In re Sentinel Trust Co.

• Decision Date: 29 December 2005
• Citation: 206 S.W.3d 501
• Parties: In re SENTINEL TRUST COMPANY. Sentinel Trust Company, et al. v. Kevin P. Lavender.
• Court: Tennessee Court of Appeals

206 S.W.3d 501

In re SENTINEL TRUST COMPANY Sentinel Trust Company, et al. v. Kevin P. Lavender.

Court of Appeals of Tennessee, Western Section, at Nashville.

November 17, 2005 Session.

December 29, 2005.

Permission to Appeal Denied by Supreme Court July 3, 2006.

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Carroll D. Kilgore of Nashville, Tennessee for Appellants, Sentinel Trust Company, Danny N. Bates, Clifton T. Bates, Howard H. Cochran, and Gary L. O'Brien.

Paul G. Summers, Attorney General and Reporter; Michael E. Moore, Solicitor General, Janet M. Kleinfelter, Senior Counsel for Appellee, Commissioner Kevin P. Lavender, Tennessee Department of Financial Institutions.

J. Graham Matherne of Nashville, Tennessee for Appellees, Commissioner Kevin P. Lavender and Receivership Management, Inc., Receiver for Sentinel Trust Company.

OPINION

W. FRANK CRAWFORD, P.J., W.S., delivered the opinion of the court, in which ALAN E. HIGHERS, J. and DAVID R. FARMER, J., joined.

This appeal involves three cases consolidated for oral argument. Because of the duplication of the major issues in the cases, we consolidate the cases into one opinion. The Commissioner of the Tennessee Department of Financial Institutions, acting on statutory authority, took emergency possession of a Tennessee trust company, filing due notice of such action in the Chancery Court of Lewis County. Subsequently, the Commissioner gave notice, as required by statute, of the liquidation of the company, which was commenced in the Chancery Court of Lewis County. The company filed a petition for writ of certiorari and supersedeas in the Chancery Court of Davidson County. The court denied the petition for supersedeas and dismissed the writ of certiorari. Appellants appeal. We affirm. In the Lewis County Chancery Court proceeding, the court approved the transfer by the Commissioner of the various fiduciary accounts administered by the company and other assets of the company, and the appellants appeal. We affirm. Included in the disposition of the property was real estate located in Bellevue, and the Commissioner filed a motion in the Lewis County Chancery Court for approval of the sale of this real estate. Objections were filed to the Bellevue sale motion. The court, after hearing proof, approved the sale. Appellants filed separate appeals. We affirm.

Sentinel Trust Company is a state-chartered trust company located in Hohenwald, Lewis County, Tennessee. Danny N. Bates, Clifton T. Bates, Howard H. Cochran and Gary L. O'Brien ("Appellants") are all either former directors, officers and/or shareholders of Sentinel. Appellee Kevin P. Lavender ("Commissioner") is the Commissioner of the Tennessee Department of Financial Institutions.

In April of 1999, the Tennessee General Assembly enacted Public Chapter 112, with an effective date of July 1, 1999. The enactment of Public Chapter 112 revised T.C.A. § 45-1-124¹ such that "the provisions of chapters 1 and 2 of [the Tennessee Banking Act], and the rules thereof, shall also apply to the operation and regulation of state trust companies and banks whose purposes and powers are limited to fiduciary purposes and powers." Under T.C.A. § 45-1-104, the Commissioner is charged with enforcing and administering the provisions of chapters 1 and 2 of Title 45 of the Tennessee Code Annotated.² On June 16, 1999, the Department of Financial Institutions ("Department") sent a letter to all Tennessee trust companies not previously under the Department's regulation, including Sentinel, informing the trust companies that, with the enactment of Public Chapter 112, they were now subject to the jurisdiction of the Department.

On December 31, 1999, the Department commenced a formal examination of Sentinel pursuant to T.C.A. §§ 45-1-124(h)³ and 45-2-1602(a)(1).⁴ The Department made the following findings: Sentinel had no written policies for any aspect of their Trust Administration Department. Sentinel's President and sole shareholder, Danny Bates, had virtually unrestricted access to all areas of the company with few compensating controls. Furthermore, the Department found that Mr. Bates was responsible for all of Sentinel activities including managing and monitoring existing accounts, compilation of the general ledger, asset management and account reconciliation. Additionally, the report stated that collateral enforcement costs were being paid by allowing overdrafts within the pooled fund against each defaulted bond-issuer, which consisted of fees and expenses associated with defaulted bonds that had not been collected. The Department's examination report noted these deficiencies and violations and gave Sentinel a composite rating of "3".⁵ However, the report also included the analysis that "Management works aggressively" and that Sentinel had a "high rate of success in resolving defaulted bonds in favor of bondholders." The Department's report noted that Sentinel was a grandfathered trust company and had until three years after the July 1, 1999 enactment of Public Chapter 112 to come into compliance with the noted deficiencies and violations.

In November of 2000, the Department was made aware of a judgment from Davidson County Chancery Court against Sentinel in the case of National Commerce Financial Bancorporation v. Sentinel Trust Company, No. 97-2243-I. The lawsuit alleged that Sentinel had breached its contractual fiduciary obligations as trustee under trust indentures securing certain private placement notes. National Commerce Financial Bancorporation was awarded $2,226,047, a judgment that, if made final, would be in excess of Sentinel's capital and would deem the trust company insolvent. On November 16, 2000, the then Commissioner of the Tennessee Department of Financial Institutions, Bill Houston, served a Cease and Desist Order upon Sentinel, and downgraded Sentinel's composite rating from a "3" to a "5". In February of 2001, settlement negotiations took place between Sentinel and National Commerce Financial Bancorporation ("NCFB"). The judgment was settled for $575,000, which prevented Sentinel from being declared insolvent. The Cease and Desist Order was lifted in the context of the Department's year 2000 report, discussed infra.

On January 26, 2001, the Department began an examination of Sentinel for the year ending December 31, 2000. Following the examination, a report was issued by the Department on July 17, 2001. Again, the report noted that Mr. Bates had virtually unrestricted access to all areas of the company with few compensating controls. Additionally, the report found that there was no documentation of management's reconciliation and review procedures and no third party was reviewing Mr. Bates' reconciliation of deposit accounts. The report further noted that there were inconsistencies in the accuracy of the corporate and trust records and that there was no internal audit function in place. The report specifically stated that "[r]econciling trust and corporate general records was difficult" and that "the accuracy of reports appears suspect due to inconsistencies in totals, as well as, the varying formats and data processing systems used." While it was noted that the "overall account administration appears generally acceptable and the company complies with the governing account instruments," the report found that guidelines and policies in regards to operations, internal controls, reconcilement of deposits and securities, balancing of accounts, information technology, audit function, investment management and contingency plan were all needed in order to prove supervision of Sentinel's corporate trust activities. Sentinel received a composite rating of "3" following the Department's examination of Sentinel's operations in 2000, and it was recommended that Sentinel be required to submit progress reports to the Department every ninety days. Once again, the report noted that Sentinel was a grandfathered trust company and had until three years after the July 1, 1999 enactment of Public Chapter 112 to come into compliance with the noted deficiencies and violations.

On April 22, 2002, the Department began its third annual examination of Sentinel for the year ending December 31, 2001. During this examination, former Commissioner Houston was replaced by the Appellee, Kevin P. Lavender. During the course of the examination, Mr. Bates admitted that he had left $800,000 in assets off the Company's balance sheet when he submitted call reports to the Commissioner in an attempt to make Sentinel look less fiscally solvent while negotiating a settlement with NCFB. The report that resulted from the examination of Sentinel's 2001 operations was issued by Commissioner Lavender on February 4, 2003. The report noted, again, that Mr. Bates continued to be primarily responsible for trust operations and continued to perform the majority of the corporate operation tasks himself. The report stated that the Board of Directors of Sentinel had adopted the Federal Deposit Insurance Corporation's Statement of Principle of Trust Department Management as part of its Policy Manual. However, the report noted that Sentinel continued to operate without a formal internal audit program and that Mr. Bates continued to record and reconcile all depository accounts and handle most of the fiduciary bookkeeping without any internal review. Most notably, the report raised the issue of overdrafts in the accounts of the defaulted bond issues and noted that it was not clear as to how these overdrafts were funded. The report speculated that it appeared that the overdrafts were being funded from other bond issues and warned of the necessity of the trust company "to keep trust account assets separate," and that "the funds of one bond issue are not to be used for another bond issue." Sentinel again received a letter written by Commissioner Lavender that accompanied the examination report, in which, the...