Opinion ID: 1894114
Heading Depth: 2
Heading Rank: 2

Heading: Violation of Fiduciary Obligations

Text: On the one and only claim remaining in the case, Theodore contends that Robert and Rona violated the fiduciary duties they owed to him as a consequence of their joint engagement in the Rosenthal business enterprises. Through that wrongful conduct, Theodore continues, he was improperly forced out of the family businesses and... sold his share of those businesses at an unfairly low price. Against that remaining claim that they wrongfully froze Theodore out of the family enterprises, defendants raise a number of objections concerning the presiding justice's jury instructions on the general fiduciary obligations owed to each other by Robert, Rona, and Theodore in the context of their dealings in the Rosenthal business complex. The presiding justice set forth the following four specific fiduciary duties owed by the business associates to each other: (1) To act with that degree of diligence, care and skill which ordinarily prudent persons would exercise under similar circumstances in like positions; (2) To discharge the duties affecting their relationship in good faith with a view to furthering the interests of one another as to the matters within the scope of the relationship; (3) To disclose and not withhold from one another relevant information affecting the status and affairs of the relationship; (4) To not use their position, influence or knowledge respecting the affairs and organization that are subject to the relationship to gain any special privilege or advantage over the other person or persons involved in the relationship. This delineation of fiduciary obligations reflects accurately the duties of care and loyalty owed under Maine law by a corporate director to the corporation and its shareholders, as well as the duties of a partner to the partnership and his fellow partners. See 13-A M.R.S.A. § 716 (Supp. 1987); [3] 31 M.R.S.A. §§ 301, 302 (1978); Gay v. Gay's Super Markets, Inc., 343 A.2d 577, 578-79 (Me.1975); Simpson v. Richmond Worsted Spinning Co., 128 Me. 22, 31, 145 A. 250, 254 (1929). For the first time on appeal defendants object to the presiding justice's definition of the scope of the Rosenthals' duties as including furthering the interests of one another, rather than being restricted to furthering the interests of the business enterprise. We can find no clear error in that instruction, however, given the special nature of the Rosenthal family business, which most closely resembles a single complex family partnership doing business through numerous entities of varied legal forms. Cf. Dalton v. Austin, 432 A.2d 774, 777 (Me.1981) (existence of partnership is an inference of law based on established facts); Atlantic Acoustical & Insulation Co. v. Moreira, 348 A.2d 263, 267 (Me.1975) (fiduciary relationship of corporate directors takes on meaning and significance only in a particularized factual context). The duties owed in the circumstances here presented necessarily flowed to the other business associates, as well as to the Rosenthal enterprise as a whole and the component entities. Defendants also object to the presiding justice's instruction on the weight the jury, in determining whether defendants had violated their fiduciary obligations, should give to the reasoned exercise of business judgment by Robert and Rona. They contend that the instruction on the business judgment rule was inadequate in stating the role of that rule in protecting particular business decisions from being violations of the fiduciary obligations of those who made them. The justice instructed on that rule as follows: Now, in consideration of these issues, recognize that disagreement with procedures or results is not enough to demonstrate a violation of fiduciary duty. If good faith and prudent business judgment is applied to decisions made in operation of a business, then disagreement with results, or application of hindsight to suggest a different action should have been taken, is not a basis for complaint, absent violation of one or more of the [four specific] fiduciary duties I've already discussed in this instruction. (Emphasis added) We agree with defendants that this instruction so significantly misstates the business judgment rule as to require us to vacate the jury's special finding that Robert and Rona violated their fiduciary obligations to Theodore. Having already stated that defendants owed Theodore four specific fiduciary duties, including the duty of due care, the presiding justice told the jury that the business judgment rule would come into play only if defendants had not otherwise violated the duty of due care. Thus the justice left open to the jury to find a breach of fiduciary duty by defendants on a showing merely that they had failed [t]o act with that degree of diligence, care and skill which ordinarily prudent persons would exercise under similar circumstances in like positions. That is not the law. Many courts, including our own, have long recognized that it falls outside the proper judicial domain to inquire into and second-guess the prudence of particular business decisions honestly reached by those entrusted with the authority to determine what course of action best advances the well-being of the enterprise. See Gay v. Gay's Super Markets, Inc., 343 A.2d at 580 (quoting Bates Street Shirt Co. v. Waite, 130 Me. 352, 359, 156 A. 293, 298 (1931)). See also Radol v. Thomas, 772 F.2d 244, 257 (6th Cir.1985), cert. denied, 477 U.S. 903, 106 S.Ct. 3272, 91 L.Ed.2d 562 (1986); Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 264 (2d Cir.1984); Auerbach v. Bennett, 47 N.Y.2d 619, 629, 393 N.E.2d 994, 1000, 419 N.Y.S.2d 920, 926 (1979). In the last-cited case the New York Court of Appeals explained: Questions of policy of management, expediency of contracts or action, adequacy of consideration, lawful appropriation of corporate funds to advance corporate interests, are left solely to [the directors'] honest and unselfish decision, for their powers therein are without limitation and free from restraint, and the exercise of them for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient. Id. (quoting Pollitz v. Wabash R.R., 207 N.Y. 113, 124, 100 N.E. 721, 724 (1912)). The business judgment rule does not, however, protect business decisions that result from fraud or bad faith. See Gay v. Gay's Super Markets, Inc., 343 A.2d at 580. See also Radol v. Thomas, 772 F.2d at 257; Norlin Corp. v. Rooney, Pace Inc., 744 F.2d at 265; Panter v. Marshall Field & Co., 646 F.2d 271, 293 (7th Cir.), cert. denied, 454 U.S. 1092, 102 S.Ct. 658, 70 L.Ed.2d 631 (1981); Treadway Companies, Inc. v. Care Corp., 638 F.2d 357, 382 (2d Cir.1980); Auerbach v. Bennett, 47 N.Y.2d at 631, 393 N.E.2d at 1000, 419 N.Y.S.2d at 927. See also Principles of Corporate Governance: Analysis and Recommendations pt. IV, introductory note at 4-5 (Tent. Draft No. 4 1985). The policy reasons for keeping a court from evaluating after the fact the wisdom of a particular business decision do not apply when the issue is whether a party to that decision acted fraudulently or in bad faith. The assessment of fraud or bad faith is a function courts are accustomed to perform, and in performing it the courts do not intrude upon the process of business decisionmaking beyond assuring that those decisions are not improperly motivated. Thus the business judgment rule will insulate from a finding of liability the informed business decisions made by Robert and Rona unless Theodore is able to show that their allegedly harmful conduct was primarily motivated by fraud or bad faith. As we stated in Gay v. Gay's Super Markets, Inc., 343 A.2d at 581: In short, the plaintiff had to prove to the satisfaction of the Court below that the factual circumstances which caused him to charge the board of directors with bad faith and abuse of discretion were the motivating factors behind the board's policy of no dividend in enhancement of their personal interests rather than the promotion of the corporation's welfare. (Emphasis added) The Third Circuit, after having recognized that by the very nature of corporate life a director has a certain amount of self-interest in everything he does, stated the plaintiff's burden in a manner similar to our Gay opinion: Because the rule presumes that business judgment was exercised, the plaintiff must make a showing from which a factfinder might infer that impermissible motives predominated in the making of the decision in question. Johnson v. Trueblood, 629 F.2d 287, 292 (3d Cir.1980), cert. denied, 450 U.S. 999, 101 S.Ct. 1704, 68 L.Ed.2d 200 (1981) (emphasis added). See also Treco, Inc. v. Land of Lincoln Savings and Loan, 749 F.2d 374, 379 (7th Cir.1984). In the absence of a showing that defendants acted primarily through bad faith or fraud, the business judgment rule prevents a finding that defendants violated their fiduciary obligations to Theodore. See Radol v. Thomas, 772 F.2d at 257-58; Principles of Corporate Governance: Analysis and Recommendations pt. IV, § 4.01, at 11. The jury instruction in this case did not give Robert and Rona the benefit of the business judgment rule to which by law they are entitled. It erroneously permitted the jury to assess the ordinary prudence of defendants' business decisions, a function denied to judicial tribunals. The jury should have been told that for it to conclude that defendants in fact violated their fiduciary obligations toward Theodore, it must find that the predominating motive for their conduct was fraud or bad faith. Because the instruction failed sufficiently to inform the jury correctly and fairly in all necessary respects of the governing law, and ... resulted in prejudice to the complaining party, we vacate the jury's special finding that defendants violated their fiduciary duties toward Theodore. See Eckenrode v. Heritage Management Corp., 480 A.2d at 763.