Opposition Brief — Boatmen's National Bank of St. Louis v. Carver, 111 S. Ct. 251 (1990) (No. 90-284)

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October Term, 1990

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BOATMEN’S NATIONAL BANK OF ST. LOUIS,

AS SUCCESSOR IN INTEREST TO CENTERRE

BANK, N.A., f/k/a FIRST NATIONAL BANK

OF ST. LOUIS,

Petitioner,

vs.

GARLAND CARVER, SUCCESSOR TRUSTEE FOR

CITY OF MOUNT PLEASANT, IOWA, INDUSTRIAL

DEVELOPMENT REVENUE BOND ISSUE (SAI

PROJECT) and CITY OF GILMAN, IOWA,

INDUSTRIAL DEVELOPMENT REVENUE

BOND ISSUE (SAI PROJECT),

Respondent.

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On Petition For A Writ Of Certiorari To The

Supreme Court Of Iowa

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RESPONDENT’S BRIEF IN OPPOSITION

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Mark E. SCHANTZ

Jon P. SuLLIvAN

of

DICKINSON, THROCKMORTON,

PARKER, MANNHEIMER & RaIFE,

A Professional Corporation

1600 Hub Tower

699 Walnut Street

Des Moines, Iowa 50309

(515) 244-2600

Counsel for Respondent

COCKLE LAW BRIEF PRINTING CO,, (800) 225-6964

OR CALL COLLECT (402) 342-2831

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QUESTIONS PRESENTED

Whether the record adequately presents the 11 U.S.C.

§ 1141(a) res judicata issue belatedly suggested by

Petitioner?

Whether either of the supposed federal questions

suggested by Petitioner merits the present attention

of this Court?

ii

TABLE OF CONTENTS

Page

QUESTIONS PREG NGD 6 ccccecctsssratsvassonees i

TABLE OF AUSTROURRES GID <6 onn0acadGabeuueens enaes iii

STATEMENT OF THE CAGE 200055 ccsccascsessccees 1

WHY THE WRIT SHOULD NOT BE GRANTED... 5

I. Boatmen’s Failure to Comply With Iowa Law

Requiring It To Affirmatively Plead and Pro-

duce Evidence In Support of its Res Judicata

Argument In the Trial Court Is an Adequate

State Law Ground Supporting the Rulings

Below .......cossnccsnnndeceen eee eeaenaeae as 5

II. Neither of the Supposed Federal Questions

Suggested by Petitioner Merits the Attention of

this Coust.....ccccsccasassssnuuseeveneune pes 8

A. Neither State nor Federal Courts Have

Held that a 11 U.S.C. § 1141(a) Defense of

Res Judicata Would be Meritorious on

Analogous Facts ....scsesccsivesnswssens 8

B. The Allocation of the Burden of Proof

Regarding Damages in This Case is a Mat-

ter of State Law That Raises No Substantial

Federal Questia . i. ioscke040nssneeneeies 10

CONCLUSION . ...00000ssns5005 50 ene eens 13

APPENDIX:

Carver’s Second Amended Petition for Damages,

Restitution and Accounting. ...2666dcedseeesnsses la

Boatmen’s Answer to Carver’s Second Amended Peti-

tion for Damages, Restitution and Accounting...... 6a

—

ili

TABLE OF AUTHORITIES

Page

I. Cases:

Bankers Life and Cas. Co. v. Crenshaw, 486 U.S. 71,

108 S. Ct. 1645, 100 L.Ed.2d 62 (1988).............. 8

Bell v. Duckworth, 861 F.2d 169 (7th Cir. 1988)....... 13

Berkley Intern. Co. Ltd. v. Devine, 423 N.W.2d 9

ae Liven tsi) Wank sae cater eee wee 5

Bertran v. Glen Falls Ins. Co., 232 N.W.2d 527 (Iowa

tie Baek Gh aka b ehas haha RN eS BAN ORR O88 5

Bickford v. American Interinsurance Exchange, 224

PRVee COO DOUG occ ckccacaarswesecss scenes 5

Clinton Land Co. v. M/S Associates, Inc., 340 N.W.2d

PVT TTT eee Se tee ee 10

Estate of Stetson, 463 Pa. 64, 345 A.2d 679 (1975) .... 11

Exxon Corp. v. Eagerton, 462 U.S. 176, 103 S. Ct.

ce GE Es.) ee 8

Fuller v. Oregon, 417 U.S. 40, 94 S. Ct. 2116, 40

atcha ihe eh pace kdeakdoecwasesay ss 8

Haynes v. Dairyland Mutual Ins. Co., 199 N.W.2d 83

EC a gine Sn ra ee 11

Jefferson Nat’l Bank v. Central Nat'l Bank in Chicago,

Foe mae ONG CUR Cit, 1905)... .. 2... cece eeees. 11

Seven G. Ranching Co. v. Stewart Title & Trust of

Tucson, 128 Ariz. 590, 627 P.2d 1088 (Ariz. Ct.

IRCCS See so ccnemksteeonenucesounsa vied 11

State v. Stergion, 248 N.W.2d 911 (Iowa 1976)......... 5

Street v. New York, 394 U.S. 476, 89 S. Ct. 1354, 22

Tee ea ban bexebnabbbaneeasen s

ee

iv

TABLE OF AUTHORITIES - Continued

Swisher & Cohrt v. Yardarm, Inc., 236 N.W.2d 297

IS se pac Ge eae coe em te eet 5

Teledyne Industries Inc. v. Eon Corporation, 401 F.

Supp. 729 (S.D.N.Y. 1975) aff’d 546 F.2d 495 (2d

Se ES kN ow id cee oe a Oak donee ee asec ee ee basece 4

Webb v. Webb, 451 U.S. 493, 101 S. Ct. 1889, 68

RRMA Me CRIED oc sos ce caenuacdcndcaccaanedcducn 8

II. Statutes AND Court RUuLEs:

Iowa Rule of Civil Procedure 101.................... 5

Supreme Court Rule 14.1(h)................0..0000000. 7

STATEMENT OF THE CASE

On November 21, 1984, Garland Carver (“Carver”) as

successor trustee for the holders of certain industrial

revenue bonds issued for the benefit of SAI Corporation

(“SAI”), brought suit against the Federal Deposit Insur-

ance Corporation (“FDIC”), as receiver for the failed

Mount Pleasant Bank and Trust Company (“the Mount

Pleasant Bank”). The Mount Pleasant Bank had previ-

ously served as trustee for the bondholders Carver now

represents, and was responsible for collecting payments

from SAI on the bonds. The Mount Pleasant Bank,

together with what is now Boatmen’s National Bank of St.

Louis (“Boatmen’s”), had also extended loans of their

own to SAI. The central allegation of Carver’s petition

was the state law damage claim that the Mount Pleasant

Bank breached its fiduciary duty of loyalty to the bond-

holders in the manner in which it collected payments

from SAI on the bonds. On August 19, 1986, Carver

amended his petition to name Boatmen’s as an additional

defendant, on the ground Boatmen’s participated in

(aided and abetted) the Mount Pleasant Bank’s breach of

fiduciary duty.

Carver amended his petition again on October 12,

1987, at which time he specifically alleged that the Mount

Pleasant Bank’s breach of fiduciary duties included the

betterment of its own position, vis-a-vis the bondholders’

position, by acquiring additional collateral from SAI to

better secure the banks’ own loans to SAI after SAI had

defaulted on the bond loans. Carver also alleged that the

taking of such security interests, including a security

interest in an agreement for the purchase of stock in

Southeastern Foam Company (“the stock purchase agree-

ment”), constituted a fraudulent conveyance. Boatmen’s

filed an answer to that second amended petition on Sep-

tember 22, 1988, in which it alleged that its security

interest in the stock purchase agreement was properly

perfected, but in which Boatmen’s made no mention

whatsoever of a res judicata defense.! At no subsequent

time has Boatmen’s sought to amend its answer to

include “res judicata” as an affirmative defense, nor did

Boatmen’s so much as mention that concept before the

trial court.

The trial court entered Findings of Fact and Conclu-

sions of Law on February 2, 1989, finding that Boatmen’s

had played a dominant role in a scheme by the banks to

conceal SAI’s financial difficulties from the bondholders

long enough for the banks to improve their position by

encumbering previously unencumbered assets. The trial

court then ordered the banks to present it with an

accounting of all proceeds of such previously unencum-

bered collateral so that it might fashion an equitable

remedy. The trial court did not limit the accounting to

proceeds received by the banks outside the SAI bank-

ruptcy proceeding. In response to the trial court’s order,

Boatmen’s submitted what it characterized as “the best

reconstruction of funds” it could muster regarding pay-

ments it had received from the collateral in question.

' The bankruptcy court order which Boatmen’s now

asserts was “res judicata” of Carver’s state court claims had

been entered on July 6, 1986, more than two years before

Boatmen’s filed its answer to Carver’s second amended peti-

tion.

EE

Boatmen’s told the court it could not document further

the source of any funds, other than as appeared in its

accounting. After considering the submissions of the par-

ties, the trial court entered judgment for the plaintiff and

fashioned a remedy intended to restore the parties to the

status quo existing prior to the banks’ breach of fiduciary

duty.

Carver appealed to the Supreme Court of Iowa on

April 26, 1989. The gravamen of his appeal was that the

trial court’s remedy was inadequate in a variety of

respects, including centrally that it failed to apply the

proper measure of damages for breach of fiduciary duty

and did not properly allocate the burden of proof regard-

ing damages. The prevailing rules are that fiduciaries

should not be allowed to benefit in any respect from their

wrongdoing, and that once a breach of fiduciary duty and

loss to the beneficiaries is shown, the fiduciary must

prove that such losses did not result from the breach.

Boatmen’s and the FDIC cross-appealed, challenging

the trial court’s imposition of liability and the amount of

damages. For the first time, Boatmen’s raised in its appel-

late brief dated August 28, 1989, the question of whether

“money received through a confirmed bankruptcy plan of

reorganization is subject to collateral attack”. Boatmen’s

devoted one and one-half pages of its fifty-page brief to

that contention. The FDIC also cross-appealed, but did

not join Boatmen’s in its purported reliance on 11 U.S.C.

Section 1141(a). Carver, in a reply brief, argued both that

Boatmen’s res judicata argument was substantively incor-

rect, and that in any event, the argument had not been

properly pleaded or proven in the trial court.

On April 18, 1990, the lowa Supreme Court filed an

opinion affirming the trial court’s finding of liability, but

reversing and increasing the damage award. The case was

remanded to the trial court for calculation of pre- and

pust-judgment interest on damage amounts specified by

the Supreme Court. The Supreme Court’s ruling did not

specifically address Boatmen’s res judicata argument.

On April 30, 1990, Boatmen’s petitioned the lowa

Supreme Court for rehearing. FDIC did not. One ground

for the rehearing request was that the Supreme Court

“improperly added to the damage award $61,000.00

which [Boatmen’s] allegedly received from the federal

bankruptcy court confirmed plan of reorganization made

in a bankruptcy case in which plaintiff was a party and of

which plaintiff approved.” Boatmen’s contended further

that “the bankruptcy court’s confirmed plan was a final

judgment which, under the doctrine of res judicata,

barred plaintiff from relitigating not only the issue of

bondholders’ right to receive monies awarded to [Boat-

men’s], but also precluded plaintiff from maintaining his

action for breach of fiduciary duty”. Boatmen’s petition

for rehearing was denied without opinion on May 23,

1990.

>

WHY THE WRIT SHOULD NOT BE GRANTED

I,

BOATMEN’S FAILURE TO COMPLY WITH STATE

LAW REQUIRING IT TO AFFIRMATIVELY PLEAD

AND PRODUCE EVIDENCE IN SUPPORT OF ITS RES

JUDICATA ARGUMENT IN THE TRIAL COURT IS AN

ADEQUATE STATE LAW GROUND TO SUPPORT THE

RULINGS BELOW.

Iowa law requires defendants who wish to assert a

defense of res judicata to affirmatively plead that defense

in their answer, and to sustain the burden of proof on that

issue at trial. The lowa Supreme Court has repeatedly

held that a party who desires to set up a prior adjudica-

tion as a bar to a claim must first assert such defense in

its answer. See Swisher & Cohrt v. Yardarm, Inc., 236

N.W.2d 297, 299 (Iowa 1975); Bertran v. Glen Falls Ins. Co.,

232 N.W.2d 527, 531 (Iowa 1975); Bickford v. American

Interinsurance Exchange, 224 N.W.2d 450, 453 (lowa 1974).

See also lowa Rule of Civii Procedure 101 (“Any defense

that a contract or writing sued on is void or voidable, or

was delivered in escrow, or which alleges any matter in

justification, excuse, release or discharge, or which

admits the facts of the adverse pleading but seeks to

avoid their legal effect, must be specially pleaded”). Once

the defense of res judicata is properly pleaded, the bur-

den of proof is on the defendant to make a record ade-

quate to show that the judgment in the prior case

necessarily foreclosed the subsequent litigation. See

Berkley Intern. Co. Ltd. v. Devine, 423 N.W.2d 9, 12 (Iowa

1988); State v. Stergion, 248 N.W.2d 911, 914 (Iowa 1976).

Boatmen’s did not affirmatively plead its res judicata

defense in its answer. Carver’s second amended petition

specifically alleged that the Mount Pleasant Bank

breached its fiduciary duty to the bondholders Carver

represents, and that Boatmen’s participated in that

breach, “by acquiring additional collateral from SAI to

better secure the [Banks’ loans to SAI].” That “additional

collateral” included the same stock option for which

Boatmen’s was paid $61,000.00 from the SAI bankruptcy

(Respondent’s Appendix 5a). Carver also specifically

alleged that the bank’s taking of a security interest in the

stock option agreement constituted a fraudulent convey-

ance. Notwithstanding that Carver requested damages

from Boatmen’s for its participation in that breach of

fiduciary duty, Boatmen’s did not assert the allegedly

preclusive effect of the then two-year-old SAI plan of

reorganization in its answer to Carver’s second amended

petition. Boatmen’s instead merely asserted, in connec-

tion with its general denial, that its security interest in the

stock option was properly perfected (Respondent’s

Appendix 13a).

2 Boatmen’s states in its Petition for Writ of Certiorari that

Carver “specifically sought to recover the $61,000.00 for the

first time, post-trial, during a hearing on the parties’ post-trial

motions.” (Petition for Writ of Certiorari, p. 6, n. 1). Such

statement is incorrect for two reasons. First, Carver has never

sought the return of specific collateral or its proceeds, but has

instead sought money damages for the extent to which the

bondholders were injured by the breach of fiduciary duty in

which Boatmen’s participated. Second, Carver’s second

amended petition — filed more than one year before trial — very

clearly sought recovery for damages arising from the bank’s

taking a security interest in the stock option for which Boat-

men’s was paid $61,000.00 under the SAI plan of reorganiza-

tion. Carver’s petition specifically identified the stock option by

name (Respondent’s Appendix 8a).

Neither did Boatmen’s sustain its burden of proving

that the bankruptcy court’s order confirming the SAI plan

of reorganization necessarily foreclosed any portion of

Carver’s state court claims. No offer whatsoever was

made by Boatmen’s during the course of the trial regard-

ing the SAI plan of reorganization or the bankruptcy

court’s order approving that plan. Following a trial on the

merits, the state district court ordered the parties to each

submit an accounting “setting forth all amounts received

by the banks from [SAI] assets taken as security after

September 30, 1980,” in response to which Boatmen’s

again failed to make any record regarding the bankruptcy

court order on which it now bases its res judicata argu-

ment. Boatmen’s also failed to disclose to the trial court

the payments it had received from the collateral in ques-

tion pursuant to the SAI plan of reorganization. Carver

himself submitted a copy of a proposed plan of reorgani-

zation for SAI, to alert the trial court to Boatmen’s failure

to account for all of the payments it had received from

the collateral in question, but did not include any order

of the bankruptcy court confirming such plan. In other

words, at no time has Boatmen’s introduced into the state

court record the very bankruptcy court order on which it

makes its res judicata argument.? Clearly, Boatmen’s

failed to sustain its burden of proving its res judicata

defense.

3 Although that Order is included in the appendix to

Boatmen’s Petition for a Writ of Certiorari, it was never before

the lowa Supreme Court. Consequently, Boatmen’s is improp-

erly requesting this Court to take notice of a bankruptcy court

order which was at no time part of the record on which the

lowa Court based its decision. See Supreme Court Rule 14.1(h).

Although addressing many of Boatmen’s numerous

contentions, the lowa Supreme Court’s opinion contains

no reference whatsoever to the res judicata argument.

Whatever the reason for such silence, however, it is well

established that this Court will assume the state court’s

decision was based on non-federal grounds, whenever

such grounds are adequate, as they are here, to support

the judgment. See Exxon Corp. v. Eagerton, 462 U.S. 176,

188, 103 S. Ct. 2296, 2300-2301 n. 3, 76 L.Ed.2d 497 (1983);

Fuller v. Oregon, 417 U.S. 40, 50, n. 11, 94S. Ct. 2116, 2123

n. 11, 40 L.Ed.2d 642 (1974); Street v. New York, 394 U.S.

576, 582, 89 S. Ct. 1354, 1360, 22 L.Ed.2d 572 (1969).

Boatmen’s failure to develop a record in the state

courts also requires a conclusion that the federal issue

was not “adequately presented” below. See Bankers Life

and Cas. Co. v. Crenshaw, 486 U.S. 71, 108 S. Ct. 1645, 1651,

100 L.Ed.2d 62 (1988); Webb v. Webb, 451 U.S. 493, 501, 101

S. Ct. 1889, 1894, 68 L.Ed.2d 392 (1981). Boatmen’s res

judicata theory, unsupported by any remotely analogous

federal or state decisions, would not be appropriately

considered here absent “the benefit of a well-developed

record and a reasoned opinion on the merits.” Bankers

Life, supra at 1651. Neither is present.

Il.

NEITHER OF THE SUPPOSED FEDERAL QUESTIONS

SUGGESTED BY PETITIONER MERITS THE ATTEN-

TION OF THIS COURT.

A. NEITHER STATE NOR FEDERAL COURTS

HAVE HELD THAT A 11 U.S.C. § 1141(a)

DEFENSE OF RES JUDICATA WOULD BE

MERITORIOUS ON ANALOGOUS FACTS

As noted previously, the lowa Supreme Court's deci-

sion in this case did not discuss the merits of Boatmen’s

11 U.S.C. Section 1141(a) defense of res judicata. Iowa

courts, as do courts in other jurisdictions, treat a case as

precedent on an issue only when the issue is discussed

and decided. Clearly, the lowa Supreme Court’s opinion

in this case cannot and will not be cited as authority by

any court on the res judicata issue belatedly raised by

Boatmen’s.

Had Boatmen’s properly raised the res judicata

defense, and had the Iowa Supreme Court addressed and

rejected that argument, such a ruling would not consti-

tute a departure from prior case law. Boatmen’s does cite

cases giving res judicata effect to bankruptcy court orders

in certain circumstances. Carver does not dispute that

proposition in the abstract. But Boatmen’s does not and

cannot point to a single decision that would recognize a

res judicata defense on these facts. The cases cited by

Boatmen’s all involved claims against the debtor, or credi-

tor claims which were actually litigated in the bankruptcy

court. They also involve claims that grew out of the same

nucleus of operative fact. Carver’s claim in this action is

not a claim against SAI, and the factual basis for Carver’s

breach of fiduciary duty claim is not the same as the

factual basis for the bondholders’ claim against SAI.

Boatmen’s does not and could not maintain that

Carver’s state law, in personam, claim against other cred-

itors was presented to and decided by the bankruptcy

court. The bankruptcy court did not decide that the banks

had acquired their security interests without breaching

fiduciary duties to other creditors.

The most analogous case rejects Boatmen’s res judi-

cata defense. In Teledyne Industries, Inc. v. Eon Corporation,

10

401 F. Supp. 729, 734-36 (S.D.N.Y. 1975) aff’d, 546 F.2d 495

(2d Cir. 1976), a creditor (Teledyne) brought an action for

breach of fiduciary duties against the individual directors

of Eon Corporation. The corporation itself had filed for

Chapter 11 reorganization and a confirmed plan had been

approved. Teledyne had filed a proof of claim and other-

wise participated in proceedings before the bankruptcy

court. The directors’ res judicata defense was rejected

both because the confirmed plan only adjudicated the

creditors’ claims against the debtor and because the

causes of action, as here, were quite different than those

presented to the bankruptcy court.

Thus, even assuming that the Iowa Supreme Court

decided the res judicata issue on the merits and decided it

wrong, neither of which Boatmen’s establishes, there is no

conflict of decisions or other pending cases relating to the

reach of 11 U.S.C. Section 1141(a) that requires this Court to

reach out to an inadequate vehicle to address the issue.

II.

B. THE ALLOCATION OF THE BURDEN OF

PROOF REGARDING DAMAGES IN THIS

CASE IS A MATTER OF STATE LAW THAT

RAISES NO SUBSTANTIAL FEDERAL QUES-

TION

Iowa law shifts the burden of proof to a fiduciary to

show “fair dealing in all matters within the fiduciary

obligation” whenever the fiduciary is shown to be in a

position to take advantage over the principal, or appears

to have closer access to the facts.” Clinton Land Co. v. M/S

Associates, Inc., 340 N.W.2d 232, 233-35 (Iowa 1983). That

11

requirement, which is imposed by other jurisdictions as

well, includes the burden of proving that any losses

f sustained by the beneficiaries of the trust were not the

result of the breach of duty. See Jefferson Nat’l Bank v.

Central Nat’l Bank in Chicago, 700 F.2d 1143, 1154 (7th Cir.

1983); Seven G. Ranching Co. v. Stewart Title & Trust of

Tucson, 128 Ariz. 590, 592, 627 P.2d 1088, 1090 (Ariz. Ct.

App. 1981); Estate of Stetson, 463 Pa. 64, 84, 345 A.2d 679,

682 (1975). Such rule no doubt rests at least in part on the

general principle that the burden of proof should be

borne by that party who has possession of facts and

circumstances relating to the issue which are lacking to

the other. See Haynes v. Dairyland Mutual Ins. Co., 199

N.W.2d 83, 85 (Iowa 1972).

The Iowa Supreme Court ruled in this case that Boat-

men’s had the burden of proving that the bondholders’

losses* were not the result of Boatmen’s wrongdoing, as

to items within Boatmen’s specific knowledge. (Peti-

tioner’s Appendix A-12). Those facts as to which Boat-

men’s was found to have specific knowledge were the

amounts of the payments it received from specific collat-

eral the banks were shown to have acquired from SAI in

breach of the Mount Pleasant Bank’s fiduciary duties to

the bondholders. (Petitioner’s Appendix A-13). The lowa

Supreme Court found such allocation of proof to be fair

because Boatmen’s had possession of more facts in that

regard than did the bondholders.

4 The bondholders’ total losses - i.e. the principal amount

of the bonds which were not paid by SAI or the bondholder’s

collateral — were established at trial to be approximately

$990,000.00.

iene ea ea tle

12

The Iowa Supreme Court did not consider it neces-

sary to remand the case to allow Boatmen’s an oppor-

tunity to present further evidence on that issue;

Boatmen’s had already been given two such oppor-

tunities. Boatmen’s first opportunity was at the trial on

the merits, when Boatmen’s chose not to produce as live

witnesses any of its officers or agents who were involved

in the SAI credit. Boatmen’s second opportunity came

when the trial court specifically ordered Boatmen’s, post-

trial, to submit an accounting as to all the proceeds it

received from the collateral acquired by the banks in

breach of the Mount Pleasant Bank’s fiduciary duties.

Boatmen’s represented to the court that its accounting

was “the best reconstruction of funds” it could muster,

and that it could “not document further” the source of

the funds it received. The lowa Supreme Court had Boat-

men’s accounting before it, and had no reason to assume

that Boatmen’s had withheld from the trial court any

information at its disposal regarding subject matter of the

accounting. Indeed, Boatmen’s has never explained what

new evidence it could produce if further proceedings

were conducted.

The lowa Supreme Court’s ruling on the allocation of

the burden of proof is persuasive and well-reasoned. But

even were it not the better view, an erroneous view of its

own law by a state court does not create a constitutional

issue.

Boatmen’s extraordinary effort to convert a state law

burden of proof issue to a constitutional claim is totally

unsupported by authority. It can point to no case holding

that the constitution is violated by the allocation of the

burden of proof to a defendant on a particular issue in a

13

civil case. Perhaps most astonishing is Boatmen’s citation

of Beil v. Duckworth, 861 F2d 169 (7th Cir. 1988), in

support of its argument. There, Judge Posner wrote an

opinion only to condemn “the facile equation of state

procedural error to due process denial.” 861 F.2d at 170.

The allocation of the burden of proof on one damage

issue does not present a federal question at all, much less

an important one. And, because it was raised only at

rehearing and never expressly addressed by the state

court, the decision below can never be a precedent that

conflicts with another decision.

CONCLUSION

For the foregoing reasons, this Court should deny the

petition for a writ of certiorari.

Respectfully submitted,

Mark E. ScHANTZ

Jon P. SuLLIvAN

OF

DICKINSON, THROCKMORTON,

PARKER, MANNHEIMER & RaIFE,

A Professional Corporation

1600 Hub Tower

699 Walnut Street

Des Moines, Iowa 50309-3986

(515) 244-2600

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IN THE IOWA DISTRICT COURT

FOR HENRY COUNTY

IN THE MATTER OF THE

RECEIVERSHIP OF MT.

PLEASANT

BANK BANK AND TRUST

COMPANY,

MOUNT PLEASANT, IOWA.

RE: GARLAND CARVER,

SUCCESSOR TRUSTEE

FOR:

CITY OF GILMAN,

IOWA INDUSTRIAL

DEVELOPMENT

REVENUE BOND

ISSUE (SAI PROJECT),

Plaintiff,

VS.

FEDERAL DEPOSIT INSURANCE

CORPORATION, as Receiver of

the Mt. Pleasant Bank and

Trust Company, and CENTERRE

BANK NATIONAL ASSOCIATION,

f/k/a FIRST NATIONAL BANK

IN ST. LOUIS,

Defendants.

Nee eee Oi i iO OO a aS ae eS Ll

NO. CE

805-11-84

SECOND

AMENDED

PETITION FOR

DAMAGES,

RESTITUTION

AND

ACCOUNTING

2a

I.

BREACH OF FIDUCIARY DUTIES - EXPRESS TRUST

Plaintiff states:

1. In June, 1977, SAI Corporation (“SAI”) obtained a

line of credit of $1,200,000.00 (“the Line of Credit”) from

the Mt. Pleasant Bank and Trust Company (“Bank”) with

participation by First National Bank in St. Louis, now

known as Centerre Bank National Association (“Cen-

terre”).

2. On or about March 14, 1978, the Line of Credit

was increased to $1,500,000.00, and an additional term

loan in the amount of $1,000,000.00 was made available to

SAI by Bank and Centerre (“the Term Loan”).

3. At all times material hereto, SAI has owed sub-

stantial amounts to Bank and Centerre for borrowings

under the Line of Credit and the Term Loan.

4. On or about November 1, 1977, the City of

Gilman, Iowa, with the knowledge of Centerre, autho-

rized and undertook to issue Industrial Development

Revenue Bonds, SAI Corporation Project, Series 1977 (the

“Series 1977 Bonds”) to provide funds to pay all or a

portion of the cost of acquiring, improving and equipping

certain land and improvements thereon to be used by SAI

as an industrial and manufacturing facility (the “Pro-

ject”).

5. On or about November 1, 1977, the City of

Gilman, Iowa, and SAI executed a certain loan agreement

(the “Agreement”) whereunder the proceeds from the

sale of the Series 1977 Bonds were loaned to SAI so as to

enable SAI to acquire, construct, improve and equip the

3a

Project. A copy of said loan agreement is attached to the

Petition originally filed herein, marked Exhibit “A” and

made a part hereof by this reference.

6. On or about November 19, 1977, the City of

Gilman, lowa, and Bank, with the knowledge of Centerre,

executed a certain indenture of trust (the “Indenture”)

transferring to Bank all the City of Gilman’s right, title

and interest under the Agreement, in trust, for the bene-

fit, security and protection of all then and future holders

and owners of the Series 1977 Bonds (the “Bondholders”).

A copy of the Indenture is attached to the Petition origi-

nally filed herein, marked Exhibit “B,” and made a part

hereof by this reference.

7. The Indenture established a trust fund in the

custody of Bank designated as “City of Gilman, Iowa,

Industrial Development Revenue Bond Fund, SAI Corpo-

ration Project” (the “Bond Fund”) to be used to pay the

principal of and premium, if any, and interest on the

Bonds.

8. Bank, as Trustee, owed a fiduciary duty to all

Bondholders to:

(a) pay all moneys received by Bank under

and pursuant to any of the provisions of the

Agreement or the Indenture into the Bond Fund;

(b) provide written notice by registered

mail to each known bondholder in the event of a

default as defined under Section 9.01(a), (c) or

(e) of the Indenture;

(c) administer the Bond Fund solely in the

interest of the Bondholders;

4a

(d) communicate to the Bondholders all

material facts in connection with any dealing by

Bank with the Bondholders on its own account;

(e) keep the Bond Fund separate from

Bank’s individual property;

(f) disclose conflict of interest transactions;

(g) realize on claims which Bank held in

trust; and

(h) take reasonable steps to administer,

control, protect and preserve the trust assets.

9. Plaintiff is the duly appointed, qualified, and act-

ing Successor Trustee to Bank under the terms of the

Indenture, empowered to protect and preserve trust

assets for the benefit of the Bondholders.

10. Commencing on or about the 30th day of March,

1979, and at all times material hereto after such date,

Bank and Centerre had knowledge that SAI was in

unsound financial condition.

11. Commencing on or about the 30th day of March,

1979, the Agreement was in a continuous state of default

in one or more of the following respects:

(a) Default in the payment of interest on

bonds;

(b) Default in the payment of principal on

bonds;

(c) Default in the repayment of amounts

owed to other creditors;

(d) Default in the payment of property

taxes owed on the real estate which secures the

Agreement;

5a

(e) Default in providing Bank with certi-

fied financial statements as required by the

Indenture and Agreement;

(f) Default in the performance or obser-

vance of other covenants, agreements and con-

ditions contained in the Indenture and

Agreement.

12. On or about July 30, 1980, Centerre notified SAI,

on its own behalf and that of Bank, that they would not

extend the Line of Credit when it came due September 30,

1980, and that at such time they would also accelerate the

balance owed on the Term Loan.

12(a). Commencing no later than the 30th day of

September, 1980, the Line of Credit and the Term Loan

were in a continuous state of default.

13. Notwithstanding Bank’s knowledge of SAI’s

unsound financial condition and the occurrence of such

events of default on the Agreement, the Indenture, the

Line of Credit, and the Term Loan, Bank failed to notify

the Bondholders of SAI’s unsound financial condition,

failed to give written notice of each such default on the

Agreement to SAI and to each known Bondholder, contin-

ued to collect payments from SAI on the Line of Credit,

bettered its own position vis-a-vis the Bondholders’ posi-

tion by acquiring additional collateral from SAI to better

secure the Line of Credit and the Term Loan, and failed to

disclose to the Bondholders its conflict of interest in

collecting payments on the Line of Credit and acquiring

additional collateral to secure the Line of Credit and the

Term Loan while SAI’s financial condition was unsound.

6a

14. Bank’s said failure to notify the Bondholders of

SAI’s unsound financial condition, its failure to give writ-

ten notice of each such default on the Agreement to SAI

and to each known bondholder, its continued collection

of payments from SAI on the Line of Credit and better-

ment of its own position vis-a-vis the Bondholders’ posi-

tion by acquiring additional collateral to better secure the

Line of Credit and the Term Loan, and its failure to

disclose to Bondholders its conflict of interest in collect-

ing payments on the Line of Credit and acquiring addi-

tional collateral to secure the Line of Credit and the Term

Loan while SAI’s financial condition was unsound each

constitute a breach of its fiduciary duty to all Bond-

holders.

15. Centerre had knowledge of, participated in, and

aided and abetted Bank in its breach of its fiduciary duty

to all Bondholders.

16. The trust assets have suffered damage as a

result of Bank’s breach of its fiduciary duties.

17. Bank and Centerre profited from the breach of

Bank’s fiduciary duties.

18. Defendant FDIC is the duly appointed, quali-

fied, and acting Receiver of the Mt. Pleasant Bank and

Trust Company.

WHEREFORE, plaintiff prays for judgment, jointly

and severally, against FDIC as receiver for Mt. Pleasant

Bank and Trust Company and against Centerre Sank

National Association for the amount of damage the trust

is shown to have suffered as a result of the Mt. Pleasant

Bank and Trust Company’s breach of its fiduciary duties

7a

to the Bondholders, or in the alternative, for the amount

the Mt. Pleasant Bank and Trust Company and Centerre

Bank profited from the breach of the Mt. Pleasant Bank’s

fiduciary duties, plus interest and the costs of this action.

Il.

ACCOUNTING

For his second cause of action, plaintiff states:

19. He incorporates by reference the allegations

contained in paragraphs 1 through 16 of Division I.

20. Plaintiff, as successor Trustee under the Inden-

ture and the Constructive Trust, is entitled to an account-

ing by defendant FDIC as Receiver for the Mt. Pleasant

Bank and Trust Company, Trustee.

WHEREFORE, plaintiff prays the court to order

defendant, as Receiver for Trustee, to account for the

actions of Mt. Pleasant Bank and Trust Company taken as

Trustee during its tenure as Trustee.

III.

FRAUDULENT CONVEYANCE

For his third cause of action, plaintiff states:

21. He incorporates by reference the allegations

contained in paragraphs 1 through 13 of Division I.

22. While the Agreement, Indenture, Line of Credit,

and Term Loan were in a continuous state of default,

while SAI was of unsound financial condition, and while

Bank and Centerre had knowledge of such defaults and

8a

of SAI’s unsound financial condition, SAI executed and

delivered to Bank and Centerre security interests in var-

ious of its assets that were theretofore unencumbered,

including, without limitation, all of SAI’s general intang-

ibles, and its interest in a certain stock purchase agree-

ment for the acquisition of the stock of one Southeastern

Foam Products.

23. Prior to and at the giving of the security inter-

ests, SAI did not have property sufficient to pay its then

existing debts.

24. Such security interests were given by SAI for the

purpose of hindering, delaying, and defrauding its other

creditors.

WHEREFORE, plaintiff prays for judgment, jointly

and severally, against FDIC as receiver for Mt. Pleasant

Bank and Trust Company and against Centerre Bank

National Association for the amount of damage the trust

is shown to have suffered as a result of the above-

described fraudulent conveyances, or in the alternative,

for the amount the Mt. Pleasant Bank and Trust Company

and Centerre Bank profited from the above-described

fraudulent conveyances, plus interest and the costs of this

action.

/s/ Mark E. Schantz

MARK E. SCHANTZ

/s/ a P. SULLIVAN

OF

DICKINSON,

THROCKMORTON,

PARKER, MANNHEIMER &

RAIFE

9a

1600 Hub Tower

Des Moines, Iowa 50309

(515) 244-2600

ATTORNEYS FOR

PLAINTIFF.

CERTIFICATE OF SERVICE

. The undersigned, hereby certifies that a copy of the

document attached to this Certificate was mailed to the

persons listed below at the addresses indicated, stamped

with the appropriate postage for ordinary mail and

deposited on the 24th day of September, 1987, in a United

States Post office mail receptacle, in Des Moines, Iowa.

Mr. John Gosma

_ 617-A Davenport Bank Building

Davenport, IA 52801

Mr. Frank Burnette

1900 Hub Tower

Des Moines, IA 50309

/s/ Rose Wilbanks

10a

IN THE IOWA DISTRICT COURT

FOR HENRY COUNTY

IN THE MATTER OF THE

RECEIVERSHIP OF MT.

PLEASANT BANK AND

TRUST COMPANY,

MOUNT PLEASANT, IOWA

RE: GARLAND CARVER,

SUCCESSOR TRUSTEE FOR:

CITY OF GILMAN, IOWA,

INDUSTRIAL DEVELOPMENT

REVENUE BOND ISSUE

(SAI PROJECT)

Plaintiff,

VS.

FEDERAL DEPOSIT INSURANCE

CORPORATION, as Receiver of

the Mt. Pleasant Bank and

Trust Company, and CENTERRE

BANK, NATIONAL ASSOCIATION,

f/k/a FIRST NATIONAL BANK

IN ST. LOUIS,

Defendants.

NO. CE

805-11-84

ANSWER OF

DEFENDANT

CENTERRE

BANK

NATIONAL

ASSOCIATION

TO

PLAINTIFF’S

SECOND

AMENDED

PETITION FOR

DAMAGES,

RESTITUTION

AND

ACCOUNTING

COMES NOW Centerre Bank, National Association,

(“Centerre”) and for its Answer to Plaintiff’s Second

Amended Petition for Damages, Restitution and Account-

ing, states the following:

1. Paragraph 1 is admitted.

2. Paragraph 2 is admitted.

lla

3. Paragraph 3 is admitted regarding allegations

with respect to Centerre, and denied for lack of informa-

tion sufficient to form a belief regarding allegations con-

tained therein with respect to the Mt. Pleasant Bank &

Trust Company (“Bank”).

4. Centerre admits knowledge that on or about

September 1, 1977 the Industrial Revenue Bond issue

alleged was scheduled for closing, but denies any and all

other allegations of paragraph 4 for lack of information

sufficient to form a belief.

5. Centerre admits knowledge that the loan agree-

ment as alleged was to have been executed on or about

the time alleged, but denies all other allegations of para-

graph 5 for lack of information sufficient to form a belief.

6. Centerre admits knowledge that the indenture

of trust was to have been executed on or about the date

alleged, but denies each and all other allegations of para-

graph 6 for lack of information sufficient to form a belief.

7. Paragraph 7 of is denied for lack of information

sufficient to form a belief.

8. Paragraph 8 is admitted.

9. Paragraph 9 is admitted.

10. Centerre denies paragraph 10 on grounds of

both lack of information sufficient to form a belief and

because the term “unsound financial condition” is vague

and ambiguous and Centerre does not know what

“unsound financial condition” means in the context

plead.

12a

11. Paragraph 11 is denied for lack of information

sufficient to form a belief.

12. Centerre admits that on July 30, 1980 it notified

SAI on its own behalf that the Line of Credit would not

be renewed after September 30, 1980, denies that such

notification was given on behalf of the Bank, and further

denies that it notified SAI it would accelerate the balance

owed on the Term Loan as of September 30, 1980.

12(a) Paragraph 12a is denied.

13. Paragraph 13 is denied for lack of information

sufficient to form a belief.

14. Paragraph 14 is denied for lack of information

sufficient to form a belief.

15. Paragraph 15 is denied.

16. Paragraph 16 is denied.

17. Paragraph 17 is denied.

18. Paragraph 18 is admitted.

19. Centerre incorporates by reference its prior

responses to paragraphs 1 through 16 of Division I of the

Second Amended Petition and realleges the same as if set

forth in full herein.

20. Paragraph 20 is denied.

21. Centerre incorporates by reference its prior

responses to paragraphs 1 through 13 of Division I of the

Second Amended Petition and hereby alleges the same as

if set forth fully herein.

13a

22. Paragraph 22 is denied. Centerre further states

that its security interest in accounts receivable and con-

tract rights, including rights to proceeds of the stock

purchase agreement for acquisition of the stock of South-

eastern Foam Products, was properly perfected by grant

of security interest on March 14, 1978 and filing with the

Secretary of State of the State of Iowa.

23. Paragraph 23 is denied.

24. Paragraph 24 is denied for lack of information

sufficient to form a belief.

WHEREFORE, Centerre requests that this Court dis-

miss Plaintiff’s Second Amended Petition with costs to

Plaintiff.

/s/ W. Don. Brittin, Jr.

W. Don Brittin, jr.

/s/ F. L. Burnette, II

F. L. Burnette, Ii

=- Of «~

NYEMASTER, GOODE,

MCLAUGHLIN, EMERY

AND O’BRIEN, P.C.

1900 Hub Tower

699 Walnut Street

Des Moines, Iowa 50309

(515) 283-3123

ATTORNEYS FOR

CENTERRE BANK

NATIONAL ASSOCIATION

PROOF OF SERVICE

The undersigned hereby certifies that a true copy of

the foregoing instrument was served upon one of the

nee

14a

attorneys of record for each party to the above-entitled

cause by enclosing the same in an envelope addressed to

each such attorney at his/her last known address as

shown below, with postage fully paid, and by depositing

said envelope in a United States Post Office depository on

the 21st day of September, 1988.

/s/ Andrea E. Jones

Jon P. Sullivan

Dickinson, Throckmorton,

Parker, Mannheimer & Raife

1600 Hub Tower

Des Moines, Iowa 50309

John S. Gosma

Rehling, Lindburg and Gosma

617A Davenport Bank Building

Davenport, Iowa 52801