Eureka Bank Provides Page-Turner (Gwen Moritz commentary)

Looking for a page-turner to take to the lake this weekend? Something with a rapidly unfolding plot, a building sense of horror and surprisingly complex characters set in a small town so familiar you’d swear you’d been there before?

I have just the thing for you. It’s called “The Bank of Eureka Springs and John Cross, Appellants, vs. Floyd Carroll Evans, Appellee,” and it was published June 5 by the Arkansas Supreme Court.

Chief Justice W.H. “Dub” Arnold wrote the lively majority opinion affirming a Carroll County Circuit Court jury’s decision to award Carroll Evans $400,000 for the outrageous conduct of the Bank of Eureka Springs and John Cross, its CEO and majority shareholder. Not to slight Justice Arnold’s talent, but in my line of work we call this the kind of story that writes itself.

The story begins innocently enough in those halcyon days of 1994. Evans, a builder and cattle rancher, approached his longtime bankers at the Bank of Eureka Springs about getting a $460,000 loan to buy 1,120 acres of property to develop into a cattle ranch.

In his loan paperwork, Evans specifically declared that he planned to harvest timber from the land and use part of the proceeds to help repay the loan. Even the minutes of the board of directors meeting at which the loan was approved reflect the plan to harvest timber from the property. But somehow — and this isn’t fully explained — the actual loan agreement included language forbidding the harvesting of timber from the land that was used to secure the loan.

Evans did begin harvesting the timber, as he had planned all along, and he used almost $22,000 of the proceeds to pay down the principal of his loan. But in 1995, a couple of Evans’ other business ventures went south and he defaulted on the loan. He began to consider bankruptcy. According to testimony in the case, John Cross warned Evans that he would “make his life hell” if Evans filed for bankruptcy, and he told Evans’ brother that he would have the brothers arrested if they didn’t “play ball.”

As Arnold succinctly wrote, “Mr. Evans filed for bankruptcy on June 11, 1997, and Mr. Cross eventually made good on his threat.”

In addition to badmouthing Evans around town (using language that forced the Honorables to resort to asterisks), bank officials filed two “suspicious activity reports” with federal authorities. The first alleged that Evans has wrongfully disposed of a bulldozer and a boat and motor that were collateral on other notes the bank held. The second accused him of harvesting timber from the mortgaged property without getting permission from the bank and without making any repayment to the bank.

In fact, the bulldozer in question had burned and the bank had already received a settlement from Evans’ insurance company; the boat and motor had been loaned to a friend; the timber harvest was a documented part of Evans’ repayment plan; and some repayment had been made from its proceeds. But Cross and his son didn’t tell any of that to the Carroll County Prosecuting Attorney, whom they persuaded to file criminal bank fraud charges against Carroll Evans.

Evans wasn’t convicted — the trial judge dismissed the charge because the statute of limitations had run out — but defending himself cost about $34,000. He filed a civil suit accusing the bank and Cross of malicious prosecution. A local jury awarded him $100,000 in compensatory damages and $300,000 in punitive damages.

But that’s not the end of the story. The bank appealed the verdict, and its main argument — get this — was that a “safe harbor” provision of federal money-laundering statutes makes banks immune from liability if they report suspicious activity that turns out to be legitimate.

The argument actually persuaded one justice, Ray Thornton, who wrote a dissenting opinion. But Arnold, writing for himself and the other five justices, said the bank’s claim of immunity led to an “absurd result.”

“We do not believe,” Arnold wrote, “that Congress intended the safe harbor to protect Bank employees or officers who pursue personal vendettas against delinquent borrowers.”

Let us all fervently hope Arnold is right.