In re: Frank Francis v.

Opinion

(/(&7521,&&,7$7,21)('$SS3WK&LU

)LOH1DPHES

%$1.5837&<$33(//$7(3$1(/2)7+(6,;7+&,5&8,7

,QUH )5$1.)5$1&,6

'HEWRU

BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB

('6&+25< 6216,1&

3ODLQWLII$SSHOODQW

Y

1R

)5$1.)5$1&,6 

'HIHQGDQW$SSHOOHH

BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB $SSHDOIURPWKH8QLWHG6WDWHV%DQNUXSWF\&RXUW IRUWKH1RUWKHUQ'LVWULFWRI2KLRDW&DQWRQ 1R

$UJXHG6HSWHPEHU

'HFLGHGDQG)LOHG)HEUXDU\

%HIRUH$8*%52:1DQG5+2'(6%DQNUXSWF\$SSHOODWH3DQHOsXGJHV

BBBBBBBBBBBBBBBBBBBB

&2816(/

$5*8('5&OLQW=ROOLQJHUsU1RUWK&DQWRQ2KLRIRU$SSHOODQW'RQDOG00LOOHU &DQWRQ2KLRIRU$SSHOOHH21%5,()5&OLQW=ROOLQJHUsU&KULVWRSKHUs)UHHPDQ 1RUWK&DQWRQ2KLRIRU$SSHOODQW'RQDOG00LOOHU&DQWRQ2KLRIRU$SSHOOHH

BBBBBBBBBBBBBBBBBBBB

23,1,21

BBBBBBBBBBBBBBBBBBBB

s9,1&(17$8*s5%DQNUXSWF\$SSHOODWH3DQHOsXGJH$SSHOODQW(G6FKRU\ 6RQV,QFm6FKRU\l DSSHDOVWKHEDQNUXSWF\FRXUWjVRUGHUFRQILUPLQJWKHFKDSWHUSODQ ILOHGE\)UDQN)UDQFLVm)UDQFLVlRUm'HEWRUl 6FKRU\FRQWHQGVWKDWWKHEDQNUXSWF\FRXUW HUUHGLQFRQILUPLQJ'HEWRUjVSODQEHFDXVHWKHSODQZDVQRWILOHGLQJRRGIDLWK%HFDXVH ZHILQGWKDWWKHEDQNUXSWF\FRXUWjVILQGLQJVRIIDFWRQWKHLVVXHRIJRRGIDLWKZHUHQRW FOHDUO\HUURQHRXVZH$)),50

, ,668(6 21 $33($/

:KHWKHUWKHEDQNUXSWF\FRXUWHUUHGLQILQGLQJWKDW'HEWRUSURSRVHGKLVFKDSWHU SODQLQJRRGIDLWKDQGZKHWKHUWKHEDQNUXSWF\FRXUWHUUHGLQFRQILUPLQJ'HEWRUjVSODQ

,, s85,6',&7,21 $1' 67$1'$5' 2) 5(9,(:

7KH3DQHOKDVMXULVGLFWLRQRYHUDSSHDOVIURPWKHILQDORUGHUVRIEDQNUXSWF\FRXUWV LQWKH1RUWKHUQ'LVWULFWRI2KLRSXUVXDQWWR86&†D  DQGWKDWGLVWULFWKDV DXWKRUL]HGDSSHDOVWRWKH3DQHO7KHRUGHURIWKHEDQNUXSWF\FRXUWFRQILUPLQJWKH'HEWRUjV SODQLVDILQDORUGHUIRUSXUSRVHVRIDSSHDO6HH)LUVW8QLRQ0RUWJDJH&RUSY(XEDQNV ,QUH(XEDQNV %5%$3WK&LU  mµ$EDQNUXSWF\MXGJHjVILQGLQJWKDWDGHEWRUjVSODQLVSURSRVHGLQJRRGIDLWKLVD ILQGLQJRIIDFWUHYLHZHGXQGHUWKHFOHDUO\HUURQHRXVVWDQGDUGjl+DUGLQY&DOGZHOO,QUH &DOGZHOO )GWK&LU >KHUHLQDIWHUm&DOGZHOO,l@TXRWLQJ'RZQH\ 6DYLQJV /RDQ$VVRFY0HW],QUH0HW]

)GWK&LU VHHDOVR 0DVRQY<RXQJ,QUH<RXQJ )GWK&LU 7KHFRXUWmUHYLHZ>V@ IRUFOHDUHUURUWKHEDQNUXSWF\FRXUWjVIDFWXDOGHWHUPLQDWLRQWKDW>'HEWRUjV@&KDSWHUSODQ ZDVSURSRVHGLQJRRGIDLWKl )DFWXDOGHWHUPLQDWLRQVDUHFOHDUO\HUURQHRXVmLIZHDUHOHIW ZLWK WKH GHILQLWH DQG ILUP FRQYLFWLRQ WKDW D PLVWDNH KDV EHHQ FRPPLWWHGl 7HQQHVVHH 6WXGHQW$VVLVWDQFH&RUSY+RUQVE\,QUH+RUQVE\ )GWK&LU

LQWHUQDOTXRWDWLRQVDQGFLWDWLRQVRPLWWHG VHHDOVR)('5%$1.53m)LQGLQJVRI



IDFWZKHWKHUEDVHGRQRUDORUGRFXPHQWDU\HYLGHQFHVKDOOQRWEHVHWDVLGHXQOHVVFOHDUO\ HUURQHRXVDQGGXHUHJDUGVKDOOEHJLYHQWRWKHRSSRUWXQLW\RIWKHEDQNUXSWF\FRXUWWR MXGJHWKHFUHGLELOLW\RIWKHZLWQHVVHVl 

,,, )$&76

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sDQXDU\6FKRU\ILOHGDQREMHFWLRQWRFRQILUPDWLRQRIWKHSODQ7KHPDLQWKUXVW RIWKHREMHFWLRQZDVWKDWWKHGHEWRZHGWR6FKRU\KDGEHHQIRXQGQRQGLVFKDUJHDEOHLQWKH SULRUFKDSWHUILOHGE\)UDQFLVLQDQG)UDQFLVjVSODQSURSRVHG WR SD\DPLQLPDO DPRXQWWRXQVHFXUHGFUHGLWRUV ,QGHWHUPLQLQJWKDW)UDQFLVjVFKDSWHUSODQVKRXOGEHFRQILUPHGWKHEDQNUXSWF\ FRXUW VWDWHG WKDW WKH WHVW WR EH DSSOLHG LV mD IRUP RI WKH &DOGZHOO 7RWDOLW\ RI WKH &LUFXPVWDQFHV7HVWl$SSRI$SSHOODQWDW $OWKRXJKLWGLGQRWVWDWHZLWKVSHFLILFLW\ WKH HOHPHQWV RI WKH &DOGZHOO 7RWDOLW\ RI WKH &LUFXPVWDQFHV 7HVW WKH EDQNUXSWF\ FRXUW SHUIRUPHGDYHU\WKRURXJKDQDO\VLVRIWKHFLUFXPVWDQFHVVXUURXQGLQJ)UDQFLVjVILOLQJ7KH EDQNUXSWF\FRXUWQRWHGWKHIROORZLQJIDFWRUVRQWKHQHJDWLYHVLGHRIFRQILUPDWLRQ  )UDQFLVjVSULRUFKDSWHUSURFHHGLQJDQGKLVIDLOXUHWROLVWWKHSULRUFKDSWHU LQKLVFKDSWHUSHWLWLRQDQGVFKHGXOHV  7KHIDFWWKDWWKHGHEWWR6FKRU\ZDVQRQGLVFKDUJHDEOHLQWKHSULRUFKDSWHU

 $WRUDODUJXPHQWWKHSDUWLHVVWLSXODWHGWKDWWKHSODQSHUFHQWDJHLVWZRWRWKUHH SHUFHQWDQGWKDWWKHEDQNUXSWF\MXGJHZDVDZDUHRIWKHORZSHUFHQWDJH,WLVHYLGHQWIURP WKHWULDOWUDQVFULSWDQGWKHEDQNUXSWF\FRXUWjVRUDOGHFLVLRQWKDWWKHORZSHUFHQWDJHZDVRI FRQFHUQWRWKHEDQNUXSWF\FRXUWDQGWKDWWKH'HEWRUjVSODQUHFHLYHGSDUWLFXODUVFUXWLQ\GXH WRWKHORZSHUFHQWDJH$SSRI$SSHOODQWDW



 )DLOXUHRI)UDQFLVWRILOHDOORIKLVWD[UHWXUQV  )DLOXUHWROLVWWKH,QWHUQDO5HYHQXH6HUYLFHDVDFUHGLWRULQKLVFKDSWHU  7KHORZSD\PHQWSHUFHQWDJHWRXQVHFXUHGFUHGLWRUVLQWKHFKDSWHUDQG  )UDQFLVjV VFKHGXOHV DQG VWDWHPHQWV RI DIIDLUV mZHUH QRW RI WKH KLJKHVW FDOLEHUl $SSRI$SSHOODQWDW 2QWKHSRVLWLYHVLGHRIFRQILUPDWLRQWKHEDQNUXSWF\FRXUWQRWHG  ,W KDV EHHQ WKUHH DQG D KDOI \HDUV VLQFH WKH ILOLQJ RI )UDQFLVjV FKDSWHU  SHWLWLRQ  7KHGHEWRZHGWR6FKRU\LVVXEVWDQWLDODSSUR[LPDWHO\ DQG)UDQFLV KDVPDGHVXEVWDQWLDOSD\PHQWVRQWKHGHEWRIDSSUR[LPDWHO\  )UDQFLV KDV PDLQWDLQHG D IDLUO\ VWHDG\ LQFRPH DQG JURZWK RYHU WKH SDVW VHYHUDO\HDUV  )UDQFLVKDVFRPPLWWHGWRWKHPD[LPXPILYH\HDUSODQDWWKHDJHRI  )UDQFLV LV FRQWULEXWLQJ DOO DYDLODEOH PRQH\ WR KLV SODQ LQFOXGLQJ REWDLQLQJ FRQWULEXWLRQVIURPUHODWLYHV  $IWHULQWHQVHVFUXWLQ\WKHEDQNUXSWF\FRXUWZDVVDWLVILHGZLWKWKHFXUUHQW DFFXUDF\RI)UDQFLVjVILQDQFLDOVWDWHPHQWVDVWRDVVHWVDQGLQFRPHDQGWKDW)UDQFLVKDV YLUWXDOO\QRDVVHWV  7KHUH LV QR XQXVXDO EXUGHQ RQ WKH FKDSWHU  WUXVWHH LQ DGPLQLVWHULQJ )UDQFLVjVFKDSWHUSODQDQG  *LYHQKLVDJHDQGWKHLQWHUHVWDFFUXLQJRQWKHGHEWRZHGWR6FKRU\LWLV KRSHOHVVWKDW)UDQFLVZLOOHYHUEHDEOHWRSD\RIIWKHGHEWLQIXOO

 $SSUR[LPDWHO\RIWKHZDVSDLGZKHQ6FKRU\OHYLHGRQDOORI)UDQFLVjV KRXVHKROGIXUQLWXUH$SSRI$SSHOODQWDW )UDQFLVWHVWLILHGWKDWDODUJHUSRUWLRQ RIWKHZDVSDLGWR6FKRU\ZKHQ)UDQFLVVROGVHYHUDOFRQGRV)UDQFLVSDLG6FKRU\  HDFK RQ WKH VDOH RI IRXU FRQGRV DQG PDGH D mVHYHQWHHQ   RU DQ HLJKWHHQ WKRXVDQGGROODU SD\PHQWWKDWZDVHYHU\SHQQ\PDGHRIIRIDQRWKHUWZRFRQGRV WKDWVROG2WKHUWKDQZKDWWKHEDQNJRWZHVHQWHYHU\WKLQJRYHUWR6FKRU\DQ\WKLQJWR SD\WKHQRWHGRZQl$SSRI$SSHOODQWDW



7KHEDQNUXSWF\FRXUWDOVRFRQVLGHUHGWKDW)UDQFLVDSSDUHQWO\UHFHLYHGSRRUOHJDO DGYLFHLQWKHSDVW,WKDVEHHQ\HDUVVLQFH)UDQFLVjVGRZQZDUGVSLUDOVWDUWHGDQGLQ UHFHQW\HDUV)UDQFLVKDVPDGHDVXEVWDQWLDOHIIRUWWRSXWKLVOLIHEDFNWRJHWKHU 7KHEDQNUXSWF\FRXUWFRQILUPHG)UDQFLVjVSODQLQDQRUDOGHFLVLRQVXSSOHPHQWHGE\ DQRUGHUFRQILUPLQJWKHSODQHQWHUHG$SULO6FKRU\ILOHGWKLVWLPHO\DSSHDO

',6&866,21

3XUVXDQWWR86&†D  DGHEWRUjVSODQFDQQRWEHFRQILUPHGXQOHVVLW LVSURSRVHGLQJRRGIDLWKDQGWKHGHEWRUEHDUVWKHEXUGHQRISURYLQJKLVJRRGIDLWK6HH +DUGLQ Y &DOGZHOO ,Q UH &DOGZHOO   )G   WK &LU   >KHUHLQDIWHU m&DOGZHOO,,l@ 6FKRU\DUJXHVWKDW)UDQFLVKDVQRWSURSRVHGKLVSODQLQJRRGIDLWKDQGLQGHHGRQHjV LQLWLDOUHDFWLRQLVWRTXHVWLRQWKHJRRGIDLWKRIDGHEWRUZKRSURSRVHVDSODQSD\LQJWZRWR WKUHHSHUFHQWRIDQRQGLVFKDUJHDEOHGHEW+RZHYHUWKHVHIDFWVDORQHGRQRW IRUFHDFRQFOXVLRQWKDW'HEWRUjVSODQZDVILOHGLQEDGIDLWK7KHUXOHLQWKH6L[WK&LUFXLWLV WKDWSODQVSURSRVLQJWRSD\VXFKORZSHUFHQWDJHVRIQRQGLVFKDUJHDEOHGHEWVGHVHUYH mSDUWLFXODUVFUXWLQ\l&DOGZHOO,,)GDW7KDWLVH[DFWO\WKHDFWLRQWDNHQE\WKH EDQNUXSWF\FRXUWLQWKLVPDWWHU 6FKRU\ DOVR DVVHUWV WKDW )UDQFLVjV SODQ ZDV QRW ILOHG LQ JRRG IDLWK EHFDXVH RI )UDQFLVjVIDLOXUHWROLVWWKH,QWHUQDO5HYHQXH6HUYLFHDVDFUHGLWRUKLVIDLOXUHWRGLVFORVHWKH SULRU FKDSWHU  DQG LQDFFXUDFLHV LQ WKH 'HEWRUjV VFKHGXOHG DVVHWV DQG LQFRPH  7KH EDQNUXSWF\FRXUWORRNHGDWHDFKRIWKHVHLVVXHVLQGHWDLO

&ULWHULDWR'HWHUPLQH*RRG)DLWK 7KH 6L[WK &LUFXLW KDV LQGLFDWHG WKDW mµD GHEWRUjV SUHSHWLWLRQ FRQGXFW LV EXW RQH HOHPHQWjl DQG WKDW EDQNUXSWF\ FRXUWV PXVW ORRN WR WKH WRWDOLW\ RI WKH FLUFXPVWDQFHV LQ

 ,QLWVRUDOGHFLVLRQWKHEDQNUXSWF\FRXUWDOVRQRWHVZKHQGLVFXVVLQJWKHIDYRUDEOH FRQVLGHUDWLRQVWKDWm>W@KHUHLVDSUHIHUHQWLDOWUHDWPHQWEHWZHHQWKHFODVVHVLQWKHSODQl $SSRI$SSHOODQWDW 7KLVDSSHDUVWREHDW\SRJUDSKLFDOHUURURUDPLVVWDWHPHQWE\ WKHEDQNUXSWF\MXGJHVLQFHWKHUHZDVQRHYLGHQFHJLYHQRUDVVHUWLRQPDGHE\6FKRU\WKDW DQ\FUHGLWRUVZHUHUHFHLYLQJSUHIHUHQWLDOWUHDWPHQW3UHVXPDEO\WKHEDQNUXSWF\FRXUW LQWHQGHG WR LQGLFDWH DV D IDYRUDEOH FRQVLGHUDWLRQ WKDW WKHUH ZDV QRW DQ\ SUHIHUHQWLDO WUHDWPHQWEHWZHHQFODVVHVLQWKHSODQ



GHWHUPLQLQJDGHEWRUjVJRRGIDLWKLQILOLQJDFKDSWHUSHWLWLRQDQGSODQ&DOGZHOO, )GDW TXRWLQJ0HWUR(PSOR\HHV&UHGLW8QLRQY2NRUHHK%DDK,QUH2NRUHHK EDDK   )G   WK &LU    7KH 6L[WK &LUFXLW mKDV VXJJHVWHG D WZHOYHSDUWWHVWWRGHWHUPLQHZKHWKHUDGHEWRU V&KDSWHUSODQLVSURSRVHGLQJRRGIDLWKl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jGVXEQRP.LWFKHQVY*HRUJLD55 %DQN 7UXVW&R,QUH.LWFKHQV )GWK&LU  7KHDERYHIDFWRUVFDQEHVXSSOHPHQWHGZLWKDGGLWLRQDOFRQVLGHUDWLRQV 

ZKHWKHU WKH GHEWRU LV DWWHPSWLQJ WR DEXVH WKH VSLULW RI WKH %DQNUXSWF\&RGH  >WKDW@ JRRG IDLWK GRHV QRW QHFHVVDULO\ UHTXLUH VXEVWDQWLDO UHSD\PHQWRIWKHXQVHFXUHGFODLPV  >WKDW@WKHIDFWDGHEWLVQRQGLVFKDUJHDEOHXQGHU&KDSWHUGRHV QRWPDNHLWQRQGLVFKDUJHDEOHXQGHU&KDSWHUDQG 

WKH IDFW WKDW D GHEWRU VHHNV WR GLVFKDUJH DQ RWKHUZLVH QRQGLVFKDUJHDEOH GHEW LV QRW SHU VH HYLGHQFH RI EDG IDLWK EXW PD\ EH FRQVLGHUHGDVSDUWRIWKHWRWDOLW\RIWKHFLUFXPVWDQFHVDQDO\VLV &DOGZHOO,)GDWLQWHUQDOTXRWDWLRQVDQGFLWDWLRQVRPLWWHG 



7KH6L[WK&LUFXLWKDVVWDWHGWKDWEDQNUXSWF\FRXUWVVKRXOGQRWDSSURYHFKDSWHU SODQVWKDWDUHQRWKLQJPRUHWKDQmYHLOHGlFKDSWHUSODQV&DOGZHOO,,)GDW $mYHLOHGlFKDSWHUSODQKDVQRWEHHQGHILQHG+RZHYHUWKHFRQFHSWKDVQRW\HWHYROYHG LQWRDQ\WKLQJEH\RQGDFKDSWHUSHWLWLRQDQGSODQWKDWGRHVQRWPHHWWKHJRRGIDLWK UHTXLUHPHQWVVHWIRUWKLQ2NRUHHK%DDK6HH&DOGZHOO,,)GILUVWXVLQJWKH SKUDVHmYHLOHGFKDSWHUSODQlWRGHVFULEHDFKDSWHUSODQZKLFKIDLOHGWRPHHWWKHJRRG IDLWKUHTXLUHPHQWVVHWIRUWKLQ2NRUHHK%DDK  0RUHLQVWUXFWLYHDQGPRUHLQOLQHZLWKGHWHUPLQLQJZKHWKHUWKLV'HEWRUjVSODQVKRXOG KDYHEHHQFRQILUPHGLVWKH6L[WK&LUFXLWjVGLUHFWLRQWKDWDFKDSWHUSODQZKLFKSURSRVHV WRSD\RQO\DVPDOOSRUWLRQRIDGHEWWKDWFRXOGQRWEHGLVFKDUJHGLQDFKDSWHUGHVHUYHV SDUWLFXODUVFUXWLQ\&DOGZHOO,,)GDW 7KHEDQNUXSWF\FRXUWPXVWXOWLPDWHO\GHWHUPLQHZKHWKHUWKHGHEWRUjVSODQ JLYHQKLVRUKHULQGLYLGXDOFLUFXPVWDQFHVVDWLVILHVWKHSXUSRVHVXQGHUJLUGLQJ &KDSWHUDVLQFHUHO\LQWHQGHGUHSD\PHQWRISUHSHWLWLRQGHEWFRQVLVWHQW ZLWKWKHGHEWRUjVDYDLODEOHUHVRXUFHV7KHGHFLVLRQVKRXOGEHOHIWVLPSO\WR WKHEDQNUXSWF\FRXUWjVFRPPRQVHQVHDQGMXGJPHQW 2NRUHHK%DDK)GDW &RQVLVWHQWZLWKLWVGXW\WRJLYHSDUWLFXODUVFUXWLQ\WR)UDQFLVjVSODQWKHEDQNUXSWF\ FRXUWLQWKHFDVHEHIRUHWKH3DQHOWKRURXJKO\FRQVLGHUHGHDFKRIWKHLVVXHVUDLVHGE\ 6FKRU\DVZHOODVWKHRWKHUIDFWRUVJLYHQE\WKH6L[WK&LUFXLWLQ2NRUHHK%DDK

/RZ3HUFHQWDJH3ODQDQG&KDSWHU'LVFKDUJHRIWKH1RQGLVFKDUJHDEOH'HEWRZHGWR 6FKRU\ 7KHEDQNUXSWF\FRXUWZDVSDUWLFXODUO\FRQFHUQHGZLWKWKHORZSHUFHQWDJH)UDQFLVjV SODQSURSRVHGWRSD\DQGZLWKKLVFKDSWHUSODQGLVFKDUJLQJ6FKRU\jVGHEWZKHQWKHGHEW ZDVQRQGLVFKDUJHDEOHLQWKHSULRUFKDSWHU 7KHSODLQODQJXDJHRI86&†D  VHWVWKHPLQLPXPGLYLGHQGSD\DEOH E\DFKDSWHUGHEWRUDQG†D  UHTXLUHVWKDWDOORIDGHEWRUjVGLVSRVDEOHLQFRPH EH SDLG LQWR WKH SODQ IRU D WKUHH\HDU SHULRG   86& †  SURYLGHV IRU D VXSHUGLVFKDUJHIRUFKDSWHUGHEWRUVE\SHUPLWWLQJGLVFKDUJHRIVRPHGHEWVWKDWZRXOG EHQRQGLVFKDUJHDEOHLQDFKDSWHU6HH.HDFKY%R\DMLDQ,QUH.HDFK %5 %$3VW&LU m7KHUHLVKRZHYHUDTXLGSURTXRIRUWKHH[SDQGHGGLVFKDUJH



DYDLODEOHXQGHU&KDSWHU7KHGHEWRUPXVWGHYRWHDOOKLVSURMHFWHGGLVSRVDEOHLQFRPH IRUWKUHH\HDUVWRWKHSODQjVSD\PHQWVl,GDW 7KHUHZDVQRTXHVWLRQIRUWKHEDQNUXSWF\FRXUWWKDW)UDQFLVjVSODQRQLWVIDFHPHW WKH UHTXLUHPHQWV RI † D    +RZHYHU GXH WR WKH FLUFXPVWDQFHV VXUURXQGLQJ )UDQFLVjVSODQWKHEDQNUXSWF\FRXUWZDVUHTXLUHGWRDQGGLGIXUWKHUVFUXWLQL]H)UDQFLVjV ILQDQFLDOVLWXDWLRQWRGHWHUPLQHLI6FKRU\jVDOOHJDWLRQVWKDW)UDQFLVKDGKLGGHQDVVHWVRU LQFRPHZHUHPHULWRULRXV 7KH EDQNUXSWF\ FRXUW DQG 6FKRU\jV FRXQVHO WKRURXJKO\ TXHVWLRQHG )UDQFLV ZLWK UHVSHFW WR KLV LQFRPH DQG H[SHQVHV  7KH RQO\ DVVHWV WKDW 6FKRU\ ZDV DEOH WR VKRZ )UDQFLVIDLOHGWROLVWLQKLVVFKHGXOHVZHUHDZRUNYDQZLWKPLOHVYDOXHGDW DSSUR[LPDWHO\DQGWRROVSXUFKDVHGDWDJDUDJHVDOHIRXUDQGDKDOI\HDUVDJRWKDW )UDQFLVXVHVLQKLVSDLQWLQJEXVLQHVV $OO TXHVWLRQV UHJDUGLQJ GLVFUHSDQFLHV LQ )UDQFLVjV GHSRVLWLRQ WHVWLPRQ\ WULDO WHVWLPRQ\ DQG VFKHGXOHV UHJDUGLQJ )UDQFLVjV LQFRPH ZHUH DGHTXDWHO\ H[SODLQHG DV GLIIHUHQFHVEHWZHHQJURVVDQGQHWLQFRPHIURPKLVSDLQWLQJEXVLQHVVDQGE\WKHIDFWWKDW VRPHILJXUHVZHUHHVWLPDWHV7KHEDQNUXSWF\FRXUWZDVVDWLVILHGZLWK)UDQFLVjVWHVWLPRQ\ FODULI\LQJWKHLQFRPHDQGDVVHWLVVXHV 7KHEDQNUXSWF\FRXUWLQWKHFDVHEHIRUHWKH3DQHOGHWHUPLQHGWKDW)UDQFLVmKDV YLUWXDOO\QRDVVHWVl$SSRI$SSHOODQWDW 7KHRQO\DVVHW)UDQFLVKDVLVKLVLQWHUHVW LQKLVKDOIRIWKHGXSOH[KHVKDUHVZLWKKLVPRWKHU7KHPRUWJDJHOLHQVRQWKHGXSOH[DUH VXSHULRU WR 6FKRU\jV OLHQ DQG D VDOH RI )UDQFLVjV KDOI LQWHUHVW ZLOO QRW OHDYH DQ\ IXQGV DYDLODEOHIRU6FKRU\$SSRI$SSHOODQWDW  ,QLWVRUDOGHFLVLRQWKHEDQNUXSWF\FRXUWGHWHUPLQHGWKDW)UDQFLVLVFRQWULEXWLQJDOO RIKLVGLVSRVDEOHLQFRPHLQWRKLVSODQIRUWKHPD[LPXPSHULRGRIILYH\HDUV,QDGGLWLRQ )UDQFLVjVUHODWLYHVKDYHDJUHHGWRPDNHDOXPSVXPFRQWULEXWLRQWRWKHSODQXSRQ FRQILUPDWLRQ

 6HFWLRQD  ORRNVDWZKDWDFUHGLWRUZLOOEHmSDLGlLQDFKDSWHUQRWZKDW LWLVHQWLWOHGWREHSDLG6HH 86& † D  mWKHYDOXHRISURSHUW\WREH GLVWULEXWHGXQGHUWKHSODQRQDFFRXQWRIHDFKDOORZHGXQVHFXUHGFODLPLVQRWOHVVWKDQWKH DPRXQWWKDWZRXOGEHSDLGRQVXFKFODLPLIWKHHVWDWHRIWKHGHEWRUZHUHOLTXLGDWHGXQGHU FKDSWHU HPSKDVLVDGGHG 



,W LV LPSRUWDQW WR QRWH WKDW WKH EDQNUXSWF\ FRXUW ZDV FRQYLQFHG WKDW D WKRURXJK VHDUFK RI WKH 'HEWRUjV DVVHWV DQG LQFRPH KDG EHHQ SHUIRUPHG E\ WKH QXPHURXV LQYHVWLJDWLRQVFRQGXFWHGE\6FKRU\,QLWVRUDOGHFLVLRQWKHEDQNUXSWF\FRXUWVWDWHVm,WKLQN DFWXDOO\WKHWKRURXJKQHVVZLWKZKLFK>6FKRU\jVFRXQVHO@ZHQWRYHUWKLVLVRQHRIWKHWKLQJV WKDWPDGHLWSRVVLEOHIRU>'HEWRUjV@SODQWREHFRQILUPHGEHFDXVH,EHFDPHFRQYLQFHGWKDW >'HEWRUjV@OLIHKDGEHHQFRPEHGWKURXJKl$SSRI$SSHOODQWDW  )XUWKHUWKH%DQNUXSWF\&RGHVSHFLILFDOO\DOORZVDGHEWRUZKRRWKHUZLVHPHHWVWKH UHTXLUHPHQWVRI†WRGLVFKDUJHFHUWDLQGHEWVWKDWDUHQRWGLVFKDUJHDEOHLQDFKDSWHU 6FKRU\jVGHEWZDVIRXQGQRQGLVFKDUJHDEOHXQGHU86&†D  $ )UDQFLV %58QIRUWXQDWHO\IRU6FKRU\KLVFODLPLVQRWLQRQHRIWKHFODVVHVRIGHEWZKLFK &RQJUHVVFKRVHWRH[FHSWIURPWKHVXSHUGLVFKDUJHJUDQWHGWRFKDSWHUGHEWRUV6HH  86& † D   7R EH HQWLWOHG WR WKH EHQHILW RI WKH VXSHUGLVFKDUJH WKH GHEWRU VXEMHFWVKLPVHOIWRDWOHDVWWKUHH\HDUVRISODQSD\PHQWVFRQVLVWLQJRIDOORIKLVGLVSRVDEOH LQFRPH)UDQFLVjVSODQH[FHHGVWKHPLQLPXPUHTXLUHPHQWVE\SD\LQJLQWRWKHSODQDOORI KLVGLVSRVDEOHLQFRPHIRUDSHULRGRIILYH\HDUVSOXVYROXQWDULO\REWDLQLQJDORDQIURPKLV UHODWLYHV IRU DQ DGGLWLRQDO  ZKLFK UHSUHVHQWV D VLJQLILFDQW IXQG QRW RWKHUZLVH DYDLODEOHWRWKHFUHGLWRUV :HGRQRWILQGFOHDUO\HUURQHRXVWKHEDQNUXSWF\FRXUWjVGHWHUPLQDWLRQWKDWWKHORZ SHUFHQWDJH SURSRVHG E\ )UDQFLVjV SODQ DQG WKH IDFW WKDW )UDQFLV ZDV DWWHPSWLQJ WR GLVFKDUJH6FKRU\jVGHEWWKDWZDVQRQGLVFKDUJHDEOHLQDFKDSWHUZHUHQRWLQWKLVFDVH HYLGHQFHRIEDGIDLWK

$GGLWLRQDO,VVXHV$VVHUWHGE\6FKRU\DV(YLGHQFHRI%DG)DLWK ,QIXUWKHUH[DPLQLQJZKHWKHU)UDQFLVjVSODQZDVILOHGLQJRRGIDLWKWKHEDQNUXSWF\ FRXUWDGGUHVVHGHDFKRI)UDQFLVj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jVIDLOLQJKHDOWKUHVXOWHGLQKHUEHFRPLQJDQLQYDOLG'HEWRUFXUUHQWO\XVHV



WKHVHUYLFHVRIDQDFFRXQWDQWWRSURSHUO\ILOHKLVTXDUWHUO\UHWXUQVDQGDQQXDOWD[UHWXUQV )UDQFLVZDVDEOHWRGHVFULEHLQGHWDLOWRWKHEDQNUXSWF\FRXUWWKHVHUYLFHVSURYLGHGE\KLV DFFRXQWDQWDQGZKDW'HEWRUjVGXWLHVZHUHWRPDNHLWSRVVLEOHIRUWKHDFFRXQWDQWWRSHUIRUP KLVMRE7KXVIXWXUHSUREOHPVZLWKXQILOHGWD[HVVKRXOGEHDOOHYLDWHG )DLOXUHWRGLVFORVHWKHSULRUFKDSWHUZDVLQDGYHUWHQW7KH'HEWRUWHVWLILHGWKDWKH DQGKLVFRXQVHOKDGGLVFXVVHGWKHSULRUILOLQJDQGZKHQTXHVWLRQHGE\WKHEDQNUXSWF\ FRXUW'HEWRUjVFRXQVHOVWDWHGWKDWKHmKRQHVWO\PLVVHGLWP\VHOIl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†D  GHEWRUILOHG FKDSWHUMXVWWZRZHHNVDIWHUFRQFOXVLRQRIFKDSWHUFUHGLWRUjVQRQGLVFKDUJHDEOHGHEW ZDV RQO\ GHEW OLVWHG LQ FKDSWHU  SODQ SURSRVHG WR SD\  RI GHEW SODQ ZDV IRU PLQLPXP PRQWK SHULRG DQG SURSRVHG PRQWKO\ SD\PHQWV RI  FRXUW IRXQG FRQILUPDWLRQ LV WDQWDPRXQW WR GLVFKDUJH RI FUHGLWRUjV QRQGLVFKDUJHDEOH GHEW  'DYLV Y 0DWKHU,QUH'DYLV %5%$3WK&LU GHEWRUGLGQRWRULJLQDOO\PHHW GHEWOLPLWDWLRQVRIFKDSWHUDQGILOHGFKDSWHUFKDSWHUZDVILOHGDIWHUGLVFKDUJHEXW EHIRUHSULRUFKDSWHUZDVFORVHGGHEWRUSURSRVHGSD\PHQWRIWRXQVHFXUHGFUHGLWRU ZKRVH GHEW ZDV IRXQG WR EH QRQGLVFKDUJHDEOH LQ SULRU FKDSWHU  GHEWRU SURSRVHG WR VXUUHQGHUWRFUHGLWRUQRQH[HPSWSURSHUW\WKDWUHPDLQHGDQDVVHWRIKLVFKDSWHUHVWDWH  ,QUH5RVH%5%DQNU6'2KLR GLVKRQHVWQDWXUHRIGHEWRUjVSUHSHWLWLRQ FRQGXFWUHVXOWLQJLQUHVWLWXWLRQDJUHHPHQWQRYROXQWDU\SD\PHQWVDIWHUSUREDWLRQSHULRG GHVSLWH VXEVWDQWLDO  VDODU\ LQ  DQG DELOLW\ WR SD\ IDLOXUH WR FRPPLW DOO



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jVSODQLVWKHPD[LPXPSHUPLWWHGE\WKH%DQNUXSWF\&RGH$OORI )UDQFLVjVGLVSRVDEOHLQFRPHLVFRPPLWWHGWRSD\PHQWLQWRWKHSODQIRUWKHILYH\HDUSHULRG DQG)UDQFLVZLOOQHYHUEHDEOHWRSD\RIIWKHIXOODPRXQWRIWKHGHEWRZHGWR6FKRU\ )URPWKHWUDQVFULSWWKLVGLVSXWHEHWZHHQWKHSDUWLHVKDVIHVWHUHGIRURYHU\HDUV 7KHEDQNUXSWF\FRXUWDGPRQLVKHG)UDQFLVWKDWWKLVZDVKLVODVWFKDQFHWRSXWKLVOLIHEDFN WRJHWKHU6LPLODUO\ >&UHGLWRU@ VKRXOG EH DGYLVHG    WKDW D GHEWRU ZKR KDV VRXJKW WKH SURWHFWLRQV RI EDQNUXSWF\ DQG ZKR PHHWV WKH REOLJDWLRQV RI > 86&@ †D IRUFRQILUPDWLRQRIDSODQRYHUWKHPD[LPXPWHUPSHUPLWWHGE\ ODZQHHGQRWEHWXUQHGDZD\DQGIRUFHGWRVHOODSSOHVRQWKHVWUHHWVLQ HYHU\ FDVH LQ RUGHU WR VDWLVI\ DQ LPSRVVLEO\ ODUJH XQVHFXUHG REOLJDWLRQ KRZHYHU HJUHJLRXV PD\ KDYH EHHQ WKH FRQGXFW ZKLFK JDYH ULVH WR WKH REOLJDWLRQ

'HEWRU SURSRVHV WR REOLJDWH KLPVHOI WR PDNLQJ &KDSWHU  SODQ SD\PHQWVIRUWKHPD[LPXPSHULRGSHUPLWWHGE\ODZLQDQDPRXQWHTXDOWR KLVWRWDOSURMHFWHGGLVSRVDEOHLQFRPHEDVHGDVLWPXVWEHXSRQGHEWRUj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jVSULVRQE\ DOLIHORQJVHQWHQFHRISHQXU\:KLOHZHDSSUHFLDWH>&UHGLWRUjV@IUXVWUDWLRQDW >'HEWRUjV@ LQDELOLW\ WR UHSD\ WKH ZKROH RI KLV GHEW WKH IDFW UHPDLQV WKDW



>'HEWRU@ILOHGD&KDSWHUSODQZLWKWKHEDQNUXSWF\FRXUWDUUDQJLQJWKHUHLQ WRGHYRWHDOORIKLVGLVSRVDEOHLQFRPHWRWKHUHSD\PHQWRIKLVYDULRXVGHEWV LQFOXGLQJKLVGHEWWR>&UHGLWRU@IRUWKHPD[LPXPILYH\HDUSHULRGDOORZHGE\ ODZ$VGLVFXVVHGDERYHWKHEDQNUXSWF\FRXUWIRXQG>'HEWRUjV@SODQWRKDYH EHHQILOHGLQJRRGIDLWKDQGZHGLVFHUQQRFOHDUHUURULQWKDWGHWHUPLQDWLRQ <RXQJ)GDW

&21&/86,21

m7KHUHZDVDPSOHHYLGHQFHLQWKHUHFRUGWRVXVWDLQHDFKRIWKHFRXUWjVGHWDLOHG IDFWXDO ILQGLQJV  'HEWRU H[SODLQHG HDFK LQFRQVLVWHQF\      7KH EDQNUXSWF\ FRXUW >DSSDUHQWO\@MXGJHGKLVWHVWLPRQ\WREHFUHGLEOH,WLVQRWWKHIXQFWLRQRIDQDSSHOODWHFRXUW WRVXEVWLWXWHLWVMXGJPHQWRIWKHFUHGLELOLW\RIDZLWQHVVIRUWKDWRIWKHWULDOFRXUWl7UL&RXQW\ &UHGLW8QLRQY/HXDQJ,QUH/HXDQJ %5%$3WK&LU VHHDOVR ,QUH'RZ&RUQLQJ&RUS%5%DQNU('0LFK DSSHOODWHFRXUW FDQQRWVXEVWLWXWHLWVRZQMXGJPHQWIRUWKDWRIWKHWULDOFRXUWXQOHVVWULDOFRXUWKDVDEXVHG LWVGLVFUHWLRQ  7KHGLVVHQWUHOLHVXSRQ&DOGZHOO,,jVLQVWUXFWLRQWKDWmYHLOHG&KDSWHUSODQVlVKRXOG QRWEHFRQILUPHGEXWWKHXQGHUSLQQLQJRIWKDWLQVWUXFWLRQLVWKDWDQ\FKDSWHUSODQWKDW PLJKWEHVRFRQVWUXHGPXVWEHJLYHQmSDUWLFXODUVFUXWLQ\l&DOGZHOO,,)GDW 6FUXWLQ\LVWKHWULDOMXGJHjVUROHDQGWKHEDQNUXSWF\MXGJHSHUIRUPHGmSDUWLFXODUVFUXWLQ\l LQWKLVFDVH7KHGLVVHQWGLVDJUHHVZLWKWKHUHVXOWEXWRXUUROHLVWRDVVXUHWKDWWKHWULDO MXGJH GLG LQ IDFW JLYH WKH FLUFXPVWDQFHV mSDUWLFXODU VFUXWLQ\l  8QGHU RXU YLHZ RI WKLV &LUFXLWjVDXWKRULW\ZHFDQQRWILQGWKHEDQNUXSWF\FRXUWjVIDFWXDO GHWHUPLQDWLRQVFOHDUO\ HUURQHRXV7KHGHFLVLRQRIWKHEDQNUXSWF\FRXUWLV$)),50('



67(9(1 : 5+2'(6 &KLHI %DQNUXSWF\ $SSHOODWH 3DQHO sXGJH GLVVHQWLQJ  , DJUHH ZLWK WKH PDMRULW\ WKDW LQ FRPLQJ WR D FRQFOXVLRQ RQ WKH JRRG IDLWK LVVXH WKH EDQNUXSWF\ FRXUW SHUIRUPHG D WKRURXJK UHYLHZ RI WKH WRWDOLW\ RI WKH FLUFXPVWDQFHV DV UHTXLUHGE\DSSOLFDEOH6L[WK&LUFXLWSUHFHGHQW,DOVRDJUHHWKDWWKHUHZDVQRFOHDUHUURU LQWKHEDQNUXSWF\FRXUWjVILQGLQJVUHJDUGLQJHLWKHUWKHEHVWHIIRUWVUHTXLUHPHQWRI86& †E  % RUWKHOLTXLGDWLRQWHVWRI86&†D  )LQDOO\DOWKRXJKWKH GHEWRUjV H[SODQDWLRQV RI WKH GLVFUHSDQFLHV LQ KLV EDQNUXSWF\ SDSHUV VWUDLQ FUHGLELOLW\ , FDQQRWFRQFOXGHWKDWWKHEDQNUXSWF\FRXUWjVDFFHSWDQFHRIWKRVHH[SODQDWLRQVZDVFOHDUO\ HUURQHRXV ,PXVWGLVVHQWIURPWKHSDQHOjVGHFLVLRQKRZHYHUEHFDXVHWKHEDQNUXSWF\FRXUWjV ILQGLQJWKDWWKLVSODQZDVSURSRVHGLQJRRGIDLWKLVLQFRQVLVWHQWZLWK+DUGLQY&DOGZHOO,Q UH&DOGZHOO )GWK&LU DQGLVFOHDUO\HUURQHRXV ,Q&DOGZHOOWKHFRXUWRIDSSHDOVVWDWHGm&RXUWVVKRXOGQRWDSSURYH&KDSWHU SODQVZKLFKDUHQRWKLQJPRUHWKDQµYHLOHGj&KDSWHUSODQVl,GDW,Q)UDQFLVjVILUVW EDQNUXSWF\FDVHILOHGXQGHUFKDSWHUKHSURSRVHGWRGLVFKDUJHRI6FKRU\jVWKHIW FODLP7KDWZDVGHQLHG,QWKLVEDQNUXSWF\FDVHILOHGXQGHUFKDSWHU)UDQFLVSURSRVHV WRGLVFKDUJHRIWKHVDPHFODLP7KLVWRRVKRXOGEHGHQLHG,WLVSUHFLVHO\VXFK DFKDSWHUSODQWKDWWKH&DOGZHOOFRXUWLQVWUXFWVVKRXOGQRWEHDSSURYHGEHFDXVHLWLVD YHLOHGFKDSWHUSODQ&DOGZHOOLPSOLFLWO\UHFRJQL]HVWKDWWKHUHLVVLPSO\QRUDWLRQDOEDVLV HYHQLQWKHFRQWH[WRIWKHmWRWDOLW\RIWKHFLUFXPVWDQFHVlWHVWWRFRQFOXGHWKDW&RQJUHVV LQWHQGHGEDQNUXSWF\FRXUWVWRGHQ\DGLVFKDUJHWRRIDWKHIWFODLPLQDFKDSWHU FDVHEXWWRJUDQWDGLVFKDUJHWRRIWKHVDPHFODLPLQDFKDSWHUFDVH 7KHGHEWLVQRWGLVFKDUJHDEOHLQFKDSWHUEHFDXVH)UDQFLVVWROHIURP 6FKRU\KLVEXVLQHVVSDUWQHU(G6FKRU\ 6RQV,QFY)UDQFLV,QUH)UDQFLV %5 %$3WK&LU 2IFRXUVHWKLVIDFWRUE\LWVHOILVQRWVXIILFLHQWWRILQGEDGIDLWK LQDFKDSWHUFDVH$VWKH&DOGZHOOFRXUWVWDWHGm$OWKRXJKZHFRQVLGHUDVDIDFWRUZKDW

 7KHUHFRUGLQWKHFRXUWEHORZGRHVQRWUHIOHFWWKDWWKHEDQNUXSWF\FRXUWZDVDZDUH RIWKHSUHFLVHSHUFHQWDJHGLYLGHQGWKDWWKHGHEWRUjVSODQSURSRVHVWRSD\WR6FKRU\7KLV LPSRUWDQWLQIRUPDWLRQLVQRWLQWKHSODQDQGWKHUHZDVQRWHVWLPRQ\RQWKHSRLQW$WWKH RUDODUJXPHQWRQWKLVDSSHDOWKHSDQHODVNHGFRXQVHOWRVWLSXODWHWRWKHGLYLGHQGDQGWKH\ DJUHHGWKDWLWLVDERXW1HYHUWKHOHVVWKHUHFRUGUHIOHFWVFOHDUO\HQRXJKWKDWWKH EDQNUXSWF\FRXUWZDVDZDUHWKDWWKHSODQSURSRVHGDYHU\PLQLPDOGLYLGHQGWR6FKRU\



>WKHGHEWRU@GLGWRLQFXUWKHMXGJPHQWLWLVZKDWKHKDVGRQHVLQFHWKHMXGJPHQWWRDYRLG SD\LQJLWWKDWLVPRVWLPSRUWDQWl,GDW :KDW)UDQFLVKDVGRQHWRDYRLGUHSD\LQJ6FKRU\LVZHOOGRFXPHQWHGLQWKHUHFRUGV RI)UDQFLVjVWZREDQNUXSWF\FDVHV7KHVHUHFRUGVHVWDEOLVKWKDW)UDQFLVKDVVXFFHVVIXOO\ GHOD\HG6FKRU\IRURYHUWHQ\HDUVE\OLWLJDWLQJKLVFODLPVDQGGHIHQVHVLQVHYHQFRXUWV ,WZDVRQO\ZKHQKHUDQRXWRIOLWLJDWLRQRSWLRQVWKDWKHILQDOO\SDLGDVPDOOSRUWLRQRIWKH GHEWDQGWKHQILOHGWKLVFKDSWHUFDVH7KLVKLVWRU\ILUPO\HVWDEOLVKHV)UDQFLVjVEDGIDLWK LQGHDOLQJZLWK6FKRU\RYHUWKH\HDUVDQGQRZ 7KHKLVWRU\EHJLQVZLWK)UDQFLVj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jO%DQN1(G2KLR %\ WKHQILYH\HDUVKDGHODSVHGVLQFHWKHLQLWLDOVHWWOHPHQWDQG)UDQFLVKDGUHSDLGOLWWOHLIDQ\ RIWKHPRQH\WKDWKHVWROH $IWHU WKLV XQVXFFHVVIXO OLWLJDWLRQ LQ  )UDQFLVj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jVVLQFHULW\LQWKLVFKDSWHUFDVHLVD VWUDLJKWIRUZDUGPDWWHU&OHDUO\)UDQFLVGLGQRWGHPRQVWUDWHDVLQFHUHGHVLUHWRUHSD\WKH



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jVSODQ7KHSDQHOPDMRULW\jVDSSURYDORIWKLVSODQVLPSO\ FDQQRWEHUHFRQFLOHGZLWK&DOGZHOO %RWKWKHEDQNUXSWF\FRXUWDQGWKHPDMRULW\UHO\KHDYLO\RQWKHIDFWWKDWWKHSODQ PHHWVWKHEHVWHIIRUWVWHVW%XW&DOGZHOOLQVWUXFWVWKDWLQWKLVFRQWH[Wm>E@HVWHIIRUWV ZLWKRXWPRUHDUHQRWHQRXJKl,G,QGHHGWKLVLQVWUXFWLRQLVFOHDUIURPWKHVWDWXWHLWVHOI ZKLFKGLVWLQFWO\UHTXLUHVERWKJRRGIDLWKDQGEHVWHIIRUWV 6RPHFRXUWVGRQRWGLVWLQJXLVKEHWZHHQJRRGIDLWKDQGEHVWHIIRUWV)RUH[DPSOH WKH GHFLVLRQ WKDW WKH PDMRULW\ TXRWHV DQG KHDYLO\ UHOLHV XSRQ 0DVRQ Y <RXQJ ,Q UH <RXQJ )GWK&LU SODLQO\UHDFKHVWKHFRQFOXVLRQWKDWWKHGHEWRUjV EHVWHIIRUWLVVXIILFLHQWWRHVWDEOLVKJRRGIDLWKUHJDUGOHVVRIKRZHJUHJLRXVWKHGHEWRUjV LQLWLDOFRQGXFWZDV:HKRZHYHUDUHERXQGE\&DOGZHOO )LQDOO\WKHPDMRULW\DOVRUHOLHVKHDYLO\RQWKHIUHVKVWDUWSROLFLHVRIWKHEDQNUXSWF\ ODZIURPZKLFK)UDQFLVFHUWDLQO\FRXOGEHQHILW%XWWKHVHZHOOLQWHQWLRQHGSROLFLHVVD\OLWWOH DERXWZKHWKHUDQ\SDUWLFXODUGHEWRULVHQWLWOHGWRUHOLHI,QGHHGWKH6XSUHPH&RXUWKDV VWDWHGm>$@GHEWRUKDVQRFRQVWLWXWLRQDORUµIXQGDPHQWDOjULJKWWRDGLVFKDUJHLQEDQNUXSWF\l *URJDQY*DUQHU86 FLWLQJ8QLWHG6WDWHVY.UDV86  0RUHRYHURXUEDQNUXSWF\ODZmOLPLWVWKHRSSRUWXQLW\IRUDFRPSOHWHO\ XQHQFXPEHUHGQHZEHJLQQLQJWRWKHµKRQHVWEXWXQIRUWXQDWHGHEWRUjl,GDWFLWLQJ /RFDO/RDQ&RY+XQW86  $V WKH PDMRULW\ QRWHV )UDQFLV EHDUV WKH EXUGHQ RI SURYLQJ WKDW WKLV SODQ ZDV SURSRVHGLQJRRGIDLWKDQGZHKDYHDQREOLJDWLRQWRFDUHIXOO\VFUXWLQL]HWKHFLUFXPVWDQFHV EHDULQJRQWKHGHEWRUjVJRRGIDWK+HKDVQRWPHWWKDWEXUGHQDQGKLVFODLPRIJRRGIDLWK FDQQRWZLWKVWDQGWKDWVFUXWLQ\7KHDGMHFWLYHVmKRQHVWlDQGmXQIRUWXQDWHlVLPSO\GRQRW DSSO\WR)UDQFLV



%HFDXVH,DPOHIWZLWKWKHGHILQLWHDQGILUPFRQYLFWLRQWKDWWKHEDQNUXSWF\FRXUWjV ILQGLQJRIJRRGIDLWKZDVDPLVWDNH,UHVSHFWIXOO\GLVVHQW,ZRXOGUHYHUVHWKHFRQILUPDWLRQ RUGHUDQGUHPDQGZLWKLQVWUXFWLRQVWRGLVPLVVWKHEDQNUXSWF\FDVH