Francis v. United Jersey Bank case brief

Francis v. United Jersey Bank

87 N.J. 15 (1981) 

 

OVERVIEW

NJ Supreme Court held that corporate directors owe a duty of care to their corporation and its shareholders. The court outlined the responsibilities that arise from the duty of care.

FACTS

Pritchard & Baird Intermediaries Corporation was a reinsurance broker. The company acted as a “middle man” between insurance companies seeking to indemnify each other for insurance claims. The company had begun as a partnership co-founded by Charles Prichard, Sr. (“Charles Sr.”) but eventually became a corporation whose whose board included Lillian Pritchard (“Lillian”), William Pritchard (“William”), and Charles Pritchard, Jr. (“Charles Jr.”). Following the death of Charles Sr., Charles Jr. and William began to abuse the company’s finances by withdrawing increasing sums of money from its accounts under the guise of “shareholder loans.” Although the withdrawals created enormous capital deficits that eventually forced the company into bankruptcy, Lillian did nothing to rein in the abuse.

ISSUE

(1) Did Lillian Pritchard breach a duty of care to the corporation and its

shareholders? 

(2) If so, was the breach a proximate cause of the bankruptcy?

HOLDING

(1) Lillian Pritchard breached a duty of care to the corporation and its share-

holders.  

(2) The breach was a proximate cause of the bankruptcy.

ANALYSIS

Corporate directors owe a duty of care to the corporation andits shareholders. While the specific responsibilities vary according to the nature of the corporation, the duty of care requires directors to have at least  a rudimentary understanding of the corporation’s business as well as up-to- date knowledge of the corporation’s activities. Although a director need not personally audit the corporation’s accounts, directors should review financial statements to keep abreast of its financial situation. Therefore, a director may not excuse his failure to discharge this duty by claiming ignorance of the corporation’s state. 

 

Despite being a director of Pritchard & Baird, Lillian was entirely detached from the company’s affairs. Had she reviewed its financial statements, she would immediately have realized that Charles Jr. and William were making improper withdrawals from the company’s accounts. The obviousness of the withdrawals means that Lillian also had an obligation to attempt reining in the abuse. Her failure to intervene was therefore a proximate cause of the bankruptcy.