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.

 

Illinois Replevin Law: Who Gets to Keep (Broken) Engagement Ring?

cheatin

The (diabolical?) Joey Greco (I think that’s the ‘Cheaters’ Host’s name) would love this one.  In Carroll v. Curry, 912 N.E.2d 273 (2nd Dist. 2009), the plaintiff filed a replevin suit against his ex-fiancée (defendant) seeking the return of an engagement ring that he previously bought.

The couple was engaged to be married for several years until the defendant broke it off after she accused the plaintiff of cheating.  After kicking plaintiff out of their home, the defendant refused to return the ring since plaintiff’s infidelity caused the relationship to end.  Plaintiff filed a replevin suit to get the ring back and eventually moved for summary judgment.  The trial court granted the motion and the defendant appealed.

Held: Affirmed.  Plaintiff gets the ring back.

Siding for the plaintiff, the Court noted that replevin is a strict, statutory proceeding that does not look at the concept of “fault.”  This means a court will not look at the underlying reasons why someone refuses to return an item of personal property.

The primary purpose of the replevin statute is to test the right of possession of personal property and place the successful party in possession of the property.  735 ILCS 5/19-101. 

A replevin plaintiff must prove he is (1) lawfully entitled to possession of property, (2) the defendant wrongfully detains the property and (3) refuses to deliver the possession of the property to the plaintiff.

“Wrongful” in the replevin context doesn’t mean immoral or “bad.”  It’s wrongful in the legal sense; meaning one person has a superior right to an object over the other.

Normally, the replevin plaintiff must make a demand for return of the item.  However, where a demand would be pointless (“demand futility”), the plaintiff is excused from the demand requirement.

The Second District described an engagement ring as a gift in contemplation of marriage.  The plaintiff here bought the ring to induce defendant to marry him.  The gift of the ring was contingent on defendant following through with the marriage.  Since defendant was the one that terminated the engagement, the contingency (marriage) didn’t occur and defendant no longer had a claim to the ring: “the party who fails to perform on the condition of the gift has no right to property acquired under such pretenses.”

The court then rejected the defendant’s argument that plaintiff’s infidelity was the reason for the break-up.  Delving into fault-based inquiries, the court said, would mire it in examining parties’ subjective motivations as opposed to objectively deciding who has a better claim to possession of an object.

Take-aways:

– Replevin is narrowly focused on the question of a party’s right to possession;

– The replevin calculus doesn’t concern itself with questions of who’s at fault or the cause of a dispute;

– Occasionally,  where there is fraud or unjust enrichment, equitable considerations can factor in a replevin case.  Here, however, since the plaintiff paid for the ring, there was no unjust enrichment in allowing him to reclaim it.