Opinion ID: 782377
Heading Depth: 3
Heading Rank: 2

Heading: Collateral Substitution Transaction

Text: 42 As collateral for a $1.6 million loan to RVDM, FIB held a lien over 320 acres of real property owned by Fuente/IIP. De La Fuente orchestrated a complex transaction whereby this encumbered property was to be released so that it could be sold to a third party (McMillin) as environmental mitigation property. 8 The real property to be sold to McMillin eventually came to include some RVDM property and some property personally owned by De La Fuente. The property to be substituted as collateral was other RVDM land on which FIB already had a secondary lien. 43 Thus, De La Fuente requested that FIB release its lien on the Fuente/IIP land. Around the same time, NEI, one of De La Fuente's other companies, committed the proceeds of the McMillin sale to pay down a different loan. De La Fuente then met with U.S. Fish and Wildlife Service officials on behalf of Fuente/IIP and RVDM to clear any environmental regulatory hurdles to the transaction. 44 The FIB board of directors met on June 17, 1994 to consider the collateral substitution on the RVDM loan. De La Fuente initially was not present during the FIB board's deliberations. However, when it became clear that the other FIB board members did not understand the transaction, De La Fuente was called in to explain it. De La Fuente answered the board members' questions, but did not disclose certain crucial facts which later came to light. At the time, the FIB board members were under the mistaken impression that Fuente/IIP was in bankruptcy, so that it might be advantageous for FIB to divest itself of Fuente/IIP property; in fact, however, De La Fuente knew that Fuente/IIP's bankruptcy proceedings had terminated a few months earlier. De La Fuente also knew and did not disclose that RVDM was delinquent on the loan in question and subject to foreclosure proceedings by another bank. Finally, although the FIB board was under the impression that the Fuente/IIP property would be difficult to sell because of environmental issues, De La Fuente knew that the property was in fact valuable because it could be used as environmental mitigation property. 45 After the transaction was approved, RVDM defaulted on its loan, and FIB foreclosed on the substituted collateral and lost over $700,000. De La Fuente sold the released Fuente/IIP property to McMillin for $2.1 million, and received an additional $260,000 for his own land. 46 The Board found that De La Fuente's actions in facilitating this transaction violated 12 U.S.C. § 1818(e). This statute has three elements: (1) the banker committed an improper act; (2) the act had an impermissible effect, either an adverse effect on the bank or a benefit to the actor; and (3) the act was accompanied by a culpable state of mind. See Seidman v. Office of Thrift Supervision (In re Seidman), 37 F.3d 911, 929 (3d Cir.1994). 9 We examine the Board's order to ensure that substantial evidence supports its findings as to each of these elements. See id. at 930. A. Improper Act 47 The Board correctly found that De La Fuente acted improperly by engaging in an unsafe or unsound practice and/or by breaching his fiduciary duty to FIB. We have held that an unsafe or unsound practice is one which is contrary to generally accepted standards of prudent operation, the possible consequences of which, if continued, would be abnormal risk or loss or damage to an institution, its shareholders, or the agencies administering the insurance funds and that it is a practice which has a reasonably direct effect on an association's financial soundness. Simpson v. Office of Thrift Supervision, 29 F.3d 1418, 1425 (9th Cir.1994) (internal quotation marks omitted). The Board properly relied on the fact that at the time FIB was deciding whether to approve this transaction, De La Fuente failed to disclose critical facts that should have counseled against its approval. 48 De La Fuente objects that because he answered all of the FIB board members' questions regarding the transaction, he could not have breached a fiduciary duty by simply failing to volunteer additional relevant information. De La Fuente is wrong. It is well established that a person can breach a fiduciary duty by failing to disclose material information, even if not asked, see, e.g., Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1246 (9th Cir.2001) (in bankruptcy context), and that De La Fuente had a fiduciary duty to disclose everything he knew relating to the transaction. A fiduciary's duty of candor is encompassed within the duty of loyalty. The duty of candor requires corporate fiduciaries to disclose all material information relevant to corporate decisions from which they may derive a personal benefit. Seidman, 37 F.3d at 935 n. 34 (emphasis added and internal quotation marks and alteration omitted). 49 That De La Fuente may only have possessed information about the existing collateral does not alter our decision. The information he possessed was relevant because the FIB board agreed to permit the transaction only as long as the [replacement] collateral was equal or superior in value and market ability [to] the existing collateral. This required the FIB board to know the value of the existing collateral, an inquiry De La Fuente hindered by failing to disclose the information he had. B. Impermissible Effect 50 The Board also correctly concluded that De La Fuente's actions had an impermissible effect because he received financial benefit from the transaction and/or because the interests of FIB's depositors were prejudiced thereby. De La Fuente argues that neither his financial gain (his receipt of loan proceeds to pay off an NEI loan and of the proceeds of selling his personal property to McMillin) nor the bank's loss (the costs associated with the foreclosure and the losses from the substitution of the inferior collateral) were proximately caused by his failure to disclose the information he possessed. See 12 U.S.C. § 1818(e)(1)(B) ([ B ] y reason of the violation.... such insured depository institution... has suffered or will probably suffer financial loss or other damage.... (emphasis added)). 51 The D.C. Circuit has interpreted § 1818(e) to require that the risk of loss to the bank be reasonably foreseeable to the offender: Any ... risk must of course be reasonably foreseeable. That is not to say that the exact series of events that cause injury or loss to the institution must be perceived or even perceivable, but surely no director can be faulted for approving a management proposal that does not pose an increased risk of some kind to the financial institution. Kaplan v. United States Office of Thrift Supervision, 104 F.3d 417, 421 (D.C.Cir.1997). It is undoubtedly reasonably foreseeable to any banker that substituting inferior collateral for superior collateral on a bank loan would pose an increased risk of some kind to the financial institution. We agree with the D.C. Circuit that it is immaterial whether or not De La Fuente should have been aware of the precise sequence of events that would transpire leading to this impermissible effect.