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    Wednesday, February 20, 2008

    Beware of form bank resolutions!

    It’s not smart to trust anyone’s standard documents. Your vendor or your bank may tell you that its documents are safe because so many of their customers (buyers, borrowers, users, etc.) use them. And you may think that you can save hundreds or thousands in legal costs by not having your attorney review "standard form documents" or negotiate with the other side (especially when the other side is a bank and will charge you for the fees and expenses of its own attorneys). This can be penny-wise, but pound-foolish.

    Banks often offer to save legal expenses for our small and mid-sized clients by using standard documents from their word-processing and/or in-house legal departments. Bankers often refer to these as "LaserPro® documents," using the trade mark of a well-known bank document package. We have found that these bank documents are drafted to only protect the interests of the bank and ensure that the bank has no liability. These form documents usually do not address a borrower's concerns or issues. So, accepting these standard form documents (without an attorney's review) can put your company at risk be and can lead to unintended consequences.

    In the case Dalton Point, L.P. v. Regions Bank, Inc.1, a bank customer signed the bank-supplied form resolutions. These resolutions contained a limitation of liability that protected the bank when it honored Dalton Point's checks. Apparently, Dalton Point’s owners did not think they needed outside review of form documents for a loan transaction of more than $1 million and a new operating account with the bank.

    The court records indicate that the bookkeeper was embezzling money by using Dalton Point's checks to pay her own personal loan from the bank. Dalton Point sued the bank, claiming the bank should have realized the bookkeeper was commiting fraud. The bank argued that the terms of the form resolution protected it from liability and the court agreed. So, Dalton Point ended up with an unrecovered loss of almost $67,000.

    We understand that the expense of custom-tailored documents may not seem justified for small credit transactions. But for a borrower’s protection, those documents do need to be reviewed and appropriate changes negotiated with the bank, and in some cases replaced by documents drafted by the borrower’s attorney.

    Over the years, the attorneys at Griffith & Jacobson, LLC have represented both borrowers and banks in a great many loan transactions. With this experience we are able to efficiently identify and address the substantive legal issues that are important to both parties. Banks are generally willing to negotiate many of the terms and conditions contained in their documents (even their standard form documents) - but you have to ask. Generally, banks have been very receptive to our revisions and suggestions. We credit this positive response to the fact that we strive to be fair and balanced while protecting our client's best interests.

    So at Griffith & Jacobson, LLC, we advise our clients that — even if the bank will use its standard form documents — we should review all of the documents, including the bank-supplied account resolutions. We also suggest drafting at least the approving resolutions for the transactions, rather than adopting the bank resolutions wholesale.

    Our advice to our clients and our readers is a slight twist of an old saying:

    "Trust, but double check with your lawyers!"

    Louis Michael Bell
    Griffith & Jacobson, LLC - a Chicago business law firm
    - We know your business.

    Contact me at 312-236-8110 or lmb@gjlaw.com
    or check us out at http://www.gjlaw.com/.

    Read more details on the Dalton Point case below....

    * * * * * * * * * * ** * * * * * * * * * * ** * ** * * * * * * * * *
    In the Dalton Point case, Dalton Point had an account and a loan with Regions Bank. When Dalton Point opened the account, the signatory card was signed by a limited partner and by Dalton Point’s bookkeeper. The documents they signed and delivered to the Bank for the account included a Certificate of Resolution, which included the following:

    "RESOLVED, that all drafts and other items for the payment of money from the accounts identified shall be signed by any 1 of the following: Ronald G. Ralston, Limited Partner; Patricia H. Page, Bookkeeper."


    "RESOLVED, that the Bank is authorized to honor all drafts, checks, or other items or instructions for payment or transfer from a deposit account even though drawn, endorsed or otherwise payable to a person identified above, and whether presented for cash or for credit to the account of that person or another person, or in payment of an individual obligation of that person or another person, and the Bank need make no inquiry concerning such withdrawals or disposition of the money, items or credit given therefor."

    Over the next 48 months, Ms. Page allegedly embezzled a substantial amount of money. Accordingly to the court records, Ms. Page used company checks to pay down a personal loan from Regions Bank. She was able to do this becuase Dalton Point also had a business loan from the bank. Rather than write a company check directly to the bank in the amount of Dalton Point's monthly payment (approximately $23,100 per month), each month she wrote a company check for almost $24,000. She took this check to the bank to have it cashed and she instructed the bank teller to apply approximately $23,100 of the check towards the monthly payment due from Dalton Point and requested a check or cash for the remaining $900. The court records state that she used these funds to pay the $900 she owed on a personal loan from Regions Bank.

    When Dalton Point discovered this some time later, it sued Regions Bank for the embezzled money and interest (almost $67,000), claiming that the Bank should have noticed the fraud committed by Ms. Page. Regions Bank argued that it was protected, among other things, by the quoted language in the Certificate of Resolution. The trial court ruled in favor of Regions Bank and rejected Dalton Point’s claim, and the Georgia Court of Appeals upheld the result.

    The report of the case does not say who drafted the Certificate of Resolution, but it is similar to a number of "standard form" bank resolutions that we see from time to time. We doubt that any borrower’s lawyer would have read and accepted those resolutions, much less drafted them for a client. Dalton Point seems indeed to have been "penny-wise and pound-foolish."

    Louis Michael Bell
    Griffith & Jacobson, LLC - a Chicago business law firm
    - We know your business.

    Contact me at 312-236-8110 or lmb@gjlaw.com
    or check us out at http://www.GJlaw.com.
    ____________________________________________________ 1. Dalton Point, L.P. v. Regions Bank, Inc., 287 Ga.App. 468, 651 S.E.2d 549, decided on September 10, 2007 by the Georgia Court of Appeals.