Opinion ID: 1142705
Heading Depth: 2
Heading Rank: 3

Heading: Gray's Duty of Loyalty

Text: Officers such as Gray owe a second duty to the corporation they serve, a multi-faceted duty of loyalty, of good faith, a central sphere of which has been recently renamed the duty of fair dealing. Principles of Corporate Governance, § 5.01. See also, Derouen v. Murray, supra ; Hill v. Southeastern Floor Covering Company, Inc., 596 So.2d 874, 877 (Miss. 1992); Fought v. Morris, 543 So.2d 167, 171 (Miss. 1989); Ellzey v. Fyr-Pruf, Inc., 376 So.2d 1328, 1332 (Miss. 1979); Cooper v. Mississippi Land Co., 220 So.2d 302 (Miss. 1969); Knox Glass Bottle Co. v. Underwood, 228 Miss. 699, 89 So.2d 799 (1956). This duty is fiduciary in nature, by reason of which the officer is held to something stricter than the morals of the market place. Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928). The duty obtains most directly when the officer is interested personally in a matter affecting the corporation. The concept of interest is broadly defined and includes cases where the officer has a relationship with a party to the transaction that may reasonably be expected to affect the officer's judgment or is subject to the influence and domination of such a party. See Principles of Corporate Governance, § 1.23(a). Yet the duty goes beyond this and is coextensive with the legitimate, enduring interests of the corporation. Loyalty to those interests is the corporation's due. The duty of loyalty takes no canonical form. It is as complex as corporate interests and officer temptations and means of descent from grace. It partakes of the objective as well as the subjective. If, for example, an officer neglects the substantial interests of his corporate principal by preferring another in a matter of importance, the officer may well offend his duty of loyalty though his heart be pure. In such a case we would not concern ourselves with the officer's subjective intent but with the content of his conduct reasonably viewed by objective third persons. We would ask whether there be a rational basis for a belief his action was in the entity's best interest and not whether in fact he held such a belief. As members of the human race and participants in original sin, corporate officers at times consciously pursue the interests of self and others to the neglect of their principal. They may seize opportunities for profit they know belong to their corporations. At other times they steal and embezzle and defraud the corporations they serve, and so their malignant mind becomes our central focus; hence, the subjective side of the duty of loyalty. We need not search here for subjective breach. In the USB-drafted findings of fact, the Chancery Court found there was no evidence in this case that Mr. Gray's conduct was in any way the result of fraud, dishonesty, or similar misconduct, ... . USB makes no charge Gray has perpetrated a fraud. It concedes Gray has received no payment to him personally or other personal benefit arising or growing out of loans and other transactions during the time he was employed by USB. This is tantamount to a finding Gray was not interested in the several credits for which he is called to account. Gray's case is not within the newly-refined duty of fair dealing but is subject rather to the older, admittedly more amorphous duty of loyalty, objective variety. What the Court does say is, the source of Gray's sin lay in his divided loyalties in breach of his fiduciary duty to USB. To be sure, for some five months Gray acted for BOM and USB with the full knowledge and acquiescence of each. That period of dual devotion ended July 2, 1984. Much is said in the USB-drafted findings, and in the briefs of the parties, of pre-July 2 matters, of Gray's handling of the LK & R and Bigelow matters prior to July 2, 1984. This is but background. Gray's present and only offense is that, once he became an officer of USB, he neglected the interests of USB and favored those of BOM. And so the Court below held Gray violated his fiduciary duty ... in the Bigelow and LK & R transactions by ... acting with divided loyalties. One feature of the holding below seems off base. The Court found Gray violated his fiduciary duty in the Piecara transactions by exceeding his authority both as to the amounts involved and inadequate and unperfected security for such advances. The Court faulted Gray as well in the Bigelow and LK & R transactions for exceeding his [loan] authority. These offenses import primarily the duty of care, not the duty of loyalty. A bank officer extending credit in excess of his loan authority or without adequate security may well act in complete and disinterested good faith, and in the belief that he is furthering the interests of the bank. This is not to say there may not be some level of excess that may, objectively viewed, offend the duty of loyalty. On today's record, these findings support the view that Gray violated his duty of care, but that is all. A part of an officer's duty of loyalty requires that he protect the corporation's property. That he may not appropriate corporate assets to his own use seems apparent. And the same of corporate opportunities. It is equally an offense that he gives that property away to the poor, to the church, to charity. However worthy in other settings, altruism has little role within the officer's duty of loyalty, at least absent full disclosure and formal authorization. And so when Gray on July 23, 1984  gratuitously, if you will  took USB's $407,210.96 and gave it to BOM (to the credit of LK & R), he breached his duty of loyalty to USB. Similarly, when Gray expended USB's funds for Bigelow to pay Heller and on January 13, 1985, issued USB's letter of credit to prevent Heller's calling the BOM letter before it expired, he breached his duty of loyalty to USB. Whether these actions evince a (disinterested) loyalty to BOM is not important. There is substantial evidence supporting the crudely put holding Gray breached his duty of loyalty to USB in the sense that no loan officer could rationally believe Gray's handling of these matters was in USB's best interest. [10] These things said, we may only affirm the judgment in favor of USB and against Gray.