Appendix II ethics problems

• Author: Stewart Edelstein
• Pages: 325-342

325

APPENDIX II

ETHICS PROBLEMS

1. ARETHESECONVERSATIONSFORBIDDEN?

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

ment complexes, whose managi ng member is Bill Bixby. Bixby obt ained

$20 million financing 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 maturit y date on the loan

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

the requirement of a new appraisal of the subject property satisfactory

to the bank, by an appraiser approved by the bank, evidencing a value

reasonably acceptable to the bank.

Bixby submitted an appraisal to the bank, prepared by the bank’s

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

from the appraisal t he bank relied upon in making the orig inal construc-

tion loan. The bank denied the one-year extension of the maturity date,

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solely based on its determination that the appraisal was unacceptable. As

a result, Bixby was forced to sell t he subject property at a signif icant loss.

You have learned that, within a month after the execution of the

loan modification agreement, a nd before Bixby submitted the appraisal,

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

carry t his loan on the bank’s books, and did want to increase t he capital-

ization of the bank. Accordingly, he instructed Hink ley to do whatever

he had to do to make sure the Bixby loan was not extended, no matter

what he had to do.

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

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

on the 5 percent reduction in the appraised value of the property is

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

against Midas Nat ional Bank for breach of contract, and against Proc tor

for tortious 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 Hinkley to a meeting, attended by Hinkley’s secre-

tary, Harriet Longsworth, at which Proctor instructed Hinkley to con-

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

the terms of the loan modi fication agreement. Midas National Bank and

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

bank reasonably rejected the appraisal, which was a condition precedent

for the one-year extension of the maturity date of the loan.

1. Assume that Hinkley is st ill employed at Midas National Bank ,

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

of the case?

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

you brought suit, was fired from Midas National Bank and now

works as senior vice president at Century National Bank?

a. Can you call H inkley? If so, do you need to call defense coun-

sel 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 Hinkley tells you that he has discussed your

client’s claims with counsel for Midas National Bank?

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