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April 30, 1990


The opinion of the court was delivered by: NIXON


 As FBT's assignee under the Blanket Bond, the FDIC presented St. Paul with four claims for indemnification, and St. Paul denied all four claims. The FDIC subsequently filed the above-styled action in this Court claiming that St. Paul had breached its obligations under the Blanket Bond by failing to pay on the four claims. This action was tried without a jury on March 28, 29, 30, 31, 1988. Pursuant to Federal Rule of Civil Procedure 52, the Court hereby issues the following Findings of Fact and Conclusions of Law in resolution of this dispute.


 The Farmers Bank and Trust Company was owned in its entirety by Farmbanc Company, a stock holding company specifically created to hold only the stock of FBT. Ownership in Farmbanc Company was represented by 60,000 shares of outstanding stock. Between January, 1982 and January, 1983, ownership of the 60,000 shares of Farmbanc stock was divided among Millard Oakley, Travis Anderson, Billy Mac Welch, Franklin Glass, Gary Ramsey, Ramsey's father, and Ramsey's father-in-law. In January, 1983, Jake Cantrell and Russell McGee also purchased blocks of Farmbanc stock.

 In 1982, FBT's Board of Directors consisted of fifteen directors with equal voting power, of whom only Gary Ramsey was a Farmbanc stockholder. The minutes of the FBT Board meetings indicate that the FBT Board of Directors actively reviewed and exercised its authority to approve and disapprove of the bank's policies, loans, investments, appointments, salaries and operations. The minutes further indicate that the Board took special consideration and voted separately on every loan proposed to be made to individuals or businesses in which a director had an interest, and that it was the practice for a director to abstain from voting on loans in which he had a personal interest.

 On June 2, 1980, FBT's Board of Directors elected Gary Ramsey to be President and Chief Executive Officer of the bank and to serve as a director on the bank's Board. At their June 16, 1980 meeting, the Board set Ramsey's salary at $ 50,000 per year. When salaries were next considered, on May 26, 1981, the Board made no changes in any of the officers' salaries. In September of 1983, the Board set the salary of Ramsey's successor as Chief Executive Officer, Thomas Mottern, at $ 75,000 per year.

 One of the FDIC's claims under the Blanket Bond concerns a promissory note issued to FBT from the Bull Run Oil Company. The Bull Run Oil Company was an Amoco oil jobbership incorporated in the State of Tennessee. Jake Butcher was the Chairman of the Board of Bull Run Oil Company, W. Dwight Church was the Company's President, and Sonya Butcher was its Secretary. On March 31, 1977, the Bull Run Oil Company executed a promissory note payable to FBT in the amount of $ 1,342,000. The promissory note payable to FBT was unsecured but accompanied by personal guarantees purportedly signed by Jake and Sonya Butcher. FBT retained $ 300,000 of the Bull Run indebtedness and sold the remainder of the loan to five other banks.

 Pursuant to their regulatory authority, FDIC examiners reviewed the accounts of the Farmers Bank and Trust on April 4, 1983. During that examination, the FDIC classified the Bull Run loan as a lost account due to the collapse of Jake Butcher's banking empire and the deterioration of his assets. The loan went into default on July 1, 1983 and no payments were made on it thereafter.

 On September 8, 1983, an involuntary bankruptcy petition was filed against Sonya Butcher. Jake Butcher was also the subject of bankruptcy proceedings at that time. In her bankruptcy case, Sonya Butcher asserted that she had not signed the personal guarantee for the Bull Run loan and that she had no knowledge of the loan's existence until the bankruptcy claim had been brought against her. After Mrs. Butcher asserted that her signature had been forged on the Bull Run guarantee, the FDIC, as assignee of the note, dropped its claim against her and filed for recovery under the forgery provision of the FBT -- St. Paul Blanket Bond. By that time, both Jake and Sonya Butcher had been declared bankrupt. Unsecured creditors, such as the FDIC, expected to recover less than five percent of the amounts that they were owed from the Butchers' estates.

 In deposition testimony entered into evidence in the present case, Sonya Butcher testified that she had difficulty recalling the details of her activities at the time that the personal guarantee was executed in March, 1977. Mrs. Butcher testified that several people in her employ were authorized to sign her name to checks and letters, but that she didn't recall anyone signing her name to bank notes and that she didn't recall having authorized anyone to sign her name to the Bull Run guarantee. She testified that she would have signed the Bull Run note if her husband had asked her to do so. As of March 1988, the outstanding indebtedness on the Bull Run note totalled $ 805,216 in principal and $ 431,176 in interest.

 The FDIC also submitted a claim for indemnification under the Blanket Bond for FBT's payment of $ 70,666.70 to Consolidated Financial Service (hereinafter "CFS"). CFS provided consulting services to banks regarding marketing and insurance programs. Jake Cantrell served as the Chairman of the Board of CFS and set the company's policy. CFS's operations were supervised by its President, Russell McGee. CFS was affiliated with the Rhea Bancshares holding company and the stockholders of Rhea Bancshares were automatically given ownership interests in CFS of equal proportion to their interests in the Rhea stock.

 Beginning July 1, 1982, CFS received ten monthly payments of $ 1,666.67 from Farmers Bank and Trust. The Court finds that CFS rendered legitimate consulting services to FBT for the $ 1,666.67 payments. Among the services provided for these fees, CFS established several marketing programs for FBT, restructured FBT's credit life insurance programs, analyzed FBT's general insurance program, and advised FBT as to their potential liability under certain promotional campaigns. The fee arrangement was never evidenced by a written contract, but was informally agreed to by CFS Chairman Jake Cantrell and FBT President Gary Ramsey.

 Apart from the ten monthly payments of $ 1,666.67, FBT also issued three other checks to CFS on January 4, 1982, July 13, 1982, and January 17, 1983, each in the amount of $ 18,000. The checks were ordered and authorized by FBT President Ramsey. The $ 18,000 checks were not sent to CFS President McGee as the $ 1,666.67 consulting checks had been, but were instead personally given by Ramsey to Cantrell, who used the proceeds to service his personal debts. Part of the monies paid by FBT to CFS were also used to purchase a life insurance policy for Gary Ramsey.

 In November, 1982, FBT President Gary Ramsey became a stockholder in CFS and Rhea Bancshares. The other FBT Directors were unaware of Ramsey's interest in CFS. The FBT Directors were also unaware of the $ 1,666.67 monthly consulting payments and the $ 18,000 checks paid to CFS. The payments had been included without explanation under the "fees" category in the monthly financial statement reviewed by the Board. Moreover, CFS President McGee was also unaware of the three $ 18,000 checks issued to CFS and knew of no services that his company had performed to merit the $ 18,000 payments. According to the deposition testimony of Gary Ramsey, neither CFS nor Jake Cantrell performed any services to justify the $ 18,000 payments. Ramsey authorized the payments because he was personally and financially indebted to Cantrell. Ramsey intended to keep the FBT Board of Directors unaware of the CFS payments. Upon becoming apprised of the CFS payments and Ramsey's CFS interest through a report presented by the FDIC in May of 1983, the FBT Board cancelled all future payments to CFS.

 The CFS payments constituted part of the basis on which Gary Ramsey was indicted and pled guilty in 1987 to conspiring with Jake Cantrell to willfully misapply the money of FBT with the intent to injure and defraud FBT in violation of 18 U.S.C. § 371 and 18 U.S.C. § 372. The criminal charge against Ramsey was also based on his receipt of $ 170,000 under the guise of "executive committee fees."

 The $ 170,000 paid to Ramsey as "executive committee fees" was also the subject of one of the FDIC's claims under the Blanket Bond. Ramsey had ordered FBT's controller, Robert Marion Anderton, to issue cashier's checks to Ramsey in the amount of $ 10,000 every month, beginning January, 1982. Ramsey told Anderton that the checks were for "executive committee fees." Upon Ramsey's installment as President in 1980, Anderton had been told to follow Ramsey's instructions without question. Accordingly, Anderton issued the $ 10,000 checks in the process of paying the bank bills without knowing any details of the purpose of the payments. Anderton entered the $ 10,000 payments in the bank's ledger books, and the payments were combined with other expenses on the bank's Income and Expense Statement under the heading "Expense -- Fees". The checks were not entered under the separate expense category titled "Expense -- Salaries." Ramsey deposited the $ 10,000 checks in his personal account at the Citizens & Southern National Bank in Atlanta, Georgia. After depositing a check each month, Ramsey would then write a personal check on his account to Jake Cantrell for $ 5,000. Both Ramsey and Cantrell used their halves of the $ 10,000 payments to service the debts that they had incurred in purchasing the stock and options of Farmbanc, Inc.

 In his deposition testimony, Ramsey admitted that he purposely concealed the "executive committee fees" from the FBT Board of Directors. Ramsey also admitted that he was the entire "executive committee" and that he performed no services for the bank beyond those for which he was compensated as bank President. The FBT Directors testified that they were unaware of the funds which Ramsey was drawing as "executive committee fees" until the $ 10,000 checks were brought to the Board's attention by the May, 1983 FDIC report. At that time, the Board voted to discontinue the fee payments.

 Two of FBT's officers, Robert Marion Anderton and Eunetta Carmack, were aware of the CFS and "executive committee" payments at the time that the payments were made. Eunetta Carmack was an administrative vice-president of FBT who was responsible for receiving vendor invoices, preparing checks, and presenting the checks and invoices to the appropriate bank officers for authorization and signature. Carmack received many of the invoices for the CFS payments not by mail, but directly from Gary Ramsey. Carmack then presented the CFS invoices to Ramsey or Robert Marion Anderton for authorization, and checks payable to CFS were then prepared by Carmack and signed by Ramsey or Anderton. It was not Carmack's duty to examine the underlying validity of the invoices. Anderton, as FBT controller and vice-president, authorized and signed the CFS and "executive committee fee" checks upon the orders of Ramsey without investigation into the legitimacy of the payments. Carmack testified that she did not know that Ramsey was acting dishonestly by receiving the payments. Anderton considered Ramsey's actions to be "unusual", but not dishonest.

 Gary Ramsey was extensively involved with the operations, affiliated companies, and stockholders of Rhea Bancshares. In 1978, Ramsey was hired by DBT President Jake Cantrell to work as a loan officer at Dayton Bank & Trust. When Cantrell and his associates formed Rhea Bancshares in 1979, Ramsey was promoted to the position of executive vice-president of DBT. In 1980, Cantrell obtained an option to purchase the Farmbanc shares of Willard Oakley, at which time he arranged for Ramsey to leave DBT and take up the position of President at Farmers Bank & Trust. In March, 1982, while still serving as President of Farmers Bank & Trust, Ramsey was elected President of Rhea Bancshares.

 On November 2, 1982, Gary Ramsey invested $ 500,000 in Rhea Bancshares in return for 10,000 shares of Rhea Bancshares stock. To further the success of his investment, Ramsey loaned FBT funds to Alfred Cowley, Thomas Parsons, and Walter Spiva to finance the purchase of the remaining shares of the Rhea stock issue.

 Alfred H. Cowley originally financed his purchase of Rhea Bancshares stock through a loan of $ 750,000 from the Bank of Cummings, Georgia. On October 28, 1982, Gary Ramsey arranged for FBT to purchase a $ 495,000 participation in Cowley's $ 750,000 loan. The original loan and FBT participation were unsecured until 20,000 shares of Rhea stock were pledged as collateral for the participation during the FDIC's examination of FBT's books in the Spring of 1983. FBT files contained an unverified August, 1982 financial statement for Cowley listing his net worth at 7 million dollars, and an unverified November 1982 statement listing his net worth at 12 million dollars, without explanation of the drastic increase. In his deposition testimony, Ramsey later admitted that he hadn't known enough about Cowley to justify the purchase of the loan participation, but had arranged the participation at the insistence of Jake Cantrell.

 On November 1, 1982, FBT loaned $ 250,000 to Thomas C. Parsons to purchase 5,000 shares of Rhea Bancshares stock. The loan was extended by FBT President Ramsey and collateralized by the 5,000 shares of Rhea Bancshares stock that Parsons was to purchase. Parsons' unverified financial statement indicated that he had an annual income of approximately $ 110,000 and net worth of approximately $ 260,000. Parsons testified that, at the time that he signed the $ 250,000 note, he did not believe that his finances were sufficient to service the annual principal and interest payments. He accepted the loan, however, on behalf of his friend Ellis Galyon and with the written assurance that Galyon would make all the debt service payments on the $ 250,000 loan. Galyon was an old friend of Rhea Bancshares Chairman Jake Cantrell and had desired to personally participate in the stock issue but was too highly leveraged through other investments to obtain a $ 250,000 loan on his own behalf. Prior to execution of the $ 250,000 note, the most money Parsons had ever borrowed from FBT was $ 17,000.

 On November 4, 1982, FBT loaned $ 250,000 to Walter Spiva to purchase 5,000 shares of Rhea Bancshares stock. The loan was extended by Ramsey and collateralized by the 5,000 shares of stock. Spiva earned $ 40,000 per year as President and Chief Executive Officer of Dayton Bank & Trust. At the time of the loan, Spiva's most recent financial statement indicated that he had a net worth of $ 73,427. The $ 250,000 loan required service payment of $ 50,000 per year.

 Ramsey prepared a memorandum to the bank's credit file in regard to the Spiva loan. The memorandum noted that Dayton Bank & Trust was a subsidiary of Rhea Bancshares and that

An ownership interest in Consolidated Financial Services, Rhea Insurance & Dayton Insurance Company is included with the purchase of the holding company stock . . . . The source of [Spiva's] repayment will be derived from dividends from the insurance & services & companies & bonuses from [Dayton Bank & Trust]. The dividends may also be available from the bank as the banks [sic] income improves since the one bank holding company [Rhea Bancshares] loan at C & S [Citizens & Southern Bank] in Atlanta is paid ahead four years.

 The statement that the Rhea Bancshares debt to Citizens & Southern Bank had been "paid ahead four years" was incorrect. Rhea Bancshares defaulted on the loan in early 1984 and lost ownership of Dayton Bank & Trust in the resulting foreclosure.

 The FBT Board members testified that Ramsey never revealed his interest in Rhea Bancshares to the FBT Board and that they were unaware that he held such an interest at the time the loans were made. Furthermore, when the Cowley, Parsons, and Spiva loans were presented to the FBT Board on November 15, 1982, Ramsey indicated to the Board that the book value of the Rhea stock offered as collateral was $ 50 per share. The book value of the Rhea stock was actually $ 12.28 per share at that time and $ 26.43 per share after the loan proceeds were invested in the stock issue. The book value never approached the $ 50 level which Ramsey indicated to the Board.

 The loan policy in effect for Farmers Bank and Trust at the time of the Rhea loans stated that "loan officers shall not process loans to borrowers in which they have a financial interest." The policy further states that "loans to borrowers in which officers of the bank are financially interested shall . . . be approved by the Board of Directors." Furthermore, as noted earlier, the FBT Board minutes indicate that directors were required to abstain from voting on loans for entities in which they had an interest and that such loans were specially considered by the Board of Directors. The Parsons, Cowley, and Spiva loans were all processed by Gary Ramsey. All of the loans were extended by Ramsey without prior Board approval. Furthermore, the loans were not presented to the Board for special consideration as loans in which a director had an interest, and Ramsey did not abstain from voting on the loans when they were presented to the Board for subsequent ratification. After the default of the Parsons, Cowley and Spiva loans, the FDIC, as FBT's assignee, filed a claim under the employee dishonesty clause of the St. Paul Blanket Bond.

 The FDIC also presented a Blanket Bond claim for money lost due to the default of loans made to Billy Mac Welch and Franklin Glass for the benefit of the Century Motors Company. The Century Motors Company had 200 shares of outstanding stock. Fifty of those shares were owned by Century's operating manager, Bob Littleton. The other 150 shares were held by Franklin Glass on behalf of himself, Billy Mac Welch, Jake Cantrell, and Gary Ramsey pursuant to a written agreement. Cantrell, Welch, and Ramsey remained as unofficial, silent partners to avoid appearances of conflict with their positions at FBT and the Dayton Bank & Trust. Ramsey paid $ 15,000 for his ownership interest in 37.5 shares of Century Motors' stock.

 Financial statements for Welch and Glass were not submitted to FBT until after the loans were made. The financial statement filed for Billy Mac Welch, dated June 30, 1982, shows total assets of $ 2,919,325, total liabilities of $ 661,701 and a net worth of $ 1,257,624. A financial statement for Franklin Glass dated February 1, 1983 shows total assets of $ 2,473,000, total liabilities of $ 1,119,633, and a net worth of $ 1,353,367. Ramsey never verified the accuracy of these financial statements. Furthermore, Ramsey did not receive prior Board approval for the loans and served as the acting loan officer, even though the loans were being made to benefit an entity in which Ramsey had a financial interest. Moreover, minutes of the February, 1983 FBT Board meeting do not indicate that the Welch and Glass loans were considered as loans in which a director had an interest, nor do they indicate that Ramsey abstained from voting on the loans. The FBT Board members testified that they were unaware of Ramsey's interest in Century Motors, were misled by his approval of the loans without revealing his interest, and would have probably disapproved the loans had they been aware that Ramsey had concealed his interests. After the default of the Glass and Welch loans, the FDIC, as FBT's assignee, filed a claim under the employee dishonesty clause of the St. Paul Blanket Bond.

 The FDIC also presented a Blanket bond claim arising from the default of loans made to Donald A. Wilson. Donald A. Wilson was a real estate developer who had purchased 75 acres of land near Smyrna, Tennessee to develop into condominiums. Wilson financed the purchase by executing a January 23, 1982 promissory note to the property's sellers, Robert and Frances Harris, for the full purchase price of the property. Robert and Frances Harris thereby secured the first mortgage lien on the Smyrna property in the event that Wilson defaulted upon the note.

 Wilson began a borrowing relationship with Farmers Bank & Trust on February 25, 1981. By November 25, 1981, Wilson owed FBT $ 77,000. Between November, 1981 and January, 1983, Wilson received several more fund advances from FBT until all of his outstanding advances were consolidated into one note of $ 300,000 on January 24, 1983. All of the funds evidenced by the $ 300,000 promissory note were used for the Smyrna project, except for $ 24,000 which was applied to a debt incurred in the purchase of an airplane. The $ 300,000 note was collateralized by a second mortgage lien on the Smyrna property. The FBT lien was secondary to the lien held by Robert and Frances Harris.

 Gary Ramsey was Wilson's loan officer at FBT. Ramsey's December 31, 1981 financial statement indicates that Ramsey also held a 10% ownership interest in Wilson's Smyrna condominium project. Ramsey did not reveal this interest to the FBT Board of Directors. Furthermore, neither the Credit File Memorandum nor the Security Agreement which Ramsey prepared for Wilson's $ 300,000 note indicated that FBT's mortgage on the Smyrna property was inferior to any other mortgage. Since Ramsey did not reveal his interest in the Smyrna project to the FBT Board of Directors, neither the $ 300,000 note nor its composite advances were presented to the Board to be specially reviewed as insider transactions. When questioned by FDIC examiners during the April, 1983 review of FBT accounts, Ramsey stated that he had no interest in the Smyrna project. Ramsey now admits that this was a lie.

 In the Spring of 1983, Wilson defaulted upon his obligation to Robert and Frances Harris and the Smyrna property was foreclosed upon as a result. The foreclosure to Robert and Frances Harris extinguished the junior mortgage lien which FBT held on the property. Wilson subsequently defaulted on his $ 300,000 note to FBT and filed for bankruptcy. Wilson's bankruptcy case was dismissed and Wilson is left without any assets to satisfy the FBT obligation. The FDIC, as FBT's assignee on the note and Blanket Bond, submitted a claim to St. Paul for $ 282,015.15 for the amount, exclusive of interest, which FBT lost on the Wilson loans.



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