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July 30, 1974

David M. STERN et al., Plaintiffs,

Gesell, District Judge.

The opinion of the court was delivered by: GESELL


GESELL, District Judge.

 This is a class action which was tried to the Court without a jury. Plaintiffs were certified as a class under Rule 23(b)(2) of the Federal Rules of Civil Procedure and represent patients of Sibley Memorial Hospital, a District of Columbia non-profit charitable corporation organized under D.C.Code ยง 29-1001 et seq. They challenge various aspects of the Hospital's fiscal management. The amended complaint named as defendants nine members of the Hospital's Board of Trustees, *fn1" six financial institutions, and the Hospital itself. Four trustees and one financial institution were dropped by plaintiffs prior to trial, and the Court dismissed the complaint as to the remaining financial institutions at the close of plaintiffs' case.

 Several different causes of action were initially alleged. Some were rejected after hearing pretrial motions. Others were dismissed at the close of plaintiffs' evidence and still others are now awaiting determination following completion of the record. The most significant pretrial rulings have been fully covered in a prior opinion, Stern v. Lucy Webb Hayes Nat. Train. Sch. for Deacon. & M., 367 F. Supp. 536 (D.D.C.1973). This Memorandum Opinion will set forth the basis of the Court's determinations made at the close of plaintiffs' case and will, in addition, resolve the remaining issues which went to full trial. All of these matters have been fully briefed and argued and proposed findings of fact have been submitted, all of which the Court has carefully considered. The record consists of 1,169 pages of transcript and 137 exhibits.

 The two principal contentions in the complaint are that the defendant trustees conspired to enrich themselves and certain financial institutions with which they were affiliated by favoring those institutions in financial dealings with the Hospital, and that they breached their fiduciary duties of care and loyalty in the management of Sibley's funds. The defendant financial institutions are said to have joined in the alleged conspiracy and to have knowingly benefited from the alleged breaches of duty. The Hospital is named as a nominal defendant for the purpose of facilitating relief.

 I. Corporate History.

 The Lucy Webb Hayes National Training School for Deaconesses and Missionaries was established in 1891 by the Methodist Women's Home Missionary Society for the purpose, in part, of providing health care services to the poor of the Washington area. The School was incorporated under the laws of the District of Columbia as a charitable, benevolent and educational institution by instrument dated August 8, 1894. During the following year, the School built the Sibley Memorial Hospital on North Capitol Street to facilitate its charitable work. Over the years, operation of the Hospital has become the School's principal concern, so that the two institutions have been referred to synonymously by all parties and will be so treated in this Opinion. As increasing demands were made upon Sibley's facilities, the Hospital was renovated several times. Finally, in the mid-1950's, it was decided to move the Hospital to a new location on Loughboro Road in Northwest Washington. The nearby Hahnemann Hospital, another Methodist charity, was merged with Sibley in 1956 in anticipation of this move. *fn2" The new Sibley Memorial Hospital was dedicated on June 17, 1962.

  In 1960, shortly after ground was broken for the new building, the Sibley Board of Trustees revised the corporate by-laws in preparation for an expected increase in the volume and complexity of Hospital business following the move. Under the new by-laws, the Board was to consist of from 25 to 35 trustees, who were to meet at least twice each year. Between such meetings, an Executive Committee was to represent the Board, and was authorized, inter alia, to open checking and savings accounts, approve the Hospital budget, renew mortgages, and enter into contracts. A Finance Committee was created to review the budget and to report regularly on the amount of cash available for investment. Management of those investments was to be supervised by an Investment Committee, which was to work closely with the Finance Committee in such matters.

 In fact, management of the Hospital from the early 1950's until 1968 was handled almost exclusively by two trustee officers: Dr. Orem, the Hospital Administrator, and Mr. Ernst, the Treasurer. Unlike most of their fellow trustees, to whom membership on the Sibley Board was a charitable service incidental to their principal vocations, Orem and Ernst were continuously involved on almost a daily basis in the affairs of Sibley. They dominated the Board and its Executive Committee, which routinely accepted their recommendations and ratified their actions. Even more significantly, neither the Finance Committee nor the Investment Committee ever met or conducted business from the date of their creation until 1971, three years after the death of Dr. Orem. As a result, budgetary and investment decisions during this period, like most other management decisions affecting the Hospital's finances, were handled by Orem and Ernst, receiving only cursory supervision from the Executive Committee and the full Board.

 Dr. Orem's death on April 5, 1968, obliged some of the other trustees to play a more active role in running the Hospital. The Executive Committee, and particularly defendant Stacy Reed (as Chairman of the Board, President of the Hospital, and ex officio member of the Executive Committee), became more deeply involved in the day-to-day management of the Hospital while efforts were made to find a new Administrator. The man who was eventually selected for that office, Dr. Jarvis, had little managerial experience and his performance was not entirely satisfactory. Mr. Ernst still made most of the financial and investment decisions for Sibley, but his actions and failures to act came slowly under increasing scrutiny by several of the other trustees, particularly after a series of disagreements between Ernst and the Hospital Comptroller which led to the discharge of the latter early in 1971.

 Prompted by these difficulties, Mr. Reed decided to activate the Finance and Investment Committees in the Fall of 1971. *fn3" However, as Chairman of the Finance Committee and member of the Investment Committee as well as Treasurer, Mr. Ernst continued to exercise dominant control over investment decisions and, on several occasions, discouraged and flatly refused to respond to inquiries by other trustees into such matters. It has only been since the death of Mr. Ernst on October 30, 1972, that the other trustees appear to have assumed an identifiable supervisory role over investment policy and Hospital fiscal management in general.

 Against this background, the basic claims will be examined.

 II. Conspiracy. Plaintiffs first contend that the five defendant trustees and the five defendant financial institutions were involved in a conspiracy to enrich themselves at the expense of the Hospital. They point to the fact that each named trustee held positions of responsibility with one or more of the defendant institutions as evidence that the trustees had both motive and opportunity to carry out such a conspiracy. The extent of these interlocking duties and interests is revealed by the following table: TABLE I Hospital Defendant Trustees Financial Institution Responsibilities Responsibilities SIBLEY STACY M. SECURITY NATIONAL BANK Trustee (1956-) REED Director (1930-) Executive Com. (1961-) Executive Com. (1937-) Finance Com. (1961-) Minor stockholder Investment Com. (1961-) Board Chairman (1960-) President (1968-72;1973-) SIBLEY LANIER P. McLACHLEN NATIONAL BANK Trustee (1956-) McLACHLEN Director (1974-) Investment Com. (1960-73) Board Chairman (1953-73) President (1922-54) Principal stockholder (8.1%) SIBLEY GEORGE M. FERRIS & CO. Trustee (1956-) FERRIS Senior Partner (-1971) Finance Com. (1973-) Board Chairman (1971-) Investment Com. (1962-70) Principal stockholder (42%) Acting Treas. (1972-73) SIBLEY EDWARD K. INTERSTATE BUILDING ASSOC. Trustee (1959-) JONES Director (1932-) Executive Com. (1959-) Executive Com. (1932-) Finance Com.(1960-73) Board Chairman (1969-) Investment Com. (1971-73) President (1954-69) Minor stockholder RIGGS NATIONAL BANK Director (1967-) Executive Com. (1967-74) Minor stockholder SIBLEY FRED W. RIGGS NATIONAL BANK Trustee (1964-) SMITH Advisory Director (1964-) Executive Com. (1964-) Minor stockholder Investment Com. (1967-73) JEFFERSON FEDERAL S. & L. Director (1954-) Executive Com. (1957-) President (1959-)


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