Breach of Fiduciary Duties: Case Analysis

In the field of business, the quality of conduct the compliance with the rules and guidelines of responsible performance is obligatory for the C-suite. The corporation’s interest must be a priority of the Board of directors in any sphere of business since the Board represents the organization as a whole. To regulate and direct proper conduct in a corporate setting, a set of fiduciary duties of directors and officers (including loyalty and due care) is applied. The notion and applications of the breach of fiduciary duties are presented in this essay by analyzing Rentco’s case.

Bob’s decisions to alter the transactions and misreport the purchase negotiation were motivated by his greediness and personal interest over the corporation’s financial interests. According to the fiduciary duty of loyalty, officers, and the members of the Board are to preserve the financial interests of their organization without expressing greediness and avoiding the conflict of interests (Kostritsky, 2017). Indeed, this rule states that “all investors are equally entitled to sue the director/agent for breach of the duty of loyalty when assets are misappropriated” (Kostritsky, 2017, p. 20). Bob was the primary initiator and actor of the procedures implemented against the interests of Rentco, the company that launched the projects of purchasing The Plaza initially. Without informing other board members about his intentions, Bob commanded launching a new temporary company named Diverco to use it as a third party in the building purchasing transactions. Since Bob was the only shareholder at Diverco, which was the selling company of the Plaza, the $300,000 that remained after Rentco purchased the building for $600,000 became Bob’s personal assets. Therefore, Bob breached his duty of loyalty by prioritizing his personal interests over the interests of the organization.

Besides, Bob’s actions caused unreasonable expenditures for Rentco when purchasing The Plaza, which could be avoided without additional transactions executed by Bob. As the title implies, the duty of due care requires fiduciaries to care about the corporation, act in good faith, and make reasonable decisions. Bob specifically initiated a fraudulent procedure of creating a fictitious company Diverco, with the help of which he managed to implement transactions that increased the purchased building’s market value. Such actions were unreasonable from the point of view of Rentco since the market price of The Plaza was higher than it might have been if Bob had not initiated his plan. The Bank’s President did not act in a prudent manner and failed to preserve the reasonability of his actions when negotiating the issues pivotal to the corporation’s business processes. Therefore, there are direct indicators of Bob’s breach of the duty of due care, which is why he is liable for it.

Al’s actions in this scenario also must be reviewed against the implications of fiduciary duties. He acted in Bob’s personal interests instead of the company, although the duty of loyalty requires putting the company’s financial interests first (Kostritsky, 2017). When applying this rule, one should note that unlike Bob, Al did not initiate any transactions that would harm the business’s financial situation. Moreover, since Bob did not share his plans of purchasing the building of the Plaza at Bank’s foreclosure sale, Al was not aware of his wrongdoings. However, as an attorney and the general counsel at Rentco, Al was professionally involved in the process of Bob’s plan implementation. He did all the legal work for foreclosure of the mortgage for the Bank. When preparing these documents, Al must have seen the actual price. Furthermore, as requested by Bob, Al formed Diverco, at which Bob was a sole shareholder. This decision might have demonstrated Al Bob’s intentions. When the price of $600,000 was announced, he should have raised a question about its difference from the price claimed in the mortgage foreclosure. Thus, Al is liable for the breach of his duty of loyalty.

In addition, Al was negligent about reporting the unacceptable actions of Bob that he had observed and helped with. According to the duty of due care, a person should make decisions in good faith, prioritizing the corporation’s benefits (Duska & Weber, 2016). After the meeting, Al did the paperwork for a formal purchasing agreement where he identified Diverco as a seller. At that moment, Al had all the information demonstrating Bob’s misconduct and the preference of his personal interests over the business interests of the company. Since even after having all the information, Al did not respond in a prudent manner and failed to report his colleague’s misconduct, he should be considered as a person involved in the breach of fiduciary duties of Directors. Thus, he is liable for breach of duty of due care.

When considering Ed’s case, one should state that Bob did not interact with Ed during the transactions. Moreover, Ed was not informed about the procedures surrounding the project of purchasing The Plaza and did not know about the legal work Al performed for Bob. The duty of loyalty requires prioritizing the company’s financial interests. Ed has not displayed any manifestation of the conflict of interests. He did not commit any misconduct related to the project and is not liable for the breach of duty of loyalty. As for the duty of due care, which appeals to the reasonable and prudent actions within the corporation, Ed was not involved in the actions initiated by Bob (Duska & Weber, 2016). Moreover, he did not witness and was not aware of any information that would imply Bob and Al’s misconduct during the purchase-related meetings. Therefore, the responsibility for the violation of due care duty cannot be imposed on Ed.

From the ethical perspective, Al as Rentco’s attorney and the general counsel failed to detect fraudulent actions of Bob and react to them appropriately to his position. One of the ethical standards requires attorneys to “serve the client’s ‘best’ interest” (Duska & Weber, 2016, p. 24). Since Al performs two roles, including a director of Rentco and its general counsel, his primary client is Rentco. In order to act in the best interest of his client, Al must have prevented unreasonable decision-making that led to financial losses of Rentco (Duska & Weber, 2016). Therefore, Al’s conduct should be considered as a breach of ethical duties.

In conclusion, the importance of the provision of fiduciary duties by the Board of Directors of a corporation is validated by the necessity to ensure the competent, loyal, and caring performance of all prudent participants. As the case analysis shows, unreasonable decision-making, prioritization of personal interests over the corporation’s, and neglecting attitude toward colleagues’ conduct lead to the breach of the duties of loyalty and due care. Consequently, the directors liable for the breach of fiduciary duties should be held responsible according to disciplinary guidelines.

References

Duska, R. F., & Weber, R. M. (2016). Where ethics intersects the fiduciary duty. Journal of Financial Service Professionals, 70(5), 23 – 26.

Kostritsky, J. P. (2017). One size does not fit all: A contextual approach to fiduciary duties owed to preferred stockholder from venture capital to public preferred to family business. Rutgers University Law Review, 70, 1 – 80.