Hunt Brothers Seek to Test Liability of Banks : Charge Plot Against Family Empire
If it were a popularity contest, both sides might lose. But the $3.6-billion lawsuit filed recently by the Hunt brothers of Dallas against 23 of the world’s biggest banks stands to be more than that.
The suit accuses the banks of deliberately undermining the Hunts’ two big oil companies with a series of maneuvers that created financial crises and aided competitors, all in a scheme to “destroy” the companies and seize control of the Hunt family empire.
It might seem like an implausibly grand scheme by the banks, and the suit has been publicly belittled by some bankers and financial analysts as a desperate stalling tactic to save the Hunts’ crumbling oil empire. In fact, one of the banks has countersued the Hunts, claiming that it had been the victim.
But lawyers who have succeeded at this sort of thing say the Hunt case is more than a stalling tactic. To them, it is a promising example of a spreading “sue the bank” legal strategy that is cropping up in the energy industry as it did in agriculture not long ago.
Variation on Other Suits
Known as lender liability, it is a variation on the more familiar types of liability lawsuits aimed against doctors, widget manufacturers and the like. And it is tailor-made for today’s Oil Patch, where the collapse in prices since last winter slashed corporate assets by half and threw substantial companies into technical default on their loans almost overnight.
Just a week before the Hunt suit was filed in federal court in Dallas, a Texas state jury handed down a verdict that could be worth $68 million to five oilmen who lost their business after an Abilene bank reneged on a promised $3-million loan to drill several oil wells. Dallas attorney Tom Thomas, who won a $19-million judgment against an El Paso bank in a noted 1982 liability case on behalf of apparel maker Farah, says he now has 15 active lender liability cases involving oil and gas companies--all filed since 1984.
“There’s nothing like past-due loans to engender interest in a lender liability case,” Thomas says.
The idea is that banks that cut off credit, call in a loan or take certain other actions that effectively damage or bankrupt a customer might be held accountable if the banks are thought to have been deceitful or acted in bad faith, especially with longtime customers.
As with other areas of the law, California apparently leads in such cases--several stemming from the financial crises faced by the state’s farmers and growers. The biggest settlement to date was a $26-million judgment last year against Bank of America, whose actions were deemed responsible for putting Sonoma County apple grower George Jewell out of business.
Another California verdict on behalf of a cotton speculator has spurred banker-sponsored legislation, which has already cleared the state Senate, amending existing law to make it more difficult to collect in certain bank liability cases.
In the Hunt case, the brothers allege a pattern of behavior by the banks dating to 1980 that had the effect of making the Hunts financially vulnerable and limiting their flexibility to deal with worsening prices in world oil markets. By this spring, the collapse in prices had thrown the Hunts--like many other oilmen--into default with their banks.
“It is going to be the lead energy case, and energy is going to be the new wave of lender liability cases,” said Santa Barbara attorney Barry Cappello, who won the Jewell case and is considered one of the stars in this field of law.
“If I represented any one of those banks,” Cappello added, “I’d be sitting down with the Hunts and trying to cut a deal. If even some of the facts alleged here are true, there is significant liability by some of the lenders.”
Thomas agrees: “In these cases, you look for something about it that hits you in the gut. Nobody can read that Hunt complaint without it hitting you in the gut.”
The suit in U.S. District Court in Dallas accuses the banks of fraud, breaches of fiduciary duties, antitrust violations and other wrongdoing. Among the defendants are California-based B of A, Security Pacific National Bank, Crocker Bank and First Interstate.
The lead banks in the credit agreements that extended $1.5 billion in loans to the Hunts are RepublicBank of Dallas and Manufacturers Hanover Trust and Bankers Trust, both of New York.
An Obvious Defense
Unlike the Hunts--who hired a public relations firm to portray their case as an action on behalf of beleaguered oilmen everywhere--the banks have generally refused to comment. But it’s not difficult to envision a defense based on the notion that people who borrow money are supposed to pay it back.
Though that idea gets understandably short shrift in the Hunt complaint, the chronology makes it clear that the lenders have restructured the debt package twice before. And in the wake of such scandals as the collapse of Penn Square Bank over careless energy lending practices in the boom years of the late 1970s, a more hard-nosed approach by the banks might be deemed prudent.
But at the core of such lawsuits is the role that a bank may have played in fostering a company’s problems--encouraging reckless borrowing by a small farmer in sunny economic times, for example, then abandoning him when the sky turns dark. How a jury would view the plight of the wealthy, presumably savvy Hunts remains to be seen.
The dispute focuses on Nelson Bunker, Herbert and Lamar Hunt, sons of the late oil wildcatter H. L. Hunt, and the family trusts that own two big oil concerns called Placid Oil and Penrod Drilling. Penrod claims to be the world’s biggest offshore driller, and Placid’s oil and gas reserves were once valued at $2 billion.
Fortune Decimated
The oil concerns are the cornerstone of what was once one of the nation’s great private fortunes--with a net worth estimated at more than $6 billion--but that has been decimated by the Hunt brothers’ failed effort to corner the world silver market in 1980 and the subsequent downward spiral in energy prices.
It was debt growing out of the Hunts’ $1-billion loss in silver that provided the springboard for the banks’ “vindictive” effort to “dismantle and ultimately to destroy” the oil companies, according to the suit.
As oil prices fell, the banks orchestrated financial crises by refusing to restructure debt until the last moment, undermined efforts by the Hunts to get financial support from other lenders and aided direct competitors of Penrod and Placid, some of which are partly owned by Hunt lenders, the suit claims.
Morgan Guaranty Trust was preparing to lend the Hunts money last January until the banks put out the word that “the Hunts don’t pay their debts,” the suit says. Morgan then “abruptly terminated” the negotiations.
By March, the collapse in oil prices had dropped the value of the Hunts’ oil below the required 150% of the outstanding debt, and they were unable to make the interest payments. Two meetings with the banks in April resulted in lenders’ demands that “would, if met, put Placid out of business,” the suit says.
Wanted Other Collateral
Among other things, the banks wanted pieces of the Hunts’ still-vast personal holdings in real estate and other ventures pledged as collateral. They also wanted part ownership of the oil concerns.
The initial complaint is slim on details, but one piece of evidence was mentioned by outside lawyers as particularly interesting: a purported letter from First City National Bank of Houston urging other Hunt lenders to “take any action necessary to preclude any advances, loans or distribution to any Hunt-related entity.”
Cappello says such a scatter-gun boycott aimed at other Hunt enterprises would link unrelated loans and is, therefore, “outrageous if it’s true. It’s what’s called in the business, ‘the squeeze.’ ” Putting that sort of proposal in writing, says a Houston lawyer with little sympathy for the Hunts, “is a stupid thing for a bank to do.”
The Hunts claim that the banks’ demands in return for restructuring the debt would drain Placid of cash and jeopardize projects in which they have already invested more than $500 million. Thus, in lender liability terms, the banks’ demands would contain the seeds of the company’s demise.
The principal project is apparently the development of the Green Canyon oil reservoir in the Gulf of Mexico, in which Placid is the majority partner.
Another element of the case is the lenders’ alleged granting of financial concessions to companies that compete with Placid and Penrod. Banks are thus in the position of “playing God,” lawyers say--deciding through their loan department which firms survive and which fail.
‘Motivated by Revenge’
Such decisions are supposed to be made independent of a competitor’s situation. But the Hunts complain that their relationships with the lenders--some of which date to the 1960s, a spokesman says--had soured after years of battle and at least some banks were “motivated by the desire for revenge.”
The Hunt case might seem larger than life, just because of the Hunts themselves and the amount of money involved. But regardless of how it turns out, lawyers say, the banks will continue to make mistakes and will increasingly pay the price as the notion of “bank malpractice” becomes familiar.
“A lot of people have never heard of it,” lawyer Thomas says. “But legally, these cases are pretty much the same. At the moment, they’re just based on hydrocarbons instead of nuts and bolts, because that’s where you’re seeing the pinch.”
