Litwin vs.

Allen AUTHOR: Valera

25 N.Y.S 2d 667 (1940) NOTE:
Duty Of Dilligence
Shientag, J:
FACTS:
 This is a derivative suit by the shareholders of Guarantee Trust Company of NY (Bank/Trust Company) and its
subsidiary now in liquidation, The Guarantee Company of NY (Guarantee Company) and together with the banking
firm of JP Morgan & Co.
 The derivative suit arises from 4 transactions:
1.) The purchase of the Directors from JP Morgan, of common stock owned by Alleghany Corporation
2.) Participation of the Trust Company or the Guarantee Company to the extent of 3 million in a purchase of
Missouri Pacific convertible debenture at 5.5 % bonds at par and interest with a repurchase option in favor of the
seller, Alleghany Corporation within 6 months. The plaintiffs claim that they realized a loss of 2.25 million
because of the transaction
3.) Participation of the Trust Company to the extent of 11 million in a 39 million loan to Veness Company and
Cleveland Terminals Building Company
4.) Sale of Collaterals under loan.
- THE COURT ALREADY RULED IN FAVOR OF THE DEFENDANT IN TRANSACTIONS 1,3 AND 4.
 The plaintiffs have conceded that that in all but the 4 stated transactions the defendants exercised an unusual degree of
care in the management of the company.
 The issue in the first transaction in simple is on JP Morgan in disposing 1,250 shares of new common stock of
Alleghany Corporation. JP MORGAN offered 500k shares to Guaranty corporation to be sold on a commission of $4
per share at $4 per share at $24. Before the actual public offering of these shares by Guaranty, Morgan also offered
the other 759k shares to friends at 20$ Among those receiving the latter stock were some directors of Guaranty, who
took a total of 40k shares. The market in the stock opened at a premium and after waiting until the 30 period of
public sale was over the directors were able to dispose of their stock at a substantial profit.
 The circumstance has given rise to the claim that the profits belong to the Guaranty Company on the “Corporate
Opportunity theory
 The question was raised at the trial why the 40k shares sold to Mr. Potter and his associate were not added to
Guaranty Company’s public offering so as to give it at least 4$ commission to which was supposedly entitled by
virtue of the underwriting agreement on the 500k shares.
 The plaintiff’s point out that the Guaranty Company made a profit form the underwriting of the 500k shares of 1.263
million or an average profit of 2.5$ per share and the plaintiffs contend that the Guaranty Company could profitably
have disposed of the additional 40k shares f they had been offered to the company by the directors and officer within
a reasonably short time after their issue.
ISSUE(S):
 WON the act of the directors in purchasing 40k shares outside the 500k shares offered by JP Morgan is under the
Corporate Opportunity Theory? And in breach of there fiduciary

HELD:
1.) No.
RATIO:
1.) The evidence on this point is unanimous to effect that such an operation would have not been to the advantage of
Guaranty Company
2.) There is no basis that in acquiring stock of Alleghany company through JP Morgan at 20$ a share any of the
defendants were guilty of a breach of fiduciary duty. The common stock purchased by the defendants did not
represent in any sense a business opportunity for the defendant corporation Having fulfilled there duty to the
corporation in accordance with their best judgement the defendant directors were not precluded form a transaction
for their own account and risk.
 In order to permit such theory the plaintiffs are required to establish:
a.) That the shares in contemplation of equity offered to the Guaranty Company
b.) That Guaranty Company had some legitimate right or expectancy in these shares
3.) The opportunity which the defendants are said to have deprived the Guaranty Company to respect the shares
bought by them was a routine piece of business wholly lacking n the unique and special quality which
distinguished the corporate opportunity in other jurisprudence. Where in like cases Guaranty Company bought
none of it. The company was commission to retail 500k shares which it did not want for its own purposes at all.
 These facts deprive the instant case of any substantial resemblance to the corporate opportunity cases.
4.) The intesrest of the individuals who bought the stock privately was speculative. They became full owners of the
stock and the possibility of merit would depend upon the course of the market after the 30 day underwriting period
which during which the restriction against resale applied.
5.) There is nothing substantial to the contention that Alleghany stock transaction operated on the minds of the
directors as a favor Clearly these stock purchases had no influence upon the Independent judgement of the
defendant directors in connection with the three remaining transactions complained of.
CASE LAW/ DOCTRINE:
DISSENTING/CONCURRING OPINION(S):