Energy Resources Corp., Inc. v. Porter
1982 Mass. App. LEXIS 1418, 438 N.E.2d 391, 14 Mass. App. Ct. 296 (1982)
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Rule of Law:
A corporate officer cannot defend the diversion of a corporate opportunity by claiming a third party refused to deal with the corporation unless the officer first unambiguously discloses the refusal and the reasons for it to the corporation.
Facts:
- James H. Porter was the vice-president and chief scientist for Energy Resources Corporation, Inc. (ERGO), a company involved in fluidized bed combustion technology.
- On behalf of ERGO, Porter collaborated with Professors Cannon and Jackson of Howard University to prepare a joint proposal for a Department of Energy (DOE) grant.
- Professor Jackson informed Porter that Howard University no longer wanted to work with ERGO, expressing concern that ERGO would take all the credit and stating a preference for a minority-owned subcontractor.
- Cannon and Jackson then proposed to Porter that if he formed his own company, they would substitute it for ERGO in the DOE proposal, and Porter agreed.
- While still employed by ERGO, Porter assisted in removing ERGO from the proposal and replacing it with his yet-to-be-formed company, Energy & Environmental Engineering, Inc. (EEE).
- When ERGO's president asked Porter about the status of the Howard proposal, Porter replied only, 'We're not going to get that,' without providing any further details about Howard's refusal to deal.
- After the DOE grant was awarded to Howard with EEE as the subcontractor, Porter resigned from ERGO, giving a false reason for his departure.
Procedural Posture:
- Energy Resources Corporation, Inc. (ERGO) sued James H. Porter and Energy & Environmental Engineering, Inc. (EEE) in the Massachusetts Superior Court (trial court).
- After a bench trial (a trial with a judge and no jury), the Superior Court judge entered a judgment for the defendants, Porter and EEE.
- ERGO, the plaintiff, appealed the trial court's judgment to the Massachusetts Appeals Court (intermediate appellate court).
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Issue:
Does a corporate officer violate their fiduciary duty by pursuing a corporate opportunity for their own benefit, without first fully disclosing to the corporation that a third party has refused to deal with the corporation and the reasons for that refusal?
Opinions:
Majority - Kass, J.
Yes, a corporate officer violates their fiduciary duty by pursuing a corporate opportunity under these circumstances. The defense that a third party refused to deal with the corporation is unavailable unless the officer first makes a full and unambiguous disclosure of that refusal, including the reasons for it, to the corporation. Porter's vague statement, 'We're not going to get that,' was insufficient because it deprived ERGO of the opportunity to test the firmness of Howard University's refusal or to propose alternative arrangements. Without full disclosure, it is too easy for an officer to induce or feign a third party's unwillingness to deal. Therefore, Porter breached his fiduciary duty by secretly diverting the corporate opportunity for his own benefit.
Concurring - Brown, J.
Yes. This opinion agrees with the majority's conclusion and criticizes the legal advice Porter received. It emphasizes that fiduciaries have a duty to be honest and transparent, stating that in this context, 'a fiduciary's silence is equivalent to a stranger's lie.' Lawyers have a public duty to advise their clients to act ethically and avoid such breaches of trust.
Analysis:
This decision establishes a critical procedural requirement for the 'refusal to deal' defense in corporate opportunity law. It clarifies that a fiduciary cannot unilaterally determine that an opportunity is unavailable to the corporation; they must provide the corporation with all relevant information first. This precedent strengthens the duty of loyalty by preventing fiduciaries from using alleged third-party reluctance as a shield for self-dealing and secret profiteering. Future cases involving this defense will now require courts to scrutinize not only whether a refusal occurred, but also the adequacy and timing of the fiduciary's disclosure to the corporation.
