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When Board Governance Conflicts With Policy

A nine-million dollar loan is at the center of two lawsuits filed by former partners in a mobile home development project against the bank and financial firm that provided those loans. The lawsuits stemmed from the bank's recent decision to declare the loan in default and require immediate payment of more than six million dollars.

The bank made the loan in 2006, at a time when one of the partners, a county judge, was a director of the bank and on the board of directors at the financial firm. The loan went unpaid when the development project faltered during the recession that followed.

The judge's lawsuit contains allegations that the bank engaged in breach of contract and illegal interference and that its management of the loans was "illegal and unethical."

The judge's partner is also suing, alleging the bank provided desirable considerations with regard to the loan because of the judge's relationship with the bank. The plaintiff alleges this "special protection" kept the project afloat for years. It was only after the judge discontinued his directorship at the bank that bank management sought to call the loan, citing unpaid taxes.

The bank denies any wrongdoing, but will not comment further. Riley Yates "Northampton County judge suing Lafayette Ambassador Bank over $6 million the bank says it's owed" www.mcall.com (Jun. 06, 2018).


Commentary

The above case illustrates how a wrongful exercise of authority or privilege can cause both legal and economic risk for financial institutions.

Providing a loan to a board member and then not enforcing the conditions of the loan until the board member leaves puts the bank in a vulnerable position. There was a governance conflict of interest and the loan should not have been made or, in the alternative, it should have been enforced like any other loan.

It is a best practice to create a comprehensive conflict of interest policy that is communicated to all employees, executives, and directors. The policy should make clear what is considered a conflict of interest and why such conflicts should be avoided. It should state specifically that loans to board members are prohibited.  

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