Court Of Appeals Disposes Of Derivative Claims Brought On Individual Basis

In an August 14 decision, the Kentucky Court of Appeals dismissed, under the rubric of lack of standing, a series of what were determined to be derivative claims that had been brought individually by a shareholder. Ultimately, the court determined that the shareholder lacked standing to bring claims based upon fiduciary duties that, to the extent they existed, were owed to the business organization and not the individual investor. Griffin v. Jones, No. 2014-CA-000402-MR, 2015 WL 4776300 (Ky. App. Aug. 14, 2015).

David Griffin invested, at the solicitation of Charles Jones, husband to defendant Sarah Jones, $2,000,000 for a 50% ownership interest in Integrated Computer Solutions, Inc. There followed thereafter a series of investments in additional entities organized and controlled by either Charles or Sarah Jones, that total investment, a combination of loans and equity, coming to approximately $29,000,000. It was alleged, however, that Charles and Sarah Jones, in their control of these various entities, caused them to co-mingle their assets and ultimately transfer them to a LLC, CA Jones Management Group LLC, a company in which Charles Griffin was the sole member. Griffin ultimately brought suit against Sarah (this decision does not discuss any claim made against Charles Jones) alleging:

1. breach of fiduciary duty owed to him, personally;

2. fraud by omission;

3. misappropriation; and

4. unjust enrichment.

The trial court dismissed all of these claims without explanation, and the Court of Appeals would review them under the assumption that the Circuit Court adopted the reasoning employed by Sarah Jones in her motion to dismiss.

Foreshadowing the theme of the decision, the Court of Appeals wrote that "a proper ground for dismissing the balance of Griffin's claims was his lack of standing." Slip op., at 4.

Breach of Fiduciary Duty

With respect to the claim for breach of fiduciary duty, Griffin alleged that Sarah Jones, in her capacity as a officer of the corporations in which he invested, owed to him a fiduciary duty. For example, he alleged that:

As Secretary of ICS, Sarah Jones owed fiduciary duties to ICS and its shareholders - including Griffin. It is black letter law that corporate officers owed to the corporation and to its shareholders fundamental duties of care and loyalty... Slip op., at 5.

Responding to this assertion, the Court of Appeals wrote that "Kentucky law does not support that Sarah owed Griffin fiduciary duties under the...