Resolution Trust Corporation v. A.P. Eason, Jr. Rex A. Smith J.F. Robinson J. Warren Murray Joe A. Upchurch Delbert A. Allen, James E. Shreve, Resolution Trust Corporation v. A.P. Eason, Jr. Rex A. Smith J.F. Robinson J. Warren Murray Joe A. Upchurch, Delbert A. Allen, James E. Shreve, Resolution Trust Corporation v. A.P. Eason, Jr. Rex A. Smith J.F. Robinson J. Warren Murray Joe A. Upchurch, Delbert A. Allen James E. Shreve

Citations: 17 F.3d 1126; 1994 U.S. App. LEXIS 3657Docket: 93-2185

Court: Court of Appeals for the Eighth Circuit; March 2, 1994; Federal Appellate Court

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Resolution Trust Corporation (RTC) appealed a jury's dismissal of its $12 million negligence and breach of fiduciary duty claims against the former officers and directors of First Federal Savings and Loan Association. The RTC alleged that these individuals were negligent in approving participation loans that ultimately failed. The jury ruled in favor of the defendants, leading to RTC's appeal and the defendants' cross-appeal for attorney's fees, which the court denied.

Key issues in RTC's appeal included the admission of unauthenticated hearsay documents, jury instructions regarding industry customs, and misstatements related to the business judgment rule. The court affirmed the district court's decisions on all counts. 

The defendants included bank officer A.P. Eason and directors Rex A. Smith, J.F. Robinson, J. Warren Murray, Joe A. Upchurch, and Delbert A. Allen, who were involved during the early 1980s when the loans were made. Between 1982 and 1984, First Federal engaged in $25 million worth of participation loans for large-scale commercial real estate projects, with RTC challenging eleven loans that resulted in losses of approximately $12 million. RTC acknowledged that while entering the participation loan business was not itself negligent, the underwriting process employed by the Officers was deficient, constituting a breach of their fiduciary responsibilities.

First Federal engaged in participation loans by collaborating with lead lenders, typically savings and loans (S.L.) in the project’s locality, who provided written information about proposed constructions. Eason and his top employees reviewed this information, which included financial statements, project costs, and participation details. While Eason occasionally visited project sites, he primarily relied on information from lead lenders and his own knowledge rather than conducting independent assessments. He placed significant value on 'take-out' commitments from other S.L.s, which promised to cover losses if the original borrower defaulted, viewing them as a risk mitigator, despite not verifying the financial stability of these take-out lenders.

Some loan proposals were rejected based on lead lender information, while approved loans were presented to First Federal's Board of Directors, which ultimately sanctioned all projects. While several participations yielded high returns, eleven challenged loans resulted in losses, leading to partial recoveries through litigation against borrowers or take-out lenders. Following First Federal’s bankruptcy in 1989, the Office of Thrift Supervision appointed the RTC as receiver, which later acquired the rights to pursue claims against the Officers for negligence and breach of fiduciary duty.

During trial, the adequacy of First Federal's underwriting process was contested. RTC argued that First Federal failed to verify the financial data provided by borrowers, while the Officers contended they justifiably relied on lead lenders for this verification, pointing out that their practices had previously received no criticism. Evidence was presented, including a favorable grading of First Federal’s underwriting by a Federal Home Loan Bank Board examiner and positive remarks on certain loans. The Officers' motion for judgment as a matter of law was denied, and the jury was instructed on Arkansas laws regarding negligence, breach of fiduciary duty, the business judgment rule, and industry customs.

The jury was presented with twelve interrogatories concerning eleven loans, ultimately answering 'no' regarding the defendants' liability, leading to a judgment of dismissal. RTC's motion for a new trial was denied, as was a subsequent motion for attorney's fees from the Officers. During cross-examination of Eason, the defendants attempted to introduce two FHLBB documents related to specific loans. Eason testified that prior examiners praised the documentation of loan participations and noted that handwritten comments were customary. The defense presented workpapers containing the notation 'excellent investment,' which RTC's counsel objected to on hearsay grounds, arguing the notes lacked proper underwriting analysis since the author was unavailable for cross-examination. The trial court overruled the objection, deeming the workpapers admissible. RTC appealed the admission of these documents on three bases: lack of authentication, hearsay, and undue prejudice. The district court upheld the admission, stating the documents were produced during discovery and deemed accurate business records. The court also noted that even if the evidentiary ruling was erroneous, it did not warrant a new trial due to lack of significant prejudice. RTC's authentication objection was dismissed as RTC's counsel had acknowledged the authenticity of the exhibits, meeting the requirements under Federal Rule of Evidence 901.

RTC's counsel's statements and supporting evidence provided a sufficient, albeit minimal, foundation for the admissibility of certain exhibits under Federal Rule of Evidence 803(6). Counsel acknowledged that the notes were made by a member of the FHLBB during their official duties, although he was uncertain if those duties involved underwriting analysis. Testimony indicated that examiners commonly took handwritten notes during their record assessments, and the FHLBB's favorable grading of First Federal's underwriting suggested that underwriting practices were reviewed as part of their procedures. The evidence confirmed that the workpapers with positive notations were created and maintained in the regular course of FHLBB's activities.

No indications of untrustworthiness were found regarding Exhibits 76 and 77, and it was noted that Eason could provide relevant background information to establish these as business records. The interpretation of the term "other qualified witness" in Rule 803(6) is broad, allowing for the admission of records even if the witness lacked personal knowledge of their creation.

RTC's objection based on Federal Rule of Evidence 403, claiming unfair prejudice from the exhibits, was not raised timely, thus the court declined to address it. Given the extensive evidence presented during the trial, the introduction of these exhibits was deemed at worst a harmless error, and the judgment would not be overturned on this evidentiary basis.

Regarding jury instructions, RTC argued that the evidence was insufficient to justify instructions on industry custom and the business judgment rule. The district court has broad discretion in framing jury instructions, and as long as they adequately reflect the applicable law, they will not be disturbed on appeal. The instruction on custom and usage allowed the jury to consider industry practices in assessing the defendants' negligence, while clarifying that such practices are not definitive in establishing negligence. RTC contended that the Officers did not provide enough evidence of a uniform industry custom for comparison, but the record suggested that sufficient evidence was presented to warrant the instruction.

Eason provided testimony indicating that First Federal relied on lead lenders for in-state loan participations during the 1970s, a practice not questioned by the Federal Home Loan Bank Board (FHLBB). Allen, a board member, corroborated this by stating that it was customary for savings and loans (S.Ls) to depend on the accuracy of lead lenders' information. The jury could reasonably conclude that First Federal's reliance on lead lenders was standard practice. Additionally, the Officers presented significant evidence supporting the use of custom and usage, including a 1986 Notice of Proposed Rulemaking by the FHLBB endorsing this reliance and a 'B' grade assigned to First Federal's underwriting practices in 1983, suggesting adherence to acceptable underwriting standards.

The court appropriately instructed the jury on the need for evidence of industry custom before considering custom and usage regarding liability. Regarding the business judgment rule, the court found sufficient evidence to justify its instruction. The rule requires directors to be disinterested, informed, and to act with due care. Instruction 16 allowed the jury to apply the rebuttable presumption of the business judgment rule only if they found that the Officers had adequately informed themselves. The conditional language of the instruction necessitated the jury to resolve whether the Officers had sufficiently informed themselves before applying the presumption in their favor.

RTC's claim that the instruction on the business judgment rule was ambiguous was rejected, as the instruction mirrored the Arkansas Supreme Court's requirement that directors must be informed of all material information before making decisions. The district court's instruction did not misstate the business judgment rule's content.

The district court's decision on RTC's appeal was affirmed, and the Officers' cross-appeal regarding the denial of attorney's fees under the Equal Access to Justice Act (EAJA) was noted, highlighting that reasonable fees may be awarded unless prohibited by statute, aligning the U.S. liability with common law principles.

28 U.S.C. Sec. 2412(b) allows courts to award reasonable attorney's fees to the prevailing party in civil actions involving the federal government, operating as a limited waiver of sovereign immunity. Such waivers must be strictly interpreted in favor of the government. Attorney's fees under the Equal Access to Justice Act (EAJA) can only be reversed for an abuse of discretion, with legal conclusions reviewed de novo and factual findings overturned only if clearly erroneous. 

The Officers argue that since the Resolution Trust Corporation (RTC) acquired certain assets from First Federal, including the right to pursue claims, RTC should be liable for attorney's fees as First Federal would have been under 12 C.F.R. Sec. 545.121, which mandates indemnification of directors when they prevail on the merits of a lawsuit. The district court denied the Officers' motion for fees, stating that Sec. 545.121 does not provide a statutory basis for fees under EAJA and that it only outlines when a savings and loan association must indemnify its officers and directors. The court noted that indemnification is contingent upon the association being a going concern and requires approval from disinterested directors. Additionally, the regulation assumes the existence of an ongoing institution, which was not the case with RTC at the time of the claim for attorney's fees. Thus, the court ruled that the indemnification provisions apply only while the association or its legal successors are operational.

RTC filed a lawsuit after First Federal's failure, but it did not continue the thrift's operations, seeking solely to resolve the bankrupt institution under 12 U.S.C. Sec. 1441a(b)(3). RTC was not considered a legal successor or assignee of First Federal regarding indemnification obligations under 12 C.F.R. Sec. 545.121, as such indemnification liabilities did not exist when RTC was appointed as receiver. First Federal had never pursued legal action against its Officers, resulting in no indemnification liability. The Officers relied on Harris v. Resolution Trust Corporation, which affirmed that RTC was not mandated to indemnify Harris due to a hung jury on a conspiracy charge; thus, the case did not support the Officers' claims. The Eleventh Circuit clarified that Harris's indemnification demand was against an active corporation, unlike the current situation with a defunct thrift. Without explicit language in Sec. 545.121, the Officers' indemnification claim was rejected, leading to the affirmation of the district court's denial of attorney's fees to the Officers. The court found no errors in the challenged rulings.

The workpapers could have been introduced for non-hearsay purposes, specifically to demonstrate the examiner's state of mind during the examination, to support Eason's claims regarding the examiners' statements about the S. L loan practices, and to show that the Officers believed the FHLBB did not consider First Federal's lending practices to be unsafe or unsound. The objection to the exhibits, which focused solely on interest rates rather than the propriety of underwriting, could have been addressed with a limiting instruction under Fed. R. Evid. 105, but such an instruction was not requested by either party.

The defendants assert they are not liable for losses from the loans in question due to the protection of the business judgment rule, which presumes that corporate directors or officers act on an informed basis, in good faith, and in the company's best interest. For this rule to apply, a director or officer must be disinterested and act in good faith, meaning they should not have a personal interest in the transaction. The plaintiff does not claim that the defendants had any personal financial interest or acted in bad faith regarding the loans. If evidence shows a defendant fulfilled their duty to inform themselves before making decisions, the verdict should favor that defendant unless the plaintiff can rebut the presumption of the business judgment rule by demonstrating that no reasonable person in a similar position would have agreed to the action taken.

Additionally, under 28 U.S.C. § 2412(b), the United States is liable for attorney's fees to the same extent as any other party under federal common law or federal statutes, but not under state laws. The court has clarified that the provisions referenced in § 2412(b) must be federal, rejecting any claims based on state law provisions. Lastly, there is a regulation stating that a Federal association must indemnify its directors, officers, and employees according to specified requirements.

An association is required to indemnify individuals who were or are directors, officers, or employees when an action is brought or threatened against them. This indemnification covers two main aspects: (1) any liability incurred under a judgment in the action and (2) reasonable costs and expenses, including attorney's fees, for defending or settling the action, as well as for enforcing rights under this section if a favorable judgment is obtained. However, indemnification is contingent upon a final judgment on the merits being in favor of the individual. The regulation cited, 12 C.F.R. Sec. 545.121, is interpreted to incorporate common law indemnity or impose federal statutory liability for indemnification. Additionally, it notes that indemnification is not available from the RTC (Resolution Trust Corporation) when it sues directors for misconduct against a financial institution. The Officers' cross-appeal regarding the denial of their motion for judgment as a matter of law is rendered moot by the affirmation of the district court's decision.