F.D.I.C. v. Bierman

• Citation: 2 F.3d 1424
• Decision Date: 10 August 1993
• Docket Number: Nos. 91-2893,s. 91-2893
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Plaintiff-Appellee, v. Gilbert BIERMAN, V. Edgar Stanley, Robert Marcuccilli, Judith Stanley, Dan Stanley, and John Boley, Defendants-Appellants. & 91-2941.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 1424

2 F.3d 1424

FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate

capacity, Plaintiff-Appellee, v. Gilbert BIERMAN, V. Edgar Stanley, Robert Marcuccilli, Judith Stanley, Dan Stanley, and John Boley,

Defendants-Appellants.

Nos. 91-2893 & 91-2941.

United States Court of Appeals, Seventh Circuit.

Argued Sept. 10, 1992.

Decided Aug. 10, 1993.

Philip A. Whistler, Fred R. Biesecker, Charles E. Greer, Ice, Miller, Donadio & Ryan, Indianapolis, IN, C. Erik Chickedantz, Miller, Carson, Boxberger & Murphy, Fort Wayne, IN, Edward J. O'Meara (argued), F.D.I.C., Washington, DC, for plaintiff-appellee.

John R. Wilks (argued), Wilks & Kimbrough, Fort Wayne, IN, for Gilbert Bierman.

F. Walter Riebenack (argued), Linda J. Peters, Fort Wayne, IN, for V. Edgar Stanley, Robert Marcuccilli, Judith A. Stanley, Dan Stanley, John Boley.

Before FLAUM and RIPPLE, Circuit Judges, and SHADUR, Senior District Judge. ^*

RIPPLE, Circuit Judge.

In November 1985, after a lengthy investigation of the faltering Allen County Bank (ACB) in Fort Wayne, Indiana, the Indiana Department of Financial Institutions (DFI)

began liquidation proceedings and the Federal Deposit Insurance Corporation (FDIC) was appointed receiver. On November 27, 1987, the FDIC filed suit against seven former directors and officers of ACB. It alleged breaches of common law and statutory duties that resulted in losses to the bank. The case was tried to the bench in July 1991, and judgment was entered in the amount of $574,809.36 against the defendants, ¹ jointly and severally, with regard to three of the eight groups of loans that were at issue. Federal Deposit Ins. Corp. v. Stanley, 770 F.Supp. 1281 (N.D.Ind.1991). For the reasons that follow, we affirm the judgment of the district court. ²

I BACKGROUND ³

As the district court noted at the beginning of its comprehensive opinion, this litigation consumed two years of pretrial activity and involved a lengthy, complicated trial. We shall not attempt to repeat here all of the detail so painstakingly set forth by our colleague in the district court. Rather, we shall assume a familiarity with that opinion and limit our efforts to orienting the reader to the discussion of issues on appeal. Indeed, we shall defer some discussion of the facts until our consideration of particular issues.

A. Pre-Closure and Closure Events

As early as August 1981, the FDIC began to examine ACB's financial condition and issued a Report of Examination indicating that the classified assets of the bank had risen to 124.2% of total capital and reserves. The FDIC termed this state of affairs "staggering" and cautioned ACB that its loan portfolio was in poor condition, that better quality loans must be acquired, and that the directors must "adequately monitor the lending function." Stanley, 770 F.Supp. at 1285. On February 10, 1982, the FDIC and the DFI entered into a Memorandum of Understanding with ACB requiring, among other things, a 50% reduction of substandard loans within 360 days and the provision of loan servicing and collection policies.

Despite these warnings, ACB continued to deteriorate. On September 11, 1982, the FDIC began to examine ACB. ⁴ The FDIC Report of Examination was issued on November 18, 1982, and showed a loan delinquency rate of more than 25% and many loans that were not supported by current credit information. The Report stressed poor lending practices, including poor supervision, incomplete credit information, self-dealing, and overlending generally. The Report specifically mentioned that little or no credit information had been maintained for commercial loans, including participation loans purchased from affiliated banks.

On February 22, 1983, the FDIC and the DFI entered into a second Memorandum of Understanding with ACB under which ACB agreed to implement an amended written loan policy and to reduce its substandard assets by $1,200,000 by December 31, 1983. ACB did not fulfill its agreement, and on November 22, 1985, liquidation proceedings were initiated pursuant to Indiana Code Sec. 28-1-3.1-1 et seq., and the FDIC was appointed

receiver of ACB pursuant to Indiana Code Sec. 28-1-3.1-5. On the same date, the FDIC, as receiver, sold certain ACB assets to the FDIC in its corporate capacity pursuant to Indiana Code Sec. 28-1-3.1-7 and 12 U.S.C. Sec. 1823(c)(2)(A). Among these assets were the claims against ACB directors and officers for failing to perform or poorly performing their duties.

B. The Appellants

The appellants are former directors and officers of ACB. V. Edgar (Ed) Stanley and Robert Marcuccilli sat on the ACB Board of Directors (Board) from March 24, 1982, until May 22, 1984; Ed Stanley served as president from March 24, 1982, until September 13, 1983. Judith Stanley sat on the Board between March 24, 1982, and May 8, 1984; Dan Stanley served between May 25, 1982, and May 8, 1984; and John Boley served between 1970 and June 16, 1983. Finally, Dr. Gilbert Bierman served from May 1978 until April 9, 1984. During the period when they were ACB directors, the defendants were also shareholders of the bank.

In addition to serving on the Board, Ed Stanley and Judith Stanley also served as directors of Leiters Ford State Bank (Leiters Ford), Counting House Bank, and Western State Bank. Mr. Marcuccilli served concurrently as director of Counting House Bank and Western State Bank, and he served until January 1983 as a director of Leiters Ford.

Mr. Boley attended only one Board meeting between November 9, 1982, and his resignation in June 1983. Dr. Bierman was advised by Ed Stanley in 1982 that he need not attend Board meetings, but that ACB wished to retain his name as director. Accordingly, Dr. Bierman attended no Board meetings after the October 5, 1982 meeting.

C. The District Court

In its extensive opinion, the district court dealt with both the legal and factual issues presented by the parties. We shall set forth here the basics of that exhaustive treatment and rearrange the order of presentation in order to accommodate more efficiently our review of the matters presented to us in this appeal. The district court realized that the liability of the directors was dependent on two issues, standard of care and causation. It addressed, with respect to each, both the appropriate legal principles and the application of those principles to the facts of this case.

1.

With respect to the appropriate standard of care, the district court held that the degree of care to which the bank directors were bound is that which ordinarily prudent and diligent persons would exercise under similar circumstances. Stanley, 770 F.Supp. at 1310. This standard requires that the court review all of the circumstances of the particular case. Under this standard, the directors had a duty to ascertain the condition of the bank and exercise reasonable control and supervision over it. Id. This duty requires that the directors devote, continued the court, a sufficient amount of time and energy to overseeing the bank's affairs, to attending meetings, and to reading the reports of federal and state bank examiners. Id. These duties, held the court, were not delegable and could not be discharged solely by reliance on others. Id. at 1310-11.

With respect to the burden of proof, the district court held that, as a general matter, the burden rested with those who claim a breach of the director's duties. However, when a director approves a transaction between the bank and another institution in which he has an interest, it is the director's obligation to prove that there was no breach of his duty of loyalty and good faith and that the transaction was fair and reasonable to the bank. Id. at 1311.

The district court also recognized that, in order for a director to be liable, any breach of these standards must also be the proximate cause of the injury to the bank. Under this principle, held the district court, if the defendant's negligence is a substantial factor in producing the injury and if the injury is one of a class that was reasonably foreseeable at the time of the defendant's wrongful act, a sufficient causal relationship exists. Id. at 1309-10.

2.

The court took pains to detail the evidence regarding the soundness of the loans at the time ACB acquired them and to evaluate them in light of the foregoing principles. It determined that a prudent banker would not have assumed the Abbott, DeVries, and Conn loans. It found the seven directors jointly and severally liable to the FDIC in the amount of $405,599.45; in addition, it found all directors, save for Mr. Boley, jointly and severally liable to the FDIC on an additional $169,209.91. Id. at 1315. The court found that Mr. Boley was no longer a member of the Board at the time the Conn loans were made. We shall summarize each of the transactions in which the district court determined that the directors had breached their duty of care to ACB.

a. Abbott Coal and Energy Loans (Abbott)

On December 30, 1982, ACB was assigned without recourse an installment lease in the amount of $130,484 between Northern Indiana Leasing and Abbott, which was secured by a bulldozer. Ed Stanley and Mr. Marcuccilli were "interested directors" because they were vice-presidents of Northern Indiana Leasing when the lease was sold to ACB. On February 12, 1983, ACB purchased a $60,000 commercial loan to Abbott from Counting House Bank. At the time, Ed Stanley, Judith Stanley, and Mr. Marcuccilli were "interested directors." The district court found that Abbott's financial condition at the time ACB acquired the lease and loan was very poor. Id. at 1288. Indeed, Abbott filed Chapter 11 bankruptcy on June 25, 1985.

The district court engaged in a detailed analysis of the transactions. The court first noted that, prior to purchasing the Abbott lease and the Abbott loan, the ACB had been involved in only one coal-related transaction and had written that particular transaction off as a $39,682 loss on its ...