Tuesday, August 14, 2012

Principal's Agent Not the Agent of the Principal's Constituent

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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