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Litwin v. Allen - 25 N.Y.S.2d 667 (Sup. Ct. 1940)

Rule:

A director owes loyalty and allegiance to the company -- a loyalty that is undivided and an allegiance that is influenced in action by no consideration other than the welfare of the corporation. Any adverse interest of a director will be subjected to a scrutiny rigid and uncompromising. He may not profit at the expense of his corporation and in conflict with its rights; he may not for personal gain divert unto himself the opportunities which in equity and fairness belong to his corporation. He is required to use his independent judgment. In the discharge of his duties a director must act honestly and in good faith, but that is not enough. He must also exercise some degree of skill, prudence, and diligence.

Facts:

In consolidated actions, plaintiffs filed derivative stockholder suits against defendants for allegedly improper transactions involving a trust company in which plaintiffs owned shares. In derivative stockholder action, plaintiffs sued defendants over four allegedly improper transactions. Plaintiffs first claimed defendant officers' stock purchase of a third-party corporation for their personal benefit violated their fiduciary duties. Plaintiffs also charged defendant officers' bond acquisition on trust company's behalf constituted an improper loan to third-party corporation. Plaintiffs also claimed defendant officers negligently extended a loan to a third-party company and then improperly auctioned the loan's collateral due to improper influence from defendant banking firm. 

Issue:

(a) Was there a violation of their fiduciary duties when defendant officers purchase a third-party corporation;

(b) Was the bond acquisition improper?;

(c) Was there negligence when the defendant officers extended a loan?

Answer:

(a) No (b) Yes (c) No

Conclusion:

(a) Court held trust company had no interest in third-party corporation; thus, defendant officers had not breached their duty. The common stock purchased by the defendants did not represent in any sense a business opportunity for the defendant corporation. Having fulfilled their duty to the corporation in accordance with their best judgment, the defendant directors were not precluded from a transaction for their own account and risk.; (b) The court held that the bonds were purchased negligently. The directors who approved or participated in the bond transaction in are liable in negligence, for the difference between the amount paid for the bonds and what could have been realized therefor, if sold after the option to Alleghany Corporation. But that the applicable statute of limitations prevented recovery against three defendant officers; (c) The court followed the rule that allowed deference to business decisions, and held defendant directors properly extended the loan using information they possessed and that their auction of the loan's collateral was equitable.

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