Brane v. Roth

Porter Roth and other shareholders (plaintiffs) filed a lawsuit against Paul Brane and other directors (defendants) of a rural grain-elevator cooperative (co-op). The complaint alleged that the directors failed to protect the co-op’s financial position by adequately hedging in the grain market. Ninety percent of the co-op’s business was buying and selling grain, which was handled by the co-op’s manager. The directors met monthly to review reports prepared by the manager and the co-op’s bookkeeper. The co-op’s profits had been declining for a few years, and in 1979, the co-op’s certified public accountant (CPA) recommended that the directors hedge the co-op’s grain position to protect the co-op’s financial interests. The directors authorized the manager to hedge for the co-op, but only a minimal amount was hedged. The directors rarely requested additional information on the manager’s and bookkeeper’s reports and did not make any specific inquiry as to significant losses sustained in 1980. Another CPA opined that the co-op’s gross loss was primarily caused by the failure to hedge. The trial court concluded that the directors breached their fiduciary duties by hiring a manager who was inexperienced in hedging and failing to reasonably supervise him. The court also found that the directors failed to learn the fundamentals of hedging that would have allowed them to effectively direct the manager and the co-op’s hedging activities and that their gross inattention to these matters caused the co-op’s financial losses. The directors appealed.