Court Finds That There Is A Fact Issue On Whether Corporate Shareholder And Officer Breached Fiduciary Duties To Creditors

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In Tow v. Wellington Yu, a bankruptcy trustee sued a corporation’s shareholder and officer for breaching fiduciary duties by entering into a settlement agreement that required the sale of real estate where the defendant would take a percentage of the proceeds. No. H-14-3103, 2017 U.S. Dist. LEXIS 21987 (S.D. Tex. January 30, 2017). The defendant filed a motion for summary judgment, and the trial court denied that motion regarding the breach of fiduciary duty claim.

The court first cited to the opinion in Weaver v. Kellogg, 216 B.R. 563, 583 (S.D. Tex. 1997). In Weaver, the court held that under Texas law “corporate insiders . . . may have a fiduciary duty to the corporation’s creditors even when the corporation [is] not insolvent.” Id. The “corporate insiders” in Weaver were two sole shareholders and directors of the corporation. Id. at 581-84. The Weaver court held that the “Plaintiff may therefore prevail on his breach of corporate duty claims if he shows, for each allegedly wrongful transaction, that [the corporation] was, at the time, in the ‘vicinity of insolvency’; that the transaction led to [the corporation’s] insolvency; or that the transaction was a fraudulent conveyance.” Id. at 584. The Weaver court found that it could not decide, at the summary judgment stage, the issue of whether the defendants had breached their fiduciary duties because the above listed fact issues had not been resolved.

In Tow, the defendant contended that he did not breach his fiduciary duty to the company and its creditors because the settlement agreement was in their best interests. The trustee argued that the defendant breached his fiduciary duty by negotiating the settlement agreement to give himself a portion of the proceeds from the sale of the property, rather than the company.

The court noted that there was no dispute that defendant owed a fiduciary duty to the company as he was the sole shareholder of a company that was having major financial issues and was in the “vicinity of insolvency” at the time the settlement agreement was executed, which was a few months before the company filed for bankruptcy. The court concluded:

Looking to Weaver, it is beyond debate that Defendant, as the sole shareholder and officer of PGI also owed a fiduciary duty to PGI’s creditors. Defendant gave up PGI’s interest in the Note and Deed of Trust, and he negotiated a settlement agreement where he kept a portion of the sale proceeds for himself, a non-party to the underlying transaction. Therefore, Defendant has failed to show that he did not breach his fiduciary duty to PGI as a matter of law. The court finds that a genuine issue of material fact exists whether Defendant breached his fiduciary duties to PGI, precluding summary judgment on Plaintiff’s claim.

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