When Might a Corporate Officer Owe a Fiduciary Duty to a Corporate Creditor? – Workforce Solutions v. Urban Services of America

1345287_55883695.jpgThe officers of a corporation, such as the chief executive officer, president, or treasurer, owe a fiduciary duty to the corporation and its shareholders. This generally means a duty of loyalty and care in executing the officer’s duties, using good faith and reasonable care to advance the corporation’s best interests. It also means avoiding “self-dealing,” or acting in a way that benefits the individual officer to the detriment, or merely the missed opportunity, of the corporation. In limited circumstances, corporate officers owe similar fiduciary duties to corporate creditors when a corporation is insolvent or otherwise in financial distress. An Illinois appellate court recently considered the extent of this fiduciary duty to creditors in Workforce Solutions v. Urban Services of America, Inc., Nos. 1-11-1410 and 1-11-3046, slip op. (Ill. App., Aug. 28, 2012). The court reversed a trial court’s dismissal of a corporate creditor’s claim for breach of fiduciary duty against a debtor corporation and its officers and directors.

The plaintiff and creditor, Workforce Solutions (WS), entered into a contract with the defendant, Urban Services of America (USA), in 2003, in which WS would provide contract employees to operate USA-run recycling facilities. WS sued USA in 2006 for breach of contract after attempting to collect past-due fees, and it obtained default judgments against USA in 2008 totaling more than $1 million. It filed a separate action later in 2008 against USA and various related third-party companies under Illinois’ Uniform Fraudulent Transfer Act, seeking an order to turn over assets from the third-parties to satisfy the judgments against USA. Finally, in 2010, WS filed suit against USA, other related companies, and their officers and directors, asserting seven causes of action including breach of fiduciary duty and breach of the duty of disclosure and candor, related to alleged transactions between USA and the other entities intended to conceal assets. The circuit court denied WS’s turnover motion, and it later dismissed all of the claims in the latest lawsuit. WS appealed both rulings, and the appellate court consolidated the two appeals into the present case.

The appellate court ruled that the circuit court erred in denying WS’s motion for turnover, and it reversed the dismissal of three of WS’s causes of action: fraud, breach of fiduciary duty, and successor liability. In dismissing the breach of fiduciary duty claim with prejudice, the circuit court noted that the evidence showed a lien that was superior to WS’s lien, and ruled that WS could not prove causation. The appellate court found that the officers’ fiduciary duty applied much more broadly to the corporation’s creditors. It reviewed a wide range of evidence and found that USA was in a state of financial distress at the time, and that this imposed a fiduciary duty on its officers towards creditors such as WS. The officers, it found, failed to maintain the corporation’s assets, and made transfers to related entities in a way that made recovery of damages by the creditor all but impossible. This was sufficient for the court to reverse the dismissal of the breach of fiduciary duty claim and remand it to the circuit court.

The business attorneys at Samuel C. Berger, PC offer fixed-fee packages of legal services to businesses and entrepreneurs who want to do business in New York and northern New Jersey. To speak to a member of our skilled legal team, contact us today online or at (212) 380-8117.

Web Resources:

Fiduciary Duties and Potential Liabilities of Directors and Officers of Financially Distressed Corporations (PDF File), American Bar Association
More Blog Posts:

Corporate Directors, Even Though Acting in Subjective Good Faith, May Breach Fiduciary Duties to the Corporation, According to Delaware Court, New York & New Jersey Business Lawyer Blog, December 28, 2012
New Jersey Strips Contractor of Authority to Own or Run a Business for Alleged Consumer Fraud, New York & New Jersey Business Lawyer Blog, December 14, 2012
New Jersey Offers Support to Businesses Damaged by Hurricane Sandy, New York & New Jersey Business Lawyer Blog, November 16, 2012
Photo credit: muffet1 on stock.xchng.