Opinion ID: 392203
Heading Depth: 1
Heading Rank: 3

Heading: the standard to be applied under section 4

Text: 11 As a threshold matter, we are called upon to consider the correctness of the district court's position that the propriety of the September dividend should be judged by the financial statements actually before the Board of ICB at the September meeting. The district court seems to have taken the position that the matter of whether the dividends violated section 4 of the Note Agreement should be determined by whether they were declared in good faith or under the reasonable belief that the financial statements relied upon by the Board were accurate. LNB argues, on appeal, that the Note Agreement does not contemplate such a standard in determining the propriety of the declaration of the dividend. Section 4 of the Note Agreement states that ICB shall not declare any dividends ... unless the aggregate amount of all such dividends declared or made after April 1, 1972 would not exceed the net profits of (ICB) earned after April 1, 1972. On its face, section 4 creates an objective standard for determining whether dividends may be declared, which turns on the amount of dividends declared or made subsequent to April 1, 1972, and on net profits earned subsequent to such date, as distinguished from the subjective, good faith standard on which the district court seems to have relied. Financial covenants in loan agreements, such as the dividend restriction at issue in this case, normally create tests for determining the propriety of certain corporate action affecting the financial position of the borrower which are to be applied to financial statements of the borrower prepared in accordance with generally accepted accounting principles consistently maintained. There is no suggestion in the Note Agreement at issue here that the propriety of any dividend declared by ICB should be determined in any other manner. Further, the Notes were offered and sold pursuant to the terms of an Offering Circular which contained complete financial statements for ICB at December 31, 1971, and for the year then ended, accompanied by the report of Touche Ross to the effect that such financial statements had been prepared in accordance with generally accepted accounting principles and fairly presented the financial position of ICB at December 31, 1971, and the results of its operations and changes in financial position for the year then ended, in conformity with generally accepted accounting principles applied on a consistent basis with that of the preceding year. It would be anomalous indeed to apply to the determination of the propriety of the September dividend a standard with respect to the financial statements on which that dividend is based which is different from that employed in the financial statements included in the Offering Circular pursuant to which the Notes were issued and sold. We hold, therefore, that the district court was in error to the extent that its holding and opinion are based upon the notion that the September dividend is to be judged on the basis of whether it was declared in good faith or under the reasonable belief that the financial statements relied upon by the Board were accurate. The test to be applied under section 4 in determining the propriety of the September dividend is whether there were net profits subsequent to April 1, 1972, in excess of dividends declared or made subsequent to that date, and in determining the amount of net profits and the amount of dividends declared and made, generally accepted accounting principles must be applied. Any adjustments required by those principles to the net profits and dividends declared, as reflected in the financial statements presented to the Board at the September meeting, must be made before the propriety of the September dividend can be determined. 12 The matter of how the aggregate amount of all such dividends declared or made after April 1, 1972 should be computed requires one further caveat. The district court treated the allegation made by LNB relating to the securities purchase transactions as a disagreement over the classification of the type of 'accounting' transaction which should have been used ... The FDIC, in its brief on appeal, firmly agrees 1 with that characterization but goes on to argue that LNB failed to offer any evidence which could or did establish that section 4 was violated. Because the parties have treated the ultimate issue in this case whether ICB was in default under section 4 as a controversy over the proper accounting treatment of certain transactions, there seems to be no dispute between the parties that it is the accounting treatment of the securities purchase transactions which determines whether those transactions are dividends within the meaning of section 4. We pretermit, therefore, any consideration of whether, as a general rule, the phrase dividends declared or made should be construed in a narrower fashion to include only those dividends actually declared by the Board of ICB and denominated as such.