William King and Mazak Corporation signed an employment severance and separation agreement in 2003, which included a clause releasing King "from any and all claims, both known and unknown ... including but not limited to claims of negligence, lack of objectivity, conflict of interests, and insufficient corporate disclosure." King had served since 1990 as Mazak's Vice President and Controller. Beginning in 1998 he and another Mazak employee had developed lucrative interests in companies that did business with Mazak, although neither disclosed those interests to Mazak.
Mazak found out about King's undisclosed outside interests in 2005 and sued him for breach of fiduciary duty and other claims. Naturally, King offered the separation agreement as a defensive bar to Mazak's claims; after all, Mazak had released King from "any and all claims, both known and unknown including ... conflict of interests and insufficient corporate disclosure." This appears a good defense since alleged conflict of interests and insufficient disclosure are the very basis of Mazak's breach of fiduciary duty claim as discussed on a post on the Kentucky Employment Law Blog: Does A Corporate Executive Breach His Fiduciary Duty Where He Has An Undisclosed Interest In A Noncompeting Company?
King got nowhere with this defense in the district court, which entered judgment against him for $3,472,896. He appealed to the Sixth Circuit, which likewise rejected the defense in its decision Mazak Corporation v. William King explaining as follows:
- the vast majority of state and federal courts have held that a release must be set aside if the fiduciary failed to make a full disclosure of all relevant facts to the beneficiary
- under federal common law, a contract between a fiduciary and a beneficiary is voidable unless (1) it is fair on its terms and (2) "all parties beneficially interested manifest assent with full understanding of their legal rights and of all relevant facts that the fiduciary knows or should know"
- the Kentucky Court of Appeals, in a different context, set aside a release obtained by an estate executor who did not disclose to estate beneficiaries the tax advantages of probating an estate under Pennsylvania as opposed to Kentucky law. Hale v. Moore, 289 SW3d 567 (Ky App 2008)
From this the Sixth Circuit concluded that "Kentucky court would decline to enforce the release here" and so the $3.4 million judgment against King stood.
Robert L. Abell
www.RobertAbellLaw.com
