“No Hit, No Foul” Does Not Apply to Breaches of Fiduciary Duty

“No Hit, No Foul” Does Not Apply to Breaches of Fiduciary Duty

      In a recent decision from Kansas, there was affirmed an award of punitive damages against a corporate officer notwithstanding the fact that the transaction breaching the fiduciary duties had been unwound. In effect, although the corporation suffered no net damages, the disloyal officer was still subject to an award of punitive damages. Still Corporation, Inc. v. Still, No. 116910, 2017 WL 5507708 (Kan. Ct. App. Nov. 17, 2017).

      Still was a 25% shareholder and the president of Still Corporation. He structured a transaction in which he would purchase from the corporation 197 acres of land for $90,000. It was ultimately determined that the value of the land was between $450,000 and $532,000. While certain other shareholders in the corporation, in their capacity as corporate officers, signed off on the deal, ultimately the corporation filed suit against Still for fraud and breach of fiduciary duties. Ultimately Still announced that he would return the property to the corporation, at which time the District Court entered a judgment that canceled and voided the deed conveying the land from the corporation to Still, declared that Still and his spouse had no ownership rights in that land, and directed Still at his spouse to assist in providing necessary documents to return title on the property to the corporation.

      Thereafter, a bench trial was held to assess whether the company’s claim for punitive damages against Still for breach of fiduciary duty would have any value. The trial court, considering the Kansas statute for punitive damages, awarded the corporation $85,000. Still filed this appeal.

      The Court of Appeals found that the amount of the punitive damages fell clearly within the range that is appropriate under Kansas law. As to the validity of the claim itself, the court discussed the fiduciary duties of corporate officers and directors. The award of punitive damages, ab initio, was justified in that:

In short, Still, as the corporate president, breached a fiduciary duty by engineering his purchase of company assets at what he understood to be far less than their true value. A breach of fiduciary duty will support awards of both actual and punitive damages.

      The court dismissed Still’s suggestion that the knowledge of at least aspects of the transaction by the other shareholders should militate against his exposure, observing:

Still has suggested any punitive award ought to be excused or moderated because the other shareholders should have known the approximate value of the land he purchased. Assuming that to be true, the suggestion misses the point. Still had a duty to act faithfully in the interest of the shareholders rather than scheming to fleece them if he could get away with it. The other shareholders had a right to rely on Still’s performance of that duty as the company’s president. They were not obligated to police his actions for malfeasance or dishonesty, and they did not somehow forfeit the corporation’s right to relief by failing to scrutinize this transaction.