Federal Deposit Ins. Corp. v. Lesselyoung

• Court: U.S. District Court — Eastern District of Wisconsin
• Writing for the Court: WARREN
• Citation: Federal Deposit Ins. Corp. v. Lesselyoung, 476 F.Supp. 938 (E.D. Wis. 1979)
• Decision Date: 14 September 1979
• Docket Number: No. 76-C-340,341 and 342.,76-C-340
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation, Plaintiff, v. Nicholas LESSELYOUNG, Defendant. FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation, Plaintiff, v. Henry S. LAUTERBACH, Defendant. FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation, Plaintiff, v. John DEBELAK, Defendant.

476 F. Supp. 938

FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation, Plaintiff, v. Nicholas LESSELYOUNG, Defendant.

FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation, Plaintiff, v. Henry S. LAUTERBACH, Defendant.

FEDERAL DEPOSIT INSURANCE CORPORATION, a United States Corporation, Plaintiff, v. John DEBELAK, Defendant.

Nos. 76-C-340, 341 and 342.

United States District Court, E. D. Wisconsin.

September 14, 1979.

COPYRIGHT MATERIAL OMITTED

John W. Hein, Gibbs, Roper, Loots & Williams, Milwaukee, Wis., for plaintiff.

Ronald L. Wallenfang, Quarles & Brady, Milwaukee, Wis., for defendant.

MEMORANDUM AND ORDER

WARREN, District Judge.

The three above-encaptioned civil actions are brought by the Federal Deposit Insurance Corporation (FDIC) as the holder of three notes. Each defendant named above executed a note payable to the American City Bank. These three notes are the subject of this action. In each of the three above-encaptioned cases, the FDIC has moved for summary judgment.

Although these actions were not consolidated, the summary judgment motions are being considered together since the defendants have each raised the same defenses and were similarly related to American City Bank, the payee on the notes in issue. Furthermore, each defendant is represented by the same attorney, who submitted almost identical briefs in each of the three cases. In order to protect defendants' rights, however, where appropriate, each defendant will be discussed separately.

All three defendants admit executing notes payable to the order of the American City Bank & Trust Company, N.A., all three of which were due April 28, 1976. The DeBelak note was in the principal sum of $318,181.12. The Lauterbach note was in the principal sum of $154,958.34. Finally, the Lesselyoung note was in the principal sum of $137,396.39. Each defendant admits not having made any payments of principal or interest.

The FDIC in its corporate capacity became the holder of the notes in issue following the liquidation of the American City Bank (American). Subsequent to declaration that American was insolvent, the FDIC was appointed as receiver of American. As receiver, the FDIC entered into a purchase and assumption agreement with the Marine National Exchange Bank of Milwaukee, whereby the Marine agreed to assume certain of American's liabilities in exchange for certain assets. In order to facilitate the purchase and assumption agreement with Marine, the FDIC, in its corporate capacity, purchased certain of the assets of American. Among the assets purchased were the three notes in issue. The purchase and assumption agreement was approved, ex parte, by this Court on October 21, 1975. Matter of American City Bank & Trust Company, N.A., 402 F.Supp. 1229 (E.D.Wis. 1975).

Defendants have each asserted the same defenses, several of which were incorporated from the pleadings in Colonial Bank & Trust Co. v. American Bankshares Corp., 439 F.Supp. 797 (E.D.Wis.):

1. Each defendant denies that he received value for the note.

2. Each defendant asserts that the transfer of the note to the FDIC was ineffective by reason of

(a) it being approved by this Court ex parte,

(b) the failure of the FDIC to assume liabilities of American City Bank, and (c) the alleged failure of the Receiver to receive value for the transfer.

3. Each defendant asserts that delivery of his note was induced by the fraud of American City Bank and the FDIC in a prior stock purchase financed through a loan subsequently repaid with the proceeds of the note sued upon. Specifically defendants each allege that in December of 1974 he was induced to buy stock in Bankshares, the parent of American City Bank, by bank officers who misrepresented that

(a) the bank's loan loss reserves were adequate

(b) the correct volume of loans had been placed in non-accrual of interest status. (Col. Cross-Claim ¶ 17),

(c) the purchase of stock would discharge his director's liability for bank "overlines" (Col. Cross-Claim ¶ 19), and

(d) the infusion of capital demanded by the Comptroller would make the bank viable (Col. Cross-Claim ¶ 19).

Each allege that the FDIC was making extensive examinations of the bank prior to December 21, 1974, and that knowing that the officers were telling defendant that the capital infusion would make the Bank viable, it aided the officers' fraud by failing to advise defendants that the amount of capital being infused would be insufficient.

In its briefs in support of the motions for summary judgment and in its reply briefs, the FDIC discusses each of these issues at length endeavoring to show that as to all of these issues there is no genuine issue as to any material fact.

Defendants each primarily rely upon the defenses asserted above. Defendants have each been deposed and have each submitted ex parte affidavits. The affidavits set forth additional facts which defendants claim create a genuine issue of fact with respect to the claim of fraud.

Summary judgment, as provided in Rule 56(c) of the Federal Rules of Civil Procedure, is only appropriate when the pleadings, affidavits and documents indicate that there is no genuine issue as to any material fact and that the moving party is entitled to judgment. Poller v. Columbia Broadcasting System, 368 U.S. 464, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962). When a motion for summary judgment is filed, the opposing party cannot rely upon his pleadings but must respond with affidavits or otherwise showing that a genuine issue of fact exists in the case. Rule 56(e) of the Federal Rules of Civil Procedure.

At the outset, it should be noted that each defendant claims that summary judgment is inappropriate in cases involving fraud. While summary judgment may be inappropriate in certain fraud cases, there are situations where it would be apropos in a case involving a defense of fraud. 8 Wright & Miller, Federal Practice & Procedure, § 2130 at 596-600 (1970). Where, for example, an essential element of fraud is unquestionably shown to be absent, summary judgment may be granted in a case involving a defense of fraud. The FDIC argues that, as to each defense raised by defendants, it has shown that no genuine issue exists.

Before reaching the legal arguments raised and the facts presented, a review of the background of this case and of defendants' situations will prove of assistance.

Each defendant has a varied business background. DeBelak is an owner of a heating, plumbing and sewer contracting concern. DeBelak has obtained financing from American for several real estate ventures. Lauterbach is the chairman of the board of Sta-Rite Corporation and has been engaged in that corporation's business since 1939. Having a college education in business and financial accounting, Lauterbach has performed financial accounting services for his corporation. Mr. Lauterbach has served on the boards of directors of two banks and three corporations. Lesselyoung, possessing a law degree, has practiced law privately, served as a state legislator, and acted as a member of the Wisconsin Public Service Commission. Currently, Lesselyoung is vice-president and general counsel of the Wisconsin Gas & Light Company.

Each defendant was an outside director of American in that they were not employed with the Bank. Lauterbach served as a director of American from prior to 1970 through 1974. Mr. DeBelak's term of service began in about 1965 and continued through 1975. DeBelak owned 2,000 shares of stock of American Bankshares Corporation, American's holding company, when he became a director. Thereafter, Mr. DeBelak made additional purchases besides the December 31, 1974 purchase which eventually led to the note in issue. The term of Mr. Lesselyoung's service as a director of American, or its predecessor, commenced in 1972 and continued through 1975. Lesselyoung also served as a director of American Bankshares. Prior to the December 31, 1974, stock sale, Mr. Lesselyoung purchased approximately 1,000 shares of Bankshares stock in the initial qualifying purchase.

Serving as directors of American during 1974, defendants received information concerning the poor financial structure of American. For example, at a meeting held on April 17, 1974, it was reported to defendants that Ernst & Ernst, American's outside auditors, advised the bank that 1973 earnings had to be reduced by $600,000.00 to bring the loss reserve up to the required amount. Creation of an additional reserve was also suggested. At the April 17, 1974 meeting it was also reported to defendants that reports from the Regional Administrator of National Banks showed loans in the total of over five million dollars as a loss, doubtful, substandard or special mention. The Regional Administrator had also advised the bank, a fact reported to defendants, that the bank's classified loan to capital ratio was on the high end of acceptable.

During May of 1974, several more meetings of the board of directors were held at which meetings defendants were informed of the serious financial problems facing the American City Bank. At a May 4, 1974 meeting defendants were informed that, due to difficulties with a series of loans known as the Bradley loans, Ernst & Ernst advised the bank to create a $3,000,000 reserve. At the May 4, 1974 meeting, defendants were also informed that the Comptroller of Currency was back to re-examine the Bradley loans. The Regional Administrator of National Banks also advised the infusion of $3,000,000. Defendants were advised that the bank examiners had already required a charge off of $929,426.00 of the Bradley loans. Among other acts, the boards of directors of American and American Bankshares authorized a plan to raise $3,000,000 in additional capital and to reduce the loans and borrowings of American. At a joint meeting of American and American Bankshares boards held on May 10, 1974, with Messrs. DeBelak and Lesselyoung in attendance but with Mr. Lauterbach absent, although...