Stern v. Lucy Webb Hayes National Training School for Deaconesses & Missionaries
1974 U.S. Dist. LEXIS 7380, 381 F.Supp. 1003 (1974)
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Rule of Law:
Directors of a non-profit charitable corporation are held to a corporate standard of care and owe a fiduciary duty to the corporation. This duty of care requires directors to use ordinary and reasonable care in the performance of their duties, including supervising the management of the corporation's investments, while the duty of loyalty requires full disclosure of any conflicting interests and abstention from voting on or influencing self-dealing transactions.
Facts:
- Sibley Memorial Hospital is a non-profit charitable corporation governed by a Board of Trustees.
- The hospital's bylaws created Finance and Investment Committees to oversee fiscal matters, but from their creation in 1960 until 1971, these committees never held a single meeting.
- For nearly two decades, the hospital's Treasurer, Mr. Ernst, exercised almost exclusive control over Sibley's financial and investment decisions with only cursory supervision from the Board or its Executive Committee.
- Mr. Ernst maintained substantial hospital funds, at times exceeding $1 million, in non-interest-bearing or low-interest checking and savings accounts.
- A significant portion of these funds were deposited in financial institutions where some defendant trustees also served as officers or directors.
- On the advice of the Executive Committee, the Board renewed a multi-million dollar mortgage with a syndicate of local financial institutions that had interlocking directorships with the hospital.
- The Board also approved an investment advisory agreement with Ferris & Co., a firm whose Chairman and principal stockholder, Mr. Ferris, was also a Sibley trustee and a member of the Investment Committee that recommended the agreement.
Procedural Posture:
- Plaintiffs, a certified class of patients, filed a class-action lawsuit against five trustees of Sibley Memorial Hospital, several financial institutions, and the hospital itself in the U.S. District Court for the District of Columbia (a trial court).
- The complaint alleged that the defendants conspired to enrich themselves and breached their fiduciary duties of care and loyalty.
- At the close of the plaintiffs' case, the court dismissed the complaint against all defendant financial institutions.
- The case proceeded to a full trial against the remaining five individual defendant trustees on the claims of conspiracy and breach of fiduciary duty.
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Issue:
Do the trustees of a non-profit charitable hospital breach their fiduciary duties of care and loyalty by failing to supervise the hospital's fiscal management and by approving transactions with financial institutions with which they have interlocking directorships?
Opinions:
Majority - Gesell, J.
Yes, the trustees of a non-profit charitable hospital breach their fiduciary duties of care and loyalty when they fail to supervise hospital investments and engage in self-dealing. Directors of a charitable corporation are held to the corporate standard of care, requiring them to exercise ordinary and reasonable care, rather than the stricter standard applied to trustees. The defendant trustees breached their duty of care by completely abdicating their supervisory role over the hospital's finances. For over a decade, they failed to ensure that the Investment and Finance Committees met, did not diligently review audits, and allowed the hospital's Treasurer to manage millions of dollars in assets without oversight, resulting in the maintenance of excessive, low-yield deposits. The trustees also breached their duty of loyalty by approving transactions with entities in which they had a personal interest (interlocking directorships) without full disclosure and by actively participating in and voting on these self-dealing transactions. Although the court found no evidence of a conspiracy or personal profiteering, these failures constituted serious breaches of their fiduciary responsibilities. However, the defendant financial institutions were not held liable, as they lacked actual or constructive knowledge that the transactions constituted a breach of the trustees' duties.
Analysis:
This case is significant for establishing that directors of non-profit charitable corporations in the District of Columbia are governed by the corporate standard of ordinary and reasonable care, not the stricter fiduciary standard applicable to trustees of a trust. It clarifies that this standard, while less stringent, is not a license for passivity; directors have an affirmative duty to supervise corporate affairs and cannot abdicate that responsibility to officers or committees. The opinion provides a clear framework for analyzing both the duty of care (nonmanagement) and the duty of loyalty (self-dealing), emphasizing that directors must remain informed and engaged, and must disclose conflicts and abstain from voting on conflicted transactions. The court's choice of remedy—an injunction mandating structural and procedural reforms rather than damages or removal—highlights a judicial preference for corrective over punitive measures in cases of non-fraudulent breach of duty in the non-profit context.
