Wichita Federal Sav. and Loan Ass'n v. Black

• Decision Date: 27 October 1989
• Docket Number: No. 63120,63120
• Citation: 245 Kan. 523,781 P.2d 707
• Parties: WICHITA FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellee/Cross-Appellant, v. Gale D. BLACK, Appellant/Cross-Appellee.
• Court: Kansas Supreme Court

Page 707

781 P.2d 707

245 Kan. 523

WICHITA FEDERAL SAVINGS AND LOAN ASSOCIATION, Appellee/Cross-Appellant, v. Gale D. BLACK, Appellant/Cross-Appellee.

No. 63120.

Supreme Court of Kansas.

Oct. 27, 1989.

Syllabus by the Court

1. In a negligence case, the plaintiff must establish a duty of reasonable care owed by the defendant to the plaintiff, a breach of that duty, damage to plaintiff, and a causal connection between the duty breached and the damage sustained.

2. Where the trial court has made findings of fact and conclusions of law, the function of this court on appeal is to determine whether the findings are supported by substantial competent evidence and whether the findings are sufficient to support the trial court's conclusions of law.

3. "Substantial evidence" is defined as evidence which possesses both relevance and substance and which furnishes a substantial basis of fact from which the issues can reasonably be resolved.

4. Upon appellate review, this court accepts as true the evidence and all inferences to be drawn therefrom which support or tend to support the findings in the trial court, and disregards any conflicting evidence or other inferences which might be drawn therefrom.

5. The common-law rule of liability of an agent for violation of his authority or neglect of his duty to the detriment of his principal extends to directors or officers for damages caused by negligent or unauthorized acts. Kansas has traditionally imposed a stricter duty on officers and directors than have many other jurisdictions.

6. In an action by a savings and loan association against a former president and chairman of the board for negligence in investing the institution's funds in financial futures, resulting in a loss of millions of dollars, the record is examined and it is held that substantial competent evidence supports the trial court's findings of fact and conclusions of law and its judgment in favor of plaintiff.

7. A party may not properly base a claim of estoppel in his favor on his own wrongful act or dereliction of duty, or for acts or omissions induced by his own conduct.

8. The defense of quasi-estoppel is found not to lie under the facts herein, as representations made by plaintiff savings and loan association on its tax return and audited financial statement were not so inconsistent with its present position as to render its present claims unconscionable.

9. Where defendant's tortious misconduct or breach of contract causes damages, but also operates directly to confer some benefit upon the plaintiff the plaintiff's claim may be offset by the amount of the benefits received. However, under the facts herein, the court rejects defendant's claim of offsetting benefits.

10. Because comparative fault is a substantive defense, the 1987 amendment to K.S.A. 60-258a is not applicable to this action.

11. In an action by a savings and loan association against a former president and chairman of the board, the trial court did not abuse its discretion in refusing to award prejudgment interest against the defendant.

Clifford L. Malone, of Adams, Jones, Robinson and Malone, Chartered, Wichita, argued the cause, and Larry D. Spurgeon, was with him on the briefs, for appellant/cross-appellee.

Alexander B. Mitchell, II, of Klenda, Mitchell, Austerman & Zuercher, Wichita, argued the cause, and John B. Gilliam, was with him on the briefs, for appellee/cross-appellant.

E. NEWTON VICKERS, District Judge, Assigned:

Gale Black, the former President and Chairman of the Board of Wichita Federal Savings and Loan Association (Wichita Federal), appeals from a $17,537,185.75 judgment against him for his negligence in financial futures trading on behalf of Wichita Federal. Wichita Federal cross-appeals the district court's denial of prejudgment interest on the damages.

Facts

Gale Black began working for Wichita Federal as a teller in 1947 and over the next thirty years rose to the position of President and Chairman of the Board of Directors of Wichita Federal. At all times herein Black was responsible for the managing of investments for Wichita Federal. As a federally chartered savings and loan association insured by the Federal Savings and Loan Insurance Corporation (FSLIC), Wichita Federal was subject to supervision and regulation by the Federal Home Loan Bank Board (the Bank).

In October 1984, the Bank initiated an examination of Wichita Federal. A formal report of the examination was sent to Wichita Federal in January 1985. The report was not favorable and made a number of criticisms. The report revolved around the fact that Black had been investing Wichita Federal funds in speculative reverse-repurchase agreements. The report was also critical of the fact that Black was the only person making investment decisions and accounting for them and that Wichita Federal had no written business plan to meet interest rate risks.

The savings and loan industry had been a fairly profitable industry until the late 1970s. Up until that time, savings and loan institutions made their profits by charging slightly higher interest on long-term mortgages than the interest paid to depositors. In the late 1970s, interest rates soared, resulting in higher interest having to be paid on deposits while the interest on most long-term mortgages remained fixed. This result is referred to as "interest rate risk."

Defendant Black was able to offset losses paid to depositors as a result of high interest rates by investing in reverse-repurchase agreements. On February 8, 1985, Anne McDonley, financial futures specialist for the Bank, wrote to the Board of Directors of Wichita Federal and made certain recommendations. She directed it to compile a formal business plan, identifying goals and objectives and outlining strategies to improve the operations of the association. She said an investment policy should be developed, with particular emphasis on interest rate risk. The letter also stated:

"As a result of the potential risk your association faces, you are directed to cease your present activity of speculating with dollar roll reverse-repurchase agreements until such time a formal business plan is developed and submitted to this office. Prudent management also dictates the use of other methods to facilitate the restructuring of your association's balance sheet that are less risky. Some form of a hedging strategy is also a necessity to offset interest rate risk." (Emphasis added.)

Upon oral deposition, McDonley gave a definition of "hedging" as:

"trying to immunize yourself against interest rate risks. As rates go up, you're concerned that the value of your portfolio will go down, so by putting on a financial futures contract you're protected because you're taking an equal but opposite position in the market so that if you're losing money in the cash markets, you should be gaining money in the futures market, or vice versa, so you end up with a balance of a net zero position."

The Board of Directors of Wichita Federal met on February 15, 1985, at which time it discussed the Bank's examination and recommendations. Black presented an outline of a business plan for Wichita Federal which was tentatively approved subject to review of the final plan itself. According to the minutes of the February 15 meeting, the Board unanimously authorized Black to engage in the trading of financial futures and also authorized Black to conduct business with certain securities brokerage firms. On February 19, 1985, Black informed the Bank that the Board had authorized him to engage in futures and options transactions.

Black implemented a "hedging" program with Shearson/American Express, Inc., to offset the interest rate risk created by reverse-repurchase agreements. On February 27, 1985, Black sold short 1,930 June treasury bond contracts. Black closed the transactions on March 1, 1985, and realized a profit of $416,709.60, which profit he did not report to the Board of Directors or mention in the monthly report.

On March 25, 1985, Black sold short 1,950 June treasury bonds through Landmark Securities Corporation (Landmark) to Iowa Grain Company and on May 28, 1985, he closed his position on the June treasury bonds and opened a new position on 1,950 September treasury bond contracts. On June 21, 1985, Black closed the short sale of the treasury bond contracts, which resulted in a loss from March 25 to June 21, 1985, of $17,537,185.75. This amount exceeded the net worth of Wichita Federal.

Wichita Federal's Audit Committee and Board of Directors met with Black during the month of March 1985. At the Audit Committee meeting, it was recommended that there should be a segregation of duties so that no one individual had sole and exclusive control over executing and recording transactions. Further, it was stressed that there be a formal asset-liability management plan to reduce exposure to interest rate risks. Neither at the March Audit Committee meeting or the meeting of the Board of Directors did Black disclose that he had made a profit of $416,709.60 selling short June treasury bonds.

The Bank also initiated a special examination of Wichita Federal on March 11 to see if McDonley's directives of February 8, 1985, had been carried out. The special examination of Wichita Federal found that three regulatory violations had taken place: (1) There was no written financial futures policy; (2) the Board of Directors had not given Black the authority, at least in writing, to engage in futures transactions; and (3) the Board of Directors had not set forth Black's duties and responsibilities and limits in the futures area. See 12 C.F.R. § 563.17-4(d), (e) (1989).

On April 15 the Board of Directors met in Wichita and on April 16 the Board met in Topeka with representatives of the Bank to execute a supervisory agreement between Wichita Federal and the Federal Home Loan Bank Board. The latter meeting was held so that the Board of Directors of Wichita Federal could avoid...