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Federal Deposit Insurance Corporation As Receiver For Wheatland Bank v. Lewis Mark Spangler

December 22, 2011


The opinion of the court was delivered by: Judge Robert M. Dow, Jr.


This matter is before the Court on two motions to dismiss [60, 63], one filed by Defendant Mary Davolt and one filed by Defendants Lewis Mark Spangler, Arthur P. Sundry, Jr., Michael A. Sykes, Frank Maly, Dolores Ritter, Beverly Harvey, Michael Rees, Norman Beles, and Leonard Eichas.*fn1 For the reasons set forth below, the Court denies Defendant Mary Davolt's motion to dismiss [60] and grants in part and denies in part the motion to dismiss [63] filed by Defendants Lewis Mark Spangler, Arthur P. Sundry, Jr., Michael A. Sykes, Frank Maly, Dolores Ritter, Beverly Harvey, Michael Rees, Norman Beles, and Leonard Eichas.

I. Background*fn2

A.Procedural History

On April 23, 2010, the Illinois Department of Financial and Professional Regulation ("IDFPR") closed Wheatland bank in Naperville, Illinois, and appointed the FDIC as receiver. Pursuant to that appointment, the FDIC succeeded to all rights, titles, powers and privileges of Wheatland and the stockholders, depositors and other parties interested in the affairs of Wheatland. See12 U.S.C. § 1821(d)(2)(A)(i) (2010). As receiver, the FDIC is charged with collecting monies owed to the institution and distributing the funds to the creditors of Wheatland. See12 U.S.C. §§ 1821(d)(2)(B)(ii); 1821(d)(11). The FDIC is authorized by Congress to act as receiver to pursue claims against directors and officers of failed banks for alleged breaches of the applicable duty of care. See12USC § 1821(k).

In July 2010, after being substituted for Wheatland in two lawsuits pending in the Circuit Court of Cook County, the FDIC removed those cases to the Northern District of Illinois. The first suit was filed by Wheatland in December 2009 against Michael Sykes, Arthur Sundry, and others, alleging breach of fiduciary duty, tortious inducement of breach of fiduciary duty, fraud, negligence, conspiracy, and deceptive trade practices. The second suit was a shareholder derivative action filed by Michael Sykes in May 2010 against Mark Spangler and other former directors, asserting claims of breach of fiduciary duty, gross mismanagement, waste of corporate assets, and negligence. On May 5, 2011, Judge William T. Hart consolidated these cases, after substituting the FDIC as plaintiff in the Sykes v. Spangler matter, and granted the FDIC's leave to file an amended complaint. The FDIC filed its amended complaint, and Defendants' motions to dismiss followed.

B. Factual Background

The FDIC's amended complaint charges ten individuals with wrongdoing in relation to their work as former officers or directors (or both) of Wheatland Bank. Wheatland opened for business on February 5, 2007 and on April 23, 2010, after three years in operation, the IDFPR closed the bank and appointed the FDIC as Receiver. At the time of its failure, Wheatland had assets of $441.6 million. Its failure resulted in an estimated loss to the FDIC Deposit Insurance Fund of $136.9 million. According to the amended complaint, despite early and repeated regulatory warnings of the bank's excessive growth, heavily concentrated loan portfolio, poor credit administration, and lax oversight, the directors and officers of Wheatland continued on a course of asset growth, increased concentrations of high-risk real estate loans, and uncorrected underwriting failures that would result in massive losses to the bank.

The amended complaint divides Defendants into several groups. Plaintiff labels a group of eight Defendants as the "Directors Defendants" because they are alleged to have been on the bank's Board of Directors at certain points in time: Chairman of the Board Lewis Mark Spangler, President and CEO Michael A. Sykes, director Arthur P. Sundry, Jr., director Frank Maly, Michael Rees, Mary Davolt, Norman Beles, and Beverly Harvey. A subgroup of four of these Director Defendants (Rees, Davolt, Beles, and Harvey) are labeled as "Outside Directors." And lastly, Plaintiff labels a group of six Defendants as "Loan Committee Defendants" because they are alleged to have been on the bank's loan committee: Spangler, Sykes, Sundry, Maly, Chief Lending Officer Leonard Eichas, and Chief Financial Officer Dolores Ritter. Eichas and Ritter are the only defendants in the "Loan Committee" group that are not in the "Director" group.

Wheatland delegated the authority to approve loans to the Loan Committee. The Loan Committee was responsible for evaluating the adequacy of the underwriting of each loan and voting on whether to approve or reject the proposed loan. Plaintiff alleges that Wheatland adopted an aggressive asset growth strategy that violated the business plan that it submitted and committed to follow in order to obtain federal deposit insurance. After six months in operation, Wheatland had total assets at levels not projected in its business plan until the second quarter of its second year of operation. By the end of its second year of operation, Wheatland had extended $401 million in loans, approximately five times the loan limit approved by state and federal regulators. According to the amended complaint, this rapid loan growth compromised Wheatland's credit underwriting and administration, eventually leading to loan losses that substantially depleted its capital.

Wheatland's officers and directors concentrated the Bank's excessive lending in commercial real estate ("CRE") and acquisition, development, and construction ("ADC") loans. The amended complaint describes in detail eight specific "Loss Loans" made by Wheatland. See Am. Compl. at ¶¶ 25-29; 40-47; 112-115. According to the FDIC, Wheatland's percentage of high-risk real estate loans sharply exceeded that of its peers, prompting frequent warnings from bank examiners, which were ignored by Defendants. Specifically, Plaintiff alleges that Wheatland's officers and directors permitted the lending to concentrate in a few individuals, a majority of whom already held adversely classified credits with Wheatland. For example, the complaint alleges that as of December 31, 2008-roughly a year and a half after Wheatland's founding-ten individuals were obligated on loans that represented 97 percent of Wheatland's total capital and seven of these borrowers had credits that had been adversely classified by examiners. This focus on loan growth over risk diversification and asset quality resulted in large adverse classification levels, substantial charge-offs, and additional provisions to the allowance for loan and lease losses ("ALLL"), all of which significantly depleted Wheatland's capital.

The amended complaint also alleges that the Loan Committee Defendants failed to follow the bank's written lending policies and ensure prudent underwriting in approving the Loss Loans.

The Loan Committee allegedly approved loans without current and complete financial information on the borrower and guarantor and without obtaining a full guarantee on the loans. Other significant underwriting problems included failing to assess the repayment abilities of borrowers and guarantors, failing to assess creditworthiness before allowing generous interest reserves, and funding loans that were not financially feasible. Loans were made with excessive long-to-value ratios in violation of the bank's loan policies and federal regulatory standards, thereby heightening Wheatland's risk. The Loan Committee Defendants also allegedly approved loans where the collateral was impaired, no appraisals had been performed, and no title insurance was secured, and then failed to oversee loan draws. Furthermore, Wheatland extended loans to certain shareholders of Wheatland with preferential terms. When these loans failed, Plaintiff alleges that Wheatland chose not to pursue repayment from these borrowers and guarantors.

The amended complaint further alleges that these failings were compounded by the Director Defendants' failure to address repeated regulatory warnings about the state of Wheatland, beginning in 2007 through its collapse in April 2010. In the summer of 2007, state regulators urged the directors to monitor lending closely due to Wheatland's "de novo status, rapid loan growth, and the inherent risk associated with CRE and ADC lending." Am. Compl. at ¶ 33. Going forward, federal and state regulators cautioned Wheatland's Board to address its high CRE and ADC concentrations and excessive growth rate given the bank's de novo status and criticized Wheatland's inadequate credit underwriting and administration. According to the amended complaint, the Director Defendants took no action to reform the lending process. As a result, Wheatland further deteriorated and in December 2009 entered into a consent order with the FDIC and IDFPR which required Wheatland, among other things, to increase Board participation, reduce all loan concentrations, and revise and improve its lending policies. In the February 2010 regulatory examination, the FDIC and IDFPR found that Wheatland's emphasis on loan growth over diversification and asset quality resulted in significant charge-offs that adversely affected its capital. The FDIC also issued a Prompt Corrective Action letter in February 2010, notifying the bank that it was "critically" undercapitalized and requiring it to submit a capital restoration plan by March 15, 2010. Am. Compl. at ¶ 39. It failed to do so and Wheatland closed soon thereafter, allegedly causing substantial losses to the FDIC Deposit Insurance Fund and creditors of the bank.

On the basis of these factual allegations, the amended complaint contends that in approving the Loss Loans, the Loan Committee Defendants (Spangler, Sundry, Sykes, Maly, Eichas and Ritter) were grossly negligent within the meaning of 12 U.S.C. ยง1821(k) (count I) and negligent under Illinois common law (count II) and that these same defendants breached their fiduciary duty of care in approving the eight "Loss Loans" (count III) and their fiduciary duty of loyalty in approving the seven "Insider Loss Loans" (count IV). The amended complaint also alleges that the Director Defendants (everyone except Eichas and Ritter) were grossly negligent ...

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