Court Discusses Claims Against Corporate Board Members And The Business Judgment Rule

Originally published by David Fowler Johnson.

In In re Estate of Poe, the son of a car dealership owner who was frozen out of control of the business by the dying father’s decision to issue new stock sued his father’s estate, trust, and officers of the business. No. 08-18-00015-CV, 2019 Tex. App. LEXIS 7842 (Tex. App.—El Paso August 28, 2019, no pet. history). The court of appeals held that the son had the burden to overcome the business judgment rule as a part of his breach of fiduciary duty claim. The court held that the son’s claim that the directors breached their duty by delegating responsibilities to others failed:

Bound up within the duty of care is the obligation to actually manage the affairs of the corporation. Yet we do not read into that duty the obligation to micromanage corporate affairs. Good corporate boards often rely on skilled employees to handle day-to-day operating decisions. Nothing suggests that Bock and Castro did not do that here. They continued the employment of two long-time managers at the Dodge and Chrysler dealerships, both of which Dick had originally hired. Sergent explained they did so to keep a continuity of experienced management who had relationships with the employees. They retained John Attel and initially placed him in charge of the parts and service departments of the dealerships. No witness criticized, or even specifically analyzed the profitability of those departments. Attel was later promoted to general manager, but with the approval of Chrysler. Finally, the board regularly met with management, and reviewed financials. We find no evidence of the breach of the duty of care in this record and the directed verdict was properly granted on that claim.

Id. The court found that the issue of whether the directors breached their duties by hiring a director to do legal work should have gone to the jury:

 Officers or directors self-deal when they make a personal profit from a transaction by dealing with the corporation. The burden of proof is on the interested officer or director to show that the action under consideration is fair to the corporation. As interested director transactions, each of the billings for professional services we note above might well be justified as fair to the corporation. The rates charged may have been appropriate for the service rendered. The burden of fairness, however, fell on the interested directors and not Richard. Just as Richard failed to explain the business decisions in sufficient detail for us to conclude there was some evidence of a violation of the business judgment rule, the record is similarly limited, or at least conflicting, on the fairness issue for these billings. We therefore remand the claims for disgorgement under the fiduciary duty of loyalty claim as to Bock and Sergent.

Id. The court then reviewed the conspiracy to breach fiduciary duty claims against the individual defendants, and held that those claims were properly dismissed because there was no evidence that they knew of an improper purpose in the transactions.

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