Omnibank of Mantee v. United Southern Bank

• Decision Date: 29 July 1992
• Docket Number: No. 89-CA-0614,89-CA-0614
• Citation: 607 So.2d 76
• Parties: OMNIBANK OF MANTEE and James R. Gray v. UNITED SOUTHERN BANK, Phillip Kantor and John B. Lowery.
• Court: Mississippi Supreme Court

Page 76

607 So.2d 76

OMNIBANK OF MANTEE and James R. Gray v. UNITED SOUTHERN BANK, Phillip Kantor and John B. Lowery.

No. 89-CA-0614.

Supreme Court of Mississippi.

Decided July 29, 1992.

Rehearing Denied Aug. 26, 1992.

Grady F. Tollison, Jr., S. Allan Alexander, Tollison Austin & Twiford, Oxford, Heidelberg & Woodliff, Jackson, John W. Dulaney, Jr., Tunica, for appellants.

John H. Dunbar, Jack F. Dunbar, Holcomb Dunbar Connell Chaffin & Willard, Oxford, Winn Davis Brown, Jr., Southaven, Roger A. Stone, Memphis, Tenn., William F. Travis, Southaven, William H. Thomas, Jr., Memphis, Tenn., for appellees.

Before DAN M. LEE, P.J., and ROBERTSON and SULLIVAN, JJ.

ROBERTSON, Justice, for the Court:

I.

This appeal arises from a branch bank officer's imprudent credit practices, only days after the branch opened with assets purchased from another parent bank. Problems of corporate governance are present as well, some of which arise incident to the branch bank president's divided loyalties between the selling and buying parent banks. The Chancery Court awarded the buying parent bank a substantial personal judgment against its former officer, attributable largely to three sizable credits turned sour. The Court held the selling bank as well on two of the bad credits. We affirm the judgment against the officer but reverse and render that against the selling bank.

II.

A.

Our principal players are three in number, two parent banks and the officer who managed the branch one bank sold the other and who served first the selling bank, served both during a five-month transition period and, finally, served the buying bank for some nine months post-consummation.

Omnibank Of Mantee is a state-chartered banking association having its principal office in Mantee, Webster County, Mississippi, whose official name at all times relevant hereto was Bank Of Mantee ("BOM"). At all times relevant here, BOM's president was Jerry Ishee, and Woodrow W. Martin, Jr., was chairman of its Board of Directors. BOM's deposits were insured with the Federal Deposit Insurance Corporation ("FDIC"). BOM was the selling bank and was one of the Defendants below and is one of the Appellants here.

United Southern Bank ("USB") is a state-chartered banking association, having its principal place of business in Clarksdale, Coahoma County, Mississippi. USB has five branch banks in Coahoma County and branches as well in Lafayette, Quitman, Panola, Sunflower, Tallahatchie and Tate Counties. At all times relevant hereto, USB's President and Chief Executive Officer was C. Willis Connell, Jr. Willis L. Frazier and Edward P. Peacock, III, each served as Senior Vice President. USB's deposits were FDIC insured. USB was the buying bank and was the Plaintiff below and is the Appellee here.

Prior to 1982, Peoples Bank and Trust Company independently engaged in the banking business at 8975 Goodman Road in Olive Branch, DeSoto County, Mississippi. In 1982, BOM acquired Peoples and operated it as a branch bank, keeping the trade name of Peoples Bank and Trust Company, for convenience sometimes referred to as "the Branch." James R. Gray came aboard Peoples' banking staff in 1981 as an assistant branch manager and loan officer. BOM promoted Gray to president of the Branch in May of 1982. In January of 1983, Gray was elected to BOM's Board of Directors. Gray remained in these capacities through and including July of 1984 when USB acquired most of the Branch's assets and liabilities, and on into April of 1985. To be specific, on June 30, 1984, Gray resigned as an officer and director of BOM. On July 2, 1984, USB formally hired Gray and installed him as president of the Branch, a position Gray resigned on March 21, 1985, effective April 4, 1985. Gray was one of the Defendants below and is one of the Appellants here.

But back up to January of 1984, BOM, having problems of its own, sought to sell the Branch. USB was interested in expanding into the economically prosperous DeSoto County area. The two began negotiations regarding their respective interests, and on January 13, 1984, USB made a bid to purchase most Branch assets, consisting mainly of loans and fixed assets, and to assume liabilities consisting mainly of the customer deposit base. BOM accepted this bid, and on January 30, 1984, the parties entered into a written buy-sell agreement. On March 7, 1984, BOM, as seller, and USB, as purchaser, formally applied to the FDIC for approval of the transaction.

USB had acquired at least eleven branch banks in recent decades and had found it advantageous to retain the branch presidents as USB's branch managers after the acquisition, for reasons ranging from community goodwill to continuity of operations. These thoughts in mind, USB independently inquired of Gray's qualifications and, upon the yield of this inquiry and Gray's obvious familiarity with the Branch and its operations, decided to keep Gray on the job. On February 1, 1984, USB and Gray agreed in principle that, when FDIC approval was obtained and the transaction closed, USB would retain Gray as president and managing officer of the Branch. The parties so represented in the FDIC application, providing that an inducement for the transaction was that Gray would remain at an increased base salary.

The sale ultimately closed on July 2, 1984, and BOM ceased all banking operations based in the Olive Branch area. Prior to that time, Gray remained a compensated officer of BOM. During the period February 1 through July 2, 1984, however, Gray worked closely with USB personnel, who were often in the Branch, in their evaluation of the assets and liabilities of the Branch and in generally familiarizing USB personnel with the details of the Branch's business. Beyond dispute, during this time Gray was serving two masters, with full disclosure and consent of all.

During this post-agreement period, USB carefully sifted through all of the branch's outstanding loans and had determined to purchase loans aggregating about fourteen million dollars. USB set aside and did not assume loans aggregating $1,014,855.77, regarded by USB as bad risks. These loans remained on the BOM books. Nor did USB designate for assumption any contingent liabilities. This becomes important, for at the time USB was deciding which loans it would assume, BOM had outstanding two letters of credit, one issued for the benefit of John B. Lowery, Phillip Kantor and Charles S. Riggan ("LK & R") and a second for the benefit of Jess Bigelow. As it was not assuming any contingent liabilities, it is not clear USB was even aware of these two letters of credit. USB's non-assumption decision suggests no adverse view at that time of the worthiness of these credits.

USB affords all of its branch banks substantial autonomy. Under the new regime, Gray had complete charge of the day-to-day banking business of the Branch. He had discretionary loan authority, subject to USB's limits for all senior loan officers: $75,000.00 for unsecured loans; $150,000.00 for secured loans. Within two months of July 2, 1989, Gray had exceeded this authority, and much more, and the seeds of this civil action had been sown.

1. Lowery, Kantor and Riggan Transactions

Before USB ever appeared, Lowery, Kantor and Riggan ("LK & R") banked with the Branch, and Gray had been the principal officer with whom they dealt. Lowery and a partner owned the Belvedere Apartments in Memphis, Tennessee. Lowery, Kantor and Riggan were also involved in a substantial condominium development in Memphis known as Wagner Place.

In November of 1983, Gray issued BOM's letter of credit for the benefit of LK & R in the sum of $400,000.00, understanding that LK & R would deliver the letter to First South Savings and Loan Association of Pine Bluff, Arkansas, ("First South") as part security for financing outstanding loans regarding the Belvedere Apartment Building. The letter obligated BOM to pay First South upon the latter's written representation the $3,200,000.00 purchase money loan First South held on Belvedere was in default. In the late Spring of 1984, First South called the Belvedere letter of credit. BOM undoubtedly was obligated, and Gray honored the letter of credit on June 5, 1984, wiring First South $400,000.00 of BOM funds. Lowery and Riggan assured Gray the $400,000.00 would be repaid shortly--a matter of weeks but certainly before the pending sale to USB--either from the half million dollar surplus on the Wagner Place construction loan or from the anticipated sale of the Belvedere. June 26, 1984, arrived, and the debtors had produced no funds. On that date, Gray had Lowery, Kantor and Riggan formalize the debt by giving BOM their ninety day note in the principal sum of $400,000.00, payable on September 4, 1984, with interest at fourteen percent per annum.

Sometime near the end of June, Gray told Woodrow W. Martin, Jr., chairman of the Board of the Bank of Mantee, about the Lowery/Kantor/Riggan matter and said the funds would be shortly repaid or, if necessary, once USB took over, he would make Lowery, Kantor and Riggan a new loan, so they could repay BOM. There is no evidence that Martin ¹ told anyone about the conversation with Gray, including Jerry Ishee, BOM's president.

Three weeks after USB had acquired the Branch and Gray had become USB's Branch president, on July 23, to be exact, Gray wired $407,210.96 from USB to BOM, the $7,210.96 representing interest from June 5, the day BOM paid First South, until July 23, 1984. The record is silent whether Lowery, Kantor or Riggan requested the wire, or a USB loan to repay BOM. It appears Gray moved the loan to USB on his own initiative. He sought no approval from higher authority within USB for these credit extensions that so obviously exceeded his authority. Of the $407,211.96, BOM credited $400,000.00 to its commercial loans general ledger account and $7,210.96 to its interest general ledger account. LK & R's June 26 note to BOM had been paid in full. On ...