Case Summary: Star Forge v. F.C. Mason (Part 1 of 2): Breach of Fiduciary Duty and Corporate Opportunity Rule (IL Law)

A corporate officer’s fiduciary duties to his corporate employer and the monetary damages that flow from a breach of those duties are two of the key issues dissected and applied by the Second District appeals court in Star Forge, Inc. v. Ward, 2014 IL App (2d) 130527-U.

Plaintiff was a steel company that sued its former President and some rival steel companies after he secretly entered into separate employment and sales commission agreements with those companies and even formed his own competing steel sales venture – all while employed by the plaintiff.  The plaintiff sued for breach of fiduciary, breach of contract and fraud and sought damages equal to about a decades’ worth of payments it made to the defendant.  After settling with the corporate competitor defendants, the plaintiff went forward on its claims against its former President.  The trial court granted summary judgment for the plaintiff and entered judgment of over $700K against the defendant.  Defendant appealed.

Held: Affirmed

Q: Why?

A:  The Court found that the defendant breached his duties of loyalty to his company (the plaintiff) by surreptitiously entering into deals with rival manufacturers and by forming a stealth sales representative entity that marketed towards plaintiff’s customers.

In Illinois, to prevail on a breach of fiduciary duty claim, the plaintiff must show: (1) existence of a fiduciary duty, (2) breach of that duty, and (3) damages flowing from the breach;

– A corporate officer is a quintessential fiduciary of his company and has the duty to act with “utmost good faith and loyalty” in managing the company;

– A corporate officer breaches his fiduciary duties where (a) he tries to enhance his personal interests at the expense of the corporate interests, or (b) he hinders his corporate employer’s ability to carry on its business;

– Where a corporate officer solicits business for his own benefit or uses his employer’s facilities or resources to further his personal interests without informing his company, he breaches his fiduciary duties to the company;

– To show breach of fiduciary duty by diversion of business opportunity, all that’s required is that the other companies benefitting from the officer’s actions are in the same line of businessas the plaintiff/employer; the companies don’t have to be direct competitors;

– Under the corporate opportunity doctrine, a fiduciary (like a corporate officer) can’t take advantage of business opportunities unless he first presents that opportunity to his employer;

– A business opportunity belongs to a plaintiff employer if it is “reasonably incident to the corporation’s present or prospective business and is one in which the corporation has the capacity to engage”;

– A corporate officer can’t divert a business opportunity merely because he suspects that his employer lacks the legal or financial capability to take advantage of that opportunity.

(¶¶ 18-24).

The Court found that the defendant unquestionably breached his fiduciary duties by diverting business to plaintiff’s competitors and by forming a corporation that secretly sold to plaintiff’s customers.  Significantly, the defendant failed to first offer to his employer a lucrative deal involving John Deere – one of plaintiff’s largest customers.  The Court rejected defendant’s arguments that some of the business defendant steered from the plaintiff was outside the parameters of plaintiff’s capabilities.  It was enough that the diverted business was possibly or arguably within the scope of plaintiff’s business to establish defendant’s breach of his duties to his employer.  Id.

Take-aways: Though this case is unpublished, Star Forge provides clean synopsis of Illinois breach of fiduciary duty rules, the corporate opportunity doctrine and what a plaintiff must show to prove that an officer wrongfully usurped a business opportunity belonging to the plaintiff.  The case also shows that an officer’s belief as to whether or not his employer can “handle” or service a given opportunity doesn’t matter.  All that’s required for the employer to show a breach is that the diverted business opportunity falls within the possible range of the employer’s business, services and resources.

 

Published by

PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.