Hoye v. Mee

795 F.2d 893 (10th Cir. 1986)

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Nature of the Case

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Facts

Hoye (P) filed suit against Meek (D) and other members of the board of Guaranty Trust Company. P was the trustee in bankruptcy for the estate of Guaranty Trust Company. The problems started with Guaranty's highly leverage investment in Ginnie Mays between January 1977 and December 1978. As interest rates rose, Guaranty sustained increasing losses on their investments. One of Guaranty's stated investment policies was that no more than $100,000 would be placed in any type of investment. Excepted from this limitation were government securities. For seven years, the company operated at a profit, and periodic bank examinations did not disclose any major problems. In 1978, serious problems were uncovered by a bank examiner as records did not reflect recent investments in Ginnie Mays. In January 1977, through the initiative of Maxwell Meek, and unknown to D and the other directors, Guaranty had begun investing in Ginnie Mays which were subject to repurchase contracts. At the end of the repurchase term, Guaranty had the option of paying its broker the full purchase price and taking delivery or renewing the contract. Guaranty continually opted to roll over the investment through repurchase contracts. As interest rates rose, the market value declined. As Ginnie Mays were considered government securities, they were exempted from the $100,000 limit. Guaranty got in deep trouble because it elected to finance the purchase of these contracts and within two months of the initial investment it had lost $521,420.90. This was because Guaranty had to pay the broker interest and cover any market price differential. By October 1977, the money allocated to repurchase contracts was $628,219.77; this exceeded the net worth of Guaranty. Between October 1977 and December 1978, Guaranty spent an additional $790,717.62 on repurchase contracts. Total losses amounted to $1,418,937.39 The district court held that Ds had breached their duty of care by failing to curb the investments while losses on the investment exceeded the company's assets. The court also held that Ds failed to monitor investment decisions and results and gave excessive authority to his son.