Successful business owners and investors are smart when it comes to raising capital. But how they do it can be just as important as they fact that they get it done.
It’s imperative for corporations to have a corporate finance lawyer on board to help a growing firm sync all of its finances. This ensures not only that the company is paying the right taxes and getting as many tax rebates as possible, it also makes certain that any capital-raising ventures are legal and in line with local, state and federal laws. It may also help to insulate the firm and/or investors from certain liabilities if the venture is not successful.
In the case of FDIC v. Arciero, decided Dec. 20, 2013 by the U.S. Court of Appeals for the Tenth Circuit, corporate borrowers lost big because the promises of a failed bank’s former CEO were not properly memorialized in the bank’s records. The oversight was a major one, and it was also preventable.
According to court records, the situation started with an effort to save Quartz Mountain Aerospace Company, based out of Oklahoma. The company, which employed about 120 people, was falling into debt and had racked up hundreds of thousands of dollars in past-due utility bills.
In an effort to save the firm, several of its investors and directors took out sizable loans ($2.5 million) from the First State Bank of Altus. The idea was that those loans would ultimately be repaid once the company again began thriving.
However, then the bank failed in 2009. In stepped the Federal Deposit Insurance Corporation (FDIC), which acted as a receiver. In doing so, it filed a lawsuit to collect on the failed bank’s outstanding loans. That included the Quartz loans.
But Quartz still wasn’t doing better by that time, and the investors and directors didn’t have the personal capital to repay the loans they had taken out on the firm’s behalf.
The FDIC contended, however ,that the borrowers were liable for those loans regardless. The borrowers argued that they weren’t because the CEO of the bank had promised them at the time the loans were originated that the borrowers wouldn’t be personally liable.
However, such a promise isn’t recognized unless it’s properly recorded per the guidelines spelled out in 12 U.S.C. 1823(e), which is part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The law says that such an agreement has to be made in writing, executed by the depository institution, approved by the board of directors or loan committee of the bank and be continuously a part of the bank’s official record.
The district court found that was not the case, and as such, the borrowers were liable to repay the loans.
The borrowers then appealed, arguing that the court awarded summary judgment to the FDIC before they had a chance to conduct discovery and further that there was newly-discovered evidence of securities fraud by the bank.
However, the appellate court ultimately affirmed the earlier ruling, holding that there was no showing that any evidence drummed up in discovery would have eliminated their obligation to pay. With regard to the alleged securities fraud, the appellate court found that this evidence would not have been admissible relative to the legal theory that the borrowers could have raised, but didn’t, in the previous legal proceedings.
A simple proper recording of the agreement between the bank and the borrowers could have saved all this trouble. Instead, not only did Quartz fail and file for bankruptcy, its investors and directors were left liable for loans.
The Brown Law Firm, LLC, has offices in Belmont and Boston. For a free and confidential consultation, call 617-489-0817 or contact us online.
FDIC v. Arciero, Dec. 20, 2013, U.S. Court of Appeals Tenth Circuit
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Massachusetts Breach of Contract Claim Filed Against Lab, Worker, July 14, 2013, Boston Corporate Finance Lawyer Blog