Litwin vs Allen

Facts. This is a stockholders derivative suit against the directors of Guaranty Trust Company, (Trust), its subsidiary
Guaranty Company of New York, (Guaranty), and J.P. Morgan & Co., (J.P.). The complaint alleges the directors breached
their duty of care when they entered into the Missouri Pacific Bond Transaction. Alleghany Corporation, (Alleghany), had
purchased certain properties the balance on which was $10,500,000 due on October 16. Alleghany needed money to make
the payment but because of certain borrowing limitations in its charter, could not borrow the money. To overcome this
limitation and to enable Alleghany to complete the purchase, Alleghany was to sell some of the securities it held. Alleghany
held debentures, which were unsecured and subordinate to other Missouri Pacific bond issues.
J.P. purchased $10 million of these bonds at par giving an option to Alleghany to buy them back within six months for
the price paid. Trust committed to participate in the bond purchase and Guaranty committed itself to Trust to take up the
bonds if Alleghany failed to exercise its option to repurchase. In October of 1929, the stock market crashed.

Issue.
Whether the directors breached a duty of care with respect to the Missouri Pacific Bond Transaction.
Whether the directors should be liable for the total loss suffered when the bonds were ultimately sold at an 81% loss.
Whether all of the directors shall be liable for the breach of the duty of care

Held.
The directors plainly failed to bestow the care which the situation demanded because the entire arrangement was so
improvident, risky unusual and unnecessary as to be contrary to the fundamental conceptions of prudent banking practice.
No. The directors should only be liable for the portion of the loss which accrued within the six month option period
No. All the directors who were present and voted at the relevant meetings are liable.

Discussion.
It is against public policy for a bank to for a bank to purchase securities and give the seller the option to buy them back at
the same price thereby incurring the entire risk of loss with no possibility of gain other than the interest derived from the
securities in the interim. Any benefit of a rise in price is assured to the seller and any risk of heavy loss s inevitably assumed
by the bank.

Barnes v. Andrews
United States District Court for the Southern District of New York
298 F. 614 (1924)

Facts
Liberty Starters Corporation (Liberty) was a New York corporation that manufactured airplanes and starters for Ford
Motor Company. Charles Andrews (defendant), a corporate director of Liberty, took office as a director of Liberty in
October 1919 and resigned in June 1920, serving for less than a year. Liberty continued business until 1921, when Earl
Barnes (plaintiff) was appointed as receiver and sold Liberty’s assets for a small profit. Barnes brought a suit in equity
against Andrews, alleging that Andrews did not give proper attention to his duties as corporate director of Liberty.
Specifically, Barnes alleged that Andrews did not pay attention to Liberty’s waste in the spending and the incompetence
of certain employees. During Andrews’s time at Liberty, there had only been two meetings for the corporate directors.
Andrews attended one meeting, but missed the other meeting because his mother died. Andrews had remained informed
about Liberty by speaking with Maynard, who was Liberty’s president and Andrew’s personal friend, but did not ask
specific questions about Liberty and instead relied on the information that Maynard gave him. A decree was entered for
Andrews, and the suit came before the federal district court on a final hearing on the bill in equity.

W/N Andrews is guilty of misprision on office. NO

 ACTIVE DUTY OF CARE. His liability is his failure in general to keep advised of the conduct of the corporate
affairs.
o No neglect in not attending 2nd meeting – adequate excuse.
o While directors are collectively managers of the company, they are not expected to interfere individually
in the actual conduct of its affairs. Yet they have an individual duty to keep themselves informed in
some details – Andrews failed.
o Did not press Maynard (Pres) for details. Otherwise he would have learned about delays.
 o Clear from his letters that he allowed himself to be carried along as a figure head.
 NO PROXIMATE CAUSE. Plaintiff must show that that the performance of defendant’s duties would have
avoided loss, and what loss it would have avoided.
o There has to be a definite loss and that it is caused by the defendant
o Else no men of sense would take an office, if the law imposed upon them a guaranty of the general
success of their companies as a penalty for any negligence.

 So basically there was misprision but acquitted because plaintiff must further show what loss (not just
conjectures) since this cause of action rests upon a tort of omission as though it has rested upon a positive act.
 Dismissed.

Bates v. Dresser
Posted on April 17, 2014 | Business Law | Tags: Business Law Case Briefs
.entry-meta
FACTS: Dresser (Defendant) was the president of a small bank in Cambridge. The bank had only a few employees, and
defendant supervised all the work that was done. One of the employees, Coleman, was promoted from messenger to
bookkeeper in 1904. From 1904 until 1907, there were several small shortages in the bank and indications that an employee
was stealing. There was no indication, however, that Coleman was dishonest. In 1907, Coleman began using his access
to the books to cover up the thefts he was making. He did this by altering the records in such a way that the only way he
could be caught was to examine the deposit record of all the deposits. During this time, defendant had several indications
that someone at the bank was a thief. He never attempted to ascertain who the thief was or to examine the books, even
though he had the opportunity to do so.
ISSUE: Did the failure to take affirmative action to discover the thief amount to a breach of duty to the corporation?
HOLDING: Yes, as far as the president is concerned, but not regarding the directors. The directors acted reasonably
by relying on the information given to them. They had no reason to believe that there were any irregularities in the bank
records. Dresser’s position was different. He was in the bank daily. He had access to the books at all times. He
knew of shortages and apparent unexplained declines in deposits , yet he failed to make any attempt to discover
the reasons behind these peculiar events. The continued losses were his fault b/c the warnings that he had should
have led him to investigate. Had he investigated, the losses may have been eliminated b/c he may have discovered the
reason behind them. Dresser, as president, was much closer to the operation of the bank than the directors. He
was there every day, and he supervised the actual operation of the bank. This the directors didn’t do; therefore, Dresser’s
position exposed him to the warning signs, while the directors were not exposed and, therefore, he was
personally liable while the directors were not.

The question of the liability of the directors in this case is the question whether they neglected their duty by accepting the
cashier's statement of liabilities and failing to inspect the depositors' ledger.

Strong vs Repide

"Special Facts or Special Circumstances"

In 1909, the Supreme Court in Strong v. Repide gave impetus to the trend allowing recovery by plaintiffs. Strong v. Repide
was an insider trading case arising from the sale of stock in the Philippine Sugar Estates Development Company to one
of the directors of the company. The defendant, while negotiating the purchase of the plaintiff's stock, was
simultaneously negotiating the sale of the corporate land assets to the Philippine government.
The defendant took extraordinary efforts to conceal the information about the negotiations. As a result, the purchaser
was able to obtain the stock from the stockholder for about one-tenth of its actual value. In a decision written by Justice
Peckham, the Supreme Court refused to follow either the majority or minority rule, instead adopting a third approach
holding that, under the particular facts of the case,
8"the law would indeed be impotent if the sale could not be set aside or the defendant case in damages for his fraud."(6)
This "special facts or special circumstances" rule meant that although directors generally had no duty to disclose material
facts when trading with shareholders, as the majority rule held, a duty might arise where there were special
circumstances, such as concealment of the defendant-purchaser's identity (the corporate officer had used an agent go-
between to avoid detection of his actions by the seller here) and a failure to disclose significant facts that materially
affected the price of the stock.
Over the next twenty years, state courts that continued to follow the majority rule paid deference to the special
circumstances rule in insider trading cases. States used the three theories as they developed their own unique approaches
to insider trading regulation. But neither the special circumstances nor the minority rules applied to stock transactions
involving impersonal or non-face-to-face trades. During that time, the stock market evolved into a national market where
the majority of trades were impersonal, with sellers and buyers having little or no contact with one another.