This blog, written by Thomas E. Rutledge, focuses primarily on business entity law in Kentucky. Postings on contract law, contractual and statutory construction, and the entity law of other jurisdictions appear as well. There may as well be some random discussions of classical, medieval and renaissance history.
Tuesday, February 12, 2019
The Difficulties of Fiduciary Duties in Indiana Corporations
Difficulties of Fiduciary Duties in Indiana Corporations
A recent decision from Indiana highlights
particular challenges that exist in assessing and applying fiduciary duties in
an Indiana business corporation.The
decision is an interesting read with respect to the operation as a closely held
company that, like so many, spent little effort in satisfying various corporate
formalities and consistent attention to the rights and responsibilities of
directors, officers and shareholders.The
decision is noteworthy with respect to a claim for breach of fiduciary duty. Tracy v. Minne, Cause No. 3:15-cv-212 RLM, 2018 WL 6583911 (N.D. Ind. Dec.
Minne had been brought into
the company as its white knight manager and investor. By the time of the
actions at issue, he, with his wife, was a 50% shareholder in the company, was
its president and was on the Board of Directors. In connection with a prior
loan of $200,000, he proffered a promissory note and security agreements. He
signed it as the lender, and another officer/shareholder, Madison, signed the
document on behalf of the company. Madison was declared by the Board of
Directors to be the vice president of the company even though the bylaws did
not provide for a vice president. The court keyed up the question of whether Minne
could rely upon the apparent agency of authority of a corporate officer where
the bylaws did not provide for that officer. Ultimately, it was able to avoid
The court did find,
however, that Minne, in tendering the promissory note and security agreement,
breached his fiduciary duties to the company. The plaintiffs, the Tracys (the
other 50% shareholders), were never advised that the company’s obligation to Minne
had been so memorialized. The court wrote:
Mr. Minne breached the fiduciary duty he owed to the Tracys when he failed to
disclose the note and security agreement to the Tracys. As an officer of a
close corporation, Mr. Minne owed the Tracys, as shareholders, a duty to deal
fairly, honestly, and openly, Rapkin
Group v. Cardinal Ventures, 29 N.E.3d at 757, and to act in the honest
belief that the action taken was in Phoenix Pallet’s best interests. G & N Aircraft v. Boehm, 743 N.E.2d
at 238. Mr. Minne acted solely in his own interest. Granting himself a security
interest in the money he already had put into the company gave his interest
priority over investments by the Tracys and Madisons, who were shareholders.
Mr. Minne argued that the note and security agreement benefitted Phoenix Pallet
because he wouldn’t have put any more money into the business without them, but
the evidence presented at trial doesn’t support that contention. Phoenix Pallet
couldn’t benefit from the note and security agreement.
Minne, as he says, never thought to tell the Tracys is easily believed in light
of their lack of involvement after the Kokomo Cracker Barrel meeting. But the
fiduciary duty doesn’t ebb and flow with the extent of thought one gives it.
Mr. Minne filed his note and security agreement in January 2012, but couldn’t
reasonably expect the Tracys to discover those papers as a result. Instead of
telling the Tracys that he now held the only non-bank security interest in
Phoenix Pallet’s assets, Mr. Minne kept that security interest like an ace up
his sleeve for three years. Had he told the Tracys, they, too, could have
secured their equipment loan to Phoenix Pallet.
breached his fiduciary duty to the Tracys as shareholders a second time when he
shuttered the company and moved its liquid assets to the Lake City Bank account
without notice to the Tracys.
ØThe court treats the
fiduciary duties owed by a director or officer of the corporation as being owed
to each shareholder notwithstanding that the Indiana Business Corporation Act
says that the directors and officers owed a fiduciary duties to the
corporation. See Indiana Code § 23-1-35-1
(directors to act “in the best interests of the corporation.”)
ØThe opinion is somewhat
muddled as to whether the breach of fiduciary duty was consequent to the tender
and receipt of the note and security interest, the failure to disclose same, or
a combination of the two.
ØThe court seems to find an
affirmative fiduciary duty of disclosure rather than an obligation to respond
to inquiries when made.
All in all, this decision
highlights the difficulty of advising the constituents of an Indiana business corporation
with respect to their fiduciary obligations.