The primary issue on this appeal is whether a corporate director is personally liable in negligence for the failure to prevent the misappropriation of trust funds by other directors who were also officers and shareholders of the corporation.

Plaintiffs are trustees in bankruptcy of Pritchard & Baird Intermediaries Corp. (Pritchard & Baird), a reinsurance broker or intermediary. Defendant Lillian P. Overcash is the daughter of Lillian G. Pritchard and the executrix of her estate. At the time of her death, Mrs. Pritchard was a director and the largest single shareholder of Pritchard & Baird. Because Mrs. Pritchard died after the institution of suit but before trial, her executrix was substituted as a defendant. United Jersey Bank is joined as the administrator of the estate of Charles Pritchard, Sr., who had been president, director and majority shareholder of Pritchard & Baird.

This litigation focuses on payments made by Pritchard & Baird to Charles Pritchard, Jr. and William Pritchard, who were sons of Mr. and Mrs. Charles Pritchard, Sr., as well as officers, directors and shareholders of the corporation. Claims against Charles, Jr. and William are being pursued in bankruptcy proceedings against them.

The initial question is whether Mrs. Pritchard was negligent in not noticing and trying to prevent the misappropriation of funds held by the corporation in an implied trust. A further question is whether her negligence was the proximate cause of the plaintiffs' losses. Both lower courts found that she was liable in negligence for the losses caused by the wrongdoing of Charles, Jr. and William. We affirm.

The matrix for our decision is the customs and practices of the reinsurance industry and the role of Pritchard & Baird as a reinsurance broker. Reinsurance involves a contract under which one insurer agrees to indemnify another for loss sustained under the latter's policy of insurance. Insurance companies that insure against losses arising out of fire or other casualty seek at times to minimize their exposure by sharing risks with other insurance companies. Thus, when the face amount of a policy is comparatively large, the company may enlist one or more insurers to participate in that risk. Similarly, an insurance company's loss potential and overall exposure may be reduced by reinsuring a part of an entire class of policies (e. g., 25% of all of its fire insurance policies). The selling insurance company is known as a ceding company. The entity that assumes the obligation is designated as the reinsurer.

The reinsurance broker arranges the contract between the ceding company and the reinsurer. In accordance with industry custom before the Pritchard & Baird bankruptcy, the reinsurance contract or treaty did not specify the rights and duties of the broker. Typically, the ceding company communicates to the broker the details concerning the risk. The broker negotiates the sale of portions of the risk to the reinsurers. In most instances, the ceding company and the reinsurer do not communicate with each other, but rely upon the reinsurance broker. The ceding company pays premiums due a reinsurer to the broker, who deducts his commission and transmits the balance to the appropriate reinsurer. When a loss occurs, a reinsurer pays money due a ceding company to the broker, who then transmits it to the ceding company. #p#分页标题#e#

The reinsurance business was described by an expert at trial as having “a magic aura around it of dignity and quality and integrity.” A telephone call which might be confirmed by a handwritten memorandum is sufficient to create a reinsurance obligation. Though separate bank accounts are not maintained for each treaty, the industry practice is to segregate the insurance funds from the broker's general accounts. Thus, the insurance fund accounts would contain the identifiable amounts for transmittal to either the reinsurer or the ceder. The expert stated that in general three kinds of checks may be drawn on this account: checks payable to reinsurers as premiums, checks payable to ceders as loss payments and checks payable to the brokers as commissions.

Charles Pritchard, Sr. was the chief executive and controlled the business in the years following Baird's withdrawal. Beginning in 1966, he gradually relinquished control over the operations of the corporation. In 1968, Charles, Jr. became president and William became executive vice president. Charles, Sr. apparently became ill in 1971 and during the last year and a half of his life was not involved in the affairs of the business. He continued, however, to serve as a director until his death on December 10, 1973. Notwithstanding the presence of Charles, Sr. on the board until his death in 1973, Charles, Jr. dominated the management of the corporation and the board from 1968 until the bankruptcy in 1975. Lillian Pritchard inherited 72 of her husband's 120 shares in Pritchard & Baird, thereby becoming the largest shareholder in the corporation with 48% of the stock.

Contrary to the industry custom of segregating funds, Pritchard & Baird commingled the funds of reinsurers and ceding companies with its own funds. All monies (including commissions, premiums and loss monies) were deposited in a single account. Charles, Sr. began the practice of withdrawing funds from the commingled account in transactions identified on the corporate books as “loans.” As long as Charles, Sr. controlled the corporation, the “loans” correlated with corporate profits and were repaid at the end of each year. Starting in 1970, however, Charles, Jr. and William begin to siphon ever-increasing sums from the corporation under the guise of loans. By October 1975, the year of bankruptcy, the “shareholders' loans” had metastasized to a total of $12,333,514.47.

The funding of the “loans” left the corporation with insufficient money to operate. Pritchard & Baird could defer payment on accounts payable because its clients allowed a grace period, generally 30 to 90 days, before the payment was due. During this period, Pritchard & Baird used the funds entrusted to it as a “float” to pay current accounts payable. By recourse to the funds of its clients, Pritchard & Baird not only paid its trade debts, but also funded the payments to Charles, Jr. and William. Thus, Pritchard & Baird was able to meet its obligations as they came due only through the use of clients' funds. #p#分页标题#e#

Mrs. Pritchard was not active in the business of Pritchard & Baird and knew virtually nothing of its corporate affairs. She briefly visited the corporate offices in Morristown on only one occasion, and she never read or obtained the annual financial statements. She was unfamiliar with the rudiments of reinsurance and made no effort to assure that the policies and practices of the corporation, particularly pertaining to the withdrawal of funds, complied with industry custom or relevant law. Although her husband had warned her that Charles, Jr. would “take the shirt off my back,” Mrs. Pritchard did not pay any attention to her duties as a director or to the affairs of the corporation.

After her husband died in December 1973, Mrs. Pritchard became incapacitated and was bedridden for a six-month period. She became listless at this time and started to drink rather heavily. Her physical condition**820 deteriorated, and in 1978 she died. The trial court rejected testimony seeking to exonerate her because she “was old, was grief-stricken at the loss of her husband, sometimes consumed too much alcohol and was psychologically overborne by her sons.” 162 N.J.Super. at 371, 392 A.2d 1233. That court found that she was competent to act and that the reason Mrs. Pritchard never knew what her sons “were doing was because she never made the slightest effort to discharge any of her responsibilities as a director of Pritchard & Baird.” 162 N.J.Super. at 372, 392 A.2d 1233.

Individual liability of a corporate director for acts of the corporation is a prickly problem. Generally directors are accorded broad immunity and are not insurers of corporate activities. The problem is particularly nettlesome when a third party asserts that a director, because of nonfeasance, is liable for losses caused by acts of insiders, who in this case were officers, directors and shareholders. Determination of the liability of Mrs. Pritchard requires findings that she had a duty to the clients of Pritchard & Baird, that she breached that duty and that her breach was a proximate cause of their losses.

The New Jersey Business Corporation Act, which took effect on January 1, 1969, was a comprehensive revision of the statutes relating to business corporations. One section, N.J.S.A. 14A:6-14, concerning a director's general obligation makes it incumbent upon directors to

discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions. (N.J.S.A. 14A:6-14)

Because N.J.S.A. 14A:6-14 is modeled in part upon section 717 of the New York statute, N.Y.Bus.Corp. Law s 717 (McKinney), we consider also the law of New York in interpreting the New Jersey statute.

Prior to the enactment of section 717, the New York courts, like those of New Jersey, had espoused the principle that directors owed that degree of care that a businessman of ordinary prudence would exercise in the management of his own affairs. In addition to requiring that directors act honestly and in good faith, the New York courts recognized that the nature and extent of reasonable care depended upon the type of corporation, its size and financial resources. Thus, a bank director was held to stricter accountability than the director of an ordinary business. #p#分页标题#e#

As a general rule, a director should acquire at least a rudimentary understanding of the business of the corporation. Accordingly, a director should become familiar**822 with the fundamentals of the business in which the corporation is engaged. Campbell, supra, 62 N.J.Eq. at 416, 50 A. 120 Because directors are bound to exercise ordinary care, they cannot set up as a defense lack of the knowledge needed to exercise the requisite degree of care. If one “feels that he has not had sufficient business experience to qualify him to perform the duties of a director, he should either acquire the knowledge by inquiry, or refuse to act.” Ibid.

Directors are under a continuing obligation to keep informed about the activities of the corporation. Otherwise, they may not be able to participate in the overall management of corporate affairs. Directors may not shut their eyes to corporate misconduct and then claim that because they did not see the misconduct, they did not have a duty to look. The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect.

Directorial management does not require a detailed inspection of day-to-day activities, but rather a general monitoring of corporate affairs and policies.

While directors are not required to audit corporate books, they should maintain familiarity with the financial status of the corporation by a regular review of financial statements.

Of some relevance in this case is the circumstance that the financial records disclose the “shareholders' loans”. Generally directors are immune from liability if, in good faith,

they rely upon the opinion of counsel for the corporation or upon written reports setting forth financial data concerning the corporation and prepared by an independent public accountant or certified public accountant or firm of such accountants or upon financial statements, books of account or reports of the corporation represented to them to be correct by the president, the officer of the corporation having charge of its books of account, or the person presiding at a meeting of the board. (N.J.S.A. 14A:6-14)

The review of financial statements, however, may give rise to a duty to inquire further into matters revealed by those statements. Upon discovery of an illegal course of action, a director has a duty to object and, if the corporation does not correct the conduct, to resign.

In certain circumstances, the fulfillment of the duty of a director may call for more than mere objection and resignation. Sometimes a director may be required to seek the advice of counsel. A director may have a duty to take reasonable means to prevent illegal conduct by co-directors; in any appropriate case, this may include threat of suit..

A director's duty of care does not exist in the abstract, but must be considered in relation to specific obligees. In general, the relationship of a corporate director to the corporation and its stockholders is that of a fiduciary. Shareholders have a right to expect that directors will exercise reasonable supervision and control over the policies and practices of a corporation. The institutional integrity of a corporation depends upon the proper discharge by directors of those duties. #p#分页标题#e#

While directors may owe a fiduciary duty to creditors also, that obligation generally has not been recognized in the absence of insolvency. With certain corporations, however, directors are seemed to owe a duty to creditors and other third parties even when the corporation is solvent. Although depositors of a bank are considered in some respects to be creditors, courts have recognized that directors may owe them a fiduciary duty. Directors of nonbanking corporations may owe a similar duty when the corporation holds funds of others in trust.

The most striking circumstances affecting Mrs. Pritchard's duty as a director are the character of the reinsurance industry, the nature of the misappropriated funds and the financial condition of Pritchard & Baird. The hallmark of the reinsurance industry has been the unqualified trust and confidence reposed by ceding companies and reinsurers in reinsurance brokers. Those companies entrust money to reinsurance intermediaries with the justifiable expectation that the funds will be transmitted to the appropriate parties. Consequently, the companies could have assumed rightfully that Mrs. Pritchard, as a director of a reinsurance brokerage corporation, would not sanction the comingling and the conversion of loss and premium funds for the personal use of the principals of Pritchard & Baird.

As a reinsurance broker, Pritchard & Baird received annually as a fiduciary millions of dollars of clients' money which it was under a duty to segregate. [FN4] To this extent, it resembled a bank rather than a small family business. Accordingly, Mrs. Pritchard's relationship to the clientele of Pritchard & Baird was akin to that of a director of a bank to its depositors. All parties agree that Pritchard & Baird held the misappropriated funds in an implied trust. That trust relationship gave rise to a fiduciary duty to guard the funds with fidelity and good faith.

As a director of a substantial reinsurance brokerage corporation, she should have known that it received annually millions of dollars of loss and premium funds which it held in trust for ceding and reinsurance companies. Mrs. Pritchard should have obtained and read the annual statements of financial condition of Pritchard & Baird. Although she had a right to rely upon financial statements prepared in accordance with N.J.S.A. 14A:6-14, such reliance would not excuse her conduct. The reason is that those statements disclosed on their face the misappropriation of trust funds.

From those statements, she should have realized that, as of January 31, 1970, her sons were withdrawing substantial trust funds under the guise of “Shareholders' Loans.” The financial statements for each fiscal year commencing with that of January*39 31, 1970, disclosed that the working capital deficits and the “loans” were escalating in tandem. Detecting a misappropriation of funds would not have required special expertise or extraordinary diligence; a cursory reading of the financial statements would have revealed the pillage. Thus, if Mrs. Pritchard had read the financial statements, she would have known that her sons were converting trust funds. When financial statements demonstrate that insiders are bleeding a corporation to death, a director should notice and try to stanch the flow of blood. #p#分页标题#e#

In summary, Mrs. Pritchard was charged with the obligation of basic knowledge and supervision of the business of Pritchard & Baird. Under the circumstances, this obligation included reading and understanding financial statements, and making reasonable attempts at detection and prevention of the illegal conduct of other officers and directors. She had a duty to protect the clients of Pritchard & Baird against policies and practices that would result in the misappropriation of money they had entrusted to the corporation. She breached that duty.

Nonetheless, the negligence of Mrs. Pritchard does not result in liability unless it is a proximate cause of the loss. Analysis of proximate cause requires an initial determination of cause-in-fact. Causation-in-fact calls for a finding that the defendant's act or omission was a necessary antecedent of the loss, i. e.., that if the defendant had observed his or her duty of care, the loss would not have occurred. Further, the plaintiff has the burden of establishing the amount of the loss or damages caused by the negligence of the defendant.

Cases involving nonfeasance present a much more difficult causation question than those in which the director has committed an affirmative act of negligence leading to the loss. Analysis in cases of negligent omissions calls for determination of the reasonable steps a director should have taken and whether that course of action would have averted the loss.

Usually a director can absolve himself from liability by informing the other directors of the impropriety and voting for a proper course of action. Conversely, a director who votes for or concurs in certain actions may be “liable to the corporation for the benefit of its creditors or shareholders, to the extent of any injuries suffered by such persons, respectively, as a result of any such action.” N.J.S.A. 14A:6-12 (Supp.1981-1982). A director who is present at a board meeting is presumed to concur in corporate action taken at the meeting unless his dissent is entered in the minutes of the meeting or filed promptly after adjournment. N.J.S.A. 14:6-13. In many, if not most, instances an objecting director whose dissent is noted in accordance with N.J.S.A. 14:6-13 would be absolved after attempting to persuade fellow directors to follow a different course of action. Cf. McGlynn, supra, 90 N.J.Super. at 520-521, 529, 218 A.2d 408 (receiver had no case against director who advised president that certain funds should be escrowed, wrote to executive committee to that effect, and objected at special meeting of board of directors); **827 Selheimer v. Manganese Corp., supra, 423 Pa. at 572, 584, 224 A.2d at 640, 646 (dissenting minority director in publicly held corporation absolved because he did all he could to divert majority directors from their course of conduct by complaining to management, threatening to institute suit and organizing a stockholders' committee).

Even accepting the hypothesis that Mrs. Pritchard might not be liable if she had objected and resigned, there are two significant reasons for holding her liable. First, she did not resign until just before the bankruptcy. Consequently, there is no factual basis for the speculation that the losses would have occurred even if she had objected and resigned. Indeed, the trial court reached the opposite conclusion: “The actions of the sons were so blatantly wrongful that it is hard to see how they could have resisted any moderately firm objection to what they were doing.” 162 N.J.Super. at 372, 392 A.2d 1233. Second, the nature of the reinsurance business distinguishes it from most other commercial activities in that reinsurance brokers are encumbered by fiduciary duties owed to third parties. In other corporations, a director's duty normally does not extend beyond the shareholders to third parties. #p#分页标题#e#

In this case, the scope of Mrs. Pritchard's duties was determined by the precarious financial condition of Pritchard & Baird, its fiduciary relationship to its clients and the implied trust in which it held their funds. Thus viewed, the scope of her duties encompassed all reasonable action to stop the continuing conversion. Her duties extended beyond mere objection and resignation to reasonable attempts to prevent the misappropriation of the trust funds.

In assessing whether Mrs. Pritchard's conduct was a legal or proximate cause of the conversion, “(l)egal responsibility must be limited to those causes which are so closely connected with the result and of such significance that the law is justified in imposing liability.” Such a judicial determination involves not only considerations of causation-in-fact and matters of policy, but also common sense and logic. The act or the failure to act must be a substantial factor in producing the harm.

Within Pritchard & Baird, several factors contributed to the loss of the funds: comingling of corporate and client monies, conversion of funds by Charles, Jr. and William and dereliction of her duties by Mrs. Pritchard. The wrongdoing of her sons, although the immediate cause of the loss, should not excuse Mrs. Pritchard from her negligence which also was a substantial factor contributing to the loss. Her sons knew that she, the only other director, was not reviewing their conduct; they spawned their fraud in the backwater of her neglect. Her neglect of duty contributed to the climate of corruption; her failure to act contributed to the continuation of that corruption. Consequently, her conduct was a substantial factor contributing to the loss.

Analysis of proximate cause is especially difficult in a corporate context where the allegation is that nonfeasance of a director is a proximate cause of damage to a third party. *45 Where a case involves nonfeasance, no one can say “with absolute certainty what would have occurred if the defendant had acted otherwise.” Nonetheless, where it is reasonable to conclude that the failure to act would produce a particular result and that result has followed, causation may be inferred. Ibid. We conclude that even if Mrs. Pritchard's mere objection had not stopped the depredations of her sons, her consultation with an attorney and the threat of suit would have deterred them. That conclusion flows as a matter of common sense and logic from the record. Whether in other situations a director has a duty to do more than protest and resign is best left to case-by-case determinations. In this case, we are satisfied that there was a duty to do more than object and resign. Consequently, we find that Mrs. Pritchard's negligence was a proximate cause of the misappropriations.

To conclude, by virtue of her office, Mrs. Pritchard had the power to prevent the losses sustained by the clients of Pritchard & Baird. With power comes responsibility. She had a duty to deter the depredation of the other insiders, her sons. She breached that duty and caused plaintiffs to sustain damages. #p#分页标题#e#

The judgment of the Appellate Division is affirmed.