Vermont Supreme Court Affirms Breach of Fiduciary Duties by Corporate Officer and Director

Vermont Supreme Court Affirms Breach of Fiduciary Duties by Corporate Officer and Director

J.A. Morrissey, Inc. v. Smejkal, 6 A.3d 701 (Vt. 2010). [Read full opinion]

In a recently reported case, the Vermont Supreme Court upheld a jury finding of breach of fiduciary duties against a corporate officer and director. The Defendant, Peter Smejkal was an officer and director of Plaintiff, J.A. Morrissey, Inc. (JAM), a construction company. Prior to his termination, Smejkal had started his own excavation business and secretly performed excavation work on JAM projects on his own behalf. The jury further found that Smejkal poisoned the relationship with three JAM clients while still an officer and director and then succeeded in obtaining those projects for his own company after his termination.

The Vermont Supreme Court held that a director may not profit at the expense or against the interest of the corporation. 6 A.3d at 706 (citing Lash v. Lash Furniture Co. of Barre, 130 Vt. 517, 522, 296 A.2d 207, 211 (1972)). The duties of good faith and loyalty require that a director must not allow personal interests to interfere with or supersede the interests of the corporation. Id.

The court held that Smejkal, as an officer and director, had fiduciary duties to act with the utmost good faith and loyalty for the best interests of JAM. Id. at 707; see also Vt. Dep't of Pub. Serv. v. Mass. Mun. Wholesale Elec. Co., 151 Vt. 73, 89, 558 A.2d 215, 224 (1988) (“directors of a corporation are regarded as fiduciaries and are required to exercise their own independent judgment for the highest welfare of the corporation”); Lash, 130 Vt. at 522, 296 A.2d at 211 (“The relationship of a director ... to his corporation binds him to use the utmost good faith and loyalty for the furtherance and advancement of the interest of that corporation.”).

The plaintiff had also sued the defendant and obtained a judgment for tortious interference with prospective business relationships. It is not clear why the plaintiff chose to pursue this theory of liability, as the burden was much higher than on the breach of fiduciary duty claims, and the damages were the same. The tortious interference claim would only be necessary to establish liability on a party who did not owe fiduciary duties. In fact, the Vermont Supreme Court, in upholding the judgment on this tort, reasoned that the defendant’s breach of his fiduciary duties demonstrated the wrongful nature of the interference. See id at 710.

Apparently, the plaintiff believed that the tortious interference claim was necessary to establish liability on the Smejkal ‘s corporation (which was incorporated after the termination) and on the Smejkal ‘s wife. While it is true that neither the corporation nor the wife owed fiduciary duties to the plaintiff, a much cleaner and easier theory of liability would have been based on their knowing participation in Smejkal’s breach of fiduciary duties. This theory appears not to have been pursued by the plaintiff.

Like most jurisdictions, Vermont recognizes joint and several liability for third parties who knowingly participate in a corporate officer’s or director’s breach of fiduciary duties. “‘Any one who knowingly participates with a fiduciary in a breach of trust is liable for the full amount of the damage caused thereby ....’ ” Cooper v. Cooper, 173 Vt. 1, 17, 783 A.2d 430, 443 (2001) (quoting Wechsler v. Bowman, 285 N.Y. 284, 34 N.E.2d 322, 326 (1941)).

While the jury found the corporation liable for tortious interference, the jury did not find the wife to have committed that tort—although the jury did award punitive damages against the wife, about which the trial court was forced to grant a judgment n.o.v. due to the absence of any tort liability. Presumably, the result would have been better for the plaintiff on a knowing participation claim.

Read entire case analysis of Morrissey v. Smejkal--Vermont Officer/Director Fiduciary Duties.