April 19, 2021

Volume XI, Number 109

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April 16, 2021

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Business Divorce: Court Found That There Was A Fact Question On Whether Officers Violated Fiduciary Duties By Obtaining A Side Bonus From A Purchaser When Negotiating A Sale Of The Company’s Assets

A business divorce may mean that the owners need to sell the business or the business’s assets. In the following case, some of the owners/officers took advantage of a sale transaction to benefit from that transaction at the expense of their co-owners. In Rex Performance Prods., LLC v. Tate, a company sued its former officers for breaching fiduciary duties related to the sale of the company’s assets. No. 02-20-00009-CV, 2020 Tex. App. LEXIS 10465 (Tex. App.—Fort Worth December 31, 2020, no pet.). The company alleged that the officers intentionally drove down the price of the sale in order to obtain a separate bonus from the buyer. The defendants alleged that the plaintiff knew of the side bonus agreement and consummated the transaction anyway, thereby establishing a waiver or ratification. The trial court granted summary judgment for the defendants, and the plaintiff appealed.

The court of appeals discussed the fiduciary duties owned by officers and directors:

Corporate officers and directors owe a fiduciary duty to the corporation that they serve. A corporate fiduciary is under an obligation not to usurp corporate opportunities for personal gain, and equity will hold him accountable to the corporation for his profits if he does so. The responsibility of the corporate fiduciary includes the dedication of his uncorrupted business judgment for the sole benefit of the corporation. As this court has noted before, it is without question that corporate officers and fiduciaries are “held ‘in official action, to the extreme measure of candor, unselfishness, and good faith.’” The duty of loyalty dictates that a corporate officer or director must act in good faith and must not allow his personal interest to prevail over that of the corporation. Directors and officers of a corporation must make full disclosure of their personal interest in a transaction that they are negotiating for the corporation. A transaction in which a corporate fiduciary derives personal profit is subject to the closest examination, and the form of the transaction will give way to the substance of what actually occurred.

Id.

The court of appeals first addressed the duty to disclose, and held that there was a fact question on that issue. The court held:

RPP did not have full knowledge of all information about the retention bonus agreements until after this lawsuit was filed. Considering the evidence in the light most favorable to RPP, whatever information RPP knew was learned only after the conduct by Tate and Cuffia had occurred and before the retention bonus agreements had been finalized… even assuming that RPP had some knowledge of the retention bonus agreements before it signed the asset purchase agreement, such knowledge does not bar a claim for breach of fiduciary duty. An after-the-fact disclosure of the facts that form the basis of a breach-of-fiduciary duty claim does not restore the parties to a position as if there had been no breach.

Id. The court also held that the defendants’ conduct also violated other fiduciary duties, other than a duty to disclose, and that the defendants did not move for summary judgment on those other breach claims.

The court then addressed the defendants’ ratification and waiver arguments. The court found that those were not proven as a matter of law because the sale transaction and the bonus transaction were separate transactions. The company approving the sale of the assets for a certain price did not preclude it from challenging the separate bonus transaction for the officers to which it did not consent. The court stated: “the retention bonus agreements were solely for the benefit of Tate, Cuffia, and two others. RPP neither agreed to nor accepted these agreements. In addition, only Pregis was responsible for paying the bonuses. Therefore, signing of the agreements by Tate, Cuffia, and Pregis cannot act as a waiver or ratification of RPP’s rights.” Id.

Finally, the court held that there was a fact question on whether the plaintiff suffered damages. There were emails that showed that the price for the assets went down due to the bonus agreement. In any event, the court held that damages were not necessary for the plaintiff to recover forfeiture or disgorgement relief. The court held:

[A] party seeking forfeiture and equitable disgorgement need not prove damages as a result of the breach of fiduciary duty. To remedy a breach of fiduciary duty, courts may fashion equitable remedies such as profit disgorgement and fee forfeiture. As explained by the Texas Supreme Court: “A fiduciary cannot say to the one to whom he bears such relationship: You have sustained no loss by my misconduct in receiving a commission from a party opposite to you, and therefore you are without remedy. It would be a dangerous precedent for us to say that unless some affirmative loss can be shown, the person who has violated his fiduciary relationship with another may hold on to any secret gain or benefit he may have thereby acquired.” Courts may disgorge all ill-gotten profits from a fiduciary when a fiduciary agent usurps an opportunity properly belonging to a principal or competes with a principal. Even if a fiduciary does not obtain a benefit from a third party by violating his duty, a fiduciary may be required to forfeit the right to compensation for the fiduciary’s work. “The main purpose of forfeiture is not to compensate an injured principal, even though it may have that effect. Rather, the central purpose . . . is to protect relationships of trust by discouraging agents’ disloyalty.” In its third amended petition, RPP pled for profit disgorgement or fee forfeiture due to Tate’s and Cuffia’s “many breaches of their fiduciary duties.” By relying on these equitable theories, RPP was not required to show actual damages.

Id. The court reversed the summary judgment, in part, and remanded the case for further proceedings.

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© 2021 Winstead PC.National Law Review, Volume XI, Number 67
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About this Author

David Johnson Financial Institution lLtigation Winstead Law Firm Fort Worth Texas
Managing Shareholder - Fort Worth

David maintains an active trial and appellate practice and has consistently worked on financial institution litigation matters throughout his career. David is the primary author of the Texas Fiduciary Litigator blog, which reports on legal cases and issues impacting the fiduciary field in Texas. 

David's financial institution experience includes (but is not limited to): breach of contract, foreclosure litigation, lender liability, receivership and injunction remedies upon default, non-recourse and other real estate lending, class...

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