-P&B was an insurance broker that handled large sums of money for its clients.
-Prichard had a habit of borrowing large sums of money out of his clients accounts.
-Prichard died. His wife began drinking heavy and didn’t do much in regards to her duty as a director. Her sons borrowed money causing the company to go bankrupt.
-P argues that the wife failed to keep track of what was happening with the company and did not step in to stop her sons from looting it.)
Was Mrs. Prichard negligent in not noticing and trying to prevent the misappropriation of funds held by the corporation in an implied trust?
Yes, she was liable in negligence for the wrongdoings of her sons.
Dicussion of Holding
-Industry custom was segregation of funds.
-Funds here were commingled. All funds were deposited in a single account.
-Funding of the loans left the corporation with insufficient money to operate.
D was not active in the business of P&B and knew virtually nothing of its corporate affairs.
D was unfamiliar with the rudiments of reinsurance.
She did not pay attention to her duties as a director or to the affairs of the corporation.
Problem arises here when a third party asserts a director, because of nonfeasance, is liable for the losses caused by acts of insiders (in this case, officers directors, or shareholders.)
a. Determination of liability requires: findings that D had a duty to the clients of the corporation, that D breached that duty and that her breach was a proximate cause of their losses.
b. Directors must discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.
i. A director should acquire at least a rudimentary understanding of the business of the corporation.
ii. A director should become familiar with the fundamentals of the business in which the corporation is engaged.
iii. Lack of knowledge is not a defense.
a. If one feels that he has not had sufficient business experience to qualify him to perform the duties of a director, he should either acquire the knowledge by inquiry, or refuse to act.
b. Directors are under a continuing obligation to keep informed about the business activities of the corporation. Otherwise they may not be able to participate in the overall management of corporate affairs.
c. Needs not be a detailed inspection of day to day activities, rather a general monitoring of corporate affairs and policies.
d. Must attend board meetings regularly. (must attend meetings as a matter of practice, not every single board meeting.)
A director who is absent from a board meeting is presumed to concur in action taken on a corporate matter unless he files a dissent with the secretary of the corp. within a reasonable time of learning of such action.
e. Directors should maintain familiarity with the financial status of the corporation by a regular review of financial statements.
iv. Generally directors are immune from liability if in good faith they rely upon opinion of counsel or upon written reports setting forth financial data concerning the corporation and prepared by an independent accountant, or upon financial statements, books of account or reports of the corporation represented to them to be correct by the president, the officer of the corporation having charge of the books in account, or the person presiding at a meeting of the board.
a. Review of financial statements may give rise to duty to inquire further into matters revealed by those statements.
b. Upon discovery of an illegal course of action, a director has a duty to object and if the corp. does not correct conduct, to resign.
c. There may be more than a duty to object, and instead, duty to seek advice of counsel.
i. In some circumstances, a director is well advised to consult with regular corporate counsel at any time in which he is doubtful regarding proposed action.
d. Director may have to make threat of a suit (as in this case).
v. The relationship of a corporate director to the corporation and its stockholders if that of a fiduciary.
a. Shareholders have a right to expect that directors will exercise reasonable supervision and control over the policies and practices of a corporation.
b. The institutional integrity of a corporation depends upon the proper discharge of duties by their directors.
vi. Directors may owe a fiduciary duty to creditors (generally in insolvency).
-The court discusses that there is trust and confidence in the reinsurance industry.
-Resembled a bank rather than a small family business.
a. D’s relationship to her clients was akin to that of a director of a bank to its depositors.
b. If D had read the financial statements, she would have known that her sons were converting trust funds.
i. Negligence of director does not result in liability unless it is a proximate cause of the loss.
(The act or failure to act must be a substantial factor in producing the harm).
The court states that reinsurance brokers are encumbered with fiduciary duties owed to third parties, in other corporations, however, a director’s duty normally does not extend beyond the shareholders to third parties.
-D’s dereliction of duties was not the immediate cause, however, it was a substantial factor contributing to the loss.
Here there was more than a mere duty to reject and resign, she should have consulted with an attorney and threatened to sue.
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