Brane v. Roth - 590 N.E.2d 587 (Ind. Ct. App. 1992)

Rule:

Ind. Code § 23-1-2-11 provided that a director shall perform his duties in good faith in the best interest of the corporation and with such care as an ordinarily prudent person in a like position would use in similar circumstances. 

Facts:

This case involves a shareholders' action against the directors of a rural grain elevator cooperative for losses Co-op suffered in 1980 due to the directors' failure to protect its position by adequately hedging in the grain market. Paul Brane, Kenneth Richison, Ralph Dawes, and John Thompson were directors of Co-op in 1980. Eldon Richison was Co-op's manager that year who handled the buying and selling of grain. Approximately ninety percent of Co-op's business was buying and selling grain. The directors met on a monthly basis reviewing the manager's general report and financial reports prepared by Virginia Daihl, Co-op's bookkeeper. The directors also discussed maintenance and improvement matters and authorized loan transactions for Co-op. Requests for additional information on the reports were rare. The directors did not make any specific inquiry as to losses sustained in 1980. The records show that Co-op's gross profit had fallen continually from 1977. After a substantial loss in 1979, Co-op's CPA, Michael Matchette, recommended that the directors hedge Co-op's grain position to protect itself from future losses. The directors authorized the manager to hedge for Co-op. Only a minimal amount was hedged, specifically $ 20,050 in hedging contracts were made, whereas Co-op had $ 7,300,000 in grain sales. On February 3, 1981, Matchette presented the 1980 financial statement to the directors, indicating a net profit of only $ 68,684. In 1982, Matchette informed the directors of errors in his 1980 financial statement and that Co-op had actually experienced a gross loss of $ 227,329. The 1982 restatement was admitted over objections as Exhibit 25A. The directors consulted another accounting firm to review the financial condition of Co-op. CPA Rex E. Coulter found additional errors in Matchette's 1980 financial statement, which increased the gross loss to $ 424,038. Coulter's recalculation was admitted over objections as Exhibit 25B. Coulter opined that the primary cause of the gross loss was the failure to hedge. The court entered specific findings and conclusions determining that the directors breached their duties by retaining a manager inexperienced in hedging; failing to maintain reasonable supervision over him; and failing to attain knowledge of the basic fundamentals of hedging to be able to direct the hedging activities and supervise the manager properly; and that their gross inattention and failure to protect the grain profits caused the resultant loss of $ 424,038.89. The court ordered prejudgment interest of 8% from December 31, 1980 to the judgment date.

Issue:

Did the court apply an improper standard of care to the directors?

Answer:

No

Conclusion:

The court held that the trial court's denial of the motion was not clearly erroneous, and the trial court applied the correct standard of care upon the directors as established in Ind. Code § 23-1-2-11. The trial court had not used the gross negligence standard articulated by the directors. Moreover, the court said that the court had not admitted any improper evidence because the summary was admitted under an exception to the hearsay rule. And the court refused to consider new arguments made in the reply brief for the first time. Finally, the court said that the directors had the burden of demonstrating their position and that it would not sift through the record to locate evidence to support their case; the other issues were, therefore, waived.