Lynch v. John M. Redfield Foundation
88 Cal. Rptr. 86, 9 Cal.App.3d 293, 51 A.L.R. 3d 1284 (1970)
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Rule of Law:
Directors of a charitable corporation, acting as trustees, have a fiduciary duty under the 'prudent man' rule to invest idle funds so they are productive. Allowing a substantial amount of cash to accumulate in a non-interest-bearing account for an unreasonably long period constitutes a breach of this duty, for which the directors are jointly and severally liable for the lost income, regardless of their good faith or internal disputes.
Facts:
- The John M. Redfield Foundation was a charitable corporation governed by a three-person board of directors: Morris W. Young, Anne F. Redfield Heaver, and John M. Redfield, Jr.
- In the late 1950s, a serious dispute arose among the directors, leading to a stalemate where director Heaver refused to attend meetings or cooperate with the other two directors.
- In 1961, due to the ongoing controversy, the bank holding the Foundation's funds notified the directors it would not honor any transactions without a court order or unanimous director approval.
- From 1961 to 1966, the directors were unable to agree on distributing or investing the Foundation's funds.
- During this five-year period, dividend income continued to be deposited into the Foundation's non-interest-bearing checking account.
- The cash balance in the account grew from $4,928.47 to $47,099.64, earning no interest.
Procedural Posture:
- The California Attorney General filed a lawsuit in the trial court against The John M. Redfield Foundation and its three directors.
- The complaint sought to remove the directors and surcharge them for income lost due to mismanagement.
- Two directors, Young and Redfield, filed a cross-complaint against the third director, Heaver, for indemnity.
- The trial court found the directors acted in good faith, declined to surcharge them, but ordered the removal of director Heaver.
- The Attorney General, as plaintiff, appealed the judgment to the intermediate court of appeal, challenging only the trial court's refusal to surcharge the directors for lost income.
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Issue:
Does the failure of directors of a charitable foundation to invest accumulated income, instead allowing it to sit in a non-interest-bearing checking account for approximately five years due to an internal dispute, constitute a breach of their fiduciary duty under the prudent man investment rule?
Opinions:
Majority - Schweitzer, Acting P. J.
Yes. The directors' failure to invest the accumulated income for five years was a breach of their duty as trustees under the prudent man investment rule. Directors of a charitable corporation are held to the same standard as trustees of a private trust, which includes the duty to make trust assets productive. Allowing a substantial sum to remain idle in a non-interest-bearing account for five years is unreasonable as a matter of law. The directors' offered excuses, including their internal dispute, the bank's refusal to honor drafts, potential litigation costs, and their service without compensation, do not exonerate them from liability. Good faith is not a defense to a claim of negligence, and liability for a breach of trust is joint and several among all trustees.
Analysis:
This case firmly establishes that directors of California charitable corporations are held to the strict fiduciary standards of trustees, including the duty to prudently invest assets. It clarifies that internal gridlock or director disputes do not suspend this fundamental duty, and inaction can lead to personal liability. The court's rejection of 'good faith' as a defense for negligence serves as a significant warning to nonprofit boards, emphasizing that they can be surcharged for lost income resulting from passive mismanagement, even without any intent to harm. This precedent underscores the importance of active, diligent asset management and provides a legal basis for holding passive or feuding directors accountable for financial losses.
