Stern v. Lucy Webb Hayes National Training School For Deaconesses And Missionaries

381 F. Supp. 1003 (1974)

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Nature of the Case

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Facts

In 1891, the Methodist Women’s Missionary Society established D for the purpose of providing health care services to the poor. The School was incorporated as a charitable, benevolent and educational institution. D built the Sibley Memorial Hospital to facilitate its charitable work. In 1956, Sibley was merged with Hahnemann Hospital. The Sibley Board of Trustees revised the corporate by-laws. The Board was to consist of 35 trustees, who were to meet at least twice each year. An Executive Committee was to represent the Board in between such meetings to open checking and savings accounts, approve Hospital Budget, renew mortgages and enter into contracts. A Finance Committee was created to review the budget and to report regularly on the amount of cash available for investment. The management of those investments was supervised by an Investment Committee. In reality, the management was handled almost exclusively by two trustee officers, Dr. Orem, the Administrator, and Ernst, the treasurer until 1968. Neither the Finance Committee nor the Investment Committee ever met or conducted business since their creation until 1971. Dr. Orem died in 1968, which obliged some of the other trustees to play a more active role in running the Hospital. The new Administrator was incompetent and Ernst made most of the financial and investment decisions. Ernest came under increasing scrutiny and Reed decided to activate the Finance and Investment Committees in 1971. Ernst died in 1972 and other trustees assumed their supervisory role over the investment policy and fiscal management. in general. Ps filed this class action alleging that the five defendant trustees and the five defendant financial institutions were involved in a conspiracy to enrich themselves at the expense of the Hospital. Ps in their class-action thus allege that Ds have been involved and accomplished in a conspiracy to enrich themselves and certain financial institutions with which they were affiliated by favoring those institutions in financial dealings with the Hospital and that they breached their fiduciary duties of care and loyalty in the management of the funds. Each named trustee held positions of responsibility with one or more of the defendant institutions. Ps claimed this was the motive and opportunity to carry out such a conspiracy. The institutions offered little or no interest on the deposited money. The Hospital maintained much of its liquid assets in savings and checking accounts rather than in Treasury bonds or investment securities. Ds offered no adequate justification and Ps failed to establish that it was the result of a conscious direction. All of the defendant trustees testified that they approved Ernst's recommendations as a matter of course, rarely if ever read the relevant details of audits critically, and generally left investment decisions to the presumed expertise of Ernst. When the Board's own investigations revealed the inadequacy of Ernst's policies, the trustees moved toward a more realistic investment program in a manner that negates the existence of a prior agreement.