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Banking and Financial Services Update, Vol. 11, Winter 2011

12.20.11

In this issue:

  • Why Minutes Matter – Tips for Boards of Directors
  • Bank has a Duty to Non-Customers? Contour Says Yes.
  • Recap of First Annual Alabama Banking Seminar

Thank you to all who participated in the First Annual Alabama Banking Seminar!
See the recap and call for topics at the end of this Bulletin!


Why Minutes Matter*

By: Marlee Mitchell
* full version published by DirectorCorps – www.bankdirector.com

In the lingering aftermath of the financial market meltdown, there has been a pronounced uptick in litigation against, and regulatory investigations of, banks and bank directors. In the course of these proceedings, it is becoming increasingly evident that banks can and should improve the way they create and maintain accurate and adequate board meeting minutes. Board meeting minutes are too often treated as a ministerial afterthought, but have taken on newfound significance as they are increasingly subject to enhanced scrutiny by shareholders, government regulators, auditors, potential acquirers and others.  Boards of banks should reexamine best practices for minutes, which serve as the official record of board activity, in light of the current economic and regulatory environment.

Guidelines for the Preparation of Effective Minutes.           

What follows are suggestions for "best practices" in preparing for and documenting Board meetings. Obviously there is not a "one size fits all" approach for all financial institutions; the key is finding the right balance between too much content (minutes should not be a transcript of the proceedings or bury important actions within pages of minutiae) and too little content (minutes should convey the appropriate amount of deliberation, due care and thoughtful review).

Preparation for board meetings

  • Schedule regular board meetings in advance
  • Aim for full board participation
  • Circulate relevant materials in advance of each regularly scheduled meeting
  • Circulate minutes of prior meeting(s) for review and approval
  • Ask your legal counsel to attend your board meetings

Objectives at meeting

  • Minutes are a summary, not a transcript
  • Preservation of official record of proceedings
  • Achieve optimal level of detail
    • Avoid verbatim recitation
    • Avoid vague/cursory descriptions
    • Memorialize the abstention or recusal of any Board member who has a conflict of interest regarding the matter at hand
    • Describe votes as either "unanimous" or "passed" and note any directors who voted against or abstained, but avoid recording each director who "moved" and "seconded" items on which action is taken
  • Scrivener should not be a board member or member of senior management who is presenting at the meeting (i.e. your Chief Financial Officer has more than enough tasks); preferably the minute taker should be the corporate secretary or legal counsel
  • Discussions with legal counsel should be identified as privileged and describe only the topics covered, not the advice provided
  • If you are a director who raised a material issue as a result of a "red flag" or otherwise, you will want the minutes to reflect that these issues were raised and, if applicable, addressed by management
  • Note all breaks taken for executive sessions outside the presence of senior management

 Length of minutes

  • Commensurate with actual discussions and matter importance
  • Convey board reflection, review, and information-gathering proportional to issue significance

Consider audience

  • Shareholders
  • Bank regulatory examiners/investigators
  • Auditors
  • Plaintiffs' counsel
  • Investment bankers and legal counsel for potential acquirers
  • Underwriters/placement agents and their legal counsel
  • Assume it will also include readers of the front page of your local newspaper

Neutrality

  • Maintain neutral, objective tone
  • Avoid opinionated/judgmental language, editorials
  • Use unambiguous language

Completeness

  • Sloppy minutes may cause an auditor or regulator to infer sloppy internal controls or a nonchalant attitude regarding compliance with internal policies
  • Implement clear document retention policy as to source materials for minutes
  • Generally, avoid retention of extra copies of additional materials (notes/drafts/investment bankers’ pitch books)
  • Notes/drafts have been held discoverable and not protected by privilege or work-product protection
  • Directors should not keep their own notes during or after meetings; the minutes as approved should be the official, and only, record of the meeting

Consistency

  • Maintain consistency in minute writing style
  • Maintain subject-matter consistency with public disclosures
  • SEC reports and Call Reports, for example

Prompt review/approval

  • Each board member should carefully read/review minutes and raise any issues prior to final approval
  • For public banks/bank holding companies, directors should carefully consider the interplay with Form 8-K reporting requirements
  • Distinguish between board approval and board consideration
  • Prompt preparation facilitates external auditor quarterly reviews, and could protect against future attacks  for hastily and less thoughtfully prepared minutes

Other Issues

  • Tape recording of meetings is not recommended
  • Board committee meeting minutes should be kept with consistent form and content as board meeting minutes, to the extent possible
  • Check your bylaws—Roberts Rules of Order or other rules of parliamentary procedure are generally not required and not recommended for the conduct of your meetings
  • Do not use written consent actions in lieu of meetings to take action on significant matters
  • Do not style a document "minutes" if a meeting was not duly called and held, as was reported to have occurred in the WorldCom and Enron cases
  • A bank and its parent holding company are not the same legal person, even if they share common boards of directors; to the extent practicable, maintain separate sets of minutes (don't hand plaintiffs two defendants at once).

At the end of the day, as a Board member, ask yourself:

"How would I feel if these minutes were printed on the front page of The Wall Street Journal?"

"How would I feel answering questions of a Senate subcommittee regarding the content of my bank's minutes?"

If the answer to both of these questions is "good," or better yet, "great," your job is done.


Bank Has a Duty to Non-Customers? Contour Says Yes.
By: Michael Harmon

Should a bank question a long-time, good customer? One bank chose not to, and it cost $360,000 plus the headache of a lawsuit. 

In the recent case of Contour Industries v. U.S. Bank, 437 Fed.Appx. 408 (6th Cir. 2011), Contour Industries sued U.S. Bank claiming that U.S. Bank improperly allowed Timothy Byrd, a Contour employee, to cash checks made out to Contour. Mr. Byrd had access to both Contour's accounting system and Contour's deposit stamp. He was a customer of U.S. Bank, but Contour was not. 

Over the course of approximately three years, Mr. Byrd embezzled sixty-two checks that were payable to Contour. He had altered Contour's deposit stamp and endorsed the sixty-two checks to himself by forging the signature of Contour's accountant and placing the endorsement "Pay to the order of" Timothy Byrd on the checks. Mr. Byrd also took steps to hide the fraud from Contour. 

U.S. Bank had a policy that required supervisor approval for depositing or cashing any check that was originally made payable to a business and that was later signed over to another party. When Mr. Byrd attempted to deposit the first of the sixty-two checks made payable to Contour, a U.S. Bank supervisor allowed Mr. Byrd to deposit the check into his account after apparently talking with a Contour employee who said that the check was signed over to Mr. Byrd to correct a problem with his recent paycheck. U.S. Bank tellers interpreted the approval of the deposit for the first check as a blanket approval for any checks signed over from Contour to Byrd. 

Eventually, Contour discovered the fraud and sued U.S. Bank under the Tennessee Uniform Commercial Code. U.S. Bank asserted a defense under the "fictitious payee rule" that required, among other things, a showing that U.S. Bank deposited the funds into Byrd's account in good faith. At trial, the jury found for Contour and awarded it more than $360,000. On appeal, U.S. Bank argued that its actions were in good faith and that the case should be dismissed because the bank did not owe any duty to a non-customer under the Tennessee Uniform Commercial Code. Whether or not banks owed certain duties to non-customers under the Tennessee Uniform Commercial Code was an open question before the Contour decision. The Sixth Circuit rejected U.S. Bank's arguments and upheld the jury verdict.

There are three takeaways from the Contour case.

  1. Bank procedures are not rules that are meant to be broken. In Contour, a bank employee followed protocol for the first check by calling the payee company to verify that the transfer of the check to Mr. Byrd was proper; however, employees did not follow protocol for subsequent checks. It is easy to relax the rules for long-time, trusted customers, but any relaxation comes with risk, especially when done over a long period of time. 
  1. When it comes to dealing with third-party checks, the phone is a friend and a letter is better. Even if a blanket exception for a customer is provided, follow-up phone calls and letters to the affected third parties will go a long way toward protecting your institution, should litigation ever arise.  
  1. On a narrower, legal note, under the Contour decision, banks can be liable to non-customers under the Tennessee Uniform Commercial Code for certain things happening to the non-customer's account. It is no longer a defense to say that no duty is owed to non-customers. 

No institution can completely insulate itself from lawsuit, but every now and then, it is a good idea to remind yourself to follow protocols and to follow up with third parties, even if they are not customers. If nothing else, the Contour decision provides that reminder. 


Recap of First Annual Alabama Banking Seminar

On December 9, after seven years of hosting the highly successful Southeastern Banking Seminar in Nashville, Waller Lansden expanded the program to host the first Alabama Banking Seminar at the Summit Club in Birmingham. The complimentary half-day seminar covered a broad range of topics, including the economic, regulatory and legal issues that financial institutions face, and the audience included executives from a number of different sized banks and credit unions, as well as service providers to financial institutions.

Faculty included Robert B. Albertson, Principal and Chief Strategist, Investment Strategy at Sandler O'Neill & Partners, who discussed the current economic environment, his future outlook for the economy, and how this will affect banks and the banking industry as a whole. To this end, Mr. Albertson discussed what he called the "unavoidable consolidation" within the industry. Denyette DePierro, Senior Counsel with the American Bankers Association also spoke providing insight from the ABA and their view of Washington, D.C. Ms. DePierro discussed the implementation of regulations following the passage of the Dodd-Frank Act, information regarding a number of current and proposed regulations and legislation, and insight into the management of the regulatory agencies. The seminar concluded with a panel discussion that included Pat Caldwell, General Counsel for BancorpSouth, Jerry Powell, General Counsel for Cadence Bank, and Kevin Patton, Vice President and Head of Litigation for Regions Financial Corporation, and was moderated by our own Larry Childs. This panel used their combined experience to cover a broad range of potential litigation threats to banks, and how to protect your institution from these threats.

So that we can continue to offer events that meet the needs of the financial services and banking sectors, please email Chris Siderys with suggestions for topics that we can include in next year's seminar. We value your input.

We look forward to hosting the Second Annual Alabama Banking Seminar and hope that you will be able to join us.


Corporate and Commercial Transactions:

Marlee Mitchell (615-850-8943), David Wilson (615-850-8586)

Finance and Restructuring:

Rob Harris (615-850-8467), David E. Lemke (615-850-8655)

Financial Services Litigation:

Joseph A. Woodruff (615-850-8485), Larry B. Childs (205-214-6380)

Regulatory Issues:

Marlee Mitchell (615-850-8943), Chris Siderys (615-850-8176)

Please provide suggestions for future topics or feedback to:

Miranda K. Kelley, Editor
Phone: 615-850-8674
Email: Miranda.Kelley@wallerlaw.com