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{{4-1-90 p.A-144}}
   [5013] FDIC Docket No. FDIC-83-21k-C(12-5-83).

   Bank directors assessed civil money penalties for extending credit in the form of a loan participation in an amount exceeding the lending limit, without adequate documentation, and without proper collateral.

   [.1] Directors—Duties and Responsibilities—Inquiry into Credit Terms
   Directors have a duty to inquire as to the terms of a loan participation and the contents of a loan agreement.

   [.2] Civil Money Penalties—FDIC Authority
   The FDIC has the authority to impose civil money penalties against any person participating in the conduct of the affairs of a bank who violates the Federal Reserve Act or any lawful regulation.

   [.3] Civil Money Penalties—Amount—Statutory Standard
   Certain factors must be considered in determining the amount of a civil money penalty: the size of the financial resources, good faith of the insured bank or
{{4-1-90 p.A-145}}person charged, the gravity of the violation, and the history of previous violations.

   [.4] Directors—Duties and Responsibilities—Standard of Care
   Directors of a bank have a fiduciary relationship to the bank and its shareholders. They should exercise the utmost good faith in the discharge of their duties and give the bank the benefit of their best judgment. They must exercise ordinary care and prudence in the administration of the bank's affairs, and will not be absolved from their responsibility because of want of knowledge of wrongdoing resulting from gross inattention to their duties.

In the Matter of * * * , individually and
as a Director and Principal Shareholder of
* * * , and insured state nonmember bank;
and * * * and * * * individually and as
directors of * * *, and insured state
nonmember bank.



DECISION AND ORDER
FDIC-83-21k-C
   Pursuant to its authority under section 18(j)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1828(j)(3)), the Federal Deposit Insurance Corporation on February 7, 1983, issued a notice of assessment of civil money penalties against the above-named parties alleging violations of sections 22(h) and 23A of the Federal Reserve Act, as amended (12 U.S.C. 375b and 371c), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215) by virtue of exceeding the lending limits and failing to comply with the collateral requirements therein. On May 12, 1983, a hearing in the matter was held in * * * . Thereafter, the parties filed proposed findings of fact, proposed conclusions of law, proposed orders, briefs and reply briefs. The Administrative Law Judge filed his Recommended Decision and Order on September 1, 1983 upholding the FDIC's charges and affirming the assessment of a $5,000 penalty against * * * and a $1,000 penalty against each of the other Respondents.
   On July 16, 1981 Respondents, as directors of * * * ("* * *"), approved a $500,000 participation by * * * in a $2.1 million loan by another bank to the father of * * * chairman and principal shareholder. The co-obligor and recipient of the loan proceeds was an affiliated loan company of * * *. At the May 24, 1982 examination of * * * , FDIC examiners cited this loan participation as violating sections 22(h) and 23A, in that the $500,000 participation exceeded * * * lending limits thereunder and was not adequately secured by collateral of the type required by section 23A. At a June 11, 1982 meeting of * * * Board of Directors with FDIC examiners, Board chairman and principal shareholder, * * * , promised to have the violations corrected. As directors, the other Respondents took no steps themselves either to correct the violations or to assure that Chairman * * * carried through on his promise to do so. Not until six months later, on December 9, 1982, was * * * loan participation reduced and properly collateralized so as to bring it into compliance.
   When * * * Board first approved this loan participation on July 16, 1981, there was no documentation available whatsoever regarding the loan; the Board acted solely on representations of * * * with very little inquiry. After receipt of the loan documents, Respondents were polled and again unanimously approved the participation. Although the loan agreement clearly indicated that the affiliated loan company was the recipient of the loan proceeds, Respondents claim not to have read the agreement and generally pleaded lack of knowledge regarding this salient aspect of the transaction.

   [.1] As directors, Respondents had a duty to inquire as to the terms of the loan participation and the contents of the loan agreement. They were also remiss for failing to take steps to correct the violations until six months after being advised thereof by FDIC examiners.
   Since * * * proposed the loan participation and was principal shareholder of both * * * and its affiliated loan company that received the loan proceeds, he should have had sufficient information about the transaction to raise serious questions about its legality under sections 22(h) and 23A. * * * apparently did not share all he knew about the transaction with the other Respondents. It is believed that the penalties assessed by FDIC and confirmed by the administrative law judge appropriately reflect the role of * * * in this matter, as well as extenuating circumstances alleged by Respondents. Further, it is noted that none of the Respondents have questioned the appropriateness of the penalties {{4-1-90 p.A-146}}with respect to their resources. The FDIC therefore concludes that the penalties are proper for reasons cited in the administrative law judge's opinion.

FINDINGS OF FACT AND
CONCLUSIONS OF LAW

   Accordingly, the Board of Directors adopts all the findings of fact and conclusions of law of the Administrative Law Judge, and the bases therefor, as set forth in his Recommended Decision, which are hereby incorporated by reference as part of this decision.

ORDER

   The Board also adopts in full the proposed order of the Administrative Law Judge as contained in his Recommended Decision, which is incorporated herein by reference, as its Final Order. This Order shall become effective at the expiration of 30 days after the service of the Order upon the Respondents.
   By order of the Board of Directors, Dated December 5, 1983.

/s/ Hoyle L. Robinson
Executive Secretary

FDIC-83-21k-C
RECOMMENDED DECISION

   Burroughs, Judge: The Federal Deposit Insurance Corporation ("FDIC") seeks monetary penalties against certain directors of the * * *, * * * ("* * *"), * * * , pursuant to section 18(j)(3)(A) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1828(j)(3)(A). The action results from a Report of Examination of Citizens at the close of business on May 24, 1982, wherein it was determined that * * * participation in a loan of $2,100,000 made by the * * * , was in violation of sections 22(h) and 23A of the Federal Reserve Act, as amended (12 U.S.C. §§ 375b and 371c), and Regulation O of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 215), promulgated pursuant to section 22(h) of the Federal Reserve Act. The loan was made by the * * * to * * * for the benefit of * * * ("* * *"), an affiliate of * * *.
   On February 7, 1983, the Board of Directors of the FDIC issued a Notice of Assessment of Civil Money Penalties assessing a $5,000 penalty against * * * and a penalty of $1,000 against * * * , and * * * , all of whom were directors of * * * at the time of the loan participation. On February 24, 1983, a letter was received by the Executive Secretary of the FDIC from counsel for the directors advising that they desired a hearing pursuant to section 308.69(b) of the FDIC's Rules of Practice and Procedures. A hearing was held in * * * , on May 12, 1983.
   * * * is an insured, State nonmember bank. On July 16, 1981, * * * was chairman of the board and principal shareholder of the bank and * * * and * * * were directors of the bank. During a board of directors meeting of the bank held on July 16, 1981, * * * informed the directors that the * * *, had agreed to loan his father, * * *, a sum of $2,100,000. He requested that * * * participate in the loan to the extent of $500,000. Directors * * * unanimously to approve the loan participation. Director * * * abstained from voting on the transaction.
   There was no documentation for the loan at the time the directors voted their approval on July 16, 1981. The board acted solely upon the representations made by * * * (Tr. 14–15). There is no evidence to suggest that any of the directors had advance knowledge of the loan request. No direct communication had been received from the * * * seeking the participation of * * * (Tr. 12). The transcript1 of the meeting indicated that the following discussion took place concerning the loan (Ex. 11):

       * * * : I had one thing I wanted to bring up. It's a participating loan. I meant to talk to you about it last night * * * , but I forgot about it. * * * is making a loan to my father for $2,100,000.00, and it's to be secured by stock. He's a buying some assets, really its a tax thing mostly deal, but he's buying some assets for $2,100,000.00. He's putting up collateral close to 2 to 1 that would be close to $4,000,000.00 in collateral. * * * will hold, 1,100,000.00 of
1 All meetings of the Board of Directors are tape recorded (Tr. 16). The discussion on the tape of the July 16, 1981, meeting pertaining to the loan was later transcribed (Tr. 12).
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    it. Bank * * * is going to take $500,000.00 and that's already been approved, and we would like to ask that * * * Bank take $500,000.00. It's an 18 months loan at prime rate and the first $600,000.00 paid back on it will bring * * * down to the 3 banks at 500 each and then the payments on down from that will be proportionate. Each bank will come down the same until 18 months its all due if not paid off by then.
       * * *: What is the nature of the collateral * * * ?
       * * * : It will be, it will be bank stock, It will be floor plan, $2,000,000.00 of it will be floor plan and the other $2,000,000.00 will be floor plan like trucks, cars, refrigerators; it's a conglomerate of floor plan and then the other $2,000,000.00 will be approximately $1,000,000.00, little over $1,000,000.00 in bank stock and that stock will be * * * Bank stock, and about a $1,000,000.00 in real estate. So, there will be $1,000,000.00 in real estate, $1,100,000.00 in bank stock and $2,100,000.00 in other floor plan collateral backed loans.
       * * * : Collateral ratio is 2 to 1 you say?
       * * * : Yeah, and * * * will be, they will be the lead bank.
       * * * : * * * Bank, * * *?
       * * * : Yes. They will keep track of the collateral and all that kind of stuff.
       * * * : Your father is not a stockholder in our bank.
       * * * : It's not an insider loan but
       * * * : a relative?
       * * * : yes, but I think only, I mean I don't think, it would be considered as insider in this bank except that it's a participating loan and I thought it ought to be, you know, approved or disapproved by the board of directors on that size.
       * * * : I would move that we go ahead with the participation with * * * in the loan based on the schedule that * * * presented it, the rate he presented it, and on delivery of the evidence that * * * delivers to us.
       * * * : I second that motion.
       * * * : They will be the one delivering all the papers and collateral and all that kind of stuff, and the supporting evidence of the financial statements and that part of it. Any other discussions or any other questions in regards to this that anyone else would like to ask? All in favor "I", All opposed "No".
       This was the only information available to the board at the time the loan participation was unanimously approved on July 16, 1981 (Tr. 14).
   Subsequent to the approval of the loan participation by the Board of Directors on July 16, 1981, copies of the loan participation certificate, demand note and loan agreement were received by * * * . The president of * * * reviewed the demand note and loan participation certificate (Tr. 14, 19–20). These two documents made no reference to * * * The loan participation agreement was executed on August 3, 1981, by * * * on behalf of * * * and the disbursement of funds was made on August 4, 1981 (Ex. 10, 11; Tr. 18). The loan agreement made reference to * * * and clearly indicated that the loan was for the benefit of * * * . The agreement provided that the proceeds of the note would be made by check payable to * * * and * * * and that would endorse the check over to * * * (Ex. 8). * * * claims that he did not read the loan agreement at the time of disbursement and was unaware that the loan was for the benefit of * * * (Tr. 20–21).
   After receipt and review of the documents from the * * * , * * * testified that he was concerned that the loan could be considered an insider transaction because he thought * * * might be a stockholder in * * * * * * , a stockholder of * * * . Prior to disbursing the funds, * * * informed each stockholder of the collateral and expressed the view that the loan might be construed to be an insider transaction. He polled each stockholder individually with respect to the loan. The directors again approved the loan (Tr. 17–18, 20). * * * did not inform the directors that the loan agreement was between * * * . He did inform them that part of the collateral for the loan had been in the ownership of * * * and that * * *, * * *, and * * * were directors of * * * (Tr. 18–19).
   * * * conceded that the loan agreement was received from the * * * prior to the {{4-1-90 p.A-148}}disbursement of the funds on August 14, 1981, and that it clearly reflected that the proceeds of the loan were going to a related interest of * * * (Tr. 19–20). He stated that he did not read the loan agreement and was unaware of the fact that the funds were to go to * * * (Tr. 20). The loan participation certificate and the demand note made no reference to * * * or to the collateral for the loan (Ex. 9, 11; Tr. 14,20). The demand note makes reference to the loan agreement which in turn details the collateral for the loan (Ex. 8, 9).
   On June 11, 1982, the examiners held a meeting with members of the Board of Directors of * * * to review tentative findings of the examination. The examiners informed the board that the $500,000 extension of credit was in violation of section 23A of the Federal Reserve Act and Regulation O (Ex. 18—page 1-a-1; Tr. 34). During the meeting, * * * promised the Board of Directors that he would make arrangements to have the violations corrected. The remaining directors made no communication with * * * concerning the matter and left any corrective action entirely with * * * (Tr. 35). Difficulty was experienced in having the loan corrected. The board asked * * * about the matter and was informed that he was working on it. Corrective action was impeded by the fact that * * * had died and that * * * was having additional problems (Tr. 35–36). On December 9, 1982, the extension of credit was reduced to $400,000 and stock of the * * * , in the value of $480,000, was physically transmitted to * * * as collateral for the extension of credit.
   The FDIC submits that the extension of credit was in violation of sections 22(h) and 23A of the Federal Reserve Act, (12 U.S.C. §§ 375b and 371c) and Regulation O (12 C.F.R. Part 215), which implements section 22(h). The provisions of sections 22(h) and 23A of the Federal Reserve Act involved in this proceeding are those in force immediately prior to the enactment of the Garn-St. Germain Depository Institutions Act of 1982, Pub. L. No. 97–320, 96 Stat. 1469 (1982). Respondents do not dispute that the violations occurred but submit that they were unaware of violating any of these provisions at the time of the extension of credit because they were unaware that the proceeds were to go to * * *.
   Security for the $2,100,000 loan consisted of bank stocks (Ex. 12), an extensive list of real estate holdings and various loans and accounts receivables of * * *. Detail listings of the collateral were attached as exhibits to the loan agreement. All of the collateral was pledged to and held by the * * * . Respondents concede that a violation of 23A occurred but argue that it was corrected by a later agreement with the * * * to release to * * * , free and clear, a sufficient amount of the stock of the * * * Bank * * *, so as to secure the loan to meet the requirements of section 23A (Brief; Ex. 19, 20, 21). The * * * on December 9, 1982, segregated 2,127 shares of stock of the * * * * * * in the amount of $480,000 from its collateral and physically transmitted it to * * * to secure the loan which had been reduced to $400,000 on December 9, 1982 (Ex. 20, 21). Respondents address their argument on the issue as to whether the stock of the * * * to * * * is violative of the Gran-St. Germain Act signed into law by President Reagan on November 15, 1982. It is necessary to address this issue since the transfer of stock occurred several months after the loan and has no relevance as to whether a violation occurred at the time of the extension of credit.
   The $500,000 extension of credit also violated section 23A by exceeding the allowable lending limit. The lending limit to any one borrower on August 4, 1981, was $408,800. Respondents do not dispute the fact that the violation occurred but point out that corrective action was taken on December 9, 1982, to reduce the loan to $400,000. The granting of the $500,000 extension of credit also violated the lending limit of Regulation O, which implements section 22(h)(1) of the Federal Reserve Act. Respondents do not dispute the fact that a violation of Regulation O occurred but point out that compliance was achieved when the loan was reduced to $400,000 (Brief; Ex. 19, 20, 21).

   [.2,.3] Section 18(j)(3)(A) of the Federal Deposit Insurance Act (12 U.S.C. § 1828(j)(3)(A)) empowers the FDIC to impose civil penalties against any person participating in the conduct of the affairs of an insured nonmember bank who violates any provision of section 23A or 22(h) of the Federal Reserve Act or any lawful regulation, such as Regulation O, promulgated {{4-1-90 p.A-149}}pursuant to such authority.2 Certain factors must be considered in determining an appropriate penalty. These factors specifically include the size of the financial resources, good faith of the insured bank or person charged, the gravity of the violation and the history of previous violations.3
   Respondents submit that the loan was made to * * * , not to * * * , and that no director knew nor could have reasonably known that the loan proceeds would eventually be transferred to * * * . For purposes of determining the priority of a penalty, they contend that the transaction should be examined on the basis of knowledge they possessed at the time of the board meeting. There is no dispute over the fact that * * * was an affiliate of * * *. * * * testified that they had carried * * * as being an affiliate in previous examinations because of the positions of * * * and * * * in * * * (Ex. 18, at 1-c; Tr. 32–33). * * * was, at the time of the loan, chairman of the board and a director of * * *.

   [.4] Directors of a bank have a fiduciary relationship to the bank and its stockholders. They should exercise the utmost good faith in the discharge of their duties and give the bank the benefit of their best judgment. They must exercise ordinary care and prudence in the administration of the bank's affairs and will not be absolved from their responsibility because of want of knowledge of wrongdoing resulting from gross inattention to their duties. Briggs v. Spaulding, 141 U.S. 132, 165–166 (1891); Lane v. Chouning, 610 F.2d 1385 (8th Cir. 1979).
   Respondents argue their lack of knowledge as to the true facts on July 16, 1981, as a defense. Ignorance under such circumstances is not a valid defense. It was their duty to know the facts. The pertinent part of the transcript of the July 16, 1981, meeting indicates little inclination on the part of the directors to fully develop the facts surrounding the extension of credit. The directors could have questioned * * * more closely on the loan or held off approval until they had all the facts. They are not excused by saying that they were unaware of the fact that the proceeds were to go to * * * . They cannot blindly rely upon another's representations where ordinary care would have revealed the truth.
   The facts presented by * * * to the board on July 16, 1981, were less than candid. Important features of the loan, for some unexplained reason, were concealed. The reason for this concealment, whether through inadvertence or intentionally, does not appear in the record since * * * did not testify. It is absurd for him to contend that he was unaware that the loan was for the benefit of * * * . His detail of the collateral at the July 16, 1981, board of directors meeting leaves little doubt that he had knowledge of the provisions of the loan agreement. He knew that assets formerly owned by * * * would be used to secure the loan. Since he was chairman of the board of * * * , it is inconceivable that he was unaware that assets of * * * would be transferred and used to secure the loan.
   Regardless of the discussion at the July 16, 1981, meeting of the board, the directors were presented with a second opportunity to ascertain the full facts when the loan documents were received from the * * * . The loan agreement was explicit as to the collateral being pledged and as to the disbursement of the loan proceeds. The agreement was in possession of the bank prior to disbursement of the funds and revealed * * * as the recipient of the funds. The directors had prior knowledge that * * * was an affiliate of * * * .
   * * * claims that he had not read the loan agreement at the time the funds were disbursed and did not know it was between * * * and the * * * (Tr. 18, 20–21). Yet, he was aware of the collateral for the loan and

2 Section 18(j)(3)(A) of the FDIC Act provides (12 U.S.C. § 1828(j)(3)(A)):
   Any nonmember insured bank which violates or any officer, director, employee, agent, or other person participating in the conduct of the affairs of such nonmember insured bank who violates any provision of section 371c or 375b of this title, or any lawful regulation issued pursuant thereto, shall forfeit and pay a civil penalty of not more than $1,000 per day for each day during which such violation continues. The penalty shall be assessed and collected by the Corporation by written notice. As used in this section, the term "violates" includes without any limitation any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation.
3 Section 18(j)(3)(B) of the FDIC Act provides (12 U.S.C. § 1828(j)(3)(B)):
   In determining the amount of the penalty the Corporation shall take into account the appropriateness of the penalty with respect to the size of financial resources and good faith of the member bank or person charged, the gravity of the violation, the history of previous violations, and such other matters as justice may require.
 {{4-1-90 p.A-150}}knew that part of it had been in the ownership of * * * (Tr. 17, 18). He testified that he individually advised the other directors after receipt of the documents that part of the collateral for the loan had been in the ownership of * * * and that * * * was a director of * * * (Tr. 18–19). The directors were polled again concerning the extension of credit and each of them approved it as they had done on July 16, 1981. No action was taken by them to learn additional facts concerning the loan even though they were aware that some of the collateral had been owned by * * * and that * * * was an affiliate of * * * .
   * * * testimony that he did not read the loan agreement before disbursement of funds, if true, certainly does not exhibit diligence and care in the administration of the bank's affairs. If he did not read the loan agreement, then the question arises as to how he obtained his knowledge that some of the collateral had been owned by * * * ? The loan participation agreement and demand note make no reference to the type of collateral. The important fact is that he admits knowing that some of the collateral had been in the ownership of * * * and he knew that * * * was a director of * * *. He concedes relating this information to the other directors. Yet, none of them took any affirmative steps to further investigate the facts surrounding the loan. A few seconds of reading the loan agreement would have alerted them to the fact that the proceeds were for the benefit of * * * and that * * * was, in essence, a conduit for the loan. The standard of care required of a director faced with the facts of record at least required the directors to read the loan agreement. Where one is presented with an opportunity to learn the truth, he cannot ignore that opportunity and blindly rely upon another's representations where ordinary care would have revealed the truth. cf. FDIC v. Laulerbach, 626 F.2d 1327 (6th Cir. 1980). The directors did not exercise ordinary care.
   While * * * did not vote on the loan participation, under section 18(j)(3)(A) of the FDIC Act, 12 U.S.C. § 1828(j)(3)(A), he is considered to have violated the provisions of sections 22(h) and 23A of the Federal Reserve Act. The term "violates" as used in section 18(j)(3)(A) includes any action of a director, among other persons, which causes or brings about a violation. In this instance, the violation was caused by * * * failure to candidly inform the voting directors as to all the facts concerning the loan being made by the * * * .
   In determining the amount of penalty to be assessed, the FDIC must consider the size of financial resources and good faith of the person charged, the gravity of the violation, the history of previous violations and any other matters as justice may require. * * * has on two previous occasions been cited for violations of Regulation O. The gravity of the violations must be considered serious since they result from * * * being less than candid about the full details of the loan and the failure of the other directors to exercise normal care in avoiding the violations. A reading of the loan agreement, which was in the possession of * * * , would have alerted the directors to the possible violations. The depositors and shareholders have a right to expect this much care from their directors. While the evidence does not warrant the conclusion that the directors acted with a bad motive or desire for personal gain, it does reflect a failure of the directors to provide the attention to their duties that is ordinarily expected and required on the part of a director.
   The violations occurred on August 4, 1981, and the directors were tentatively advised of the violations by the examiners on June 11, 1982. Action to correct the violations was not affirmatively taken until December 9, 1982.4 While there are extenuating circumstances concerning the delay, e.g., death of * * *, a period of six months elapsed prior to any corrective action being initiated.
   Section 18(j)(3)(A) of the FDIC Act authorized the FDIC to assess a $1,000 penalty per day for each day during which such violation continues. The penalties proposed by the FDIC are minimal and more than account for several mitigating factors in this case. These factors include the fact that the bank has not suffered in any way from the extension of credit, and there was no effort to conceal the violations from the examiners. A higher penalty is justified against * * * since he failed to candidly advise the other members of the board of directors of important features of the loan. As chairman of the board of * * *, he must be regarded
4 Whether the physical transfer of the 2,127 shares of common stock of the * * *, on December 9, 1982, to * * * satisfies the collateral requirements of section 23A is not decided by this decision. Regardless of the validity of such a transfer, no action of any kind was taken prior to that date to satisfy the collateral requirements.
 {{4-1-90 p.A-151}}as sophisticated in the banking business and surely was aware that important elements of the loan were being left out of his presentation to the board.
   It is recommended that the proposed monetary penalties be sustained.

FINDINGS OF FACT

   1. * * * , is a corporation existing and doing business under the laws of * * * . Its principal place of business is located in * * * . At all times relevant to this proceeding, * * * was an insured State nonmember bank (Admitted, Notice and Answer).
   2. At all times relevant to this proceeding, * * * was a director and principal shareholder of * * * within the definition of the terms "director" and "principal shareholder" set forth at section 215.2(c) and (j) of Regulation O, respectively [12 C.F.R. § 215.2(c) and (j)] (Ex. 1, at A and B; Ex. 3, at A and B; Ex. 5; Ex. 6; Ex. 18, at A and B; Tr. 10).
   3. At all times relevant to this proceeding, * * * were directors of * * * within the term "director" set forth at section 215.2(c) of Regulation O [12 C.F.R. § 215.2(c)] (Ex. 1, at B; Ex. 3, at B and B-1; Ex. 18, at A and B).
   4. At all times pertinent to this proceeding, * * * was the related interest of * * * within the definition of "related interest" of section 215.2(k) of Regulation O [12 C.F.R. § 215.2(k)] (Tr. 10).
   5. At all times relevant to this proceeding, * * * was an "affiliate" of * * * as that term is defined by section 2(b) of the Banking Act of 1933, 12 U.S.C. § 221a(b) (1976) (Ex. 3, at 17; Ex. 18, at 17). * * * has carried * * * as being an affiliate because of the positions of * * * and * * * stockholders of * * * (Tr. 32–33).
   6. The examinations of * * * by the FDIC as of the close of business on October 27, 1980, and July 11, 1981, cited * * * for violations of Regulation O (Ex. 1, at 1-C and 1-C-1; Ex. 2; Ex. 3, at 1-C and 1-C-1; Ex. 4; Tr. 69).
   7. On July 16, 1981, the board of directors of * * * voted to approve a $500,000 participation in a $2,100,000 eighteen-month loan originated by * * * . Directors * * * voted in favor of the participation. The request for the loan participation and information pertaining to it were presented to the board by * * * . The directors had no prior knowledge about the loan transaction. * * * and * * * abstained from voting on the loan (Ex. 7; Tr. 11, 12, 14, 17, 46).
   8. The board of directors unanimously approved the loan participation although there was no documentation available for review at the time of approval (Tr. 11, 14, 16–17, 46).
   9. * * * did not inform the board of directors that the proceeds of the loan in which he sought participation by * * * would go to * * * . He informed them that * * * Company was making the loan to his father, * * * (Ex. 7; Tr. 11–12, 13–14).
   10. At the time the board of directors of * * * approved the bank's participation in the $2,100,000 loan on July 16, 1981, they were unware that the funds would go to * * * Company (Tr. 11,14).
   11. Prior to the disbursement of the funds, the loan documents were received from the * * * Company. The documentation included the Loan Participation Certificate, a copy of the demand note for $2,100,000 executed by * * * and a copy of the loan agreement. The demand note made reference to the loan agreement (Ex. 8, 9, 11; Tr. 14, 18–20, 21).
   12. The demand note and loan participation certificate made no reference to * * * (Ex. 9, 11).
   13. The loan agreement stated that it was between * * * , * * * Company, and * * * Company. Paragraph six of the agreement was as follows (Ex. 8):
   DISTRIBUTION OF PROCEEDS OF NOTE will be made by Bank by check to * * * and * * * Company. Such check will be endorsed by * * *.
   14. Paragraph two of the loan agreement, was as follows:
   SECURITY. * * * and * * * will deliver to Bank as security for the performance of the Note the following:

       A. * * * Floor Plans. These assets are listed on Exhibit B and have a total Book Value of $2,100,000. These assets have been sold by * * * to * * * with recourse, and are pledged by * * * to Bank with recourse. Copies of related documents are attached to Exhibit B. * * * and * * * agree that the proceeds of any of the Floor Plans will be applied on the Note to the bank.
    {{4-1-90 p.A-152}}
       B. * * * real estate listed on Exhibit C and having an estimated value of $1,000,000. * * * and * * * agree that the sales proceeds of any of the real estate will be applied on the Note to Bank, and * * * will resell to * * * a like amount of Floor Plan Notes (subject to prior rights of Bank).
       C. Bank stocks listed on Exhibit D and having a Book Value of $1,196,110. Pledge form attached as Exhibit D1.
   15. After receipt of the loan documents from the * * * Company, the board of directors of * * * were individually polled by President * * * before disbursement of the funds. * * * thought the loan participation could be construed to be an insider transaction in the event * * * was a stockholder in * * * , which owned stock of * * * . * * * informed the directors that part of the collateral for the loan had been in the ownership of * * * and that the loan needed an individual vote. The directors again voted unanimously to participate in the loan (Tr. 17–18, 46).
   16. Disbursement of the $500,000 was made by * * * on August 4, 1981. At the time of disbursement, the accounting department of the bank prepared a dummy note. The note was prepared to show a record of the asset and is usual procedure on participation loans. The note shows purchased participation of * * * and * * * Company (Ex. 10; Tr. 22–24).
   17. The $500,000 loan participation was outstanding from August 4, 1981, until December 9, 1982, at which time the loan was reduced to a balance of $400,000 (Ex. 20; Tr. 40–41).
   18. The May 24, 1982, FDIC Report of Examination set out the apparent violations concerning the loan participation agreement (Ex. 18; Tr. 34). The tentative findings of the examination were reviewed with members of the Board of Directors on June 11, 1982. Directors * * * and * * * attended the meeting (Ex. 18, at 1-a-1; Tr. 34).
   19. Subsequent to the examiners informing * * * and the other directors of the violations on June 11, 1982, * * * made a promise to the bank's board of directors and the examiners that he would have the loan corrected (Tr. 35). * * * and the other members of the board had no communication with the * * * concerning the loan and took no corrective action with regard to the loan (Tr. 34–35).
   20. On December 9, 1982, the * * * segregated 2,127 shares of common stock of the * * * , from its package of collateral and physically transmitted it to * * * to secure the loan which was reduced to $400,000 on the same date (Ex. 20, 21).
   21. The Regulation O lending limit could not have exceeded $458,457 calculated as follows:
   (a) Using the March 31, 1981, report of condition (total equity capital of $4,260,000), the lending limit on July 16, 1981, was ten percent of the sum that amount and the reserve for loan losses on July 16, 1981 ($300,807.31), or $456,087 (Ex. 14, at 1; Ex. 15; Tr. 30).
   (b) Using the June 30, 1981, report of condition (total equity capital of $4,311,000), the lending limit on August 4, 1981, was ten percent of the sum that amount and the reserve for loan losses on August 4, 1981 ($273,570.29), or $458,457 (Ex. 14, at 5; Ex. 16; Tr. 30).
   22. * * * "capital and surplus," within the meaning of section 23A of the Federal Reserve Act on August 4, 1981, was the sum of its total capital account ($4,088,035) and its reserve for loan losses ($273,570), or $4,361,606 (Ex. 16, at 2; Tr. 30).

CONCLUSIONS OF LAW

   1. The $500,000 extension of credit to * * * Company was made in violation of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. § 371c (1976), in that it was not secured by the kind and amount of collateral required to be provided.
   2. The $500,000 extension of credit to * * * Company was made in violation of section 23A of the Federal Reserve Act, prior to amendment, 12 U.S.C. § 371c (1976), in that it exceeded ten percent ($436,161) of * * * capital and surplus on August 4, 1981 ($4,361,606).
   3. The $500,000 extension of credit to * * * was made in violation of the lending limit of section 215.2(f) of Regulation O, 12 C.F.R. § 215.2(f), in violation of section 215.4(c) of Regulation O, 12 C.F.R. § 215.4(c) and section 22(h)(1) of the Federal Reserve Act, 12 U.S.C. § 375b(1) (Supp V 1981).
   4. The violations occurred from the failure of the named directors to exercise ordinary care and prudence in the administration of the bank's affairs.
{{4-1-90 p.A-153}}
   5. The violations were of such a gravity that the following monetary penalties are warranted pursuant to section 18(j)(3)(A) of the FDIC Act, 12 U.S.C. § 1828(j)(3)(A):

DIRECTOR MONETARY
PENALTY
* * * $5,000
* * * $1,000
* * * $1,000
* * * $1,000
* * * $1,000
* * * $1,000

PROPOSED ORDER

   Based upon the foregoing findings of fact and conclusions of law, it is RECOMMENDED that the following Order be entered by the Board:
   ORDERED: 1. That, by reason of the violations determined herein, a penalty of $5,000 is assessed against * * * , pursuant to section 18(j)(3)(A) of the Act, 12 U.S.C. § 1828(j)(3)(A);
   2. That, by reason of the violations determined herein, a penalty of $1,000 each is assessed against * * * , and * * * , individually, pursuant to the provisions of section 18(j)(3)(A) of the Act, 12 U.S.C. § 1828(j)(3)(A); and
   3. That the civil monetary penalties assessed against each of the named individuals shall not be paid directly or indirectly by * * * but shall be paid directly by the individual against whom the penalty is assessed.
   Dated this 1st day of September, 1983.
/s/ JAMES D. BURROUGHS
Judge
1365 Peachtree Street, N.E. Room 240
Atlanta, Georgia 30309
(404) 881–4197 FTS: 257–4197

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