Opinion ID: 1665643
Heading Depth: 1
Heading Rank: 5

Heading: whether summary judgment for scanlan was improper

Text: The central issue of this case is whether Mr. Scanlan, in fact, breached any fiduciary duty to Steelvest by preparing to incorporate his own steel business while still employed with Steelvest. If Scanlan was not guilty of any such breach, then the other appellees, likewise, may not be held responsible for ensuing civil violations. Appellants contend that the summary judgment here for Scanlan was improper for two reasons. First, they claim the record reveals the existence of material factual disputes concerning whether Scanlan breached any fiduciary duties. Secondly, they assert that the decisions of the trial court and the Court of Appeals rested upon an incorrect interpretation of Aero Drapery of Kentucky, Inc. v. Engdahl, Ky., 507 S.W.2d 166 (1974), respecting the law of corporate fiduciary responsibilities. As such, and under a correct interpretation of this case, a material issue of fact may exist as to whether Scanlan breached his fiduciary duties. Generally, in the absence of a contractual provision to the contrary, corporation fiduciaries, such as directors or officers, are free to resign and form an enterprise that competes with the corporation after they sever their connection with it. See, 19 C.J.S. Corporations § 512. Kentucky law has, however, recognized that directors and officers of a corporation may not set up, or attempt to set up, an enterprise which is competitive with the business in which the corporation is engaged while still serving as directors and officers. See, Aero Drapery of Kentucky, Inc. v. Engdahl, supra . See also, Raines v. Toney, 228 Ark. 1170, 313 S.W.2d 802 (1958); Witmer v. Arkansas Dailies, Inc., 202 Ark. 470, 151 S.W.2d 971 (1941). Thus, they should terminate their position/status as directors or officers when they first make arrangements or begin preparations to compete directly with the employer corporation. Aero Drapery of Kentucky, Inc. v. Engdahl, supra ; Covington & Lexington Railroad Co. v. Bowler's Heirs, 72 Ky. 468 (1872). Scanlan was not a mere employee and to the contrary his relationship with the corporation was both as a director and an officer. This provides for an established basis of fiducial confidence as between the corporate employer and Scanlan who, therefore, owed a duty of loyalty and faithfulness to the corporation. This duty also includes a duty not to act against the employer's interest. DSG Corporation v. Anderson, 754 F.2d 678 (6th Cir.1985); Stewart v. Kentucky Paving Company, Inc., Ky.App., 557 S.W.2d 435 (1977). Both the trial court and the Court of Appeals relied decidedly upon Fletcher Cyclopedia of Corporations, § 856 wherein valued reference was made to only one of two policies generally recognized by the courts when defining the scope of the right of a corporate officer to enter into competition with the principal. The Court of Appeals relied upon the following policy: The . . . policy recognized by the courts is that of safeguarding society's interest in fostering free and vigorous competition in the economic sphere. As stated by Mr. Justice Irving Levine of the Maryland Court of Appeals: [The] policy in favor of free competition has prompted the recognition of a privilege in favor of employees which enables them to prepare or make arrangements to compete with their employers prior to leaving their employ of their prospective rivals without fear of incurring liability for breach of their fiduciary duty of loyalty. The right to make arrangements to compete is by no means absolute and the exercise of the privilege may, in appropriate circumstances, rise to the level of a breach of an employee's fiduciary duty of loyalty. Thus the privilege has not been applied to immunize employees from liability where the employee has committed some fraudulent, unfair or wrongful act in the course of preparing to compete in the future. But it has been said that generally proof of serious employee misconduct causing injury to the employer must be shown before relief will be granted. The ultimate determination of whether employees or officers have breached their fiduciary duties to their employers by preparing to engage in a competing enterprise must be grounded upon a thorough examination of the facts and circumstances of each particular case. Fletcher, supra prominently refers to another important policy which is applicable to the right of an officer or director to engage in rival business and which provides: Commercial competition must be conducted according to basic rules of honesty and fair dealing. The tendency of the law, both legislative and common, has been in the direction of enforcing increasingly higher standards of fairness or commercial morality in trade. This concern for the integrity of the employment relationship has led courts to establish a rule that demands of a corporate officer or employee an undivided and unselfish loyalty to the corporation. A direct corollary of this general principle of loyalty is that a corporation officer or other higher-echelon employee is barred from actively competing with his or her employer during the tenure of the employment, even in the absence of an express covenant so providing. Thus, prior to termination of employment, an employee must not solicit for himself or herself business which the position requires the employee to obtain for the employer. The employee must refrain from actively and directly competing with the employer for customers and employees, and must continue to exert his or her best efforts on behalf of the employer. The two policies have led the courts into diverse positions. However, we find that commercial competition must be conducted according to simple and basic rules of honesty and fair dealing. This case fits within the concept enunciated in Aero Drapery of Kentucky, Inc. v. Engdahl, supra . Herein the facts, as developed, disclose that Scanlan, while still employed with Steelvest, made certain plans, arrangements, and preparations for setting up his own business to compete with Steelvest. He sought legal and accounting advice, made active efforts to acquire bank financing, and recruited investors, two of whom, coincidentally, were chief executive officers of major customers of Steelvest. Scanlan failed to disclose such activities to any representative of Steelvest. There is also some evidence of record that prior to his resignation from Steelvest, Scanlan indicated to prospective investors and to bank personnel that he would bring with him some of the present employees of Steelvest. Just coincidentally/inferentially, as noted, shortly after Scanlan resigned from Steelvest, nine office and supervisory employees left the company to work for Scansteel. Therefore, we cannot conclude that there are no genuine issues of material fact in this case respecting Scanlan's alleged breach of fiduciary duty and, thus, the summary judgment in his favor was erroneous.