## Facts

- Patients of Sibley Memorial Hospital brought a class action challenging the hospital’s financial management and investment practices.
- The hospital was operated as a District of Columbia nonprofit charitable corporation by the Lucy Webb Hayes National Training School for Deaconesses and Missionaries.
- The hospital’s charter contemplated a large board with responsibility for financial matters, but meaningful financial oversight by the board and committees was largely absent for years.
- From the early 1950s to 1968, two trustees effectively controlled major financial decisions; finance and investment committees reportedly did not meet for extended periods.
- The board received annual audits but did not meaningfully review or act on audit information concerning investments and related practices.
- Several trustees were affiliated with banks and other financial institutions used by the hospital for deposits and other transactions.
- The hospital maintained substantial funds in non-interest-bearing accounts and entered transactions with institutions affiliated with trustees, often without systematic comparison of alternatives.
- Plaintiffs alleged (i) breaches of fiduciary duties of care and loyalty through mismanagement, nonmanagement, and self-dealing, and (ii) a conspiracy to benefit trustees and affiliated institutions.
- After a non-jury trial, claims against the remaining financial institutions were dismissed at the close of plaintiffs’ case; the merits opinion principally addressed fiduciary-duty claims against remaining trustees and the hospital.

## Issues

1. What standard of care governs trustees/directors of a nonprofit charitable corporation, and whether prolonged nonmanagement of investments breaches that duty.
2. Whether trustees breach the duty of loyalty by permitting transactions with institutions in which they have interests without adequate disclosure and fair decision-making.
3. Whether the evidence established a conspiracy among trustees and financial institutions to enrich themselves at the hospital’s expense.

## Decision

- The court applied a gross-negligence standard to trustees/directors of a charitable nonprofit corporation, rather than a simple-negligence trust standard.
- The court found trustees breached fiduciary obligations by failing to exercise general supervision over the hospital’s investments and financial affairs.
- The court held delegation of investment responsibilities is permissible only if trustees maintain effective supervisory oversight; here, delegation became abdication.
- The court held conflict-of-interest transactions are not per se prohibited, but require full disclosure and fair dealing; certain trustees violated the duty of loyalty by allowing undisclosed related-institution transactions.
- The court rejected the contention that trustees and institutions engaged in a proven conspiracy to enrich themselves, and dismissed claims against the remaining financial institutions at the close of plaintiffs’ case.

## Legal Principles

- Trustees/directors of charitable nonprofit corporations must exercise general supervision over investment and financial decisions and may be liable for grossly negligent nonmanagement.
- Trustees may delegate day-to-day investment tasks, but cannot abdicate oversight; they must implement reporting, review, and governance structures sufficient to supervise delegated authority.
- Transactions involving a trustee’s affiliated institution are not automatically void, but require full disclosure of the interest and informed, fair decision-making on behalf of the institution.
- A conflict-of-interest breach may be found where trustees knowingly permit related-party dealings without disclosure or without fair consideration of available alternatives.
- Allegations of conspiracy require proof of an agreement or concerted plan; favoritism or poor governance alone does not establish conspiracy.

## Conclusion

The court imposed fiduciary liability on nonprofit hospital trustees for grossly negligent nonmanagement and for undisclosed conflicts in dealings with trustee-affiliated financial institutions, while concluding that the evidence did not prove a conspiracy to enrich trustees or the institutions involved.


Stern v. Lucy Webb Hayes Nat’l Training Sch. for Deaconesses & Missionaries, 381 F. Supp. 1003 (D.D.C. 1974)