Usurpation Of Corporate Opportunity Yields Preliminary Injunction

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A breach of fiduciary duty by the Defendants resulted in a sweeping preliminary injunction in an Order entered by the Business Court last Friday, in Esposito v. Esposito.

The parties were co-shareholders of Anthem Leather, Inc., a Delaware corporation, which was in the business of buying leather from tanneries and selling it to its customers for various uses. The Defendants also served as officers and directors of the company.

According to the Plaintiffs, the Defendants embarked on a related venture focusing on the distribution of contract leather, which is leather used in institutional furniture in offices, hotels, and hospitals. Anthem had never been in this business, but said that it was a natural area of growth for it.

When the Plaintiffs learned that the Defendants had formed a new entity, Crest Leather, LLC, to engage in the contract leather business, using Anthem's resources, they filed their Complaint alleging breaches of fiduciary duty. The Defendants, caught with their hand in the cookie jar, responded by attempting to assign their interest in Crest to the Plaintiffs.

The grant of the injunction turned on Delaware law per the internal affairs doctrine. In Delaware, it is a breach of fiduciary duty for an officer or director to usurp an opportunity belonging to the corporation. The elements of that claim are:

(1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.

The Defendants argued that their assignment to Plaintiffs of their interest in the usurped opportunity made it impossible for the Plaintiffs to show that they had been irreparably harmed. Judge Jolly was not buying any of that. He said:

Defendants contend that by voluntarily assigning their Crest interests to Anthem they mooted any showing of irreparable harm to Plaintiffs. The court does not agree. A preliminary injunction is a measure taken by a court to preserve the status quo of the parties during litigation. Triangle Leasing Co. v. McMahon, 327 N.C.224, 227 (1990). An "injunction is generally framed so as to restrain the defendant from permitting his previous act to operate, or to restore conditions that existed before the wrong complained of was committed." Anderson v. Waynesville, 203 N.C. 37, 46 (1932); see also Rauch Indus., Inc. v. Radko, No. 3:07-cv-197-C, 2007 U.S. Dist. LEXIS 79311, *19 (W.D.N.C. Oct. 25, 2007) (characterizing the status quo between the parties as "the time that the allegedly unlawful acts complained of reasonably may be believed to have occurred"). Defendants' voluntary assignment of their Crest interests to Anthem does not cure the possibility that Plaintiffs still can be irreparably harmed by Defendants' breach of fiduciary duty. On this requirement, the court concludes that Plaintiffs have shown they are likely to sustain irreparable harm in the absence of an injunction.

Op. Pars. 15-16.

The injunction barred the Defendants from, among things, entering Anthem's facilities, accessing its computer systems, or contacting or selling leather to Anthem's customers.

You can't put the cookie back in the cookie jar after you've taken it.

Congratulations to my colleagues Bob King and Elizabeth Taylor, who represented the Plaintiffs.