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Litwin v. Allen | 25 N.Y.S.2d 667 (1940)
Generally, corporate directors are given broad discretion to make business decisions and are protected from liability for decisions that turn out poorly. This is known as the business-judgment rule. But this protection isn’t without exception, which the New York Supreme Court explored in Litwin versus Allen.
Alleghany Corporation purchased several properties with a substantial payment due in 1930. Alleghany needed additional funds to make the payment but couldn’t borrow money. So instead, Alleghany sold 10 million dollars’ worth of unsecured bonds that it held in Missouri Pacific to J.P. Morgan and Company. J.P. Morgan purchased the bonds for cash at par value, with an option for Alleghany to repurchase the bonds within six months for the sale price.
Guaranty Trust Company of New York, or Trust Company, made a written commitment to J.P. Morgan to participate in the purchase. Guaranty Company of New York, a subsidiary of Trust Company, agreed to take over the bonds upon expiration of the six-month repurchase option if Alleghany failed to exercise the option.
Unfortunately, the bond’s value steadily declined. By the time the six-month repurchase option expired, the bonds were selling for a significant loss. Alleghany didn’t exercise the repurchase option, and Guaranty Company took the bonds from Trust Company at par and carried them on its books as an investment.
Shareholders in Trust Company, including Eva Litwin, brought a derivative suit against the directors of Trust Company, including Charles Allen; Guaranty Company; and members of J.P. Morgan, seeking to impose liability for losses resulting from the transaction. The New York Supreme Court considered the case.
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