Stewart G. Pollock

“ The distinguishing circumstances in regard to banks and other corporations holding trust funds is that the depositor or beneficiary can reasonably expect the director to act with ordinary prudence concerning the funds held in a fiduciary capacity. Thus, recognition of a duty of a director to those for whom a corporation holds funds in trust may be viewed as another application of the general rule that a director's duty is that of an ordinary prudent person under the circumstances. ”

“ Whether in other situations a director has a duty to do more than protest and resign is best left to case-by-case determinations. In this case, we are satisfied that there was a duty to do more than object and resign. Consequently, we find that Mrs. Pritchard's negligence was a proximate cause of the misappropriations.
To conclude, by virtue of her office, Mrs. Pritchard had the power to prevent the losses sustained by the clients of Pritchard & Baird. With power comes responsibility. She had a duty to deter the depredation of the other insiders, her sons. ”

“ Nonetheless, a close corporation may, because of the nature of its business, be affected with a public interest. For example, the stock of a bank may be closely held, but because of the nature of banking the directors would be subject to greater liability than those of another close corporation. Even in a small corporation, a director is held to the standard of that degree of care that an ordinarily prudent director would [NJ36] use under the circumstances. ”

“ One New Jersey case recognized the duty of a bank director to seek counsel where doubt existed about the meaning of the bank charter. Williams v. McKay, supra, 46 N.J.Eq. at 60. The duty to seek the assistance of counsel can extend to areas other than the interpretation of corporation instruments. Modern corporate practice recognizes that on occasion a director should seek outside advice. A director may require legal advice concerning the propriety of his or her own conduct, the conduct of other officers and directors or the conduct of the corporation. ”

“ In the opinion, Vice Chancellor Pitney explained that bank depositors have a right to
rely upon the character of the directors and officers [and upon the representation] that they will perform their sworn duty to manage the affairs of the bank according to law and devote to its affairs the same diligent attention which ordinary, prudent, diligent men pay to their own affairs ”

“ A director's duty of care does not exist in the abstract, but must be considered in relation to specific obligees. In general, the relationship of a corporate director to the corporation and its stockholders is that of a fiduciary. Whitfield v. Kern, 122 N.J.Eq. 332, 341 (E. & A. 1937) . Shareholders have a right to expect that directors will exercise reasonable supervision and control over the policies and practices of a corporation. The institutional integrity of a corporation depends upon the proper discharge by directors of those duties. ”

“ When a loss occurs, a reinsurer pays money due a ceding company to the broker, who then transmits it to the ceding company.
The reinsurance business was described by an expert at trial as having "a magic aura around it of dignity and quality and integrity." A telephone call which might be confirmed by a handwritten memorandum is sufficient to create a reinsurance obligation. Though separate bank accounts are not maintained [NJ23] for each treaty, the industry practice is to segregate the insurance funds from the broker's general accounts. ”

“ Because directors are bound to exercise ordinary care, they cannot set up as a defense lack of the knowledge needed to exercise the requisite degree of care. 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." Ibid.
Directors are under a continuing obligation to keep informed about the activities of the corporation. ”

“ Although specific duties in a given case can be determined only after consideration of all of the circumstances, the standard of ordinary care is the wellspring from which those more specific duties flow. ”

“ Second, the nature of the reinsurance business distinguishes it from most other commercial activities in that reinsurance brokers are encumbered by fiduciary duties owed to third parties. In other corporations, a director's duty normally does not extend beyond the shareholders to third parties.
In this case, the scope of Mrs. Pritchard's duties was determined by the precarious financial condition of Pritchard & Baird, its fiduciary relationship to its clients and the implied trust in which it held their funds. ”

“ But when a business fails from general mismanagement, business incapacity, or bad judgment, how is it possible to say that a single director could have made the company successful, or how much in dollars he could have saved? [Id. at 616-617]
Pointing out the absence of proof of proximate cause between defendant's negligence and the company's insolvency, Judge Hand also wrote:
[NJ42] The plaintiff must, however, go further than to show that [the director] should have been more active in his duties. ”

“ The New Jersey Business Corporation Act, which took effect on January 1, 1969, was a comprehensive revision of the statutes relating to business corporations. One section, N.J.S.A. 14A:6-14, concerning a director's general obligation had no counterpart in the old Act. That section makes it incumbent upon directors to
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. ”

“ III Individual liability of a corporate director for acts of the corporation is a prickly problem. Generally directors are accorded broad immunity and are not insurers of corporate activities. The problem is particularly nettlesome when a third party asserts that a director, because of nonfeasance, is liable for losses caused by acts of insiders, who in this case were officers, directors and shareholders. ”

“ With certain corporations, however, directors are seemed to owe a duty to creditors and other third parties even when the corporation is solvent. Although depositors of a bank are considered in some respects to be creditors, courts have recognized that directors may owe them a fiduciary duty. See Campbell, supra, 62 N.J.Eq. at 406-407. Directors of nonbanking corporations may owe a similar duty when the corporation holds funds of others in trust. ”

“ Cases involving nonfeasance present a much more difficult causation question than those in which the director has committed an affirmative act of negligence leading to the loss. Analysis in cases of negligent omissions calls for determination of the reasonable steps a director should have taken and whether that course of action would have averted the loss.
Usually a director can absolve himself from liability by informing the other directors of the impropriety and voting for a proper course of action. ”

“ Analysis of proximate cause is especially difficult in a corporate context where the allegation is that nonfeasance of a director is a proximate cause of damage to a third party. [NJ45] Where a case involves nonfeasance, no one can say "with absolute certainty what would have occurred if the defendant had acted otherwise." Prosser, supra, § 41 at 242. Nonetheless, where it is reasonable to conclude that the failure to act would produce a particular result and that result has followed, causation may be inferred. ”

“ The balance sheets for 1970-1975, however, showed an excess of assets over liabilities. This result was achieved by designating the misappropriated funds as "shareholders' loans" and listing them as assets offsetting the deficits. Although the withdrawal of the funds resulted in an obligation of repayment to Pritchard & Baird, the more significant consideration is that the "loans" represented a massive misappropriation of money belonging to the clients of the corporation. ”

“ Dyson, "The Director's Liability for Negligence," 40 Ind.L.J. 341, 365 (1965) . Conversely, .a director who votes for or concurs in certain actions may be "liable to the corporation for the benefit of its creditors or shareholders, to the extent of any injuries suffered by such persons, respectively, as a result of any such action." N.J.S.A. 14A:6-12 (Supp.1981-1982) . A director who is present at a board meeting is presumed to concur in corporate action taken at the meeting unless his dissent is entered in the minutes of the meeting or filed promptly after adjournment. ”

“ The designation of "shareholders' loans" on the balance sheet was an entry to account for the distribution of the premium and loss money to Charles, Sr., Charles, Jr. and William. As the trial court found, the [A819] entry was part of a "woefully inadequate and highly dangerous bookkeeping system." 162 N.J. Super. at 363.
The "loans" to Charles, Jr. and William far exceeded their salaries and financial resources. If the payments to Charles, Jr. and William had been treated as dividends or compensation, then the balance sheets would have shown an excess of liabilities over assets. ”

“ Gould, supra, 223 N.Y. at 111-117, 119 N.E. at 240-241 (the fact that bank director never attended board meetings or acquainted himself with bank's business or methods held to be no defense, as a matter of law, to responsibility for speculative loans made by the president and acquiesced in by other directors) . Thus, all directors are responsible for managing the [A824] business and affairs of the corporation. [NJ35] N.J.S.A. 14A:6-1 (Supp.1981-1982) ; 1 G. Hornstein, Corporation Law and Practice § 431 at 525 (1959) . ”