Tuesday, November 15, 2011

Francis v. United Jersey Bank case brief

Francis v. United Jersey Bank
87 N.J. 15, 432 A.2d 814 (N.J. 1981)

-Pritchard & Baird was an insurance broker that handled large sums of client money.
-It was owned by Pritchard and had four directors; Pritchard, his wife, and his two sons.
-Pritchard had a habit of 'borrowing' large sums of money out of his client's accounts.
-Pritchard died.  After his death, his wife started drinking heavily and never did very much with regards to her duties as a director.
-The two sons 'borrowed' more and more money until the whole company went bankrupt.
-The trustees in bankruptcy (who represented Pritchard & Baird's creditors) sued Ms. Pritchard for breach of fiduciary duty.
-The trustees argued that Ms. Pritchard failed to keep track of what was happening in the company, and did not step in to stop her sons from looting it.
-Ms. Pritchard died during the proceedings, and it was her estate who was being sued.

-The Trial Court found for the creditors, stating that Ms. Pritchard never made the slightest efforts to discharge any of her responsibilities as director.
-The Appellate Court and the New Jersey Supreme Court affirmed.

Did Ms. Pritchard have a duty to step in to stop her sons from looting the company that she was in control of?

-Yes, she had a duty to acquire an understanding of the business and protect it from her son's looting.

-As a general rule, a director should acquire at least a rudimentary understanding of the business of the corporation.
-This includes 1.  a duty to attend meetings of the board, 2. a duty to maintain familiarity with the financial status of the corporation through a regular review of the financial statements, and 3. a duty to investigate further into matters revealed by the financial statements.
-MCBA §8.31(a)(2)(iv) states that a director is personally liable for "a sustained failure of the director to be informed about the business and affairs of the corporation, or other material failure of the director to discharge the oversight function."

-The Court found that there is no excuse of being a dummy director (i.e., someone who is only a director because of a personal connection, and not expected to know what is going on).
-The Court found that had Ms. Pritchard been performing her fiduciary duties she would have quickly detected her sons' misappropriation of funds and could have taken action before the company went bankrupt.

Course: Corporations.
Subject: Director Duties, Duty of Care.

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