In Petroleum Enhancer, LLC v. Woodward (Case No. 11-1167)(pdf), the Sixth Circuit reversed a district court’s decision to grant summary judgment on Polar Molecular Holding Corporation’s (Polar Holding) breach of fiduciary duty claim against one of its directors and its civil conspiracy claim against individual third-party defendants. However, the Sixth Circuit affirmed the trial court’s decision to grant summary judgment on Polar Holding’s tortious interference claim.
Polar Holding was the sole shareholder of Polar Molecular Corporation (PMC), a company in the petroleum additive business. In 2006, PMC was in default on a loan for which it had pledged valuable intellectual property as collateral. At the same time, an ongoing dispute was festering between two members of Polar Holding’s board of directors regarding the appropriate business strategy for PMC. The dispute ultimately resulted in one of the directors, Richard Socia forming a competing company, called Petroleum Enhancer (Petroleum) to acquire PMC’s promissory note and collateral from the party holding PMC’s loan. Although Petroleum was incorporated in March 2007, Socia did not resign from Polar Holding’s board of directors until April of 2007. Petroleum acquired the promissory note shortly after Socia’s resignation.
For purposes of this post, the most significant analysis engaged in by the Sixth Circuit pertains to the breach of fiduciary duty claim asserted against Socia alleging that he breached his duties to the company by inducing Affiliated – which had entered into the loan with PMC – to foreclose on PMC’s loan and by creating Petroleum for the sole purpose of acquiring PMC’s promissory note and collateral from Affiliated. The key question before the Sixth Circuit for purposes of appeal was whether Socia’s fiduciary duties “had been legally extinguished by the end of January 2007, when the board voted to demand his resignation as a director and after which Socia helped hatch the plan to foreclose on the PMC loan and form a competing company.”
The district court had granted Socia’s motion for summary judgment based on a finding that Socia’ position on the board of directors was effectively terminated by this vote – and that as a result his fiduciary duties were extinguished – despite the fact that he technically remained on the board of directors until his resignation in April 2007. The court reasoned that because the fiduciary relationship no longer existed, Socia no longer had any fiduciary duties at the time he formed Petroleum.
In reversing the district court’s decision, a significant factor in the Court’s decision was the application of Michigan law, which provides that shareholders and not the board of directors have the authority to remove directors by a majority vote. In applying this rule, the Court rejected Socia’s effective termination argument – despite the fact that the board of directors voted for his replacement and excluded him from participating in company business – based on application of the general rule that “directors owe a fiduciary duty to their corporation until they resign, their term ends, or they are officially removed from their position.” The Court emphasized that this requirement “does not place an onerous burden on directors who prefer to be unencumbered by fiduciary obligations” and that all such directors need to do is resign. Because Socia refused to resign his position until April 18, 2007, his fiduciary duties continued to that date.