Opinion ID: 2099674
Heading Depth: 1
Heading Rank: 14

Heading: Sears' Joint Liability

Text: The next assignment of error we address is the appellants' contention that Sears should not have been found jointly and severally liable. We first consider the argument that Sears should not have been held jointly liable for Campagna's alleged misappropriations from Varsity Investments. The appellants argue that any liability found to result from Campagna's misappropriation should be borne by Campagna alone. The record does not support a finding that Sears participated in or intentionally abetted any of Campagna's alleged misappropriation. Consequently, the question is whether Sears' failure to supervise the affairs of Varsity Investments rose to the level of a breach of Sears' fiduciary duty toward the corporation and its stockholders. See, generally, Department of Banking v. Colburn, 188 Neb. 500, 198 N.W.2d 69 (1972). [22-25] An officer or director of a corporation occupies a fiduciary relation toward the corporation and its stockholders and is treated by the courts as a trustee. Woodward v. Andersen, 261 Neb. 980, 627 N.W.2d 742 (2001). An officer or director must comply with the applicable fiduciary duties in his or her dealings with the corporation and its shareholders. See Doyle v. Union Ins. Co., 202 Neb. 599, 277 N.W.2d 36 (1979). Where a director has acted in complete good faith and breached no fiduciary duties, he or she is not liable for mere mistakes in judgment. See id. However, a violation by a trustee of a duty required by law, whether willful, fraudulent, or resulting from neglect, is a breach of trust, and the trustee is liable for any damages proximately caused by the breach. See id. Directors should have a general knowledge of the manner in which the corporate business is conducted, and, where the duty of knowing exists, ignorance because of neglect of duty on the part of a director creates the same liability as actual knowledge and failure to act on that knowledge. Id. In addition, Neb. Rev. Stat. § 21-2095 (Reissue 1997) provides, in relevant part: (1) A director shall discharge his or her duties as a director, including his or her duties as a member of a committee: (a) In good faith; (b) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (c) In a manner he or she reasonably believes to be in the best interests of the corporation. (2) In discharging his or her duties, a director shall be entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by: (a) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; . . . . (3) A director shall not be considered to be acting in good faith if he or she has knowledge concerning the matter in question that makes reliance otherwise permitted by subsection (2) of this section unwarranted. (4) A director shall not be liable for any action taken as a director, or any failure to take any action, if he or she performed the duties of his or her office in compliance with this section. Admittedly, the evidence in this case does not indicate that Sears was informed about the affairs of Varsity Investments. By Sears' own admission, he did not review the books or records of the corporation, or ask to do so, and visited the Varsity Sports Café only once, when it opened. However, the record also establishes that Trieweiler's letter to Sears, sent in February 1995, did not contain the allegations of substantial misappropriation that would later come to form the basis of this litigation. At that time, Trieweiler was aware that some of the corporation's bills had not been paid and that a check issued by Campagna had been entered improperly in the corporate checkbook. Trieweiler had, at that time, not been provided with desired access to the corporate records. Sears confirmed his awareness of the corporation's difficulty covering expenses, stating that he had been informed by Campagna. The record does not establish, however, that prior to this litigation, Sears was aware of any evidence of misappropriation or missing revenue. [26] Of course, that conclusion begs the pertinent question: Did Sears breach a fiduciary duty by failing to monitor the corporation's affairs closely enough to make himself aware of any improprieties? Most state statutes now provide, as does Nebraska's, that the degree of care required of a director is the degree of care an ordinarily prudent person would exercise in a like position under similar circumstances. See, § 21-2095; 3A William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 1032 (perm. ed., rev. vol. 2002 & Cum. Supp. 2004). An ordinarily prudent person in a like position has been interpreted to mean an ordinarily prudent person who was the director of the particular corporation. 3A Fletcher, supra ; 2 Model Business Corporation Act Annotated § 8.30(b) (3d ed. 2002). The phrase under similar circumstances has been interpreted to mean that a court should take account of the director's responsibilities in the corporation, the information available at the time, and the special background knowledge or expertise the director has. Id. [27,28] An outside director is usually defined as one who is neither an officer nor an employee of the corporation. 3A Fletcher, supra, § 1035.20, citing Rowen v. Le Mars Mut. Ins. Co. of Iowa, 282 N.W.2d 639 (Iowa 1979). The degree of care for directors based on that which a prudent person in a like position under similar circumstances would give has been said to accommodate the various levels of director involvement in management; by depending on custom and usage, the standard protects the outside director from the expectation that he or she will give his or her undivided attention to corporate interests. See, generally, 18B Am. Jur. 2d Corporations § 1710 (1985 & Cum. Supp. 2003), citing Michele Healy Ubelaker, Director Liability Under the Business Judgment Rule: Fact or Fiction?, 35 Sw. L.J. 775 (1981). See, generally, Donald E. Pease, Outside Directors: Their Importance to the Corporation and Protection From Liability, 12 Del. J. Corp. L. 25 (1987). [29] While outside directors may not close their eyes to the conduct of corporate affairs, at least until they have reason to suspect impropriety, they may within reasonable limits rely on those who have primary responsibility for the corporate business. 3A Fletcher, supra, citing Rowen, supra . But lack of knowledge is not necessarily a defense, if it is the result of an abdication of directorial responsibility. See Joy v. North, 692 F.2d 880 (2d Cir. 1982). See, also, F.D.I.C. v. Bierman, 2 F.3d 1424 (7th Cir. 1993). In the last analysis, the question of whether a corporate director has become liable for losses to the corporation through neglect of duty is determined by the circumstances. If he [or she] has recklessly reposed confidence in an obviously untrustworthy employee, has refused or neglected cavalierly to perform his [or her] duty as a director, or has ignored either willfully or through inattention obvious danger signs of employee wrongdoing, the law will cast the burden of liability upon him [or her]. [But] we know of no rule of law which requires a corporate director to assume, with no justification whatsoever, that all corporate employees are incipient law violators who, but for a tight checkrein, will give free vent to their unlawful propensities. Graham, et al. vs. Allis-Chalmers Mfg. Co., et al., 41 Del. Ch. 78, 85-86, 188 A.2d 125, 130-31 (Del. Supr. 1963). The balancing of these factors must be on a case-by-case basis, depending upon the circumstances at the time of the challenged action or inaction. Rowen, supra . As previously noted, Sears did not have day-to-day responsibilities in the management of the corporation. The record is less than conclusive with respect to whether Sears was an officer of the corporation, as the following colloquy from Sears' direct examination by Trieweiler's counsel demonstrates: [Trieweiler's counsel]. Were you an officer of Varsity Investments, Inc.? [Sears]. I believe I was. I'm really not sure. Q. Do you know what position you were  you held in Varsity Investments, Inc.? A. Not exactly without looking. Probably a vice president, I would guess. I don't know. Q. So you believe you would have been a vice president? A. It would be as good a guess as any. Q. Do you know what time frame you would have been a vice president of Varsity Investments, Inc.? A. From the formation of the corporation. Q. Until the present day? A. Yeah. We conclude, based upon the record presented to us, that the district court did not err in concluding that Sears breached a fiduciary duty by failing to closely monitor Varsity Investments' affairs. Admittedly, Sears owned only 10 percent of the corporation and was not at all involved in the operation of the business, and his direct involvement had apparently not been contemplated by the other shareholders. It was clear to all concerned, from the outset, that Sears' primary role was to provide investment capital. But it is not disputed that Sears, as a director of the corporation, had a fiduciary duty to the corporation and the other shareholders, and it is difficult to see how he could have fulfilled that duty by exercising no meaningful supervisory role whatsoever. A duty which required neither action nor attention to fulfill would not be a duty at all. In this case, Sears' inattention to corporate affairs was so profound that he could not even state, with certainty, whether or not he was an officer of the corporation. Even if Sears was an outside director and was not required to give Varsity Investments his undivided attention, the record here presents a textbook example of a director who closed his eyes to the conduct of the corporation. See Rowen v. Le Mars Mut. Ins. Co. of Iowa, 282 N.W.2d 639 (Iowa 1979). Furthermore, we can find no error in the district court's conclusion that Sears' breach of fiduciary duty was the proximate cause of financial losses by Varsity Investments. Sears was an experienced businessperson, having been operator, director, and officer of Sound Recorders, Inc., and director and president of American Gramophone Records. Had Sears devoted even a minimally appropriate degree of attention to corporate affairs, he might have observed that the corporation's finances were in disarray and that adequate records of corporate income were not being maintained. Furthermore, assuming for purposes of this analysis that Campagna misappropriated funds, Sears' proper execution of his fiduciary duties would have required him to determine whether Campagna had properly deposited or spent the corporation's unrecorded income. In other words, Sears' inattention to his fiduciary duties had a proximate causal connection with the mismanagement of and alleged misappropriation from Varsity Investments. The district court did not err in holding Sears to be jointly and severally liable for that mismanagement and misappropriation. We next address the other aspect of Sears' joint liability whether Sears was correctly found to be jointly and severally liable for damages from the diversion of the Varsity West opportunity. It is not disputed that the appellants acted together in pursuing the Varsity West project. The appellants have disputed that Varsity West was a corporate opportunity of Varsity Investments. For reasons that will be explained below, we reject the appellants' argument in that respect. For purposes of the current discussion, it suffices to state that Varsity West was an usurped corporate opportunity of Varsity Investments. Given that assumption, Sears argues that instead of being held jointly liable, the appellants should each have been held liable only for the proceeds that each of them actually received from the Varsity West sale. The appellants simply argue a conclusion in that respect; they offer nothing in the way of legal analysis to advance their argument. But they have placed the issue before this court, and resolving it requires us to consider some of the fundamental principles of equitable relief. [30,31] Sears' position is supported by the fact that the traditional remedy imposed by courts upon a finding of a misappropriation of a corporate opportunity is the impression of a constructive trust in favor of the corporation upon the property. Anderson v. Bellino, 265 Neb. 577, 658 N.W.2d 645 (2003). See, generally, 3 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 861 (perm. ed., rev. vol. 2002 & Cum. Supp. 2004). A constructive trust is a relationship, with respect to property, subjecting the person who holds title to the property to an equitable duty to convey it to another on the ground that his or her acquisition or retention of the property would constitute unjust enrichment. Manker v. Manker, 263 Neb. 944, 644 N.W.2d 522 (2002); ProData Computer Servs. v. Ponec, 256 Neb. 228, 590 N.W.2d 176 (1999). See, also, Mischke v. Mischke, 253 Neb. 439, 571 N.W.2d 248 (1997). Regardless of the nature of the property upon which the constructive trust is imposed, a party seeking to establish the trust must prove by clear and convincing evidence that the individual holding the property obtained title to it by fraud, misrepresentation, or an abuse of an influential or confidential relationship and that under the circumstances, such individual should not, according to the rules of equity and good conscience, hold and enjoy the property so obtained. Manker, supra ; Ponec, supra . [32,33] Intangible property and liquid assets such as stocks and bank and investment accounts may be held subject to a constructive trust. Ponec, supra . However, where money is the asset upon which the constructive trust is based, it is necessary that the specific amounts be identified and located, either by tracing the money to a specific and existing account, or where the funds have been converted into another type of asset such as by the purchase of real property, the money must be traced into the item of property. Ponec, supra ; Chalupa v. Chalupa, 254 Neb. 59, 574 N.W.2d 509 (1998). [34,35] Consequently, the concept of joint liability is, to some extent, inconsistent with the concept of a constructive trust. A constructive trust is imposed in order to prevent unjust enrichment, and in instances in which the law imposes a constructive trust, the doctrine of unjust enrichment generally governs the substantive rights of the parties. See Barnes v. Eastern & Western Lbr. Co., 205 Or. 553, 287 P.2d 929 (1955). Unjust enrichment requires restitution, see Ahrens v. Dye, 208 Neb. 129, 302 N.W.2d 682 (1981), which measures the remedy by the gain obtained by the defendant, and seeks disgorgement of that gain. See, State ex rel. Palmer v. Unisys Corp., 637 N.W.2d 142 (Iowa 2001); Burch & Cracchiolo, P.A. v. Pugliani, 144 Ariz. 281, 697 P.2d 674 (1985) (en banc). In other words, when damages are based upon unjust enrichment, a defendant is liable only to the extent of the enrichment. See Natl. City Bank, Norwalk v. Stang, 84 Ohio App. 3d 764, 618 N.E.2d 241 (1992). [36] Joint liability, however, may render each liable party individually responsible for the entire obligation, regardless of what proportion of the plaintiff's damages were caused by each defendant. See, e.g., Lackman v. Rousselle, 257 Neb. 87, 596 N.W.2d 15 (1999). In that instance, damages are measured by the plaintiff's loss and seek to provide compensation for that loss. See Unisys Corp., supra . Thus, for instance, an action for unjust enrichment differs at common law from tortious conversion primarily on the basis that all the defendants may be held jointly liable in tort, while only those who have benefited are liable, and then only to the extent thereof, in an action for unjust enrichment. Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967). This supports a conclusion that joint and several liability is inappropriate in relation to the equitable remedy of a constructive trust. See A. T. Kearney, Inc. v. INCA International, 132 Ill. App. 3d 655, 477 N.E.2d 1326, 87 Ill. Dec. 798 (1985). See, also, Barnes, supra . [37,38] The countervailing principle, however, is the general rule that an act done by the joint agency or cooperation of several persons renders them jointly and severally liable. See English v. Bruin Engineering, Inc., 201 Neb. 791, 272 N.W.2d 753 (1978). All persons who knowingly aid or participate in committing a breach of trust will be held responsible for the resulting loss, and will be held accountable by personal judgment for the value of the property so converted. Vogt v. Town & Country Realty of Lincoln, Inc., 194 Neb. 308, 231 N.W.2d 496 (1975). [39] Based on that general principle, it has been held that directors and officers of a corporation are jointly as well as severally liable if they jointly participate in a breach of fiduciary duty, or approve of, acquiesce in, or conceal a breach by a fellow officer or director. See, generally, 3 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations § 1002 (perm. ed., rev. vol. 2002 & Cum. Supp. 2004). See, e.g., Radol v. Thomas, 772 F.2d 244 (6th Cir. 1985); Lawson v. Baltimore Paint and Chemical Corporation, 347 F. Supp. 967 (D. Md. 1972); Resolution Trust Corp. v. Block, 924 S.W.2d 354 (Tenn. 1996); Christner v Anderson, Nietzke, 433 Mich. 1, 444 N.W.2d 779 (1989); Chelsea Industries, Inc. v. Gaffney, 389 Mass. 1, 449 N.E.2d 320 (1983); Seaboard Industries, Inc. v. Monaco, 442 Pa. 256, 276 A.2d 305 (1971); Knox Glass Botl. Co. v. Underwood, 228 Miss. 699, 89 So. 2d 799 (1956). In this case, however, the appellants acted jointly to breach their fiduciary duties by diverting a corporate opportunity from Varsity Investments. That opportunity has been liquidated, and the proceeds divided among the participants, including the appellants. Diversion of a corporate opportunity is generally remedied by the imposition of a constructive trust, the theory of which is inconsistent with joint liability, yet joint liability is indicated by the appellants' cooperation to breach their fiduciary duties. [40,41] We conclude that despite the tension between joint liability and the theory of unjust enrichment, the district court did not err in holding the appellants jointly and severally liable in this case. Equity is not a rigid concept, and its principles are not applied in a vacuum, but instead equity is determined on a case-by-case basis when justice and fairness so require. Manker v. Manker, 263 Neb. 944, 644 N.W.2d 522 (2002). Where a situation exists which is contrary to the principles of equity and which can be redressed within the scope of judicial action, a court of equity will devise a remedy to meet the situation. Anderson v. Bellino, 265 Neb. 577, 658 N.W.2d 645 (2003). Where relief may be granted, although no precedent may be found, the court will so proceed. State ex rel. Stenberg v. Moore, 253 Neb. 535, 571 N.W.2d 317 (1997). [42-45] We see little reason to distinguish between the diversion of a corporate opportunity and any other jointly executed breach of fiduciary duty in determining whether defendants are jointly liable for damages resulting from the breach. There would be no sound basis in logic or public policy for concluding that defendants are not jointly liable for diverting a corporate opportunity, yet jointly liable for theft or mismanagement. Such a distinction, while conceivable, would be based in a technical understanding of equitable relief. But technicalities are not favorites of law or equity; courts relish them as instruments to prevent injustice, not to defeat justice. Miller v. School Dist. No. 69, 208 Neb. 290, 303 N.W.2d 483 (1981). Equity looks through forms to substance; thus, a court of equity goes to the root of the matter and is not deterred by forms. Dillon Tire, Inc. v. Fifer, 256 Neb. 147, 589 N.W.2d 137 (1999); Hall v. Hall, 238 Neb. 686, 472 N.W.2d 217 (1991). Where the defendants have acted jointly to breach their fiduciary duties, the risk that any one defendant will be unable to satisfy his or her proportion of liability should be borne by the other wrongdoers, not the wronged party. Equity will always strive to do complete justice. State ex rel. Beck v. Associates Discount Corp., 162 Neb. 683, 77 N.W.2d 215 (1956). The controlling objective is to make the plaintiff whole. Cf., Capital Investors v. Executors of Morrison's Estate, 800 F.2d 424 (4th Cir. 1986); Seaboard Industries, Inc. v. Monaco, 442 Pa. 256, 276 A.2d 305 (1971); Barnes v. Eastern & Western Lbr. Co., 205 Or. 553, 287 P.2d 929 (1955). The district court did not err in holding the appellants to be jointly and severally liable, with respect to either misappropriation from Varsity Investments or usurping the corporate opportunity of Varsity West. The appellants' third assignment of error is without merit.