Center Healthcare Ed. & Res. v. Internat. Cong. Joint Reconst.
CERTIFIED FOR PUBLICATION (2020)
Rule of Law:
A principal seeking the equitable remedy of disgorgement of a fiduciary's secret profits for breach of fiduciary duty is not required to prove pecuniary harm or loss; rather, the principal must only provide a reasonable approximation of the fiduciary's wrongful gain.
Facts:
- In 2009, Dr. William Norman Scott, president of the International Congress for Joint Reconstruction, Inc. (ICJR), retained Mark Sacaris, part owner of the Center for Healthcare Education and Research, Inc. (CHE), to assist ICJR in producing medical education conferences under an unwritten agreement, with no discussion of rates.
- Sacaris provided all services through CHE, unilaterally setting rates that included undisclosed markups on labor costs for profit and overhead, and used ICJR's money accounts to pay CHE's invoices without notifying ICJR's board members of the amounts being charged.
- Without informing ICJR's board, Sacaris expanded CHE’s services to include developing ICJR’s websites and broadcasting live surgeries through Live Surgery, a company owned by Tier One (co-owned by Sacaris), without disclosing his interest or CHE employees' lack of experience in these areas.
- Sacaris also arranged for CHE to manage symposia for pharmaceutical companies during ICJR conferences, creating additional sources of profit for CHE and himself, without disclosing his interest in these arrangements to ICJR.
- In 2013, Sacaris was made a chief operating officer (COO) and a nonvoting director of ICJR, but his billing practices continued unchanged without board notification.
- By February 2016, Sacaris informed the ICJR board that ICJR had amassed a $2 million debt to CHE, which, along with an employee's concerns, led the board to discover Sacaris’s and CHE’s undisclosed billing practices and financial arrangements.
- ICJR investigated CHE's billing practices and terminated its relationship with Sacaris and CHE in January 2017 without paying the demanded debt.
Procedural Posture:
- On February 3, 2017, Center for Healthcare Education and Research, Inc. (CHE) filed a complaint against International Congress for Joint Reconstruction, Inc. (ICJR) in the San Diego County Superior Court (trial court), alleging breach of contract and seeking $2,400,000 in damages.
- ICJR filed a cross-complaint against both CHE and Mark Sacaris, asserting causes of action for breach of fiduciary duty, fraud, negligence, conversion, violation of Business and Professions Code section 17200, constructive trust, and accounting, seeking disgorgement and restitution of profits.
- In January 2019, the action and cross-action were tried in a four-day bench trial in the San Diego County Superior Court.
- On June 21, 2019, the trial court issued its final statement of decision, finding in favor of CHE on its breach of contract claim, awarding $2,299,259.42.
- The trial court found Sacaris and CHE breached their fiduciary duties regarding management services but denied ICJR recovery of these profits, concluding ICJR failed to prove it suffered economic damages from the breach.
- The trial court awarded ICJR $800,000 for web development overbilling due to breach of fiduciary duty and $73,310 for profits from Live Surgery due to breach of fiduciary duty and fraud.
- The trial court denied ICJR recovery for pharmaceutical symposia profits, finding that organizing such symposia was not a corporate opportunity ICJR would have pursued.
- On August 29, 2019, the trial court entered judgment.
- ICJR appealed the judgment, specifically challenging the trial court's denial of disgorgement for the management services profits and the determination that the pharmaceutical symposia were not a corporate opportunity; ICJR is the Appellant and CHE and Sacaris are the Respondents.
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Issue:
Does a principal seeking disgorgement of a fiduciary's secret profits for breach of fiduciary duty need to demonstrate that the breach caused the principal to suffer monetary harm or loss?
Opinions:
Majority - McConnell, P.J.
No, a principal seeking disgorgement of a fiduciary's secret profits for breach of fiduciary duty does not need to demonstrate that the breach caused the principal to suffer monetary harm or loss. Disgorgement is an equitable remedy, broader than restitution, that focuses on the wrongdoer’s enrichment rather than the victim’s loss, and serves to deter future misconduct, as established in precedents like Meister v. Mensinger and County of San Bernardino v. Walsh. The court cited the Restatement Third of Agency, which states that a principal need not establish harm from a breach of fiduciary duty to require an agent to account for profits. When a fiduciary profits from transactions in breach of duty, the proper measure of recovery is full disgorgement of any secret profit, regardless of whether the principal suffered damage. The 'secret profits' subject to disgorgement are simply the fiduciary’s undisclosed earnings. The trial court erred by requiring ICJR to prove it was overcharged for management services to recover, as Sacaris’s and CHE's failure to disclose their hourly rates, markups, and overall charges constituted a breach of their duties of loyalty and full disclosure, making their resulting profits 'secret.' Once ICJR provided a reasonable approximation of the wrongful gain, as it did with expert testimony, it established a right to recovery. The court affirmed the trial court's finding that managing pharmaceutical symposia was not a corporate opportunity of ICJR, as there was substantial evidence that ICJR lacked the demonstrated corporate ability or interest in planning educational conferences for other companies.
Analysis:
This case significantly clarifies the evidentiary requirements for principals seeking disgorgement from fiduciaries in California. It reinforces that disgorgement is a distinct equitable remedy, not requiring proof of the principal's pecuniary loss, but rather focusing on preventing the unjust enrichment of the breaching fiduciary and deterring future misconduct. Future cases will apply a stringent standard to fiduciaries, emphasizing that any undisclosed earnings or exploitation of 'gaps or arguable ambiguities' in instructions for self-interest constitutes a 'secret profit' subject to disgorgement. This ruling effectively shifts the burden to the fiduciary to justify their profits and expenses once the principal demonstrates a reasonable approximation of wrongful gain, strengthening accountability for those in positions of trust.
