Kinzbach Tool Co. v. Corbett-Wallace Corp.
1942 Tex. LEXIS 375, 138 Tex. 565, 160 S.W.2d 509 (1942)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Where a third party knowingly participates in the breach of a fiduciary's duty to his principal, such as by paying the fiduciary a secret commission, the third party becomes a joint tortfeasor and is liable to the principal for the amount of the secret benefit.
Facts:
- The Corbett-Wallace Corporation (Corbett) sought to sell a sales right contract for a 'whipstock' tool to Kinzbach Tool Company (Kinzbach).
- The presidents of the two companies were unfriendly, preventing direct negotiations.
- Corbett's president contacted G. E. Turner, a trusted, salaried employee of Kinzbach, and secretly offered him a commission to help facilitate the sale.
- Corbett informed Turner that its minimum asking price was $20,000 but explicitly instructed Turner not to disclose this price to his employer, Kinzbach.
- Unaware of Turner's secret arrangement, Kinzbach's president instructed Turner to ascertain the lowest price Corbett would accept for the contract.
- Turner never disclosed to Kinzbach that he was promised a commission from Corbett or that the contract could potentially be purchased for $20,000.
- The deal was ultimately consummated, with Kinzbach agreeing to purchase the contract from Corbett for $25,000.
- After the sale, Kinzbach discovered that Corbett had agreed to pay Turner a $5,000 commission for his role in the transaction.
Procedural Posture:
- After discovering the secret commission, Kinzbach tendered a reduced payment for the first installment on the contract, which Corbett rejected.
- Kinzbach filed suit against Corbett and Turner in the district court (trial court) to establish a trust over the $5,000 commission.
- Corbett filed a separate suit against Kinzbach in the same court to collect on the contract; the two suits were consolidated.
- The trial court, sitting without a jury, entered a judgment substantially in favor of Kinzbach, cancelling the commission and crediting the amount against the contract price.
- Corbett and Turner, as appellants, appealed to the Court of Civil Appeals (intermediate appellate court).
- The Court of Civil Appeals reversed the trial court's judgment, holding that Turner did not breach a fiduciary duty and that Corbett's obligation to pay the commission was valid.
- Kinzbach, as petitioner, was granted a writ of error to bring the case before the Supreme Court of Texas (highest court).
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 third party who knowingly pays a secret commission to another's employee to facilitate a transaction, thereby inducing a breach of the employee's fiduciary duty, become liable to the employer for the amount of that commission?
Opinions:
Majority - Mr. Justice Critz
Yes, a third party who knowingly induces an employee to breach their fiduciary duty by paying them a secret commission is liable to the employer for the amount of that commission. Turner, as a trusted employee, occupied a fiduciary relationship with Kinzbach that demanded integrity, fidelity, and full disclosure. He breached this duty by accepting a secret commission from Corbett and withholding material information—namely, the minimum selling price—from his employer. It is irrelevant whether Kinzbach can show affirmative financial loss; a fiduciary cannot retain a secret profit obtained through a breach of trust. Because Corbett knew of Turner's employment and knowingly induced this breach of duty, it became a party to the wrongful act and is considered a joint tort-feasor with Turner. Consequently, Kinzbach is entitled to recover the full $5,000 commission, which operates as a credit against the contract price owed to Corbett.
Analysis:
This decision reinforces the high standard of loyalty required of fiduciaries and establishes that the remedy for a breach involving a secret profit is the disgorgement of that profit, irrespective of whether the principal suffered demonstrable damages. It significantly extends liability to third parties who knowingly induce such a breach, preventing them from benefiting from their complicity in corrupting an agent's loyalty. The ruling serves as a strong deterrent against such practices by making the inducing party jointly liable for the secret commission, ensuring the principal is made whole.
