Durfee v. Durfee & Canning, Inc.

Supreme Judicial Court of Massachusetts · Corporations

CorporationsCorporate fiduciary dutyCorporate opportunitySecret profitsRatificationfiduciary dutydirector loyaltycorporate opportunity

Facts

Durfee and Canning each owned half of Durfee & Canning, Inc., and both served as directors and officers. Canning organized and controlled Pacific Gas Corporation, then caused Pacific to buy natural gasoline from Warren and resell about forty-five million gallons of it to Durfee & Canning at a markup while using Durfee & Canning's facilities and personnel to handle the business. Durfee knew Canning was connected with Pacific, but did not know until November 1944 that Pacific was marking up the gasoline, and did not know the extent of the markup until shortly before suit. The master found Pacific's markup on sales to Durfee & Canning from June 4, 1942, through October 31, 1944, was $185,553.06.

Issue

Whether Canning, a director and officer of Durfee & Canning, breached his fiduciary duty by causing a corporation he controlled to purchase gasoline and resell it to Durfee & Canning at a secret profit. Also, whether Durfee ratified or acquiesced in those transactions, and whether additional profits for a later period were proved with sufficient certainty.

Rule

Directors stand in a fiduciary relationship to the corporation, and their personal pecuniary interests are subordinate to their paramount duty to the corporation. The governing inquiry is not confined to whether the corporation had an existing interest or expectancy in the property, but whether, in the particular circumstances, it was unfair for the fiduciary to take personal profit from an opportunity when the corporation's interests justly called for protection. A director who, in violation of that duty, diverts profits to himself through a controlled corporation must account for the secret profits, and ratification requires full knowledge of all material facts and their legal effect.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Rina Patel is a director and purchasing officer of Harbor Blend Fuels, a closely held distributor in Providence, Rhode Island. She forms Seaview Supply LLC, controls it entirely, and uses Harbor Blend’s warehouse staff and dispatch system to arrange purchases of a new blending additive from a producer in Texas, then resells the additive to Harbor Blend at a markup without telling the board that Seaview is making a profit.

If Harbor Blend sues derivatively to recover the markup, which is the strongest argument for liability?

Explanation. The majority rejected a narrow existing-interest-or-expectancy test. The proper inquiry is whether, in the circumstances, it was unfair for a fiduciary to take personal profit when the corporation’s interests justly called for protection. A director who uses corporate facilities and position to buy goods for resale to the corporation at a secret profit must account for that profit, even if the corporation lacked a preexisting right to the property. (Derived from Durfee v. Durfee & Canning, Inc. (n.d.).)