Corporate officer and director usurped the corporate opportunity of a supplier corporation in which he was also a director by choosing to insource services previously provided by the supplier; proper remedy was to impose a constructive trust on profits attributable to the insourcing.
Mitchell v. K&B Fabricators, Inc., 2018 WL 4657076 (Sup. Ct. Ala. 2018).
An Alabama based company and seller of storm shelters (“AME”) had outsourced steel fabrication since its inception in 1995. In 2006, its COO joined with two others to form a new corporation (“K&B”) to perform steel fabrication services for AME, becoming a ten percent owner and a director of K&B. In 2014, after engaging in unsuccessful negotiations to buy K&B, the COO had AME acquire the facilities, equipment, and employees necessary to move steel fabrication in house. In conjunction with this, he terminated AME’s relationship with K&B. Throughout, he remained a director of K&B.
K&B sued AME and the COO alleging that he had violated his duty of loyalty as a director of K&B by usurping for himself and AME corporate opportunities that belonged to K&B. After a bench trial, the trial court found that the COO had usurped and misappropriated corporate opportunities of K&B by diverting steel fabrication business from K&B to AME. The trial court imposed a constructive trust on all of AME’s profits earned since the insourcing; it then amended the order to clarify that the trust should only cover profits attributable to in-house steel fabrication, but it still calculated the amount by multiplying the number of storm shelters sold by AME during the period by the total profit on each one.
AME and its COO appealed on the grounds that: (1) steel fabrication was not a corporate opportunity but a part of AME’s pre-existing business; (2) if it was a corporate opportunity, it did not belong to K&B because there was no exclusive contract; (3) the COO had no duty to prefer the interests of K&B to those of AME, which he also owed fiduciary duties; and (4) the calculation of profits attributable to the insourcing was incorrect in the amended order. The Supreme Court of Alabama rejected the first argument because AME had never done its own steel fabrication and because it found that steel fabrication is a distinct line of business. The Court rejected the second argument because, although there was no exclusive contract, it said the COO had a duty as a director of K&B to sustain its business relationship with AME. The Court also rejected the third argument, saying that his duties to AME did not override the duty that he owed to act in K&B’s interest. Finally, the Court remanded for the trial court to find the facts necessary to calculate how much of the profit of each shelter was attributable to steel fabrication.