Author Question: Officers of a company have a duty to use reasonable efforts to make a profit for shareholders, but ... (Read 54 times)

cmoore54 · **on:** Jun 24, 2018

Officers of a company have a duty to use reasonable efforts to make a profit for shareholders, but are rarely liable for losses suffered during their leadership.
a. True
b. False
Indicate whether the statement is true or false

Question 2

A QUESTION OF ETHICS
Kirkman was involved in the horse business. He formed a business arrangement with an acquaintance, John Roundtree, who worked as a loan officer for American Federal Bank. Under the arrangement, Kirkman would locate buyers for horses, and the buyers could seek financing from American Federal. Roundtree gave Kirkman blank promissory notes and security agreements from American Federal, and Kirkman was to locate potential purchasers, take care of the paperwork, and bring the documents to the bank for approval of the purchaser's loan. Eventually, Kirkman entered into a purchase agreement with Gene Parker, a horse dealer. Parker agreed with Kirkman that they would jointly purchase a certain horse for 35,000. Parker signed a blank American Federal promissory note, with the understanding that Kirkman would cosign the note and complete the details of the transaction with the bank. Parker also signed a form authorizing the bank to release the funds to the seller of the collateral (the horse). Kirkman did not cosign the note and completed it for 85,000 instead of 35,000. He then took the note and authorization form to Roundtree, told Roundtree that he was the seller, and received from Roundtree checks totaling 85,000. After paying the actual seller of the horse the agreed-on 35,000 and seeing to it that Parker received the horse, Kirkman skipped town with the remaining 50,000. Parker paid American Federal 35,000 but refused to pay any more, claiming that he had agreed to pay only 35,000 and that the other 50,000 was unauthorized by him. In the subsequent action brought by the bank to collect the 50,000, the bank prevailed. The court found that the bank was a holder in due course of the promissory note and had not been negligent in the way it handled the transaction.

fwbard · **Reply #1 on:** Jun 24, 2018

Answer to Question 1

TRUE

Answer to Question 2

A QUESTION OF ETHICS
1. In determining whether the bank had been negligent because it had not contacted Parker before disbursing the loan proceeds to Kirkman, it is important to realize that the note was complete when presented to the bank, and there were no obvious alterations on it. Also, it is significant that the bank loan officer had known Kirkman for a number of years and knew that he was in the horse business. In other words, there was no evidence before the bank that would put it on notice that there was anything wrong with, or unusual about, the note. In view of these circumstances, you could easily conclude that the bank should not be held negligent simply because it did not contact Parker about the loan transaction before it disbursed the proceeds. Even if the bank were deemed negligent in failing to contact Parker, it is doubtful that Parker would be relieved of liability for this reason, given his own negligence in signing a blank promissory note. Generally, the UCC has little sympathy for those who sign incomplete instruments, and those who do so are normally held liable for whatever negative conse-quences they might suffer from such negligence.
2. As mentioned before in this text, an underlying goal of the UCCand of the law generallyis to protect innocent parties from harm. Generally, if one of two innocent parties to a transaction must be forced to bear a loss, the UCC, in the interests of fairness, will hold that the party in the best position to prevent the loss should bear the loss. If a drawer or maker signs an incomplete instrument and the instrument is later completed in a way not contemplated or authorized by the drawer or maker, and then the instrument is transferred to a holder in due course (HDC), one of two innocent parties must bear the loss. (See UCC 3-407.) In such a case, the drawer or maker will normally have to bear the loss because he or she could have prevented the loss by exercising prudence and reasonable care in refusing to sign a blank instrument.
3. If you decided that Parker should be liable for the loss, you could justify your conclusion by referring to the UCC's policy discussed abovethat the party in the best position to prevent the loss should bear the loss. Obviously, Parker, by signing an incomplete instrument, opened himself to liability under the UCC. On the other hand, if you decided that the bank should be liable for the loss, you might argue that Roundtree, as an agent of the bank, should have taken more care and exercised more oversight over Kirkman's activities. If this had been the case, the damages incurred by Parker could have been avoided. Furthermore, one could maintain that Roundtree was a bit overzealous in his attempt to gain business for the bank in the form of loan agreements. In other words, Roundtree might have been more concerned with self-gain (success in negotiating loans, greater stature in the eyes of the bank, and thus possible future promotions) than with ordinary prudence in the conduct of his job. Although under the UCC these arguments would carry less weight than Parker's negligence, they could be used to justify your conclusion that the bank was more at fault here than Parker.