Thursday, August 10, 2017

Federal District Court Addresses Aiding & Abetting a Breach of Fiduciary Duty

Federal District Court Addresses Aiding & Abetting a Breach of Fiduciary Duty

      In a recent decision, the Federal District Court for the Western District of Kentucky (Judge Simpson) addressed competing summary judgment motions, including an effort to dismiss a claim for aiding and abetting a breach of fiduciary duty.  In rejecting that effort, additional guidance as to what is or is not necessary to bring such an action was addressed.  Cadle v. Jefferson, Civ. Act. No. 3:07-CV-000070-CRS, 2017 WL 3013385 (W.D. Ky. July 14, 2017).

      William Jefferson, then a congressman, solicited for himself (through a company purportedly controlled by his spouse) both cash payment and stock from iGate, Inc., a company for which Vernon Jackson was the founder.  Those requests for cash and stock followed Jefferson’s introduction of iGate/Jackson to the US military as a potential customer for iGate technology.  Those case payments would come to $362,500.  Both Jackson and Jefferson were charged with bribery related offenses; Jackson plead guilty and Jefferson being tried and convicted by a jury.  This derivative action was then brought on iGate’s behalf.
      Cadle, on behalf of iGate, sought summary judgment with respect to a claim against Jefferson for aiding and abetting Jackson's breach of fiduciary duty to the company. In order to prevail on this claim, Cadle needed to show all of:
·                     That Jackson breached his fiduciary duty to iGate
·                     That Jefferson gave “substantial assistance or encouragement” to Jackson, and
·                     That Jefferson knew that Jackson's conduct breached a fiduciary duty.

      Turning first to the question of whether Jackson breached a fiduciary duty, the court, citing Steelvest, Inc. v Scansteel Serv. Ctr, Inc., 807 S.W. 2d 476, 483 (Ky. 1991), found that “An officer’s fiduciary duties include the duty not to act against the corporation’s interest. It was certainly against iGate’s interest when Jackson used iGate funds for an illegal purpose.” Later in the opinion, the court would observe as well that “Indeed, common sense and available case law indicates that a director or officer breaches his fiduciary duty when he pays bribes using corporate funds.” The first element of aiding and abetting was satisfied.
      In reliance upon Miles Farm Supplies, LLC v. Helena Chem Co., 595 F.3d 663, 666 (6th Cir. 2010), it was necessary for Cadle to show that Jefferson gave “substantial assistance or encouragement” to Jackson in connection with Jackson's breach of his fiduciary obligations to iGate. On this issue, Jefferson’s conviction for various bribery related offenses precluded him from arguing that he had not given substantial assistance or encouragement. Rather, under Count 16 of his indictment, for which he was convicted, it had been determined that he “demanded, sought and accepted things of value.” In effect, “Jefferson’s assistance in Jackson’s breach of fiduciary duty is apparent here because [Jefferson] not only sought but also accepted bribes from iGate.” The second element of aiding and abetting was thereby satisfied.
      Last, with respect to the requirement that Cadle show that Jefferson knew that Jackson was breaching his fiduciary duty in making the payments to Jefferson, the court, again in reliance upon Miles Farm Supply, stated that actual knowledge is necessary and that constructive knowledge is insufficient. Still, in reliance upon Aetna Cas. & Sur. Co. v. Leahey Constr. Co., 219 F.3d 519 (6th Cir. 2000), the court reiterated that actual knowledge may be demonstrated via circumstantial evidence and that “the exact level of knowledge necessary for liability remains flexible and must be decided on a case-by-case basis.”
      In this instance, Jefferson was a lawyer who graduated from Harvard Law school, it being asserted that “It is absurd to think any attorney would be unaware that soliciting and accepting bribes from Jackson would be a breach of Jackson’s fiduciary duty.” Ultimately, based in part upon Jefferson’s education as well as his efforts to interject his wife’s company between himself and the payments indicated that “Jefferson was attempting to hide the relationship between him and iGate, indicating his knowledge of the wrongfulness.” The third element of aiding and abetting was thereby satisfied.
      For these reasons, summary judgment was issued against Jefferson on the claim for aiding and abetting Jackson’s breach of fiduciary.

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