Court Holds That A Plaintiff Can Raise A Conspiracy To Breach Fiduciary Duty Claim Even Where The Party Who Owed Fiduciary Duties Was Not A Party To The Suit

Winstead PC
Contact

Winstead PC

In Klinek v. Luxeyard, Inc., a company sued its majority shareholder in a suit for breach of fiduciary duty arising from a pump-and-dump scheme and later settled that claim. No. 14-17-00899-C, 2019 Tex. App. LEXIS 9421 (Tex. App.—Houston [14th Dist.] October 29, 2019, no pet. history). The company then sued a third party for common-law fraud, unjust enrichment, and for conspiring in a breach of fiduciary duty, but asserted no claims for breach of fiduciary duty. After a lengthy bench trial, the trial court ordered the defendant to pay the company $395,146.63 as equitable disgorgement of profits from the sale of free-trading shares. The defendant appealed.

The defendant alleged that the trial court should have dismissed the conspiracy to breach fiduciary duty claim because the party who owed the fiduciary duty was not a party to the case and had previously settled his claim. The court of appealed disagreed:

We are not persuaded that the underlying tortfeasor must be sued in the same suit with the conspirators. If this were so, then a plaintiff who learned of the conspiracy or of additional conspirators after successfully suing the tortfeasor could not prevail against the tortfeasor’s confederates. The claims would be defeated not because the plaintiff was unable to prove the underlying tort, but because the plaintiff already had proved it. Such a result seems inconsistent with the Texas Supreme Court’s recent statement that “a civil conspiracy claim is connected to the underlying tort and survives or fails alongside it.” Nor do we think the result is changed if the plaintiff settled the claims against the tortfeasor. The legislature has declared that “[i]t is the policy of this state to encourage the peaceable resolution of disputes . . . and the early settlement of pending litigation through voluntary settlement procedures.” Texas courts likewise “promote a public policy that encourages settlements.” If the plaintiff and the tortfeasor have reached a compromise agreement, requiring the plaintiff to continue litigating the resolved claim in order to prove a different defendant’s liability “would contravene the policy of the courts to encourage settlements and to minimize litigation.” Further, “[c]ivil conspiracy depends entirely on the injury caused by the underlying tort,” and a party may prosecute consecutive suits against different defendants for a single indivisible injury. This is true regardless of whether the various defendants are joint tortfeasors. The plaintiff may even bring the second suit after the first case settles… On the particular facts presented in this case, we conclude that LuxeYard’s claim against Klinek for conspiring in Casey’s breach of fiduciary duty is not foreclosed by LuxeYard’s settlement of such claims against Casey in a separate suit.

Id.

The court of appeals then reviewed whether the majority shareholder owed fiduciary duties. The court held that that issue was controlled by Delaware law as the company was a Delaware company. Under Delaware law, a controlling shareholder who exercises actual control of the board of directors has the same fiduciary duties as a director. The court also found that there was evidenced that the majority shareholder breached his duties by conducting concealed transactions, that put free-trading shares in the hands of his confederates, who used them to execute, and to profit by, the pump-and-dump scheme.

The court then held that there was sufficient evidence that the defendant conspired with the majority shareholder even though there was no evidence of direct communications about the scheme:

In arguing that there is no evidence to support the trial court’s determination that Klinek conspired in Casey’s breach of fiduciary duty, Klinek states that his only direct contact with Casey was a single email confirming that Klinek would proceed with the investment, although Bahr also forwarded to Klinek emails written by Casey. But direct communication with the primary tortfeasor is not an essential element of conspiracy, and there is evidence supporting an inference that communications with Klinek about the conspiracy were passed through Bahr. For example, on March 9, 2012, 105,000 shares of LuxeYard were traded, and the 100,000 shares Klinek bought had been sold by Friedlander’s company Equity Highrise to fund the unauthorized “marketing blitz” that artificially inflated the price of LuxeYard’s shares. While there is no evidence that Klinek and Friedlander spoke together directly, each of them had frequent phone conversations with Bahr preceding the trade, from which the trial court could infer that this trade was a “matched order.” Bahr also testified that he had over a hundred phone calls with Casey after Casey introduced him to LuxeYard, and about a dozen emails; however, Bahr claimed that his computer hard-drive crashed in April 2012 so that there is no record of the emails. Presumably, the trial court did not find this explanation credible.

Id. The court affirmed the judgment for the plaintiff company against the conspiracy defendant.

Written by:

Winstead PC
Contact
more
less

Winstead PC on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.