Norwood v. Norwood, No. 2-07-244-CV (Tex. App.—Fort Worth, November 13, 2008). Read Opinion
Yesterday, the Second Court of Appeals released an opinion dealing with breach of fiduciary duties to a corporation. The case arose out of a divorce. The husband owned 60% and the wife owned 40% of a corporation that provided catering services to corporate aircraft. The corporation was formed prior to the couple's marriage. Later, the couple filed for divorce but continued to run the business while seeking a purchaser. While the divorce was still pending, the husband discovered that the wife was using company vehicles to steal large amounts of company inventory and equipment and to deliver them to a competitor's place of business. The husband called the police and had the looting stopped, and he fired the wife and barred her from admittance to the corporation's place of business. Four days later, the wife resigned as an employee and director, citing the lock-out. Shortly thereafter, the wife started a new company with the competitor. In addition to the physical materials previously stolen by the wife, she also took the corporation's customer list (and changed the password on the corporation's computer to prevent the husband from utilizing the same information). The wife's new company was then able to hire away all of the corporation's employees, including its chef, and to persuade all the corporation's customers to switch. As a result, the husband shut down the business and sold the remaining equipment. The trial court ultimately entered a judgment against the wife and in favor of the corporation for breach of fiduciary duties as a result of death penalty sanctions for violating discovery orders. The court of appeals affirmed the sanctions and held that the evidence was sufficient to support the judgment.
Apparently, the liability theory advanced at trial was based on the wife's fiduciary duties as an employee. The court does not discuss her position as a director at all. The court holds that there was sufficient evidence of the wife's use of the corporation's proprietary information. What is interesting about the opinion is the court's affirmance of the damages award. The award was based solely on the diminution in the going-concern value of the business. On appeal, the wife argued that only out-of-pocket damages were recoverable for breach of fiduciary duties and that there was no evidence of such losses. The court of appeals held that damages resulting from breach of fiduciary duties were not limited to out-of-pocket losses. The evidence supporting the damages award was the testimony of a CPA that the going-concern value of the corporation was $235,000 immediately prior to the wife's leaving and zero afterwards. The court of appeals held that this testimony was sufficient to support a judgment of $235,000 to the corporation. This is an interesting concept because the corporation does not actually suffer the loss of its own value. That loss would be suffered solely by the shareholders, who would not ordinarily have standing to recover that amount directly for a breach of fiduciary duty to the corporation. See Commonwealth of Massachusetts v. Davis, 168 S.W.2d 216, 221 (Tex. 1943) ("Ordinarily, the cause of action for injury to the property of a corporation or the impairment or destruction of its business, is vested in the corporation, as distinguished from its stockholders, even though it may result indirectly in loss of earnings to the stockholders. Generally, the individual stockholders have no separate and independent right of action for injuries suffered by the corporation which merely result in the depreciation of the value of their stock.").If this opinion is not reversed, then shareholders may be able to calculate damages in derivative suits based on a diminution in value, which measure will sometimes be more easily calculated than other measures.
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