(251) 299-0101

Corporate Opportunity Doctrine; Constructive Trusts

Mitchell v. K&B Fabricators, Inc., [Ms. 1170021, Sept. 28, 2018] __ So. 3d __ (Ala. 2018). This opinion (Mendheim, J.; and Stuart, C.J., and Parker, Main, and Bryan, JJ., concur) affirms in part a judgment entered by the Morgan Circuit Court following a bench trial with evidence heard ore tenus in a case involving alleged usurpation of corporate opportunities by businesses engaged in fabricating storm shelters. The Court affirms the judgment as to liability, but remands the case for the trial court to recalculate its damages award.

The Court first addresses the corporate opportunity doctrine and reiterates its essential principles:

"The corporate fiduciary duty is divided into two parts: (1) a duty of care; and (2) a duty of loyalty. ... The corporate opportunity doctrine is one aspect of the duty of loyalty." Massey v. Disc Mfg., Inc., 601 So. 2d 449, 456 (Ala. 1992).

"The duty is only co-extensive with the trust, so that in general the legal restrictions which rest upon such officers in their acquisitions are generally limited to property wherein the corporation has an interest already existing, or in which it has an expectancy growing out of an existing right, or to cases where the officers' interference will in some degree balk the corporation in effecting the purposes of its creation."

Lagarde v. Anniston Lime & Stone Co., 126 Ala. 496, 502, 28 So. 199, 201 (1900).

"The last restriction in Lagarde, that which prohibits 'balking the corporate purpose,' is really quite broad in its formulation, although the case has often been described as restrictive. See e.g., Note, Corporate Opportunity, 74 Harv. L. Rev. 765 (1961). We think that Lagarde when properly read establishes responsibilities for the corporate officer or director comparable to those outlined Guth v. Loft, Inc., 23 Del. Ch. 255, 5 A.2d 503 (1939), where the Delaware Supreme Court employed the doctrine of corporate opportunity and observed that it

"'... demands of a corporate officer or director, peremptorily and inexorably, the most scrupulous observance of his duty, not only affirmatively to protect the interests of the corporation committed to his charge, but also to refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage which his skill and ability might properly bring to it, or to enable it to make in the reasonable and lawful exercise of its powers. The rule that requires an undivided and unselfish loyalty to the corporation demands that there shall be no conflict between duty and self-interest. The occasions for the determination of honesty, good faith and loyal conduct are many and varied, and no hard and fast rule can be formulated. The standard of loyalty is measured by no fixed scale.'

"Moreover, the Delaware Supreme Court stated in more practical terms what the law demands of corporate officers or directors:

"'[I]f there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself.'

"We think that this passage provides a workable definition of 'balking the corporate purpose.'"

Morad, 361 So. 2d at 8–9.

Ms. *22-24 (quoting Morad v. Coupounas, 361 So. 2d 6 (Ala. 1978). The Court summarizes Morad's essential holding regarding the duty of loyalty owed by corporate fiduciaries as "must 'not only affirmatively ... protect the interests of [the corporation], but also ... refrain from doing anything that would work injury to [the corporation], or ... deprive it of profit or advantage which its skill and ability might properly bring to it,' ... or 'in some degree balk [the corporation] in effecting the purposes of its creation.' ")). Ms. *26.

When one serves as a corporate fiduciary among competing corporations, Alabama adheres to Delaware law which holds:

"[t]here is no 'safe harbor' for such divided loyalties .... When directors of a Delaware corporation are on both sides of a transaction, they are required to demonstrate their utmost good faith and the most scrupulous inherent fairness of the bargain. [Citations omitted.] The requirement of fairness is unflinching in its demand that where one stands on both sides of a transaction he has the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the courts."

Weinberger v. UOP, Inc., 457 A.2d 701, 710-11 (Del. 1983).

Ms. *31-32. This "unflinching" "requirement" "of fairness" means:

"'When acting in good faith, a director or officer is not precluded from engaging in distinct enterprises of the same general class of business as the corporation is engaged in; but he may not wrongfully use the corporation's resources therein, nor may he enter into an opposition business of such a nature as to cripple or injure the corporation.'"

Banks, 497 So. 2d at 462–63 (Ala. 1986).

Ms. *32.

The Court also reviewed the law of constructive trusts, holding the Morgan Circuit Court did not err in imposing a constructive trust upon the competitor corporation's profits from the opportunities usurped by the shared fiduciary. The Court explained:

"A constructive trust 'bears much the same relation to an express trust that a quasi contractual obligation bears to a contract.... [A]n obligation is imposed not because of the intention of the parties but to prevent unjust enrichment.' 3 Scott on Trusts § 462.1 (1939).

"Equity may impress a constructive trust on property in favor of one beneficially entitled thereto when another holds title to the property by fraud, commission of wrong, abuse of a confidential relationship, or any other form of unconscionable conduct. Keeton, Law of Trusts, 210 (5th ed. 1949); 4 Pomeroy, Equity Jurisprudence, § 1053 (5th ed. 1941); Walsh on Equity, § 106 (1930). ...

"Equity may also impress a constructive trust on property in favor of one beneficially entitled thereto against a person, who, against the rules of equity and against good conscience, in any way either has obtained or holds and enjoys legal title to property that in justice that person ought not to hold and enjoy. 3 Scott on Trusts § 462.1 (1939); Restatement (Restitution) § 160, Comment A (1937).

"'A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee.'

"Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 122 N.E. 378, 380 (1919)."

American Family Care, Inc. v. Irwin, 571 So. 2d 1053, 1058–59 (Ala. 1990). In short, a constructive trust is imposed when property is wrongfully acquired and held; the fact that the present holder of the property was not complicit in the wrongful acquisition will not necessarily prevent the imposition of a constructive trust.

Ms. *38-39. The purpose of a constructive trust in such circumstances is not to capture the profits the plaintiff corporation would have made, but to instead capture the profits wrongfully made by the new competitive business. (See Ms. 42-43 summarizing opinions).

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