Opinion ID: 1142705
Heading Depth: 1
Heading Rank: 6

Heading: officer gray's duties to usb

Text: By law, officer Gray owed USB two principal duties: a duty of care and a duty of loyalty and fair dealing. These duties differ in nature and content, though they doubtless intersect and overlap. The law demands these duties of bank officers the same as officers of other corporations, and there is a bit of lore born no doubt of thought of failed banks and helpless widows that we ought demand more of bank officers than one who runs a foundry or a pest control company. See 1 Malloy, The Corporate Law of Banks, § 3.2.6, n. 1 (1988); 10 Am.Jur.2d, Banks, § 172, p. 161 (1963). We begin with the duty of care, which we find appropriately articulated as follows: A director or officer has a duty to the corporation to perform the director's or officer's functions in good faith, in a manner that he or she reasonably believes to be in the best interests of the corporation, and with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position and under similar circumstances... . (1) The duty in Subsection (a) includes the obligation to make, or cause to be made, an inquiry when, but only when, the circumstances would alert a reasonable director or officer to the need therefor. The extent of such inquiry shall be such as the director or officer reasonably believes to be necessary. Principles of Corporate Governance, § 4.01(a). See Derouen v. Murray, 604 So.2d 1086, 1092 (Miss. 1992). We long ago recognized this duty in a banking setting and said an officer who very negligently makes unreasonably risky loans may on his borrowers' default be held personally to make good the bank's loss. Boyd v. Applewhite, 121 Miss. 879, 908-09, 84 So. 16, 26 (1920). Today, we accept that a loan officer has broad discretion but in exercising that discretion he must reasonably assess a risk and, if he fails in this, may expect to have each loan judicially scrutinized for borrower solvency, responsibility and adequate security. 1 Schlichting, Rice, Cooper, Banking Law, § 6.15, pp. 6-86 (1989). An agent is liable to his principal for losses proximately caused when the agent substantially deviates from his principal's instructions. The same rule applies to bank loan officers. Shaw v. McShane, 33 S.W.2d 277 (Tex.Civ.App. 1930). An officer who violates substantially his bank's loan policies and lending limits may be held for losses caused thereby. Mechem on Agency, § 1295, p. 939 (2nd Ed. 1914). All of this is informed by the customs and usages of the banking community, 1 Schlichting, Rice, Cooper, Banking Law, § 6.15[9], pp. 6-102 (1989), and in this we understand the admonition that bank officers are held to a higher duty of care than the officers of other corporations. Banking customs and usages flesh out a like position and under similar circumstances within the duty. [6] See Hoehn v. Crews, 144 F.2d 665, 673 (10th Cir.1944). His faults so measured, the officer is accountable for the losses they cause. Bates v. Dresser, 251 U.S. 524, 531, 40 S.Ct. 247, 249, 64 L.Ed. 388, 395 (1920). A person charging an officer with breach of his duty of care has the burden of production and persuasion on the issues of breach, cause, and damage to the corporation. Principles of Corporate Governance, § 4.01(d). The duty of care is subject to a well-settled common law defense, known as the business judgment rule. That rule has recently been stated with care: A director or officer who makes a business judgment in good faith fulfills the duty ... [of care] if the director or officer: (1) is not interested ... in the subject of the business judgment; (2) is informed with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate under the circumstances; and (3) rationally believes that the business judgment is in the best interests of the corporation. Principles of Corporate Governance, § 4.01(c). See Miss. Code Ann. § 79-4-8.42 (rev. 1989); see also, Home Telephone Company v. Darley, 355 F. Supp. 992, 1000 (N.D.Miss. 1973). As with the duty itself, the business judgment rule imports an objective standard. Regarding Gray's duty of care to USB, the Chancery Court found, via USB's drafting services: 24. Gray's loan limit as the president in charge of the Branch was $75,000.00 in aggregate unsecured loans, and $150,000.00 in aggregate secured loans to any one borrower; hence, the three $150,000.00 unsecured LR & K loans and the unsecured $100,000.00 Bigelow letter of credit exceeded Gray's lending authority. 25. While Gray denies that anyone specifically told him what his loan authority was on and after July 2, 1984, the Court finds that due to his position of trust and because of his experience in lending, audit and operations, if Gray did not know, he was obligated to know and should have known the extent of his lending authority before advancing any loan to anyone. The Court's finding regarding a bank officer's duty to ask is supported factually by the testimony of every banker/witness, other than Gray, who testified at trial, including Mr. Ishee, an officer of ... [BOM]. ..... 29. USB's banking expert, Mr. Ed Neeley, opined that Gray's handling of the Piecara transactions violated sound banking practices and was imprudent. Mr. Neeley testified to the same effect, about the LR & K and Bigelow transactions. Mr. Neeley's opinions were uncontradicted. The Court notes significantly that no experts testified in justification of Gray's conduct in any of the three transactions in this case. The Court accepts Mr. Neeley's testimony as credible and agrees with the opinions advanced at trial. From these findings, the Chancery Court held Gray had breached his duty of care. The Court can only conclude that Gray negligently extended credit to Messrs. Bigelow, Lowery, Riggan, Kantor and Piecara ... when he knew or should have known these men were insolvent, in the sense they could not pay their debts when due. Moreover, he took no collateral whatsoever and violated USB's loan policy.
The evidence supporting these findings regarding Gray's handling of the LK & R transactions in July of 1984 is quite substantial. It will be recalled that on June 5, 1984, acting for BOM, Gray honored the LK & R letter of credit and paid the $400,000.00 to First South. On June 26, 1984, LK & R executed a $400,000.00 unsecured note payable to BOM maturing on September 4, 1984, with interest at date at fourteen percent per annum. This note was outstanding on July 2, 1984, and was not assumed by USB. Because it was in conditional liability/letter of credit form at the time USB was reviewing Branch loans, it was not considered for purchase, although, in fact, USB had designated for purchase certain other individual loans of Lowery and Riggan. What is critical is that on July 23, 1984, James R. Gray, in his new capacity as president of USB's Branch, determined that he would transfer the LK & R loan to USB by paying BOM and obtaining new notes from LK & R in favor of USB. There is substantial evidence that at the time, Gray knew, or reasonably should have known, that Lowery, Kantor and Riggan were in financial distress and were likely unable to meet their obligations in a timely fashion. See, e.g., Miss. Code Ann. § 75-1-201(23) (rev. 1989) (defining insolvency). Evidence undergirding this conclusion included that the Lowery-and-Riggan-guaranteed $3,200,000.00 Belvedere loan with First South was in default in June of 1984. At the time Gray honored the BOM-to-First South letter of credit, Lowery, Kantor and Riggan had represented they would repay BOM the $400,000.00 within a few weeks. That they were unable to do so should have told Gray something. Moreover, Gray knew that Lowery, Kantor and Riggan had guaranteed the $15,350,000.00 Wagner Place loan with First South, which was then in default, liabilities for which were not reflected on the financial statements of either of them. Gray further knew that some $1,200,000.00 in unsatisfied materialmen's and other construction liens had been placed against the Wagner Place project in Memphis, thus halting that project's sale and development, as well as LK & R's cash flow. Notwithstanding, Gray unilaterally and without authority loaned LK & R unsecured $450,000.00 of USB's funds. The LK & R notes were not paid when due, and USB renewed them several times. In the USB-drafted findings of fact, the Court found that Despite reasonable collection efforts, at the present time the respective $150,000 notes to Lowery, Riggan, and Kantor, aggregating $450,000.00 plus interest, are unpaid and have been charged off in full. Money has been collected from each borrower but has been applied in accordance with the law or the borrower's instructions to earlier obligations of the borrowers to USB. The unpaid principal remains $450,000.00. Interest at the prime rate is $157,539.03 through October 17, 1988. The total debt is $607,539.03. Later, the Court somewhat gratuitously holds Gray's acts ... reckless[ [7] ] and tantamount to gross negligence as a predicate to assessing Gray with USB's attorneys fees and legal expenses. For the moment, we find no grounds for disturbing the Chancery Court's conclusion that, in his handling of the LK & R matter, Gray breached his duty of care, causing USB a substantial loss.
Gray says he did not know if USB selected the Bigelow letter of credit when it was selecting the loans to purchase. BOM's President Ishee and CEO Martin handled those matters; Gray did not. Gray kept the letters of credit in a file behind his secretary's desk. He had no discussions with USB's higher ups about letters of credit. When Bigelow fell into arrears on his payments to Heller, he approached Gray. On July 31, 1984, Gray made Bigelow an unsecured loan of $20,000.00 and wired $12,830.00 to Heller, which was more than due. Gray says he was relying on Bigelow's mother's property in Kentucky and an inheritance from his grandmother, but did not verify these properties. In October, Gray loaned Bigelow another $20,000.00 unsecured, knowing the land in Kentucky was not attached. By January these unsecured loans totaled $61,857.40. Our principal concern is the new $100,000.00 letter of credit Gray had USB issue without security on January 11, 1985. Gray says he did this because Heller asked him to do so. He was worried Heller was going to call in the BOM letter of credit. I issued the [new USB] letter of credit because there was a possibility it would be called, but I issued the letter from USB with the assumption that if it was called then USB would have to pay it. Gray did not clear that assumption with anyone at USB. He just did it. The evidence is more than adequate that Gray breached his duty of care in handling the Bigelow matter, causing USB substantial losses.
Gray's defaults in the Piecara loans are equally apparent. To be sure, there is nothing per se improper about a banker securing a credit by taking a security interest in contract rights or an assignment of accounts or the like. [8] We are unimpressed with USB's constant carping that such collateral was worthless until Piecara performed and that Gray was somehow supposed to have confirmed that Piecara had earned payments under his subcontract before he released loan proceeds. On the other hand, there are risks associated with this receivables form of collateral not associated with more tangible security, and a prudent loan officer must reasonably assess and control these risks. These risks are exacerbated where, as here, the subcontract is to be performed some 1500 miles away. Here Gray's defaults become apparent. He made no inquiry of the financial responsibility of the prime contractor or the owner. A prudent loan officer taking such collateral will give notice of his bank's interests to the prime contractor and the owner and demand that all payments due under the subcontract be routed through the bank. Gray did none of this, nor did he monitor performance of the subcontract and have Piecara remit as his company was paid. Gray failed to perfect USB's security interest, a matter no doubt controlled by the Uniform Commercial Code as enacted in Arizona and any other applicable jurisdiction. Moreover, it appears clear the value of his collateral was far below what prudently should have been required for a credit of this size. We accept the Chancery Court's holding Gray breached his duty of care to USB in handling the Piecara loans.

Gray's argument in reply is laced with implied references to the business judgment rule. He insists he acted in subjective good faith at all times, and of this there is little doubt. USB does not seriously contend otherwise. The Chancery Court in effect found Gray had no interest in any of the credits at issue. See Principles of Corporate Governance, § 1.23. He points to reasonably current financial statements of the several debtors and beyond these to his personal knowledge of their backgrounds and circumstances. Gray reminds us as well all of these credit extensions  to LK & R, Bigelow and Piecara  were reflected on USB's internal records which his superiors were charged to review, implying they found nothing wrong with his business judgments until things turned sour. Gray insists he reasonably believed all five debtors would respond to their obligations in a reasonably timely fashion. Beyond this, Gray makes a more practical plea. It begins by reminding us that Lowery, Kantor, Riggan, Bigelow and Piecara were all established customers and borrowers at the Branch before USB first talked to BOM about the purchase. He tells us further USB selected and assumed nine other loans to these men or their businesses, with an aggregate balance outstanding on July 2, 1984, of $399,287.03. By this he was hardly on notice he should not do business with these men. Even after July 2, Gray insists he thought the risks reasonable and, where unsecured, backed by adequate financial statements. Reports of these loans, their terms, and periodic status were routinely available to Clarksdale, which offered nothing but praise until a state bank examiner's probe in January, 1985. These are not irrelevancies. They are evidence that Gray may have acted with reasonable business judgment. Most assuredly, the duty of care holds no truck with Monday morning quarterbacking, and the business judgment rule stands to prevent this. A loan officer is no guarantor of the success of each credit extension. By no means should anything said here be taken to suggest he has personal exposure every time a loan proves uncollectible. The prudence of the practice is judged objectively in the circumstances then existing and reasonably knowable by the officer. Principles of Corporate Governance, § 4.01(c); Miss. Code Ann. § 79-4-8.42 (rev. 1989). The defense ultimately founders. The Chancery Court abundantly found the facts against Gray on the critical issues and from there impliedly found unreasonable Gray's belief regarding the extent to which he should have informed himself at the time regarding these debtors. Further, the Court impliedly found there was no rational basis for a belief that his handling of each of these matters was in USB's best interest. Each of these implied findings is more than supported by substantial evidence in the record.
Undaunted, Gray presses us that the losses in issue were caused or contributed to by USB's senior management. If Gray was negligent, so too were his superiors who acted or failed to act on behalf of USB. If Gray was reckless, so were these experienced executives and directors for USB. A major factual premise of the point is that Gray was an unsuspecting underling whom USB placed in a position beyond his abilities. As he puts it in his brief: On July 2, 1984, at 35 years of age, Gray was placed in charge of the USB branch bank at Olive Branch acquired by it from [BOM] on that date... . At the time, he was the youngest of the branch managers in any of the ten branches in the USB system. While a college graduate, he had majored in accounting. He had one Freshman course in Banking. Unlike other managers of USB banks, he had not attended or graduated from the three-year Louisiana State University School of Banking. At the time he was placed in charge of Olive Branch by USB, he had approximately two years of bank lending experience, while other USB branch managers had on average some eighteen years of experience, all with USB. Most of the work experience of Gray after leaving college was in the bank accounting area which did not involve the making or assessing of the quality of bank loans. We find this theme trailing along on practically every page thereafter. Gray goes on to charge he was negligently supervised by USB senior executives, and that his prior experience and the conduct of his seniors with USB led him to think he was doing fine in his post-July 2, 1984, capacity. The premise is fundamentally flawed. The duty of care the law devolves upon a corporate officer states an objective standard general in scope. Offenses may not be excused by any alleged inexperience or lack of skill and training as a loan officer. 3A Fletcher, Cyclopedia of Corporations, § 1060, p. 1061, (1986 Rev.); 18B Am.Jur.2d, Corporations, § 1727, p. 580 (1985). Nor does it matter Gray's offenses occurred during the early days of his new service, before USB's ninety-day probationary period had expired. The law of corporate governance provides no incompetence defense to officers called to account on their duty of care. Perhaps the notion may be captured in the phrase assumption of risk. One who seeks corporate office assumes the risk he may not be up to the job. The law does not allow that a person may seek and accept corporate office and, upon charge of default, plead he was not qualified for the job and that the corporation should never have hired him in the first place. Gray charges that senior vice president Edward P. Peacock, III, had oversight responsibilities for the Branch and was substantially neglectful in that regard. He points particularly to the $300,000.00 letter of credit issued for the benefit of Piecara's Mirage Construction in July of 1984. Gray did discuss the matter with Peacock, and it appears uncontradicted each used his $150,000.00 loan authority to issue the letter of credit. The same obtains with the Bigelow and LK & R credits. Gray reminds us the details of these credits were a part of the Branch's open records and reports which were surely read and approved by Clarksdale. This may be so, but it may not belie the fact that Gray was the officer who initiated these credits, was most familiar with their details, and without whose sanction no funds would have been released. The short answer is, it is no defense to the charge that Gray breached his duty of care owed USB in this and other matters, that Peacock or someone else may also have breached a duty owed USB. [9] Nor is there a contributory negligence defense to a corporate officer's breach of the duty of care. Neither may he defend on grounds other officers with superior authority negligently failed to detect or deter his defaults. This is not a case where a superior officer ordered Gray to extend the bad credits that have spawned this suit. It is not even a case  with one exception  where he claims his superior knew or should have known what he was doing before the fact and did not stop him. If we understand his plea, Gray is saying, after the fact, his superiors knew or should have known of the loans he was making and didn't criticize him. But by then the horse was gone. Within Gray's first six weeks of service as USB's Branch president, most of the damage was done.
Gray's defense has a further dimension. Gray urges the evidence shows after his departure, USB was seriously neglectful in its management of the LK & R loans and, had it prudently pursued Messrs. Lowery, Kantor and Riggan, USB could have effected a much greater recovery on its notes. Gray points to $6,004,600.00 combined net worth of LK & R as reflected on their 1984 financial statements. Lowery is said to have a steady $100,000.00 annual salary, a portion of which was surely available. Riggan is supposed to have had an equity in an interest in 1718 acres of farmland in Tunica County. Gray says USB missed a chance to get a deed of trust on this land and, more generally, let all of the LK & R assets slip away by not suing on the notes and obtaining and enrolling lien-generating judgments. USB retorts this is so much fancy. Suits and judgments would only have forced Lowery and Riggan into bankruptcy. Besides, Gray made no credible proof there were assets of consequence a judgment lien might have seized. USB says its patience in working with Lowery and Riggan resulted in a $130,000.00 plus recovery that would otherwise have been lost, though this was applied to other, older debts. More generally, USB sounds a lot like Gray when it says it made a reasonable business judgment how it ought pursue collection and that judgment ought not now be second guessed. The Chancery Court heard this evidence and held Gray's defaults the sole proximate cause of the losses endured. Though USB's post-Gray collection strategy is not given express mention, we have here a circumstance for implied findings. We may from this record infer with confidence the Court below thought USB had made reasonable collection efforts and this is all the law asks.
Officers such as Gray owe a second duty to the corporation they serve, a multi-faceted duty of loyalty, of good faith, a central sphere of which has been recently renamed the duty of fair dealing. Principles of Corporate Governance, § 5.01. See also, Derouen v. Murray, supra ; Hill v. Southeastern Floor Covering Company, Inc., 596 So.2d 874, 877 (Miss. 1992); Fought v. Morris, 543 So.2d 167, 171 (Miss. 1989); Ellzey v. Fyr-Pruf, Inc., 376 So.2d 1328, 1332 (Miss. 1979); Cooper v. Mississippi Land Co., 220 So.2d 302 (Miss. 1969); Knox Glass Bottle Co. v. Underwood, 228 Miss. 699, 89 So.2d 799 (1956). This duty is fiduciary in nature, by reason of which the officer is held to something stricter than the morals of the market place. Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928). The duty obtains most directly when the officer is interested personally in a matter affecting the corporation. The concept of interest is broadly defined and includes cases where the officer has a relationship with a party to the transaction that may reasonably be expected to affect the officer's judgment or is subject to the influence and domination of such a party. See Principles of Corporate Governance, § 1.23(a). Yet the duty goes beyond this and is coextensive with the legitimate, enduring interests of the corporation. Loyalty to those interests is the corporation's due. The duty of loyalty takes no canonical form. It is as complex as corporate interests and officer temptations and means of descent from grace. It partakes of the objective as well as the subjective. If, for example, an officer neglects the substantial interests of his corporate principal by preferring another in a matter of importance, the officer may well offend his duty of loyalty though his heart be pure. In such a case we would not concern ourselves with the officer's subjective intent but with the content of his conduct reasonably viewed by objective third persons. We would ask whether there be a rational basis for a belief his action was in the entity's best interest and not whether in fact he held such a belief. As members of the human race and participants in original sin, corporate officers at times consciously pursue the interests of self and others to the neglect of their principal. They may seize opportunities for profit they know belong to their corporations. At other times they steal and embezzle and defraud the corporations they serve, and so their malignant mind becomes our central focus; hence, the subjective side of the duty of loyalty. We need not search here for subjective breach. In the USB-drafted findings of fact, the Chancery Court found there was no evidence in this case that Mr. Gray's conduct was in any way the result of fraud, dishonesty, or similar misconduct, ... . USB makes no charge Gray has perpetrated a fraud. It concedes Gray has received no payment to him personally or other personal benefit arising or growing out of loans and other transactions during the time he was employed by USB. This is tantamount to a finding Gray was not interested in the several credits for which he is called to account. Gray's case is not within the newly-refined duty of fair dealing but is subject rather to the older, admittedly more amorphous duty of loyalty, objective variety. What the Court does say is, the source of Gray's sin lay in his divided loyalties in breach of his fiduciary duty to USB. To be sure, for some five months Gray acted for BOM and USB with the full knowledge and acquiescence of each. That period of dual devotion ended July 2, 1984. Much is said in the USB-drafted findings, and in the briefs of the parties, of pre-July 2 matters, of Gray's handling of the LK & R and Bigelow matters prior to July 2, 1984. This is but background. Gray's present and only offense is that, once he became an officer of USB, he neglected the interests of USB and favored those of BOM. And so the Court below held Gray violated his fiduciary duty ... in the Bigelow and LK & R transactions by ... acting with divided loyalties. One feature of the holding below seems off base. The Court found Gray violated his fiduciary duty in the Piecara transactions by exceeding his authority both as to the amounts involved and inadequate and unperfected security for such advances. The Court faulted Gray as well in the Bigelow and LK & R transactions for exceeding his [loan] authority. These offenses import primarily the duty of care, not the duty of loyalty. A bank officer extending credit in excess of his loan authority or without adequate security may well act in complete and disinterested good faith, and in the belief that he is furthering the interests of the bank. This is not to say there may not be some level of excess that may, objectively viewed, offend the duty of loyalty. On today's record, these findings support the view that Gray violated his duty of care, but that is all. A part of an officer's duty of loyalty requires that he protect the corporation's property. That he may not appropriate corporate assets to his own use seems apparent. And the same of corporate opportunities. It is equally an offense that he gives that property away to the poor, to the church, to charity. However worthy in other settings, altruism has little role within the officer's duty of loyalty, at least absent full disclosure and formal authorization. And so when Gray on July 23, 1984  gratuitously, if you will  took USB's $407,210.96 and gave it to BOM (to the credit of LK & R), he breached his duty of loyalty to USB. Similarly, when Gray expended USB's funds for Bigelow to pay Heller and on January 13, 1985, issued USB's letter of credit to prevent Heller's calling the BOM letter before it expired, he breached his duty of loyalty to USB. Whether these actions evince a (disinterested) loyalty to BOM is not important. There is substantial evidence supporting the crudely put holding Gray breached his duty of loyalty to USB in the sense that no loan officer could rationally believe Gray's handling of these matters was in USB's best interest. [10] These things said, we may only affirm the judgment in favor of USB and against Gray.