Landon v. S & H Marketing Group, Inc.
2002 WL 1292023, 82 S.W.3d 666 (2002)
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Rule of Law:
Under the discovery rule, the statute of limitations for a corporation's breach of fiduciary duty claim against an officer begins to run when the corporation knew or, through the exercise of reasonable diligence, should have known of the facts giving rise to the claim. Knowledge acquired by a director concerning corporate affairs is imputed to the corporation.
Facts:
- Carl D. Landon served as president and a director for S & H Marketing Group, Inc. (S & H) and Direct Merchandising, Inc. (DMI) from 1987 to 1996.
- Hamilton Farrar Richardson, the majority shareholder of the companies' parent corporation, also served as a director but described himself as a passive investor, leaving day-to-day control to Landon.
- Between 1986 and 1992, Landon, acting as president, paid himself several large bonuses from the companies.
- In a 1993 deposition for an unrelated lawsuit, Richardson acknowledged his awareness that Landon received large bonuses, sometimes totaling over $200,000 per year.
- Richardson further testified in the 1993 deposition that Landon had his confidence and would discuss bonuses with him before payment.
- In April 1996, Landon's employment with the companies was terminated.
- Landon engaged in several other transactions where he was on both sides, including purchasing company property and taking loans from the company with self-serving terms he drafted and executed himself.
Procedural Posture:
- Carl D. Landon filed suit against S & H and DMI in a Texas state trial court to collect on a purported loan.
- S & H and DMI filed a counterclaim against Landon, alleging he breached his fiduciary duties through numerous transactions, including paying himself unauthorized bonuses.
- The case was tried to the court in a bench trial.
- The trial court found that the companies' claims regarding most of the bonuses were barred by the statute of limitations, reasoning that director and shareholder Richardson knew or should have known of them.
- The trial court entered a judgment resolving the various claims and counterclaims, with partial success for both sides.
- Both Landon and the companies appealed the trial court's judgment to the Texas Court of Appeals, Eleventh District.
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Issue:
Does the discovery rule toll the statute of limitations on a corporation's breach of fiduciary duty claim against its president for self-dealing until a key director and majority shareholder knew or should have known of the underlying facts?
Opinions:
Majority - W.G. Arnot, III, Chief Justice
No. The discovery rule applies, but the statute of limitations is not tolled indefinitely; it begins to run when the claimant knew or should have known of facts that, with reasonable diligence, would lead to discovering the wrongful act. Here, the corporations' claims for most of the bonuses were time-barred because the statute of limitations began to run when Richardson, a director and majority shareholder's representative, became aware of the bonuses. Richardson's 1993 deposition testimony conclusively established that he knew Landon was receiving large bonuses. This knowledge is imputed to the corporations, S & H and DMI. As a director, Richardson had a duty to protect the corporation, and his knowledge was sufficient to put the corporation on notice of any potential breach of fiduciary duty, thereby starting the limitations period long before the companies filed their counterclaim in 1996.
Analysis:
This decision reinforces the principle that knowledge of a corporate director is imputed to the corporation itself for the purpose of the discovery rule and statutes of limitation. It serves as a caution to corporations and their directors, particularly passive investors, that they cannot neglect their oversight responsibilities and later claim ignorance to revive stale claims. The ruling underscores that once a director has notice of facts that would prompt a reasonably diligent person to investigate a potential breach of fiduciary duty, the clock on the statute of limitations begins to run. It effectively prevents a corporation from sitting on its rights after a key insider has been put on notice of potential self-dealing by another officer.
