119 Foster v. Bowen AUTHOR: Miguel M.

Consing
[41 NE 2d 181 (1942)] NOTES:
TOPIC: Duty of Diligence; Business Judgements Rule This case was decided by the Massachusetts Supreme Court
PONENTE: Qua, J. Parties
1. Foster – Minority stockholder of the company
2. Bowen – Current president of the company
3. Cushing – Former treasurer and manager of the
company
4. Baker – Former president of the company
FACTS:
 The Fitchburg and Leominster Street Railway Company (Company) owned an amusement resort known as the
Whalon Park which had a roller skating rink.

 Cushing was in charge of the leasing of the concession of the park, including the skating rink.

 In 1929, the person who held the lease for the skating rink left. Subsequently, Cushing, on behalf of the company,
leased the rink to himself. He did this with the consent of Baker who agreed to the arrangement that Cushing would
pay 25% of the gross receipts from the rink to the Company.

 In 1934, the entire Whalon Park was leased to Venner, from whom Cushing obtained a sublease of the rink. Cushing
then sublet the rink to Laventure, who agreed to pay Cushing 50% of the gross receipts.

 Thus Cushing was getting 50% of the gross receipts and paid the company 25%. Baker was aware of this
arrangement, but he was not aware of the exact percentage Laventure paid to Cushing, but he still gave his consent to
it.

 In 1935, Bowen became president of the Company. In 1937 he learned about Cushing’s leases to himself after
Cushing explained the situation and told him that he had Baker’s approval.

 Bowen informed the other directors that the transaction was illegal but they did nothing about it. It was only in 1938
when the directors learned more about the leases and the amount Cushing was actually making that they decided to let
go of Cushing.

 The Plaintiffs, as minority stockholders, now bring this case against Bowen to recover for the company losses which
are claimed to have been sustained by it in consequence of alleged breaches by the defendant Bowen of his fiduciary
obligations as its president and director.
ISSUE(S):
Is Bowen liable for any damages by reason of alleged breaches of his fiduciary obligation to the Company?
HELD/RATIO:
No. Bowen was held to be not liable because: (1) Cushing's acts were not actually dishonest or fraudulent; (2) Cushing
performed personal work such as keeping the facility in repair which redounded to the benefit of the company and even
increased its income; (3) Bowen did not profit personally through Cushing's lease; and (4) when the issue of the possible
illegality of the lease was put before the Board of Directors, but the Board did not act on it but instead moved on to the
next item on the agenda. Absent any bad faith on Bowen's part, and a showing that it was a reasonable exercise of
judgment to take no action on the lease agreement at the time it was entered into, Bowen was not liable.

[COROLLARY ISSUES]
Is Bowen liable for causing the Company to lose the benefit of two fidelity bonds through improper conduct of
Cushing?
No. Fidelity bonds are a form of business insurance that offers an employer protection against losses caused by its
employees' fraudulent or dishonest actions. Bowen’s failure to claim proceeds from the fidelity bonds was based on the
belief that Cushing’s acts were not fraudulent as it was sanctioned by the other directors and therefore, would not come
under the protection of the bond for fraud. The Court agreed and held that jurisprudence has construed these bonds as
applying to cases where the conduct of the employee is intentionally and consciously dishonest and fraudulent. It did not
apply where the employee acted in good faith.