Brief Fact Summary. 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.).
Synopsis of Rule of Law. Directors of a corporation have a duty to act with honesty diligence and prudence. A director is not liable for loss or damage other than what was proximately caused by his own acts or omissions in breach of his duty.
Those principles are rigid, essential and salutary.
View Full Point of LawIssue.
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.
A director is not liable for loss or damage other than what was proximately caused by his own acts or omissions in breach of his duty. Once the option had expired, there was nothing to prevent the directors of the Company that had taken over the bonds in accordance with its agreement from selling them. Any loss that incurred after the option had expired was a result of the directors’ independent business judgment in holding them. The further loss should not be laid at the door of the improper but expired repurchase option.
The ratification by the directors is equivalent to prior acquiescence and should result in liability. The ratification prevented a possible later rescission on the ground that the directors did not authorize it.