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Saturday, February 28, 2009

Hypothetical: Is This A Breach of Fiduciary Duty?

As I continue to think about this story, its weighty implications grow in my mind. Maybe I'm thinking about the story all wrong, and there is no reason for concern. To explore this, let me pose the following hypothetical in all seriousness:

Suppose Mr. Smith is a member of the Board of Governors of a nonprofit hospital. As a Board member, Mr. Smith has a fiduciary duty of loyalty to the hospital to support its financial stability, growth, and success. Suppose Dan Donor decides to make a $3 million donation to the hospital and pledges this money to the hospital. Now suppose Mr. Smith talks to Dan Donor and convinces him to rescind his pledge to the hospital. Suppose Mr. Smith goes even farther than this, and convinces Dan Donor to instead donate the $3 million dollars to a private highschool, which will enable the highschool to expand and to get classroom resources. Suppose that Mr. Smith stands to benefit from the donation to the highschool: maybe Mr. Smith's child is a student there, or maybe Mr. Smith is the principal of the school, or maybe Mr. Smith is Chairman of the Board of the school and would like donations in order to keep the school afloat.

Now I don't have enough knowledge of corporate law, so these are honest questions:

1. Has Mr. Smith violated his duty of loyalty to the hospital?

2. If Mr Smith breached his duty of loyalty to the hospital, is there any remedy or possible cause of action by an interested party at the hospital against Mr. Smith for the loss of the $3 million?

3. Is this hypothetical essentially the same, or different (and thus distinguishable), from what happened here, when Monaghan convinced a donor to rescind his $3 million pledge to AMU and to instead donate it to the grammar school?

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