Sanford v. Waugh & Co., Inc.
328 S.W.3d 836
Tenn.2010Background
- Sanford and Bruce Prow formed SecureOne, Inc. in 1995; they owned equal interests and Sanford sold his stake in 2002 for $3,000,000, including a $2,000,000 secured note and a security interest in SecureOne’s assets.
- Waughs (Mrs. and Mr. Waugh) lent SecureOne $900,000 pre-closing and later provided additional financing, with promissory notes totaling $425,000 to Mrs. Waugh and $475,000 to Waugh & Co., secured by Prows’ stock and guarantees.
- Following a 2003 decline in SecureOne’s operations, the Waughs foreclosed on the Prows’ SecureOne stock, taking 100% ownership, and later extended more credit secured by house accounts and vehicles.
- SecureOne wound down under Waugh control; in 2004 the Prows started a competing company, Security Networks, operating from the same space and moving SecureOne’s phone number to the new venture.
- Sanford sued in 2004 for the Sanford note; SecureOne and the Prows counterclaimed for misrepresentation; Sanford later recovered judgments in related actions, including fraud-related transfers and related prosecutions.
- Sanford asserted a direct breach of fiduciary duty claim against the Waughs as officers and directors of SecureOne, which the trial court dismissed; the Court of Appeals later reversed this dismissal, prompting review by the Tennessee Supreme Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Can an individual creditor sue directly for breach of fiduciary duty? | Sanford: creditors may sue for direct fiduciary breaches. | Waughs: no direct fiduciary duty claim by creditors; protections exist via other theories. | No direct claims by individual creditors; only derivative claims are available. |
| Whether evidence of conspiracy to interfere with contract was admissible | Sanford contends conspiracy evidence should be admitted to support underlying claims. | Waughs: no pleadings or discovery on interference with contract; proper exclusion. | Trial court did not abuse discretion; exclusion affirmed. |
| Whether punitive damages could be awarded and if the verdict was proper | Sanford seeks punitive damages for egregious conduct. | Waughs: insufficient clear and convincing evidence of egregious conduct. | Directed verdict denying punitive damages affirmed; no clear and convincing showing of egregious conduct. |
Key Cases Cited
- North American Catholic Educational Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) (creditors of insolvent/zone-of-insolvency corporations lack direct fiduciary claims; protective safeguards exist)
- Deadrick v. Bank of Commerce, 45 S.W. 786 (Tenn. 1898) (directors owe fiduciary duties to corporation and shareholders, not creditors)
- Merriman v. Smith, 599 S.W.2d 548 (Tenn. Ct. App. 1979) (creditors lack privity; directors not directly liable to creditors absent independent right)
- Intertherm, Inc. v. Olympic Homes Sys., Inc., 569 S.W.2d 467 (Tenn. Ct. App. 1978) (derivative action available for creditors on behalf of insolvent corporation)
- Kradel v. Piper Indus., 60 S.W.3d 744 (Tenn. 2001) (trust fund doctrine protecting creditors’ rights in insolvency context)