts to acquire the Glenstone, Respondent remained in the meeting. He received the loan package presented, made notes on the cover sheet, and voted for the loan. This incident removes any doubt as to the deception in which Respondent was engaged, if any doubt could be raised about his prior activity.
   Respondent contends that he discharged any obligation he may have had to the Bolings by voting for the loan. This vote, however, is entirely consistent with his concealment from the Bank, as well as the Bolings, of his interest in the business at hand. Indeed, it was probably the only way that his concealment could be continued.
   If he had recused himself from the deliberations on the loan application his interest would have been thereby revealed. If he had voted against the loan, questions would have been raised in light of his earlier agreement that allowed Bush to seek participants for a higher loan on the same property. His vote provided no benefit to the Bolings, and did not affect his interest with the Foley Group.
   The Respondent, by remaining in the meeting, implicitly stated, falsely, to the other Board members the he had no personal interest in the matter being considered. This deception was a further breach of his duty to the Bank and to the potential borrowers.
   On March 27, 1989, Mr. Boling in a meeting with Bush, reported that he had received a favorable response from a Pikeville, Kentucky bank to his request for a loan to complete the loan package, although formal approval was yet to be given by that bank's officials. Respondent was at the meeting and heard the discussion between Boling and Bush. He disputes Boling's account of the subjects mentioned during the meeting, but it is not disputed that Bush checked public reports to see if the Pikeville bank had sufficient assets to make the loan as requested. At the very least, Respondent learned that the Bolings' prospects of receiving funds to purchase the Glenstone looked good.
   Significantly, both Respondent and Bush realized that it was not proper for Respondent to hear this conversation with Boling without Boling being aware of Respondent's situation. After Boling left the meeting Respondent told Bush that he was a member of the Foley Group, and therefore, should not have been there. Bush advised him to inform the Bolings of his membership interest in the Foley Group, but he did not do so.
   Again, this was a deception against Boling by Respondent, and a breach of his fiduciary duty to him.
   On the morning of the auction the rival groups met at separate locations. The Foley Group was in its attorney's office while the Bolings and others met in the office of the Bank's attorney. Respondent was with Foley Group. Bush was with the Bolings. Prior to the auction, Respondent called Bush to inquire if "there was a race on," meaning had the Bolings received final loan approval to enable them to bid on the property. Bush replied in the affirmative.
   Respondent denies he made any use of this information, or told other members of the Foley Group of the fact that he learned. It cannot be disputed that Respondent was seeking information from a Bank customer that was useful to his conflicting interest. This was also a breach of his fiduciary duty to the Bank and its borrowers.
   Section 1818(e)(1)(B) provides that a removal and prohibition order may be predicated upon a showing that by reason of the violation, practice or breach described in the preceding paragraph, the involved institution has suffered or will probably suffer financial loss or other damage. It is beyond dispute here that the Bank incurred losses in the amount of $565,443.99 in damages, interest, and attorney's fees, by reason of Respondent's activity.
   The other element in section 1818(e) that must be determined in these proceedings is the culpability of the affiliated party in question. Section 1818(e)(1)(C) states that the alleged violation, practice or breach must entail personal dishonesty or willful or continuing disregard for the safety and soundness of the involved institution. These elements are present here. It was personally dishonest for Respondent to remain at the meeting where the Bolings' loan was being reviewed after being told that anyone with an interest in the matter should excuse himself. Respondent's joining the Foley Group and participation therein was willful as well as contrary to the Bank's interest, and was carried out in a willful disregard for the safety and soundness of the Bank, as the subsequent lawsuit and judgment demonstrated.
   Since the elements for removal and prohibition set forth in section 1818(e) are established here by undisputed material facts, the FDIC motion for summary disposition is hereby granted. The request for oral response is denied. It is recommended that the attached order be entered.
   So Ordered, this 12th day of February, 1998.
   Arthur L. Shipe
   Administrative Law Judge
   Date: February 12, 1998
{{12-31-98 p.A-2988}}
In The Matter of
BILLY PROFFITT,
individually and as an institution-affiliated party of
TENNESSEE STATE BANK
GATLINBURG, TENNESSEE
(Insured State Nonmember Bank)
PROPOSED ORDER
FDIC 96-105e

   Pursuant to section 8(e) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e), it is hereby ORDERED, that:
       1. Billy Proffitt shall not participate in any manner in the conduct of the affairs 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); and
       2. Billy Proffitt 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 financial 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); and
       3. Billy Proffitt 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), 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); and
       4. Billy Proffitt 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), 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 will become effective thirty (30) days from the date of its issuance.
   The provisions of this ORDER will remain effective and in force except of 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.



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