Resolution Trust Corp. v. Walde

• Decision Date: 04 May 1994
• Docket Number: Civ. A. No. 94-0070-A.
• Citation: 856 F. Supp. 281
• Parties: RESOLUTION TRUST CORPORATION, as Receiver of Trustbank Federal Savings Bank, Plaintiff, v. William L. WALDE, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

856 F. Supp. 281

RESOLUTION TRUST CORPORATION, as Receiver of Trustbank Federal Savings Bank, Plaintiff, v. William L. WALDE, et al., Defendants.

Civ. A. No. 94-0070-A.

United States District Court, E.D. Virginia, Alexandria Division.

May 4, 1994.

James Robert Easthom, Pillsbury, Madison & Sutro, Washington, DC, for Resolution Trust Corp.

Thomas M. Buchanan, Winston & Strawn, Washington, DC, for William L. Walde.

Leslie M. Alden, Verner, Liipfert, Bernhard, McPherson and Hand, McLean, VA, for David A. Neal.

Craig Crandall Reilly, Murphy, McGettigan, Richards & West, P.C., Gregory Lynn Murphy, Murphy, McGettigan, Richards & West, P.C., Alexandria, VA, for Harold G. Bowen.

J. Jonathan Schraub, Robins Kaplan Miller & Ciresi, Washington, DC, for Zalmon D. Chelec, David L. Erickson, William M. Huey, Thomas O'Dea, and Walter M. Rock.

William M. Huey, pro se.

Harvey B. Cohen, Cohen, Gettings & Dunham, Arlington, VA, for D. Gay Walde.

MEMORANDUM OPINION

HILTON, District Judge.

The RTC brings this action as receiver of Trustbank Federal Savings Bank ("Trustbank") against the former directors of Trustbank and its predecessor entity Dominion Federal Savings & Loan ("Dominion"). The RTC seeks to recover $20 million from the defendants for breach of fiduciary duty, negligence, gross negligence and violations of federal statutes and regulations.

Each count is based on the defendants' alleged failure to observe careful lending practices and to comply with thrift regulations in the course of a series of credit transactions with certain related entities collectively called "EPIC."

The last loan transaction was made with EPIC on August 26, 1985. On September 5, 1985, EPIC filed for protection under Chapter 11 of the Bankruptcy Code and allegedly defaulted on over $88 million in principal and interest owed to Dominion. The $20 million sought by the RTC allegedly represents the uncollected amount remaining of the $88 million in defaulted EPIC loans.

Less than two months after the EPIC collapse and continuing through to Trustbank's receivership, Dominion and Trustbank disclosed the fact and extent of the EPIC losses. In a Form 8-K dated October 16, 1985, Dominion reported that EPIC had defaulted on "$65 million of single-family residential mortgages held by Dominion;" EPIC's parent Community Savings and Loan Association had defaulted on $10 million in loans; and various EPIC partnerships had defaulted on an additional $7 million in loans. The 8-K also reported that Dominion had allocated $5 million of its loan loss reserves to cover potential EPIC losses.

In the 1986 Annual Report, Dominion's directors disclosed that the EPIC partnerships had defaulted on approximately $1.4 billion of mortgage loans. The 1986 Annual Report also disclosed that the $65 million of EPIC loans had become classified as "substandard" assets. Dominion repeated these loss reports in its March 31, 1986 Form 10-K.

The EPIC loss was again reported in Dominion's 1987 Annual Report. It was highlighted both in Walde's message to the shareholders, and in Management's Discussion And Analysis of Financial Results. Dominion's March 31, 1987 Form 10-K also disclosed the losses, scheduled assets and potential losses related to EPIC.

The Annual Reports and Form 10-Ks for 1988, 1989 and 1990 similarly reported the increasing EPIC losses.

In its 1989 Annual Report, Dominion disclosed millions of dollars in further losses "related primarily to loans purchased from EPIC."

In addition to the disclosures made in Dominion's annual filings, Dominion's holdings of $65 million in defaulted EPIC mortgages and its $6 million set aside to cover potential EPIC losses was reported in the Washington Post as early as October 9, 1986. The October 1986 Post article also reported that defendant "Neal and Dominion were under investigation by federal thrift regulators over ties between Dominion, Ticor Mortgage Insurance Co., and EPIC."

Dominion's directors also publicly disclosed the fact that Dominion was the subject of a Supervisory Agreement with federal regulators in 1984 and the subject of an Operating Agreement with federal thrift regulators in 1988. The 1988 Operating Agreement was disclosed in the 1989 Annual Report.

The FHLBB conducted examinations into Dominion's lending practices in 1982, 1984 and 1986. During each examination, the federal regulators reviewed each and every loan to EPIC. In addition, the regulators had complete access to Dominion's books and files, and they likewise had complete access to all the bank's directors, officers and employees to discuss any regulatory matter they desired.

During the 1986 examination, Dominion provided the FHLBB with a report prepared by its outside counsel, William Stauffer, which concluded that the EPIC loans constituted a "probable violation" of the loans to one borrower regulation. Mr. Stauffer prepared the report in response to a request made by Mr. Walde on the day of the EPIC collapse.

Pursuant to FHLBB regulations, Dominion was required to and did submit all its securities filings and proxy materials, including its annual reports, 10-Ks and shareholder reports, to the FHLBB. Any action or occurrence that the regulators deem material, including material regulatory violations, are mandated for disclosure. Moreover, the sections of the FHLBB responsible for reviewing securities filings have access to everything in the agency's files, including exam reports and correspondence.

Only after the FHLBB approved the proxy statements and securities filings did Dominion disseminate them to the public. At no time did the FHLBB indicate that there were any problems regarding Dominion's disclosure of the EPIC loans in any securities filings or proxy materials.

Dominion did not renew its D & O policy after its expiration in 1986 based on the fact that coverage was so restricted and the premium and deductibles were so high. The new policy offered to Dominion to replace the policy that expired March 22, 1986, included a reduction in total coverage from $2 million per each officer and director per policy year to an aggregate of $2 million per year to be shared by all officers and directors; an increase in the deductible from $5,000 to $250,000; an increase in the premium from $5,190 to $220,077 a year; an exclusion for any claims that could be brought by any state or federal agency, including any type of legal action which such agencies had the legal right to bring as receiver, conservator, liquidator, or otherwise, notwithstanding whether such action was brought in the name of such agency or on behalf of such agency by another entity or solely in the name of any third party; an exclusion for any loans which had been charged off as a loss, were delinquent for over 60 days, or defined as a scheduled item; and an exclusion for any acquisition, development and/or construction loans.

Dominion's counsel, William L. Stauffer, prepared a letter which would have advised Dominion's D & O carrier of a possible EPIC related claim. However, Mr. Stauffer advised Dominion's directors that "it was either unnecessary to file or should not be filed." In reliance upon Mr. Stauffer's advice the letter was not sent.

Section 2(b) of Dominion's D & O policy permitted Dominion to purchase tail coverage only "if the insurer shall cancel or refuse to renew this policy." Thus, Dominion had no right to purchase tail coverage in the event Dominion opted not to renew the policy. CNA's "Notice of Cancellation, Non-Renewal, or Reduction in Coverage" dated February 5, 1986, clearly indicates that Dominion, not the insurer, opted not to renew the policy. The Notice states that Dominion's insurance "will not be renewed or continued in force at its expiration for the following reasons: Renewal application not received 50 days prior to its expiration date of 3-22-86." A subsequent Notice to Dominion from its D & O carrier similarly states: "Our records indicate the customer desires to cancel coverage."

Each of Dominion's securities filings and proxy statements was reviewed by George Murphy, a banking/securities attorney with the law firm of Muldoon, Murphy, Faucette and Gray. In connection with these reviews, Dominion disclosed all relevant information to Mr. Murphy, and made available to him any and all documents he requested so that he could adequately review the securities filings and proxy materials. Mr. Murphy also attended a number of Dominion Board of Directors meetings each year and the annual meeting of stockholders. He received and reviewed the regulators' examination reports of the institution and was aware of criticism contained in the 1982 and 1984 examinations that the institution had inadequate underwriting, and the FHLBB's finding in the 1986 examination report that the institution violated the LTOB regulation with respect to the EPIC loans.

After reviewing these materials, Mr. Murphy advised Dominion's directors what information was required to be disclosed. Mr. Murphy advised Dominion's directors that criticisms of Dominion's loan underwriting procedures contained in the 1982 Examination Report did not need to be disclosed in Dominion's securities filings, because they were not material for securities law purposes. Mr. Murphy similarly advised Dominion's directors that certain criticisms contained in the 1984 and 1986 Examination Reports were not material and should not be included in securities filings. These were criticisms of Dominion's (1) loan underwriting procedures; (2) violations of the loan to one borrower regulation; and (3) non-compliance with the 1984 Supervisory Agreement. Dominion's directors reasonably relied on Mr. Murphy's judgment as to what was appropriate to be put in the securities filings and believed that his approval of the documents was the best judgment the institution could receive as to its obligations under all applicable securities laws.

As the party moving for summary judgment, a defendant has the...