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insider.” 12 C.F.R. § 215.3(f). However, an exception applies if the loan is made on substantially the
same terms as loans to non-insiders, the loan does not involve more than the normal risk of repayment or
present other unfavorable terms, and the borrower uses the proceeds in a bona fide transaction to acquire
property, goods or services from the insider. In addition, Regulation O requires that the insiders’ interest
be disclosed and that they abstain from voting on the loan. See 12 C.F.R. § 215.4.

Because the loan in the first transaction involved unusual risk, because the
brothers’ roles were not fully disclosed, and because they participated in the
approval, they could not find solace in Regulation O, the court said. The failure to
properly disclose their roles, a lending limit violation, and their failure to abstain from
voting also caused the court to find Reg O violations in the third transaction.

But the FDIC and the court also found breaches of fiduciary duty in these
transactions. “Self-dealing, conflicts of interest, or even divided loyalties are inconsistent
with fiduciary responsibilities,” the court said. “A person can breach a fiduciary duty by
failing to disclose material information, even if not asked.”

The agency and the court also found the brothers to have engaged in unsafe or unsound practices.
They found that the first and third transactions exposed the bank to abnormal risk of loss or harm contrary
to prudent banking practice, and constituted willful disregard under § 1818(e)(1). They also found that the
double-pledging of stock was an unsafe and unsound practice which exposed a bank to loss or harm.

Persons interested in bank insider liability issues should also review FDIC v. Spangler, 836 F.Supp.2d
778 (2011), in which the court sustained the FDIC’s complaint against a bank’s officers, directors and loan
committee members on state-law grounds.

New Law Prohibits False U.C.C. Filings

Illinois’ enactment of Article 9 of the Uniform Commercial Code (810 ILCS 5/9-101 et seq.) has been
amended to prohibit and punish filing of false financing statements.

Not only does P.A. 97-0836 make such false filings a crime, it creates a powerful civil remedy for
injured persons. Under new § 9-501.1, injured persons may sue and recover the greater of $10,000 or
actual damages; attorney’s fees; expenses of bringing the action; and, in the discretion of the court,
exemplary damages. It also creates an administrative procedure for termination of the false filing.

Reformation Request Not Barred By Credit Agreements Act

The Illinois Credit Agreements Act (815 ILCS 160) does not prohibit a debtor from seeking
reformation of a written agreement on grounds of mutual mistake of fact, a majority of a panel in the
Appellate Court’s Third District has ruled.

At issue in Schafer v. UnionBank/Central, 2012 IL App (3d) 110008, was a security agreement which
had been checked to cover “All Debts” instead of “Specific Debts.” When the bank used the security
agreement to seize and sell debtors’ property upon default on transactions other than the one in which it
was given, the debtors sued for conversion. The bank raised the security agreement as a defense, and
the debtors asked that it be reformed. Over an objection by the third judge, the majority said the Credit
Agreements Act does not prevent such reformation.

- John T. Hundley, Jhundley@lotsharp.com, 618-242-0246
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