Kentucky Supreme Court Hears Oral Arguments in New
Lexington Clinic v. Cooper
On March 14, the Kentucky
Supreme Court heard oral arguments in New
Lexington Clinic v. Cooper (now styled Baptist
Physicians Lexington, Inc. v. New Lexington Clinic, P.S.C.). This case, may lay down numerous important
principles of law governing Kentucky business corporations.
To briefly recap the facts to
date, several director/employees of a medical practice entered into
negotiations to create a new practice liaisoned with an existing healthcare
network. While still directors of the
existing venture, the physicians solicited other doctors and professional staff
to move to the new venture. Also, at
least one of the director/employee physicians shared with the new venture certain
internal financial reports of the existing practice. After the director/employees resigned and
left, suit was filed charging them with breach of fiduciary duty. The complaint did not reference KRS §
271B.8-300, which recites the fiduciary duties of a director of a Kentucky
business corporation.
Anne Chestnut, representing the
defendants, argued (at least) a pair of themes:
·
KRS § 271B.8-300 sets
forth the only fiduciary duties of a director of a Kentucky business
corporation and also specifies the threshold of culpability for assessing
damages against a director; and
·
there is no causal
linkage between any violation that may have occurred and the damages now
claimed by the plaintiff.
The plaintiffs, represented by
Tom Miller, argued that:
·
under the modern rules
of civil procedure, it is not necessary to cite the statutory basis of a claim;
·
even if KRS §
271B.8-300 is the exclusive statement of a director’s fiduciary duties and the
limits on a monetary claim for breach of those duties, the limits do not apply when
the violation of duty does not take place in the course of discharging the
duties of a director; and
·
the summary judgment granted
the defendants was premature.
It was my impression that the Justices
have spent a good deal of time studying this case. That said, and applying Samuel Mayer’s rule
that “I never make predictions, especially about the future,” I would be hard
pressed to hazard a guess as to the Court’s ultimate ruling or the alignment of
any individual justice.
Issues such as the necessity of
demonstrating causation of damages and the sufficiency of the discovery before
summary judgment was granted are all points above my pay grade. I can, however, speak to issues of fiduciary
duty.
I begin initially by agreeing
with both Anne Chestnut on behalf of the defendants and Tom Miller on behalf of
the plaintiffs. As Anne argued, there
really can be no question that KRS § 271B.8-300 was intended by the General
Assembly to constitute the exclusive recitation of the duties of a director of
a Kentucky business corporation, including the standard of culpability and the
imposition of the burden of proof. See KRS § 271B.8-300(1) (standard of
conduct); id. § 271B.8-300(5)(b)
(standard of culpability for monetary damages from breach of duties); and id. § 271B.8-300(6) (allocation of
burden). These statutory provisions
entirely identify the burdens of a corporate director in the discharge of his
or her obligations as such and the requirements for a challenge thereto,
supplanting any prior common law to the contrary.
At the same time, Tom is
correct that these limitations as to culpability and burden of proof are not
applicable with respect to all charges against an individual merely because he
or she happens to be a director. He
referenced at length Judge Coffman’s ruling in Gundaker/Jordan American Holdings, Inc. v. Clark, 2008 U.S. Dist.
LEXIS 80907 (E.D. Ky. 2008), and argued
that as the organization of a competing business is never part of the discharge
of a director’s obligations, conduct of this nature falls outside the
protections of the statute. See also KRS § 271B.8-300(1) (“A
director shall discharge his duties as a director ...”). To provide an example that was begun by Tom
in the course of his argument, but not completed in order to respond to a
question from the Court, a director who embezzles money from the corporation is
not, while executing the embezzlement, acting in the discharge of his or her
obligations as a director. As such, when
the corporation brings an action against the director for what is indisputably
theft, conduct manifestly “not in the best interest in the corporation” (KRS §
271B.8-300(1)(c)), the director cannot raise as a defense the obligation of the
corporation to demonstrate that his or her conduct was wanton or willful. KRS § 271B.8-300(5)(b).
Cases like this are, however,
somewhat closer than a case of embezzlement would be. It could be said that an aspect of a
director’s obligations of good faith and to act in the best interest of the
corporation necessitate an obligation to protect the confidentiality of company
financial information; from there it could be argued that the inappropriate
dissemination of that information is a breach of the statutory duty of loyalty
for which the protections of KRS §§ 271B.8-300(5), (6) apply. Against this argument is the fact that
seeking to utilize company financial information to benefit a different venture
is not an action in the discharge of a director’s duties, so the statute should
not control. My feeling is the latter
position is correct.
Under this analytic structure, Steelvest and Aero Drapery can be reconciled and exist alongside the statutory
standard when a director is acting outside his or her capacity as a director,
such as leaving one venture to accept employment with another. At the same time, the statutory limitations
of KRS § 271B.8-300 will alone be applicable (i.e., excluding any prior law) when the board is exercising its
oversight function with respect to a corporation; for example, approving a
merger or sale of substantially all corporate assets, or approving the terms by
which the corporation will enter into a conflict of interest transaction with
an entity controlled by a director. See also Ridley v. Sullivan, No. 2009-CA-000712-MR (Ky. App. May 20, 2011) (Not to be Published) (corporate officer would be denied indemnification otherwise provided to officers by KRS 271B.8-510 where his actions involved intentional misconduct for improper personal benefit and were not within the scope of his employment as a corporate officer).
With respect to the question of
damages, I must disagree with both Mr. Miller and Ms. Chestnut. The plaintiffs are arguing that they should
be allowed to proceed with discovery in order to calculate damages and
demonstrate them to a finder of fact.
Conversely, the defendants argue, in the absence of a demonstration of
causation between the alleged breach and any damages that might be sought, that
there is no need to proceed further (it is not clear to me whether or not Ms.
Chestnut’s position is based upon KRS § 271B.8-300(6) and its allocation of the
burden of proof). As indicated above, I
do not believe that KRS §§ 271B.8-300(5), (6) are relevant to this case in that
the actions at issue were not taken in the discharge of director obligations. Ergo, the burdens imposed by these statutes
for the plaintiff to clearly demonstrate that the director’s conduct was wanton
or willful and to prove causation are inapplicable to the dispute.
Absent KRS §§ 271B.8-300(5),
(6), under the traditional law of fiduciary duties as exemplified in trust law,
in the event of a fiduciary’s breach of its obligations to the beneficiary (in
this instance the corporation), the fiduciary must pay over to the trust all of
the benefits derived from the transaction tainted by the breach of duty, with
the fiduciary bearing the burden to show that not all of the proceeds thereof
should be surrendered. Such an in terrorem imposition of liability
serves an important policing function with respect to fiduciaries and
appropriately relieves the beneficiary of an obligation to demonstrate damages.
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