Monday, December 28, 2015

Jury Finds Breach of Fiduciary Duties Where Corporation Used as Personal Piggy-Bank of 51% Shareholder

Jury Finds Breach of Fiduciary Duties Where Corporation Used as Personal
Piggy-Bank of 51% Shareholder

As reported in the Kentucky Trial Court Review, a jury found that a corporate director and 51% shareholder violated his fiduciary obligations by, inter alia, using the corporation’s assets as his personal piggy-bank.  Liberty Rehabilitation v. Waide, 19 KTCR 10 at 7 (October 2015).

Forrest “Ben” Waide was the the 51% shareholder in Liberty Rehabilitation; Lawrence Holmes and Jason Myers were the minority shareholders therein.  Waide was elected to the Kentucky General Assembly in 2010 and reelected in 2012.  Also in 2012 Holmes and Myers became concerned about how corporate funds were being used.  For example, the company paid for Waide to attend the Republican National Convention, a trip to St. Louis with his wife, and some $20,000 went to Waide’s reelection campaign. Ultimately Waide’s diversion of corporate funds to his campaign led to his indictment for campaign finance violations; he pled guilty and resigned from the General Assembly.  See KRS § 121.025 (forbidding corporate contributions to political campaigns); see also

Holmes and Myers initiated a derivative action on behalf of Liberty Rehabilitation seeking to recover $504,304 of diverted funds.  Waide argued that (a) there were benefits to the corporation at least sought in the trip to St. Louis and (b) while there were errors, they were not sufficient to justify a finding that he violated his fiduciary obligations.  The jury was apparently having none of that.  It awarded compensatory damages in the amount of $456,500 and punitive damages of $225,000. 

At this juncture I do not know if an appeal has been filed.

This decision should be a wake-up call to corporate officers and directors and all others charged with fiduciary obligations.  A fiduciary is obligated to use the entrusted assets for the benefit of the principal, and it is the fiduciaries obligation to be able to make that demonstration.  A personal benefit is a red flag, and a failure to disclose is doubly a red flag.  Had Waide sent to Holmes and Myers an email before the St. Louis trip saying “I’m going to St. Louis, taking my wife along, to try to get work from Peabody Coal.  Trip expected to cost $______.  Let me know if you have a problem with me doing so.”, at least that aspect of the dispute likely could have been avoided.  That is not to say that prior approval is required; it is, however, an easy way to diffuse any subsequent question.



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