Kerrigan v. Unity Savings Association
58 Ill. 2d 20, 317 N.E.2d 39 (1974)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Corporate directors breach their fiduciary duty when they divert a business opportunity reasonably incident to the corporation's existing or prospective business for their own benefit without first making full disclosure of the opportunity to the corporation and giving it the right of first refusal.
Facts:
- Unity Savings Association (Unity) was a savings and loan association that made mortgage loans.
- Five of Unity's directors, who controlled its business affairs, organized a separate corporation, Plaza Insurance Agency, Inc. (Plaza), in 1962.
- Three of the defendant directors also held executive positions at Plaza, including president and secretary.
- Plaza leased office space in the same building as Unity.
- Unity referred its mortgage borrowers to Plaza to obtain fire and homeowner's insurance, which was a condition of the loans.
- Plaza advertised itself as an 'agent' of Unity.
- Between 1962 and 1969, Plaza earned approximately $428,000 in insurance commissions from this business.
- The directors did not disclose the opportunity to operate an insurance brokerage to Unity or its shareholders, nor did they give Unity a chance to pursue the business itself.
Procedural Posture:
- Walter F. Kerrigan filed a shareholder derivative action in the circuit court of Cook County on behalf of Unity Savings Association against five of its directors and Plaza Insurance Agency, Inc.
- After pleadings were filed, both parties moved for summary judgment.
- The trial court granted the defendants' motion for summary judgment and dismissed the case.
- The plaintiff, Kerrigan, appealed to the Appellate Court for the First District.
- The appellate court reversed the trial court's judgment and remanded the case for further proceedings.
- The defendants petitioned the Supreme Court of Illinois for leave to appeal, which was granted.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Do corporate directors breach their fiduciary duty of loyalty by creating a separate company to exploit a business opportunity reasonably incident to the corporation's business, without first disclosing the opportunity to the corporation for its consideration, even if the directors subjectively believe the corporation is legally prohibited from pursuing it?
Opinions:
Majority - Justice Schaefer
Yes. Corporate directors breach their fiduciary duty when they fail to disclose and tender a relevant business opportunity to the corporation before pursuing it themselves. The court first determined that Unity did, in fact, have the legal power to act as an insurance broker, as this activity was reasonably incident to its primary business of making mortgage loans, a principle established in Chicago Building Society v. Crowell. However, the court held that the directors' liability was not solely dependent on this finding. The core of the breach was the failure to uphold their fiduciary duty. If the doctrine of corporate opportunity is to have vitality, the corporation must be given the chance to decide for itself whether to pursue a business reasonably incident to its operations. The directors' personal belief that Unity was legally barred from the insurance business is not a valid defense; they had an absolute duty to present the opportunity to Unity (and its shareholders, given the directors' conflict of interest) for an independent evaluation. By failing to disclose and instead actively funneling Unity's customers and goodwill to their own company, the defendants exploited their positions for personal benefit, which is a clear breach of their duty of loyalty.
Analysis:
This case solidifies the corporate opportunity doctrine in Illinois by establishing a strict prophylactic rule. It clarifies that a director's duty to disclose a relevant business opportunity is paramount and not excused by a good-faith but incorrect belief about the corporation's legal inability to pursue it. The decision emphasizes that the corporation itself, not the conflicted directors, has the right to make the business judgment about whether to enter a new line of business. This holding strengthens shareholder protections by preventing fiduciaries from unilaterally deciding what opportunities the corporation can or cannot pursue, thereby closing a potential loophole for self-dealing.
Unlock the full brief for Kerrigan v. Unity Savings Association