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Dweck v. Nasser, C.A. No. 1353-VCL (Del. Ch. Jan. 18, 2012) (Laster, V.C.)

January 18, 2012

In Dweck v. Nasser, C.A. No. 1353-VCL (Del. Ch. Jan. 18, 2012) (Laster, V.C.), the Delaware Court of Chancery, in a post-trial opinion, found that various former officers of Kids International Corp. (“Kids” or the “Company”) breached their fiduciary duties by (i) establishing competing companies that usurped corporate opportunities from Kids; (ii) using the resources of Kids to conduct their competing operations; (iii) seeking or authorizing the reimbursement of hundreds of thousands of dollars of personal expenses; and (iv) raiding the employees of Kids and transferring customer relationships for the benefit of the competing companies.  The Court also held that the chairman and controlling stockholder of Kids was liable for a consulting fee paid to him when he performed no work for the Company and was required to perform an accounting for cash the Company had on hand at the time plaintiffs left Kids.

In 1993, Gila Dweck (“Dweck”), Haim Dabah (“Dabah”), and Albert Nasser (“Nasser”) formed Kids, which purchased Gitano Group, an apparel wholesaler that had an established relationship with Wal-Mart.   Nasser invested $9.2 million and initially owned 100% of the Company’s equity, but after the Company began to prosper and he had recovered his initial investment, plus 10% interest, the Company issued a 27.5% interest to Dweck, a 17.5% interest to Dabah, and a 5% interest to the Company’s outside counsel.  As Kids’ sales continued to grow, Dweck repeatedly requested a greater share of the equity to reflect her contributions to the Company, but Nassar and Dabah declined. 

Dissatisfied with her inability to increase her profit share in Kids, Dweck (with help from Kids’ President Kevin Taxin) formed Success Apparel LLC (“Success”) and Premium Apparel Brands LLC (“Premium”) to operate as competitors to Kids.  From 2001-2005, Success operated out of Kids’ premises for a highly discounted rent, used Kids employees without reimbursing the Company, and disseminated marketing materials implying a relationship between Kids and Success.  Dweck and Taxin also secretly diverted corporate opportunities to Success and Premium.  During this same time period, Dweck billed Kids for hundreds of thousands of dollars of personal expenses.   All of this was done without the knowledge or consent of Nasser.  During a March 2005 board meeting, Dweck advised Nasser for the first time that she was in fact operating a competing business from Kids’ premises and could no longer serve as a director because of the conflict of interest.  Dweck and Taxin continued to divert business away from Kids and organized a mass exodus of Kids’ employees to join Success, which included wiping computer hard drives clean and taking boxes from Kids’ premises.  These events left the business of Kids’ crippled, leading to this action where both parties asserted various claims for breaches of fiduciary duty.

After trial, the Court found that the continual exploitation of corporate resources and usurpation of  corporate opportunities by Dweck and Taxin amounted to a breach of their fiduciary duty of loyalty to Kids.  As a remedy, the Court found Dweck, Taxin, Success, and Premium jointly and severally liable to Kids for lost profits from business diverted to Success and Premium, which included profits from several license agreements signed by Success and Premium.

The Court next held that Dweck, Taxin and Fine (Kids’ CFO) breached their fiduciary duties by organizing the mass departure of employees, transferring orders, and taking Kids’ files.  Recognizing that Dweck and Taxin were mainly responsible for Kids’ success, the Court limited its relief for these breaches to damages that Kids suffered over and above what its financial circumstances would have been had they resigned in an appropriate manner.  The Court determined this damage to be the profits generated by Success for the Holiday 2005 and Spring 2006 seasons. 

The Court also found Dweck and Fine liable for $342,366 in personal or unaccounted for expenses reimbursed to Dweck by Kids.  The Court held Fine was jointly and severally liable for this amount because he “consciously abdicated his duty to review [Dweck’s] expenses” by simply signing off without performing any review of whether they were legitimate.   

With respect to Nasser, the Court considered whether he breached his fiduciary duties by ordering Kids to pay an entity he owned consulting fees from 1996-2008.  For payments made before 2002, the Court found Dweck’s challenges were barred by laches because she did not challenge the payments until 2005.   As the remaining consulting payments constituted an interested transaction between a corporation and its controlling stockholder, Nasser bore the burden of demonstrating their entire fairness to Kids.  As neither Nasser nor his entity rendered any services to Kids in exchange for the payments, the transactions were not fair to Kids.

The full opinion is available here