Alexander You

In Dweck v. Nasser, the Delaware Chancery Court, through an opinion by Vice Chancellor Laster, held that Gila Dweck, director and officer of Kids International Corporation (Kids), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by forming competing companies that usurped Kids’ corporate opportunities and misused Kids’ resources. The Court also held that Dweck had violated her fiduciary duty of loyalty by having Kids reimburse hundreds of thousands of dollars in personal expenses. Additionally, the Court found that Bruce Fine, Kids’ CFO, breached his fiduciary duties by authorizing the reimbursement of Dweck’s personal expenses.

Gila Dweck and Albert Nasser were both stockholders and directors in Kids, a clothing wholesale company. Dweck formed two other companies with Taxin, Success Apparel LLC (Success) and Premium Apparel Brands LLC (Premium), which operated out of Kids’ premises and in the same line of business. Dweck and Taxin used Kids’ employees, office space, letters of credit, customer relations, and goodwill to operate Success and Premium. Dweck charged hundreds of thousands of dollars of personal expenses, including vacations and luxury goods, to Kids and was reimbursed after Fine authorized the expenses. Dweck and Nasser had a falling out and accused each other of breaching their fiduciary duties to the company. The dispute has resulted in nearly seven years of litigation.

In analyzing the duty of loyalty held by the corporate officers and directors, the Chancery Court established that “the duty of loyalty proscribes a fiduciary from any means of misappropriation of assets entrusted to his management and supervision.”[1] Corporate opportunities are one such asset, and a corporate officer or director may not take a business opportunity for his own if: “(1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable [sic] to his duties to the corporation.”[2]

The Chancery Court held that Dweck and Taxin misappropriated Kids’ corporate opportunities by operating competing companies out of Kids’ premises. The Court found particularly compelling that Dweck and Taxin used Kids’ employees and resources to conduct business for the competing companies, demonstrating that Kids was financially capable of exploiting the opportunity.

The Court rejected Dweck’s and Taxin’s attempt to distinguish private and branded clothing. Dweck and Taxin argued that Kids only operated in the private label business, which allowed Success and Premium to operate in the branded label business. In rejecting this distinction, the Court held that a company’s line of business requires broad interpretation to allow for development and expansion.

The Court also rejected Dweck’s assertion that an operating agreement with a so-called “free-for-all” provision allowed Dweck to compete with Kids. The Chancery Court refused this interpretation and as to any ambiguity the Court looked to the parties’ course of performance which did not comport with Dweck’s reading of the agreement. Before founding Success, Dweck tried to convince Nasser to sign agreements with the “free-for-all” clause, but Nasser refused specifically because of the clause’s presence. Nasser only signed the agreement after Dweck assured him that Success would not compete with Kids. If Dweck believed the agreement operated as she contended, she would not have requierd Nasser’s consent.

The Court also held that Fine had violated his fiduciary duties by authorizing reimbursement of Dweck’s personal expenses to Kids. The Court determined that Dweck, Taxin, Success, and Premium were jointly and severally liable for lost profits to Kids while the competing firms operated. Furthermore, the Court determined that Dweck was liable for the personal expenses paid by Kids.

This case demonstrates that corporate opportunities are a company asset and that operating a competing company can place an officer or director in breach of his fiduciary duties of loyalty.  This case was particularly egregious because Dweck and Taxin operated their competing company out of Kids premises and using Kids resources; however, given the Court’s statements that a company’s line of business should be broadly interpreted, such egregious facts may not be needed to find a violation.

With respect to Fine, who authorized repayment of personal expenses, the fiduciary duty of loyalty may force officers to choose between two unenviable positions: risks losing one’s job by refusing to process a superior’s request for reimbursement or risks personal liability in court proceedings having authorized those expenses.

[1] Dweck v. Nasser, C.A. No. 1353-VCL, at *24 (Del. Ch. Jan. 18, 2012) (quoting US W., Inc. v. Time Warner Inc., 1996 WL 307445, at *21 (Del. Ch. June 6, 1996).

[2] Id. at *24-25 (quoting Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 154-55 (Del. 1996)).

Posted in

Share this post