• Third Circuit Court of Appeals Finds Corporate Director and Uniform Transfer to Minors Custodian Violated Fiduciary Duties By Failing to Act to Protect the Corporation and Appropriating to Himself Assets of the Minor
  • May 24, 2012
  • Law Firm: Kozloff Stoudt Professional Corporation - Wyomissing Office
  • In Payne, Custodian for LL, a minor v. Lampe, 2011 U.S. App. Lexis 26014, C.A. No. 11-1819 (December 30, 2011), the Court of Appeals for the Third Circuit ruled that Lampe, a director of a closely-held corporation, breached his fiduciary duties to the corporation when he failed to provide a defense or other protection for the corporation before he filed a lawsuit against that corporation for money he alleged he had loaned to the corporation.

    The Court of Appeals also found that Lampe breached his duties to LL, a minor, for whom he served as custodian of property gifted under Pennsylvania’s Uniform Transfer to Minors Act (“PUTMA”).

    The decision of the Court of Appeals, which reversed the United States Bankruptcy Court and District Court for the Eastern District of Pennsylvania, established important principals regarding the fiduciary duties owed by a director in a closely-held corporation as well as a PUTMA custodian.

    Background
    In 1991, WEL Management, Inc. was formed as a family-owned Pennsylvania business corporation with three directors: Lampe, his son, William and his daughter-in -law, Theresa.  WEL Management had two shareholders.  Lampe owned one share.  Nine shares were gifted to LL, a minor, under PUTMA.  Lampe served as the PUTMA custodian for LL.

    In 2004, Lampe filed suit against WEL Management, alleging that he was owed $1.2 million for loans advanced to WEL Management and related companies over the preceding 15 years.  Lampe did not notify Theresa that the suit had been filed and did not arrange for a copy of the complaint to be served on her.  William accepted service of the complaint for WEL Management on the day it was filed, but did not retain counsel or otherwise defend WEL Management.  Instead, a default judgment was entered in favor of Lampe.  Lampe then executed on two parcels of land, WEL Management’s only assets, purchased the properties at a sheriff’s sale and then sold them for $345,000.00.

    Payne, the court-appointed substitute custodian for LL, brought a shareholder’s derivative action against Lampe on behalf of WEL Management and a direct action against Lampe on behalf of LL for breach of his fiduciary duties as a PUTMA custodian.

    Analysis

    Fiduciary Duties of a Corporate Director

    This case presented issues of first impression on the facts of a director permitting a default judgment to be entered in his favor and against a corporation he served as a director.  The Court of Appeals ruled that Lampe, as a director of WEL Management, owed a duty of loyalty to insure that the interests of the corporation were protected before he commenced his action against WEL Management:

    It is clear that [Lampe] by not taking any steps to assist WEL in avoiding a default in a case in which he took actions that resulted in the sheriff’s sale of the Reading Avenue property, in the words of Tyler v. O’Neill, used his “position to obtain . . . personal profit or advantage other than that enjoyed also by their fellow shareholders.” 994 F. Supp. at 612. Although WEL may have been indebted to [Lampe}, he contributed to depriving WEL of a substantial asset, perhaps unjustifiably as he acquired the Reading Avenue property for himself to its detriment. Accordingly, {Lampe} breached his duty of loyalty to WEL. 2011 U.S. Lexis26014, 35.

    Lampe defended his actions on the grounds that he was not unjustly enriched.  The Court of Appeals rejected this defense.  In so doing, the court clarified an important element of a claim to establish corporate fiduciary liability.  The Court of Appeals held that unjust enrichment was not a necessary element of such a cause of action and that corporate fiduciary liability could be established when the corporation was harmed and the director’s breach of his fiduciary duties was a substantial factor in bringing about that harm.  The Court of Appeals held that it would be inequitable for Lampe to retain the proceeds of the sale of the real estate because of his breach of his fiduciary duties.

    Fiduciary Duties of PUTMA Custodian

    The Court of Appeals also held that Lampe owed, and breached, fiduciary duties to LL.  The court cited to the Restatement (Second) of Trusts, § 170 and its comments for the proposition that a trustee may not purchase trust property.  When Lampe purchased the WEL Management real estate, he appropriated assets of LL and breached his fiduciary duties.

    The Court of Appeals rejected Lampe’s defense that his conflict was waived by LL’s parents, William and Theresa.  The court held that, at least in the circumstances of this case, PUTMA does not permit waivers of conflicts on behalf of the minor.

    On January 27, 2012, the Court of Appeals rejected Lampe’s request for reargument en banc.