## Facts

- Pritchard & Baird Intermediaries Corp. was a reinsurance intermediary that received and held large sums belonging to client insurance companies, treated as funds held in an implied trust rather than free corporate assets.
- After the death of the company’s long-time controlling figure, two sons who were officers, directors, and shareholders began taking client funds from corporate accounts for personal use without repayment.
- The misappropriations continued and grew until the company became insolvent and entered bankruptcy.
- Bankruptcy trustees sued, seeking to recover losses stemming from the sons’ withdrawals and alleging director-level misconduct.
- Lillian G. Pritchard, a director and the largest single shareholder, did not participate in corporate governance: she did not attend board meetings, review financial statements, or make inquiries into corporate affairs.
- The trustees alleged her total failure to supervise or investigate was negligent and a proximate cause of the ongoing conversion of client funds.

## Issues

1. Whether a corporate director breaches the duty of care by failing to acquire basic knowledge of the business and failing to monitor corporate finances and operations.
2. Whether such negligent nonfeasance can result in the director’s personal liability for losses caused by other directors/officers’ misappropriation of funds held for third parties.
3. Whether the director’s failure to act was a proximate cause of the losses from the misappropriations.

## Decision

- The Supreme Court of New Jersey affirmed the director’s liability for negligence.
- The Court held that directors have an affirmative obligation to be informed about the corporation’s business and financial condition and to respond to warning signs.
- The Court accepted the characterization of the withdrawals as conversion of funds held in an implied trust for clients, not merely transfers of corporate assets.
- The Court found the director’s sustained inattention was a substantial factor in allowing the misconduct to continue and thereby proximately caused the losses.

## Legal Principles

- A corporate director must acquire at least a rudimentary understanding of the corporation’s business and cannot serve as a nominal or figurehead director without performing oversight functions.
- Directors must attend meetings, review financial statements, and investigate irregularities; ignorance resulting from inattention is not a defense.
- The duty of care is measured by an objective “reasonably prudent person in like position” standard; personal limitations (age, illness, lack of business background) do not excuse wholesale nonperformance.
- If a director lacks sufficient competence to evaluate corporate affairs, the director must seek appropriate professional advice rather than remain uninformed.
- When a corporation holds property of others in a trust-like capacity, a director’s negligent failure to supervise and protect those funds can support personal liability to those whose funds were converted (asserted here through bankruptcy trustees).
- Proximate cause may be established where reasonable oversight would likely have revealed and stopped the improper withdrawals earlier.

## Conclusion

The court held that a director’s complete abdication of basic oversight duties constitutes negligence and can create personal liability when that inaction foreseeably permits continued conversion of third-party funds held by the corporation in a trust-like capacity.


Francis v. United Jersey Bank, 87 N.J. 15, 432 A.2d 814 (N.J. 1981)