Article Archives >> Lead Stories >> December 16, 2008-January 15, 2009

Preview of Article:

Board Chair May Be Sued
Personally For Fraud Under Contract
Court refuses to dismiss complaint alleging
intentional misrepresentation of intent to pay

A federal District Court in Arizona has refused to dismiss a complaint against the Chair of the Board of the nonprofit Frank Lloyd Wright Foundation for alleged intentional misrepresentation of the Foundation’s intent to pay a contractor.  The Court has held that a director has no privilege to commit fraud.  (Frank Lloyd Wright Foundation v. Kroeter, D. AZ, No. CV-08-1112, PHX, 12/3/08.)

The Foundation entered into an agreement for an exclusive agency for licensing intellectual property, but a new group of officers chose not to implement the strategic licensing plan proposed by the contractor.  The Board Chair Gerald Morosco and CEO Phillip Allsopp assured the contractor that the Foundation would pay what was owed for the work the contractor had done, but the Foundation failed to do so.

In June, 2008, the Foundation filed a complaint against the contractor for breach of contract, and the contractor filed a counter suit against the Foundation and the Board Chair and the CEO personally.  The Board Chair filed a motion to dismiss.

The Court agreed that the contractor’s claim for negligent misrepresentation could not be sustained because that cause of action requires a misrepresentation or omission of a fact, and a promise of future conduct is not a statement of fact.

A claim for fraud can be sustained, however, if an unfulfilled promise of future performance was “made with the present intent not to perform.”  For purposes of the motion to dismiss, the Court was required to assume that the allegations of the complaint were true.  The contractor alleged that Morosco knew his promises were false and that the contractor justifiably and detrimentally relied on them.

“Morosco was chairman of the Foundation’s board of directors when the alleged misrepresentations were made,” the Court wrote.  “The Court cannot say at this stage of the litigation that [the contractor’s] reliance on the board chairman’s promises were per se unreasonable, even if the chairman was not personally a party to the contract.  More must be known about the representations before the Court can conclude whether they induced reasonable reliance, whether they were made solely on behalf of the Foundation, and whether they can give rise to a fraud claim against Morosco personally.”

The allegation that the contractor was induced to continue negotiations and incur substantial legal fees, the Court said, was sufficient allegation of reliance to sustain the complaint.

The board chair also sought protection of the general rule shielding directors from liability for acts done in good faith on behalf of the corporation.  But the rule does not protect them from personal liability to those harmed as a result of intentionally harmful or fraudulent conduct, the Court said.  The allegation of intentionally false representations was sufficient at this stage of the proceedings to preclude dismissal.

YOU NEED TO KNOW

Directors are very seldom found personally liable for their work on behalf of the corporation, especially in connection with what are primarily contractual claims.  But directors must be aware that they are liable for their personal conduct and the allegation of intentional misconduct, even in connection with contractual disputes, is usually sufficient to preclude dismissal of the complaint and application of volunteer protection laws.

Article Archives >> Lead Stories >> December 16, 2008-January 15, 2009