All in the Family: Brother’s Suit Claiming Breach of Fiduciary Duties and Unjust Enrichment Fails

Jemison v. Jemison, No. 21-1805, 2022 WL 2383611 (3d Cir. July 1, 2022)

William Jemison and Michael Jemison were officers and members of the Board of Directors for Heyco, Inc. (“Heyco”), and co-trustees and beneficiaries to the Jemison Family Trust (“Trust”).  Their brother, Steven Jemison (“Steven”), a former shareholder of Heyco and a co-trustee and beneficiary of the Trust, brought this action against William and Michael, claiming they breached their fiduciary duties as corporate directors of Heyco and trustees of the Trust and were unjustly enriched in connection with three transactions:  (1) Heyco’s issuance, and subsequent forgiveness, of $500,000 loans to William and Michael; (2) commission payments to William and Michael stemming from the sale of a Heyco subsidiary, Heyco Products, Inc. (“Products”);  and (3) the sale of another Heyco subsidiary, Heyco Metals, Inc. (“Metals”), to Hummock Holdings, a company owned by Michael and his children.

Claims For Breach of Fiduciary Duties as Corporate Directors

The New Jersey Business Corporation Act (“NJBCA”) requires corporate directors to act in good faith and with that degree of diligence, care, and skill that ordinarily prudent people would exercise under similar circumstances.”  See N.J.S.A. § 14A:6-14(1).  The Third Circuit agreed with the district court’s application of the NJBCA and recognized that board directors are afforded broad discretion in decision-making as long as they make decisions in good faith.  The burden is on the challenger to show that such decisions were, in fact, made in bad faith.

The Third Circuit agreed that Steven had the burden of showing the corporate decision-makers (i.e., Heyco’s Board of Directors) acted in bad faith.  The Third Circuit also agreed with the district court’s analysis that the issuance and forgiveness of a $500,000 loan to William and Michael and payment of commissions as part of the sale of a subsidiary company were protected by the NJBCA.  Further, Steven did not produce sufficient evidence to overcome the presumption that Michael and William satisfied their duty of loyalty.

The court noted that the NJBCA gives boards the authority to set compensation for directors and permits a corporation to lend money to a director “whenever, in the judgment of the directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation.”  N.J.S.A. §§ 14A:6-8(3), 14A:6-11.  The court recognized that a director can approve his own compensation without it being a conflict of interest.  Citing the NJBCA, the court found it significant that the transactions were also approved by two disinterested directors to overcome any potential for a conflict of interest.  See N.J.S.A.§ 14A:6-8(1)(b) (permitting transactions that would otherwise be void or voidable due to conflict of interest if the board is aware of the conflict and nonetheless “authorizes, approves, or ratifies the … transaction… by unanimous written consent, provided at least one director so consenting is disinterested”).  Moreover, the court noted multiple valuations during various negotiations as evidence that the board acted reasonably and was informed about the sale.

Thus, Steven did not sufficiently allege fraudulent, self-dealing, or bad faith conduct.  He did not identify any facts suggesting the board was anything less than fully informed when it decided to forgive the loans and issued commissions to William and Michael.

Claims For Breach of Fiduciary Duties as Trustees

The Third Circuit disagreed with the district court’s evaluation of the trustee claims.  The appropriate standard is one of New Jersey trust law.  Section 3B:31 of the New Jersey Uniform Trust Code (“NJUTC”) sets out default rules governing the conduct of trustees absent conflicting terms in the trust agreement.  It requires trustees to “administer the trust with undivided loyalty to and solely in the best interests of the beneficiaries.”   N.J.S.A. § 3B:31-55(a).  This duty to act in the best interest of beneficiaries extends to when trustees vote shares of stock or exercise power over similar interests in other forms of enterprise.  N.J.S.A. § 3B:31-55(f).  Accordingly, “[a] sale … or other transaction involving the investment or management of trust property is presumed to be affected by a conflict between personal and fiduciary interests if it is entered into by the trustee with … [an] enterprise in which the trustee … has an interest that might affect the trustee’s judgment.”  N.J.S.A. § 3B:31-55(c)(4).

William and Michael conceded that the sale of Metals was affected by conflict because Michael controlled Hummock.  The Third Circuit then had to decide if William and Michael cured the conflict.  There are five ways William and Michael could rebut the presumption of conflict: (1) the transaction was authorized by the terms of the trust; (2) the transaction was approved by the court; (3) the beneficiary did not commence a judicial proceeding within the time allowed by; (4) the beneficiary consented to the trustee’s conduct, ratified the transaction, or released the trustee in compliance with; or (5) the transaction involved a contract entered into or a claim acquired by the trustee before the person became a trustee.

William and Michael argued only that the terms of the Trust authorized the sale.  They pointed to the “broad discretionary rights and powers” afforded to the trustees under the Trust, including “the ability to vote to exercise or sell any rights,” and “consent to … any contract, … sale or action by any corporation.”  Jemison at *17.  The court found that the Trust terms were silent as to whether trustees can vote in self-interested transactions, thereby failing to overcome the NJUTC’s requirement that trustees “administer the trust with undivided loyalty to … the beneficiaries,” N.J.S.A. § 3B:31-55(a).

William and Michael contended that they had a right to vote their shares in favor of the transaction because the Trust (1) did not limit their ability to serve both as co-trustees and as directors; (2) allowed all the Jemison siblings, as co-trustees, to vote the Trust’s shares; and (3) did not require them to act unanimously.  Unlike the district court, the Third Circuit found this did not cure the presumed conflict.  William and Michael’s ability to serve simultaneously as co-trustees and directors of Heyco, or their general power to vote the Trust’s shares, had little bearing on whether they could, as co-trustees, approve the conflicted sale at issue here.  Additionally, the unanimity argument fell short because Steven’s objections stemmed from his rights as a beneficiary of the Trust, not as a co-trustee.

The district court’s reliance on Rosencrans v. Fry, 91 A.2d 162 (N.J. Super. Ct. Ch. Div. 1952), for its conclusion that the Trust permitted William and Michael’s roles as Trustees of the Trust and directors of Heyco, is misplaced.  Rosencrans did not apply because the Trust here, unlike the instrument in that case, did not explicitly authorize trustees to purchase property from the Trust.  Though the district court was correct that New Jersey law and the Trust generally allowed William and Michael to vote the shares of the Trust and hold positions on Heyco’s Board, its Rosencrans analysis did not extend to the specific circumstances of William and Michael’s exercising those rights to approve a conflicted transaction.  Because of this remaining conflict under New Jersey trust law and no successful rebuttal of the presumption, summary judgment was inappropriate on this claim.

Unjust Enrichment

Steven’s argument for unjust enrichment was also rejected by the Third Circuit.  Because the unjust enrichment claim was based on his brothers’ actions as trustees, it failed because the parties’ relationship was governed by the Trust.  Steven neither alleged that the Trust was void nor did he seek rescission; therefore, his claim did not have merit.  See Van Orman v. Am. Ins. Co., 680 F.2d 301, 310 (3d Cir. 1982) (“recovery under unjust enrichment may not be had when a valid, un-rescinded contract governs the rights of the parties”).