Tuesday, February 12, 2019

The Difficulties of Fiduciary Duties in Indiana Corporations

The 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. 12, 2018).
       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 that question.
       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:

Nonetheless, 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.
That Mr. 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.
Mr. Minne 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.

A couple of observations:

Ø  The 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.”)
Ø  The 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.
Ø  The 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.


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