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.

 

A.P. Smith Manufacturing Co. v. Barlow case brief

A.P. Smith Manufacturing Co. v. Barlow

13 N.J. 145 (1953) 

 

OVERVIEW

The New Jersey Supreme Court held that a corporation may make donations

to the public good.

FACTS

A.P. Smith Manufacturing Company made a donation to Princeton University. According to the president of the company, the donation was “good” business” because it helped to produce an educated citizenry from which the company could hire. The president further stated that such donations were a “reasonable and justified public expectation.” The company’s shareholders sued on the ground that the company’s charter allowed no such donations.

ISSUE

May a corporation make donations for the public good?

HOLDING

A corporation may make donations for the public good.

REASONING

The realities of the twentieth century have driven courts to

construe corporate powers more and more broadly. The original restrictions on corporate powers developed in the nineteenth century, when wealth was concentrated in private hands rather than corporations. As corporations became more powerful, new legislation allowed them to donate within broad limits. Since nothing suggests that the donation was made to a pet charity, the donation is valid