Opinion ID: 1966617
Heading Depth: 1
Heading Rank: 5

Heading: Duty in corporate affairs.

Text: The executors, and each of them, failed to perform the duty incumbent upon them as fiduciaries to exercise that supervision and control which the stockholdings of the estate gave them over the Bright Star Battery Company. They had the power of election of sufficient directors of that corporation to assure proper management for the maintenance of stability and productivity of the corporation for the benefit of all its stockholders including the estate. The estate's primary asset consisted of the controlling interest (79.2%) of the outstanding stock in this corporation. At various times during the period in controversy each of the executors was a member of the board of directors; both Kadison and Gross were directors at the time the corporation made the foregoing gift to Barash. In addition to that matter, there were various other incidents which show neglect or avoidance of duty on the part of the executors with respect to the estate and as well to all other stockholders of the corporation. Rather than make the corporation productive (and thus make the assets of the estate productive): the executors made no effort to investigate officers' compensation although the corporation's income was declining; they appear to have permitted rentals paid by Battery to Warehouse to jump from $27,000 per year before testator's death to $39,000 per year in 1946 or 1947; they authorized increased salaries and bonuses, or failed to exercise their duty of control in this respect; the executors allowed the corporation to make large contributions to charity in 1946, 1947, 1948 (including a total of $28,000 to a single charity). Kislak testified that he approved the bonuses (to Barash, Horton and Pollak) and that the executors didn't want to butt into corporate affairs although they wanted to know what was going on. Kadison testified all three wanted Barash to be president of the Battery Company and Kislak testified that he approved of the election of Horton and Barash to the board of directors of the Battery Company in April, 1946, although he knew on March 27, 1946, that they had signed the fraudulently issued certificates of stock of the Warehouse Company, and that he approved of Pollak's election although he participated in the fraud. All the executors testified they knew this fraud had been perpetrated and that Barash, Horton and Pollack were involved therein, at the time Barash, Horton and Pollack were elected by the executors (voting the stock of the estate) to the board of directors of the Battery Company on April 2, 1946. In voting shares of stock fiduciaries are under a duty to vote in such a way as to promote the interests of the beneficiaries. 2 Scott on Trusts, sec. 193.1, p. 1047. See also 6 N.J. Practice, Wills & Administration, sec. 571, p. 579; R.S. 14:10-7 as amended by L. 1946, c. 61 ( N.J.S.A. 14:10-7); Clowes v. Miller, 60 N.J. Eq. 179, 185 ( Ch. 1900); and Fawcett v. Cooper Hospital, 131 N.J. Eq. 181, 185 ( E. & A. 1942). And where a fiduciary holds sufficient shares to control actually or substantially the conduct of the corporation he is under a duty to exercise that control for the benefit of the trust. 2 Scott on Trusts, sec. 193.2, pp. 1049, 1050. See Latorraca v. Latorraca, 132 N.J. Eq. 40 ( Ch. 1942) affirmed 133 N.J. Eq. 298 ( E. & A. 1942); Murray v. Beattie Mfg. Co., 79 N.J. Eq. 322, 336 ( Ch. 1911) reversed on other grounds, 79 N.J. Eq. 604 ( E. & A. 1912); Lister v. Weeks, 60 N.J. Eq. 215 ( Ch. 1900), affirmed 61 N.J. Eq. 675 ( E. & A. 1900); and 6 N.J. Practice, Wills & Administration, sec. 571, p. 580. Certainly it cannot be said that it was the exercise of good business judgment for these executors as representatives of the predominant stockholder (the estate) to elect as directors men known by them to have been involved in a recent stock fraud, nor may it be said with good conscience that it was the proper exercise of their fiduciary duty to this decedent's estate for the executors to vote into control of the affairs of the corporation which constituted their estate's primary asset men who were known to the executors already to have participated in a stock fraud which if successful would have deprived the estate of a substantial asset. Thus, aside from their actions from time to time in their capacity as directors of the corporation, such as voting bonuses to these same perpetrators of fraud against the estate and voting of substantial charitable contributions, while the corporation was suffering a noticeable decline in profits, these executors clearly abused the trust and confidence reposed in them by the testator and neglected or actively breached their duty to the estate and the beneficiaries thereof.