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

Rule:

The Uniform Fiduciaries Act, D.C. Code § 21-1701 et seq., provides that banks may only be held liable for breaches of fiduciary duty of which they had actual knowledge. That Act, however, applies only to liability for check transactions, and the common law prevails in all areas where the Act does not expressly apply. The maintenance of excessive deposits does not appear to fall within any of the Act's provisions, so the principles set forth above are controlling.

Facts:

Plaintiff hospital patients were certified as a class to represent all patients in their allegations that a non-profit charitable hospital's trustees conspired to enrich themselves and certain affiliated financial institutions by favoring those institutions in financial dealings. Plaintiff class also alleged that the trustees  breached their fiduciary duties of care and loyalty in the management of the hospital's funds.

Issue:

  1. Did the non-profit hospital trustees favor financial institutions in its dealings, thereby enriching themselves and the institutions?
  2. Did the hospital trustees breach their fiduciary duties of care and loyalty in the management of the hospital’s funds?

Answer:

1) No 2) Yes

Conclusion:

The court explained that basically, the trustees were charged with mismanagement, nonmanagement and self-dealing. However, the applicable law is unsettled. The charitable corporation is a relatively new legal entity which does not fit neatly into the established common law categories of corporation and trust. As the discussion below indicates, however, the modern trend is to apply corporate rather than trust principles in determining the liability of the directors of charitable corporations, because their functions are virtually indistinguishable from those of their "pure" corporate counterparts.

The court held that there was no evidence that the trustees reached a mutual agreement to direct or encourage favoritism, despite the frequent transactions which benefited the affiliated financial institutions. Indeed, the court noted, the trustees implemented a more realistic investment program when informed of the treasurer's policies, and no conspiratorial inference could be drawn from any of their course of dealing. However, the court found, the trustees had breached their fiduciary duty to supervise the management of the hospital's investments, as demonstrated by the evidence that all of the trustees, with only one exception, were repeatedly elected to the investment committee without ever bothering to object when no meetings were called for more than 10 years, and all approved self-dealing transactions.

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