Resolution Trust Corp. v. Farmer

Citation865 F. Supp. 1143
Decision Date16 September 1994
Docket NumberCiv. A. No. 92-3310.
PartiesRESOLUTION TRUST CORPORATION, Receiver for Horizon Financial, F.A. v. Peter J. FARMER, et al. v. Sandra K. CHITWOOD, et al. v. PARKER, JOHNSON, COOK & DUNLEVIE, et al.
CourtUnited States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)

COPYRIGHT MATERIAL OMITTED

John T. Rogers, Mannino, Walsh & Griffith, P.C., Roberta D. Liebenberg, Mager, Liebenberg & White, Marguerite S. Walsh, Mary Kay Brown, Buchanan Ingersoll, P.C., W. Scott Magargee, Mager, Liebenberg and White, Philadelphia, PA, for Resolution Trust Corp., Receiver for Horizon Financial F.A.

Mark A. Nation, William J. Brennan, J. Shane Creamer, Dilworth, Paxson, Kalish & Kauffman, Philadelphia, PA, for Peter J. Farmer, Gregor F. Meyer.

Robert L. Hickok, Jeffery C. Hayes, Pepper, Hamilton & Scheetz, Philadelphia, PA, for J. Stanley Davis, Robert P. Johnson, Carl N. Wallnau, John J. McCarthy, Jr., M.D., Paul Bendik, Louis A. Tronzo.

Glenn C. Equi, Diana Andreacchio, Harvey, Pennington, Herting & Renneisen, Ltd., Philadelphia, PA, for Stuckert & Yates, a Professional Partnership, John P. Diefenderfer, John Kerrigan, Jr., Richard Danese, Jr., Steven Sailer.

Kean K. McDonald, Sally J. Garber, Jeffrey D. Hutton, Pamela Tobin, Maria B. Mazzeo, La Brum and Doak, Philadelphia, PA, for Sidney T. Yates, Don F. Marshall.

Carl Anthony Maio, Margolis, Edelstein, Scherlis, Sarowitz & Kraemer, Glenn C. Equi, Diana Andreacchio, Harvey, Pennington, Herting & Renneisen, Ltd., Philadelphia, PA, for William F. Schroeder.

Carl Anthony Maio, Robert D. MacMahon, Margolis, Edelstein, Scherlis, Sarowitz & Kraemer, Philadelphia, PA, Glenn C. Equi, Harvey, Pennington, Herting & Renneisen, Ltd., Kimberly A. Rushton, Margolis, Edelstein, Scherlis, Sarowitz & Kraemer, Philadelphia, PA, for Greg B. Emmons.

Robert E. Welsh, Jr., Robert E. Welsh, Jr., Atty., Philadelphia, PA, for Richard Reynaud.

Anthony Granato, Mattioni, Mattioni & Mattioni, Ltd., Philadelphia, PA, Thomas C. Jessee, Jessee & Jessee, Johnson City, TN, for third-party defendants Sandra K. Chitwood, Gene Artrip, Margaret Artrip, Robert Hatfield, Stewart Credit Cars, Inc., Coasters Unlimited, Inc., Southeast Auto, Property Financial Services, Inc.

Robert C. Heim, William R. Spade, Jr., Dechert, Price & Rhoads, Philadelphia, PA, H. Lamar Mixson, Bondurant, Mixson & Elmore, Jill A. Pryor, Bondurant, Mixson & Elmore, Atlanta, GA, for third-party defendants Hurt Richardson Garner Todd and Cadenhead, E. Lewis Hansen.

Robert W. Hayes, Cozen & O'Connor, Philadelphia, PA, for third-party defendants Parker, Johnson, Cook & Dunlevie, Robert F. Cook.

MEMORANDUM

RENDELL, District Judge.

On May 25, 1990, the Office of Thrift Supervision of the Department of the Treasury ("OTS") closed Horizon Financial F.A. ("Horizon") and appointed the Resolution Trust Corporation ("RTC") as Horizon's receiver. In that capacity, on June 5, 1992, the RTC filed this action seeking damages against Horizon's former directors and officers1 and its general counsel, the law firm of Stuckert and Yates and its partners (collectively, the "Attorney Defendants")2. In a Memorandum and Order dated June 8, 1993, Judge Giles (to whom the case was then assigned) dismissed several of the RTC's claims. Consequently, what remains are causes of action for gross negligence against the directors and officers and tort claims of malpractice, breach of fiduciary duty and aiding and abetting against the Attorney Defendants.3

Now before me is a motion for summary judgment, based on the statute of limitations, filed on behalf of Peter J. Farmer and Gregor Meyer (the "Inside Director Defendants") and the Attorney Defendants (collectively the "IDA Defendants"). In addition to the parties' extensive briefing, I held a hearing on May 27, 1994 at which I heard both testimony and oral argument. For the reasons that follow, I will deny the IDA Defendants' motion for summary judgment.

I. Factual Background

Horizon was a federally insured, federally chartered mutual savings and loan association subject to the regulation and oversight of the Federal Home Loan Bank Board ("FHLBB"). On October 21, 1982 the FHLBB required Horizon to enter into a consent resolution (the "Consent Resolution"), whereby the board of directors of Horizon agreed, among other things, to obtain the written approval of the Federal Savings and Loan Insurance Corporation ("FSLIC") before Horizon would enter into any significant transaction, and to resign from the board if requested by the FSLIC. Horizon's difficulties continued when, on February 18, 1986, the FHLBB required Horizon to enter into a supervisory agreement (the "Supervisory Agreement") which required, among other things, that Horizon limit its liability growth to an annualized rate not greater than fifty percent and exert its best efforts to bring an infusion of capital into the institution. Horizon operated pursuant to the terms of the Consent Resolution and the Supervisory Agreement until June 7, 1989, when the FHLBB determined that Horizon was insolvent and appointed the FSLIC as Horizon's conservator. On August 9, 1989, pursuant to FIRREA, Congress abolished the FSLIC, 12 U.S.C. § 1437(a)(1), and created the RTC to manage failed savings and loan institutions. 12 U.S.C. § 1441a(b)(1). Thus, on May 25, 1990, when the OTS closed Horizon, it appointed the RTC as receiver. In that capacity, the RTC acquired all rights, titles, powers and privileges of Horizon, including the right to bring this action. 12 U.S.C. § 1441a(b)(4) and 12 U.S.C. § 1821(d)(2)(A)(i).

The RTC alleges that each defendant in "their various capacities, made, authorized and permitted numerous imprudent loans and, by their wrongful acts and omissions, caused Horizon substantial damage and loss" (Amended Complaint ¶ 38). The RTC alleges that the director and officer defendants were grossly negligent in that, among other things, they: failed to institute adequate loan policies and procedures; failed to institute adequate internal controls over lending officers; failed to monitor adequately the activities of lending officers; failed to conduct proper credit analysis and investigation; failed to establish policies and procedures despite criticisms of federal regulators; violated federal statutes rules and regulations; failed adequately to monitor loans; and failed to become sufficiently familiar with the savings and loan industry in general (Amended Complaint ¶ 68(a)-(j)). As against the Attorney Defendants, the RTC alleges that they breached their duties to the bank in that, among other things, they: failed to properly document loans; failed to become adequately familiar with legal issues relating to the banking industry in general and Horizon's business in particular; failed adequately to supervise Stuckert and Yates attorneys who worked on Horizon matters; failed to advise Horizon that its lending policies and procedures were inadequate; failed to advise Horizon that its internal controls over lending officers were inadequate; failed to advise Horizon that its credit analysis and investigation were inadequate; and failed to advise Horizon that certain loan agreements did not adequately protect its rights (id. at ¶ 84(a)-(i)).

At the center of this maelstrom are two series of related loan transactions that occurred between June 1984 and July 1986. These loans involved investments outside of Horizon's traditional geographic and risk boundaries. The risk proved to be unwise and the loans went into default allegedly causing approximately $17 million in losses to Horizon (Amended Complaint ¶ 65).

A. The SBL Portfolio

Beginning in June 1984 and continuing through January 1985, Horizon purchased automobile and second mortgage consumer loan portfolios from three lending institutions: Sentry Acceptance Corporation, Bankers Service Corporation and Landbank Equities (collectively the "SBL portfolio") (Amended Complaint ¶¶ 39-47; Horizon Commitment with Sentry Acceptance Corporation dated June 21, 1984, Exhibit 2 of Appendix to Defendants' Memorandum in Support of Defendants' Motion for Summary Judgment, hereinafter cited as "Defendants' Appendix"; Horizon Commitment with Bankers Service Corporation dated January 17, 1985, Defendants' Appendix Exhibit 5). Problems with the SBL portfolio surfaced almost immediately (see memorandum written by Michael Callahan, a Horizon loan officer, included as part of the FHLBB Report of Examination as of December 15, 1984 at p. A0035031-36, Defendants' Appendix Exhibit 4). In the cover letter to its Report of Examination as of December 15, 1984 — sent to Horizon's board on June 13, 1985 — the FHLBB expressed its concerns to Horizon's board regarding these loans:

We express to the board our serious concern at the precarious financial condition of the institution, as evidenced by continuing losses and the low sustaining power of current net worth. The difficulties encountered in the purchase of automobile loans from Sentry Acceptance Corporation ... are also of concern, as the institution can little afford additional losses of any kind at this time.

(Defendants' Appendix Exhibit 4).

B. The Brokers South Transactions

In the fall of 1985, Horizon began to sell the SBL portfolio to Brokers South, Inc. ("Brokers South"), with Horizon providing all of the financing (FHLBB Report of Examination dated February 21, 1989, p. 12, 13, attached as Exhibit "J" to Memorandum of Law of Plaintiff Resolution Trust Corporation in Opposition to Defendants' Motion for Summary Judgment, hereinafter cited as "Plaintiff's Memorandum"). Brokers South was an affiliation of used-car dealerships operated throughout the southern United States, marketing cars primarily to low-income individuals (Amended Complaint ¶ 50). On October 31, 1985, Horizon entered into the first of three credit facilities with Brokers South. The transaction consisted of Brokers South using a portion of the $4.3 million loan to make a partial...

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