A Virginia wine investing scheme that cost investors million of dollars four years ago has aged into a legal test of the responsibilities of coporate directors.
A Fairfax County Circuit Court jury this week is deciding whether the members of the board of a small bank can be held responsible for the bank making loans for wine that cost the bank more than $1.5 million when the wine deal went sour.
The directors of McLean Bank should be forced to pay back the bank's losses, because they were derelict in overseeing the bank's lending, contends the lawsuit filed by two stockholders, Janet L. Law and Rice Odell.
The case stems from a wine investment scheme in which some 400 investors lost upwards of $20 million when the wine they thought they were buying turned out not to exist.
Robert Dale Johnson, the McLean man who promoted the wine investments in 1974 went to federal prison for a six-year sentence after the Securities and Exchange Commission investigated his venture.
McLean Bank, which had loaned nearly $2.2 million to investors in the wine scheme, nearly collapsed when the loans could not be repaid and eventually lost $1.5 million, the lawsuit says.
The bank's president Walter P. Johnson was removed from office for approving the wine loans and late last year was indicted and pleaded guilty to embezzlement and misuse of bank funds and was sentenced to six months in federal prison.
A business acquaintence, but not a relative of the Johnson who promoted the wine investments, bank president Johnson invested in wine himself and as the bank's chief loan officer approved large uncollateralized or partly-collateralized loans to other wine investors.
Along with the bank presiden, seven of the nine board members lost their jobs, either resigning or not seeking reelection when their terms ended.
The former board members are defendants in the legal action now being heard. They are being sued in a stockholder's suit filed on behalf of all stockholders by the two plaintiffs.
The defendants include J. Michael Burry, former chairman of the bank, who is president of Coastal Industries, a real estate firm.
Co-defendants are board members William Howlett, an engineer with Union Ironworks; Henry Mackall, a Fairfax attorney; Dr. George Schreiner, a kidney specialist; Dr. Frederick M. Gross, an internist; Carl Schmitz, a wholesale and retail Exxon distributor; and Baise De Sibour, an insurance executive.
A federal audit of the bank in 1974 revealed that over about a year and a half the small made an unusually high concentration of loans to persons investing in imports of wine from Portugal and Spain.
The lawsuit charges the bank board members never established formal procedures to review the loans, never examined the loans collateral, permitted loan lending limits to be exceeded and allowed the bank's president to continue making wine loans even after he had been warned to cut back on the loans.
While the lawsuit charges of the bank directors neglected their duties, the directors contend they were merely depending on the advice and expertise of their bank president.
The issue is raised in the local courts at a time when there is a legal trend toward imposing individual liability on corporate directors for the business decisions made by the corporations they direct.
In such cases stockholders usually must prove the directors were deliberately or grossly negligent in order to recover damages. The two shareholders suing the McLean bank directors are not seeking any damages for themselves, only to force the directors to make up the bank's losses.