Fiduciary Duties Category Archives — The Virginia Business Litigation Blog Published by Virginia and Washington, D.C. Litigation & Appeals Attorney

October 21, 2020

Project Manager Sabotages Employer, Ordered to Pay Triple Damages

About a year ago, a disgruntled systems engineer for government contractor Federated IT was sentenced to two years in prison for illegally accessing his former employer’s network systems, stealing critical servers and information, and causing a loss valued at over $1.1 million. In a civil lawsuit against his girlfriend and arising out of much of the same conduct, a former project manager at the same company has been held in default and ordered to pay over $150,000 in damages for breach of fiduciary duty, conversion, and conspiracy.

The facts of the case, which are assumed to be true by virtue of the fact the defendant was held in default for violating a court order, are as follows. Federated IT provides cyber security, information technology, and analytic and operations support services, and managed a contract with the U.S. Army Office of the Chief of Chaplains. Ashley Arrington was a project manager for the Army contract and a direct supervisor of Barrence Anthony, the engineer currently serving a two-year prison sentence. Arrington and Anthony were romantically involved but did not notify Federated IT about the relationship. At some point during Anthony’s tenure, he began to behave insubordinately and failed to show up for work, eventually leading to his termination. He decided to go out with a bang. Among other spiteful acts he was accused of before and after he left, Federated IT alleged he:

deactivated all administrator accounts except his own and refused to share the master password with his replacement
changed the responsible-party contact information on Federated IT’s Amazon Web Services account to “Anthony Enterprises”
modified Federated IT’s Help Desk email address to redirect emails to his personal email account
deleted files from a SharePoint project folder, including encryption keys, account information, and network diagram files
wiped the hard drive on his work laptop
made unauthorized copies of the Army’s servers which contained their Financial Management System
attempted thousands of “brute force cyberattacks” against the Chief of Chaplains’ web application system, which necessitated a shutdown of one of Federated IT’s servers.

November 27, 2019

Kevin Hart Did Not Breach Fiduciary Duty, Says Virginia Court

by Lee E. Berlik

A couple of years ago, comedian Kevin Hart teamed up with a Virginia mobile-game developer called Stand Up Digital, Inc., to develop and release a video game called “Gold Ambush” that would feature Hart and his family members as playable characters. Hart licensed his likeness to Stand Up and was granted a 20% stake in the company as well as a seat on the board of directors in exchange. The game was launched in September 2017 but did not perform as well as the developer had hoped and is no longer available for download. Stand Up attributes the poor performance of the game to Hart’s decision to issue an emotional apology on Instagram–just days prior to the game’s launch–following rumors of infidelity. In the recording , Hart apologized to his wife and kids for having done “something wrong” and said that he would not permit “another person to have financial gain off his mistakes.” The video has been viewed several million times.

Stand Up sued Hart for breach of fiduciary duty (amid other claims), arguing that Hart’s failure to warn it of his plans to “go public” about the alleged affair before posting his Instagram apology damaged the success of Gold Ambush. The court allowed the case to proceed through the discovery phase but ultimately entered summary judgment in Hart’s favor on the fiduciary-duty claim, finding that there was no evidence he breached such a duty.

March 27, 2016

Remedies in Breach of Fiduciary Duty Cases

by Lee E. Berlik

Earlier this month I wrote about the case of a dentist who had sued a consultant for breach of fiduciary duty and failed. The court in that case found that the allegations were insufficient to establish the existence of an agency relationship, and without such a relationship, the consultant owed no fiduciary duty to the dentist. In a similar case between a medical doctor and a consultant, Bocek v. JGA Associates, the trial court reached the same conclusion, but was reversed on appeal, the Fourth Circuit holding that the doctor had proved as a matter of law that the defendants were agents of the doctor and had breached fiduciary obligations by misappropriating a business opportunity for themselves. When the case went back to the trial court, the only issue was to determine the appropriate remedies for the consultants’ breach of fiduciary duty. The latest opinion offers a helpful guide as to the potential remedies available in breach-of-fiduciary-duty cases. What follows is a brief summary of the various forms of relief discussed in the opinion.

March 5, 2016

Agents Owe Fiduciary Duties to their Principals

by Lee E. Berlik

To state a plausible breach-of-fiduciary-duty claim in Virginia, a plaintiff must allege enough facts to prove (1) the existence of a fiduciary duty, (2) the breach of that duty, and (3) resulting damages. The first element—existence of a fiduciary duty—is often the most difficult to prove. Fiduciary duties can arise in a number of different contexts, including between employee and employer, between corporate officer and corporation, and between principal and agent. The Western District of Virginia recently dealt with a case, Broadhead v. Watterson, in which agency was alleged as the basis for a breach-of-fiduciary-duty claim. The court reviewed the allegations and found them insufficient to state a valid claim.

The Virginia Supreme Court has defined agency as “a fiduciary relationship resulting from one person’s manifestation of consent to another person that the other shall act on his behalf and subject to his control, and the other person’s manifestation of consent so to act.” (See Reistroffer v. Person, 247 Va. 45, 48 (1994)). Such consent may be manifested expressly or may be inferred from the conduct of the parties and from the surrounding facts and circumstances. Independent contractors, as a rule, are not agents of any principal. The distinction between contractors and agents generally lies in the degree of control (or right to control) the methods or details of doing the work. There’s a presumption that a person acts on his own behalf and not as the agent of another, but this presumption can be rebutted with appropriate evidence.

August 17, 2015

Derivative Actions Carry Heightened Pleading Standard

by Lee E. Berlik

Derivative actions are a mainstay of modern business litigation. They allow a shareholder of a corporation to enforce a right the corporation has but is wrongfully refusing to enforce. Normally, corporate management would be responsible for deciding whether to pursue litigation against someone, but sometimes it’s the management itself–such as an officer or director–that is causing the problem. In such situations, the board of directors may be reluctant to initiate a lawsuit against one of their own, so allowing a shareholder to bring the suit in the name of the corporation can be the only practical way to protect the interests of the corporation. Still, derivative suits are considered an extraordinary procedural device, permitted only when it is clear that the corporation will not act to enforce its rights. The pleading requirements are laid out in Federal Rule of Civil Procedure 23.1.

Because it’s normally up to the board of directors to decide whether to pursue litigation in the interest of the corporation or shareholders, it’s necessary to plead both the plaintiff’s demand on the corporation and the corporation’s refusal to comply. Under Rule 23.1, any complaint purporting to be a derivative action must state with particularity (a) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and (b) the reasons for not obtaining the action or not making the effort. The reason for this requirement is that derivative suits may proceed only if the shareholder shows that the board’s refusal was wrongful. If the board’s refusal to pursue litigation is justified, there will not be grounds for a derivative action.
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April 30, 2015

Customer Lists and Pricing Information Aren’t Necessarily Confidential

by Lee E. Berlik

When an employee has signed an enforceable non-competition and non-solicitation agreement, he will be prohibited from soliciting the employer’s customers for a certain length of time after the employment relationship ends. In the absence of an express non-competition clause, a former employee is generally free to compete with his former employer, even if that means contacting the former employer’s customers and offering lower prices. Without the benefit of contractual noncompetes and the remedies they provide, employers who pursue their former employees in court often argue that the employees violated their post-employment fiduciary obligations by making inappropriate use of the employer’s customer list and/or pricing data. In a recent opinion authored by Judge Liam O’Grady of the Eastern District of Virginia, the court held that customer lists aren’t automatically entitled to trade-secret or other “confidentiality” status, and that whether former employees can use the data depends on the steps taken by the employer to keep it confidential.

In Contract Associates, Inc. v. Atalay, Contract Associates, Inc. (“CAI”) sued its former employees, Senem Atalay and Michael Spade, claiming that they breached their fiduciary duties and misappropriated trade secrets when they left to form their own competing company. Neither employee had a written employment agreement. Within hours of tendering their resignations, they called three of CAI’s major clients to announce their resignations and the formation of their new, competing company. Shortly thereafter, virtually all of CAI’s major clients terminated their at-will agreements with CAI and moved their business to the defendants’ new company, costing CAI “nearly its entire revenue stream.” CAI sued for breach of fiduciary duty, misappropriation of trade secrets, tortious interference with existing and prospective contracts, and statutory business conspiracy.
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March 10, 2014

White House Crasher’s Tortious Interference Claim Reinstated on Appeal

by Lee E. Berlik

Readers may remember Tareq and Michaele Salahi from the national attention they gained in November 2009 when they crashed a White House state dinner in honor of India’s Prime Minister Manmohan Singh or from their run on the reality show “The Real Housewives of D.C.” The Salahis are no stranger to litigation, having gone through a messy divorce in 2012. Most recently, the Supreme Court of Virginia heard Mr. Salahi’s appeal from a decision of the Circuit Court of Warren County regarding claims against the couple’s former agent, DD Entertainment, LLC.

According to Mr. Salahi, he and his then wife had a verbal agreement to appear on reality T.V. shows, talk programs and other media outlets to promote their entertainment partnership, “The Salahis,” and they were to use the profits from the partnership for their mutual benefit. DD Entertainment acted as the Salahis’ agent and procured additional projects for them. Mr. Salahi alleged that DD Entertainment was aware of the couple’s business partnership and used improper means to interfere with the partnership by encouraging Mrs. Salahi to leave the enterprise and become the adulterous mistress of Journey guitarist Neal Schon in violation of Virginia’s adultery statute, Virginia Code § 18.2-365.
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July 15, 2013

Negligent Breach of Contract Is Not a Tort in Virginia

by Lee E. Berlik

Although parties can sometimes demonstrate both breach of contract and a tortious breach of duty, the duty in such cases must arise separate from the contractual duty, and negligent performance of a contract cannot form the basis for a tort claim. The United States District Court for the Western District of Virginia emphasized this point in American Legion John Radcliff Post 164 v. BB&T Corporation.

Debra Horn was president of the American Legion Ladies Auxiliary Unit 164. Her husband, Mack Horn, was a member of American Legion John Ratcliff Post 164. Over the course of a year, the Horns made several transactions, including writing checks, making expenditures and withdrawals and closing accounts that Post 164 did not authorize. Specifically, Post 164 had a Certificate of Deposit with BB&T Bank. Without the Post’s permission, BB&T allowed Mr. Horn to withdraw $15,447.15 from the CD and Mrs. Horn to withdraw $29,975 and to close the CD by withdrawing $49,975. BB&T processed a deposit of $49,975 to a checking account in Post 164’s name and a check in the amount of $35,000 from Post 164’s checking account into an account that the Horns controlled. The Horns used the funds for their own personal benefit.

Post 164 sued BB&T for breach of contract, negligence, and breach of fiduciary duties. The complaint also contained a claim entitled “Statutory Claim” and asked for punitive damages. BB&T argued that the action was essentially a breach of contract claim and asked that all the other claims be dismissed. BB&T also asked the court to strike Post 164’s claim for punitive damages.

May 20, 2013

Prior to Derivative Suit, Shareholder Demand Must Clearly Identify Wrong and Demand Action

by Lee E. Berlik

A shareholder acting on behalf of a corporation may bring a “derivative suit” against corporate directors and management for fraud, mismanagement, self-dealing or dishonesty. Before bringing such a suit, the shareholder must make a written demand that clearly identifies the alleged wrong and demands the corporation take action to redress it. A court will examine a complaint and a written demand to insure that they are sufficiently connected. A Norfolk Circuit Court recently addressed the sufficiency of a demand letter in Williams v. Stevens and Dornemann.

Alex Williams, Eric Stevens and Karl Dornemann were the sole shareholders of Dogsbollocks, Inc., a corporation that managed restaurants. Williams alleged that Stevens and Dornemann (the defendants) prevented him from involvement with the corporation and refused to give him pertinent corporate information. He also alleged that the defendants developed a restaurant independently. Williams’ attorney sent two letters to the defendants. The first letter demanded access to the corporation’s financial records and requested the name of the corporation’s accounting firm, and the second letter accused defendants of ignoring the first letter and gave the defendants notice that Williams was requesting financial records pursuant to Virginia Code § 13.1-774. Williams later filed a derivative suit. In response to an Amended Complaint, defendants filed a plea in bar, arguing that Williams’ suit was barred because he failed to make a written demand before bringing the derivative action. Williams contended that his two letters fulfilled the demand requirement.

The court considered what components a document must contain in order to satisfy the written demand requirement. No Virginia court had previously addressed the question, so the court looked to rules established in North Carolina, where the demand requirement is almost identical to Virginia’s. Neither state’s statutes specify the form of the demand other than requiring it to be written. North Carolina courts have held that the document should set forth the facts of share ownership and describe the remedy demanded with enough specificity to allow the corporation to correct the problem or bring a lawsuit on its own behalf. See e.g., LeCann v. CHL II, LLC, 2011 NCBC 29 (2011). In North Carolina, emails, sworn affidavits and letters have satisfied the written demand requirement where they identified the allegedly wrongful acts and demanded redress in a clear and particular manner sufficient to put the corporation on notice as to the substance of the shareholder’s complaint.

July 22, 2011

Virginia Business Owners Smacked For Paying Themselves Excessive Fees

by Lee E. Berlik

Two owners of a Virginia restaurant breached their fiduciary duty to the corporation they managed by paying themselves exorbitant management fees and by making improper loans and distributions to themselves, a Fairfax County judge has found.

“Fiduciary duty” in this context generally refers to the duty of loyalty owed by officers, directors, and other employees to each other or to the corporation they work for. Fiduciary duties include things like acting at all times with the corporation’s best interests in mind, refraining from usurping business opportunities for yourself, and refraining from actively competing with the company. In general, the law in Virginia and elsewhere holds that people in a position of trust vis-à-vis a closely held corporation must perform their duties without self-dealing or conflict of interest.

According to the opinion, the basic facts were as follows. As of 1993, Michael Magill, Thomas Dinsmore, and Raymond Clatworthy each owned 33 percent of the shares of DPR, Inc., a Virginia corporation that operated a restaurant. The restaurant’s primary business was preparing buffet lunches for sightseeing school groups visiting the Washington, D.C., area. Magill, who lived in the D.C. area, set up Magill Enterprises, Ltd., which operated the restaurant as an independent contractor of DPR and charged it a management fee. The other two owners did not live in the D.C. area. DPR was organized as an S corporation.