The Buck Stops Here: Vicarious Liability for
Actions of Agent
Limited to Actual Principal
In a recent decision, the
Kentucky Court of Appeals made clear that the vicarious liability of a principal
for the actions of the agent are restricted to the actual principal. James
v. James, No. 2007-CA-001837-MR, 2012 WL 2945518 (Ky. App. July 20,
2012).
Donald James (“Donald”)
established an irrevocable trust for the purpose of owning James Medical
Equipment, Ltd. (“JME”). This separation
of ownership was necessary in order to satisfy certain requirements of the
Medicare law, they otherwise being violated by cross-referral between commonly
owned entities. Ultimately, Thomas
James, nephew to Donald (“Thomas”), a healthcare attorney practicing in Washington,
D.C., was appointed the trustee of that irrevocable trust. It later came to pass that Donald, still
exercising operational control over JME, proposed to transfer its clients to
another entity he owned for the purpose of rendering JME judgment proof against
claims from Medicare for improperly paid benefits. In response, Thomas, as trustee of the
irrevocable trust controlling JME, terminated Donald’s authority to act on its
behalf. Thomas in turn hired new management
for JME, Copeland, who effected a financial turn-around for JME.
Ultimately, pursuant to other
litigation, it was determined that Donald had the authority to terminate the irrevocable
trust that controlled JME. After doing
so, he discovered that Copeland and another JME employee had themselves started
a competing business, Breathe Easy, to which they had transferred numerous of
JME’s customers. In response, Donald
filed suit against Thomas asserting a breach of fiduciary duty. Ultimately, the jury found in favor of
Thomas, the Court having rejected a proposed instruction, namely:
For purposes of this instruction, if
you find that Sharon Morrison Copeland was acting within the scope of her apparent
authority as an agent of the Defendant, James, then the Defendant would be
liable for the fraudulent acts of his agent even if he did not know of the
agent’s wrongful acts.
The Court of Appeals, upholding
the rejection of the proposed instruction, wrote:
There is no question that Thomas, as
a trustee, owed Donald a duty to exercise such care and skill in administering
the trust as a man of ordinary prudence would exercise in dealing with his
property, or to exercise such skill as a trustee has, if greater than a man of
ordinary prudence. Bryan v. Security Trust Co., 176 S.W.2d 104 (Ky. 1943). Further, “a [t]rustee is personally liable
for torts committed by an agent or employee in the course of the administration
of the trust. The principle of respondeat superior is applied to the trustee just as though he were the owner
of the trust property free of the trustee.
His liability is the same as it would be if he were not a trustee. It is immaterial that the trustee receives no
benefit from the trust.” Cook [v. Holland], 578 S.W.2d [648] at
742 [Ky. App. 1978].
The flaw in Donald’s argument,
however, is that Copeland was not an agent or employee of Thomas in his
capacity as trustee. Rather, Copeland
was an employee of JME, whose stock was owned by the trust. Copeland never worked for Thomas personally,
nor was she paid by Thomas or trust proceeds.
In fact, under Donald’s interpretation of the law, every employee of JME
would be Thomas’s agent, making him vicariously liable for every alleged act of
every employee. Clearly, the law as
established in Cook did not expand
the scope of vicarious liability to such an extreme position.
The Court went on to explain
that even were Copeland Thomas’s agent, no liability would attach.
Ultimately, the agent of a
principal is not, in turn, the agent of the principal’s constituents.
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