March 2022 Update
A confidential relationship may exist when there is no formal fiduciary relationship. Huy Fong Foods, Inc. v Underwood Ranches, LP (2021) 66 CA5th 1112, 1122. In Huy Fong Foods, Inc., the court found that a confidential relationship existed, despite the fact that the defendant had apparently not voluntarily accepted it. The parties’ relationship extended over 28 years; the plaintiff’s principal testified that his relationship with the defendant was like family, that he trusted the defendant and saw him as a good friend. The parties shared financial information, and the plaintiff obtained more land in reliance on the defendant’s assurance that it would buy what the plaintiff produced. In the court’s view, perhaps the most compelling evidence of a confidential relationship was that for many years the parties entered into transactions involving tens of millions of dollars without formal written contracts. See §1.6.
In June 2020, the U.S. Department of Justice, Criminal Division, published an updated Evaluation of Corporate Compliance Programs, available at https://www.justice.gov/criminal-fraud/page/file/937501/download. The document is intended to assist prosecutors in making informed decisions on whether, and to what extent, the corporation’s compliance program was effective at the time of the offense and is effective at the time of a charging decision or resolution. See §4.16.
In re Boeing Co. Derivative Litig. (Del Ch, Sept. 7, 2021, No. 2019-0907-MTZ) 2021 Del Ch Lexis 197 at *70, was one of the cases that followed the two fatal crashes of Boeing’s 737 MAX aircraft. (It was reportedly settled for $237.5 million by the Boeing directors in November 2021.) In holding that the plaintiffs’ complaint sufficiently alleged that the directors faced a substantial likelihood of liability under In re Caremark Int’l, Inc. Derivative Litig. (Del Ch 1996) 698 A2d 959, 967, the court relied heavily on the deficiencies outlined in Marchand v Barnhill (Del 2019) 212 A3d 805, 822. Although the court in Boeing emphasized that these factors were not a prescriptive list and that “directors have great discretion to design context- and industry-specific approaches tailored to their companies’ businesses and resources” (2021 Del Ch Lexis 197 at *72), the court also found that the factual allegations in both cases were remarkably similar. See §4.19.
In Coley v Eskaton (2020) 51 CA5th 943, 956, a case involving directors of a homeowners association, the California court discussed with approval the three standards of judicial review in Delaware, holding that in this case, the entire fairness standard would apply, given the directors’ material conflict of interest. See §4.31.
Regarding the potential fiduciary duties of corporate officers, citing Bancroft-Whitney Co. v Glen (1966) 64 C2d 327, 346, the court in Hooked Media Group, Inc. v Apple Inc. (2020) 55 CA5th 323, 333, held that “[n]o ironclad rules as to the type of conduct which is permissible can be stated, since the spectrum of activities in this regard is as broad as the ingenuity of man itself.” In both Bancroft-Whitney and Hooked Media, a corporate officer was making preparations to secure a job with a competitor. The courts each held that the preparations at issue were not sufficient to constitute a breach of fiduciary duty. See §4.55.
Although controlling shareholders owe fiduciary duties to the minority, “Delaware law does not … impose on controlling stockholders a duty to engage in self-sacrifice for the benefit of minority shareholders. … ‘Controlling shareholders, while not allowed to use their control over corporate property or processes to exploit the minority, are not required to act altruistically towards them.’” RCS Creditor Trust v Schorsch (Del Ch, Mar. 18, 2021, No. 2017-0178-SG) 2021 Del Ch Lexis 49 at *18 n73. See §4.57A.
While perhaps not advisable, it is common for inter-estate conflicts to be ignored in intact marriages but then be dissected on a highly technical basis if the marriage goes into dissolution. See Marriage of Nevai & Klemunes (2020) 59 CA5th 108, 115 (when community funds are used to make payments on property purchased by one spouse before marriage, community has pro tanto community property interest in that property in ratio that payments on purchase price with community funds bear to payments made with separate funds, but excluding payments for interest and taxes). See §6.17.
A spouse seeking transparency (with respect to a community business interest) may or may not have record ownership of the community interest, but likely has equal access rights under family law. See Ramirez v Gilead Sciences, Inc. (2021) 66 CA5th 218, 225 (citing Schnabel v Superior Court (1993) 5 C4th 704, 715, and distinguishing limited information rights of corporate shareholder from spouse’s right to “equivalent” information about community business). It is often helpful to encourage the corporate attorney to become familiar with family law transparency rules (or to suggest that a family law attorney be consulted). See §6.34.
In Korchemny v Piterman (Aug. 27, 2021, Nos. A155483, A157716; not certified for publication) 2021 Cal App Unpub Lexis 5557, the court affirmed a substantial contractual attorney fees award to the wife when supposed coordination between the husband’s attorney and the attorney for a supposedly adverse litigant increased the wife’s defense costs in an action concerning loans allegedly made to the marital community. See §6.49B.
Although cases in which an accounting is sought typically involve fiduciary relationships, a fiduciary relationship is not required to state a cause of action for an accounting. See Conservatorship of Farrant (2021) 67 CA5th 370 (“‘[t]he right to an accounting can arise from the possession by the defendant of money or property which, because of the defendant’s relationship with the plaintiff, the defendant is obliged to surrender’”). See §6.56.
Discussed at length in Jolie v Superior Court of Los Angeles (2021) 66 CA5th 1025, the standard for judicial disqualification of a private temporary judge is objective and asks whether a reasonable person would entertain doubts concerning the judge’s impartiality. In Jolie, the temporary judge was disqualified after he failed to voluntarily disclose to the wife and her new counsel his professional, business, and financial relationships with the husband’s counsel, including his involvement in two previously undisclosed matters in which the husband’s counsel represented one of the parties. See §6.71.
When a plaintiff fails to sufficiently allege and support with evidence the traditional relationship typically supporting a breach of fiduciary duty claim, the claim is subject to dismissal based on the lack of a fiduciary relationship. In re Hoag Urgent Care Tustin, Inc. (CD Cal, Mar. 30, 2021, No. 19-2343-MWF) 2021 US Dist Lexis 61233 (summary judgment dismissing breach of fiduciary duty claim based on lack of facts supporting joint venture allegation). See §8.6.
In Summers v Colette (2019) 34 CA5th 361, the court held Corp C §5233(c) provided a nonprofit corporate director standing to sue to address self-dealing by another director, even after the plaintiff-director was removed from her directorship. But in Turner v Victoria (2021) 67 CA5th 1099, the court disagreed with Summers v Colette, holding a director whose term had ended lacked standing to continue the prosecution of breach of fiduciary duty claims. See §8.9.
In Su v Henry Global Consulting Group (CD Cal, Apr. 2, 2021, No. 20-cv-02235-ODW) 2021 US Dist Lexis 64984, the court dismissed the fiduciary duty conspiracy claim under Fed R Civ P 12(b)(6) because the complaint failed to allege sufficient facts showing a conspiracy to commit a breach of fiduciary duty. See §8.13.
In Ridgway v Phillips (ND Cal, Mar. 18, 2020, No. 18-cv-078220-HSG) 2020 US Dist Lexis 47109, the court held that an accounting is an available remedy when a fiduciary duty exists and an accounting is necessary because the balance due can only be ascertained by an accounting. See §8.52.
As the COVID-19 pandemic persists, it is conceivable that D&O liability insurance could be implicated. Although we are still in the nascent stages of the fallout from the pandemic and any effect it may have on D&O insurance, it is conceivable that decisions that companies have made to continue operating during these difficult times may be called into question and could potentially prompt the need for such coverage. As examples, (1) COVID-19-related layoff decisions made by corporate officers and directors might result in lawsuits concerning a corporation’s failure to comply with employment-related rules and regulations; or (2) corporate directors and officers might be sued for negligence in developing or implementing adequate COVID-19 guidelines or procedures. This is a dynamic and developing area. See §10.1.
In Spicer v Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. (SD NY, July 3, 2021, No. 1:20-cv-3784-GHW) 2021 US Dist Lexis 125513, the court held that the allegations in a counterclaim created at least a potential for coverage, triggering the duty to defend. Relying on the first prong of the “wrongful act” definition, which, unlike the second prong, did not include the word “solely,” the court in Spicer concluded that it could be reasonably inferred that the individuals named in a counterclaim were acting in their insured capacity as directors and officers of the corporation. See §10.8.
The Delaware Supreme Court, in considering California’s Ins C §533, held that breach of the duty of loyalty claims based on fraud are not uninsurable as a matter of Delaware public policy. In RSUI Indem. Co. v Murdock & Dole Food Co. (Del 2021) 248 A3d 887, Dole’s insurers filed an action seeking a declaration that they had no obligation to fund a settlement under California law based on the application of Ins C §533, which bars coverage for willful acts. Despite the facts that Dole’s D&O policies had been issued in California to a California company by a California broker with California amendatory endorsements, and Dole’s officers in question lived and worked in California, the Delaware Supreme Court concluded that when the insured risk is the directors’ and officers’ fidelity to the corporation, the state of incorporation (Delaware) has the most significant interest and, therefore, Delaware law (not Ins C §533) should apply. See §10.10.