Federal Deposit Insurance Corporation v. Aultman et al

Filing 43

ORDER denying 15 Defendants James Aultman, Earl Holland, and Brian Schmitt's Motion to Dismiss Amended Class Action Complaint. Defendants James Aultman, Earl Holland, and Brian Schmitt's Request for Oral Argument on Dispositive Motion to Dismiss Complaint 16 is DENIED. Defendants are directed to file an answer to Plaintiff's Complaint within twenty-one (21) days of the date of this Order. Signed by Judge Sheri Polster Chappell on 7/3/2013. (LMF)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION

FEDERAL DEPOSIT INSURANCE
CORPORATION, as receiver for Orion
Bank of Naples, Florida
Plaintiff,
v.

Case No: 2:13-cv-58-FtM-38UAM

JAMES AULTMAN, EARL
HOLLAND, ALAN PRATT and
BRIAN SCHMITT,
Defendants.
/
ORDER1
This matter comes before the Court on Defendants James Aultman, Earl Holland,
and Brian Schmitt's Motion to Dismiss Amended Class Action Complaint (Doc. #15) filed
on March 22, 2013. Defendants also filed a Request for Oral Argument on Dispositive
Motion (Doc. #16) on March 22, 2013. Plaintiff, Federal Deposit Insurance Corporation,
as receiver for Orion Bank of Naples, Florida, filed a response in opposition (Doc. #29)
on April 19, 2013.

Defendants filed a Reply in Support of Defendant’s Motion to

Dismiss (Doc. #38) on June 3, 2013.

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Plaintiff filed a Sur-Reply in Support of its

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Opposition to Defendants’ Motion to Dismiss (Doc. #42) on June 26, 2013. Thus, the
Motion is now ripe for review.
BACKGROUND
Plaintiff initiated this action by filing a two-count Complaint for Recovery of
Damages (Doc. #1) on January 29, 2013. The Complaint alleges that Plaintiff suffered
losses in excess of $53 million as a result of Defendants James Aultman, Earl Holland,
Alan Pratt, and Brian Schmitt’s gross negligence.2
Plaintiff FDIC is a corporation organized under 12 U.S.C. § 1811, et. seq., and
charged with, among other duties, the orderly liquidation of failed banks. Orion was
chartered as a Florida bank and was a Federal Reserve Member. On November 13,
2009, the Florida Office of Financial Regulation (“FOFR”) closed Orion and the FDIC
was named as receiver (“FDIC-R”). Defendant James Aultman was a director of Orion
from 1992 until the Bank failed; Defendant Earl Holland was a director of Orion from
1987 until the Bank failed; and Defendant Brian Schmitt was a director of Orion from
1997 until the Bank failed. All Defendants were also members of the Bank’s Board
Loan Committee (“BLC”) at all relevant times.
In both Counts, Plaintiff alleges that each of the Defendants, as directors of Orion
and members of the Bank’s BLC, owed the Bank the obligation to exercise the degree
of diligence, care, and skill that ordinarily prudent persons in like positions would
exercise under similar circumstances. In Count I, Plaintiff alleges that Defendants were
grossly negligent and therefore breached their statutory and common law duties of care
owed to Orion by permitting the Bank to pursue an excessively risky and aggressive

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Plaintiff has been unable to successfully locate and serve Alan Pratt. Thus, Aultman, Holland, and
Schmitt are hereinafter referred to as “Defendants.”

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growth strategy characterized by the accumulation of excessive concentrations of
commercial real estate (“CRE”) and acquisition, development, and construction (“ADC”)
loans and disregard for prudent risk management and underwriting. Plaintiff alleges
that on August 20, 2008, when regulators gave the Bank a composite rating of 4,
including a 4 for management, Defendants were aware that their oversight of the Bank
was deficient. Plaintiff alleges that despite these warnings, Defendants took no action
to improve the Bank’s position.
In Count II, Plaintiff alleges that Defendants owed Orion a duty to inform
themselves about, and then carefully evaluate, loans presented to them for their
approval. Plaintiff alleges that Defendants exhibited gross negligence by approving
loans after inadequate review and despite underwriting deficiencies. Plaintiff states that
Defendants permitted Jerry Williams, Orion’s Chief Executive Officer, to effectively
become the Bank’s sole decision-maker. Plaintiff alleges that Defendants approved
Williams’ decisions and rubberstamped any loan Williams proposed without meaningful
review or consideration. As an example, the Complaint alleges that in 2008, Francesco
Mileto (“Mileto”) was approved for more than $45 million in loans and lines of credit.
Plaintiff alleges that Defendants never conducted an investigation into or attempted to
verify Mileto’s representations as to his enormous personal wealth, even though the
Mileto loans took the Bank to its legal lending limit.

Plaintiff states that even after

Defendants became aware that the Bank was failing, they took no action to improve the
Bank’s position. On November 13, 2009, Orion failed, causing an estimated loss of
$880 million to the Deposit Insurance Fund.

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Defendants now move to dismiss Plaintiff’s Complaint with prejudice pursuant to
Fed. R. Civ. P. 12(b)(6) for failure to state a claim as required by Fed. R. Civ. P. 8.
DISCUSSION
To satisfy the pleading requirements of Fed. R. Civ. P. 8, a complaint must
simply give the defendants fair notice of what the plaintiff’s claim is and the grounds
upon which it rests. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, S. Ct. 127 S. Ct.
1955, 167 L. Ed. 2d 929 (2007); Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512, 122
S. Ct. 992, 152 L. Ed. 2d 1 (2002). Although the pleading standard announced in Fed.
R. Civ. P. 8 does not require “detailed factual allegations,” it does demand more than an
unadorned, “the-defendant-unlawfully-harmed-me accusation.”

Sinaltrainal v. Coca-

Cola Co., 578 F. 3d 1252, 1268 (11th Cir. 2009) (citing Ascroft v. Iqbal, ----- U.S.----,
129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868

(2009).

Furthermore, unwarranted

deductions of fact in a complaint are not admitted as true for the purpose of testing the
sufficiency of the allegations. Sinaltrainal, 578 F.3d at 1268 (citing Aldana v. Del Monte
Fresh Produce, N.A., Inc., 416 F.3d 1242, 1248 (11th Cir. 2005)). The facts as pled
must state a claim for relief that is plausible on its face. Sinaltrainal, 578 F.3d at 1268
(citing Iqbal, 129 S. Ct. at 1950).
In deciding a Rule 12(b)(6) motion to dismiss, the Court must accept all factual
allegations in a complaint as true and take them in the light most favorable to plaintiff.
Bedasee v Fremont Investment & Loan, 2010 WL 98996 * 1 (M.D. Fla. Jan. 6, 2010)
(citing Erickson v. Pardus, 551 U.S. 89, 127 S. Ct. 2197, 167 L. Ed. 2d 1081 (2007));
Christopher v. Harbury, 536 U.S. 403, 406, 122 S. Ct. 2179, 153 L. Ed. 2d 413 (2002).
“To survive dismissal, the complaint’s allegations must plausibly suggest that the

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[plaintiff] has a right to relief, raising that possibility above a speculative level; if they do
not, the plaintiff’s complaint should be dismissed.” James River Insurance Co. v.
Ground Down Engineering, Inc., 540 F.3d 1270, 1274 (11th Cir. 2008) (citing Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56, 127 S. Ct. 1955, 167 L. Ed. 2d 929
(2007)). The former rule-that “[a] complaint should be dismissed only if it appears
beyond doubt that the plaintiffs can prove no set of facts which would entitle them to
relief,” La Grasta v. First Union Securities, Inc., 358 F.3d 840, 845 (11th Cir. 2004), has
been retired by Twombly. James River Insurance Co., 540 F.3d at 1274. Thus, the
Court engages in a two-step approach: “When there are well-pleaded factual
allegations, a court should assume their veracity and then determine whether they
plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, --- U.S. ----, 129 S. Ct.
1937, 1950, 173 L. Ed. 2d 868 (2009). Dismissal is warranted under Fed. R. Civ. P.
12(b)(6) if, assuming the truth of the factual allegations of plaintiff's complaint, there is a
dispositive legal issue which precludes relief. Bedasee, 2010 WL 98996 at * 1 (citing
Neitzke v. Williams, 490 U.S. 319, 326, 109 S. Ct. 1827, 104 L. Ed. 2d 338 (1989);
Brown v. Crawford County, 960 F.2d 1002, 1009-10 (11th Cir. 1992).
In ruling on a Rule 12(b)(6) motion, the court focuses principally on the
complaint, but may also consider documents attached to a pleading. See Fed. R. Civ.
P. 10(c). The Court has considered the Complaint, to which no exhibits were attached.
There were ten (10) exhibits3 attached to the Motion to Dismiss. Plaintiff does not

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The FDIC’s Victim Impact Statement in United States v. Williams (Ex. 1); the Sentencing Transcript for
October 25, 2011 in United States v. Hebble (Ex. 2); two excerpts from the Bank’s Loan Policy (Ex. 3, 8);
the FDIC’s Memorandum in Aid of Sentencing in United States v. Guerzon (Ex. 4); the June 12, 2012
Sentencing Transcript in United States v. Williams (Ex. 5); minutes from the Bank’s Board Loan
Committee meeting on June 29, 2009 (Ex. 6); the Written Agreement between Orion and FOFR (Ex. 7);

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dispute the contents of any of the exhibits, but disputes their consideration at this stage
of the proceedings. As Exhibits 3, 6, 7, 8, and 10 are referenced in the Complaint (¶¶
19, 20, 21, 26, 38, 39, 42, 49, 52, 63, 67), it is proper for the Court to consider these
documents at the motion to dismiss stage. Fed. R. Civ. P. 10(c); Harris, 182 F.3d at
802 n.2.
With regard to all Defendants, Plaintiff has brought Count I for breach of duty of
care for grossly negligent failure to adequately supervise Orion’s lending, and Count II
for breach of duty of care for grossly negligent direct approval of obviously risky loans.
Defendants attack these Counts based on Rule 12(b)(6) of the Federal Rules of Civil
Procedure, essentially arguing that Plaintiff has not alleged enough facts to state a
claim for gross negligence of bank directors under the Financial Institutions Reform,
Recovery and Enforcement Act of 1989.
I.

Gross Negligence (Counts I and II)
Defendants argue that both Counts in the Complaint are implausible and should

be dismissed because Plaintiff has failed to show that Defendants were grossly
negligent. Under the Financial Institutions Reform, Recovery and Enforcement Act of
1989 (“FIRREA”), the FDIC-R may hold directors of a failed bank liable for their gross
negligence. 12 U.S.C. § 1821(k). Gross negligence provides the “floor” for director
liability and permits claims against directors even where state law requires greater
culpability. Atheron v. FDIC, 519 U.S. 213 (1997); see also FDIC v. Stahl, 89 F.3d
1510, 1516 (11th Cir. 1996). FIRREA incorporates the definition of gross negligence
provided by relevant state law. RTC v. Fiala, 870 F. Supp. 962 (E.D. Mo. 1994). Orion

the March 3, 2006 Commercial Bank Report of Examination (Ex. 9); and the Prompt Corrective Action
Directive requiring Williams’ dismissal from the Bank (Ex. 10).

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was chartered as a Florida bank and all Defendants were residents of, and conducted
their business in Florida. Therefore, the Court looks to Florida law for the definition of
gross negligence. Florida courts have defined gross negligence as “an act or omission
that a reasonable, prudent person would know is likely to result in injury to another.”
Turner v. PCR, Inc., 754 So.2d 683, 687, n.3 (Fla. 2000) (citation omitted). Florida
statutes define gross negligence as conduct “so reckless or wanting in care that it
constituted a conscious disregard or indifference to the life, safety, or rights of persons
exposed to such conduct.” Fla. Stat. § 768.71(2)(b). The Florida statute governing
liability of directors of business organizations requires a showing of “conscious
disregard for the best interest of the corporation, or willful misconduct.”

Fla. Stat.

§607.0831(1)(b)(4).
Defendants also argue that Plaintiff’s claims must overcome Florida’s business
judgment rule, which presumes that directors have acted in good faith. However, courts
have found application of the business judgment rule a question of fact and therefore
questionable in ruling on a motion to dismiss. See, e.g., FDIC v. Stahl, 840 F. Supp.
124, 128 (S.D. Fla. 1993); see also Ashcroft, 556 U.S. at 675 (“[e]valuating the
sufficiency of a complaint is not a ‘fact-based’ question of law”). Even if considering the
business judgment rule appropriate, it would still only require Plaintiff to plead gross
negligence. Thus, the business judgment rule does not provide a heightened standard
by which to evaluate the legal sufficiency of the Complaint.
In FDIC v. Price, No. 2:12-cv-00148-UA-DNF, 2012 WL 3242316, at *4 (M.D. Fla.
2012), the court recognized that allegations of ignored regulatory warnings, approved
loans despite inadequate collateral, and approved loans to borrowers/guarantors who

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had not demonstrated sufficient ability to repay, were sufficient to state a claim for gross
negligence under FIRREA. Similarly, in this case, the Complaint specifically alleges
numerous acts and omissions of Defendants that, if true, support Plaintiff’s contention
that they were “likely to result in injury” to the Bank and that exhibited “conscious
disregard” for the Bank’s best interest. In Count I, Plaintiff alleges that Defendants
permitted the Bank to pursue a risky and aggressive growth strategy characterized by
accumulation of excessive concentrations in CRE and ADC loans and disregard for
prudent risk management and underwriting. By way of example, Plaintiff specifically
details events surrounding the Mileto loans that, if true, show that Defendants allowed
Williams to approve such loans without questioning him or his practices. The Complaint
also alleges that Defendants consciously disregarded repeated communications from
regulators criticizing the Bank’s underwriting and warning Defendants about the dangers
of the Bank’s excessive concentration in CRE and ADC loans.
In Count II, Plaintiff alleges that Defendants were grossly negligent in approving
without reviewing or independently evaluating loans proposed by Williams and in failing
to ensure adequate verification of borrower financial information. The Complaint alleges
that Defendants approved millions of dollars in loans without verifying borrowers’
represented assets. Plaintiff also alleges that board meeting minutes show Defendants
asked no questions about the proposed loans before approving them.
Defendants also argue that both Counts are implausible because they are based
largely on a heightened duty imposed by the Written Agreement of August 25, 2008.
(Doc. #15 Ex. 7). Under Florida law, gross negligence is to be determined “under all of
the circumstances and in light of all the related factors taken collectively.”

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BDO

Seidman, LLP v. Banco Espirito Santo Intern., 38 So. 3d 874, 879 (Fla. Dist. Ct. App.
2010). The Complaint alleges that the Written Agreement was adopted to improve
board oversight, manage its concentration risks, and enhance its lending and credit
administration.

Plaintiff alleges that the Written Agreement, in conjunction with the

warnings from regulators, put Defendants on notice that their review of loans had been
deficient in the past.

Additionally, the Complaint alleges that Defendants had a

heightened duty as BLC members after the Written Agreement was signed, even
though Defendants argue that the Written Agreement did not create a heightened duty
with respect to the Mileto loans. However, even if the Written Agreement imposed no
heightened duty on Defendants with regard to the Mileto loans, the Complaint
sufficiently alleges enough other facts to state a claim for gross negligence.
II.

Grossly Negligent Failure to Adequately Supervise
Lending—Breach of Duty of Care (Count I)

the

Bank’s

With respect to Count I of the Complaint, Defendants argue that there is an
“alternative explanation” for Defendants’ approval of most, if not all, loans. Defendants’
argument must fail. In considering a motion to dismiss, this Court is not bound to
consider every alternative, but is to accept as true all factual allegations in the complaint
and construe the facts in the light most favorable to plaintiff. Erickson, 551 U.S. 89;
Christopher, 536 U.S. 403. At this stage in the proceedings, the Court reviews the
complaint to determine whether Plaintiff has alleged facts showing its entitlement to
relief, and if it has, the Court may not grant a motion to dismiss. Id. Thus, the Court
need not consider Defendants’ “alternative explanation,” having found that Plaintiff has
alleged sufficient facts to make its entitlement to relief plausible.

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Additionally, Defendants argue that Plaintiff’s claim ignores the economic
conditions in the country that caused several other banks to fail around the same time
that Orion failed. Although economic conditions may be considered in the totality of the
circumstances, Defendants essentially argue that the economic recession, not
Defendants’ conduct, was the proximate cause of the Bank’s failure. Proximate cause
is a fact-sensitive determination inappropriate for consideration on a motion to dismiss.
In re Flagship Healthcare, Inc., 269 B.R. 721, 729 (Bankr. S.D. Fla. 2001); see also
FDIC ex rel. Wheatland Bank v. Spangler, 836 F. Supp. 2d 778, 787 (N.D. Ill. 2011).
Thus, the purported ignorance of the economic recession in the Complaint will not
support dismissal at this stage of the proceedings.
Based on the foregoing, the Court finds that Plaintiff’s allegations with respect to
Count I of its Complaint are sufficient to raise its right to relief above a speculative level.
Therefore, Defendants’ Motion to Dismiss with respect to Count I is denied.
III.

Grossly Negligent Direct Approval of Obviously Risky Loans—Breach of
Duty of Care (Count II)
Defendants assert that Plaintiff’s claim relating to the Mileto loans (Count II) is

implausible. In support of this assertion, Defendants rely on statements made by the
Government and the FDIC in criminal cases against Williams, Mileto, and two coconspiring loan officers. The Court determined above that it may not look to these
statements in considering the Motion to Dismiss. Fed. R. Civ. P. 10(c). For this reason,
Defendants ask the Court to take judicial notice of the FDIC’s Victim Impact Statement
from Williams’ criminal case (Doc. #15 Ex. 1), the transcript of the October 25, 2011
sentencing proceeding for Thomas Hebble (Doc. #15 Ex. 2), the Memorandum in Aid of

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Sentencing submitted by the United States Attorney (Doc. #15 Ex. 4), and the transcript
of the June 12, 2012 sentencing proceeding for Jerry Williams (Doc. #15 Ex. 5).
At the motion to dismiss stage of the proceedings, a court may take judicial
notice of public records that are “not subject to reasonable dispute” and readily
determinable to be accurate. Horne v. Potter, 392 F. App’x. 800, 802 (11th Cir. 2010)
(citing Fed. R. Evid. 201(b)). The Eleventh Circuit has instructed that a court “may take
judicial notice of a document filed in another court not for the truth of the matters
asserted . . . but rather to establish the fact of such litigation and related filings.” United
States v. Jones, 29 F.3d 1549, 1553 (11th Cir. 1994). Because the Defendants ask the
Court to take judicial notice of the statements made in the criminal cases for the truth of
the matters asserted therein, the Court will not take judicial notice of the statements in
Exhibits 1, 2, 4, and 5.
Defendants also argue that the Complaint fails to set forth plausible allegations
as to exactly how Defendants’ review of the Mileto loans was “grossly and obviously
inadequate” or how underwriting deficiencies were “obvious.” To set forth a claim under
FIRREA, Plaintiff must allege some facts that Defendants were grossly negligent in their
approval of the loans. 12 U.S.C. § 1821(k). The complaint need only set forth enough
factual allegations to provide grounds for Plaintiff’s entitlement to relief. Twombly, 550
U.S. at 555. This standard does not require Plaintiff to plead every fact necessary to
prevail at trial, but only to “raise a right to relief above the speculative level.” Id. The
Complaint alleges that although the Bank’s loan policy required verification of assets
that borrowers listed on financial statements, no meaningful investigation into or attempt
at verification of Mileto’s representations as to his personal wealth were made. The

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Complaint also alleges that certain board meeting minutes4 did not contain any record
of any of the Defendants asking any questions about Mileto or why he was willing to
purchase nonperforming loans for full or close to full value. Nonetheless, according to
the Complaint, Defendants unanimously approved loans, immediately taking the Bank
to its legal lending limit despite being backed by no personal guarantees. Plaintiff also
alleges that in one meeting lasting 80 minutes, Defendants approved over $70 million in
21 separate loans, and in a 60 minute meeting,5 they approved over $140 million in 20
loans. Furthermore, the Complaint alleges that after signing the Written Agreement and
receiving repeated warnings from regulators about deficient underwriting practices,
Defendants were or should have been aware of the deficiencies in the underwriting
process and their review of the loans. These are just a sampling of the allegations
raised by Plaintiff.
Thus, the Court finds that Plaintiff’s allegations are sufficient at this stage of the
proceedings to state a claim for gross negligence. Consequently, the Court denies
Defendants’ Motion to Dismiss with respect to Count II.
Accordingly, it is now

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Defendants argue that Plaintiff’s reliance on minutes from two board meetings is misguided because the
Complaint does not allege that other meetings recorded every question asked by the directors.
Defendants claim that Plaintiff’s allegations that Defendants spent four minutes reviewing each loan are
unsupported by testimony or witness statements. Whether the Complaint’s allegations are supported by
evidence is not the question at the motion to dismiss stage. Watts v. Fla. Int’l Univ., 495 F.3d 1289, 1295
(11th Cir. 2007) (quoting Twombly, 550 U.S. at 556). A well-pleaded complaint may not be dismissed
even if the Court finds “that actual proof of those [alleged] facts is improbable.” Id.
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Defendants argue that the case against Defendant Schmitt should be dismissed because the minutes
show that Defendant Schmitt was not present at the meeting. (Doc. #15, Ex. 6). However, the Complaint
does not specifically allege that Defendant Schmitt was present at the meeting, but rather, that no
Defendant asked any question at that meeting. All of Plaintiff’s other allegations apply to Defendant
Schmitt. Additionally, relying on FDIC v. Spangler, Plaintiffs argue that directors of a failed bank do not
immunize themselves from liability by being absent from board and committee meetings. 836 F. Supp. 2d
at 789. For these reasons, the Court finds that the fact that Defendant Schmitt was not present at the
June 29, 2009 meeting is not sufficient to dismiss the case against him.

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ORDERED:
(1) Defendants James Aultman, Earl Holland, and Brian Schmitt’s Motion to
Dismiss Amended Class Action Complaint (Doc. #15) is DENIED.
(2) Defendants James Aultman, Earl Holland, and Brian Schmitt’s Request for
Oral Argument on Dispositive Motion to Dismiss Complaint (Doc. #16) is
DENIED.
(3) Defendants are directed to file an answer to Plaintiff’s Complaint within
twenty-one (21) days of the date of this Order.
DONE and ORDERED in Fort Myers, Florida this 3rd day of July, 2013.

Copies: All Parties of Record

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