united states district court southern district of indiana indianapolis ...

Case 1:13-cv-00782-TWP-DML Document 1 Filed 05/13/13 Page 1 of 58 PageID #: 1 

FEDERAL DEPOSIT INSURANCE 

CORPORATION AS RECEIVER FOR 

IRWIN UNION BANK AND TRUST 

COMPANY 

and 

FEDERAL DEPOSIT INSURANCE 

CORPORATION AS RECEIVER FOR 

IRWIN UNION BANK, FSB 

v. 

Plaintiffs, 

BRADLEY J. KIME, DUNCAN 

BURDETTE, KIM ROERIG, and 

MICHAEL WATERS 

Defendants. 

UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF INDIANA 

INDIANAPOLIS DIVISION 

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Case No. 1:13-cv-782 

Jury Trial Demanded 

COMPLAINT FOR NEGLIGENCE, GROSS NEGLIGENCE, 

AND BREACH OF FIDUCIARY DUTY 

For their Complaint against the Defendants, Plaintiffs, the Federal Deposit Insurance 

Corporation (“FDIC”) as Receiver for Irwin Union Bank and Trust Company, and as Receiver 

for Irwin Union Bank, FSB (collectively “FDIC-R”), plead as follows: 

I. INTRODUCTION 

1. The FDIC brings this case in its capacity as Receiver for Irwin Union Bank 

and Trust Company (“IUBT”) and as Receiver for Irwin Union Bank, FSB (“FSB”) (IUBT 

and FSB together referred to as “the Banks”), pursuant to authority granted by 12 U.S.C. § 

1821. The FDIC-R seeks to recover losses of at least $42 million the Banks suffered because


Defendants Bradley J. Kime, Duncan Burdette, Michael Waters, and Kim Roerig – four of 

the Banks’ former officers – negligently, grossly negligently, and in breach of their fiduciary 

duties approved 19 poorly underwritten acquisition, development, and construction (“ADC”) 

and commercial real estate (“CRE”) loans from May 27, 2005 through April 12, 2009. 

2. As officers, Defendants had a duty to ensure compliance with the Banks’ 

shared Loan Policy (“Loan Policy”) and safe and sound banking practices, and to make 

informed decisions that were in the best interests of the Banks. Specifically, Defendants 

were required to ensure that the borrowers were creditworthy, that there was a clear 

repayment source, and that the loan would not result in unnecessary risk to the Banks. By 

repeatedly ignoring Loan Policy violations that were clear on the face of the Credit 

Memoranda and exhibits (“Credit Memos”) that they received prior to approving loans, 

Defendants completely abdicated each and every one of these responsibilities as officers of 

the Banks. 

3. Defendants acted clearly unreasonably under the circumstances known to 

them at the time, and otherwise closed their eyes to known risks, thereby committing 

numerous breaches of their duties. 

4. Each of the loan transactions suffered from multiple and egregious 

deficiencies that made the risk of loss clear. Not a single loan contained an analysis of credit 

information that was sufficient to ascertain the adequacy of cash flows to service the loans or 

to identify a clear repayment source. The loans relied on appraisals that were inconsistent 

with the Banks’ appraisal standards, contained loan-to-value (“LTV”) ratio violations, failed 

to properly value the collateral, did not contain current financial statements for the borrower 

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and all guarantors, and failed to adequately identify contingent liabilities of the borrower and 

all guarantors. Despite these glaring deficiencies, the Defendants approved the loans. 

5. By approving the loans despite their myriad deficiencies, the Defendants 

acted negligently, grossly negligently and breached their fiduciary duties to the Banks. 

Defendant Kime approved at least 13 of the loans; Defendant Burdette approved at least 15 

of the loans; Defendant Roerig approved at least 7 of the loans; and Defendant Waters 

approved at least 11 of the loans. No Defendant voted against any of the loans. 

6. In addition to improvidently approving the loans, Defendants also modified 

and extended the loan terms on a number of occasions. These modifications and extensions 

had the practical effect of delaying the ultimate default of certain loans and thereby 

concealed the Defendants’ improper lending practices from the Banks. 

7. The FDIC-R seeks recovery of damages of no less than $42 million caused by 

the Defendants’ negligence, gross negligence and breaches of fiduciary duties in causing the 

Banks to violate their own policies and to violate prudent, safe, and sound banking practices.. 

II. THE PARTIES 

A. PLAINTIFF 

8. The FDIC was appointed as Receiver for IUBT on September 18, 2009, by the 

Indiana Department of Financial Institutions (“IDFI”). That same day the FDIC was 

appointed by the Office of Thrift Supervision (“OTS”) as Receiver for FSB. Pursuant to 12 

U.S.C. § 1821(d)(2)(A)(i), the FDIC-R succeeded to all rights, titles, powers, and privileges 

of the Banks, the Banks’ shareholders, accountholders, and depositors, including, but not 

limited to, the Banks’ claims against their former officers as set forth herein. 

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B. DEFENDANTS 

9. Bradley J. Kime (“Kime”) served as President of FSB from December 2000 

through November 2008 and as President of the Commercial Banking Line of Business 

(“Commercial LoB”) from May 2003 through the second quarter of 2009. Kime also served 

as a director both of FSB from its inception and of IUBT from June 2007 through June 2009. 

10. Duncan Burdette (“Burdette”) served as Executive Vice President (“EVP”) 

and Chief Credit Officer (“CCO”) of FSB and as CCO of the Commercial LoB from 

September 2004 through March 2009. 

11. Kim Roerig (“Roerig”) served as EVP of U.S. Banking for both FSB and the 

Commercial LoB from 2004 through 2008. 

12. Michael Waters (“Waters”) served as Senior Vice President (“SVP”) of IUBT 

and as a Regional Credit Officer (“RCO”) for the Southwest Region of the Commercial LoB 

from 2005 through 2008. 

III. JURISDICTION AND VENUE 

13. The Court has subject matter jurisdiction over this matter, as actions in which 

the FDIC is a party are deemed to arise under federal law pursuant to 12 U.S.C. § 1811, et 

seq.; 12 U.S.C. § 1819(b)(1) and (2), and 28 U.S.C. §§ 1331 and 1345. 

14. This Court has personal jurisdiction over all Defendants. Kime and Burdette 

are residents of the State of Indiana. All Defendants regularly and systematically conducted 

the business of the Banks in the State of Indiana and otherwise purposefully availed 

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themselves of jurisdiction in Indiana by, among other means, causing the Banks to approve 

and fund the loans. 

15. This Court also has personal jurisdiction over each of the Defendants named 

in this action pursuant to Indiana Trial Rule 4.4(A). 

16. Venue is proper in this district pursuant to 28 U.S.C. § 1391(b) because the 

Banks were located in this district and a substantial part of the events or omissions giving 

rise to the claims asserted by the FDIC-R occurred in this district. 

IV. RELEVANT FACTUAL ALLEGATIONS 

A. BACKGROUND 

17. IUBT, an Indiana chartered member of the Federal Reserve, was established 

in 1871 and operated in Indiana, Michigan, Utah, and Nevada. IUBT’s principal place of 

business was located in Columbus, Indiana. FSB, a federally chartered thrift, was 

established in 2000 to expand commercial banking activities into markets where IUBT, its 

sister commercial bank, was not permitted to branch pursuant to Indiana law. FSB operated 

in Kentucky, Missouri, Wisconsin, Arizona, California, Nevada, New Mexico, Florida, and 

Ohio. FSB operated as the alter-ego of IUBT, and its management functions were conducted 

from Indiana. The Banks were wholly owned by Irwin Financial Corporation (“IFC” or 

“Holding Company”), a publicly-traded, multi-state holding company that filed for Chapter 7 

bankruptcy protection on September 18, 2009, the same day the Banks failed. 

18. In conjunction with the formation of FSB and the expansion into new markets 

across the country, management adopted a business model that essentially disregarded the 

separateness of FSB and IUBT and provided for operating both Banks as a single enterprise 

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organized in four unincorporated divisions: the Commercial LoB, the Commercial Finance 

Line of Business, the Mortgage Banking Line of Business, and the Home Equity Line of 

Business. Each Line of Business had its own president and senior management, each of 

whom also served in senior management positions at IUBT and/or FSB. The Defendants 

constituted the senior management of the Commercial LoB, in which capacity they approved 

the loans. 

19. The Defendants pursued an aggressive growth strategy that depended on 

volatile, non-core funding sources to support the Banks’ investment in high-risk, high- 

yielding assets. At the same time, the Banks had few sources of liquidity, which further 

increased the Banks’ risk profile, and key corporate control functions and risk management 

practices did not keep pace with the Banks’ increasingly complex operations and escalating 

risk profile. Defendants’ pursuit of an aggressive growth strategy resulted in IUBT’s total 

assets almost tripling between 2000 and 2005 while its net income continually decreased. 

20. In the years leading up to the Banks’ failures, proper separation of 

management between FSB and IUBT was not maintained. Underwriting was performed by 

officers and employees of the Commercial LoB without regard to which legal entity would 

ultimately fund the loan. CRE and ADC loans were originated by either FSB or IUBT but 

then were freely transferred between the two entities. Additionally, participation interests in 

these loans were sold between FSB and IUBT without the Banks’ standard written 

participation agreements. In essence, FSB and IUBT were operated as one entity. 

21. On September 18, 2009, IUBT was closed by the IDFI with $2.8 billion in 

assets and a loss to the Deposit Insurance Fund currently estimated at $934.3 million. On the 

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same day, FSB was closed by the OTS with $518 million in assets and a loss to the Deposit 

Insurance Fund currently estimated at $161.3 million. 

B. THE LOAN APPROVAL PROCESS AND LOAN POLICY 

22. CRE and ADC loans are known to be more speculative than other types of 

loans because of, among other reasons, the lack of present cash flow source and the 

uncertainties of development and sale. Prudent lending in this segment of banking requires 

sound underwriting, timely evaluation and response to economic trends impacting the 

industry, and strict adherence to prudent lending policies and standards, including a well- 

defined, adequate secondary source of repayment. Regulatory agencies periodically 

reminded financial institutions of the risks involved in CRE/ADC lending. On October 8, 

1998, the FDIC issued Financial Institution Letter 110-98, which warned financial 

institutions of the risk inherent in ADC lending in a favorable real estate market. Among 

other things, FIL 110-98 stated that: “ADC lending is a highly specialized field with 

inherent risks that must be managed and controlled to ensure that this activity remains 

profitable.” 

23. Sound underwriting practices are one of the most critical aspects of loan 

portfolio management. Loan underwriting standards define the bank’s desired level of 

creditworthiness for individual loans and provide uniform criteria for evaluating loans 

with similar characteristics. Underwriting standards are also important in protecting the 

bank’s capital which can erode from unsafe and unsound lending practices. 

24. Underwriting is the criteria used to qualify borrowers, loan pricing, 

repayment terms, sources of repayment, and collateral requirements. An effective loan 

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approval process establishes minimum requirements for the information and analysis upon 

which a credit decision is based. The purpose of a loan approval process is to provide 

controls to ensure acceptable credit at origination. 

25. During the relevant time period, the single Loan Policy adopted by both FSB 

and IUBT applied to all of the loans, whether they were for FSB’s or IUBT’s loan portfolio. 

The policy expressly provided: “For purposes of this Policy, Irwin Union Bank, Irwin Union 

Bank and Trust, Irwin Union Bank F.S.B. and Irwin Union Bank LOB are all considered 

synonymous in our expectations of officers and staff of the IUB Line of Business in 

following the policies and procedures set out in this document.” The Loan Policy 

requirements were established to ensure that each loan made had a strong likelihood of 

repayment. The Defendants consistently approved loans that materially violated the Loan 

Policy in numerous respects, and these deficiencies were apparent on the face of the Credit 

Memos submitted to the Defendants before they approved each of the Loans. 

Commercial Line of Business Division 

26. The Commercial LoB operated in many different municipal markets 

throughout the United States. The loans were originated in six markets – Phoenix, Arizona; 

Sacramento, California; Kalamazoo, Michigan; Indianapolis, Indiana; Las Vegas, Nevada; 

and Milwaukee, Wisconsin. A Market Credit Committee (“MCC”) for each market was 

authorized to approve smaller loans (between $500,000 and $1 million, depending on the 

market), but loans in excess of MCC credit authority required approval by either a Regional 

Credit Officer (“RCO”) or the Chief Credit Officer (“CCO”). During the relevant period, 

Waters was the RCO of the Southwest Region and Burdette was the CCO. Their regional 

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credit approval authority was as high as $8 million before 2007 but was reduced to $6 

million in 2007. 

27. Loans in excess of regional credit authority required approval of the 

Executive Credit Group (“ECG”), which consisted of the President, the CCO, and the EVP of 

U.S. Banking. During the relevant time period, these individuals were Kime, Burdette, and 

Roerig, respectively. If one member of the ECG was not available, then a second RCO 

(different from the original approving RCO) could be substituted to act as a temporary 

member of the ECG. 

28. All 19 loans exceeded MCC authority. Eight loans were within the regional 

credit authority and were approved by Burdette or Waters, 11 exceeded regional authority 

and were approved by the ECG. 

29. For each loan, the Defendants received a Credit Memo prepared by a loan 

officer. The Credit Memo explained the transaction in detail, including the credit terms, the 

value of collateral, repayment sources, key credit risks, and the borrower’s financial 

information. Financial statements, proposed construction budgets, and other relevant 

information were either attached to or set out in the Credit Memo in detail. 

30. The Loan Policy expressly provided that credit decisions would be made with 

the understanding that the borrower’s positive cash flow was the primary source of 

repayment for the loan, and that loans would not be made solely on the basis of collateral 

value or other secondary sources of repayment. 

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31. The Loan Policy required that loans to commercial entities be guaranteed by 

all major owners of that entity, and these guarantors were required to provide financial 

statements and other documentation that clearly outlined their assets, liabilities, income, 

expenses, and contingent liabilities necessary to ascertain their creditworthiness. 

32. The Loan Policy set out maximum LTV ratios and terms for real estate based 

lending (75 percent LTV with a maximum five-year term for raw land and 80 percent LTV 

with a maximum five-year term for land development). 

33. The Loan Policy also required real estate appraisals by qualified independent 

fee appraisers and review appraisals by an independent reviewer. 

34. Defendants’ repeated failures to follow the requirements of the Loan Policy 

constitute negligence, gross negligence, and breaches of fiduciary duty by Defendants, and 

were the direct and proximate cause of the Banks’ losses. 

C. DEFENDANTS IMPROVIDENTLY VOTED TO APPROVE 19 

LOANS TOTALING APPROXIMATELY $127.5 MILLION, IN 

DISREGARD OF SOUND BANKING PRINCIPLES AND THE 

BANKS’ OWN LENDING POLICY. 

35. The loans are 19 CRE and ADC loans approved from May 27, 2005, through 

April 12, 2009. None of the Defendants voted against any of the loans. Instead, the 

Defendants ignored Loan Policy violations that were clear from the face of documentation 

available to them and repeatedly approved loans that, among other things, violated the 

Banks’ LTV and debt service coverage (“DSC”) ratio limits, were supported by inadequate 

or inaccurate financial information, and/or were based on inadequate or wrongly-valued 

collateral. 

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36. Of the 19 loans, Defendants approved 18 for FSB’s loan portfolio, and one for 

IUBT’s portfolio. Of the 18 loans approved for FSB’s portfolio, 14 were participated to 

IUBT upon the approval of the Defendants. 

37. The Credit Memos provided to the Defendants prior to approval of each of the 

19 loans were facially deficient; as such, the Defendants were not entitled to rely upon them. 

38. The following table shows the loans, along with the particular Defendant(s) 

who approved each loan and which Bank originated each loan: 

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Borrower 

The 19 Loans and Final Approval Votes 

FSB IUBT 

Final 

Approval 

Date 

12 

Loan 

Amount 

(millions) 

Kime 

Approvers 

1. Borrower A 1 O P June 02, 2005 $3.50 X 

2. Borrower A O P Oct. 13, 2005 $1.50 X 

3. Borrower A O P Nov. 03, 2006 $4.50 X X X 

4. Borrower A 

Burdette 

Roerig 

Waters 

O P Oct. 05, 2007 $5.50 X X X 

5. Borrower B O P April 26, 2006 $2.00 X X X 

6. Tuscany Villas PAI O P May 25, 2006 $15.05 X X X 

7. 1475 Oakdale Ave 2 O P June 13, 2005 $3.55 X X 

8. Borrowers C & D O P Sept. 29, 2006 $5.87 X X X X 

9. Newcastle Invest. O P May 24, 2007 $4.04 X X X X 

10. Hinton McGraw 49 O P Nov. 26, 2006 $3.00 X X X 

11. Cobble Court 

O P April 09, 2007 $6.62 X X 

12. Cobble Court O P April 12, 2009 $0.50 X X 

13. Placer 536 A Calif O P May 27, 2005 $4.50 X 

14. Placer 536 A Calif O P Jan. 11, 2007 $6.00 X 

15. Village Investors O Nov. 02, 2007 $9.60 X X X 

16. Phoenix Casa Del O Mar. 01, 2007 $2.70 X 

17. Highline Properties O June 28, 2007 $2.00 X 

18. C.G. Korsten I-10 O Sept. 29, 2006 $15.19 X X X X 

19. Borrower E O Mar. 31, 2008 $13.80 X X X X 

Totals $127.50 

O = Originated; P = Participated 

39. Each Defendant approved at least seven of the loans and no Defendant voted 

against any of the loans. 

1 

The names of individual borrowers, entity principals, and guarantors have been withheld to preserve personally 

identifiable information. 

2 1475 Oakdale Ave and the Cobble Court loans required approval of the ECG when combined with the debt of 

related borrowers. Upon information and belief, Kime and Burdette approved these loans without Roerig, the third 

member of the ECG.


40. The underwriting deficiencies on the 19 loans include failures to: (i) ascertain 

the adequacy of cash flows to service the loan; (ii) require a clear repayment source; (iii) 

obtain current and complete financial information from the borrower and the guarantors; (iv) 

adequately identify contingent liabilities of borrowers and/or guarantors; (v) require an 

appraisal consistent with the Banks’ Loan Policy; (vi) require an acceptable LTV ratio; and 

(vii) obtain guarantees from all significant owners of commercial borrowers. 

1. Placer 536 A California (2 loans) 

41. The initial Placer 536 A California loan was approved on or about May 27, 

2005. The $4.5 million loan was to refinance an existing $3 million loan made by the Bank 

of Lodi to purchase 88 acres of land in Placer County, California (the “Placer Property”), 

which was the collateral for the loan, and to fund permits, fees and interest carry for three 

years. The primary source of repayment was the sales to builders of lots in the Placer 

Property. The loan was interest only with all interest paid from an interest reserve. Burdette 

approved this loan for FSB’s loan portfolio, and it was participated to IUBT. 

42. On or about January 11, 2007, Waters approved an additional interest only 

$1.5 million loan to Placer 536 A California to fund increased development costs (county 

fees and environmental mitigation) and a $650,000 additional interest reserve. Despite the 

fact that the appraised value of the Placer Property had declined between the time of the first 

loan and the second loan, Waters failed to require additional collateral for the loan. After 

Waters approved this additional advance for FSB’s loan portfolio, it was participated to 

IUBT. 

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43. The Credit Memos revealed many deficiencies and violations of the Banks’ 

Loan Policy that impacted the soundness and collectability of the loans. Among other things, 

Burdette and Waters failed to analyze the adequacy of cash flows to service the loans, require 

a clear repayment source, obtain current and complete financial information from the 

borrower and the guarantors, require an appraisal consistent with the Banks’ Loan Policy, 

require an acceptable LTV ratio, and adequately identify contingent liabilities. 

44. Had Burdette and Waters insisted on the required underwriting and credit 

analysis, it would have demonstrated, among other things, that there was no adequate 

repayment source, the repayment sources were speculative, the borrower’s creditworthiness 

did not support the loan amount, the LTV ratio exceeded the Loan Policy limit, the collateral 

was overvalued in the Credit Memo, and the guarantors did not have sufficient assets to serve 

as a source of repayment. 

45. Although the loans were interest only with the primary source of repayment 

the speculative sales to builders of lots in an unsubdivided, undeveloped tract of land, the 

Credit Memos failed to adequately evaluate the risk associated with obtaining a zoning 

modification consistent with development plans. 

46. Moreover, the loans were critically under-collateralized. The Credit Memos 

for the 2005 and 2007 loans indicate that the appraised value of Placer Property was $15.4 

million in 2005 and $14.4 million in 2007. Both Credit Memos note that the land was 

currently zoned agricultural, and that the proposed development would require a change in 

zoning. There is no analysis of the impact on value if the requested zoning was not obtained. 

Inquiry would have revealed that the real estate as currently zoned was valued by the Placer 

14


County Tax Assessor at $2.2 million, and therefore the true LTV of the initial loan exceeded 

200%. 

47. The Credit Memos did not include any financial analysis of the borrower 

entity, and failed to evaluate the high-risk nature of the guarantors. Although both of the 

guarantors reported major investments in closely held real estate partnerships – which are 

generally accompanied by significant guarantor liability – the Credit Memos did not discuss 

or evaluate their contingent liabilities. Likewise, one of the guarantors only provided a 

financial statement that showed assets jointly held with his wife, without discussing the 

guarantor’s individual net worth. Finally, the assets of both guarantors were largely 

composed of “partnership interests,” which are inherently difficult to analyze and collect. 

Nevertheless, no analysis was conducted of the value of the assets held by these partnerships. 

48. Despite these clear deficiencies in the Credit Memos and the highly 

speculative repayment source, Burdette and Waters negligently, grossly negligently, and in 

breach of their fiduciary duties approved the loans, in violation of the Banks’ own Loan 

Policy, ignoring the clear warning signs that the loans were unsafe and unsound. 

49. The loans were due to mature in 2008, but were extended until September 1, 

2009. Had the loans not been modified, they would have defaulted and the tortious conduct 

would have been discovered at an earlier date. Instead, the modification of the loans 

effectively concealed the misconduct from the Banks until the date of default. 

50. The loans went into default, resulting in a loss of at least $5.6 million. 

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2. Borrower A (4 loans) 

51. The initial loan to Borrower A was approved on or about June 2, 2005. This 

loan, in the amount of $3.5 million, was for the purpose of refinancing an existing loan 

related to rental properties in the greater Sacramento, California area. The new loan was 

secured by 13 residential rental properties located in Sacramento. Burdette approved this 

loan for FSB’s portfolio, and it was participated to IUBT. 

52. On or about October 13, 2005, Burdette approved an additional $1.5 million 

to enable the borrower to purchase additional California rental property. On or about 

November 3, 2006, Burdette approved another $4.5 million, this time for the purchase of 

additional rental properties in Texas and Tennessee. A final $5.15 million loan was 

approved on or about October 5, 2007 by Kime, Roerig and Waters. The additional advances 

were secured by the properties purchased with the loan proceeds. 

53. The Credit Memos for these four loans revealed many deficiencies and 

violations of the Banks’ Loan Policy that impacted the soundness and collectability of the 

loans. Among other things, the Defendants failed to ascertain the adequacy of cash flows to 

service the loans, require a clear repayment source, obtain current and complete financial 

information from the borrower and the guarantors, require an appraisal consistent with the 

Banks’ Loan Policy, require an acceptable LTV ratio, and adequately identify contingent 

liabilities. 

54. Had the Defendants insisted on the required underwriting and credit analysis, 

it would have demonstrated, among other things, that there was no adequate repayment 

16


source, the repayment sources were speculative, and the borrowers’ creditworthiness did not 

support the loan amount. 

55. Sources of repayment for the loans consisted of rental income from the 

properties securing the loans and the borrower’s personal income. However, the Credit 

Memo noted significant risks with respect to both of these sources. In particular, the Credit 

Memo noted only break-even rental income from the investment properties and, with respect 

to the 2007 advance, a declining real estate market as a “key credit risk.” 

56. The financial analysis for the initial loan was based on the borrower’s 

unsigned and unaudited personal financial statement, and copies of his 2002-2003 tax 

returns. No analysis was conducted of his 2004 income. Further, no additional financial 

statements were analyzed for the subsequent loans. 

57. The borrower’s cash flow consisted entirely of capital gains from the sale of 

other rental properties. The borrower owned approximately 175 rental properties with a net 

cost of $35 million and an outstanding first mortgage balance of approximately $40 million. 

However, there was no current valuation of the borrower’s rental properties, and thus, no 

effort to assess the borrower’s ability to obtain a positive return on the sale of these 

properties, nor the ability to cover debt service from the net sales proceeds. The Credit 

Memo dated October 10, 2006 seeking approval of the third advance indicates that without 

the gain on the sale of property, the borrower’s cash flow through July 31, 2006 would have 

been a negative $306,000. The borrower’s tax returns for 2005 reflect losses on real estate of 

$3.8 million. 

17



speculative repayment source, Burdette, Kime, Roerig, and Waters negligently, grossly 

negligently, and in breach of their fiduciary duties approved the loans, in violation of the 

Banks’ own Loan Policy, ignoring the clear warning signs that the loans were unsafe and 

unsound. 

59. The loans to Borrower A were modified on several occasions to extend their 

maturity dates. Ultimately, the maturity dates for each of these loans were extended until 

June 17, 2009, at which point they went into default. Had the loans not been modified by 

Burdette, and later by Kime, Roerig, and Waters, they would have defaulted and the tortious 

conduct would have been discovered at an earlier date. Instead, the modification of the loans 


60. The loans went into default, resulting in a loss of at least $3 million. 

3. 1475 Oakdale Ave., LLC 

61. The loan to 1475 Oakdale Ave., LLC was approved on or about June 13, 

2005. The loan, in the amount of $3.5 million was to finance the purchase, renovation, and 

conversion to condominiums of a 23-unit apartment complex in El Cajon, California. The 

loan was secured by a mortgage on the apartment complex, and the primary source of 

repayment was identified as proceeds from the sale of condominium units following 

conversion. This loan required the approval of the ECG, which consisted of Kime, Burdette, 

and Roerig. On information and belief, Kime and Burdette approved the loan for FSB’s 

portfolio without Roerig’s involvement, and the loan was participated to IUBT. 

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62. The Credit Memo revealed many deficiencies and violations of the Banks’ 

Loan Policy that impacted the soundness and collectability of the loan. Among other things, 

Kime and Burdette failed to ascertain the adequacy of cash flows to service the loan, require 




63. Had Kime and Burdette insisted on the required underwriting and credit 


repayment source, the repayment sources were speculative, the LTV ratio exceeded the Loan 

Policy limit, the collateral was overvalued in the Credit Memo, and the guarantors did not 

have sufficient assets to serve as a source of repayment. 

64. Repayment was premised solely upon speculative sales of as-yet-undeveloped 

condo units, and Kime and Burdette failed to adequately account for the risk that sales would 

not occur. 

65. In valuing the property, Kime and Burdette relied on an “as is, prospective 

aggregate market value” appraisal of the collateral property securing the loan, rather than the 

purchase price of the subject property, in violation of Bank policy. The difference in 

valuation was substantial ($3.1 million purchase price vs. $5.8 million appraised value) and 

resulted in a loan to purchase price ratio of 113% in violation of Bank policy. The Credit 

Memo noted that the appraisal relied upon was not generated by an approved appraiser, and 

that the loan was made outside of the Banks’ market area. 

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66. The loan was undercapitalized from the beginning. The Credit Memo noted 

that the Bank “typically requires 20% cash equity in any project.” This requirement was 

waived so as to “remain competitive.” 

67. Financial statements were not obtained for several members of the borrower 

entity, nor for the borrower entity itself. Guarantees of three of the five members of the 

borrower entity were not obtained. There were significant deficiencies related to the three 

guarantors’ financial positions. The Credit Memo revealed that the guarantors’ cash flow 

was insufficient to service the loan. The Credit Memo reflects one of the guarantor’s income 

to be “weak as a result of expensing considerable development related items in his dot com 

business” and a negative cash flow of $14,000 in 2003. The Credit Memo indicated the 

second guarantor had excess cash flow in 2003 in the amount of $30,000. 

68. Despite these clear deficiencies in the Credit Memo and the highly speculative 

repayment source, Kime and Burdette negligently, grossly negligently, and in breach of their 

fiduciary duties approved the loans, in violation of the Banks’ own Loan Policy, ignoring the 

clear warning signs that the loans were unsafe and unsound. 

69. The loan was due to mature in December 2007, but was extended until 

January 1, 2013. Had the loan not been modified, it would have defaulted and the tortious 

conduct would have been discovered at an earlier date. However, the modification of the 

loan effectively concealed the misconduct from the Banks until the date of default. 

70. The loan went into default, resulting in a loss of at least $840,000. 

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4. Borrower B 

71. The loan to Borrower B was approved on or about April 26, 2006. The loan 

was a $2 million additional advance on existing loans to Borrower B totaling $5 million. 

The purpose of the additional advance and the existing loans was to finance Borrower B’s 

investment in single family residences to be marketed for re-sale. The pre-existing loans and 

the additional advance were revolving lines of credit. The primary source of repayment was 

revenue collected from the borrower’s interest in various notes receivable, which were, in 

turn, secured by deeds of trust on residential real estate located in Arizona and Nevada. 

Kime, Burdette, and Roerig approved the loan for FSB’s portfolio, and it was participated to 

IUBT. 


Loan Policy that impacted the soundness and collectability of the loan including. Among 

other things, Kime, Burdette, and Roerig failed to ascertain the adequacy of cash flows to 

service the loan, require a clear repayment source, obtain current and complete financial 

information from the borrower and the guarantors, require an appraisal consistent with the 

Banks’ Loan Policy, require an acceptable LTV ratio, and adequately identify contingent 

liabilities. 

73. Had Kime, Burdette, and Roerig insisted on the required underwriting and 

credit analysis, it would have demonstrated, among other things, that there was no adequate 

repayment source, the repayment sources were speculative, and the collateral was not 

properly valued. 

21


74. The financial analysis attached to the Credit Memo noted that the borrower’s 

liquidity was “weak.” The cash flow analysis noted a declining global debt service coverage 

ratio in each of the prior four years. The data further indicated that these negative trends 

were the result of increased debt service obligations that were not offset by increased 

income. The Credit Memo further indicated that the borrower’s personal debt was 

significantly increased by borrowing for the construction of a home (a non-earning asset). 

75. The Credit Memo provided that there would be no appraisal of collateral, 

which was a violation of the Loan Policy. In lieu of an appraisal, the Credit Memo provided 

for “a statistically meaningful sample of comparisons of value as determined (by the 

borrower) and the assessed values of the properties as determined by the tax records.” 

However, the advance was approved prior to even this minimal valuation process. 


speculative repayment source, Kime, Burdette and Roerig negligently, grossly negligently, 

and in breach of their fiduciary duties approved the loans, in violation of the Banks’ own 

Loan Policy, ignoring the clear warning signs that the loans were unsafe and unsound. 

77. The loan was due to mature in 2006, but was extended until July 2, 2009. Had 

the loan not been modified, it would have defaulted and the tortious conduct would have 

been discovered at an earlier date. However, the modification of the loan effectively 

concealed the misconduct from the Banks until the date of default. 

78. The loan went into default, resulting in a loss of at least $2 million. 

22


5. Tuscany Villas @ Painted Mountain, LLC 

79. The loan to Tuscany Villas @ Painted Mountain, LLC was approved on or 

about May 25, 2006. This loan was a $15.05 million loan to refinance a 311-unit townhouse 

subdivision in Mesa, Arizona. The primary source of repayment was the sale of townhouses 

and lots, and the loan was secured by 39 acres of raw land located in Mesa, Arizona. Kime, 

Burdette and Roerig approved the loan for FSB’s portfolio, and it was participated to IUBT. 



Kime, Burdette, and Roerig failed to ascertain the adequacy of cash flows to service the loan, 

require a clear repayment source, obtain current and complete financial information from the 


and require an acceptable LTV ratio. 

81. Had the Defendants insisted on the required underwriting and credit analysis, 

it would have demonstrated, among other things, that there was no adequate repayment 

source, the repayment sources were speculative, the LTV ratio exceeded the Loan Policy 

limit, and the guarantors did not have sufficient assets to serve as a source of repayment. 

82. The Credit Memo assumed a primary source of repayment based upon the 

“Borrower’s estimate of 2 sales per week within six months of close.” There was no 

independent verification of the borrower’s estimate of sales of condo units after 

development. Further, the Credit Memo failed to acknowledge carrying costs associated 

with the development of the collateral, and failed to evaluate the borrower’s obligations to 

make improvements to the adjoining golf course pursuant to the borrower’s purchase 

23


agreement with the seller of the collateral. The borrower’s 2005 financial statements 

indicated a negative net worth, negative income, and negative cash flow (due to high interest 

expense, loans to shareholders, and high existing debt). 

83. No secondary source of repayment was identified other than the guarantors’ 

combined net worth of $47 million. However, the guarantors’ financial statements indicated 

weak cash flow and poor liquidity, making collection from the guarantors difficult and 

unpredictable. 

84. Further, the collateral was not properly valued. The Defendants relied on an 

“as if complete – entire project” appraisal dated May 12, 2006 in assuming a $31 million 

value for the collateral, allegedly leading to a 50% LTV ratio. Yet, at the time the loan was 

advanced, the collateral consisted of raw land adjoining a golf course, which the borrower 

intended to develop into an approximately 330 unit condominium project. The Credit Memo 

did not identify the source of funding for the development of the condominium project or 

other standard feasibility studies that would be required to substantiate the “as is – complete 

project” valuation. The raw land was valued at $10.8 million, so the actual LTV ratio on the 

loan was approximately 139%. 

85. Despite these clear deficiencies in the Credit Memo and the highly 

speculative repayment source, Kime, Burdette, and Roerig negligently, grossly negligently, 

and in breach of their fiduciary duties approved the loans, in violation of the Banks’ own 

Loan Policy, ignoring the clear warning signs that the loans were unsafe and unsound. 

24


86. The loan was due to mature in June 2007, but was extended until June 9, 

2008. Had the loan not been modified, it would have defaulted and the tortious conduct 

would have been discovered at an earlier date. Instead, the modification of the loan 


87. The loan went into default, resulting in a loss of at least $2.23 million. 

6. Borrowers C & D 

88. The loan to Borrowers C & D was approved on or about September 29, 2006. 

This loan was a $5.87 million loan to finance the purchase of a 140-unit apartment in 

Glendale, Arizona. The primary source of repayment was rental income from the apartment 

complex, and the loan was secured by a first mortgage on the apartment complex. All 

Defendants approved the loan for the FSB portfolio, and it was participated to IUBT. 



Defendants failed to ascertain the adequacy of cash flows to service the loan, require a clear 

repayment source, obtain current and complete financial information from the borrower and 

the guarantors, require an appraisal consistent with the Banks’ Loan Policy, require an 

acceptable LTV ratio, and adequately identify contingent liabilities. 

90. Had Defendants insisted on the required underwriting and credit analysis, it 

would have demonstrated, among other things, that there was no adequate repayment source 

and the borrowers’ creditworthiness did not support the loan. 

25


91. Although the primary source of repayment for the loan was the rental income 

derived from the apartment complex, the Credit Memo noted that the rents were not at 

market rates. The Credit Memo speculated, without analysis, that rents would improve due 

solely to one borrower’s experience with apartment management. 

92. The Credit Memo stated that Borrowers C & D did not have any accounts 

greater than 30 days past due, but, in fact, the footnotes to the attached financial analysis 

indicated that they had been 30 days past due twice, and 60-days past due eight times on a 

previous mortgage account. 

93. Cash flow, liquidity and leverage for Borrowers C & D were rated satisfactory 

in the Credit Memo, yet there was no discussion of their 2003-2005 tax returns. This is 

significant because the Credit Memo shows the borrowers “did not reflect significant cash 

flow prior to 2005.” Notwithstanding this warning sign, there was no analysis of the 2003- 

2005 tax returns. Moreover, the cash and equivalent resources identified in the Credit Memo 

did not equal the cash equity of $1.672 million required by the Loan Policy. The Credit 

Memo stated that the cash flow from investment properties had improved, but there was no 

analysis conducted to support this conclusion, nor were specific properties referenced. 

94. Upon approval, Borrowers C & D immediately transferred the property via 

warranty deed to a “Nominee Borrower” – Newcastle Investments, LLC. The Defendants 

were aware of this arrangement, as the Loan Agreement stated that the real estate was not to 

be transferred without the “prior consent of the Lender” except to Newcastle Investments, 

LLC. The Credit Memo reflects that Newcastle Investments, LLC had previously applied for 

approval of the loan, but due to credit concentration limitations, the Bank was unable to loan 

26


this amount to Newcastle. This loan was structured in this fashion to circumvent the credit 

concentration limitations. 


repayment source, Burdette, Kime, Roerig, and Waters negligently, grossly negligently, and 

in breach of their fiduciary duties approved the loans, in violation of the Banks’ own Loan 



7. C.G. Kortsen I-10 320, LLC 

97. The loan to C.G. Kortsen I-10 320, LLC was approved on or about September 

29, 2006. This loan was a $15.9 million loan to refinance a loan of $12 million on 318.7 

acres of raw land located near Casa Grande, Arizona. Debt service on this loan was to be 

paid by an interest reserve and the primary source of repayment was the sale of lots to 

homebuilders. The land served as collateral for the loan. All Defendants approved the loan 

for IUBT’s portfolio. 







27



would have demonstrated, among other things, that there was no adequate repayment source, 

the repayment sources were speculative, the borrower’s creditworthiness did not support the 

loan amount, the LTV ratio exceeded the Loan Policy limit, and the guarantors did not have 

sufficient assets to serve as a source of repayment. 

100. Repayment was based primarily upon speculative sales of land to 

homebuilders. The loan funded interest for a period of eighteen months. The Loan Policy 

discouraged interest carry for a period of over one year, and mandated a higher level of 

scrutiny of the source of repayment when interest carry is advanced. The Credit Memo noted 

concern about a slow down in the Phoenix housing market (approximately 10-15%), and a 

reluctance of buyers to move into this “outlying community.” Notwithstanding this concern, 

no feasibility study was conducted of the impact on prospective sales and the repayment 

potential. 

101. The Defendants failed to obtain or analyze financial information for the more 

than twenty closely-held entities and individual members comprising the borrower entity. 

The global cash flow analysis in the Credit Memo based on the borrower’s and guarantors’ 

historical cash flows resulted in a debt service coverage ratio of .15, far below acceptable 

standards. 

102. Only three members of the borrower guaranteed the loan. The Credit Memo 

contained a financial analysis of each of the three guarantors, but none of their contingent 

liabilities were listed or discussed despite financial statements that reflected substantial 

portions of their net worth as being held in closely-held partnerships. There was an 

28


inadequate analysis of the value of the real estate assets held by these partnerships and the 

guarantee liability associated with these partnerships, both of which would dramatically 

impact guarantors’ ability to repay the loan. 

103. Further, the LTV ratio violated Bank policy. The Credit Memo relied on an 

appraisal of the raw land serving as collateral with an “as-is” market value of $30 million, 

rather than an actual acquisition cost of $15 million, which would have resulted in a loan to 

cost ratio of in excess of 100%. 





105. The loan was due to mature in May 2008, but was extended until July 6, 2008. 

Had the loan not been modified, it would have defaulted and the tortious conduct would have 

been discovered at an earlier date. Instead, the modification of the loan effectively concealed 

the misconduct from the Banks until the date of default. 


8. Hinton McGraw Berry Hill, LLC 

107. The loan to Hinton McGraw Berry Hill, LLC was approved on or about 

November 26, 2006. This was a $3.0 million construction loan secured by 45.84 acres of 

land in Frankfort, Kentucky. The primary source of repayment of this construction loan was 

the “sale of individual condominium units” with a “minimum payment to equal funds 

29


disbursed on that unit.” The secondary source of repayment was “guarantor 

support/collateral liquidation.” Kime and Burdette approved the loan for FSB’s portfolio, 

and it was participated to IUBT. 



Kime and Burdette failed to ascertain the adequacy of cash flows to service the loan, require 




109. Had Burdette and Kime insisted on the required underwriting and credit 



did not support the loan amount, and the guarantors did not have sufficient assets to serve as 

a source of repayment. 

110. Repayment was based primarily upon the speculative sale of condominium 

units. Burdette and Kime failed to account for the risk that sales would not occur and no 

cash flow analysis was obtained to verify the repayment source. 

111. Hinton McGraw Berry Hill, LLC, Prospect, KY (“HMBH”) was owned by 

three individuals. The three principals in HMBH also were involved in Hinton McGraw 

Builders Developers, LLC (“HMBD”). HMBD originally applied for this loan, but 

ultimately, HMBH became the borrower. 

30


112. No financial analysis of HMBH, the ultimate borrower, was conducted. 

Instead, the Credit Memo included a financial analysis of the initial applicant HMBD – even 

though it was not a borrower or a guarantor – and the three principals of HMBH. In any 

event, HMBD’s financial statement indicated total assets of $2.2 million, total liabilities of 

$2.3 million; and net worth of negative $.1 million. HMBD also had a negative net income, 

negative cash flow, and was at risk for filing bankruptcy. Thus, even if consideration of 

HMBD’s financial condition was appropriate, its condition was not sufficient to justify the 

loan. 

113. The financial analysis of the guarantors’ financial conditions was likewise 

deficient. The liquidity analysis of the guarantors was inadequate to verify the guarantors’ 

ability to fund debt service. Specifically, it noted that a significant portion of their income 

was capital gains income in 2005 and that similar capital gains were very unlikely to recur in 

future years. In addition, a large portion of their net worth consisted of closely held 

partnerships and real estate and there was no analysis of liquidity or contingent liabilities. 


repayment source, Kime and Burdette negligently, grossly negligently, and in breach of their 

fiduciary duties approved the loans, in violation of the Banks’ own Loan Policy, ignoring the 

clear warning signs that the loans were unsafe and unsound. 

115. The loan was due to mature in May 2008, but was extended until October 30, 

2010. Had the loan not been modified, it would have defaulted and the tortious conduct 

would have been discovered at an earlier date. Instead, the modification of the loan 


31



9. Phoenix Casa Del Sol LLC 

117. The loan to Phoenix Casa Del Sol LLC was approved on or about March 1, 

2007. This loan was a $2.7 million loan to refinance a 71-unit apartment complex in 

Phoenix, Arizona. The primary source of repayment for the loan was the rental income from 

the apartment complex, and the secondary source was identified as the guarantor’s personal 

cash flow. The loan was secured by a mortgage on the apartment complex. Waters approved 

the loan for FSB’s portfolio. 



Waters failed to ascertain the adequacy of cash flows to service the loan, require a clear 




119. Had Waters insisted on the required underwriting and credit analysis, it would 

have demonstrated, among other things, that there was no adequate repayment source, the 

borrower’s creditworthiness did not support the loan amount, the LTV ratio exceeded the 

Loan Policy limit, and the guarantors did not have sufficient assets to serve as a source of 

repayment. 

120. Repayment was based primarily upon rental income from the collateral 

apartment complex. However, the apartment complex was operating only at breakeven cash 

32


flow, and the Credit Memo simply assumed that cash flow would increase as improvements 

were made to the property and rents increased. 

121. The Credit Memo indicated that no financial statements were available for the 

borrower at the time of loan approval. Despite heavy reliance upon the sole guarantor’s 

personal financial strength to support the loan, the financial statement for the guarantor 

indicated poor liquidity and negative gross adjusted income for 2006. The schedule of real 

estate attached to the guarantor’s financial statement indicated that the real estate assets were 

not owned by her, but were held in an LLC which was not a guarantor. 

122. The loan was made for a 5-year term, even though the Banks’ Loan Policy 

provides for a maximum 3-year term for loans of this type. The borrower purchased the 

property for $3.1 million. The loan to purchase price ratio was 87%, which violated the 

Banks’ Loan Policy on multi-family loans, which provided for a maximum LTV of 80%. 


repayment source, Waters negligently, grossly negligently, and in breach of his fiduciary 

duties approved the loans, in violation of the Banks’ own Loan Policy, ignoring the clear 

warning signs that the loans were unsafe and unsound. 

124. The loan went into default, resulting in a loss of at least. 

10. Cobble Court Associates Limited Partner (2 loans) 

125. An initial loan to Cobble Court Associates Limited Partner was approved on 

or about April 9, 2007. This loan was a $6.62 million loan to refinance a development loan 

on a mixed condominium and commercial development in Sturtevant, Wisconsin. The loan 

33


was secured by a mortgage on 42 acres of raw land and partially developed condominium 

projects on the property. The Credit Memo indicates that debt service on this loan was to be 

paid by an interest reserve, and the primary source of repayment of the loan was the sale of 

lots to build condominium buildings financed by another bank (First Banking Center). Kime 

and Burdette approved the loan for FSB’s portfolio, and it was participated to IUBT. 

126. On or about April 12, 2009, FSB loaned an additional $500,000 to fund the 

interest on the original Cobble Court loan. Kime and Burdette approved this additional 

advance for FSB’s loan portfolio, and it was also participated to IUBT. 


Loan Policy that impacted the soundness and collectability of the loans. Among other things, 

Kime and Burdette failed to ascertain the adequacy of cash flows to service the loans, require 




128. Had Kime and Burdette insisted on the required underwriting and credit 



did not support the loan amount, the LTV ratio exceeded the Loan Policy limit, the collateral 

was overvalued in the Credit Memos, and the guarantors did not have sufficient assets to 

serve as a source of repayment. 

34


129. The two loans funded an interest reserve that serviced interest payments for a 

three year period. The Loan Policy discouraged interest carry for a period of over one year, 

and mandated a higher level of scrutiny of the source of repayment when interest carry is 

advanced. 

130. The primary source of repayment was the sale of land for construction of 

condominium units. However, the Credit Memo notes that questions were raised regarding 

the thirty-month absorption rate for sales, and its significant effect on value. There was 

inadequate analysis to evaluate the impact of this issue on loan repayment. 

131. The borrower entity was owned by two individuals and an entity, Cobble 

Court, GP. The financial analysis in the Credit Memo did not include any analysis of the 

borrower entity and addressed the personal financial statement of only one of the individual 

owners of the borrower entity. That individual was the only guarantor of the loan. 

132. The financial analysis of the guarantor was insufficient. In particular, the 

guarantor’s historical adjusted gross income was dependent on capital gains from sales of 

real estate. He had little or negative earned income. The guarantor had an adjusted net 

worth of $24.9 million without consideration of contingent liabilities of $77.5 million. He 

had an unsatisfactory credit score of 639. 

133. Further, the initial loan exceeded the applicable LTV guideline of 75%. The 

appraisal of the property under development (which served as collateral for the loan) valued 

it at $9.97 million, but that appraisal assumed completion of an unfunded Phase II of the 

development and included 3 acres of property not part of the collateral. The Credit Memo 

35


noted this discrepancy. Nevertheless, Kime and Burdette relied on the $9.97 million “as 

complete” appraised value, instead of the $4.4 million “as is” value. Thus, the true LTV on 

the loan was 165%. 

134. Burdette was well aware of problems with the loans. In fact, prior to the April 

12, 2009 additional advance, Burdette acknowledged in a communication to Bank officers 

that this loan would result in at least a $2 million charge off, that the value of collateral was 

less than the loan, and that the borrower was unable to repay the loan. 


speculative repayment source, Burdette and Kime negligently, grossly negligently, and in 




11. Newcastle Investment, LLC 

137. The loan to Newcastle Investment, LLC was approved on or about May 24, 

2007. This loan was a $4.035 million loan to purchase a 107-unit apartment complex in 

Glendale, Arizona. The primary source of repayment identified in the Credit Memo was the 

net operating income of the apartment complex, and the loan was secured by the apartment 

complex. All Defendants approved the loan for the FSB portfolio, and it was participated to 

IUBT. 



36









loan amount, and the guarantors did not have sufficient assets to serve as a source of 

repayment. 

140. The borrower entity was formed by a 24-year old college student whose prior 

three years’ tax returns reflected no income. His personal financial statements indicated that 

he had a net worth of $7.5 million, which was adjusted to zero after removing $7 million in 

property owned by his mother, and $500,000 in cash that could not be verified. 

141. Despite the Defendants’ reliance upon the net operating income of the 

apartment complex as the primary source of repayment, the operating history of the property 

demonstrated a significant negative net operating income. Further, the loan was approved 

without an appraisal and on a marginal loan-to-cost ratio, and with a weak debt service 

coverage ratio. 

142. The Credit Memo also indicated weak FICO scores for the principal of the 

borrower and the individual guarantors, who were the principal’s parents. The credit reports 

37


for the individual guarantors showed a history of tax liens, judgments, and slow payments. 

No contingent liabilities were evaluated for the borrower or guarantors in the Credit Memo. 






12. Highline Properties, LLC 

145. The loan to Highline Properties, LLC was approved on or about June 28, 

2007. This loan was a $2 million loan to refinance six acres of raw land in Phoenix, Arizona, 

to pay off a $1.568 million loan from Meridian Bank, to finance loan fees, closing costs and 

interest reserve, and to provide the borrower with $80,000 cash out at closing. Debt service 

on this loan was to be funded by an interest reserve and the primary source of repayment of 

the loan was sales of lots to individual buyers and builders. The secondary source of 

repayment was a personal guarantee. The loan was secured by a mortgage on the property. 

Waters approved the loan for FSB’s portfolio. 



Waters failed to ascertain the adequacy of cash flows to service the loan, require a clear 




38


147. Had Waters insisted on the required underwriting and credit analysis, it would 

have demonstrated, among other things, that there was no adequate repayment source, the 

repayment sources were speculative, the borrower’s creditworthiness did not support the loan 

amount, the collateral was not properly appraised, and the guarantor did not have sufficient 

assets to serve as a source of repayment. 

148. The loan funded interest for a period of eighteen months. The Loan Policy 

discouraged interest carry for a period of over one year, and mandates a higher level of 

scrutiny of the source of repayment when interest carry is advanced. 

homebuilders. 

149. Repayment was based primarily upon speculative sales of lots to 

150. The Credit Memo noted that the borrower had weak cash flow, weak liquidity 

and high leverage. The borrower was owned by an individual and two limited liability 

companies, Marcantof, LLC and Cartof Financial Group, LLC. Cartof was owned in part by 

the husband of the individual owner of the borrower entity. The loan was guaranteed by the 

individual owner of the borrower entity and by Marcantof, LLC. Neither Cartof nor its 

owners guaranteed the loan, which was a violation of Bank policy. 

151. The Credit Memo also noted that the property was not yet developed and 

additional debt would be added for development of the property. The Credit Memo did not 

identify any liquidity source for the improvements noted in the appraisal and relied upon to 

arrive at the valuation of the collateral. 

39


152. The Credit Memo indicated that one guarantor, Marcantof, LLC, had “limited 

assets” and negative income for the past two years. The Credit Memo also indicated that the 

individual guarantor had insufficient net worth and income to support the debt. 

153. The Banks failed to obtain their own appraisal, instead relying on an appraisal 

prepared for Meridian Bank, a prior lender, which was a violation of Bank policy. 


repayment source, Waters negligently, grossly negligently, and in breach of his fiduciary 

duties approved the loans, in violation of the Banks’ own Loan Policy, ignoring the clear 

warning signs that the loans were unsafe and unsound. 


13. Village Investors, LLC 

156. The loan to Village Investors, LLC Loan was approved on or about 

November 2, 2007. This loan was a $9.6 million loan to finance the construction of six 

industrial buildings in Elk Grove, California, including site improvements and interest 

reserve. Kime, Burdette, and Waters approved the loan for FSB’s portfolio. The loan was 

secured by a mortgage on 7.5 acres of real estate in Elk Grove, California. 



Kime, Burdette, and Waters failed to ascertain the adequacy of cash flows to service the loan, 

require a clear repayment source, obtain current and complete financial information from the 

40







loan amount, and the guarantors did not have sufficient assets to serve as a source of 

repayment 

159. The Credit Memo did not include any financial analysis of the borrower 

entity. Instead, there was a review of financial statements of Village RV, Inc., an entity that 

was not a member of the borrower entity and did not provide a guarantee. 

160. The primary repayment source was the conversion to a 

construction/permanent loan or a secondary sale or refinance. There was no loan 

commitment or sales contract in place to justify the reliance on such a speculative repayment 

source. The loan funded interest reserve for a period of eighteen months with an option to 

extend for six additional months. This was contrary to Loan Policy which discouraged 

interest carry for a period in excess of one year and required higher scrutiny of repayment 

source when interest carry is advanced. 

161. The financial analysis also relied heavily upon the net worth of one of the two 

individual owners of the borrower entity, who served as a guarantor. None of that 

individual’s contingent liabilities were analyzed or discussed in the Credit Memo. Further, 

no financial data or guarantee was provided by the other individual. 

41



repayment source, Kime, Burdette, and Waters negligently, grossly negligently, and in 




14. Borrower E 

164. The loan to Borrower E was approved on or about March 31, 2008. This loan, 

in the amount of $2 million, was an increase of an $11.8 million revolving line of credit 

previously originated to Borrower E. The loan was for the purpose of funding the cash 

requirements of Borrower E’s mortgage business operations. The primary source of payment 

for the loan was funds from Borrower E’s business operations, and the loan was secured by 

Borrower E’s residential real estate property located in Scottsdale, Arizona. All Defendants 

approved this additional advance. 









42



loan amount, and the LTV ratio exceeded the Loan Policy limit. 

167. The Credit Memo stated that “the borrower’s main source of income … has 

deteriorated to the point there is insufficient cash coming to the borrower to service this 

debt.” The Credit Memo also showed that the borrower had “negligible liquidity” and that 

his businesses have slowed down due to negative changes in the real estate market. 

168. With respect to the collateral, the Credit Memo states that the true value of the 

property is “probably above $10 million, but below $17 million. The average of this range is 

$13.5 million” Thus, based on the Bank’s internal evaluation, the LTV ratio was 

approximately 100% and in violation of the Loan Policy. 






V. CLAIMS FOR RELIEF 

NEGLIGENCE 

43


(AGAINST ALL DEFENDANTS) 

171. Plaintiff realleges and incorporates by reference each of the allegations 

contained in paragraphs 1 – 171 of this Complaint, as though fully set forth herein. 

172. The Defendants, during the period of time each was an officer of the Banks, 

owed to the Banks the duty to use reasonable care, skill and diligence in the performance of 

their duties, especially in connection with the Banks’ commercial real estate lending 

functions. 

173. Defendant Kime, as President of FSB and the Commercial LoB, among other 

duties, was responsible for the overall management of the Commercial LoB’s lending, and 

had the obligation to exercise the degree of diligence, care, and skill that ordinarily prudent 

persons in like positions would exercise under similar circumstances in management, 

oversight and conduct of the Banks’ lending function. These duties included, but were not 

limited to, ensuring: that the Banks had adequate policies, procedures and internal controls 

relating to, among other things, ADC/CRE lending; that the Banks adhered to their business 

plans, lending and credit policies, loan approval processes and loan and credit administration 

practices; that the Banks complied with banking statutes/regulations; that the Banks did not 

make imprudent loans and extensions of credit as part of a plan to unreasonably grow the 

Banks; and that the Banks approved loans and loan participations that complied with the 

Banks’ Loan Policy and prudent and sound lending practices. 

174. Defendant Burdette, as EVP and CCO of FSB and as CCO of the Commercial 

LoB, among other duties, was responsible for the Commercial LoB’s lending, and had the 

obligation to exercise the degree of diligence, care, and skill that ordinarily prudent persons 

44


in like positions would exercise under similar circumstances in management, oversight and 

conduct of the lending function. These duties included, but were not limited to, ensuring: 

that the Banks had adequate policies, procedures and internal controls relating to, among 

other things, ADC/CRE lending; that the Banks adhered to their business plans, lending and 

credit policies, loan approval processes and loan and credit administration practices; that the 

Banks complied with banking statutes/regulations; that the Banks did not make imprudent 

loans and extensions of credit as part of a plan to unreasonably grow the Banks; and that the 

Banks approved loans and loan participations that complied with the Banks’ Loan Policy and 

prudent and sound lending practices. 

175. Defendant Roerig, as EVP of U.S. Banking for both FSB and the Commercial 

LoB, among other duties, was responsible for the Commercial LoB’s lending, and had the 

obligation to exercise the degree of diligence, care, and skill that ordinarily prudent persons 

in like positions would exercise under similar circumstances in management, oversight and 

conduct of the lending function. These duties included, but were not limited to, ensuring: 

that the Banks had adequate policies, procedures and internal controls relating to, among 

other things, ADC/CRE lending; that the Banks adhered to their business plans, lending and 

credit policies, loan approval processes and loan and credit administration practices; that the 

Banks complied with banking statutes/regulations; that the Banks did not make imprudent 

loans and extensions of credit as part of a plan to unreasonably grow the Banks; and that the 

Banks approved loans and loan participations that complied with the Banks’ Loan Policy and 

prudent and sound lending practices. 

45


176. Defendant Waters, as SVP of FSB and RCO for the Southwest Region of the 

Commercial LoB, among other duties, was responsible for the Commercial LoB’s lending 

within his territory, and had the obligation to exercise the degree of diligence, care, and skill 

that ordinarily prudent persons in like positions would exercise under similar circumstances 

in management, oversight and conduct of the Banks’ lending function. These duties 

included, but were not limited to, ensuring: that the Banks had adequate policies, procedures 

and internal controls relating to, among other things, ADC/CRE lending; that the Banks 

adhered to their business plans, lending and credit policies, loan approval processes and loan 

and credit administration practices; that the Banks complied with banking 

statutes/regulations; that the Banks did not make imprudent loans and extensions of credit as 

part of a plan to unreasonably grow the Banks; and that the Banks approved loans and loan 

participations that complied with the Banks’ Loan Policy and prudent and sound lending 

practices. 

177. With respect to the specific loans they approved, each of the Defendants owed 

to the Banks duties that included, but were not limited to, informing himself/herself about the 

proposed loans and the risks the loans posed to the Banks before being approved; approving 

loans that conformed with the Banks’ Loan Policy; ensuring that any loans he or she 

approved were underwritten in a safe and sound manner; ensuring that any loans he or she 

approved were secured by sufficiently valuable collateral to prevent or minimize the risk of 

loss to the Banks; and ensuring that any loans he or she approved did not violate applicable 

banking regulations and/or create unsafe and unsound concentrations of credit. 

46


178. By their actions and inactions, as described specifically and generally herein, 

Defendants Kime, Burdette, Roerig, and Waters, as officers of the Banks, repeatedly failed 

and neglected to perform their respective duties with due care and diligence and took actions 

and made decisions without being reasonably informed and without regard to the risks, 

constituting breaches of their duties of care, as follows: 

(a) As to Defendant Kime, his negligent acts included, without limitation: 

(i) Failing to inform himself about proposed loans and loan 

participations and the risks posed to the Banks before he approved such loans and loan 

participations; 

(ii) Failing to exercise independent judgment in connection with the 

review and approval or disapproval of loans and loan participations; 

Banks’ Loan Policy; 

a safe and sound matter; 

(iii) Failing to approve only those loans that conformed with the 

(iv) Failing to confirm that the loans he approved were underwritten in 

(v) Failing to ensure that the loans he approved were secured by 

sufficiently valuable collateral and had sufficient repayment sources to prevent or minimize the 

risk of loss to the Banks; 

(vi) Failing to ensure that the loans he approved did not violate 

applicable banking regulations and/or create unsafe and unsound concentrations of credit; 

(vii) Abdicating his responsibilities to the Banks as an officer; 

(viii) Failing to investigate material facts; 

47


(ix) Failing to use his business judgment in carrying out his 

responsibilities to the Banks by failing to act with such care, including reasonable inquiry, as an 

ordinarily prudent person in a like position would use under similar circumstances; 

(x) Failing to act in good faith; and 

(xi) Ignoring the danger that his negligence was causing to the Banks. 

(b) As to Defendant Burdette, his negligent acts included, without limitation: 

















48







(c) As to Defendant Roerig, her negligent acts included, without limitation: 

(i) Failing to inform herself about proposed loans and loan 

participations and the risks posed to the Banks before she approved such loans and loan 





in a safe and sound matter; 


(iv) Failing to confirm that the loans she approved were underwritten 

(v) Failing to ensure that the loans she approved were secured by 



(vi) Failing to ensure that the loans she approved did not violate 


(vii) Abdicating her responsibilities to the Banks as an officer; 


49


(ix) Failing to use her business judgment in carrying out her 




(xi) Ignoring the danger that her negligence was causing to the Banks. 

(d) As to Defendant Waters, his negligent acts included, without limitation: 

















50







179. As a direct and proximate result of the Defendants’ negligence, the FDIC-R 

suffered damages in an amount to be proven at trial, in excess of $42 million. 

GROSS NEGLIGENCE 




181. Section 1821(k) of FIRREA holds officers of financial institutions personally 

liable for loss or damage to the institution caused by their “gross negligence,” as defined by 

applicable state law. 

182. As officers, Defendants owed the Banks a duty of care to carry out their 

responsibilities by exercising the degree of care, skill and diligence that ordinarily prudent 

persons in like positions would use under similar circumstances. This duty of care included, 

but was not limited to, the following: 

A. To inform themselves about proposed loans and the risks the loans pose to 

Banks before they approved them; 

B. To approve loans that conformed with the Banks’ Loan Policy; 

C. To ensure that any loans they approved were underwritten in a safe and 

sound manner; 

51


D. To ensure that any loans they approved were secured by sufficiently 

valuable collateral to prevent or minimize the risk of loss to the Banks; 

and 

E. To ensure that any loans they approved did not violate applicable banking 

regulations and/or create unsafe and unsound concentrations of credit. 

183. For each of the loans approved by each Defendant in their roles as officers, 

Defendants, through their gross negligence, breached their duties of care by, among other 

things, intentionally failing to perform their duty in reckless disregard of the consequences as 

follows: 

a. As to Defendant Kime, by, among other things: causing the Banks to make 

CRE and ADC loans without proper analysis of borrowers’ ability to 

repay the loans; failing to inform himself about the risks the loans posed to 

the Banks before he approved the loans; approving the loans with terms 

inconsistent with the Banks’ Loan Policy; failing to ensure that the loans 

were underwritten in a safe and sound manner; failing to ensure that the 

loans were secured by sufficiently valuable collateral to prevent or 

minimize the risk of loss to the Banks; failing to ensure that the loans did 

not violate applicable banking regulations or create unsafe and unsound 

concentrations of credit; and, failing to take action to prevent the 

reoccurrence of any unsafe or unsound banking practice that came to his 

attention. 

b. As to Defendant Burdette, by, among other things: causing the Banks to 

make CRE and ADC loans without proper analysis of borrowers’ ability to 


52


the Banks before he approved them; approving the loans with terms 








attention. 

c. As to Defendant Roerig, by, among other things: causing the Banks to 


repay the loans; failing to inform herself about the risks the loans posed to 

the Banks before she approved them; approving the loans with terms 







reoccurrence of any unsafe or unsound banking practice that came to her 

attention. 

53


d. As to Defendant Waters, by, among other things: causing the Banks to 



the Banks before he approved them; approving the loans with terms 








attention. 

184. In addition, Defendants breached their duties and were grossly negligent in 

connection with each loan for which they participated in the approval process by approving 

one or more of the loans identified in the chart in paragraph 35 above, because they knew or 

should have known that each such loan involved one or more of the following characteristics, 

which increased the risk of default: 

A. An excessive LTV ratio, as measured by The Banks’ own Loan Policy; 

B. A deficient or incomplete appraisal, or an appraisal that deemed the 

project unfeasible; 

C. A borrower or guarantor (or both) with excessive liabilities, or who 

otherwise lacked the financial wherewithal to service the loan; 

D. Insufficient proof of pre-sales and/or necessary market demand; or 

E. Insufficient collateral. 

54


185. Each Defendant was grossly negligent in that his or her manner of carrying 

out his or her duties and responsibilities to the Banks constituted an intentional failure to 

perform their duty in reckless disregard of the consequences, as further described in this 

Complaint. 

186. As a direct and proximate result of these Defendants’ gross negligence, the 

FDIC-R suffered damages in an amount to be proven at trial, in excess of $42 million. 

BREACH OF FIDUCIARY DUTIES 




188. As officers of the Banks, Defendants owed fiduciary duties of care and loyalty 

to the Banks to act with the utmost care and in the best interests of the Banks, which included 

implementing and operating the Banks’ lending policies to protect the Banks against 

excessive risk and to comply with safe and sound lending practices including the following 

duties: 

A. To implement and operate such careful, reasonable and prudent policies 

and procedures, including those related to lending and underwriting, as 

required to ensure that the Banks did not engage in unsafe and unsound 

banking practices, and to ensure that the affairs of the Banks were 

conducted in accordance with these policies and procedures; 

B. To communicate to the Banks’ loan officers and underwriters a clear 

expectation that they must adhere to sound lending policies and credit 

underwriting by establishing a system of checks and balances and by 

careful monitoring of loan officers’ conduct; 

C. To require that sufficiently detailed, current and reliable information be 

provided upon which to make prudent decisions, including the use of 

55


current technology and internal control procedures to timely identify 

problems and allow for early remediation; 

D. To support and foster the Banks’ internal risk management functions; 

E. To enforce policies and procedures designed to ensure that loans would 

not be made based on inadequate or inaccurate information; 

F. Upon receiving notice of an unsafe or unsound practice, to make a 

reasonable investigation thereof and to exercise reasonable business 

judgment with respect to all facts that a reasonable investigation would 

have disclosed, by acting with such care, including reasonable inquiry, as 

an ordinarily prudent person in a like position would use under similar 

circumstances; 

G. To conduct the Banks’ business in compliance with all applicable state 

and federal laws and regulations; 

H. To inform themselves about proposed loans and the risks the loans posed 

to the Banks before they determined whether to approve them; 

I. To ensure that loans which required approval pursuant to the Loan Policy 

were sent through the correct approval process; 

J. To properly supervise the lending function and lending program; 

K. To approve only those loans that conformed with the Banks’ Loan Policy; 

L. To ensure that any loans they approved were underwritten in a safe and 

sound manner; 

M. To ensure that loans they approved were secured by sufficiently valuable 

collateral and prevent or minimize the risk of loss to the Banks; 

N. To ensure that the Banks had sufficient, capable personnel to undertake 

and administer the lending policies; and 

O. To ensure that any loans they approved did not violate applicable banking 

regulations and/or create unsafe and unsound concentrations of credit. 

189. Defendants breached their fiduciary duties by, among other things: 

A. Failing to ensure that the implementation and operation of the Banks’ 

lending policies met appropriate standards; 

56


B. Implementing unreasonable and imprudent lending and underwriting 

procedures that amounted to unsafe and unsound banking practices with 

respect to loans in the Banks’ portfolio; 

C. Causing the Banks to make commercial real estate loans with little or no 

regard for borrowers’ ability to repay them; 

D. Failing to ensure that loans were underwritten in a safe and sound manner; 

E. Failing to ensure that loans were secured by sufficiently valuable 

collateral to prevent or minimize the risk of loss to the Banks; 

F. Failing to ensure that lending procedures did not violate applicable 

banking regulations or create unsafe and unsound concentrations of credit; 

and 

G. Failing to take action to prevent the reoccurrence of any unsafe or 

unsound banking practice that came to their attention. 

190. In committing the foregoing breaches, the Defendants acted clearly 

unreasonably under the circumstances known to them at the time, and otherwise wholly 

abdicated their corporate responsibilities by closing their eyes to known risks, did not act in 

good faith and did not act with the belief that their actions were in the best interests of the 

Banks. 

191. As a direct and proximate result of Defendants’ breach of fiduciary duties, the 

FDIC-R suffered damages in an amount to be proven at trial, in excess of $42 million. 

REQUEST FOR RELIEF 

WHEREFORE, Plaintiff the FDIC-R requests relief from Defendants as follows: 

A. For compensatory and consequential damages, jointly and severally, in a 

minimum amount of $42 million and any excess amount to be proven at 

trial; 

B. For its costs of suit against the Defendants; 

C. For prejudgment interest; 

D. For attorneys’ fees, and costs for the investigation and litigation; 

57


60235434.12 

5/3/2013 11:48 am 

E. For a trial by jury on all issues so triable; and 

F. For such other and further relief as this Court deems just and proper. 

Respectfully submitted, 

s/ John W. Woodard, Jr. 

John W. Woodard, Jr. (Ind Atty#15880-49) 

Email: jwoodard@wyattfirm.com 

Byron E. Leet (KBA # 40808) (pro hac pending) 

Email: bleet@wyattfirm.com 

WYATT, TARRANT & COMBS, LLP 

500 West Jefferson Street, Suite 2800 

Louisville, Kentucky 40202-2898 

Tel. 502.589.5235 

and 

Robert E. Craddock Jr. (TN #5826) (pro hac pending) 

rcraddock@wyattfirm.com 

Douglas A. Black (TN # 11412) (pro hac pending) 

dblack@wyattfirm.com 

Byron N. Brown (TN # 02359) (pro hac pending) 

bbrown@wyattfirm.com 

WYATT, TARRANT & COMBS, LLP 

1715 Aaron Brenner Drive, Suite 800 

Memphis, TN 38120 

Telephone: (901) 537-1000 

Facsimile: (901) 537-1010 

Attorneys for Plaintiff 

58

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