K & S Partnership v. Continental Bank, N.A.
| Decision Date | 23 January 1992 |
| Docket Number | Nos. 89-2678,89-2679,s. 89-2678 |
| Citation | 952 F.2d 971 |
| Parties | Fed. Sec. L. Rep. P 96,414, RICO Bus.Disp.Guide 7902 K & S PARTNERSHIP, Robert F. Swartzbaugh; Richard W. Kelley, Charles C. Myers, Don Erftmier, Carl L. Boschult, William A. Lorenz, Nancy D. Lorenz, Harley D. Schrager, Samuel A. Ancona, Joseph I. Ancona, Carl Ancona, Michael J. Ancona, Byron D. Strattan, Dennis Strauss, Tony LaMalfa, Kevin J. Cloonan, Stephen H. Simon, Frederick J. Simon, Alan Simon, Gary Gunderson, Frank Woods Petersen, Thomas T. Bernstein, Donald D. Graham, Albert Block, Mark Anthony, Eugene McIntyre, Dorothy McIntyre, John E. Ryan, Paul Alperson, Gerald E. Palmer, Ronald K. Parsonage, William W. Smith, O. Douglas Osterholm, and Bernard Magid, Appellees, v. CONTINENTAL BANK, N.A., Appellant. K & S PARTNERSHIP, Robert F. Swartzbaugh; Richard W. Kelley, Charles C. Myers, Don Erftmier, Carl L. Boschult, William A. Lorenz, Nancy D. Lorenz, Harley D. Schrager, Samuel A. Ancona, Joseph I. Ancona, Carl Ancona, Michael J. Ancona, Byron D. Strattan, Dennis Strauss, Tony LaMalfa, Kevin J. Cloonan, Stephen H. Simon, Frederick J. Simon, Alan Simon, Gary Gunderson, Frank Woods Petersen, Thomas T. Bernstein, Donald D. Graham, Albert Block, Mark Anthony, Eugene McIntyre, Dorothy McIntyre, John E. Ryan, Paul Alperson, Gerald E. Palmer, Ronald K. Parsonage, William W. Smith, O. Douglas Osterholm, and Bernard Magid, Appellants, v. CONTINENTAL BANK, N.A., Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Mark I. Levy, Chicago, Ill., argued (Pamela K. Black, James J. Frost and Martell J. Bundy, Omaha, Neb., and James C. Schroeder and Richard H. Ferri, Chicago, Ill., on the brief), for appellant.
Thomas H. Dahlk, Omaha, Neb., argued (Sandra L. Doughtery, David S. Houghton and Glenda J. Pierce, on the brief), for appellees.
Before JOHN R. GIBSON, FAGG and WOLLMAN, Circuit Judges.
On September 12, 1990, we filed our opinion reversing the jury verdict entered in favor of K & S Partnership and other plaintiffs (plaintiffs) and affirming the judgment notwithstanding the verdict entered in favor of Continental Bank, N.A. (Continental). Thereafter, plaintiffs filed a petition for rehearing, with a suggestion for rehearing en banc, alleging that our opinion had applied a standard of review to the motion for judgment notwithstanding the verdict that was in conflict with the standard of review heretofore adopted by this court. After careful review, we concluded that our opinion employed language that might be read by some as being in conflict with that used in our earlier opinions. Because it was not our intention to in any way depart from the well-established standard of review laid down by our prior opinions, we vacated our September 12, 1990, opinion on January 23, 1991. We now file this opinion in its place.
Continental Bank appeals from the district court's 1 judgment in favor of plaintiffs entered on a jury verdict that awarded plaintiffs damages under theories of Continental's secondary liability to plaintiffs. Plaintiffs cross-appeal from the district court's grant of judgment notwithstanding the verdict on their Racketeer Influenced and Corrupt Organizations Act (RICO) claim. 127 F.R.D. 664. We reverse the judgment entered on the jury verdict and affirm the district court's judgment notwithstanding the verdict.
We summarize the evidence produced at trial, viewing it in the light of the standard of review set forth later in this opinion. In the late 1970s and early 1980s, Penn Square Bank (Penn Square) of Oklahoma City, Oklahoma, loaned money extensively for oil and gas exploration and production. 2 Included in this lending were "drilling loans" made to Eagle Petroleum Company and its two principals, Wesley Markle and Terry Stanhagen (collectively Eagle), to explore for oil and gas. Eagle secured the loans with letters of credit that the limited partners in its oil and gas programs obtained from their own banks in favor of Penn Square. In most cases the letters of credit, along with cash paid directly to the partnerships, constituted the limited partners' investment in the programs. Using letters of credit as collateral allowed investors to take tax deductions for the entire amount of their investment instead of just the cash portion. The letters of credit in the Eagle programs generally expired after two years, and the drilling loans were repayable approximately three months prior to that time.
Under standard practice, before the drilling loan came due the partnership would apply for a "production loan" to produce and sell the oil and gas that had been discovered. When making a production loan, the bank would release the limited partners' letters of credit and substitute the oil and gas reserves as collateral. If, however, the bank refused to grant a production loan, the bank would call the letters of credit and use the proceeds to satisfy the outstanding drilling loan.
Banking regulations limited Penn Square's lending to a percentage of its capital, and further limited the amount it could lend to any single borrower. Thus, for Penn Square to make new loans it needed other banks to participate in or purchase a share of its loan portfolio. Because the oil and gas industry was thriving at the time, there was competition among major banks to purchase participations from Penn Square and other lenders. Some fifty other banks across the country bought oil and gas participations from Penn Square. For example, Chase Manhattan Bank purchased some $212 million worth of participations. See Chase Manhattan Bank, N.A. v. FDIC, 554 F.Supp. 251 (W.D.Okl.1983). Continental's participations ultimately totaled some $1.075 billion.
Continental began participating in Penn Square loans in 1978, including loans made to Eagle. Generally, each of Continental's participations was evidenced by two documents: a loan participation agreement and a certificate of participation. The loan participation agreements specifically provided that Penn Square would not, without Continental's prior written approval, release the letters of credit that secured the drilling loans.
Contrary to the terms of the loan participation agreements with Continental, the certificate of participation prepared by Penn Square stated that Penn Square could release collateral and substitute new collateral without Continental's consent.
In February 1981, Eagle sent a Continental loan officer a package of Eagle offering materials, including a twenty-six page "Investment Brief" prepared by Investment Search, Inc. Page nine of the report, summarizing Eagle Drilling Partnership 1981's "strengths," stated that Eagle had returned letters of credit to limited partners before the expiration date in five of its fourteen private oil and gas partnerships. According to the report, this record indicated Eagle's ability to select prospects that generated revenues sufficient to obtain production loans. The record does not indicate that anyone at Continental read the report or this portion of it.
Later in 1981 there were signs within Continental of problems with the Penn Square participations. In the summer of 1981, Kathleen Kenefick, a Continental vice-president, wrote a memo about her concerns with the participations, including Continental's practice of lending money to Penn Square for 30 to 90 days before doing a credit analysis. Both John Lytle, who headed Continental's Mid-Continent division, which was in charge of Penn Square participations, and George Baker, a Continental executive vice-president who headed General Banking Services, of which Lytle's Mid-Continent division was a part, knew about the memorandum.
Baker became concerned with the level of Penn Square participations after reading the Kenefick memorandum. Baker told Gerald Bergman, who headed a special industries unit that included the Mid-Continent division, to discontinue purchasing participations in drilling fund loans supported by letters of credit and to convert the participations already purchased into direct loans. A Report of the Special Litigation Committee of the Board of Directors of Continental Illinois Corporation (the Tone Report ) later stated that despite these directions, the "vast bulk of the participations were purchased, increased, or renewed after Baker's order was given."
In November 1981, two oil and gas engineers employed in the Mid-Continent division informed John Redding, a senior vice-president at Continental and Lytle's direct superior, that lending on Penn Square loans exceeded what oil and gas reserve evaluations indicated were justified. Redding apparently took no action with this information. One Continental engineer who questioned the wisdom of drilling fund loans was repeatedly told that letter-of-credit loans were "lucrative."
In December 1981, an audit revealed that Penn Square had made a series of personal loans to Lytle in the amount of $565,000 at preferential interest rates. After numerous consultations with Lytle's superiors, Roger Anderson, Continental's chairman, imposed monetary sanctions against Lytle but did not discharge him. About the same time as this discovery, Continental increased Lytle's lending authority to $10 million.
As time went on, several of the Eagle drilling loans were converted to production loans, replacing limited partners' letters of credit with oil and gas reserves as security interests. On July 5, 1982, Penn Square was taken over by the Federal Deposit Insurance Corporation. Eagle, Markle, and Stanhagen all eventually declared bankruptcy.
Plaintiffs invested in nine of the seventeen oil and gas limited partnerships Eagle formed between 1979 and 1981. In general, plaintiffs were told before they invested, often by Markle or Stanhagen, that Eagle had a good track record in exploring for and producing oil and gas, that prior programs had received...
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