Tubbs v. United Cent. Bank, N.A., Des Moines

• Decision Date: 24 January 1990
• Docket Number: No. 87-1691,87-1691
• Citation: 451 N.W.2d 177
• Parties: Edward TUBBS, State Superintendent of Banking, State of Iowa, Receiver, Appellant, v. UNITED CENTRAL BANK, N.A., DES MOINES, Iowa n/k/a First Interstate Bank of Des Moines, N.A., Appellee.
• Court: Iowa Supreme Court

Page 177

451 N.W.2d 177

Edward TUBBS, State Superintendent of Banking, State of Iowa, Receiver, Appellant, v. UNITED CENTRAL BANK, N.A., DES MOINES, Iowa n/k/a First Interstate Bank of Des Moines, N.A., Appellee.

No. 87-1691.

Supreme Court of Iowa.

Jan. 24, 1990.

As Corrected Jan. 25 and Jan. 29, 1990.

Mark E. Schantz and Richard A. Malm of Dickinson, Throckmorton, Parker, Mannheimer & Raife, P.C., Des Moines, for appellant.

Ross H. Sidney and Patrick J. McNulty of Grefe & Sidney, Des Moines, for appellee.

Considered by LARSON, P.J., and SCHULTZ, CARTER, LAVORATO and ANDREASEN, JJ.

LARSON, Justice.

The Exchange Bank of Bloomfield, Iowa, was closed in 1983 by the Iowa Superintendent of Banking, upon his determination that the bank was insolvent. The superintendent, acting as receiver for the bank's depositors, sued the United Central Bank, N.A. (UCB), now known as First Interstate Bank of Des Moines, N.A.: (1) for damages for conspiring with and aiding and abetting the Exchange Bank principals in causing the bank's insolvency; and (2) for a declaration that approximately 4500 acres of farmland and several "participation" notes in the hands of UCB must be turned over to the receiver. Edward Tubbs, the plaintiff in this case, is presently serving as receiver. The district court denied all relief, and the receiver appealed.

The appeal was submitted to the court of appeals which held, on the equity claims, that the receiver was entitled to a lien on the farmland but not to the return of the participation notes. For some reason, it did not rule on the law issues of aiding and abetting and conspiracy. On further review, we affirm the court of appeals on the equity issues but modify the decision by resolving the law issues on their merits. The decision of the district court is affirmed in part and reversed in part.

The picture that emerges in this case is one of a small town bank, uninsured and unregistered, which survived on the trust and confidence of the Bloomfield community. Long before the bank was closed in 1983, it lost its life blood to previous owners who supported opulent life-styles and ill-fated business ventures through interest-free overdrafts in the bank. As a result, the bank became insolvent many years before the recent farm crisis caused problems in other Iowa banks. Because Exchange Bank was not subject to banking department inspections, members of the Bloomfield community remained unaware of the bank's true financial condition until it was closed in 1983.

Exchange Bank was founded in 1871 by Amos Steckel. In 1919, the Iowa legislature passed a law requiring all banks to be chartered and regulated but provided an exception or "grandfather" provision for existing banks. Exchange Bank was one of them. At the time it closed, Exchange Bank was one of only four such unregulated banks. These banks had no statutory requirements with respect to financial disclosure, capital requirements, lending limits, restrictions on loans to related parties, loan documentation, or outside examinations. The present case is a vivid testimonial to the need for state regulation of banks.

After the death of Amos Steckel, his son, W.J. Steckel, ran the bank. The large overdrafts, which ultimately caused the bank's collapse, apparently began with W.J. Steckel, who maintained an account entitled the "W.J.S." account, which was permanently in the red, in large amounts. W.J. Steckel operated the bank until his death in 1940. In the meantime, Edward Burchette, who married Steckel's daughter, Josephine, began working at the bank. When W.J. Steckel died, Edward became president, although the record shows he has never had much interest or aptitude in banking. When Edward's mother-in-law died in 1947, ownership of Exchange Bank and substantial other assets passed to Edward's wife, Josephine. Josephine died in 1951, and her estate passed to Edward.

As the estate of each successive owner of the Exchange Bank was administered, the probate proceedings included a recorded statement by the estate representative that all of the assets of the Steckel family would remain behind the Exchange Bank deposits. Included in the Steckel assets, in addition to the bank, were approximately 4500 acres of farmland and other personal property.

The farmland and other Burchette assets were considered by members of the community to be a part of the Exchange Bank and were described by some as the "backbone" of the bank. Even the vehicles used in connection with the farming operations displayed the bank's name.

In 1954, Edward married Lucille Morrison, widow of the largest stockholder in a bank then known as Valley Bank of Des Moines. Through this marriage, Edward became the chairman of the board of directors of Valley Bank. Presumably because of Edward's extensive bank connections, the Bloomfield community considered him to be a man of substantial means, and he maintained a lavish life-style. After his marriage to Lucille, Edward maintained two homes, one in Des Moines and one in Bloomfield, and he often commuted between the two by chauffeur-driven limousine.

This defendant, UCB, became involved with Exchange Bank when UCB became its "correspondent" bank. A correspondent bank processes the checks of a bank such as the Exchange Bank, which has no access directly to the federal reserve system. The correspondent bank also furnishes overline credit for borrowers of the "downstream" bank whose credit needs exceed its legal lending limit (not applicable to Exchange Bank as an unregistered bank) or for borrowers whose needs exceeded the financial capability of the local bank. In the case of Exchange Bank, the participation loans from its correspondent banks were not used to furnish overline credit to the Exchange Bank customers but to actually keep the bank itself afloat. This apparently was not known to persons outside of the Exchange Bank.

For many years, Exchange Bank had used the Union Bank and Trust Company of Ottumwa (Union) as its correspondent bank. In 1974, Union and Valley Banks were acquired by the Banks of Iowa, and Edward's Valley Bank stock became Banks of Iowa stock. The Banks of Iowa acquisition of Union Bank resulted in a conflict of interest for Edward because he was now a member of the board of directors of Banks of Iowa board and therefore subject to a $5000 borrowing restriction imposed by banking regulations. Edward resigned as a board member.

For a considerable time, Union experienced overdraft problems with the Exchange Bank's correspondent account. To rectify this problem, Edward borrowed $700,000 from the Continental Bank in Chicago, secured by his Banks of Iowa stock. Soon Exchange Bank was again overdrawn. This was resolved by Edward borrowing $1.3 million from the Chicago bank which was eventually paid in full with Edward's Banks of Iowa stock and covered the overdraft.

Throughout this period, Union and Banks of Iowa urged Edward to obtain a charter for Exchange Bank and make it a regulated bank. In preparation for that possibility, a financial audit was done, revealing that family-related overdrafts of $1.3 million and family-related loans in the amount of $1.5 million had created serious liquidity problems. This information was relayed to the Iowa Department of Banking, but no action was taken, because Exchange Bank remained an unregulated bank.

When Exchange Bank's account with Union returned to an overdrawn status, the Banks of Iowa advised Edward that it could no longer do business with Exchange Bank unless it was chartered. That did not occur, and the correspondent relationship between Union and Exchange Bank was terminated.

At the time Exchange Bank was having difficulties with Union, the Iowa securities department wrote all four private banks then in existence, including Exchange Bank, expressing concern that a private bank's certificates of deposit were "securities" subject to the registration requirements of the Iowa securities law. Newspaper articles appeared concerning this problem, and it was general knowledge in the banking community. The securities department, however, did not pursue this matter further.

Exchange Bank-UCB Relationship.

Through the efforts of a Des Moines law firm, Exchange Bank in 1976 opened a correspondent account with UCB when its relationship with Union was terminated. UCB was told that the reason for the Exchange Bank's moving its account was the conflict of interest created by Edward's involvement as a board member with the Banks of Iowa. In truth, Exchange Bank was seeking a new correspondent bank because Union had terminated its relationship with it. UCB was advised that the Exchange Bank would like to use participation agreements to meet its liquidity needs, and UCB agreed to provide liquidity up to $1.2 million. UCB did not request or obtain any financial statements from the Exchange Bank until July or August of 1982. And, although UCB ordinarily contacted other correspondent bankers concerning its new accounts, it did not do so here.

The Transfer of the Exchange Bank to Peter and Nan Burchette.

The next few years were rather uneventful, although efforts were still being made to restructure and charter the Exchange Bank. In 1980, Edward became critically ill and was not expected to live long. Edward's lawyers devised a plan to avoid public revelation of the financial condition of Exchange Bank in Edward's probate proceedings. This plan included an inter vivos transfer of the bank to avoid the disclosure in a probate inventory of the bank's financial problems.

The plan called for the bank to be transferred as of January 7, 1981, to Edward's children, Peter Burchette and Nan Burchette Cameron. Edward was to give an unsecured, noninterest-bearing note to the Exchange Bank in the amount of $3,578,521, which was the amount calculated to be the deficit. Payments of the note were to be made by transfers of Edward's farmland to Peter and Nan. The plan was implemented in...