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TURNER v. OFFICERS

August 24, 1988

S.E. TURNER and MARGARET TURNER, shareholders of Mid Valley Bank; MID VALLEY BANK, derivatively through S.E. TURNER and MARGARET TURNER: and the class of Mid Valley Bank shareholders, Plaintiffs,
v.
THE OFFICERS, DIRECTORS AND EMPLOYEES OF THE MID VALLEY BANK INCLUDING THE FOLLOWING: PAUL E. FARRIS and JANE DOE FARRIS, husband and wife; MONTE RUSK and JANE DOE RUSK, husband and wife; CLAYTON EMRY and JANE DOE EMRY, husband and wife; UNNAMED NON-DISSENTING DIRECTORS; THE STATE OF WASHINGTON, STATE BANK SUPERVISOR, JOHN OLDFIELD, the agent of the State of Washington; and FIRST BANK WASHINGTON, a national banking association, Defendants. FEDERAL DEPOSIT INSURANCE CORPORATION, in its corporate capacity, Intervenor/Plaintiff, v. S.E. TURNER and MARGARET TURNER, husband and wife, Defendants



The opinion of the court was delivered by: QUACKENBUSH

 BEFORE THE COURT are motions by the plaintiffs to amend their complaint, and motions by all defendants seeking summary judgment and dismissal. Hearing in the above entitled matter was held July 16, 1988. Rodney M. Reinbold and Eric Nayes appeared for plaintiffs; James D. Perkins and Thomas S. Rees appeared for intervenor Federal Deposit Insurance Corp.; Christine Moore appeared for defendant Firstbank of Washington; Assistant Attorney General Donald Cofer appeared for defendant Washington State and State Banking Supervisor Oldfield; Geoffrey P. Knudsen appeared for defendant Farris; defendants Rusk and Emry did not appear. Having reviewed the record, heard argument of counsel, and being fully advised in the premises, it is HEREBY ORDERED THAT:

 1. Plaintiffs' motion to amend their complaint is HEREBY GRANTED.

 2. Defendants' motions to dismiss and for summary judgment ARE HEREBY GRANTED.

 BACKGROUND

 The plaintiffs, S.E. Turner and Margaret Turner are stockholders in Mid Valley Bank. In September, 1985, the State Banking Supervisor, Thomas Oldfield, began reviewing Mid Valley Bank (MVB) due to problems with its loan portfolio. On September 25, 1985 the Supervisor, having found that MVB was in an "unsafe condition", directed MVB to make certain changes. (Ct.Rec. 15, Exh. A) Losses continued. In February, 1986, MVB hired Butterfield to conduct an internal examination and to take over credit management. Butterfield completed his examination in March, 1986, at which time he estimated that MVB had a negative net worth (Ct.Rec. 43). The Supervisor and FDIC then verified his findings, calculating the criticized assets at $ 12.5 million and the net worth at minus $ 3.2 million.

 In June, 1986, following the resignation of the president of MVB, Butterfield was appointed acting president. MVB was unable to comply with the Supervisor's directive. On Friday, August 29, 1986, the Supervisor of Banking ordered that MVB be placed in the possession of the Supervisor. In his Findings of Fact and Conclusions of Law (Exhibit A, Ct.Rec. 15) the Supervisor determined that the bank would be unable to meet its obligations as they became due, and was in danger of failing or closing, and that therefore, the bank's insolvency made it necessary for the Supervisor to take possession of the bank, without notice, pursuant to RCW 30.44.020, in order to protect the interest of the public, the depositors, and creditors.

 During the months preceding the Supervisor's August 29th take-over, MVB had been involved in litigation with Central Valley Bank over certain loans which MVB had made and CVB had taken over under a participation agreement. CVB had recovered a judgment against MVB on one of the suits and allegedly settled the other, for a total of $ 2.4 million. Just before the take-over MVB settled both suits for a payment of $ 870,000, with MVB agreeing to re-assume some of the loans. Plaintiffs challenge this payment as an illegal preference which resulted in MVB's insolvency and ultimate take-over.

 For several months preceding take-over, the Supervisor had been attempting to find a bank interested in taking over MVB's operations in Omak. In his findings approving the acquisition by First Bank, the Supervisor of Banking determined that no state bank, trust company, or national banking association already doing business in Washington, or domestic bank holding company, was interested in acquiring MVB on terms at least as favorable as those offered by First Bank Systems (FBS), and that the failure or closure of MVB would have a substantial economic impact on the Okanogan trade area (Ct.Rec. 15, attachment 3). Therefore, immediately after taking possession, he entered into a Purchase and Assumption Agreement (P&A Agreement) with First Bank Washington (FBW) and First Bank Systems (FBS), its out-of-state holding company (Ct.Rec. 25, Exhibit C). Under this agreement, FBW agreed to purchase all of the assets of MVB, except for several specifically excluded assets. In a contemporaneous Assistance Agreement (Ct.Rec. 15, attachment 2), Federal Deposit Insurance Co. (FDIC) agreed to purchase the riskiest loans, including the Colbert, Johnson and Tonoro Growers (Ellis & Martin Orchards) loans, from FBW or to indemnify against certain losses from litigation or loan participation, for $ 3,500,000. *fn1" Under this agreement First Bank agreed to convey to FDIC all of First Bank's right, title and interest in any cause of action or claim against any person or entities, or any insurance policy, for recovery of such losses to the extent that FDIC incurred losses on the assets transferred by First Bank to FDIC.

 The Supervisor then petitioned the Superior Court of Okanogan County for approval of the P&A Agreement (Ct.Rec. 15, Exhibit B) and the Assistance Agreement, and an order approving the sale was entered by the court on Saturday, August 30, 1986, in Cause No. 86-2-00308-0 (Ct.Rec. 15, Exhibit D). The former MVB opened the following Monday morning under the name First Bank Washington.

 Plaintiffs do not challenge the propriety or necessity of the take-over by the Banking Supervisor. They do, however, challenge the sale of MVB's assets to FBS without notice to the shareholders, on the basis that the lack of notice was a violation of their constitutional right to due process, and that the Supervisor failed to comply with the statutory requirement that an inventory of bank assets be submitted to the court. They assert that even if the sale of the assets is upheld, the P&A Agreement does not include the bank's right to sue its officers and directors for mismanagement of the bank's affairs. They wish to have the sale set aside, the alleged preference to Central Valley Bank returned to the MVB estate, and the Supervisor directed to attempt to recover from the MVB's insurance policies covering officer and director mismanagement liability. It seems to be their belief that if all of these steps occurred, there would be assets remaining in the bank estate, after payment of all creditors, for return to the shareholders.

 Initially the plaintiffs, as putative representatives of a shareholder class, sought to personally pursue their claims against the officers and directors, and to pursue the potential for recovery under the bank's insurance policies. Due to the weight of authority *fn2" that a shareholder derivative suit is owned by the Supervisor of Banking following his taking over all bank property, the plaintiffs have withdrawn their derivative suit and have withdrawn their motion for class certification. They have asked the court for permission to amend their complaint to strike any references to class representation. (Ct.Rec. 53) Plaintiffs now take the position that they stand in the position of beneficiaries of a trust of which the Bank Supervisor is trustee. *fn3" They are asking the court to add a paragraph to the complaint praying for the court to declare that (1) the mismanagement claim, secured by $ 3.5 million of errors and omissions insurance and a $ 1 million bond, remains an asset of the bank's estate; (2) that the preference of $ 900,000 given in the form of a suit settlement to the Central Valley Bank must be returned to the bank's estate; (3) that the claim against the Bank Supervisor, for illegally licensing First Bank Washington, is an asset of the bank's estate, and (4) that all other assets not explicitly enumerated or inventoried in writing remain assets of the estate of the Bank Supervisor. (Ct.Rec. 52)

 ANALYSIS

 Whether the Supervisor can be forced to pursue such claims by shareholders if they are found to remain in the estate is not properly before this court at this time. The Supervisor of Banking has broad discretionary authority under RCW 30.44.050. *fn4" See In re Liquidation of Cashmere State Bank, 169 Wash. 258, 13 P.2d 892 (1932). Prior to a determination that the mismanagement claims remain an asset of the bank's estate, and the occurrence of sufficient events to support a claim that the ...


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