Fiduciary Duty Litigation

What Is A Fiduciary Relationship?

“A fiduciary relationship is one founded upon trust or confidence reposed by one person in the integrity and fidelity of another. It is said that the relationship exists in all cases in which influence has been acquired and abused, in which confidence has been reposed and betrayed. The rule embraces both technical fiduciary relations and those informal relations, which exist whenever one man trusts in, and relies upon, another. Such a relationship might be found to exist, in appropriate circumstances, between close friends or even where confidence is based upon prior business dealings.” Hoyle v. Diamond, 947 F.2d 595 (2013).

The Virginia Stock Corporation Act, Va. Code § 13.1-673 et seq., and the Virginia Non-Stock Corporation Act, Va. Code § 13.1-853 et seq., mandate that the business of a corporation be managed under the direction of its board of directors (the “Board”).

In the case of the Virginia Limited Liability Company Act, it can be Members or Managers. Therefore, directors, officers or managers of Virginia LLCs and corporations owe certain common law and statutory duties to the corporation and its shareholders in their capacities as fiduciaries. Unlike Delaware law, Virginia law does not impose fiduciary duties between shareholders or between the board and minority shareholders.

Elements of A Breach of Fiduciary Duty Claim

To state a claim for a breach of fiduciary duty under Virginia law, you must allege:

• the existence of a fiduciary duty;
• a breach of that duty; and

Under Virginia law a breach of fiduciary duty claim is subject to the two-year limitations period of section 8.01-248. Fiduciary Duty claims can be sub-classified into two primary categories.

FIDUCIARY DUTY OF CARE:

 Virginia’s Stock Corporation Act provides that “A Director shall discharge his duties as a Director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the Corporation.” §13.1-690.A. The Duty of Care, thus, is the affirmative duty of a Director to make informed decisions for the Corporation, after using reasonable diligence in gathering and considering material information.

Although the duty of care is sometimes expressed in terms of a fiduciary duty, it does not rise to the standard of care required of a trustee (Williams v. Fidelity Loan & Savings Co., 142 Va. 43, 128 S.E. 615 (1925). Neither the Virginia Code nor the Model Business Corporation Act categorizes the directors’ duties in terms of a fiduciary relationship. Nevertheless, the prevailing law in Virginia is clear that directors and officers must exercise some degree of care and prudence in the protection and management of corporate assets.

What Is Required from Directors & Officers to Fulfill their Duty of Care?

Case Law Examples:

• Directors must remain aware of significant corporate developments and must consider adverse developments which come to their attention. Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973). See also Francis v. United Jersey Bank, 432 A.-2d 814 (N.J.Supr. 1981), a case in which the bankruptcy trustee of the corporation successfully reached an uninterested director.
• Not using an adequate amount of care can result in a breach of fiduciary duty, regardless of whether there was any wrongdoing or personal benefit otherwise received. Kessler v. Commonwealth Doctor’s Hospital, 212 Va. 497, 185 S.E.2d 43 (1971).
• Ignorance of any fact in the corporation’s affairs which it is the director’s duty to know is not a defense.
• Inexperience and honest intentions have historically been ineffective excuses for directors who have not exercised the requisite attentiveness or inquisitiveness. Marshall v. F & M Savings Bank of Alexandria, 85 Va. 676, 8 S.E. 586 (1889).

 FIDUCIARY DUTY OF LOYALTY:

The duty of loyalty has to do with the relationship between the director and the corporation or, if any, its stockholders. In dealings with the corporation or with the stockholders as a group, the director (or officer) has the same duty of fidelity which arises in dealings between a trustee and his beneficiaries( Adelman v. Conotti Corporation, 215 Va. 782, 21 S.E.2d 774 (1975); Giannotti v. Hamway, 239 Va. 14, 387 S.E.2d 725 (1990).

Furthermore, according to the Virginia Stock Corporation Act (Va. Code Ann. § 13.1-690): “A director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation.”

This essentially means that “a director of a private corporation cannot directly or indirectly, in any transaction in which he is under a duty to guard the interests of the corporation, acquire any personal advantage, or make any profit for himself, and if he does so, he may be compelled to account therefor to the corporation” (Rowland v. Kable, 174 Va. 343, 6 S.E.2d 633, 642 (1940).

What Is Required from Directors & Officers to Fulfill their Duty of Loyalty?

Case Law Examples:

• Failure to Disclose. Failure to disclose information that might affect one’s decision-making process where a fiduciary relationship exists will frequently constitute a breach of fiduciary duty. Firebaugh v. Hanback, 247 Va. 519, 443 S.E.2d 134 (1994).
• Usurping Opportunities. In the real property context, this often happens when a director breaches his fiduciary duty to the corporation by knowingly purchasing some real property for himself instead of presenting it to the corporation first (Trayer v. Bristol Parking, Inc., 198 Va. 595, 95 S.E.2d 224 (1956).
• Making Secret Profits. Using one’s position to misappropriate money earned, rightfully belonging to the whole enterprise, or entirely to the principal, is a breach of fiduciary duty (see H-B Ltd. Partnership v. Wimmer, 220 Va. 176, 257 S.E.2d 770 (1979).
• Deriving Personal Benefit.
• Knowledge of Fraudulent Certification of Corporate Documents.
• Misuse of Confidential Information.
• Unfair Advantage in Dealing with the Principal.
• Operating Similar Business Enterprises.
• Soliciting Clients In the Employment Context.

CONFLICT OF INTEREST AND THE FAIRNESS TEST:

 Virginia Code § 13.1-691 states:

Director Conflict of Interests

1. A conflict of interests transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect personal interest. A conflict of interests transaction is not voidable by the corporation solely because of the director’s interest in the transaction if any one of the following is true:
2. The material facts of the transaction and the director’s interest were disclosed or known to the board of directors or a committee of the board of directors and the board of directors or committee authorized, approved, or ratified the transaction;
3. The material facts of the transaction and the director’s interest were disclosed to the shareholders entitled to vote and they authorized, approved, or ratified the transaction; or
4. The transaction was fair to the corporation.
5. For the purposes of this section, a director of the corporation has an indirect personal interest in a transaction if:
6. Another entity in which he has a material financial interest or in which he is a general partner is a party to the transaction; or
7. Another entity of which he is a director, officer or trustee is a party to the transaction and the transaction is or should be considered by the board of directors of the corporation.

The Business Judgment Defense:

Under Virginia law there is no business judgment rule shield to protect directors and officers from breach of duty of loyalty claims. Instead, once the plaintiff pleads the existence of a personal benefit to the director, the burden shifts to the D/O to prove that the transaction was fair to the corporation. In Willard v. Moneta Bldg. Supply, 515 S.E.2d 277, 287, 258 Va. 140 (Va., 1999) the court noted that

No inflexible rule can be established by which to test the “fairness” of a transaction. It depends largely on the nature and circumstances of the business action. But generally, a director must act in good faith, and the transaction must, “as a whole, [be] open, fair and honest at the time it was consummated.” Deford v. Ballentine Realty Corp., 164 Va. 436, 449, 180 S.E. 164, 169 (1935)…In sum, a transaction in which a director has a conflict of interests should bear “the earmarks of an arm’s length bargain” in order to be deemed “fair to the corporation” under Code § 13.1-691(A)(3). Pepper v. Litton, 308 U.S. 295, 306-07, 60 S.Ct. 238, 84 L.Ed. 281 (1939).

 Virginia law is favorable to directors and officers compared to other states like Delaware. The applicable Virginia Code § 13.1-690 states:

13.1-690. General Standards of Conduct For Director:

1. A director shall discharge his duties as a director, including his duties as a member of a committee, in accordance with his good faith business judgment of the best interests of the corporation.
2. Unless he has knowledge or information concerning the matter in question that makes reliance unwarranted, a director is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, if prepared or presented by:
3. One or more officers or employees of the corporation whom the director believes, in good faith, to be reliable and competent in the matters presented;
4. Legal counsel, public accountants, or other persons as to matters the director believes, in good faith, are within the person’s professional or expert competence; or
5. A committee of the board of directors of which he is not a member if the director believes, in good faith, that the committee merits confidence.
6. A director is not liable for any action taken as a director, or any failure to take any action, if he performed the duties of his office in compliance with this section.
7. A person alleging a violation of this section has the burden of proving the violation.

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