Ostrowski v. Avery

Connecticut Supreme Court · Corporations

CorporationsFiduciary DutyCorporate Opportunityfiduciary dutycorporate opportunityusurpationburden of proofclear and convincing evidence

Facts

Avery Abrasives manufactured abrasive cutting wheels, and its president and majority shareholder was Raymond Avery; his son Craig Avery was vice president of manufacturing and a director, and Michael Passaro was a finishing supervisor. After deciding there was a market for small cutting wheels under four inches, Craig Avery asked his father if he and Passaro could keep their jobs at Avery Abrasives while operating their own corporation, and after obtaining his consent they formed International Small Wheels (ISW) in January 1977. The next day, at an Avery Abrasives board meeting, Raymond Avery proposed that Avery Abrasives expand into small wheels, but the defendants did not disclose that ISW had already been formed to pursue that opportunity. ISW then operated for years making small wheels, buying large wheels from Avery Abrasives at a discount, selling some finished wheels to Avery Abrasives, hiring Avery Abrasives employees, sharing some customers, using Avery Abrasives' phone number in an ad, and sometimes conducting ISW business at Avery Abrasives during business hours.

Issue

When corporate fiduciaries are accused of breaching fiduciary duties and usurping a corporate opportunity, who bears the burden of proving fair dealing and what role does disclosure to the corporation play? Also, did the plaintiffs establish the threshold elements of fiduciary status and existence of a corporate opportunity here?

Rule

Once a plaintiff establishes the existence of a fiduciary duty, the burden shifts to the corporate fiduciary to prove fair dealing by clear and convincing evidence. In a corporate-opportunity case, the plaintiff must first prove both a fiduciary relationship and the existence of a corporate opportunity; thereafter, the fiduciary bears the burden, by clear and convincing evidence, to prove bona fides. Adequate disclosure of the opportunity to proper corporate decisionmakers creates an absolute safe harbor defense, but absent adequate disclosure the fiduciary may still avoid liability only by proving that the conduct did not deprive the corporation of an opportunity it could have pursued, with special weight given to the effect of nondisclosure on the corporation's entrepreneurial opportunities. The dominant inquiry in determining whether a corporate opportunity exists is whether the opportunity falls within the corporation's avowed business purpose, with interest or expectancy being probative but not dispositive.

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

Blue Harbor Tools, Inc., a closely held corporation in Hartford, manufactures industrial saw blades. Nina Cole, its operations vice president and director, begins steering some supplier discounts and machine time to a side venture she owns, and minority shareholders sue derivatively; at trial, they prove Nina was a corporate fiduciary, but the evidence on fairness is mixed.

Under the majority rule, who bears the burden on whether Nina dealt fairly with the corporation, and by what standard?

Explanation. Once the plaintiff establishes the existence of a fiduciary duty, the burden shifts to the corporate fiduciary to prove fair dealing by clear and convincing evidence. The majority rejected placing on the plaintiff the burden to prove unfairness or the extent of corporate loss after fiduciary status is shown. (Derived from Ostrowski v. Avery (n.d.).)