Laventhol, Krekstein, Horwath and Horwath v. Tuckman

• Decision Date: 23 November 1976
• Citation: 372 A.2d 168
• Court: Supreme Court of Delaware
• Parties: LAVENTHOL, KREKSTEIN, HORWATH & HORWATH and Horwath & Horwath, Defendants below, Appellants, v. Mervyn TUCKMAN, Plaintiff below, Appellee.

Page 168

372 A.2d 168

LAVENTHOL, KREKSTEIN, HORWATH & HORWATH and Horwath &amp Horwath, Defendants below, Appellants, v. Mervyn TUCKMAN, Plaintiff below, Appellee.

Supreme Court of Delaware.

Submitted Sept. 20, 1976.

Decided Nov. 23, 1976.

Upon appeal from the Court of Chancery. Affirmed.

David A. Drexler and William T. Allen, of Morris, Nichols, Arsht & Tunnell, Wilmington, for defendants below-appellants.

Thomas G. Hughes, of O'Donnell & Hughes, P.A., Wilmington, and James M Richardson, of Spector Cohen Hunt & Rosen, Philadelphia, Pa., of counsel, for plaintiff below-appellee.

Before HERRMANN, C.J., DUFFY and McNEILLY, JJ.

DUFFY, Justice:

This litigation is an aftermath of the merger of Aerosonic Corporation (Old A. Corp.), a Florida corporation, into Instrument Technology Corporation (I.T.C.), a Delaware corporation. After the merger I.T.C. changed its name to Aerosonic Corporation (New A. Corp.).

The appeal is from an order of the Court of Chancery denying a motion to dismiss the complaint. ¹ Two questions are submitted for decision: (1) Is the order denying the motion reviewable under the law governing interlocutory appeals, and (2) Is the rule of Bovay v. H. M. Byllesby & Co., Del.Supr., 27 Del.Ch. 381, 38 A.2d 808 (1944), applicable to an action for damages against alleged co-conspirators of corporate fiduciaries. We hold that the order is appealable and that the Bovay exception was properly applied to this case.

I

In late 1968 or early 1969, I.T.C. entered into an agreement with Herbert J. Frank, president and controlling stockholder of Old A. Corp., for the purchase of his interest in that company. Following completion of the sale, I.T.C. undertook to merge Old A. Corp. into itself, a process which required approval of the shareholders of Old A. Corp. To implement that decision, management of Old A. Corp. caused a proxy statement to be issued preliminarily to a meeting of its shareholders. Shareholder approval was given to the merger during a special meeting held on January 9, 1970, and the merger was consummated three days later.

Plaintiffs are stockholders of Old A. Corp. On January 15, 1973 they filed a derivative and class action in the Court of Chancery against Frank and other present and former directors of Old A. Corp., New A. Corp. and I.T.C. In brief, the complaint states a wide-ranging violation of fiduciary duties, centered around overvaluation of I.T.C.'s assets, owed to Old A. Corp. and its shareholders by Frank and the other individual defendants.

The complaint joins as parties defendant the firm of Laventhol, Krekstein, Horwath & Horwath, the certified public accountant for I.T.C., and Horwath & Horwath, the certified public accountant for Old A. Corp. ² and charges that they conspired with the directors of the respective corporations to defraud the shareholders of Old A. Corp.; specifically, it is charged that they 'knew that the Financial Statements included in the Proxy Statement failed adequately to disclose' facts stated elsewhere in the complaint and that they 'knew, or should have known, that the Proxy Statement was materially deficient, . . . false and misleading . . ..'

Defendants' motion to dismiss the complaint was based on the undisputed fact that the claim against them is for money damages only and, relying on such cases as Bokat v. Getty Oil Company, Del.Supr., 262 A.2d 246 (1970), they say that the claim is barred by the three-year statute of limitations, 10 Del.C. § 8106.

Ordinarily, we consider the appealability of an interlocutory order before reviewing its merits but, under the circumstances here presented, we must scrutinize the Trial Court's ruling before we can determine its appealability. And so we focus first on the Chancery Court's determination.

II

Generally speaking, an action in the Court of Chancery for damages or other relief which is legal in nature is subject to the statute of limitations rather than the equitable doctrine of laches. Bokat v. Getty Oil Company supra. There is, however, an established exception to this principle which denies its protection to those who owe a fiduciary duty to a corporation. In brief, the benefit of the statute of limitations will be denied to a corporate fiduciary who has engaged in fraudulent self-dealing. Bovay v. H. M. Byllesby & Co. supra; Halpern v. Barran, Del.Ch., 313 A.2d 139 (1973). In Bovay Chief Justice Layton said this:

'Sound public policy requires the acts of corporate officers and directors in dealing with the corporation to be viewed with a reasonable strictness. Where suit is brought in equity to compel them to account for loss or damage resulting to the corporation through passive neglect of duty, without more, the argument that they ought not to be deprived of the benefit of the statute of limitations is not without weight; but where they are required to answer for wrongful acts of commission by which they have enriched themselves to the injury of the corporation, a court of conscience will not regard such acts as mere torts, but as serious breaches of trust, and will point the moral and make clear the principle that corporate officers and directors, while not in strictness trustees, will, in such case, be treated as though they were in fact trustees of an express and subsisting trust, and without the protection of the statute of limitations . . ..'

Here, the Trial Court enlarged the Bovay exception in ruling on the motion to dismiss; the Chancellor refused to apply the three-year statute of limitations for the benefit of certified public accountants who allegedly conspired with corporate fiduciaries to defraud the shareholders of Old A. Corp. The Court said:

'The question then becomes one of policy. Should those who conspire to defraud with self-dealing fiduciaries be bound by the same standard for statute of...