Federal Deposit
Insurance Corporation

   [.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.

   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.

   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-

   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

   [.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.

   [.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

   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,

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.

   [.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.

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

   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)


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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).

   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.

(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).

   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.

   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.

   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


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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.

   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


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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


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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.

   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.

[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.

   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).