Rash v. J.V. Intermediate, Ltd
498 F.3d 1201 (10th Cir. 2007)

Facts:
Rash was a manager at one of JV Intermediate’s industrial plants. JV claims that Rash actively participated in and owned at least four other businesses, none of which were ever disclosed to JV. One of those businesses was Total Industrial Plant Services, Inc. (TIPS), a scaffolding business.

  • TIPS bid on projects for JV, and with Rash as its manager, often selected TIPS as a subcontractor.
  • Between 2001 to 2004, JV paid over $1 million to TIPS.

At some point during Rash’s tenure, JV started its own scaffolding business. Rash resigned and then sued JV for breach of contract and fraud.

  • He claimed the company purposely understated the net profits and equity of the Tulsa branch and therefore did not properly pay him the net profit and equity bonuses.

JV countered that Rash

(1) materially breached his employment agreement,
(2) breached his duty of loyalty, and
(3) breached his fiduciary duty.

History:
The District Court held that Rash was not a fiduciary.

Issues:
(1) The existence and scope of a fiduciary duty between an agent and a principal.
(2) The propriety of the equitable remedy of forfeiture for breach of a fiduciary duty.

Holding:
(1) Rash’s agency relationship with JV created a fiduciary obligation, and he breached that duty.
(2) Fee forfeiture is a proper equitable remedy in response to a breach of contract claim.

Case reversed and remanded.

Reasoning:
(1) Rash’s agency relationship with JV created a fiduciary obligation, and he breached that duty.

  • Agency:

Rash was an agent contractually, and also because he “ran the shop” and was responsible for generating business for the Tulsa upstart.

  • Breach:

Restatement (Second) of Agency § 387:

Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency.

Restatement (Second) of Agency § 13:

The employee has a duty to deal openly with the employer and to fully disclose to the employer information about matters affecting the company’s business.

(2) Fee forfeiture is a proper equitable remedy in response to a breach of contract claim.

  • Forfeiture is based on two propositions:

(i) the principal is considered not to have received what he bargained for if the agent breaches his fiduciary duties while representing the principal and

(ii) fee forfeiture is designed to discourage agents from being disloyal to their principal or to protect relationships of trust by discouraging agents’ disloyalty.