Business Law & Bankruptcy
Instructions:-
Assignments & Exams
Course: Business Law &
Bankruptcy: PLG-105-1705
Assignment: Assignment 3 (based on classes 6 and 7)
ManBank is a large, publicly held bank located in New York City. Joan sits on the board of directors for the bank. Joan’s friend, Bob, comes to her one day and tells her, “I’m looking to start a new airline, but the only problem is that I don’t have enough money. All I need is $300 million and I’ll have enough money to realize my dream and own my own airline.” Joan researches Bob’s background and discovers that, in fact, Bob worked as an assistant regional manager for a Midwestern airline for 12 years. Joan also discovers that, during Bob’s tenure there, Bob’s region increased sales by 28%.
Based on this information and on her friendship with Bob, Joan recommends that ManBank give Bob the $300 million loan, which is to be collateralized by the airplanes owned by Bob’s new airline. The board accepts her recommendation and gives Bob the loan. Unfortunately, Bob does a poor job and his airline goes bankrupt in three years. When Bob defaults on the loan, the bank is only able to recover $150 million.
The shareholders bring a derivative lawsuit against Joan for breach of her fiduciary duty of care. They claim that her research into Bob was deficient and that, based on Bob’s background and the state of the airline industry, she should have known that the venture was not likely to succeed.
For this assignment, I would like you to read the NPC courseware and the following cases:
Bayer v. Beran, 49 N.Y.S.2d 2 (N.Y. 1944)
Federal Deposit Insurance Corporation v. Lawrence Bober, 2002 U.S. Dist. LEXIS 13231 (S.D.N.Y. 2002)
Leonard Minzer v. Gerard C. Keegan, 1997 U.S. Dist. Lexis 16445 (E.D.N.Y. 1997)
Auerbach v. Bennett, 47 N.Y.2d 619 (N.Y. 1979)
Alpert v. 28 Williams St. Corp, 457 N.Y.S.2d 4 (App. Div. 1st Dep’t 1982)
In addition, find and read the applicable sections of New York Business Law and New York Banking Law and then answer the following 2 questions:
1) Is Joan’s conduct protected by the “business judgment rule”?
2) Keeping in mind your answer to question #1 and applying the appropriate standard to the case, how likely is the derivative action against Joan to succeed?
An IRAC-style essay IS appropriate for this assignment.
Solution
Business Law & Bankruptcy
Business judgment rule bars any inquiry into the decisions of the corporate directors if their acts were in good faith, and were in the furtherance of the business objectives. The business judgment law looks at the good faith in the dealings. A corporate director has to work in loyalty to the corporation as opposed to the personal needs and orientations. The business judgment law calls of no second-guessing of the decisions made by the director if here is good faith; there is application of reasonable care that any prudent person may apply and reasonable faith that the director was making the decision in line with the interests and directions of the organization.
However, the New York banking law holds the bank directors in a higher standard compared to the directors of the non-banking corporations (Federal Deposit Insurance Corporation v. Lawrence Bober, 2002). This high standard applies to the banks owing to the sensitive nature of the businesses. Therefore, defense under the business judgment law may not be applicable to the bank directors.
In the case of Joan, there is some consideration that she failed to follow when she was extending the loan to the defendant. She recommended that the board approve the large loan based on the friendship and in contradiction to the loyalty clause or duty of care to the bank. Therefore, she was in violation of the duty of care that she is expected as a director for the bank. Her recommendation to the bank was based on the ability of the defendant to improve on the sales volumes in another airline. His experience in the airline industry may have created the grounds for the approval of the loan. However, the applicant was incapable of replicating the previous success in another airline on the privately held airline. Basing the decision purely on his performance at another airline did not suffice as adequate research before she decided to advance the loan to her. She was expected to go beyond the assessment of the applicants/defendants application for the loan into the understanding of the performance in the industry (Federal Deposit Insurance Corporation v. Lawrence Bober, 2002).
Any prudent person could have noticed that the airline industry is working hinge mainly on the heritage and branding that it has received. Owing to this factor, the airline industry was not a viable investment area for any new businesses. The congestion and ensuing high level of competition in the industry could have been adequate to validate a proposal of the rejection of the offer. However, given that the director was not working according to the duty of loyalty, she was incapable of noticing the above crucial aspects about the proposal resulting in the wrongful recommendation for the approval of the loan. Her duty of loyalty was skewed towards the applicant/defendant due to their personal background.
The derivative action against Joan is highly likely to succeed. In as much as bank directors are not protected by the business judgment law, Joan could not cite the protection since she had also violated the three cardinal conditions for protection (Federal Deposit Insurance Corporation v. Lawrence Bober, 2002). She is also expected to have applied higher standards of care since she was in the banking industry. She failed to do so with her actions indicating a bias in favor of the applicant given the background that she shared with the defendant. With the above considerations in mind, it is possible to for the derivative action against Joan to succeed.
References
Federal Deposit Insurance Corporation v. Lawrence Bober, 2002 U.S. Dist. LEXIS 13231 (S.D.N.Y. 2002)