Endico v. Endico

Background

Felix W. Endico sued William A. Endico and ACE Endico Corp. He brought claims individually and on behalf of nominal defendant UFS Industries, Inc., doing business as Sally Sherman. Felix alleged corporate waste, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, conversion, unfair competition, aiding and abetting those claims, constructive trust, and accounting.

Felix and William are brothers and each owns 50% of Sally Sherman, a family food-manufacturing business. William is also a 61% shareholder of ACE Endico, a food and food-service distribution company. Sally Sherman had given ACE Endico a 10% discount since approximately 1985. William became CEO of Sally Sherman around 2012 and reduced the discount to 6% in 2017.

Felix argued that William’s position on both sides of the transactions created a conflict of interest and that the discounts caused Sally Sherman financial harm. The defendants argued that ACE Endico did not profit from its overall relationship with Sally Sherman and that Sally Sherman received substantial benefits, including credit, business referrals, help obtaining supplies, and delivery assistance. The parties also disputed whether the discounts were excessive and whether the relationship as a whole benefited Sally Sherman.

Summary-judgment standard

The court applied the standard for summary judgment under Federal Rule of Civil Procedure 56. Summary judgment is appropriate when there is no genuine dispute about a material fact and the moving party is entitled to judgment as a matter of law. The court viewed disputed facts and reasonable inferences in Felix’s favor, but required evidence that could support a decision in his favor at trial.

Claims treated as abandoned

The defendants argued that Felix abandoned most claims by failing to address the defendants’ arguments in his opposition papers. The court agreed and granted summary judgment on Felix’s claims for corporate waste, unjust enrichment, conversion, unfair competition, aiding and abetting those claims, and constructive trust. The court separately addressed the fiduciary-duty, aiding-and-abetting fiduciary-duty, and accounting claims.

Breach of fiduciary duty

The court dismissed Felix’s individual breach-of-fiduciary-duty claim. Under New York law, a shareholder generally cannot bring an individual claim for harm suffered by the corporation. The court concluded that Sally Sherman, rather than Felix personally, allegedly suffered the harm and would benefit from any recovery. Felix’s allegations concerned losses to Sally Sherman from the discount arrangement and an alleged decrease in the company’s value.

The court denied summary judgment on Felix’s derivative breach-of-fiduciary-duty claim. A derivative claim is brought by a shareholder on behalf of the corporation. The court found genuine disputes about whether William breached his duty of loyalty to Sally Sherman. William owed fiduciary duties to Sally Sherman as its CEO, and the court found that Felix had made an initial showing that William had a conflict because he was involved in transactions on both sides while holding a majority interest in ACE Endico.

Because of that alleged self-interest, the court ruled that the business-judgment rule did not resolve the claim at summary judgment. The burden therefore shifted to William to show that maintaining the 10% discount and later reducing it to 6% were fair and reasonable to Sally Sherman. The court found insufficient undisputed evidence to decide that question as a matter of law. A factfinder could determine either that William should have reduced the discount sooner or further, or that maintaining the arrangement supported a relationship that benefited Sally Sherman overall.

The court allowed Felix to proceed on the derivative fiduciary-duty claim based on damages allegedly resulting from the discounts. The court concluded that evidence of the discounts could support a finding that Sally Sherman lost revenue on transactions with ACE Endico if the factfinder accepted Felix’s theory that William should have reduced the discounts to industry standards.

The court granted summary judgment on Felix’s alternative theory that the discount arrangement caused Sally Sherman’s book value to decline. Felix did not provide admissible evidence showing that the discounts were the “but-for” or proximate cause of the alleged decrease. The court also ruled that Felix could not offer his own testimony to establish the company’s valuation or the cause of its alleged decline because the record did not show that he had the necessary personal, particularized financial knowledge or performed financial analysis for the company.

Aiding and abetting breach of fiduciary duty

The court granted summary judgment on Felix’s aiding-and-abetting breach-of-fiduciary-duty claims. Such a claim requires evidence of a fiduciary breach, the defendant’s actual knowledge of the breach, knowing participation or substantial assistance, and resulting damage.

Although factual disputes remained about whether William breached his fiduciary duty, the court found no evidence that ACE Endico had actual knowledge of a breach or knowingly provided substantial assistance. The court also stated that ACE Endico did not owe Felix a fiduciary duty and that a corporation cannot aid and abet a breach by a fiduciary when the corporation could act only through the same person alleged to have committed the breach.

Accounting

An accounting is an equitable remedy that can require a party in a fiduciary or confidential relationship to account for money or property. The court denied summary judgment on Felix’s accounting claim against William. The court found that factual disputes about William’s alleged breach remained and that producing financial records during discovery did not necessarily eliminate an accounting claim.

The court granted summary judgment on Felix’s accounting claim against ACE Endico because ACE Endico did not owe Felix a fiduciary duty, which the court treated as an essential element of the accounting claim.

Disposition

The defendants’ motion for summary judgment was granted in part and denied in part. Summary judgment was granted on the claims for corporate waste, unjust enrichment, conversion, unfair competition, aiding and abetting those claims, constructive trust, Felix’s direct breach-of-fiduciary-duty claim, the aiding-and-abetting breach-of-fiduciary-duty claims, and Felix’s accounting claim against ACE Endico. Summary judgment was denied on Felix’s derivative breach-of-fiduciary-duty claim and his accounting claim against William. Felix may proceed on the derivative fiduciary-duty claim based on damages allegedly caused by the discount arrangement, but he may not rely at trial on the theory that the discounts caused Sally Sherman’s alleged decrease in book value.