765 F.2d 569 (6th Cir. 1985), 84-3129, Fitzpatrick v. Federal Deposit Ins. Corp.

Docket Nº:84-3129.
Citation:765 F.2d 569
Party Name:H.D. FITZPATRICK, Jr., Individually and as Director of the Bank Josephine, Prestonsburg, Kentucky, an insured State nonmember bank, Petitioner, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Respondent.
Case Date:June 19, 1985
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 569

765 F.2d 569 (6th Cir. 1985)

H.D. FITZPATRICK, Jr., Individually and as Director of the

Bank Josephine, Prestonsburg, Kentucky, an insured

State nonmember bank, Petitioner,



No. 84-3129.

United States Court of Appeals, Sixth Circuit

June 19, 1985

Argued Dec. 4, 1984.

Page 570

James G. Apple (argued), James D. Moyer, John A. Bartlett, Stites & Harbison, Louisville, Ky., for petitioner.

John C. Deal (argued), Regional Counsel, Columbus, Ohio, Arthur L. Beamon, Asst. Gen. Counsel, Federal Deposit Ins. Corp., Washington, D.C., for respondent.

Before EDWARDS [*] and MARTIN, Circuit Judges; and BROWN, Senior Circuit Judge.

BOYCE F. MARTIN, Jr., Circuit Judge.

This case deals with the responsibilities of bank directors in policing insider loans. The petitioner, Henry Davison Fitzpatrick, Jr., seeks review of a decision and order of the Federal Deposit Insurance Corporation assessing him $1,000 in civil money damages for his failure to exercise ordinary care as a bank director, pursuant to the Financial Institutions Regulatory and Interest Rate Control Act of 1978. We affirm.


Fitzpatrick was and is president and a director of The Bank Josephine, Prestonsburg, Kentucky, an insured state nonmember bank. He is also a substantial minority shareholder. The controlling interest is held by members of the McGuire family.

These proceedings arise from Fitzpatrick's votes at meetings of the bank's board of directors on July 9, 1981, and August 27, 1981. At the time of the first meeting, the other directors were Leo Raymond McGuire, Everett Earl McGuire, Ervin Akers, and chairman Earl R. McGuire, father of Leo Raymond and Everett Earl McGuire. Earl R. McGuire died sometime in August 1981, after the second meeting, but was not present at either meeting.

At the July 9 meeting, Leo Raymond McGuire proposed that Bank Josephine make a $500,000 participation in a $2,100,000 loan to his father to buy certain receivables. The loan would be originated by First State Bank & Trust Company of Ashland, Kentucky, which would retain $1,100,000 of the loan. The loan would be secured by floor plan financing 1 and would further be secured by approximately $4,000,000 in collateral. Based solely on these representations, Fitzpatrick, Akers, and Leo Raymond McGuire voted to approve the loan; Everett Earl McGuire abstained.

The money from the loan went in fact to Grayson Loan Company, a corporation owned by the McGuire brothers. It is readily apparent from the loan agreement, signed by Fitzpatrick on behalf of Bank Josephine on August 3, 1981, that Grayson Loan Company would receive the loan proceeds. Although collateral for the loan included real estate and pledges of certain accounts receivable and floor plan loans made to affiliates of Grayson Loan Company, the only marketable securities pledged were bank stocks with a book value of $1,196,110. Bank Josephine apparently had a pro rata share of total collateral, subject to a provision that the first $600,000 in repayment of principal would go to First State Bank.

At the August 27 meeting the board approved the extension of a $750,000 line of credit to Grayson. Fitzpatrick and Akers voted in favor, and the McGuire brothers abstained. This line of credit was to be secured by 270,100 shares of Citizens Deposit Bank and Trust, Vanceburg, Kentucky. That stock was pledged to and in the possession of the First National Bank,

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Louisville, Kentucky, for a debt owed to that bank. The McGuires represented that the book value of the stock was in excess of the prior debt by $500,000. The extension of credit was disbursed to Grayson over several installments, beginning on October 8, 1981. The final installment, on December 4, 1981, represented disbursement in full.

On October 8 and 9, 1981, Fitzpatrick met with FDIC officials in Washington, D.C., and Columbus, Ohio, to express concern about the quality of Bank Josephine's loan portfolio and to request the FDIC's assistance. Fitzpatrick also had a number of other meetings with federal and state regulators. As a result of these meetings, an FDIC examiner visited Bank Josephine on November 23, 1981, and advised Fitzpatrick and Leo Raymond McGuire that the combined total of the loans to Grayson exceeded Bank Josephine's lending limits. Subsequently during the May 24, 1982, examination of Bank Josephine, FDIC examiners cited these loans as violating both the lending limits and the collateral requirements.

The Bank Josephine took no decisive action to correct the violations, even in the face of continued FDIC pressure. Fitzpatrick was the sole exception; he repeatedly spoke with the McGuires about the need to correct the violations and tried to get the board to take a more aggressive stance toward compliance. Faced with Bank Josephine's inertia, the FDIC examiner on October 13, 1982, formally recommended that the FDIC assess civil money penalties. Even after this it was not until December 29, 1982, that the bank's counsel informed the FDIC that the $750,000 line of credit had been paid off and that the $500,000 participation loan had been collateralized by $600,000 in bank stock.

The FDIC formally initiated these administrative proceedings to assess penalties against the directors, including a $1,000 penalty against Fitzpatrick, on February 7, 1983. There was a hearing before Administrative Law Judge James D. Burroughs on June 23, 1983, and Judge Burroughs recommended assessment of the penalties in a careful and detailed Recommended Decision on October 21, 1983. The FDIC adopted his findings, conclusions, and proposed order in its full Decision and Order, McGuire, No. FDIC-83-21K-A (F.D.I.C. Jan. 30, 1984), and Fitzpatrick appealed to this court pursuant to section 18(j)(3)(D) of the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1828(j)(3)(D). Akers prosecuted a separate appeal to this court, but it was subsequently dismissed at his request. Akers v. FDIC, No. 84-3139 (6th Cir. dismissed May 4, 1984).

The Lending Limit

At the time these transactions took place, section 23A of the Federal Reserve Act provided in relevant part:

No member bank shall (1) make any loan or any extension of credit to, or purchase securities under repurchase agreement from, any of its affiliates, or (2) invest any of its funds in the capital stock, bonds, debentures, or other such obligations of any such affiliate, or (3) accept the capital stock, bonds, debentures, or other such obligations of any such affiliate as collateral security for advances made to any person, partnership, association, or corporation, if, in the case of any such affiliate, the aggregate amount of such loans, extensions of credit, repurchase agreements, investments, and advances against such collateral security will exceed 10 per centum of the capital stock and surplus of such member bank, or if, in the case of all such affiliates, the aggregate amount of such loans, extensions of credits, repurchase agreements, investments, and advances against such collateral security will exceed 20 per centum of the capital stock and surplus of such member bank.

12 U.S.C. Sec. 371c (emphasis added). Section 23A has since been revised throughout, but those revisions apparently would have no effect on this issue. See Garn-St. Germain Depository Institutions Act of 1982, Pub.L. No. 97-320, Sec. 410(b), 96 Stat. 1469, 1515-20 (Banking Affiliates Act of 1982) (codified as amended at 12 U.S.C. Sec. 371c). The provisions of section 23A are made applicable to nonmember insured banks by section

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18(j)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Sec. 1828(j)(1).

The revision of section 23A incorporates a definition of "affiliate," 12 U.S.C. Sec. 371c(b)(1), but at the time of these transactions the term was defined in section 2(b) of the Federal Reserve Act, which reads in relevant part:

(b) Except where otherwise specifically provided, the term "affiliate" shall include any corporation, business trust, association, or other similar organization--

* * *

(2) Of which control is held, directly or indirectly, through stock ownership or in any other manner, by the shareholders of a member bank who own or control either a majority of the shares of such bank or more than 50 per centum of the number of shares voted for the election of directors of such bank at the preceding election, or by trustees for the benefit of the shareholders of any such bank; or

(3) Of which a majority of its directors, trustees, or other persons exercising similar functions are directors of any one member bank.

12 U.S.C. Sec. 221a(b).

Grayson was an affiliate of Bank Josephine, and loans to Grayson Loan Company thus came within the limits of section 23A. Loans to...

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