Resolution Trust Corp. v. Eason, s. 93-2185
| Citation | 17 F.3d 1126 |
| Decision Date | 03 March 1994 |
| Docket Number | 93-2264 and 93-2266,Nos. 93-2185,s. 93-2185 |
| Parties | RESOLUTION TRUST CORPORATION, Appellant, v. A.P. EASON, Jr.; Rex A. Smith; J.F. Robinson; J. Warren Murray; Joe A. Upchurch; Delbert A. Allen, Appellees, James E. Shreve, Defendant. RESOLUTION TRUST CORPORATION, Appellee, v. A.P. EASON, Jr.; Rex A. Smith; J.F. Robinson; J. Warren Murray; Joe A. Upchurch, Defendants, Delbert A. Allen, Appellant, James E. Shreve, Defendant. RESOLUTION TRUST CORPORATION, Appellee, v. A.P. EASON, Jr.; Rex A. Smith; J.F. Robinson; J. Warren Murray; Joe A. Upchurch, Appellants, Delbert A. Allen; James E. Shreve, Defendants. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Counsel who presented argument on behalf of the appellant was Lance Stockwell, Tulsa Oklahoma, for RTC. Additional attorneys appearing on the brief were Bradley K. Beasley and Sheila M. Powers, Tulsa OK, Lavenski R. Smith, Springdale, AR, Neysa Day, Overland Park, KS.
Counsel who presented argument on behalf of the appellee was William J. Butt, II, Fayetteville, for appellees Eason, Smith, Robinson, Murry and Upchurch and Matthew T. Horan, Fort Smith, AR, for appellee Allen.
Before MAGILL, Circuit Judge, BRIGHT, Senior Circuit Judge, and BEAM, Circuit Judge.
Resolution Trust Corporation (RTC) brought this jury action seeking damages in the sum of $12 million against officers and directors (Officers) of the failed First Federal Savings and Loan Association of Fayetteville, Arkansas (First Federal) alleging negligence and breach of fiduciary duty in approving loans that later failed. The jury denied recovery and RTC appeals from a judgment of dismissal. The Officers cross-appeal from the district court's post-trial order denying attorney's fees. We reject both appeals and affirm.
In its appeal, RTC contends that the district court erred in (1) admitting into evidence two unauthenticated documents which contained hearsay; (2) instructing the jury on custom and usage in the savings and loan industry; and (3) instructing the jury on the business judgment rule, and then erroneously stating the rule's content.
RTC named bank officer Eason and directors Smith, Robinson, Murray, Upchurch and Allen as defendants. Eason founded First Federal in 1953, and operated the S & L as its president until the institution failed in 1989. Smith, Robinson, Murray, Upchurch and Allen served on First Federal's Board of Directors during the early 1980s, when the challenged loans were made.
Between 1982 and 1984 First Federal made $25 million in "participation loans". A financial institution makes (or "purchases") a participation loan when it agrees to join other institutions in a large loan transaction, with each institution contributing part of the total loan. Typically, a borrower approaches one S & L for the entire loan, and that S & L, referred to as the "lead lender", attempts to find other institutions to become participants.
First Federal's participation loans were made to borrowers seeking tens of millions of dollars to build large-scale commercial real estate projects. First Federal typically loaned between $500,000 and $2 million toward these projects, and other S & Ls participated in varying amounts to meet the borrowers' needs.
RTC challenges eleven failed loans which allegedly resulted in losses to First Federal of approximately $12 million. RTC concedes that the Officers did not err in deciding to enter the risky business of participation loans, but contends that the manner in which the Officers underwrote those loans constituted negligence and a breach of fiduciary duty. In the S & L industry "underwriting" refers to the process by which a financial institution determines the likelihood of repayment for a potential loan.
Generally, First Federal entered into the challenged participation loans in the following way. 1 A lead lender, usually an S & L in the state where the borrower intended to build the project, would send First Federal's loan officers written information about the proposed construction. Eason and two of his top employees would review the material from the lead lender, which typically included financial statements and other pertinent information about the borrower, along with details about the total cost of the project and the extent of participation sought. Sometimes a First Federal employee, as part of the loan evaluation, would visit the community in which the construction would take place. More often, however, Eason evaluated the participation opportunity on the basis of the information provided by the lead lender and his own personal knowledge of the lead lender, the loan broker, or the other participants.
In evaluating participations Eason also relied on the presence of "take-out" commitments, which are promises made by one participating S & L committing that S & L to paying off all the other participants if the original borrower fails to do so. With respect to the challenged loans, the take-out lender would typically commit to paying off the other participants eighteen months after the project began. Eason favored participations with take-out commitments, reasoning that the presence of a take-out lender reduced the investment's risk. Again Eason relied solely on the lead lender's assessment of the reliability of the take-out commitment, and conducted no independent investigation concerning the financial soundness of the take-out lender.
Eason rejected some proposals on the basis of the information provided by the lead lenders. Proposals not rejected came to First Federal's Board of Directors for approval. The Board reviewed Eason's presentations and ultimately gave approval to all of the projects which were brought before it.
Some of First Federal's participations fared well, resulting in full and prompt repayment at a high rate of interest. As noted, eleven loans challenged by RTC produced losses. In some cases these loans were a total loss; in others First Federal sued the borrower or the take-out lender and recovered a portion of its investment.
After First Federal went bankrupt in 1989, the Office of Thrift Supervision (OTS) appointed RTC as receiver. Prior to bringing this action, RTC in its corporate capacity purchased from RTC as receiver the "right" to assert the negligence and breach of fiduciary duty claims against the Officers.
At trial, the parties hotly disputed the adequacy of First Federal's underwriting. RTC asserted that First Federal's underwriting included no "verification", that is, no attempt to ensure the accuracy of the financial information provided to First Federal about the borrower. The Officers responded in defense that they had relied justifiably on the lead lenders to perform the process of verification, and that they never had been criticized for this practice with respect to numerous smaller-scale in-state loan participations purchased during the 1970s. Each side presented evidence, expert witnesses and others, to support their respective contentions.
The Officers also introduced evidence that in 1983 a Federal Home Loan Bank Board (FHLBB) examiner gave First Federal's underwriting a letter grade of "B" (on an A to F scale), and answered "Yes" to the question "Are underwriting standards for loan commitments adequate?". Tr. at 577-79, Exhibits 78 and 79. In addition, two workpapers of an FHLBB examiner admitted into evidence over RTC's objection contained the handwritten comment "excellent investment" relating to each of two of the challenged loans. Tr. at 514-16, Exhibits 76 and 77.
At the close of RTC's evidence, the Officers moved for judgment as a matter of law. The district court denied this motion. The district court instructed the jury on the applicable Arkansas law of negligence and breach of fiduciary duty. The trial court also instructed the jury on the business judgment rule, and on custom and usage in the S & L industry.
The court gave the jury twelve interrogatories applicable to each of the eleven loans in question. The jury answered "no" to the interrogatories relating to the liability of defendants on each of the loans and the trial judge entered a judgment of dismissal. RTC then moved for a new trial on the same grounds presented in this appeal. The district court denied RTC's motion, and also denied the Officers' subsequent motion for attorney's fees.
We now turn to RTC's appeal.
During the cross-examination of Eason, the defendants sought to introduce into evidence two FHLBB documents, one relating to the Eagleridge loan and the other to the Century Park loan. Before defendants' counsel offered the documents, Eason testified (1) that in 1983 the FHLBB Examiner-in-Charge complimented the S & L on its documentation of loan participations; (2) that examiners often made longhand written notes on examination documents; and (3) that Eason had seen the "federal exam workpapers" on the Eagleridge and Century Park loans. Defendants' counsel then offered the workpapers, each of which contained the handwritten notation "excellent investment." RTC's counsel objected, stating that the notes
were prepared ... by ... one of the staff people who [examined] the loan, and he simply [examined] the terms of the loan, and then he called it an excellent investment and put down a percentage that there was a return that was coming on it. We do not know if this particular individual did any underwriting examination of it.... And so as a result, it is hearsay in the opinion of some staff person who we don't know the nature or extent of the work that he did.
Trial Tr. at 514. Before ruling on the objection, the trial court initiated the following colloquy, which applied to both exhibits:
THE COURT: Wasn't it made, though, that he was an employee of the examining agency and wasn't it made in the course of his duties?
MR. STOCKWELL [RTC's counsel]: It was made in...
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