Does an Executive Have a Duty to Pull Punches In Personal Litigation Against the Company?

| John J. Connolly

When a dispute between executive and company reaches the point of litigation, usually the executive’s title begins with “former.”  But not always.  Sometimes litigation proceeds while the executive remains an officer or director of the company.  How does the executive’s fiduciary duty to the company affect her litigation strategy and conduct?

Courts generally agree that a current executive can sue the company, at least in certain types of cases, without breaching the executive’s fiduciary duty.  A typical example would be a breach of a contractual obligation owed by the company personally to the executive, such as the failure to repay a loan.  E.g., Troglia v. Bartoletti, 451 P.2d 106, 108 (Mont. 1969) (“It is the rule in this state that although a director occupies a fiduciary relation to the stockholders, he is nevertheless entitled to demand payment of an honest debt due him from the corporation of which he is a director.”); see generally 3 W. Fletcher, Fletcher Cyclopedia of the Law of Corporations § 907 (2012).  Although authority is sparse, this principle may have limits.  A suit brought in bad faith may breach of the executive’s fiduciary duty to the corporation, see Armenian Assembly, Inc. v. Cafesjian, 692 F. Supp. 2d 20, 38 (D.D.C. 2010) (citing Clancy v. King, 954 A.2d 1092,1108-09 (Md. 2008)), although a claim filed in bad faith gives rise to other remedies as well.  In addition, courts will scrutinize the underlying transaction between a director and the company to ensure that the director did not take unfair advantage of the company.

But when the executive’s suit is permissible, does the fiduciary duty limit the way the executive conducts the litigation?  Again, authority is sparse, but perhaps the executive is not quite as unconstrained as other litigants.

In Inc. v. Gurland, 915 A.2d 991 (Md. 2007), a corporation terminated the employment of a director who was also an employee.  The director argued that he was entitled to severance compensation, and he demanded that the corporation pay or else he would sue.  When the corporation refused, the employee sued, and the corporation defaulted because of a snafu with the resident agent.  The director did not inform the corporation about the suit or the corporation’s failure to file a timely response.  He later obtained a judgment and promptly petitioned for a writ of garnishment; only then did the corporation become aware of the litigation.  The corporation requested that the director vacate the default and the garnishment.  The director refused, and he obtained a $150,000 judgment.  While that judgment was on appeal, the corporation filed a separate suit alleging that the director breached his fiduciary duty to the corporation by filing suit, by failing to inform the company about the default, and by vigorously enforcing his judgment. 

The Court of Appeals of Maryland affirmed the judgment for the director.  The court reasoned that a director was allowed to do business with his corporation so long as he gave proper notice of the conflicting interests and did not participate in decisions that involved his personal interests.  The court concluded that a director who had business with a corporation was entitled to sue for damage to his personal interests so long as the director gave the corporation advance notice of the likelihood of a suit and waited a reasonable period of time for the corporation to try to avoid a suit.  Because the director in Storetrax had provided the requisite notice, he did not breach any duty to the corporation by filing the suit and pursuing it within the law.  Nor did he breach his fiduciary duty by garnishing the corporation’s bank account without giving the corporation advance notice of his intention to do so; the court found the director had no duty to relinquish a properly obtained judgment merely because the corporation requested relief.

The decision in Storetrax suggests that facts matter, and the outcome might have been different if the executive’s conduct was more egregious.  Cf. Weaver v. Zenimax Media, Inc., 923 A.2d 1032, 1055 (Md. App. 2007) (executive’s surreptitious acquisition of company emails in preparation for suit against company might constitute breach of executive’s duty of loyalty).  Some decisions suggest that a corporate officer or director may not use his corporate status to advance his personal litigation position, or even that an officer in litigation with the company should ensure that some disinterested person is safeguarding the company’s position.  See Storetrax, 915 A.2d at 1008 (citing Union Ice Co. v. Hulton, 140 A. 514 (Pa. 1928)).  One court has read Storetrax to mean that a fiduciary who sues the corporation must “properly balance his own interests with the interests of the corporation,” Armenian Assembly, 692 F. Supp. 2d at 37, which implies a broader, fact-based inquiry.  

If these cases form any rule of thumb, it is that an executive contemplating a suit against the company should provide clear notice of that intention and give the company a reasonable time to resolve the dispute short of litigation.  If the matter is not resolved, the executive may proceed with the suit, at least so long as it is a good faith claim based on an obligation the company owes to the executive personally.  Once suit is properly filed, as long as the executive is not interfering with the corporation’s defense of the litigation, the executive probably can use the ordinary litigation tools in pursuit of a judgment and in collecting on the judgment.  But the courts have not held that the executive’s fiduciary duty disappears when litigation commences.  They simply have not drawn the boundary of appropriate conduct in this context. 

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Information provided on InsightZS should not be considered legal advice and expressed views are those of the authors alone. Readers should seek specific legal guidance before acting in any particular circumstance.