The Virginia Business Litigation Blog
Two owners of a Virginia restaurant breached their fiduciary duty to the corporation they managed by paying themselves exorbitant management fees and by making improper loans and distributions to themselves, a Fairfax County judge has found.
“Fiduciary duty” in this context generally refers to the duty of loyalty owed by officers, directors, and other employees to each other or to the corporation they work for. Fiduciary duties include things like acting at all times with the corporation’s best interests in mind, refraining from usurping business opportunities for yourself, and refraining from actively competing with the company. In general, the law in Virginia and elsewhere holds that people in a position of trust vis-à-vis a closely held corporation must perform their duties without self-dealing or conflict of interest.
According to the opinion, the basic facts were as follows. As of 1993, Michael Magill, Thomas Dinsmore, and Raymond Clatworthy each owned 33 percent of the shares of DPR, Inc., a Virginia corporation that operated a restaurant. The restaurant’s primary business was preparing buffet lunches for sightseeing school groups visiting the Washington, D.C., area. Magill, who lived in the D.C. area, set up Magill Enterprises, Ltd., which operated the restaurant as an independent contractor of DPR and charged it a management fee. The other two owners did not live in the D.C. area. DPR was organized as an S corporation.
The restaurant business was cyclical in that most of the groups visited in the springtime, and during the slower periods, the restaurant suffered a cash flow problem. Magill and Magill Enterprises became DPR’s primary source of credit for its ordinary expenses. In 2006, both Dinsmore and Clatworthy took $17,000 in dividends out of the company in excess of the money that
DPR had to distribute. Magill never received dividends for that year. In 2007, Dinsmore and Clatworthy directed Magill to issue dividend checks to each shareholder for $37,000. Since DPR did not have that much money to distribute, Dinsmore and Clatworthy directed DPR to forgive their loans in the amount of $17,000 each.
When Dinsmore and Clatworthy found in June 2007 that Magill had been running a separate side business of making box lunches out of the restaurant, they voted him out as a director of DPR. That month, they paid themselves management fees and other distributions. Then Magill, on the one side, and Dinsmore and Clatworthy, on the other, filed several lawsuits against each other in Virginia state court. Magill, in his capacity as a shareholder of DPR, filed a derivative suit against Dinsmore and Clatworthy, alleging that they had breached their fiduciary duty to the company by taking excessive management fees, by making loans and distributions to themselves, by reclassifying entries in DPR’s books, and by other means.
On April 6, 2011, Judge Jane Marum Roush of the Fairfax County Circuit Court ruled in Magill’s favor, entering judgment on DPR’s behalf for $17,137 for the loans forgiven in May 2007, and for $9,812 in excessive management fees.
Dinsmore and Clatworthy, in turn, sued Magill for breach of fiduciary duty and other claims concerning Magill’s box lunch business. The judge found that Magill had wrongfully converted company property by running this business but found that the plaintiffs had proved no monetary damages to the corporation as a result. Thus the court found for Magill on this claim as well.