Appendix A. Ethics Problems

• Author: Stewart I. Edelstein
• Profession: Commercial trial lawyer
• Pages: 359-377

359

APPENDIX A

ETHICS PROBLEMS

1. ARE THESE CONVERSATIONS FORBIDDEN?

You represent Bixby Real Estate Development LLC, a developer of apart-

ment complexes, whose managing member is Bill Bixby. Bixby obtained

$20 million fina ncing for his company from Midas National Bank to

develop an apartment complex, pursuant to the terms of a construction

loan agreement. Because of tough economic times, Bixby met with Len

Hinkley, senior vice president of Midas National Bank, requesting a

modification of the loan, including an extension of the maturity date of

the loan for an additional year. Af ter negotiation, they reached an agree-

ment on all terms, and both par ties executed a loan modification agree-

ment, entitling Bixby’s company to extend t he maturity date on the loan

for an additional year, on certain condit ions. Those conditions included

a new appraisal of the subject property t hat is satisfactory to t he bank,

that is completed by an appraiser who has been approved by the bank,

and that evidenced a value that is reasonably acceptable to the bank.

Bixby submitted an appraisal to the bank, prepared by t he bank’s

appraiser. The value of the subject property had decreased by 5 per-

cent from the appraisal the bank relied upon in making the original

construction loan. The bank denied the one-year extension of the

maturity date based solely on its determination that the appraisal was

unacceptable. As a result, Bixby was forced to sell the subject property

at a significant loss.

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You have learned that within a month after t he execution of the loan

modification agreement and before Bixby submitted the appraisal, Sid

Proctor, an investor, took over the bank. Proctor did not want to carry

this loan on the ba nk’s books and did want to increase the capitalization

of the bank. Accordi ngly, he instructed Hinkley to make sure t he Bixby

loan was not extended, no matter what he had to do.

Bixby has told you that he complied with all conditions for t he loan

extension and that the ban k’s refusal to extend the loan as agreed based

on the 5% reduction in the appraised value of the propert y is pretext

to comply with Proctor’s mandate. You have brought an action against

Midas National Bank for breach of contract a nd against Proctor for tor-

tious interference with contract.

Based on responses to your interrogatories and document requests

(and before you take any depositions), you have reason to believe that

Proctor summoned Hin kley to a meeting, attended by Hin kley’s secre-

tary, Harriet Longsworth, at which Proctor inst ructed Hinkley to con-

coct any reason necessar y to deny the loan extension, no matter what

the terms of the loan modif ication agreement. Midas National Bank and

Proctor are represented by counsel. Their primary defense is that the

bank rejected the appraisal rea sonably, which was a condition precedent

for the one-year extension of the matur ity date of the loan.

1. Assume that Hinkley is still employed at Midas National Bank

as senior vice president. Can you call hi m and discuss the facts

of the case?

2. Is your answer to number 1 dif ferent if you know that Hink ley,

after you brought suit, was fired f rom Midas National Bank and

now works as senior vice president at Century National Ban k?

a. Ca n you talk with Hinkley? If so, do you need to call defense

counsel first to get approval?

b. Does it matter if Hinkley calls you, eager to talk?

c. If it is proper for you to call Hinkley, is there any limit to the

subjects you can discuss?

d. Does it matter if Hink ley tells you that he has discussed your

client’s claims with counsel for Midas Nat ional Bank? Explain

why it does or does not matter.

3. Assume that Longsworth is stil l employed at Midas National

Bank as secretar y to Hinkley’s replacement. Can you talk with

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