It is probably a good idea for a corporation to avoid making fiduciary duty claims against its employees (unless they are also officers and directors). Clients (or their lawyers) who insist on making such claims are liable to be assessed with the attorneys’ fees of the persons they sue, at least based on the circumstances in Judge Gale’s Order last week in Southeast Air Charter, Inc. v. Stroud, 2015 NCBC 79.
Southeast Air Charter had brought suit against three of its former employees, none of whom were officers or directors of the Plaintiff, alleging that they had breached their fiduciary duties to it. It’s not hard to be aware that fiduciary duty claims against "rank and file" employees are rarely going to get past a Motion to Dismiss. The North Carolina Supreme Court pretty much eliminated the possibility of making a fiduciary duty claim against a non-officer or director employee almost fifteen years ago, in Dalton v. Camp, 353 N.C. 647, 548 S.E.2d 704 (2001).
Judge Gale wrote in his Southeast Air Charter ruling that:
[a]bsent extraordinary circumstances of special relationships of trust and confidence leading to dominion and control, employees who are not also officers and directors should not be put to the burden of defending fiduciary duty claims.
The Court had previously ordered that Rule 11 sanctions were appropriate for the Plaintiff "having filed the claims for which Plaintiff had no reasonable basis to believe were factually supported." By the time the Court ordered sanctions, the Plaintiff had voluntarily dismissed all of its claims. The ruling granting the Defendants’ Motion for Sanctions was entered in a June 30, 2015 unpublished Order.
The purpose of this week’s Order was to determine the appropriate amount of the sanction. The Court had to determine how to allocate the attorneys’ fees incurred by these Defendants, all of whom were represented by the same law firm. The law firm requested a total of $35,887.01. It broke that down as $19,322 for one of the Defendants (Steiner-Crowley) against whom all of Plaintiff’s claims were deemed to be in violation of Rule 11, and an amount representing one-third of the total fees incurred by the two other Defendants (Robinson and Viall) who were subjected to not only the fiduciary duty claims deemed to have been made in violation of Rule 11 but also a variety of other claims that were not subject to Rule 11 sanctions.
Judge Gale didn’t agree with those proposed allocations. As to Defendant Steiner-Crowley, even though all the claims against her were subject to Rule 11 sanctions, he did not award her all of her fees. Given that Steiner-Crowley had said that there was never any basis for the claims brought against her, the Court said that she "should bear some responsibility for not attacking those claims on the pleadings before incurring significant other expense." Order ¶16. In its discretion, the Court discounted her fees by fifty percent.
For Defendants Robinson and Viall, the determination of fees was more difficult. Those Defendants had faced multiple claims, only two of which were subject to Rule 11 sanctions. Their counsel suggested that they each receive a third of the fees they had paid. Should they, like Steiner-Crowley have mounted an early attack on the claims forming the basis for sanctions?
Judge Gale recognized the "strategic considerations" dictating that an early Motion to Dismiss not be filed. He said:
[e]ven if counsel believed the motion was strong regarding the claims now subject to sanctions, the strong possibility that other claims would have survived an early dispositive motion justified allowing even the weak claims to survive.
The Court then looked at the total fees billed for the entire representation, and found them to be reasonable. But it determined that awarding one-third of the total fees would be excessive, as:
it cannot determine that this amount was incurred solely because [the pleadings] included the breach of fiduciary duty . . . claims.
Order ¶22.The Court found that an appropriate sanction would be ten percent of the fees charged.
Even after the cutting of the amount of fees sought, this was not an insignificant sanction. The total fees awarded were $14,680.70. Order ¶23. And after some discussion about whether it was reasonable for Plaintiff’s counsel to rely on his client’s representations to make the fiduciary duty claims, Judge Gale ordered that the Plaintiff should bear the entire burden of the sanction as opposed to it being shared jointly with its lawyer.
If you are thinking that the award of nearly $15,000 in fees was not enough to give the Defendants a full recovery, Judge Gale dealt with that point as well. he said:
the purpose of imposing Rule 11 sanctions is not to assure a full recovery on claims arising from a common factual nucleus. Rather, the purpose is to sanction conduct and the statutory direction is to sanction only that portion of efforts that would not have been required but for the improper claims.
Order ¶22 & n.1.