Resolution Trust Corp. v. Gladstone, Civ. A. No. 93-11255-NG.
| Citation | 895 F. Supp. 356 |
| Decision Date | 18 July 1995 |
| Docket Number | Civ. A. No. 93-11255-NG. |
| Parties | RESOLUTION TRUST CORPORATION, as Receiver of Home Federal Savings Bank of Worcester, Plaintiffs, v. Sumner GLADSTONE, Anthony Delapa, A. James Derderian, Alfred L. Gladstone, and Charles H. Turner, III, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
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Marc K. Temin, Foley, Hoag & Eliot, Kevin F. Moloney, Barron & Stadfeld, Boston, MA, for Resolution Trust Corporation.
Richard J. Grahn, Looney & Grossman, Nancy L. Brush, Albert F. Cullen, Jr., Cullen & Butters, Boston, MA, Edward T. Robinson, Michael Consentino, Seegel & Lipshutz, Wellesley, MA, for Sumner Gladstone, Alfred L. Gladstone.
Richard J. Grahn, Looney & Grossman, Boston, MA, Charles J. Cooper, Vincent J. Colatriano, Shaw, Pittman, Potts & Trowbridge, Washington, DC, Albert F. Cullen, Jr., Cullen & Butters, Arlene B. Marcus, Lemelman & Lemelman, John C. Englander, Goodwin, Proctor & Hoar, Boston, MA, for Anthony F. Delapa.
Richard J. Grahn, Stewart F. Grossman, Looney & Grossman, Boston, MA, Albert F. Cullen, Jr., Cullen & Butters, for A. James Derderian.
Richard J. Grahn, Looney & Grossman, Gabriel O. Dumont, Jr., Dumont and Morris, Boston, MA, Albert F. Cullen, Jr., Cullen & Butters, Boston, MA, for Charles H. Turner, III.
Stephen C. Reilly, Hale & Dorr, Boston, MA, for David Ean Coleridge.
Henry Frenette, Wheatley, Frenette & Dukess, Brockton, MA, for Charles N. Fuller.
Michael P. Angelini, Bowditch & Dewey, Worcester, MA, for Edward L. Clifford.
MEMORANDUM AND DECISION
The central question in this case is what level of culpability must the Resolution Trust Corporation establish in order to recover damages against former directors and officers of a federally chartered savings and loan institution. This question in turn, requires a determination of whether federal statutory law, federal common law or state common law provides the appropriate standard. The parties to this conflict are the Resolution Trust Corporation ("RTC") and former directors and officers of Home Federal Savings Bank of Worcester ("Home Federal").
The Complaint alleges that: (1) the defendants breached their duty as fiduciaries of Home Federal (Count I); (2) the defendants were negligent per se (Count II) and grossly negligent (Count III) in their management of the bank; (3) that Defendant Sumner Gladstone breached his fiduciary duty of loyalty to Home Federal (Count IV); and (4) that Defendant Sumner Gladstone made misrepresentations to the Home Federal Board of Directors (Count V). Specifically, the defendants are charged with approving speculative commercial real estate loans without adequately considering the risk of loss associated with each borrower. In addition, Sumner Gladstone is accused of breaching his fiduciary duty of loyalty by engaging in conduct which benefitted him personally at the expense of Home Federal, such as approving loans to individuals in exchange for cash payments.
Each defendant has moved for summary judgment arguing: (1) that section 1821(k) of the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") (codified 12 U.S.C. § 1821(k)) bars the RTC from maintaining a claim for relief against former directors and officers for merely negligent conduct; (2) that since no material issue of fact exists regarding the defendants' grossly negligent behavior, judgment can be entered for defendants as a matter of law; and (3) that the RTC's claims are barred by the statute of limitations. For the reasons stated herein, the defendants' motions are ALLOWED in part and DENIED in part.
Home Federal was a savings and loan institution located in Worcester, Massachusetts. Although originally created as a state-chartered cooperative bank in 1947, Home Federal received a federal mutual savings and loan charter on December 31, 1965. Since that time, Home Federal operated under the supervision of the Federal Home Loan Bank Board ("FHLBB"). In 1985, defendants Derderian, Delapa and Sumner Gladstone, formed American Heritage Bancorp ("AHB") for the purpose of acquiring Home Federal. Initially, defendants Sumner Gladstone, Delapa and Derderian each owned one third of AHB's stock.
On June 14, 1985, Home Federal entered into an agreement under which it became a wholly owned subsidiary of AHB. The agreement was ratified by Home Federal's stockholders on November 8, 1985. Since Home Federal was under the supervision of federal regulators, the merger transaction had to be approved by the Federal Savings and Loan Insurance Corporation ("FSLIC").1 At the time of the transaction, Home Federal was failing its federal regulatory capital requirements. Accordingly, the FSLIC conditioned its approval of the transaction on AHB's (1) infusion of capital into Home Federal; and (2) its agreement to maintain Home Federal's net worth at a certain level. On June 9, 1986, Sumner Gladstone,2 Delapa3 and Derderian4 were appointed to Home Federal's Board of Directors. Defendant Alfred Gladstone joined the Board as a director of Home Federal on June 25, 1987.5 In June, 1987, Defendant Turner became Home Federal's chief loan officer.
Shortly after the defendants joined the Board of Directors, Home Federal sold its portfolio of single family fixed rate loans. In place of these loans, the bank embarked on a program of making commercial real estate loans. According to the FHLBB report dated September 30, 1986, Home Federal's commercial real estate loan portfolio, which totalled $75,000,000, represented 26% of the total assets of the bank.
The FHLBB's September 1986 report also noted deficiencies in Home Federal's commercial lending practices, including the failure to obtain adequate pre-loan appraisal reports. The FHLBB forwarded its report to Home Federal on January 27, 1987, along with a letter that highlighted its conclusions. The FHLBB specifically asked Home Federal's Board to "outline the steps taken to ensure that appraisal reports were prepared in conformance with FHLBB Memorandum R41c and that loan proceeds were not disbursed prior to the receipt of a fully documented appraisal report."6
In a letter dated March 26, 1987, defendant Sumner Gladstone, as President of Home Federal, responded to the FHLBB's concerns. The letter explained Home Federal's increased commercial real estate lending activity as necessary to insure that the Bank would receive an adequate return on its investment. Gladstone assured the FHLBB that:
the underwriting policies that will be followed for all commercial loans will be of the highest standards and we recognize a sound appraisal report as a critical element of the underwriting process. We have established an internal review of all our commercial loans and require that each commercial loan be approved by our Executive Committee.
Exhibit 4 to Second Affidavit of Rinaldi at R31368.
Despite Gladstone's assurances to the FHLBB, the RTC alleges that the defendants failed to follow both Home Federal's own procedures regarding commercial real estate lending, and the record keeping requirements contained in FHLBB Memorandum R41c.
In addition, Sumner Gladstone is singled out by the RTC for approving loans from which he personally benefitted.
Sumner Gladstone, it is alleged, engaged in certain "interested" transactions (described below) without first disclosing to the Home Federal Board of Directors either his personal gains or his business relationship to the borrowers.
According to Forrest Sell, a New Hampshire real estate developer, Sumner Gladstone personally made loan commitments to him in return for Sell paying Gladstone a total of $50,000. Deposition of Forrest Sell at pp. 24-27. Sell testified that Gladstone went so far as to refuse to forward the necessary closing documents when Sell refused to make the final payment. Deposition of Forrest Sell at pp. 24-27. The RTC maintains that Gladstone's demand for kickbacks in consideration of loan commitments violated his duty of loyalty as a fiduciary.
The RTC also alleges that Gladstone failed to make certain disclosures to the Home Federal board of directors prior to extending a $6,000,000 loan to another developer, Albert J. Winnier on August 27, 1987. According to Winnier's deposition, Gladstone approached him regarding a real estate development in Florida known as Frenchmen's Creek. Winnier testified that Gladstone asked him to buy the property and develop it, at which point Gladstone would repurchase the development from him. Deposition of Albert Winnier at p. 15. Gladstone assured him that "he Gladstone would guarantee ... the loan to purchase and it wouldn't cost me one dollar out of my pocket," and that when Gladstone repurchased the completed project, "we would have a fee of $200,000 in there above the cost." Id. The RTC argues that Gladstone breached his duty of loyalty to Home Federal by not disclosing the arrangement with Winnier prior to Home Federal approving the loan.
According to the deposition of Roger E. Bouchard, a New Hampshire real estate developer, Gladstone caused Home Federal to loan $1.12 million to two individuals for the purpose of developing a residential subdivision in Manchester and Hooksett, New Hampshire. Gladstone failed to disclose to the Board that he and his son served as trustees of Lakeview Realty Trust which owned land abutting the proposed development site and would obviously benefit from the Bouchard development loan. The RTC claims that as a fiduciary, Gladstone had an obligation to disclose his interest in the adjoining property prior to the board approving the Bouchard loan.
The remaining defendants, it is alleged, breached their duty of care by failing (1) to adhere to Home Federal's internal lending policies and ...
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