Opinion ID: 454312
Heading Depth: 2
Heading Rank: 1

Heading: Loans To Insiders From Their Own Banks

Text: Under current law, few restrictions exist on insider loans. This has created a banking system in which an insider or group of insiders, if they want to use their institution's funds for their own purposes, rather than providing services for a wider community, can borrow almost unlimited amounts of funds on terms and conditions which other nonaffiliated individuals may not be able to secure. Not only can this create discriminatory anticompetitive lending policies, but it has been the leading factor in bank failures. .... Viewing the overall banking situation, the Federal Deposit Insurance Corporation's study on bank failures between 1960 and 1975 demonstrated that insider loans were the principal cause of almost 60 percent of those failures. A review of the summaries of formal agreements or cease-and-desist orders by bank supervisors against banks over the last 5 years indicates that insider abuses are a significant factor leading to the imposition of such agreements and orders. Discussions of problem bank lists also provide evidence that insider self-dealing is a major reason for the deterioration of a bank's condition. Evidence from failed bank investigations and the 1977 FDIC survey of banking practices indicate that not only is the volume of insider lending a problem but also the granting of preferential terms and conditions on these loans. Interest rates below that charged other customers of the bank, liberal repayment terms, and the granting of loans in situations in which other customers would not be found credit-worthy, have all been documented in hearings, records, and surveys. H.R. 13471 would place insiders on the same level with the banking public and they would no longer be saved preferential spots in line before the loan windows. H.R.Rep. No. 1383, 95th Cong., 2d Sess. 10-12, reprinted in 1978 U.S.Code Cong. & Ad.News 9273, 9282-84. 3 Although section 4.01(d) of the Principles of Corporate Governance states the protective business judgment rule, we note that the business judgment rule has no application in determining responsibility for violations of law. See Miller v. AT & T, 507 F.2d 759, 762 (3d Cir.1974) Subsequent to oral argument, the American Law Institute again revised its Principles of Corporate Governance in a fourth tentative draft, dated April 12, 1985, and tentatively approved at the annual meeting held on May 14-17, 1985. See Principles of Corporate Governance: Analysis and Recommendations Secs. 4.01, 4.02 (Tent. Draft No. 4, 1985). This draft is not substantively different from sections 4.01 and 4.02 as quoted herein, although there are differences in wording and in the numbering of subsections. 4 Section 4.02 of the Principles of Corporate Governance sets out in perhaps unnecessary detail the rule that directors and officers are entitled to rely on corporate agents for information: Sec. 4.02 Reliance on Directors, Officers, Employees, Experts, and Other Persons In performing his duty and functions, a director or officer is entitled to rely on information, opinions, reports, statements (including financial statements and other financial data), or decisions, judgments, or performance within the scope of Sec. 4.01(c)(2), in each case prepared, presented, made, or performed by: (a) One or more directors, officers, or employees of the corporation, or a business organization under common control, whom the director or officer reasonably believes to be competent as to the matters presented; or (b) Legal counsel, public accountants, engineers, or other persons as to matters the director or officer reasonably believes are within the person's professional or other competence. A director or officer is not, however, entitled to rely on such information, opinions, reports, statements, decisions, judgments, or performance if his reliance is not in good faith or if he knows or, using the reasonable care required by Sec. 4.01, should know that such reliance is unwarranted. Our holding amounts to a determination that exclusive reliance on an interested representation is unwarranted.