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Federal Deposit Insurance Corporation v. Onebeacon Midwest Insurance Co.

United States District Court, N.D. Illinois, Eastern Division

March 31, 2014



JOHN F. GRADY, District Judge.

Before the court is defendant OneBeacon Midwest Insurance Company's ("OneBeacon") motion for summary judgment. For the reasons explained below, we deny OneBeacon's motion.


The Federal Deposit Insurance Corporation, as receiver for Wheatland Bank ("FDIC-R"), claims that OneBeacon breached its obligation to insure Wheatland for losses stemming from dishonest conduct by two former executives, Michael Sykes and Art Sundry. Sykes and others organized Wheatland, which began operations in February 2007. (Def.'s Stmt. ¶ 5.) During 2007, Sykes held several positions within the bank: President, CEO, director, and Loan Committee member. (Id. at ¶ 6.) Sundry was a director, shareholder, and Loan Committee member. (Id. at ¶ 7.) Sykes and Sundry were also two of the three owners (along with Ed Elsbury) of Mezzanine Finance LLC ("MFL"). (Id. at ¶ 13; see also Pl.'s Resp. to Def.'s Stmt. ¶ 13.) MFL made short-term, high-interest-rate second-lien loans secured by real property. (Def.'s Stmt. ¶ 13.)

1. The Pendolino Loan

On March 8, 2007, Sykes and Wheatland's CFO, Dolores Ritter, approved a $693, 750 loan to Bellony Real Estate and Development, LLC (the "Pendolino Loan"). (See id. at ¶ 18; see also Pl.'s Resp. to Def.'s Stmt. ¶ 18.) The loan was secured by a first mortgage, and by guarantees from Anthony Pendolino and Stephanie Lacey-Pendolino. (See Def.'s Stmt. ¶ 18; see also Pl.'s Resp. to Def.'s Stmt. ¶ 18.) The Pendolino Loan closed on March 16, 2007. (Id. at ¶ 19.) MFL made a second-lien loan to the Pendolinos that closed the same day. (Id.) The MFL loan had a 20% interest rate and was secured by a junior lien subordinate to Wheatland's mortgage on the same collateral. (Id.) On the day before closing, Sykes disclosed the existence of the MFL loan to Len Eichas - who was Wheatland's Vice President and Chief Lending Officer, a member of the bank's Loan Committee, and a director. (See Def.'s Stmt. ¶¶ 20-21; Pl.'s Resp. to Def.'s Stmt. ¶ 20.) On March 21, 2007, the Loan Committee - including Eichas - considered and approved the Pendolino Loan ex post facto. (See Def.'s Stmt. ¶ 22.)[1] OneBeacon argues that Wheatland's Loan Policy required Sykes and Sundry to recuse themselves from considering the Pendolino Loan:

Under no circumstances shall a loan officer make, fund or vote on a loan to a family relative, to another officer, or any other person or business which could be considered a conflict of interest.

(Loan Policy, attached as Ex. 8 to Def.'s Resp. to Pl.'s Stmt., at 5.) The Loan Policy itself does not define "conflict of interest." But the bank's Code of Ethical Conduct Policy is instructive:

A "conflict of interest" exists or may exist whenever a Covered Person's private interests are adverse to, interfere with, or influence the objective judgment and action of the Covered Person (or appear to do any of the foregoing) with respect to the business interests of the Company. Conflicts of interest may also arise when a Covered Person or an affiliate (including a family member) of such Covered Person receives improper personal benefits from any Company action or omission to act which are substantially attributable to such Covered Person's position with the Company.
Conflicts of interest are prohibited as a matter of Company policy.

(Code of Ethical Conduct Policy, attached as Ex. 12 to Def.'s Resp. to Pl.'s Stmt., at 3.) The FDIC-R contends that it is "uncertain" whether Sykes had to recuse himself with respect to the Pendolino Loan because: (1) he approved the Pendolino Loan before he approved the MFL loan; (2) the MFL loan was junior to the Pendolino Loan; and (3) neither Sykes nor Sundry had an interest in the underlying project and they did not receive any proceeds of the Pendolino Loan. (See Def.'s Resp. to Pl.'s Stmt. ¶ 24.)

2. The Village Walk Loan

In November 2006, MFL made a $940, 000 loan to Village Walk, LLC that was subordinate to a first-lien loan from Mutual Bank. (Def.'s Stmt. ¶ 28; Pl.'s Stmt. of Add'l Facts ¶ 5.) A local real estate developer, George Venturella, owned Village Walk. (See Pl.'s Stmt. of Add'l Facts ¶ 5.) MFL's loan had a one-year term, maturing on December 4, 2007, and was secured by a mortgage on two parcels of land designated for residential use and commercial development, respectively. (Id. at ¶¶ 5-6.) Venturella made late payments to MFL during the loan's term, and Elsbury personally went to Venturella's office on several occasions to collect money. (Id. at ¶ 8.) During this time, MFL was in workout negotiations with Anthem Home Builders ("Anthem") on two non-performing loans. (Id. at ¶ 9.) Anthem's failure to repay MFL on time caused Sykes and Sundry to make additional capital contributions to MFL to cover its financing costs. (Id.) And they needed Venturella to repay his loan at maturity to avoid having to make further capital contributions. (Id. at ¶ 10.) Sykes "repeatedly pressed" Venturella to confirm the he would repay the loan on time. (Id. at ¶ 10.)[2] And until shortly before the maturity date, Venturella did not indicate to Sykes or Sundry that he would be unable to do so. (Id. at ¶ 11.) On November 28, 2007, Venturella emailed Sykes and Sundry that he could not repay MFL on time because the sale of the Village Walk property had been delayed. (Id. at ¶ 11.) Sykes told Venturella that "[t]his debt must be repaid on December 4, 2007 or we will be very unhappy with you and our arrangement." (Id. at ¶ 14.) Internal emails amongst MFL's principals convey just how "unhappy" they were. Sykes told his partners that he was "very insecure" about the property's potential purchaser and that he felt "very much betrayed at [Venturella's] late disclosure." (Id. at ¶ 12.) Sundry reacted similarly:

no relief!
he knew and has avoided us and made no contingency plans and told us on 11/29
i want the 5% late fee and 100% of interest IMMEDIATELY to grant a 90 day extension. during extension, he pays full 20% MONTHLY, IN ADVANCE!
he is not a straight shooter

(Email from Sundry to Elsbury & Sykes, dated Nov. 29, 2007, attached as Ex. 28 to Pl.'s Resp. to Def.'s Stmt. (emphasis in original).) On December 3, 2007 - the day before the maturity date - Sundry pressed Venturella to obtain a loan from Mutual Bank to pay off MFL's loan, but told his colleagues that he did not believe that Venturella would do so. (Id. at ¶ 15.) On December 5, 2007, MFL issued a default letter imposing a $47, 000 late fee and a 25% default interest rate going forward. (Id. at ¶ 16.)[3] Without a reliable source of repayment, MFL's partners were at risk of carrying both the failed Anthem loans and the Village Walk loan for an unknown period of time. (Id. at ¶ 17.)

It is not entirely clear from the raw record, but the parties appear to agree that Venturella first proposed the idea of obtaining a loan from Wheatland. (See Def.'s Stmt. ¶ 30; see also Pl.'s Resp. to Def.'s Stmt. ¶ 30.) Sykes prepared a Loan Approval Request for a transaction refinancing Mutual's senior loan and MFL's junior loan. (See Def.'s Stmt. ¶ 31.)[4] He testified in this case that he believed, at that time, that it was "a very nice loan for [Wheatland]...." (See Def.'s Stmt. ¶ 31; Pl.'s Resp. to Def.'s Stmt. ¶ 31.) The Loan Approval Request lists "conditions precedent to closing, " including: (1) a "[s]atisfactory Appraisal Report indicating loan to value of 75% or less;" (2) a "[s]atisfactory appraisal review;" and (3) an "[i]nterest reserve of $400, 000 ($5, 400, 000 @ 7.50% × 12 months) to be established in a Wheatland Bank account." (See Loan Approval Request, attached as Depo. Ex. 21 to Def.'s Stmt., at 2.) It also states that Village Walk was "current" on its payments to MFL and Mutual Bank. (Pl.'s Stmt. of Add'l Facts ¶ 18.) It did not disclose that the MFL loan was past its maturity date, that MFL had issued a default letter imposing a late fee and default interest, or that Sykes and Sundry had misgivings about Venturella's trustworthiness. (Id.) Frank Maly and Louis Spangler, who were members of Wheatland's Loan Committee at that time, testified that they would not have approved the Village Walk Loan if Sykes and/or Sundry had disclosed this information. (See id. at ¶ 19; Maly Dep., attached as Ex. 18 to Pl.'s Resp. to Def.'s Stmt., 300; Spangler Dep., attached as Ex. 19 to Pl.'s Resp. to Def.'s Stmt., 347-62.) Sykes contends that he did disclose this information to the Loan Committee, and that he also told the Committee that he would be relying on a two-year old appraisal with respect to the tract of the Village Walk property designated for residential use. (See Pl.'s Stmt. of Add'l Facts ¶ 22; see also Loan Approval Request at 2 (citing a January 24, 2006 appraisal of that tract).) The minutes of the Loan Committee meeting do not mention these alleged disclosures. But they do state that Sykes disclosed that he and Sundry were principals of MFL:

Michael Sykes disclosed that Mezzanine Finance, in which he and Arthur Sundry, Jr. are principals, currently has a secondary ...

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