Opinion ID: 418837
Heading Depth: 1
Heading Rank: 3

Heading: Negligent Servicing.

Text: 23 In his decision, the trial judge focused solely on the bank's servicing efforts after default, i.e., liquidation. He found that from the evidence presented he was unable to test the reasonableness of the bank's liquidation efforts. Therefore, he held that the bank failed to prove that it was entitled to recover on the guaranty. We agree with the trial judge that the evidence regarding the reasonableness of the bank's liquidation efforts is inconclusive. But since the government had the burden of proof on this issue, we believe the trial judge should have held that the government failed to prove that the bank negligently serviced the loan during liquidation. This does not mean, however, that the government failed to prove its case. The loan servicing responsibility of the bank extended not only to debt liquidation, but also to all pre-default actions that were necessary after loan closing to collect the indebtedness and to protect the security and security rights. 7 C.F.R. Sec. 1841.46. Although the trial judge did not specifically find that the bank negligently serviced the loan prior to Springboro's default, we believe that there is ample evidence in the record to support a conclusion of negligent servicing prior to default. 24 First, there is no dispute that the bank failed to see that the proper hazard insurance for the Springboro plant was obtained as required by the regulations. See 7 C.F.R. Sec. 1841.46(b). Although the bank was advised by Mr. Coss (one of the personal guarantors) that the proper insurance had been obtained, it never bothered to obtain a copy of the policy to verify its existence or adequacy. The bank's conduct with regard to this servicing responsibility was certainly negligent. Because of its negligence, the bank was unable to recover the estimated $65,000 in damages that were caused when the roof of the tank room collapsed. 25 Second, the bank was negligent in monitoring Springboro's use of the loan funds. The evidence does not indicate even an attempt by the bank to see that the loan funds were used for their intended purposes. What the record does indicate is that of the $367,974.60 deposited in Springboro's account on November 12, 1975, only $1,028.69 remained by February 1, 1976, when the first principal payment on the loan was due. What happened to the loan funds is not absolutely clear because the bank was also negligent in its responsibility to require Springboro to maintain proper books of account. See 7 C.F.R. Sec. 1842.71(a)(1). The bank seems to have ignored this obligation altogether. Indeed, the bank was even negligent in maintaining its own records. It is estimated that approximately 27 checks written on Springboro's account are unaccounted for. 26 The bank's failure to monitor properly Springboro's use of the loan funds enabled the individual and corporate guarantors to use a large portion of the funds for their own benefit. For example, from the records available it seems that the bank's negligence permitted the guarantors to use at least $145,000 of the loan funds intended for Springboro for unauthorized purposes. Approximately $95,000 was used to pay Dr. Olin's personal expenses. Another $41,050 was paid to Dr. Olin, Louis LaPree, Howard Coss, and ZMR Corp., apparently for their personal benefit. In addition, $8,500 was paid to Dr. Olin's cousin. 27 The appellant does not dispute that Dr. Olin used approximately $95,000 to cover personal expenses, but contends that Dr. Olin also used personal funds to cover Springboro's business expenses. Only Dr. Olin's testimony, however, is offered to support this contention. Furthermore, even if this were true, we do not believe we should reward the bank's negligence in permitting the commingling of loan and personal funds to be asserted as a defense. Funds guaranteed by the FmHA should be used for their intended purposes and a proper record of their use maintained. The appellant also contends that the approximately $50,000 in payments made to Dr. Olin, his cousin, Louis LaPree, Howard Coss, and ZMR Corp. were actually valid business expenses. Again, the lack of proper books of account makes it impossible to verify appellant's contention. 28 Third, the bank was also negligent in overseeing the planned modernization of the Springboro plant and the acquisition and repair of machinery. Section X of the Lender's Agreement provided that it was the lender's responsibility to see that all construction is properly planned before any work proceeds; that any required permits, licenses or authorizations are obtained from the appropriate regulatory agencies; that the borrower has obtained contracts through acceptable procurement procedures; that periodic inspections during construction are made and that FmHA's concurrence on the overall development schedule is obtained. Although the bank had a duty to see that the planned construction and acquisition and repair of machinery took place, the record indicates that the bank failed to keep a watchful eye on Springboro's construction and acquisition activities. As a result, only about half of the planned construction and acquisitions may have actually taken place. 10 29 Thus, the evidence clearly indicates that the bank disregarded many of its most basic servicing obligations. Its predefault servicing activities indicate little concern for reasonable banking practices, and there can be no doubt that the government has shown the bank's servicing of the loan to be negligent. As provided in the Lender's Agreement, the government's obligation under the guaranty is thus relieved to the extent of any loss occasioned by the bank's negligence. In this case, the bank's negligence was so pervasive that it bears direct responsibility for any loss suffered on the loan. Because of the bank's negligence, the proper hazard insurance was not obtained, large amounts of money intended for Springboro were instead used for the personal benefit of the individual and corporate guarantors, and apparently only about half of the necessary construction and acquisition and repair of machinery actually took place. The bank's negligence thus had a direct bearing on the failure of the Springboro venture. Accordingly, we hold that the bank is not entitled to recover on the loan note guaranty. 30