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Federal Deposit Ins. Corp. v. Stanley
Citations: 770 F. Supp. 1281; 1991 U.S. Dist. LEXIS 10087; 1991 WL 134520Docket: Civ. F 87-325
Court: District Court, N.D. Indiana; July 19, 1991; Federal District Court
In the case Federal Deposit Insurance Corporation v. V. Edgar Stanley et al., the FDIC filed a lawsuit against several defendants, including members of the Board of Directors of the Allen County Bank, alleging breaches of fiduciary duties from March 1982 to May 1984. The FDIC claimed these breaches resulted in significant financial losses for the Bank, which the FDIC, as a purchaser and assignee of certain Bank assets, subsequently suffered. Following extensive pre-trial motions, a bench trial commenced on December 6, 1989, concluding with final arguments in May 1990 and post-trial briefs submitted thereafter. The court's findings, based on a thorough review of over 2,000 pages of testimony and 1,500 exhibits, outline the background of the Allen County Bank, which was state-chartered and examined periodically by the FDIC. An August 1981 examination revealed alarming asset classifications and a deteriorating loan portfolio, necessitating urgent action by the Board. A subsequent special audit in October 1981 disclosed fraudulent lending practices by the Bank's president, prompting a Memorandum of Understanding in February 1982 between the FDIC, the Indiana Department of Financial Institutions, and the Bank, which mandated capital increases, loan reductions, and improved loan management policies. Defendants Bierman, Boley, and DeHart were directors of the Allen County Bank when a Memorandum of Understanding was signed. In the first nine months of 1982, the bank suffered a net operating loss of $104,000, leading to FDIC examinations on September 11, 1982, which revealed significant financial deterioration, including over $2.8 million in classified assets and a loan delinquency rate exceeding 25%. The examination report criticized the bank’s lending practices, citing issues such as overlending, poor risk selection, inadequate credit information, self-dealing, and insufficient supervision. A meeting on October 5, 1982, discussed these findings, and a formal report was sent to the Board on November 18, 1982, urging prompt action to address the issues. On February 22, 1983, the FDIC and DFI established a second Memorandum of Understanding requiring the bank to reduce classified assets by $600,000 by mid-1983 and implement an amended loan policy by March 31, 1983. Liquidation proceedings were initiated by the DFI on November 22, 1985, leading to the bank's closure and the FDIC's appointment as receiver. The FDIC subsequently acquired claims against the bank's directors and officers due to their conduct and also purchased certain loans and leases deemed inappropriate, linked to insider dealings. Defendants served on the bank's board at various times, with some also holding officer positions. V. Edgar (Ed) Stanley was a director and president during critical periods from 1982 to 1984. Defendants Robert Marcuccilli, Judith Stanley, David DeHart, Dan Stanley, John Boley, and Gilbert Bierman served as members of the Board of Directors of Allen County Bank during various periods between 1981 and 1984, with Boley attending only one meeting during his tenure. Gilbert Bierman, who had been a director since May 1978, ceased attending meetings after October 1982 but retained his name for continuity. During 1982-1984, several defendants, including Ed Stanley, held significant ownership of the bank, collectively owning 40-46% of its shares at different times. Concurrently, some defendants served on the boards of multiple banks. The Allen County Bank engaged in two transactions with Abbott Coal and Energy Company, a partnership operating in Indiana. The first transaction on December 30, 1982, involved the bank acquiring an installment lease valued at $130,484, secured by a bulldozer purchased from Clark Machinery Corporation. The second transaction occurred on February 12, 1983, when the bank purchased a $60,000 commercial loan to Abbott Coal from Counting House Bank, intended for purchasing two Cat loaders. Prior to these transactions, the bank had a negative experience with a coal-related loan, which should have prompted caution in further dealings with Abbott Coal due to the lack of a strong earnings record. The financial condition of Abbott Coal at the time of the Allen County Bank's acquisition of its lease and loan was dire. A compilation by the CPA firm Churney and Counts on November 11, 1982, indicated a substantial net loss of $553,699 for the nine months ending September 30, 1982. The balance sheet reflected only $15 in cash and $229,462 in current assets against current liabilities of $170,507, which included a $44,842 bank overdraft. Long-term debt reached $1,595,117, with partners' equity at $695,109. A comparison with the July 31, 1981 balance sheet revealed a drastic increase in long-term debt from $330,890 to $1,594,117, indicating reliance on borrowed funds rather than operating income. Although total assets grew from $1,876,505 to $2,459,733, nearly $1 million of the latter consisted of 'notes receivable' without any evidence of collectability. Partners' equity halved from $1,234,788 to $695,109, suggesting an alarming decline in financial stability. While the balance sheets of partners Robert Goldman and William Gladstone initially seemed promising, they were misleading. Goldman's balance sheet claimed a net worth of $1,515,300, including an unrealistic $750,000 attributed to his interest in Abbott Coal, which had a total partners' equity of only $695,109. Additionally, his other assets lacked supporting documentation, and he did not account for any liabilities related to Abbott Coal. Similarly, Gladstone's December 31, 1981 balance sheet, showing a net worth of $1,695,000, included inflated values for his interest in Abbott Coal and 'Oil and Gas' without substantiation. Overall, both partners' financial representations were substantially overstated, failing to reflect Abbott Coal's precarious financial situation. The 'Oil and Gas' item lacks supporting documentation, with Gladstone's balance sheet notably omitting any liabilities, yet it records a $2,000,000.00 contingent liability to Liberty National Bank related to Abbott Coal. Both Gladstone and Goldman inflated their net worth on balance sheets submitted to Allen County Bank to justify their request for additional credit. The court, aligning with testimony from FDIC bank examiner Don Imel, concludes that these financial statements lacked credibility due to the absence of corroborating documentation. Consequently, the financial statements do not substantiate the defendants' claims regarding Abbott Coal's capacity to service new debt. Regarding Abbott Coal's payment history on the relevant lease, it made payments that reduced the balance from $130,484.40 to $58,507.78 until March 15, 1984, but defaulted shortly after the lease assignment to Allen County Bank in March 1983. Although Abbott Coal made several payments—twelve payments of $5,436.85, one of $5,075.00, and one of $1,659.42—these payments were not consistently timely. When payments were missed, Abbott Coal often compensated with double payments in subsequent months. Despite this pattern, a default was evident, leading to a demand letter from Allen County Bank on March 12, 1983, citing missed payments. Robert Goldman, representing Abbott Coal, and Robert Marcuccilli from Counting House Bank established a Memorandum of Understanding on March 14, 1983, acknowledging defaults on multiple loans from various banks. The agreement included provisions for the banks' security interests in Abbott Coal's assets, a personal guaranty from Goldman and his wife, and a Certified Check for $26,000.00 to cover overdue payments. Additionally, it stipulated that future defaults would allow the lenders to assign proceeds from Indianapolis Power and Light Company directly to themselves and withdraw previous demand letters upon receipt of the check. Allen County Bank received funds from Indianapolis Power and Light Company and, on March 14, 1983, Mr. and Mrs. Goldman signed a loan guaranty agreement for up to $100,000 in credit extended to Abbott Coal by the bank. In early 1984, the Small Business Administration (SBA) approved a $450,000 loan to Abbott Coal after conducting a financial investigation and determining the company was creditworthy. The SBA guaranteed 90% of this loan from Counting House Bank. The Allen County Bank's collateral for its lease—a bulldozer—was deemed inadequate as collateral due to its rapid depreciation and vulnerability to theft, contrary to prudent banking practices which recommend that collateral be geographically close to the lending bank. Both Allen County Bank and Western State Bank, which held a similar lease with Abbott Coal, retained counsel to obtain abandonment orders for the bulldozers after Abbott Coal declared bankruptcy. Western State Bank sold its bulldozer for $61,000, while Allen County Bank's bulldozer was sold for only $12,000, despite a previous offer of $40,000. Defendants argue that if Allen County Bank had exercised due diligence similar to Western State Bank, it could have sold its bulldozer for approximately $60,000, preserving its principal balance of about $58,000. Additionally, it was noted that the bulldozer sold by Western State Bank went to Mr. Charles Curry, a partner in Abbott Coal, who received favorable financing terms from Counting House Bank to pay off the bulldozer lease that had been acquired by Western State Bank. The FDIC Report of Examination highlighted that $62,000 was allocated to Western State Bank to settle the remaining balance on Abbott Coal's bulldozer lease. Mr. Curry, a former partner in Abbott Coal and Energy, had his liability for the company's debt released in March 1984 by former chairman Marcuccilli. During trial, Ed Stanley acknowledged that a bulldozer referenced in the FDIC Report was linked to Western State Bank’s lease with Abbott Coal but denied that a $62,000 loan to Mr. Curry carried zero percent interest, despite no evidence to support an interest rate other than zero. Mr. Curry's release from the Abbott Coal debt does not imply that the sale of Western State Bank's bulldozer was fraudulent. The court found the defendants’ claim that this sale for $61,000 was relevant to the Allen County Bank's bulldozer sale unpersuasive. The defendants also asserted that Allen County Bank was offered $40,000 for its bulldozer, which was not finalized due to the Harris Board's lack of diligence. A timeline reveals that Abbott Coal filed for Chapter 11 bankruptcy in June 1985, and by October 1985, the automatic stay on the bulldozer was lifted, allowing Allen County Bank to take possession. In August 1984, Clarkson Equipment Co. proposed to purchase the bulldozer for $40,000 with a long-term payment plan, but Marcuccilli advised against this offer. Clarkson withdrew his interest due to the bank’s indecisiveness. In February 1985, appraisals for the bulldozer ranged from $15,000 to $35,000, and it was ultimately sold for $12,000, which aligned with these appraised values. The evidence does not substantiate the defendants' claims that Allen County Bank's financial loss on the bulldozer resulted from the Harris Board's inaction. The Allen County Bank faced depreciation of a bulldozer leased to Abbott Coal, which was exacerbated by the Bank's failure to secure adequate collateral. In a subsequent transaction, the Bank purchased a $60,000 commercial loan to Abbott Coal, which was intended for equipment purchase, but the collateral listed (two loaders) was already owned by Abbott Coal prior to the loan application date, indicating that it could not be a purchase money loan. Both loaders were already under existing liens from Leasing Service Corporation and Liberty National Bank, with the Counting House Bank's security agreement filed later. When Abbott Coal declared bankruptcy in 1985, the prior lien holders asserted their rights over the loaders, making it impossible for the Counting House Bank to claim a purchase money security interest. Separately, Edward and Linda Carper operated a dairy farm and secured a $20,000 lease to purchase dairy cattle through Northern Indiana Leasing, which was later assigned to Allen County Bank. The Carpers made regular payments until filing for Chapter 11 bankruptcy in October 1984. The bankruptcy court approved their reorganization plan, and they made a partial payment of $2,625 to the FDIC. However, the FDIC is seeking to recover the total losses from the Carper lease, amounting to $21,421.46 in principal and interest, plus per diem interest until judgment. The FDIC is seeking to recover $416.25 in expenses and $5,615.00 in legal fees related to the Allen County Bank. The lease in question provided 100% financing for 21 head of dairy cattle, which served as the primary collateral. Both the Allen County Bank and Northern Indiana Leasing conducted an investigation into Carper's financial status, concluding that he had the capability to make lease payments and that there was sufficient collateral, with the Bank's interest properly secured. Carper's dairy farm, located in a region with many successful dairy operations, fell within the Bank's lending area, facilitating collateral monitoring. Financial records indicate Carper experienced net farm losses of $5,730.99 in 1980, $6,910.00 in 1981, and $917.89 in 1982. Notably, his interest expenses surged from $620.48 in 1981 to $13,196.22 in 1982. In 1980, prior to entering the dairy business, Carper reported minimal income and incurred significant expenses. The defendants argue that depreciation and interest expenses should be disregarded when assessing Carper's financial standing, suggesting a much smaller loss for each year. Despite showing net losses for tax purposes, Carper's gross farm profits increased significantly from $1,893.26 in 1980 to $31,211.10 in 1981 and $45,334.36 in 1982, indicating an improving financial condition. By February 15, 1983, Carper's net worth exceeded $76,000, although he had only $100 in liquid assets and a debt-to-net worth ratio of 1.63. The defendants acknowledged Carper's financial weakness at the time of the lease but believed he could manage his dairy farm effectively. Testimony from Ed Stanley highlighted that a significant portion of Carper's debt was long-term, and the Board viewed favorably his limited service debt relative to income-producing assets. The Allen County Bank held a perfected security interest in the 21 Holstein dairy cattle and associated products, filed with the DeKalb County Recorder's Office on July 26, 1983. The Allen County Bank secured an interest in Mr. Carper's silo, auger, pipeline, and bulk milk tank on July 14, 1983. In September 1983, Northern Indiana Leasing filed UCC statements on the equipment, designating the Allen County Bank as the 'Assignee of Secured Party.' It was later discovered that the silo had a prior filing, although the other equipment did not. The Carper lease was partially secured by a dairy assignment with County Line Cheese Co. Inc., which authorized the deduction of $718.32 monthly from milk proceeds for payment to the bank. This assignment was deemed irrevocable, but on August 9, 1984, Mr. Carper unilaterally revoked it, leading to the cessation of payments. The bank required Mr. Carper to maintain credit life insurance for the lease and insurance on the cattle, listing the bank as an additional insured. The court found no negligence on the part of the defendants in purchasing the Carper lease, noting they had investigated Carper's financial history and acknowledged the risks involved. The court supported its decision by highlighting the bank's collateral interest in income-producing cattle and the payment rights from the dairy assignment. Despite Mr. Carper ultimately filing for bankruptcy and losses incurred by the bank and FDIC, the lease was considered a quality asset at the time of purchase. In a separate case, James and June Conn, grain farmers, received a $147,262 loan from Leiters Ford State Bank on June 3, 1983, which was participatively shared with Allen County Bank. The Conns were subsequently issued additional loans, but their high leverage raised concerns about the prudence of the bank's participation in these loans. The financial statement of the Conns as of January 31, 1983, indicated total debts of $1,575,500.00 and a net worth of $705,750.00, resulting in a debt-to-net worth ratio of 2.23:1. Testimony from FDIC bank examiner Don Imel revealed that the Conns overvalued their farmland at $3,125.00 per acre, while market value was closer to $2,000.00 per acre. Correcting this valuation reduced their net worth by $540,000.00 to $165,750.00 and adjusted their debt-to-net worth ratio to 9.51:1. In 1982, the Conns incurred a net loss of approximately $60,000.00, including a farm loss of about $80,000.00. Their total cash income for 1982 was $249,084.00 against total cash expenses of $310,794.00, leading to a net loss of $61,710.00, which included $18,695 in non-farm income. Despite selling crops in 1982 for $203,536.00, they still faced an overall loss. For 1983, the Conns projected a total cash farm income of $233,598.00 and expenses of $133,355.00, anticipating a net cash income of $103,243.00. However, their projected debt repayments amounted to $198,352.00, indicating an inability to service existing debt. Their loan application to the FHA was denied, and evidence suggested they were not in a position to take on additional debt as of March 31, 1983. Lastly, the defendants provided security agreements for loans, securing the Allen County Bank's interest in growing crops and equipment valued collectively at $45,000.00. Defendants assert that when the Allen County Bank became involved in the Conn loans, the security interests in the Conn's crops and equipment were already perfected by Leiters Ford State Bank for its benefit and that of other participants. To facilitate the Conns' annual credit needs for purchasing inputs, Allen County Bank subordinated its liens on the crops to input lenders, ensuring they were paid first from crop sales, which diminished the collateral available for Allen County Bank. Consequently, by the time of the Conns' bankruptcy, the only collateral left for Allen County Bank was a tractor and combine, leading to a $9,000 payout to the FDIC over ten years from the bankruptcy proceedings. Sidney DeVries, who operated DeVries Hog and Grain Farms, Inc. and DeVries Trucking, Inc. in Indiana, was a significant customer of Leiters Ford State Bank in the early 1980s. After LaSalle National Bank stopped purchasing participation loans for DeVries in 1983, DeVries applied for a $500,000 Farmers Home Administration guaranteed loan. Allen Chesser, Executive Vice President of Leiters Ford State Bank, supported the loan application, indicating that DeVries could not secure financing independently. On March 24, 1983, Allen County Bank bought a $70,000 note from Leiters Ford State Bank, but prior security interests existed from a March 29, 1980 agreement with Leiters Ford for all of DeVries' livestock, crops, and equipment. LaSalle National Bank's participation in DeVries' loans meant that Allen County Bank's 1983 loan was effectively unsecured. A subsequent security agreement on March 9, 1982, also pledged all livestock, 1982 crops, and equipment to Leiters Ford, but LaSalle again took security on the same collateral, rendering Allen County Bank's March 24, 1983 loan unsecured. On February 1, 1983, another agreement attempted to pledge all 1983 crops to Leiters Ford State Bank. All crops from DeVries Hog. Grain Farm, Inc. were pledged to LaSalle National Bank in 1980 and 1981, rendering the security agreements insufficient for securing Allen County Bank's $70,000 loan. The defendants asserted that this loan was backed by two indemnifying mortgages dated March 29, 1980, and July 14, 1982, but the only relevant document, Exhibit ABX, shows a mortgage securing a $500,000 line of credit to Leiters Ford State Bank, which also secured LaSalle's participation loans, failing to provide adequate security for the Allen County Bank's loan. On April 11, 1983, Allen County Bank fully purchased a $40,000 loan to DeVries from Leiters Ford State Bank, again claiming it was secured by the aforementioned mortgages and a March 1, 1983 security agreement that included Sidney DeVries' bean hedge account. However, the hedge account was already pledged to Leiters Ford State Bank, and its speculative nature raised questions about its actual value. Sidney DeVries personally guaranteed this loan. Additionally, on June 14, 1983, Allen County Bank participated in a $35,000 loan to Sidney DeVries, contributing $34,000 while Leiters Ford retained $1,000. Defendants claimed this loan was also secured by mortgages and security agreements pledging crops and equipment, but all collateral was previously pledged to LaSalle National Bank, inadequately securing Allen County Bank's interest. In total, the Allen County Bank extended $144,000 in credit to DeVries and his farm, representing nearly 10% of its sound capital, while Leiters Ford only risked $1,000 of its own funds. Leiters Ford maintained control over the loan terms without providing warranties regarding the validity of the security interests. The transactions violated 12 U.S.C. 371c(a)(3), which prohibits the sale of substandard loans to affiliates. By February 1983, evidence indicated that DeVries and his farm were experiencing severe financial troubles, having been denied loans from the FmHA and further participation from LaSalle National Bank. In March, April, and June of 1983, the Allen County Bank acquired three loans from DeVries' loans held by the Leiters Ford State Bank, despite the borrowers being in financial distress and unable to provide new collateral. The only collateral offered was already subject to a prior secured interest by LaSalle National Bank, leading the court to conclude that a prudent banker would not have engaged in these transactions. Leonard and Eileen Diamond, dairy and grain farmers in Steuben County, Indiana, received a loan of $248,791.69 at 16% interest from the Counting House Bank on April 21, 1983, with Allen County Bank participating for $41,465.28 on April 25, 1983. This loan primarily served as debt restructuring and included substantial closing costs of $39,100 (over 15% of the loan) and a credit life premium of $7,868.65, both financed as part of the loan and not shared with participating banks. A finder's fee of $11,483 was paid to Mr. George Barger for his appraisal services. Prior to participation, the Allen County Bank conducted a thorough investigation of the Diamonds' financial situation, reviewing their milk production records and assessing equity in their equipment and farmland, which included at least $138,000 in land equity. The bank received extensive documentation from Counting House Bank regarding the loan terms and collateral, including copies of the original note, loan agreement, security agreements, insurance documentation, and financial statements, among others. The loan was secured by an irrevocable dairy assignment and all of the Diamonds' equipment, livestock, crops, accounts, and contract rights. Additionally, the Diamonds provided a loan guarantee on January 1, 1984, and executed an indemnifying mortgage recorded on May 2, 1983. Their federal income tax returns from 1978 to 1981 indicated significant net farm losses of $1,420, $149,496, $9,758, and $52,030, respectively. The Diamonds' financial statement as of April 21, 1983, indicated a net worth of $121,028.31 and total liabilities of $451,671.69, resulting in a debt-to-net worth ratio of 3.73 to 1. When using an independent appraisal of their real estate valued at $302,000 (as opposed to their self-reported $350,000), the ratio increased to 6.18 to 1. Mr. Don Imel, an FDIC Bank Examiner, concluded that based on their financial situation, the Diamonds would struggle to obtain credit, despite owning a large recently acquired farm and having significant collateral. As of September 18, 1984, their collateral included 175 acres of land (equity of $151,000), 29 milk cows ($29,000), machinery and equipment ($73,000), and crops ($106,000), with a bank valuation of $310,000 during an FDIC examination. Mr. Diamond faced severe cash flow issues in 1983 due to drought and the burden of diseased cows, which impacted his dairy production costs. He also dealt with three lawsuits. From April 21, 1983, to January 17, 1984, he reduced his loan balance with the Allen County Bank from $41,465.28 to $37,791.47. However, he filed for Chapter 11 bankruptcy in February 1984, which was later converted to Chapter 7 in August 1985 after abandoning the farm. The Counting House Bank acquired the 175-acre farm on October 17, 1986, via a Sheriff's Deed, with an appraisal value of $184,000, leaving $175,000 of collateral after sales commissions. The outstanding balance on the Diamond loan with Counting House Bank was $173,000, resulting in no collateral for the participating banks. The FDIC sold the Allen County Bank's loan portion in September 1988 for $1,418.76. The court determined that the defendants were not negligent in participating in the Diamond loan, as they had conducted due diligence on Diamond's financial history, and the risks involved did not amount to negligence given the loan's relatively small scale. Mr. Diamond's bankruptcy and the resulting losses for Allen County Bank and the FDIC were attributed primarily to unforeseen factors: a drought that reduced crop yields and the acquisition of diseased milk cows, which were not predictable by the defendants at the time of the loan participation in April 1983. Additionally, Mr. Diamond's personal issues led to the misappropriation of collateral and the abandonment of his farm, which the court deemed a quality banking asset at the time of the loan. M. M Designers, Inc., led by Charles and Gerry Merry, secured a $265,000 loan from Leiters Ford State Bank on March 11, 1982, to build a steakhouse in Rochester, Indiana. Due to financial difficulties, the loan was increased to $319,770 on June 9, 1982, but the restaurant incurred losses exceeding $21,000 by August 31, 1982. The Allen County Bank participated in this loan for $125,000 on September 3, 1982. Mr. Merry became embroiled in litigation over construction defects, leading to missed payments on the loan. On April 1, 1983, an agreement was made for Edwin E. Lucas and Janice A. Cooper to purchase the restaurant via a land contract for $400,000, without assuming the original loan. Mr. Merry refinanced the loan for M. M Designers, Inc. for $383,528.60, with Allen County Bank participating for $130,082. Lucas and Cooper's payments were sporadic, and they eventually declared bankruptcy, leaving the restaurant abandoned for over a year. On July 10, 1987, Leiters Ford State Bank sold a restaurant to Margaret Covington Doran for $340,000. Doran needed to remodel the restaurant before opening, and Ed Stanley agreed to defer loan payments until Doran could generate profits. Despite her efforts, Doran faced monthly losses of about $1,000. In 1987, Leiters Ford State Bank merged with Counting House Bank to become Liberty Bank and Trust, which closed in October 1988, leading to the FDIC taking ownership of the restaurant. Evidence shows that Leiters Ford State Bank conducted a thorough investigation of Mr. Merry and his business venture before approving the loan. Merry had strong letters of recommendation, a successful background in the food industry, and a net worth of $259,100 as of July 13, 1981, with projected monthly sales of $40,000 and a net profit expectation of $12,320. The court concluded that the bank adequately investigated the loan, contradicting the plaintiff's claims. The original loan agreement from March 11, 1982, was secured by multiple indemnifying mortgages, and the bank received a first or second mortgage on the properties involved. Although Mr. Merry could only secure $100,000 in credit life insurance instead of the requested $135,000, the Merrys obtained homeowners insurance naming the bank as mortgagee. Additionally, both Charles and Gerry Merry guaranteed the loan for $319,770. The bank also secured a claim on all current and future restaurant equipment owned by M. M Designers, Inc., and filed necessary UCCs. The court determined that the loan was well-secured and that the defendants did not breach any duty in allowing Allen County Bank to participate in the loan agreement with Leiters Ford State Bank. Mr. Merry demonstrated significant business acumen and had a considerable net worth. The court acknowledges Mr. Ed Stanley's testimony confirming that banks received a feasibility study indicating the restaurant's potential success. The loan for the restaurant was secured through indemnifying mortgages, credit life insurance, and security agreements. Despite the restaurant's lack of profitability when the Allen County Bank entered a participation agreement on September 2, 1982, early losses are typical for new businesses, particularly with high rent due to construction costs. The FDIC failed to prove that the defendants breached their director duties concerning this agreement or the April 1, 1983 loan participation in M. M Designers. The restaurant's financial troubles were primarily due to poor construction and Mr. Merry's refusal to continue payments, not due to any wrongdoing by the defendants. The FDIC's claim regarding the improper sale of the restaurant to Lucas and Cooper was unsubstantiated, and there was no evidence that Allen County Bank would have fared better had foreclosure occurred. The refinancing of M. M Designers' original loan did not indicate improper conduct by the defendants. In a separate case, James and Mona Pinkerton operated Pinkerton Farms, Inc., a hog farm in Warren, Indiana, and its subsidiary, Pinkerton Farm Commodities, Inc. On April 27, 1983, Leiters Ford State Bank loaned Pinkerton Farms $361,000, with the Allen County Bank participating for $120,179.52 on May 26, 1983. The loan was due on demand or upon liquidation of inventories, with interest payable semi-annually. The collateral included all swine, 1982 corn, and 1983 crops, valued at $912,422.70. Specifically, the pledged hogs were valued at $405,650, and 1982 soybeans at $105,000, alongside an interest in 1983 crops worth $411,772.70. Personal guarantees from the Pinkertons were obtained, who had a net worth of $1,249,000 on April 27, 1983, and their financial statement from November 1982 reflected equity of $1,173,000. The projected cash flow for 1983 was $65,727 for commodities and $203,220 for farming. UCC filings were maintained for all crops and hogs owned by the Pinkerton entities from 1983 to 1988. Allen County Bank's interests in the loan were safeguarded through several measures implemented by Leiters Ford State Bank, which included requiring insurance on the hogs and stored grain with Leiters Ford as the loss payee. Additionally, James Pinkerton was mandated to carry life insurance, naming Leiters Ford as the beneficiary. The Pinkertons were also obligated to disclose the identities of livestock dealers and grain elevators, ensuring potential buyers were aware of the bank's lien. Monitoring of hog inventory was facilitated through regular reports from the Pinkertons. The financial security was further bolstered by Pinkerton Farm's substantial real estate equity of $1.6 million in 1982, and the well-established reputation of James Pinkerton as a quality farmer, known to the Allen County Board of Directors. Despite Pinkerton Farms not repaying any principal on the loan, Leiters Ford State Bank and its successor, Liberty Bank and Trust, did not demand payment. Pinkerton defaulted on interest payments in April 1986 and October 1987 but continued to pay interest through 1988. In 1988, Pinkerton Farms refinanced its debts with Summit Bank and entered a ten-year payout plan with Liberty Bank, which included a mortgage on improved property and security interests in vehicles and farm machinery. After the FDIC became the bank's receiver, it filed UCCs to perfect the collateral under the 1988 agreement. The court concluded that the loan was a quality banking asset at the time of Allen County Bank's participation and that the defendants did not breach any duties by allowing this participation. The Pinkertons were recognized as capable farmers and businesspeople with significant net worth, and the loan was adequately secured by various collateral. The FDIC did not demonstrate that the defendants, as directors of the Allen County Bank, breached their duties concerning the May 26, 1983 participation agreement. In 1982, the Leiters Ford State Bank loaned Richard Powell $120,000 to establish Powell Implement, Inc., which subsequently reported an operating loss of $36,440 over ten months ending January 31, 1983. The loan was increased to $281,974.88 in April 1983, with Allen County Bank participating for $90,000. The loan was rewritten in April 1984 for $277,763.55, with the monthly payment raised to $5,573.96. The loan was secured by substantial collateral, including a first mortgage on the company’s property valued at $167,282, a first lien on a truck and trailer valued at $16,000, machinery and tools worth $20,182, and a first lien on parts inventory valued at $72,000. The Powells also provided personal guarantees and pledged equity in their farmland, valued between $250,011 and $300,000, along with personal farm equipment worth $133,000. The Leiters Ford State Bank thoroughly perfected its security interests, filing UCCs and conducting title searches for collateral verification. The court concluded that there was no breach of duty regarding the decision to participate in the loans, citing extensive documentation, investigations, and favorable market conditions. Prior to the loan, the Powells provided business plans and market surveys that indicated a viable market for an implement business in Kewanna, Indiana. The defendants were aware of the previous owner's success and no signs indicated an impending market downturn. Unforeseen events, including a significant drought in 1983, caused the subsequent default on the loans, which were not anticipated by Powell or the banks at the time of lending. In 1984, International Harvester's bankruptcy negatively impacted Powell Implement, Inc. by diminishing customer confidence, which Mr. Powell had not anticipated when starting the business. From 1982 to 1986, declining farm real estate values, frequent foreclosures, and high interest rates severely depressed the farm implement market. Consequently, the court ruled that the defendants were not liable for losses incurred due to Allen County Bank’s loan participations with Powell Implement, Inc. The court has jurisdiction under 28 U.S.C. 1331, 28 U.S.C. 1345, and 12 U.S.C. 1819, with jurisdiction over the parties acknowledged by counsel. The FDIC's complaint against the defendants, who are directors and/or officers of the Allen County Bank, consists of four counts: 1) breach of fiduciary duties, including loyalty and good faith; 2) breach of common law and statutory duties regarding management responsibilities; 3) violation of bank lending limits; and 4) breach of contract related to their service obligations. The FDIC raised a preliminary issue regarding the admissibility of evidence that might undermine its recovery rights based on asset collection decisions. Since acquiring Allen County Bank's assets, the FDIC has sold some loans and settled others, with remaining loans still held. Defendants argue that the FDIC's negligence in maximizing recovery from these loans absolves them of liability for any losses. The court, referencing previous cases, ruled to exclude the defendants' evidence, emphasizing that the FDIC's duty to collect on failed institution assets serves public interests, and its decisions on asset collection should not be subject to scrutiny by the defendants. Public policy dictates that the FDIC's actions in its receivership role should not be challenged in court by former officers and directors. No duty is owed by the FSLIC/Receiver to the institution or its wrongdoers, reflecting a public policy aimed at the public good. The FSLIC’s actions as a receiver in asset collection are not subject to scrutiny in damage recovery actions against wrongdoing directors and officers. Liability requires established wrongdoing; however, such wrongdoing does not allow directors or officers to challenge the FSLIC’s actions as a receiver. Officers and directors of savings and loans are aware that insolvency necessitates a receiver's appointment, often the FSLIC, to quickly manage the institution's assets to protect the insurance fund and the public. Therefore, a director or officer accused of wrongdoing should not expect to examine the receiver's conduct to lessen their liability in subsequent civil actions. The court supports the removal of affirmative defenses that would shift the burden of the FSLIC's potential errors in judgment onto the public, thereby allowing the court and jury to focus on the primary liability issues. Allowing such defenses would invite excessive evidence regarding the FSLIC's discretionary decisions, distracting from the core issues of liability. Relevant case law reinforces that the FDIC does not owe a duty to bank directors and officers concerning pre-bank closing activities, and without a duty of care, negligence cannot be established. No affirmative defenses or counterclaims can be raised against the FDIC by bank directors or officers based on theories of comparative/contributory negligence or breach of fiduciary duty, referred to as the "no duty rule." This principle is supported by several case precedents, including *First State Bank of Hudson County v. United States* and others. Defendants, however, attempt to differentiate between the FDIC's pre- and post-bank closing activities, with Defendant McCartney arguing that the FDIC could be liable for post-bank closing actions. The court rejects this distinction, asserting that the FDIC's duty is owed to the insurance fund and the banking public rather than to bank directors or officers. While some cases have differentiated between the FDIC's discretionary functions and ministerial functions, the emerging consensus is that most asset disposal actions by the FDIC are ministerial, allowing for potential counterclaims or affirmative defenses. When the FDIC acts in a proprietary capacity, such as collecting debts or managing assets, it can owe a duty to the bank. The court acknowledges that it would be inequitable for the FDIC to fail to collect on a loan and then pursue claims against the bank's directors or officers for the resultant loss. Thus, the court concludes that the FDIC can be liable for its negligence in these proprietary functions, which can form the basis for an affirmative defense or compulsory counterclaim for recoupment. The dividing line for the FDIC's negligence liability is established as the date it assumes receivership of a bank, beyond which it is protected by the discretionary function exemption of the FTCA for negligence in bank examinations or the decision-making related to receivership. In *Federal Deposit Ins. Corp. v. Jennings*, the court concluded that policy decisions made by the FDIC as a receiver cannot be second-guessed, although the FDIC can be held liable for negligent performance of proprietary tasks. The case from *Carter* has faced criticism, particularly in *FDIC v. Baker*, where the impact of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) was discussed. The *Carter* decision was based on the belief that the FDIC's actions in asset disposition were largely ministerial, lacking substantial policy grounding. However, the FDIC contests this view, asserting that FIRREA introduces significant public policy directives affecting how the Resolution Trust Corporation (RTC) manages failed institution assets, including maximizing returns and mitigating economic impacts on distressed real estate markets. The FDIC argues that these directives illustrate its role in executing congressional public policy, which contradicts the notion of purely ministerial duties. Moreover, FIRREA's extensive reforms are portrayed as transformative, shaping the FDIC's responsibilities towards the public rather than individual entities. The Supreme Court's decision in *United States v. Gaubert* reinforced this notion, establishing that the Federal Home Loan Bank Board's daily management decisions are protected under the discretionary function exception of the Federal Tort Claims Act, indicating that such decisions encompass both discretionary and operational elements rather than a strict dichotomy. This reinforces the idea that day-to-day management requires judgment and decision-making within a range of permissible options. Discretionary conduct extends beyond policy or planning levels, as clarified by the Supreme Court's interpretation that operational negligence, such as failing to maintain a lighthouse, does not involve permissible policy judgment. The case of Indian Towing established liability for negligence regardless of the operational context, contrasting with the Court of Appeals' misinterpretation of Berkovitz, which incorrectly suggested a strict separation between discretionary and operational activities. As a result, the ruling in Gaubert overrules FDIC v. Carter, asserting that the FDIC's actions as a receiver of a failed bank are protected under the discretionary function exception of the Federal Tort Claims Act. The court will disregard evidence aimed at diminishing the FDIC's recovery related to asset collection decisions. Additionally, defendants are held personally liable for damages incurred by Allen County Bank due to breaches of duty. Proximate cause is defined as the cause that initiates a chain of events leading to an injury, emphasizing a continuity from negligent acts to the injury. Essential elements of proximate cause include foreseeability; negligence can only impose liability if the resulting harm was reasonably foreseeable under the circumstances. Nonetheless, the exact mechanism of injury or its extent need not be anticipated, as long as it is reasonable to expect that the conduct could cause injury in a general sense. If a defendant's negligence significantly contributes to a plaintiff's injury and the injury is foreseeable at the time of the wrongful act, there is both factual and legal causation. In this case, the defendants are liable for damages incurred by Allen County Bank due to their breaches of duty as directors. Bank directors are held to a standard of care that an ordinarily prudent and diligent person would exercise in similar circumstances. They are responsible for reasonable supervision of the bank's affairs, which includes being familiar with its business and financial condition, attending board meetings, and reviewing reports from regulatory agencies like the FDIC. Directors are not insurers of the bank's executive officers and are not liable for losses caused by those officers' wrongful actions, provided they exercised ordinary care in their own duties. A director's duty to oversee the bank cannot be satisfied by merely relying on others; each director must independently apply their judgment and diligence. Additionally, if directors fail to discover unsound banking practices due to a lack of time and attention devoted to the bank's affairs, this lack of knowledge does not serve as a valid defense. The burden of proof in cases against bank directors is defined by specific legal precedents. The burden of proof lies with the plaintiff regarding each defendant and each necessary element for recovering damages. There is no presumption of dishonesty or carelessness among defendant directors, nor can it be assumed that loans made by the bank were improper simply due to eventual losses. The law presumes that when a bank director approves a transaction involving their own interests, it breaches their duty of loyalty and good faith to the bank, shifting the burden of proof to the director to demonstrate the transaction's fairness and reasonableness to the bank. In evaluating the fairness of a transaction, the court considers the context at the time of the directors' decisions, not hindsight. The excerpt references several case laws to support these principles. The court will assess the liability of each defendant concerning specific loans and leases, noting that all seven defendants were on the Board of Directors during the relevant transactions. Key defendants held various positions across multiple banks, and their status as "interested" or "non-interested" directors in these transactions will be examined; however, this distinction will ultimately prove irrelevant in determining liability. Ed Stanley and Marcuccilli, as vice-presidents of Northern Indiana Leasing, were deemed "interested directors" in the sale of the Abbott Coal lease to the Allen County Bank and bore the burden of proving they did not breach their duty of loyalty and good faith. The court determined they failed to meet this burden, as they did not demonstrate that the transaction was fair and reasonable for the bank. Evidence showed Northern Indiana Leasing purchased the bulldozer for $95,500 and sold the lease for $110,500, resulting in a $15,000 profit, which was deemed unfair to the bank. The remaining defendants—Judy Stanley, Dan Stanley, David DeHart, Gilbert Bierman, and John Boley—were not classified as interested directors regarding the lease but were required to act with ordinary care. Bierman claimed he effectively resigned from the board after October 5, 1982, and argued he should not be liable for board actions post-resignation. However, the court found his claim unpersuasive due to several factors: he received committee fees during that period, was reelected as a board member in 1982 and 1983 without notifying stockholders of his intention to resign, and could have prevented the loan by attending meetings and voicing objections. The law mandates that directors attend meetings and exercise their duties independently, leading to the conclusion that Bierman is liable for the bank's losses related to the lease. Additionally, John Boley attended only two board meetings from March 1982 to May 1983. Boley attended meetings in October 1982 and June 1983, where he submitted his resignation effective June 16, 1983. He argued he should not be liable for losses from the Abbott Coal lease due to his absence from board meetings, but the court ruled he could not evade liability based on this argument. The court found Boley liable for the Bank's losses on the lease. Three other defendants—David DeHart, Dan Stanley, and Judy Stanley—were outside directors who regularly attended meetings. They were aware or should have been aware of the poor banking quality of the Abbott Coal lease and had a duty to supervise the bank's affairs, which they breached by allowing the lease purchase. Regarding the Abbott Coal loan from the Counting House Bank, Ed Stanley, Judy Stanley, David DeHart, and Robert Marcuccilli were "interested directors," responsible for proving the transaction was fair to Allen County Bank. The court found they did not meet this burden, as the loan was unfair due to inadequate collateral security, which had been subject to a blanket lien prior to the loan purchase. Dan Stanley, as an outside director, was expected to ensure proper due diligence, specifically a UCC search on the collateral, which he failed to do. Noninterested directors Bierman and Boley also had a duty to be aware of the bank's actions and the quality of loans. Their failure to attend meetings and inquire about the loan did not absolve them of liability. Consequently, all seven defendants are jointly and severally liable for losses related to both the Abbott Coal lease and loan, due to their collective failure to fulfill their responsibilities as directors of Allen County Bank. All defendants, except John Boley who resigned on June 16, 1983, were Board members when the Allen County Bank participated in two Conn loans on June 24 and July 19, 1983. Ed Stanley was the bank president, and he, along with Judith Stanley and David DeHart, were directors of both the Allen County Bank and Leiters Ford State Bank, making them "interested directors." They bore the burden to prove they did not breach their duty of loyalty to the Allen County Bank but failed to demonstrate that the transactions were fair and reasonable. Evidence indicated that the Conns had a heavy debt load, a significant net loss the prior year, and were unable to secure assistance from the FHA, with the loans also being undersecured due to subordinating liens on the Conns' crops. The court determined these interested directors breached their duties. The other defendants, Gilbert Bierman, Robert Marcuccilli, and Dan Stanley were not considered "interested directors" regarding the Conn loans but were still required to act prudently. Bierman had not attended meetings since October 5, 1982, and claimed he effectively resigned then, but the court found his argument unpersuasive and held him liable for losses related to the Conn loans. Marcuccilli and Dan Stanley, as outside directors, were expected to be aware of the poor quality of the Conn loans and the interests of Ed Stanley, Judith Stanley, and David DeHart, leading the court to conclude they also breached their duties and are liable for the losses incurred on those loans. John Boley's attendance at only two board meetings from March 1982 to May 1983 is noted but does not absolve the other defendants of their responsibilities. Boley resigned from his position effective June 16, 1983, and was not a member of the Board of Directors during the Allen County Bank's participation in the Conn loans on June 24 and July 19, 1983, thus he cannot be held liable for losses associated with those loans. In contrast, all seven defendants were directors during the DeVries loans, making Ed Stanley, Judith Stanley, and David DeHart "interested directors" as they served on both the Allen County Bank and Leiters Ford State Bank boards. These three failed to demonstrate that the DeVries transactions were fair, resulting in their liability for the bank's losses on those loans. Other defendants, Robert Marcuccilli, Dan Stanley, Gilbert Bierman, and John Boley, while not "interested directors," also breached their duty of care by allowing the bank to engage in the DeVries transactions, making them liable as well. In summary, all defendants are jointly and severally liable for losses incurred from the Abbott Coal transactions, Conn loans, and DeVries loans. The total losses to the Allen County Bank, as established by the FDIC, amount to $494,905.38, with daily interest accruing since December 6, 1989, and additional expenses of $10,042.08 related to the Abbott Coal transactions. Consequently, the total recovery sought from the defendants is $574,809.36, with specified amounts owed on each loan and associated fees. The court has determined that defendants Ed Stanley, Dan Stanley, Judith Stanley, Marcuccilli, DeHart, and Bierman are jointly and severally liable for two loans to the FDIC: Conn loan No. 1 for $24,918.51 and Conn loan No. 2 for $144,291.40, totaling $169,209.91. Additionally, these defendants, along with Boley, are jointly and severally liable for a total amount of $405,599.45 to the FDIC. Wayne Roe, previously a defendant, has settled with the FDIC and is no longer involved in the case. Historical ownership details indicate that Ed Stanley, Judy Stanley, and David DeHart acquired a controlling interest in Leiters Ford State Bank in 1974, with Ed Stanley serving as its President during a period when they held 70% of its shares. They also purchased interests in several banks, including Western State Bank in 1981 and Counting House Bank in 1980, the latter transaction financed by a loan from Northern Trust Bank. The Stanley/Marcuccilli group owned significant shares in multiple banks, with Ed and Judy Stanley holding approximately 8.5% of Allen County Bank shares, compared to higher percentages in the other banks during the same period. The collateral for a related lease was a Fiatt Allis bulldozer, and the FDIC claims Northern Indiana Leasing was affiliated with Counting House Bank, a characterization disputed by the defendants. Evidence presented indicates that Marcuccilli and Ed Stanley held vice-presidential positions at Northern Indiana Leasing and that it was identified as an affiliate in an FDIC examination report. Additionally, V. Edgar Stanley testified that Northern Indiana Leasing made an additional payment of $19,500 on the bulldozer, raising its total purchase price to $115,000. Mr. Stanley's testimony lacks credibility, as the Bill of Sale clearly states that no down payment was made and the purchase price was $95,000. No financial information for Abbott Coal partners Mr. Curry and Mr. Swets was presented. Mr. Gladstone's balance sheet from January 1, 1983, is identical to that from December 31, 1981, raising concerns about its accuracy. Defendants asserted that the Allen County Bank requested additional credit history documentation for Abbott Coal, which included letters of credit from Liberty National Bank and Merchants National Bank. However, only one letter was issued after December 1982, contradicting the defendants’ claims, and there’s no evidence that Abbott Coal utilized these credits or repaid any debts incurred. The court finds the letters of credit insufficient to support the defendants' claims of having investigated Abbott Coal's credit history. The loan in question was unsecured at the time of purchase by the Allen County Bank, and despite Abbott Coal making payments that reduced the loan from $60,000 to $38,000, the bank ultimately faced a loss due to the bankruptcy of Abbott Coal, indicating that a prudent banker would not have purchased the loan given Abbott Coal's financial instability. Additionally, Carper's financial statement was improperly filled out, omitting a $28,000 asset from the summary, which, if included, would raise his net worth to $104,387 and result in a debt-to-net worth ratio of 1.19 to 1. Under 12 U.S.C. 371c(a)(3) and (b)(10), member banks are restricted from purchasing low-quality assets from affiliates unless an independent credit evaluation supports such a purchase. Key points include the definition of "loss" concerning loans, which encompasses assets in nonaccrual status, those with principal or interest payments over thirty days past due, and assets with renegotiated terms due to the obligor's declining financial condition. The security for the loan, as outlined in Exhibit 1 of the Certificate of Participation, includes a first security interest in various agricultural assets such as fixtures, farm machinery, livestock, crops, accounts receivable, and general intangibles, with specific reference to all current and future property acquired by the debtor. The document notes the limitation on the Borrowers contracting additional debt or dairy assignments for the first three years without bank consent. It details Mr. Diamond's ownership and leasing of cows, and raises concerns about the fate of his pledged collateral, suggesting he sold farm machinery and some cows, including those he did not own, with ongoing legal action from the Counting House Bank regarding these sales. Additional points include the recording of a land contract in 1983, the purchase of the Abbott Coal lease and loan by Allen County Bank, and a court order related to Conn loans. Notably, the defendants have not disputed the amount of losses nor provided alternative damage calculations.