Philadelphia Commerce Court Awards $12 Million In Damages For Breach Of Fiduciary Duty By Directors And Officers Of Closely Held Pennsylvania Corporation
Court applies entire fairness standard to self-dealing transaction by corporate fiduciaries in connection with settlement of corporate lawsuit, says Berger & Montague, P.C.
PHILADELPHIA, Sept. 19, 2014 /PRNewswire-USNewswire/ -- On September 16, 2014, Judge Albert John Snite of the Philadelphia Court of Common Pleas (Commerce Division) entered a verdict for a total of $12 million against four directors and officers of FLOORgraphics, Inc., a Pennsylvania corporation with its headquarters in New Jersey, in favor of the corporation, finding that the individual defendants had breached their fiduciary duties by authorizing and accepting payments to themselves in that amount in connection with a March 2009 transaction entered into as part of the settlement of a lawsuit by the company against News Corp. subsidiary, News America Marketing.
In a 66-page Findings of Fact and Conclusions of Law, issued following a 12 day non-jury trial, the Court held that the four individual defendants had improperly paid themselves $12 million of a total of $29.5 million paid by News America for the sale of alleged "personal goodwill."
Notably, the court also found that the transaction with News America was subject to the "entire fairness standard" for this interested transaction by the company's directors. While this standard has been applied in Delaware, it is the first time that it has been applied to Pennsylvania corporations. Applying that standard, the court held, "the undisputed evidence presented at trial sufficiently establishes fundamental unfairness in this case."
Though defendants had argued that the sole remedy for the plaintiff minority shareholders was appraisal, the court found that, "the inadequate Shareholder Notice is fundamentally unfair and therefore waives plaintiff's exclusive remedy under the BCL [Business Corporation Law] (appraisal)."
Lawrence Deutsch of Berger & Montague, one of plaintiff's trial counsel stated, "we are very pleased by this court's adoption of the entire fairness standard to this self-interested transaction by the controlling shareholders, and the Court's proper disgorgement of the $12 million from the four individual defendants."
The case is Potok v. FLOORgraphics, Inc., et al., March Term, 2009, No. 3768 (Phila.CCP, Commerce Program). Trial counsel for the plaintiff were Indik & McNamara, P.C. (Tom McNamara), and Berger & Montague, P.C. (Lawrence Deutsch and Russell Henkin). Trial counsel for the defendants was Dilworth Paxson LLP (Thomas Biemer and Katharine Hartman).
SOURCE Berger & Montague, P.C.
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