Dweck v. Nasser, C.A. No. 1353-VCL (Aug. 2, 2012).
After evidentiary hearing, were the defendants liable to their former company for additional damages?
Short Answer: Yes.
The Court issued a Post-Trial Order dated February 8, 2012 here that required the parties to submit accountings. In particular, it directed plaintiff Dweck and counterclaim-defendants Taxin and Fine to account for various corporate opportunities that they misappropriated through two companies that Dweck and Taxin formed: Success Apparel LLC and Premium Apparel Brands LLC. The Post-Trial Order also directed defendant Nasser to account for his use of funds during his period of sole control over Kids International Corporation. After an evidentiary hearing, the Court found that Dweck, Taxin, Success, and Premium were liable to Kids, jointly and severally, for an additional $539,947.20, and Nasser was liable to Kids for an additional $2,461,085.
The Court held Dweck, Taxin, Fine, Success, and Premium (the “Dweck Group”) liable to Kids for $9,365,191, comprising lost profits from misappropriated corporate opportunities and personal expenses that Dweck charged improperly to Kids. In addition, the Court found Nasser liable to Kids for $3,864,583, comprising unjustified consulting fees that he caused Kids to pay to his affiliates.
The Dweck Group was ordered to address three areas in their accounting: (i) profits from business diverted to Success and Premium between January 1 and May 18, 2005; (ii) profits generated by Success and Premium after May 18, 2005 from all license agreements in effect as of that date; and (iii) profits generated by Success in its non-branded business for the Holiday 2005 and Spring 2006 seasons. Nasser was ordered to account for “all changes in Kids’ cash account from January 1, 2006, through December 31, 2008,” the date Nasser shut down Kids. The Court evaluated whether the parties submitted an adequate and credible accounting and generally carried their burden of proof.
The lost profits award sought to remedy the loss of profits that Kids would have earned if Dweck and her team departed without breaching their fiduciary duties. In particular, however, the Post-Trial Opinion did recognize that “Dweck and Taxin likely would have captured the non-branded business eventually, but it would have taken time.”
The parties agreed during the evidentiary hearing that Dweck’s pre-departure run rate of approximately $114,000 in personal expenses annually could serve as a fair proxy for Dweck’s post-departure reimbursement practices. The Court noted, however, that “Dweck only had to account to Kids for the portion of her expenses borne by revenue generated by the misappropriated business lines. Over time, that portion of Success and Premium’s business declined.” With that caveat, the Court found the Dweck Group liable for an additional $110,386.20.
Nasser argued that the lost profits award only should account for those opportunities that turned a profit without any offsetting losses. As the Court noted, “[t]here are circumstances when a Court could impose on a faithless fiduciary the downside risk from a loyalty breach, [but] [t]his case does not call for such a remedy.”
After Dweck and her colleagues misappropriated Kids’ core business, they believed they owned it lock, stock, and barrel. They had every reason to attempt to maximize profits across all brands and business lines. To the extent they failed with some brands, it was not due to conscious neglect or malice for Nasser and Kids, but rather because of the ever-present reality that some ventures fail…Netting profits and losses for the accounting treats the issue consistently and places Kids in the position it would have been in if the Dweck Group had pursued all opportunities within Kids.
The Dweck Group argued that it had identified $4,171,143 in expenses on Nasser’s accounting that were not attributable to (i) amounts previously established at trial, (ii) purchases from third parties, (iii) rent, (iv) expenses found on Kids’ general ledger in accounts relating to Kids’ business lines that were active during 2006-2008, and (v) expenses found on Kids’ general ledger in accounts relating to a joint venture with Seabreeze Apparel. The Court, however, found that Nasser properly accounted for only $1,710,058 of the $4,171,143 in unsupported expenses identified by Dweck. As a result, Nasser had not carried his burden to account for the remaining $2,461,085, and the Court found him liable to Kids for the additional amount.