Page 12 - John Hundley 2014

The court did construe the amount of the underlying debt to be a required term, however,

Noting that late last year the General Assembly had amended §11 to state that it was intended to be
permissive, the court said it would not rely on that amendment because the cases predated it. “[W]e
agree that the terms listed in section 5/11 have always been permissive rather than mandatory.”

Relying on Crane, the United States District Court for the Southern District of Illinois then affirmed a
bankruptcy court holding that § 11 was permissive in In re HIE of Effingham, LLC, __ B.R. __, No. 13-
0393-DRH (S.D. Ill. March 28, 2014).

FIRREA May Not Bar Negligence Claims Against Bank Officials

The gross negligence standard for bank officer and director liability stated in the Financial Institutions
Reform, Recovery and Enforcement Act (12 U.S.C. § 1821(k)) (FIRREA) does not prevent the Federal
Deposit Insurance Corporation from invoking an ordinary negligence standard in a suit against officials of
a failed bank when state law imposes an ordinary negligence standard, a federal court in Georgia has
reasoned. Quoting Supreme Court precedent, FDIC v. Loudermilk, __ F.Supp.2d __, 2013 WL 6178463
(N.D. Ga. 2013), said FIRREA’s gross negligence standard “provides only a floor” and does not stand in
the way of FDIC relying on an ordinary negligence standard when state law provides same. It further
appeared to rule that the “business judgment” defense does not apply to the FDIC’s negligence claims.

Arguably inconsistent is FDIC v. Skow, 741 F.3d 1342 (11th Cir. 2013). Both cases have been
certified to the Georgia Supreme Court for decision.

Appeals Panel Okays $1 Million Penalty, Banishment Order

A federal appeals panel in Washington, D.C., has denied review of orders assessing $1 million in civil
penalties against a bank CEO, director and shareholder and banishing him from banking.

The court in effect affirmed penalties imposed by the Office of the Comptroller of the Currency (OCC) for
occurrences that predated the collapse of American Sterling Bank of Sugar Creek, MO.

The court noted that under 12 U.S.C. § 1818(e)(1) banishment was appropriate when a bank official (1)
violated “any law or regulation,” “engaged or participated in any unsafe or unsound practice,” or breached a
fiduciary duty; (2) that either caused the bank to “suffer[] or ... probably suffer financial loss or other damage,”
prejudices or could prejudice depositors’ interests, or gives the party “financial gain or other benefit;” and (3)
that involves personal dishonesty ... or ... demonstrates willful or continuing disregard . . . for the safety or
soundness of [the bank]”. Dodge v. Comptroller of Currency, __ F.3d __, 2014 WL 888423 (D.C. Cir. 2014).

It found those tests met where, among other things, the official had caused the bank to treat as capital the
transfer of a non-performing political loan from its holding company; the treating as capital of the transfer to the
holding company of a charged-off loan which the official had guaranteed; the backdating of alleged capital
contributions for the purpose of making the bank appear well capitalized; and the treatment as income of
potential earnings on a pipeline mortgage servicing project, even though there was no written agreement.

It also found that the misconduct constituted reckless engagement in unsafe or unsound practices such as
to justify the monetary penalty under 12 U.S.C. § 1818(i).
- John T. Hundley, jhundley@lotsharp.com, 618-242-0246
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