MEMORANDUM OPINION AND ORDER
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.
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. See 12 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. See 12 U.S.C. §§ 1821(d)(2)(B)(ii); 1821(d)(ll). 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. See 12 USC § 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
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 Wheat-land’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
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 Wheat-land’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 Wheat-land, 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. § 1821(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 (count V) and negligent (count VI) for failing “properly to supervise, manage and oversee the lending operations [or ‘function’] and business affairs of the Bank.”
II. Legal Standard for Rule 12(b)(6) Motions to Dismiss
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of the complaint, not the merits of the case. See Gibson v. City of Chicago,
Defendant relies on cases applying heightened pleading requirements, but those requirements are inapplicable here. Under Rule 8, a complaint “suffices if it notifies that defendant of the principal events.” Christensen v. County of Boone, IL,
III. Analysis
Defendants allege that Plaintiffs amended complaint fails to state a claim upon which relief can be granted. Specifically, Defendants maintain that the FDIC’s allegations do not support a plausible inference that Defendants knew or should have known of any problems with the eight Loss Loans identified in the complaint, nor do the allegations demonstrate how any specific Defendant caused any of the alleged losses.
A. Applicable Standards
Illinois law permits claims for both negligence and gross negligence against directors. See FDIC v. Saphir,
Gross negligence has been defined as “very great negligence” but something less than willful, wanton and reckless conduct. Gravee,
Counts I through III of the amended complaint allege claims for gross negligence, negligence, and breach of the fiduciary duty of care against the Loan Committee Defendants (Spangler, Sundry, Sykes, Eichas, Maly and Ritter) for their approval of imprudent loans. Defendants move to dismiss Counts I through III on the ground that the complaint is vague as to the role of each Loan Committee member. Defendants maintain that the “FDIC never specifies the loans that were made (or the losses that supposedly resulted) from these generally described problems. And it never ties the alleged losses to a specific director or loan committee member.” Defs’ Joint Memorandum at 16.
The amended complaint includes a table that lists which members of the Loan Committee personally approved each “Loss Loan” and the date of that approval. See Am. Compl. at ¶41. Then, for each loan, the amended complaint identifies the reasons why Plaintiff believes the approval of that loan was grossly negligent. See, e.g., Am. Compl. at ¶¶ 51; 59; 66; 80; 87; 99. For example, the complaint alleges that Spangler, Sykes, Eichas, Sundry and Maly all approved a $3.62 million loan to Galewood Plaza II, LLC in December 2007. At the direction of these Defendants, Wheatland made this non-recourse, interest-only loan to refinance a failing strip mall and raw land. Id. at ¶ 57. The complaint further alleges that the loan was approved despite the presence of a lis pendens on the property that impaired Wheatland’s security interest. Id. at ¶ 59. Notwithstanding the condition of the collateral, the Loan Committee Defendants approved the loan without ensuring that the borrower had the cash flow to repay the loan. Furthermore, the loan allegedly was approved without obtaining current financial information from the borrower or the guarantor. The guarantor, a major shareholder of Wheatland, was only required to provide a 25 percent personal guaranty in violation of the Bank’s written loan policies. Id. at ¶ 59. According to the allegations, the Galewood Plaza loan also constituted a violation of Wheatland’s commitment to its regulators that the bank would limit total loans to the amount set forth in its business plan and exacerbated the already excessive concentration in CRE and ADC lending. Id. at ¶ 60. As a result of the Loan Committee Defendants’ approval of this loan, the amended complaint alleges that Wheatland lost approximately $1.4 million. The amended complaint alleges this level of detail for each loan that the Loan Committee Defendants personally approved. See, e.g., Am. Compl. at ¶¶ 51; 59; 66; 80; 87; 99.
Defendants contend that the complaint should discuss separately each Loan Committee Defendant. Plaintiff maintains that the level of specificity urged by De
Defendants further argue that the allegations are a product of hindsight and they should not be held liable as insurers for losses resulting from a recession. However, at this juncture, accepting Plaintiffs assertions that Defendants ignored regulatory warnings against rapid growth and excessive concentration and failed to require sound underwriting procedures when approving the eight Loss Loans, it is not clear that Defendants’ action can be chalked up to “a recession.” While it is too early in the case to know whether the evidence will show that Defendants too were victims of the recession, the amended complaint does not attempt to hold the Loan Committee Defendants accountable for failing to foresee future economic developments. Instead, Plaintiff has alleged conduct on the part of Defendants sufficient to cast them as negligent in ignoring inadequate underwriting despite facts available at the time of approval, rather than as mere innocent bystanders.
The same holds true for Defendants’ argument that Count III for breach of fiduciary duty of care improperly holds the Loan Committee Defendants to an “utmost care” standard when “reasonable care” should control. Defs’ Joint Memorandum at 14. Regardless of whether the Loan Committee Defendants are held to an “utmost” or “reasonable care” standard, Defendants’ alleged failures, as detailed above, took place in the face of notice that trouble was brewing with the bank’s operations. Plaintiff has not set forth a scenario in which borderline judgment calls were made; rather, Plaintiff alleges a complete failure to ensure that safe and sound lending practices were followed to protect the bank and its depositors. See, e.g., FDIC v. Gravee,
Defendants also state that the allegations in the amended complaint are “nothing but vague assertions that officers and directors did not conform to a loan policy or get a personal guarantee,” and therefore do not rise to the level of gross negligence. Defs’ Joint Memorandum at 24. However, courts in this district have held that comparable allegations state a claim for gross negligence. See, e.g., RTC v. Franz,
The amended complaint sets forth each Defendant’s position and tenure at Wheat-land, the loans that each Defendant personally approved, the reasons why those loans were imprudent at the time of approval, and the loss suffered by Wheatland from the decision to make the loan. In sum, allegations as to the Loan Committee Defendants’ repeated approval of risky loans without obtaining sufficient personal guarantees to protect Wheatland, without investigating the borrowers or guarantors’ financial condition and ability to repay the loans, and without ensuring the basic underwriting required by the Bank’s loan policy, are sufficient to state claims for negligence, gross negligence, and breach found in Counts I through III.
C. Claims for Gross Negligence and Negligence Against Director
Defendants Counts V and VI allege that the Director Defendants were negligence (grossly or otherwise) in their oversight of Wheatland’s lending practices. According to Plaintiff, the Director Defendants were placed on notice as early as 2007 by regulatory reports, as well as through the bank’s own monthly loan reports reflecting loan concentrations, liquidity analyses and ALLL data, that Wheatland was overcon
Defendants raise three primary objections to Counts V and VI. First, Defendants assert that the amended complaint does not adequately distinguish between outside and inside directors. Second, Defendants contend that repeated warnings to the directors of out-of-control lending practices were not sufficiently specific or dire to state an action. Finally, Defendants contend that they reasonably relied on officers, consultants, and other professionals so they cannot be held liable.
Defendants argue that the complaint does not separately plead claims against inside and outside directors, but, as with the Loan Committee Defendants, Plaintiff alleges that all of the Director Defendants were on notice of Wheatland’s risky and imprudent lending practices, and all failed to take any remedial action. With respect to Spangler (Chairman of the Board and Loan Committee member), Sykes (President, CEO, and Loan Committee member), Sundry (Loan Committee member) and Maly (Loan Committee member) — all members of the Loan Committee — Plaintiff certainly has alleged familiarity with Wheatland’s lending activities. With respect to the fiduciary duties of Rees, Davolt, Beles, and Harvey (referred to as the “Outside Directors” in the amended complaint), the complaint alleges that they too were charged with overseeing the operations of the bank. The case law comports with this view of director responsibility. In Bierman, the Seventh Circuit noted that “[djireetors are charged with keeping abreast of the bank’s business and exercising reasonable supervision and control over the activities of the bank.” See Bierman, 2 F.3d at 1433. (holding absentee directors with no knowledge of transaction still liable for failure to address risky practices). “The fact that an absentee director had no knowledge of the transaction and did not participate in it does not absolve him of liability.” Id. (stating that “[f]ew distinctions have been drawn between the duties of inside and outside directors” and holding outside directors “shared responsibility with the insiders for the improvident loans” because they were on notice of the bank’s problems).
In this case, Plaintiff alleges that all of the inside and outside directors received monthly credit reports showing that Wheatland rapidly overshot its asset and loan plans soon after its inception and that all of the directors received regulatory reports from the IDFPR and the FDIC warning about the bank’s “excessive growth rate, high concentration of risky CRE and ADC loans, violations of LTV ratio guidelines, and poor earnings.” Am. Compl. at ¶ 115. Furthermore, the Board of Directors and senior officers all met with federal regulators in early 2008 to discuss the previously identified concerns. The amended complaint identifies the specific warnings provided in those reports. Within six months of Wheatland’s opening, the state examiners warned the directors that, as of June 30, 2007, CRE lending represented the largest share of the bank’s
D. Breach of Duty of Loyalty by Loan Committee Defendants
Defendants maintain that a claim for breach of the duty of loyalty can only be maintained when the wrongdoer personally benefits from his conduct. In support of their assertion, Defendants principally cite Delaware law. However, Illinois law permits a claim for breach of the duty of loyalty when it hinders the entity’s continued operations, even if the wrongdoer does not derive a personal benefit. See, e.g., Labor Ready, Inc. v. Williams Staffing, LLC,
Here, Plaintiff alleges that the Loan Committee Defendants gave preferential loans to Wheatland shareholders on terms and conditions contrary to the best interests of Wheatland. According to the amended complaint, seven of the Loss Loans (dubbed “Insider Loans”) were made to favored shareholders and borrow
E. Business Judgment Rule
Defendants contend at various times in their briefs that Plaintiffs claims fail as a matter of law because they are barred by the Illinois “business judgment” rule. The rule “applies to protect directors who have performed diligently and carefully and have not acted fraudulently, illegally, or otherwise in bad faith.” Treco, Inc. v. Land of Lincoln Sav. and Loan,
Although the Seventh Circuit has stated that “[t]he business judgment rule is a defense” (Alliant Energy Corp. v. Bie,
It is a “prerequisite to the application of the business judgment rule that the directors exercise due care in carrying out their corporate duties. If directors fail to exercise due care, then they may not use the business judgment rule as a shield to their conduct.” Davis v. Dyson,
F. Illinois Banking Act
Defendants also allege that the Illinois Banking Act shields them from Plaintiffs claims. In certain circumstances, the Illinois Banking Act allows shareholders, by a two-thirds majority vote, to limit their directors’ personal liability for monetary damages for a breach of fiduciary duty. 205 ILCS § 5/39(b) (2000). Section 5/39(b) contains exceptions to shareholders’ ability to limit a director’s exposure. 205 ILCS §§ 5/39(b)(l-5). A director may not be insulated against “an act or omission that is grossly negligent” (§ 5/39(b)(l)), “a breach of the duty of loyalty to the bank or its shareholders” (§ 5739(b)(2)), intentional or knowing misconduct (§ 5/39(b)(3)), or “a transaction from which the director derived an improper personal benefit” (§ 5739(b)(4)). Similarly, shareholders may not limit a director’s liability for acts occurring before the effective date of the limiting provision. (§ 5/39(b)(5)). Counts I and V (gross negligence) and Count IV (breach of the duty of loyalty) fall into the categories of claims against which shareholders may not shield a director. See §§ 5/39(b)(l) & (2). Thus, the Illinois Banking Act exemption does not impact those three counts. As to the remainder of the claims, Defendants’ attempt to introduce documents purporting to show that the Illinois Banking Act shields Defendants from liability is premature. Those documents, and Defendants’ arguments concerning those documents, are inconclusive at this stage and also not properly considered on a motion to dismiss. See, e.g., Loeb Indus., Inc. v. Sumitomo Corp.,
Defendants contend that the FDIC’s breach of fiduciary duty of care claim (Count III) is duplicative of its negligent approval of imprudent loans claim (Count II). Defendants are correct that courts have the authority to dismiss duplicative claims if they allege the same facts and the same injury. Beringer v. Standard Parking O’HARE Joint Venture,
IV. Conclusion
For the reasons set forth above, 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. The Court dismisses Count III as duplicative of Count II, but denies Defendants’ motion to dismiss as to the remaining counts. The Court gives Plaintiff 21 days from the date of this order to replead if it wishes to include both Counts II and III in the alternative, or if it believes that it can distinguish between the two claims in its pleading.
Notes
. In addition to filing her own motion to dismiss, Defendant Mary Davolt also filed a motion [67] to adopt the motion to dismiss filed by the other Defendants, which the Court granted. Defendant Leonard Eichas
. For purposes of Defendants’ motions, the Court assumes as true all well-pleaded allegations set forth in Plaintiff’s amended complaint. See, e.g., Killingsworth v. HSBC Bank Nevada, N.A., 507 F.3d 614, 618 (7th Cir.2007).
. Defendants, citing Delaware case law, maintain that a scienter requirement for di
. In her separate motion to dismiss, Defendant Davolt claims that the FDIC has not sufficiently alleged that she received notice of or reviewed any communications from the regulators. But the reports of examination are issued to the Board by regulators. Davolt has not denied that she was a member of the Board or that she attended the April 2008 meeting with federal regulators. Also, Davolt's suggestion that she might never have read the regulator’s reports highlighting material problems at Wheatland does not mean that she cannot be held liable for gross negligence. See, e.g., Atherton v. Anderson,