Articles Posted in Breach of Fiduciary Duty

A business made loans to the son of its founder and never required the loans to be repaid. The business later attempted to write off the loans as bad debts or as ordinary and necessary business expenses. The IRS pursued the business, seeking $92 million in back taxes. The company petitioned the tax court, but after a trial the court upheld the agency’s determination, finding that the debts could not be written off because the company and the founder’s son lacked a bonafide creditor-debtor relationship. The company appealed and the appellate panel affirmed, finding that the company routinely deferred payment or renewed promissory notes without any receipt of payments and that it did not expect to be repaid unless various other events occurred. The panel determined that the company had not shown that it presented sufficient existence of a bonafide relationship to the tax court and it, therefore, affirmed the decision of the lower court.

Ron Van Den Heuvel’s father founded VHC in 1985 to provide services to the paper manufacturing industry. Ron and his four brothers all worked for VHC or its subsidiaries in some capacity, but Ron found particular success. Ron started at two of VHC’s subsidiaries, directed a number of its other companies, and launched his own companies separate from VHC. Between 1997 and 2013, VHC advanced $111 million to Ron and his companies. The payments fulfilled several purposes, including paying debts owed by both Ron and his companies. Ron and his companies would come to owe VHC $132 million, with interest, by 2013, but would only repay $39 million.

In 2004, VHC began writing off its payments to Ron as “bad debts,” ultimately writing off $95 million by 2013. After an audit, the IRS issued a notice of deficiency to VHC rejecting $92 million of the write-offs. VHC petitioned the tax court, and after a ten-day bench trial, the tax court upheld the agency’s deficiency finding. The court determined that Ron’s debts could not be written off because VHC and Ron lacked a bonafide debtor-creditor relationship. VHC then appealed. Continue reading ›

Maryland’s highest court, the Court of Appeals, recently settled a longstanding question regarding whether Maryland law recognized an independent cause of action for breach of fiduciary duty. With its opinion in Plank v. Cherneski, the Court resolved an area of confusion that has troubled Maryland courts for more than 23 years since the Court’s 1997 opinion in the seminal case of Kann v. Kann.

In 1997, the Kann court held:

There is no universal or omnibus tort for the redress of a breach of fiduciary duty by any and all fiduciaries. This does not mean that there is no claim or cause of action available for breach of fiduciary duty. Our holding means that identifying a breach of fiduciary duty will be the beginning of the analysis and not its conclusion.

Best-Chicago-Business-Dispute-Lawyer-1-300x189AbbVie, a pharmaceutical company headquartered in Illinois, was sued by a trading firm after it conducted a Dutch auction to determine the price for its tender offer to repurchase shares of its own stock. Shareholders participated in the auction, offering to sell their stock back to AbbVie, and the lowest offered prices were selected by AbbVie until AbbVie had reached $7.5 billion worth of repurchases. AbbVie hired a company to receive bids and determine the final price it would purchase shares at. That company published preliminary numbers and later corrected them after the market had closed. The trading firm alleged that by publishing the preliminary numbers and correcting them after the close of trading, AbbVie had violated the Securities Exchange Act. The 7th U.S. Circuit Court of Appeals ruled in favor of AbbVie, affirming the decision of the district court and finding no violation.

AbbVie, Inc. made a tender offer to repurchase as much as $7.5 billion of its outstanding shares. AbbVie conducted a Dutch auction to determine the price. AbbVie began the auction by setting the price at $114. Shareholders participated by offering to sell their shares at or below $114. AbbVie then selected the lowest price that would allow it to purchase $7.5 billion of shares from the tendering shareholders.

The auction took place from May 1, 2018, to May 29, 2018. On May 30, AbbVie announced that it would purchase 71.4 million shares for $105 per share. AbbVie’s stock, which had been trading at $100 closed at $103 on May 30. Approximately an hour after the close, AbbVie announced that it had received corrected numbers from the company it hired to receive bids, Computershare Trust Co. Instead of purchasing 71.4 million shares at $105 a share, AbbVie would purchase 72.8 million shares at $103 a share. The next day, AbbVie’s share price fell to $99.

Walleye Trading LLC filed suit, contending that AbbVie’s announcement of preliminary numbers, followed by corrected numbers after trading closed, violated § 10(b) and 14(e) of the Securities Exchange Act of 1934. Walley also argued that William Chase, a controlling manager of AbbVie, was liable under § 20(a) of the act. The district court dismissed Walleye’s complaint for failing to state a claim, and Walleye appealed. Continue reading ›

Lubin_FB_1-large-300x115A railroad switch carrier sued a railroad operator alleging that the operator took advantage of its position as a majority shareholder in a joint venture to force the joint venture company to agree to a contract with atrocious and unfair terms. The switch carrier alleged that the contract forced the joint venture company to pay 3.5x the fair market value of rent for use of railroad tracks, as well as turn over its assets to the railroad operator. The plaintiff sued, but the district court found that the company’s claims were preempted by federal statutes. On appeal, the 7th Circuit found that the plaintiff had failed to develop several of the arguments that it advanced in the district court. The appellate panel found that there was no excuse for this error because the plaintiff and defendant were both sophisticated litigants. The panel determined that the plaintiff had waived its arguments as a result.

Canadian Pacific Railway owns 49% of Indiana Harbor Belt Railroad Company while Consolidated Rail Corporation owns 51%. Two other defendants, Norfolk Southern Corporation and CSX Corporation, indirectly own Consolidated Rail. Norfolk Southern and CSX each control two directors on Indiana Harbor’s seven-person board. Indiana Harbor operates as a switch carrier on tracks owned by Consolidated Rail and its parent companies near Chicago.

The railroads managed their arrangement with a 99-year contract executed in 1906 between Indiana Harbor and the previous owners of the tracks. Though the agreement expired in 2006, for seven years between 1999 and 2006, Consolidated Rail stopped paying expenses and invoicing Indiana Harbor for rent. This quid pro quo cessation lasted through the expiration of the agreement and into the extended negotiations over a new trackage rights contract. Continue reading ›

Gary Ganzi and his sister, Claire Ganzi Breen, sued their cousins back in 2012 for allegedly cheating them out of millions of dollars in royalties over the course of more than 40 years. A state court judge in Manhattan sided with the Ganzi siblings, saying the actions of the defendants, Walter Ganzi Jr. and Bruce Bozzi Jr., constituted a breach of fiduciary duty in which they prioritized their own financial wellbeing above the responsibility they bore their shareholders.

The defendants are the grandsons of the original founders of the iconic Palm steakhouse, and together they own a controlling share of the company, Just One More Restaurant Corp., which owns the chain of restaurants. They have opened more than 20 Palm restaurants across the U.S. and have licensed intellectual property related to the restaurant, including the right to use the name, logo, and the look and feel of the original Palm. The Ganzi siblings own all that intellectual property and the defendants allegedly licensed that property from them every time they opened a new Palm restaurant.

The price of licensing that intellectual property was set at a flat rate more than four decades ago, and as a result, the Ganzi siblings have been paid $6,000 in licensing fees for every new Palm restaurant that opens, but they claim that it’s worth much more. Continue reading ›

If someone is accused of defrauding investors in one city, does that mean that person can’t do business with another company in another city? Especially before the allegations of fraud have been determined by a court of law?

That’s the question James “Woody” Dillard’s attorneys and business partners are asking as investors who were allegedly defrauded by Dillard try to claim potential vendors for Dillard and his business partners should have all their facts in order before signing on the dotted line.

Dillard has recently partnered with Streamline Boats of Hialeah, Florida, which makes semi-custom fishing boats. Although the company is only a couple years old, it has already changed locations several times and is currently looking to sign a lease for warehouse space at the Port of Pensacola. The city of Pensacola has put the lease on hold while they investigate.

Specifically, the city is worried about styrene, a foul-smelling by-product from working with fiberglass, which is a prominent material used to make all kinds of boats these days. Having made strides in reducing their emissions and their impact on the environment, the city is concerned that having a boat manufacturer in their warehouse district will undo much of the work they’ve done towards making and maintaining a more eco-friendly city.

Sanchez, one of the managers of Streamline Boats, claims they use very little styrene in the production of their boats, and that they invest heavily in the warehouse space they use to make sure they don’t stink it up. Essentially, they strive to become ideal tenants.

But two investors who invested in another of Dillard’s business ventures claim emissions should be the least of the city’s concerns when deciding whether to approve the lease. Continue reading ›

Last fall, Alden Shoe Co. realized its CFO had allegedly been embezzling millions of corporate funds and transferring them to his own, personal accounts. More than half of what he allegedly stole from the shoe company he is claimed to have used to pay for gifts he gave to Bianca de la Garza, including a car, diamond jewelry, designer clothes and handbags, and investing in her production company, Lucky Gal Productions.

Unfortunately, Lucky Gal Productions according to news reports has never turned a profit in the six years since it was founded, making it unlikely the former CFO will ever see a return on his investment.

Richard Hajjar was hired by the shoe company back in 1987. His two brothers already worked for the company and his father had been the CPA for Arthur S. Tarlow Jr., Alden’s current president. No one questioned Hajjar’s loyalty until last fall when Tarlow realized Hajjar had allegedly been moving funds from the company’s bank account into family trusts. When he approached Hajjar about it, Hajjar allegedly dodged the question but assured Tarlow the funds would be transferred back into the company’s bank account.

Hajjar then according to news reports stopped showing up for working, texting Tarlow to say he wasn’t feeling well. When the funds didn’t show up in the bank account, Hajjar allegedly stopped responding to Tarlow’s text messages, and Tarlow went to his Santander bank branch, where the shoe company had accounts. Tarlow then discovered that $10 million in retained earnings was allegedly missing from the account. Continue reading ›

When a corporation hires an independent auditor to inspect its financials does that auditor owe fiduciary duties to its client? If no fiduciary duties exist as a matter of law, do they arise by virtue of a “special relationship” between the parties? In a matter of first impression, an Illinois appellate court wrestled with these questions and answered both in the negative.

Asian Human Services, Inc. (“AHS”) is a non-profit organization dedicated to helping lower income immigrants obtain health, dental, and employment assistance. After AHS was sued by another non-profit organization, AHS brought a third-party claim for breach of fiduciary duty against its long-time independent auditor, James Wong.

AHS alleged that Wong owed fiduciary duties to the non-profit by virtue of the special circumstances of the parties’ relationship. The complaint alleged that Wong had served as the independent auditor of AHS for more than a decade during which time he became an important advisor to the organization. Additionally, the complaint alleged that AHS relied heavily on Wong and that he even served an integral role in AHS’s hiring process for four separate Chief Financial Officers.

Wong filed a section 2-619 motion to dismiss AHS’s claim arguing that: (1) independent auditors do not stand in a fiduciary relationship with their clients, and (2) there were no special circumstances that created a fiduciary relationship. After briefing and oral argument on the motion, the trial court granted appellee’s motion to dismiss, with prejudice, and included Supreme Court Rule 304(a) language.

AHS appealed and argued that the trial court erred in relying on a federal case, Resolution Trust Corp. v. KPMG Peat Marwick, 844 F. Supp. 431 (N.D. Ill. 1994), which held, as a matter of law, that generally, an independent auditor does not owe a fiduciary duty to its client. Instead, the non-profit argued that the trial court should have relied on case law from various other state courts which have found that independent auditors owe fiduciary duties to their clients.

The appellate court acknowledged that no Illinois case law addressed the issue of whether independent auditors owe fiduciary duties to their clients. But ultimately the appellate court found that AHS waived the argument. In the trial court, AHS expressly stated that it was “not arguing that Mr. Wong became a fiduciary to AHS because he acted as an auditor.” AHS’s attorney in the trial court told the trial judge at oral arguments on the motion to dismiss: “One thing I want to make clear is that we’re not arguing that Mr. Wong became a fiduciary to AHS because he acted as an auditor. Now, clearly that would be the antecedent relationship and it makes his actions that much more strange, but that’s not the basis.” Continue reading ›

The Illinois Appellate Court found that a marketing company adequately pleaded a claim for breach of fiduciary duty against one of the former founders of the company who left to work for a competitor. James P. Keane Sr. was one of the founders of Advantage Marketing Group Inc. and owned 35% of the company. When he left his company to purchase and operate a competing business, Advantage sued. The trial court dismissed Advantage’s breach of fiduciary duty claim finding that because Keane was not an officer or director at the time of the alleged conduct, Advantage failed to establish that he owed a fiduciary duty to the company.

The appellate court rejected the argument that only officers or directors of a company owe fiduciary duties to the company. The Court explained that the determination of whether a fiduciary relationship exists must be made based on an examination of the realities of the relationship rather than the employee’s title. Accordingly, the Court examined the nature of Keane’s relationship with Advantage to determine if Advantage adequately alleged that Keane owed fiduciary duties to the company. Continue reading ›

The primary laws that govern the disclosures to shareholders and the marketplace include the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules adopted by the Securities and Exchange Commission (the “SEC”).  These laws have come subject to scrutiny in the Camping World Holdings, Inc. who suffered financial losses in excess of $100,000 due to a failure to disclose.  Some of their executives have been charged with failing to disclose material information during the Class Period, violating federal securities laws.

Generally speaking, causes of action have been interpreted by the federal courts to specifically set forth in the statutes and to address claims brought as class actions.  These types of claims are often brought forward and against the corporation, its directors and officers, purchasers and sellers of securities, persons otherwise having a duty to investors who participate in the alleged disclosure violation.  Sometimes accountants and underwriters and persons required to make public filings with the SEC.  The history behind it is entrenched in common law notions of disclosure claims such as fraud and negligent misrepresentation. Continue reading ›

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