Judge Preska’s valuable opinion in IMG Fragrance Brands, LLC v. Houbigant, Inc.,09 CV 3655 (LAP) untangles the financial dealings of Plaintiffs (IMG), the licensees of fragrance trademarks from the Defendants (Houbigant). The opinion includes a neat summary of the application of the common law “sole shareholder rule” to claims of fiduciary breach. The sole shareholder rule “precludes a corporation’s claim against a third party for aiding and abetting a breach of fiduciary duty owed to it where the breach of duty was by the corporation’s sole shareholder.”
IMG’s trademark fragrance License Agreement from Houbigant was among the collateral provided by IMG to its lenders. When IMG hit hard times, IMG’s lenders ended up acquiring the majority of IMG’s stock from its then owner and sole shareholder. The lenders allegedly discovered that the owner and Houbigant had conspired to mask IMG’s fragile financial condition from them in violation of the License Agreement. The lenders, as new owners of IMG, sued Houbigant for aiding and abetting the prior owner’s breach of his fiduciary duty to IMG “so as to derive more profit from the License Agreement than was permissible under that Agreement.”
Houbigant moved to dismiss under the sole shareholder rule, and the motion was granted by Judge Preska. The “sole shareholder rule is an outgrowth of the general agency law principle that acts of an agent, within the scope of employment, are imputed to the principal…Even if the sole shareholder totally abandons the corporation’s interests, the … rule imputes the agent’s knowledge to the principal because the ‘party that should have been informed was the agent itself albeit in its capacity as principal.’”
The lenders also claimed that the application of the rule to them as new owners would be unfair because the prior owner was no longer in a position to benefit from his wrongdoing, and they were innocent victims of the breach of his fiduciary duty. But according to Judge Preska, there is no support under New York law for a “fairness exception” to the sole shareholder rule, however appealing that may seem to be.
Judge Preska’s opinion also addresses New York law in several important areas, including interference with contract, aiding and abetting fraud, civil conspiracy, and the difference between pleading contract and fraud claims. Indeed, Judge Preska’s analysis of the interference with contract claim is particularly commended as it aptly summarizes the necessity of pleading active participation in procuring a breach — “that Houbigant may have been aware that IMG was breaching the Collateral Agreement [with its lenders] is insufficient to show that Houbigant intended to procure IMG’s breach.”