Divided Illinois Supreme Court Holds That Fiduciaries Are Not Liable for Usurpation of a Corporate Opportunity Where the Opportunity Taken Is Not Exclusive

The fiduciary duty of loyalty that directors, officers, and employees owe to their corporations includes the duty to refrain from taking advantage of opportunities that are within the company’s line of business without the corporation’s consent.  This obligation is known as the “corporate opportunity doctrine”.   A corporate opportunity is one that is reasonably incident to the corporation’s present or prospective business and one in which the corporation has the capacity to undertake.[1]  The corporate opportunity doctrine requires that fiduciaries of corporations must first disclose and tender corporate opportunities to their corporations and can only personally take advantage of the opportunity with the corporation’s consent.[2]

Corporate opportunity cases typically involve an opportunity that is available to the fiduciary personally or the corporation, but not both.[3]   For instance, a common scenario in which the corporate opportunity doctrine is implicated is when a director, officer, or employee personally purchases another business that the corporation was or may have been interested in purchasing.[4]  However, in Indeck Energy Services, Inc. v. DePodesta[5], the Illinois Supreme Court recently addressed the question of whether a fiduciary can be liable for usurpation of a corporate opportunity where the fiduciary’s personal taking of the opportunity did not prevent the corporation from being able to take advantage of the opportunity as well.  A divided Supreme Court in a 4-3 decision held that, even where fiduciaries breach their duties by failing to tender, disclose, and obtain the corporation’s consent prior to personally taking advantage of a corporate opportunity, where the taking of the opportunity did not prevent the corporation from also being able to take advantage of the opportunity, the corporation has not suffered the requisite injury to prevail on a usurpation of corporate opportunity claim.[6]

As set forth in the opinion, Indeck Energy Services, Inc. (“Indeck”) is a developer, owner, and operator of independent power generation projects.  Defendant Christopher M. Podesta (“Podesta”) was the company’s vice president for development.  Defendant Karl G. Dahlstrom (“Dahlstrom”) served as its director of development.   Both DePodesta and Dahlstrom’s duties for Indeck included identifying opportunities for the development of power generation projects and developing those projects.[7]  Indeck’s president charged both DePodesta and Dahlstrom with researching the viability of natural gas power generation projects in an area known the Electrical Reliability Council of Texas (“ERCOT”).[8]

In connection with their employment duties, DePodesta and Dahlstrom entered into discussions with Merced, an investment fund that invests in power generation projects.  Merced was interested in partnering with Indeck in the development of power generation projects in ERCOT.  Indeck alleged that, while DePodesta and Dahlstrom were ostensibly negotiating with Merced on Indeck’s behalf, they purposefully sabotaged the negotiations by asserting unreasonable demands on behalf of Indeck without authorization and misrepresented Merced’s positions to Indeck’s president.  Indeck further alleged that DePodesta and Dahlstrom then secretly negotiated with Merced for the formation of a new limited liability company to be owned by Merced III, which was an affiliate of Merced, and a limited liability company that DePodesta and Dahlstrom owned called Halyard Energy Ventures, LLC (“HEV”).  The purpose of the new company to be owned by HEV and Merced III was also to develop power plants in ERCOT.  DePodesta and Dahlstrom then resigned from their positions at Indeck and, days later, signed a LLC operating agreement for MHV, LLC, which was owned by HEV and Merced III.  MHV, LLC (“MHV”) then began work to develop natural gas power generation projects in Texas.[9]

Indeck sued DePodesta and Dahlstrom, alleging breach of fiduciary duty, among other claims.  After learning that DePodesta and Dahlstrom had formed a company with Merced, Indeck amended its complaint to add a separate count titled “Usurpation of Corporate Opportunity”.  Through that count, Indeck sought disgorgement of the compensation and profits that DePodesta and Dahlstrom received from their relationship with Merced and assignment of all interests that they held in the projects being developed by HEV and Merced.[10]

The case proceeded to trial.  At the conclusion of Indeck’s case-in-chief, the trial court entered a directed verdict in favor of DePodesta and Dahlstrom on Indeck’s Usurpation of Corporate Opportunity count.  The trial court found that, because HEV’s agreement with Merced was not exclusive, the opportunity for Indeck to partner with Merced, which the court termed the “Funding Opportunity”, was still available to it.  The court then held that, because the Funding Opportunity was still available to Indeck, there had not been a usurpation of that opportunity.[11]

At the conclusion of the trial, the court did hold that DePodesta and Dahlstrom’s actions in secretly negotiating with Merced while they were still employees of Indeck were violations of their fiduciary duties of loyalty.  Therefore, the court ordered the disgorgement of DePodesta and Dahlstrom’s salaries received during the approximately nine-month period in which the secret negotiations with Merced occurred.[12]  However, because the court had held that there had not been a usurpation of the opportunity to partner with Merced as that opportunity was still available to Indeck,  DePodesta and Dahlstrom were not required to disgorge the compensation and profits that they had received from their relationship with Merced nor were they required to assign their interests in MHV to Indeck as Indeck had requested through its Usurpation of Corporate Opportunity count.

The appellate court reversed the directed verdict in favor of DePodesta and Dahlstrom on Indeck’s Usurpation of Corporate Opportunity count, finding that it was “immaterial” whether the Funding Opportunity was also available to Indeck.[13]  Rather, the appellate court held that, as the Funding Opportunity was a corporate opportunity, the only relevant questions were whether DePodesta and Dahlstrom had tendered, disclosed, and obtained the consent of Indeck prior to proceeding to form MHV, LLC with Merced.  As Indeck had presented evidence that DePodesta and Dahlstrom did not tender, disclose, and obtain Indeck’s consent prior to pursuing the opportunity with Merced, the appellate court held that the trial court erred in entering the directed verdict on the Usurpation of Corporate Opportunity count.[14]

However, a divided Supreme Court reversed the appellate court and affirmed the trial court’s grant of a directed verdict in favor of the DePodesta and Dahlstrom on Indeck’s Usurpation of Corporate Opportunity count.[15]  Writing for a 4-3 majority, Chief Justice Burke focused on whether Indeck had been damaged by DePodesta and Dahlstrom’s breaches of their fiduciary duties by failing to tender and disclose the opportunity and secure Indeck’s consent.  The court noted that, in order to prevail on a claim of breach of fiduciary duty, in addition to proving the existence of a fiduciary duty and the breach of that duty, the plaintiff must also prove that the breach proximately caused injury to the plaintiff.[16]  The court further observed that usurpation of a corporate opportunity is a distinct type of fiduciary duty claim that involves a particular type of injury –  the taking of a corporate opportunity and the resulting loss of that opportunity by the corporation.[17]

In discussing whether Indeck had suffered the type of injury necessary to prevail on a usurpation of corporate opportunity claim, the court held that, because Merced and HEV’s agreement was not exclusive and there was no evidence that the Funding Opportunity was not still available to Indeck, Indeck had not established that it had lost the opportunity.  Therefore, the opportunity had not been usurped.[18]

The court noted that, because they were found to have breached their fiduciary duties, DePodesta and Dahlstrom had been required to forfeit their salaries for the period that they were secretly negotiating with Merced.  However, because DePodesta and Dahlstrom’s breaches of their fiduciary duties did not deprive Indeck of the ability to also take advantage of opportunities to develop power plants with Merced, Indeck had not suffered the type of injury necessary to prevail on its usurpation of corporate opportunity claim.[19]The result of that determination was that Indeck’s damages were limited to the forfeiture of DePodesta and Dahlstrom’s salaries.  Indeck was not able to recover the additional damages it sought through its usurpation of corporate opportunity claim, namely the disgorgement of DePodesta and Dahlstrom’s profits from MHV and an assignment of the projects developed jointly by HEV and Merced.

Justice Overstreet joined by two other justices dissented.  The dissent agreed with the appellate court that the only relevant inquiry was whether DePodesta and Dahlstrom had disclosed and tendered the opportunity and obtained Indeck’s consent before proceeding to take advantage of it themselves.  The dissent, therefore, agreed with the appellate court that whether the opportunity was also available to Indeck was immaterial.[20]  While the majority had focused on the issue of whether Indeck had suffered the requisite injury, the dissent’s focus was on the “prophylactic purpose” of the corporate opportunity doctrine – to prevent fiduciaries from exploiting for their own gain opportunities within their corporation’s line of business without first disclosing, tendering, and obtaining consent.[21]  The dissent cautioned that the rule of law announced by the majority would allow disingenuous fiduciaries to evade the tender/disclose/consent obligations by simply including language in their contracting documents providing that the opportunity is not exclusive.[22]

Under the rule announced by the Indeck majority, whether a fiduciary who personally takes a corporate opportunity can be held liable under the corporate opportunity doctrine may hinge on whether the fiduciary’s taking of the opportunity prevented the corporation from also taking advantage of the opportunity.  Despite the centrality of this issue to the Indeck decision, there was little evidence discussed in the opinion about whether the opportunity to partner with Merced to develop natural gas power plants in the ERCOT region was actually still available to Indeck once Merced formed a separate company with Indeck’s former development executives for that same purpose.  The trial court found that the opportunity was still available to Indeck based on the fact that Merced’s agreement with HEV was not exclusive, a finding that the Supreme Court majority determined was not against the manifest weight of the evidence.[23]  However, as the dissent pointed out, simply because contracts identify an arrangement as non-exclusive does not necessarily mean that the opportunity  is actually still available to other parties.[24]   In light of the rule announced by the Indeck majority, parties litigating usurpation of corporate opportunity cases in which the opportunity taken by the fiduciary was not clearly exclusive should consider developing evidence that demonstrates whether the opportunity taken by the fiduciary was or was not actually still available to the corporation.

[1]  Advantage Mktg. Grp., Inc. v. Keane, 2019 IL App (1st) 181126, ¶ 35.

[2] Kerrigan v. Unity Sav. Ass’n, 58 Ill. 2d 20, 28 (1974); Advantage Mktg. Grp., Inc. v. Keane, 2019 IL App (1st) 181126, ¶ 40.

[3] Indeck Energy Servs., Inc. v. DePodesta, 2021 IL 125733, ¶ 82.

[4]  See e.g., Advantage Mktg. Grp., Inc. v. Keane, 154 Ill. App. 3d 61, 67  (2d Dist. 1987); Lindenhurst Drugs, Inc. v. Becker; 154 Ill. App. 3d 61, 67  (2d Dist. 1987).

[5] 2021 IL 125733

[6]   Id., ¶¶

[7]   Id., ¶¶ 4-6.

[8]   Id., ¶ 11.

[9]  Id., ¶¶ 12-30.

[10]  Id., ¶ 32.

[11]  Id., ¶ 34.

[12]  Id., ¶¶ 34-35.

[13]  2019 IL App (2d) 190043, ¶ 70.

[14]   Id., ¶¶ 66, 70.

[15]   2021 IL 125733, ¶ 52.

[16]   Id., ¶ 47.

[17]   Id.

[18]   Id.,  49.

[19]   Id., ¶ 52.

[20]   Id., ¶ 82.

[21]   Id.

[22]   Id., ¶ 77.

[23]   Id., ¶ 49.

[24]   Id., ¶ 79.

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