Francis v. United Jersey Bank

432 A.2d 814 (1981)

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Nature of the Case

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Facts

Ps are trustees in the bankruptcy of Pritchard & Baird Intermediraried Corp, (Corp.) a reinsurance broker or intermediary. Reinsurance involves a contract under which one insured agrees to indemnify another for loss sustained under the latter's policy of insurance. MESSRS. Pritchard and Baird initially operated as a partnership. Later, the formed several corporate entities to carry on their brokerage activities. When the corporation in question was created, it had five directors: Pritchard, their son, and Baird and his wife. Another son became a director in 1960. The corporation issued 200 shares of a common stock. Mr. Pritchard acquired 120, his sons 15 each and Baird remained with 50. In 1964, Bairds resigned and sold their stock to the corporation. After Mr. Pritchard's death, his wife inherited 72 shares and became the largest stockholder with 48% of the stock. In 1968, one son became a president and the other executive vice president. Contrary to the industrial custom of segregating funds, Corp. commingled the funds of reinsurers and ceding companies with its own funds. President began the practice of withdrawing funds from the account in transactions identified on the corporate books 'loans.' The loans correlated with corporate profits and were repaid at the end of each year. Starting in 1970, both sons took more and more money under the guise of loans. As of January 31, 1970, the loans to president were $230,932 and to vice president $207,329. By October 1975, the year of bankruptcy, the shareholders’ loans amounted to $12,333,514.47. In December 1975, the corporation filed an involuntary petition in bankruptcy and Ps were appointed as trustees. Overcash (D) is the daughter of Lillian Pritchard and the executrix of her estate. At the time of death, Mrs. Pritchard was a director and the largest single shareholder of Pritchard & Baird. However, she was not active in the business of the corporation and knew virtually nothing of its corporate business. Because she died after the commencement of this suit, her daughter was substituted as a defendant. United Jersey bank is joined as the administrator of the estate of Charles Pritchard, who had been president, director and majority shareholder of the D Corp. This litigation focuses on payments made by Corp to sons of Mrs. and Mr. Pritchard as well as officers, directors and shareholders of the Corp. The trial court, without a jury, held that the payments were fraudulent and entered a judgment for $10,355,736.91 plus interest against the estate of Mrs. Pritchard. The trial court rejected the characterization of payments as loans because, no corporate resolution authorizing the loans was made and no note or other instrument evidencing debt existed. The designation of shareholders' loans on the balance sheet was an entry to account for the distribution of the premium and loss money to both sons. The judgment includes damages for her negligence in permitting payments from the corporation of $4,391,133.21 to one son and $5,483,799.02 to another. The trial court also entered judgment for payment of other sums plus interest: against the estate of Mrs. Pritchard for $33,000 accepted by her during her lifetime; against the estate of Mr. Pritchard for $189,194.17 paid to him during his lifetime and $168,454 for payment of taxes on his estate; and against D individually for $123,156.51 for payment to her. The Appellate Division affirmed but found that the payments were a conversion of trust funds, rather than fraudulent conveyance of the assets of the corporation. We granted certification limited to the issue of the liability of D as a director. We affirm.