HMG/Courtland Properties, Inc. v. Gray
749 A.2d 94, 1999 WL 504781, 1999 Del. Ch. LEXIS 149 (1999)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When corporate directors engage in self-dealing transactions with their corporation and fail to disclose material facts about their personal interests, they breach their fiduciary duties of loyalty and care, thereby triggering the entire fairness standard of review, under which they must prove both fair dealing and fair price.
Facts:
- HMG/Courtland Properties, Inc. (HMG) was a publicly held real estate investment trust; Maurice Wiener was its Chairman/CEO, and Lee Gray was its President/Treasurer and a director. Norman Fieber was also an HMG director, introduced by Gray.
- In late 1985, Gray suggested to Wiener that HMG partner with Fieber to maximize the development potential of HMG's Grossman's Portfolio properties, with Gray taking the lead in negotiations for HMG.
- During negotiations for the Wallingford property (part of the Portfolio), Gray, HMG's lead negotiator, told Fieber that Martine Avenue Associates, a partnership Gray co-owned with his sister Betsy Gray Saffell, was interested in investing on Fieber's buy-side of the deal.
- Gray persuaded Wiener and Rothstein to accept Fieber's offer of $350,000 for a two-thirds stake in the Wallingford property, which was less than its Leased Fee Value, by characterizing Fieber as a tough negotiator and recommending acceptance.
- On May 1, 1986, the Wallingford transaction closed, and Martine invested $55,000 on Fieber's buy-side, without Gray disclosing his interest to HMG.
- On July 15, 1986, the NAF Transaction for the remaining properties closed. Fieber's associates submitted a partnership agreement listing Martine as an investor, but Martine's address was falsely listed as Fieber's home address, and Jim Fieber, with Saffell's authorization, signed on behalf of Martine.
- At the August 18, 1986 HMG Board meeting to ratify both transactions, neither Gray nor Fieber disclosed Martine's interest. Gray voted to ratify the deals.
- For the next decade (1987-1996), Gray and Fieber consistently failed to disclose Martine's interest in annual HMG director questionnaires and 10-K filings, despite Fieber being aware of Gray's partnership in Martine by November 1986.
Procedural Posture:
- HMG/Courtland Properties, Inc. (HMG) commenced litigation on July 2, 1997, against defendants Lee Gray, Norman Fieber, and Betsy Gray Saffell in the Delaware Court of Chancery.
- HMG brought claims against Gray and Fieber for breach of fiduciary duty and fraud, and against Saffell for aiding and abetting.
- The case proceeded to trial in the Delaware Court of Chancery, where the court heard evidence and post-trial arguments from the parties.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate director's undisclosed buy-side interest in transactions negotiated on behalf of the corporation, along with the participation of another director who knew of the conflict and concealed it, constitute a breach of fiduciary duty and fraud, requiring the directors to demonstrate the entire fairness of the transactions?
Opinions:
Majority - Vice Chancellor Strine
Yes, a corporate director's undisclosed buy-side interest in transactions negotiated for the corporation, coupled with another director's knowledge and concealment of this conflict, constitutes a breach of fiduciary duty and fraud, thereby requiring the directors to prove the entire fairness of the transactions. Gray's undisclosed buy-side interest in the Wallingford and NAF Transactions constituted a "classic case of self-dealing" under Delaware law, directly implicating 8 Del. C. § 144, which requires disclosure of material facts. Since Gray and Fieber failed to disclose Gray's interest, the transactions were not properly ratified, triggering the entire fairness standard of review. Gray, as HMG's primary negotiator, lacked the necessary pure seller-side incentive for HMG, especially with Fieber already on the buy-side. His colleagues relied on his compromised depiction of negotiations. The court found fair dealing was absent because Gray was conflicted and concealed his interest, preventing the HMG Board from properly evaluating the transactions. Fair price was also not demonstrated because the 1984 appraisals used to set the price understated the properties' actual values, and a properly motivated negotiator would have sought a price closer to the Fee Simple Value. Gray deliberately concealed his interest with intent to induce HMG's reliance, causing HMG to approve transactions it would not have otherwise, thus committing fraud. Norman Fieber also committed fraud by knowingly concealing Gray's interest from the Board, despite understanding it to be a conflicted family interest and later having explicit knowledge of Gray's partnership. While Betsy Gray Saffell was not found to have knowingly aided and abetted Gray's breach, she is liable as a former general partner in Martine and for unjust enrichment. Fieber's defense under 8 Del. C. § 102(b)(7) failed because his misconduct involved a breach of the duty of loyalty, not merely care, and occurred before the relevant charter provision became effective. As a remedy, Gray and Fieber are jointly and severally liable for damages representing the difference between the Fee Simple Value and the price actually paid. Gray and Saffell must transfer their ownership interests in NAF Associates to HMG, and Gray, Saffell, and Fieber are jointly and severally liable for Martine's past distributions, net of investment costs. Norman Fieber will also be disabled from managerial control over the Joint Venture, and Gray is solely liable for a portion of HMG's attorneys' fees due to his egregious pre-litigation and litigation conduct.
Analysis:
This case strongly affirms the strict application of fiduciary duties, particularly the duty of loyalty, to corporate directors in Delaware. It underscores that any undisclosed, material self-interest in a transaction triggers the rigorous 'entire fairness' standard, irrespective of whether the final price falls within a defensible range. The ruling serves as a critical warning against directors exploiting their positions for personal gain, emphasizing that both fair process ('fair dealing') and fair value ('fair price') are essential for validating interested transactions. The court's decision highlights the significant legal and financial repercussions, including personal liability and attorneys' fees, for directors who fail in their obligation of candor and loyalty.
