Opinion ID: 10313
Heading Depth: 2
Heading Rank: 1

Heading: McDonald's Fiduciary Breach

Text: 16 The parties agree that Louisiana's rules on mandates (agency), La. Civil Code arts. 2985 et seq. govern this case. McDonald contends that portions of Louisiana's statute on corporate directors, La.Rev.Stat. §§ 12:84 and 12:91 also apply. They do dispute the proper application of articles 3005 and 3006 to the issue of damages. 17 According to Article 3000, 18 Powers granted to persons, who exercise a profession, or fulfill certain functions, or doing any business in the ordinary course of affairs to which they are devoted, need not be specified, but are inferred from the functions which these mandataries exercise. 19 The district court, in evaluating McDonald's obligations to C & B, found that McDonald was hired because of his expertise in the compressor industry to run and manage the company in a conservative fashion, minimizing Cason's personal exposure. The court held that article 3000 applied but that Cason's instructions for running the company were general. It was this generality that gave McDonald room for rationalizing his own activities outside the company. McDonald actively concealed his outside interests, particularly evidenced by the concealment letter he drafted for Humphrey and in the exclusion of his name in invoices. The district court also cited McDonald's attempt to have Humphrey alter the COI documents of incorporation to show only Humphrey as owner once it became apparent that McDonald's interest in COI had become known to C & B and Cason. McDonald's own testimony at trial showed him taking positive steps to prevent Cason and C & B from learning of his interests in companies doing business with C & B. There is also McDonald's active concealment of the change in the rental agreement from lease purchase to straight lease. Based upon the evidence, the district court decided that McDonald knew his actions were not fully justified and that he was breaching his fiduciary obligation to C & B. 20 McDonald argues that he is protected by La.Civ.Code art. 3006 which states 21 In case of an indefinite power, the attorney can not be sued for what he has done with good intention. 22 The judge must have regard to the nature of the affair, and the difficulty of communication between the principal and the attorney. 23 Article 3006 has not been the subject of much modern litigation; however, McDonald says that it has been used to excuse liability on the part of an agent who lost all the assets of her principal by placing blind faith in an unscrupulous lawyer. Weinhardt v. Weinhardt, 214 So.2d 254, 256-57 (La.Ct.App.1968). McDonald argues that his agency was indefinite, and article 3006 prevents recovery against him because he acted in good faith, albeit unwisely. 24 The district court rejected this argument, finding that McDonald's actions went beyond being unwise and were not wholly of good intent. In its memorandum ruling, the court stated, 25 Although McDonald clearly intended for C & B to profit from his position and actions made within that position at C & B, he also intended for Maxwell McDonald to profit from same. Although McDonald had no intent to injure or damage C & B, he had intent for Maxwell McDonald to profit from the situations he created, at least in part, from the dual position McDonald held as C & B's agent and as a COI/Humphrey investor. 26 The court found that McDonald's responsibilities were indefinite largely because he refused to respond to Cason's repeated requests for information concerning the business, an example being Cason's several requests for the new rental agreement between C & B and COI. The court rejected the application of Article 3006, finding that McDonald acted with mixed motives, intending to benefit himself and C & B. 27 McDonald admits to having mixed motives, but he insists that this duality is entirely consistent with having a mandate coupled with an interest. He argues that he intended to benefit himself only to the extent he was a C & B shareholder. In reference to Article 3006, McDonald asserts that he went out of his way to treat C & B fairly and never intended to harm the company: there was no evidence showing that any transaction was unfair to C & B. In addition, he claims that he believed that his mandate did not involve the purchase of used equipment. In support, he asserts that C & B was not financially capable of making speculative purchases. Finally, he further asserts that the nature of the mandate--to grow the company conservatively, without putting Cason personally at risk--and the difficulty of communicating with a semi-retired owner support his position. 28 With respect to Article 3005 which says, 29 [The mandatary] is bound to restore to his principal whatever he has received by virtue of his procuration, even should he have received it unduly[,] 30 McDonald contends that he profited from his own investment risk at a time that C & B was unable to make such investments, not from his procuration with C & B. 31 There are two types of transactions involved here. The first are those in which CCC sold or leased equipment to C & B. The second type are transactions in which CCC transacted with other companies and C & B took no part. We consider each type in turn under the appropriate rubrics.
32 Agency law in Louisiana requires mandataries, like McDonald, to disgorge all undisclosed benefits that they receive in dealing secretly with either their employers/principals or their employers' competitors. Texana Oil & Refining Co. v. Belchic, 150 La. 88, 90 So. 522 (La.1922); Neal v. Daniels, 217 La. 679, 47 So.2d 44 (1950); ODECO Oil & Gas Co. v. Nunez, 532 So.2d 453 (La.Ct.App.1988); Robinson v. Commercial Cattle Co., 82 So.2d 108 (La.Ct.App.1955); McDonald v. O'Meara, 473 F.2d 799 (5th Cir.), cert. denied, 412 U.S. 906, 93 S.Ct. 2293, 36 L.Ed.2d 971 (1973). The agent is not entitled to avail himself of any advantage that his position may give him to profit beyond the agreed compensation for his service. ODECO, 532 So.2d at 462 (quoting Texana, 90 So. at 527). The principal need not show damage when the agent benefits secretly because it would be difficult to prove such loss. Furthermore, the agent must account for any profit he thus received though it does not appear that the principal has suffered any actual loss by fraud or otherwise. Id. at 462-63. 33 We decline to differ with the district court's rejection of McDonald's argument that article 3006 applies because he acted with good intentions. First, the district court found that he did not act with good intentions; instead, he concealed his self-dealing because he knew his conduct was untoward with respect to his duties to C & B. Second, McDonald fails to cite authority suggesting that article 3006 overrides prevailing Louisiana agency law which does not permit an agent to escape liability for an intentional violation of his fiduciary duties. McDonald committed secret double-dealing in the ordinary course of C & B's business. The district court correctly found McDonald liable for breach of his fiduciary duty to C & B.
34 Corporate officers have a fiduciary duty to their companies. La.Rev.Stat. § 12:91. Nonetheless, they are permitted to do business with their corporations when: (1) the director disclosed his interest and the board authorized it in good faith; or (2) the director disclosed his interest and the shareholders authorized it in good faith; or (3) the transaction was fair at the time it was authorized or ratified by the board, a committee, or the shareholders. La.Rev.Stat. § 12:84(A). 35 McDonald contends that § 12:84(A) establishes a fairness standard. The plain language of the statute requires both (1) disclosure and approval and (2) fairness. Thus, fairness alone is insufficient. Because McDonald failed to disclose his interest and the board never approved his activities, he cannot rely on § 12:84.
36 The district court found that McDonald's deceit excluded C & B from certain transactions in which it might have chosen to participate had it been given the opportunity. Although C & B's financial ability to buy used equipment was limited, according to the court the evidence indicated that McDonald unilaterally decided--without C & B's knowledge and without consulting Cason--whether a given deal was a risk C & B wished to or could afford to take. 37 McDonald seeks protection behind La.Rev.Stat. § 12:91 by claiming that the transactions involving himself, COI, and CCC with third parties were arm's length and fair; and, therefore, the standard under § 12:91 was met. Section 12:91 states: 38 Officers and directors shall be deemed to stand in a fiduciary relation to the corporation and its shareholders, and shall discharge the duties of their respective positions in good faith, and with that diligence, care, judgment and skill which ordinarily prudent men would exercise under similar circumstances in like positions.... 39 The district court was right not to speculate as to whether C & B, had it known of the opportunities, would have accepted them or chosen to let McDonald make those decisions for it. The court allowed for the fact that C & B was operating under constraints imposed by its loan obligations and the charge of its chief shareholder. But even these allowances do not surmount the district court's finding on good faith. McDonald's active concealment for years of his interests in relation to C & B transactions or potential transactions undermines any argument on his part that he acted fairly and to the benefit of both C & B and himself. C & B was never allowed to make those decisions for itself. We do not dispute the district court's good faith finding, and we affirm its judgment that McDonald breached his fiduciary duty to C & B.