Tuesday, February 26, 2013

Francis v. United Jersey Bank case brief

Francis v. United Jersey Bank case brief summary,  
87 N.J. 15

SYNOPSIS: Defendants, estates representatives of some of a corporations directors, challenged a judgment of the Superior Court, Appellate Division (New Jersey) which held that the corporate directors defendants represented were liable for negligence in failing to prevent other of the corporation's directors from misappropriating trust funds from the corporation. Plaintiffs, the trustees in bankruptcy of the corporation, sued on behalf of the corporation.

-Defendants argued that the corporate directors whom defendants represented were not liable for fellow directors' conversion of trust funds because they were not aware of it.
-Plaintiffs argued that the directors were negligent in not noticing or trying to prevent the misappropriation, and that their negligence proximately caused the resulting harm.

-The court held that the directors did have a duty to exercise ordinary care in managing the corporation.

-The court noted that ordinary care included becoming familiar with corporate business, staying informed about activities, becoming familiar with corporate financial status, and objecting to or taking means to prevent illegal activity when it was discovered.
-The court then found that the directors had breached their duty by failing to do those things, and that such negligence proximately caused plaintiffs harm.

OUTCOME: The court affirmed the judgment, holding that the directors whom defendants represented had a duty to prevent other directors from misappropriating trust funds, that they breached that duty by not taking an active role in the corporation, and as such, caused plaintiffs harm.

-A director can be personally liable, even to third parties, if they neglect to provide the ordinary care of staying current with corporate affairs as one would normally do in that position, and that neglect is the proximate cause of the damages.
-Lillian Pritchard, as a director on the Board, had a duty of care in managing the business. She did not have to know every detail of day-to-day operations, but she needed to have a baseline understanding of the finances and important activities. If she did not understand the activities, then she was obligated to consult counsel for advice. Her absence from the business did not excuse her duties. The court determined that if she did intervene in the dubious financial decisions of her sons, or at least consulted an attorney or expert, it may have prevented her sons from fleecing the company. Therefore, her lack of care was a proximate cause of the damages to the company and the third parties who relied upon the company. Because of the nature of the business (holding assets of third parties), she was liable to the third parties for any damages.-The decision makes it impossible for directors to hide their head in the sand to avoid liability. The amount of oversight required will depend on the nature of the business, so it will be very fact-specific.

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