Kanaryk's inaccurate financial statements do not rise to this level. This is because the evidence at trial established, not that Kanaryk presented the financial statements with reckless indifference to their truth, but rather that he presented them fully believing that they were true.
Kanaryk testified that he failed to observe the lower of cost or market rule because he believed the rule was inapplicable to financial institutions which kept one third or more of their assets in the form of cash, as did the Credit Union. His explanation as to why certain defaulted employee loans were not marked as losses was credible and was not the result of recklessness.
In short, Kanaryk believed that financial statements prepared by him did accurately reflect the financial condition of the Credit Union during the relevant period. While Kanaryk was incorrect and should have ascertained the correct accounting rule for the Credit Union's investments, the court does not find Kanaryk's conduct to be recklessly indifferent.
Finally, as to constructive fraud, the plaintiff failed to establish "the existence of a fiduciary or confidential relationship warranting the trusting party to repose his confidence in the defendant and . . . relax the care and vigilance he would ordinarily exercise. . . ." Brown v. Lockwood, 432 N.Y.S.2d at 194. In a purely business transaction, "the defendant against whom constructive fraud is alleged must have misled the plaintiff by false representations concerning the subject of his superior knowledge or expertise." Id. at 195. However, "such claims are rarely sustained in New York." Id.
In the instant case, the Credit Union board of directors were simply not warranted in reposing confidence in Kanaryk's abilities to the point of relaxing their own fiduciary duties to the Credit Union. Throughout the litigated period, the Board was able to avail themselves of the advice and assistance of an independent auditor, whom they were under a duty to employ annually, and the expertise of an NCUA examiner. Both the independent auditor who they eventually employed and the NCUA examiner suggested irregularities in the financial statements. Yet the board of directors chose not to act on this information. Under these circumstances, the court believes that a finding of constructive fraud on Kanaryk's part would not be justified.
B. Breach of Fiduciary Duty
1. Parties' Contentions
The Credit Union also alleges that Kanaryk breached his fiduciary duty as an officer to the plaintiff. Specifically, plaintiff claims that Kanaryk's inaccurate representations on financial statements were not merely wrong but were intentionally falsified for his personal benefit, thereby breaching the fiduciary duties of honesty and loyalty owed to the Credit Union. In the alternative, plaintiff argues that Kanaryk had a fiduciary duty of care, and was under an obligation to present truthful and accurate financial statements to the Credit Union's Board members.
Kanaryk argues that he did not breach his fiduciary duties because the financial statements, while erroneous, were presented in good faith and did not arise from disloyal motives or from a desire to deceive the Board as to the value of the Credit Union's investments.
2. Legal Analysis
Since the court has already concluded that Kanaryk is not liable for fraud, we will focus on the second prong of plaintiff's breach of fiduciary duty claim. In order to establish breach of fiduciary duty, it must be shown, first, that there is a fiduciary relationship between the parties, and second, that the fiduciary duty has been breached. Cramer v. Devon Group, Inc., 774 F. Supp. 176, 182 (S.D.N.Y. 1991) (applying New York law).
Under New York law, a director or officer of a corporation owes fiduciary duties to the corporation. See New York Business Corporation Law §§ 715, 720 (McKinney 1986); Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 568, 483 N.Y.S.2d 667, 673, 473 N.E.2d 19 (1984) (as to corporate directors). These duties have been described as "rules of conscientious fairness, morality, and honesty in purpose" which reflect an "extreme measure of candor, unselfishness, and good faith." Litwin v. Allen, 25 N.Y.S.2d 667, 677 (Sup 1940). In addition, a director owes "a loyalty that is undivided and an allegiance that is influenced in action by no consideration other than the corporation's welfare." Id. This is not to suggest, however, that corporate directors or officers are required by law to be superhuman or infallible. Rather, "corporation laws expressly require directors and officers to exercise that degree of diligence, care, and skill which ordinarily prudent men would exercise under similar circumstances in like positions." 15 N.Y. Jur.2d Business Relationships § 998.
Moreover, the formulation of a standard of care governing corporate fiduciaries is a fact-sensitive inquiry. It has been observed that
It is impossible to establish an exact measure of care which will be deemed sufficient, or negligence which will be deemed culpable, with respect to the duty owing on the part of directors and officers of corporations in the performance of their official functions, because the degree of care required depends upon the subjects to which it is applied, the particular circumstances of the case, and the usages of business.
In the instant case, the evidence established that Kanaryk's treasurer position was originally intended to be a part-time job, but had grown much more demanding in intervening years. When Kanaryk was initially hired in 1978, the Credit Union had total assets of approximately $ 200,000. At the time of the events in question in this suit, the Credit Union had assets of approximately $ 3,000,000 -- a 1500% increase. An independent auditor commissioned by the Credit Union supervisory committee in April, 1987 to review financial records noted that "the vast growth of the credit union has taken it out of the realm of a 'one man job,'" and advised that an assistant with bookkeeping experience be hired. Jt. Exh. 57. Both in September, 1986 and in May, 1987, the NCUA examiner assigned to review the Credit Union's financial records noted in detail the accounting inaccuracies on financial statements and explicitly advised the Board to get more involved in running the Credit Union and to obtain outside accounting help. Jt. Exhs. 105, 95. According to Kanaryk's uncontradicted testimony, he informed Board members in April, 1987, that he was preparing to retire as treasurer. Tr. 237.
However, the Credit Union board of directors were indifferent to what was rapidly becoming a management crisis. To their credit, their indifference was partially a result of Kanaryk's assurances that the financial statements were not substantially inaccurate. As their treasurer, Kanaryk should have apprised the Credit Union of the urgency of the NCUA's recommendations, and of their responsibility to take immediate corrective action by hiring outside accounting assistance. However, the court cannot view Kanaryk's actions in a vacuum and does not believe that his actions give rise to fiduciary liability in this case.
Rather, the court believes that reports prepared by an independent auditor and by the NCUA examiner, all of which were addressed to Board members other than Kanaryk and all of which were written in non-technical layperson's terms, successfully establish that the information needed by the Board to make an informed decision as to the accuracy of financial statements was in their hands. Moreover, the Board not only had access to the independent audits and NCUA reports, they were duty-bound to apprise themselves of the contents. See Credit Union charter and by-laws, Jt. Exh. 49. Therefore, as to the relevant issues at trial, the Board was not in any less of a position to take corrective action than was Kanaryk. In fact, the Board was the only entity that could remedy the crisis -- by simply deciding to hire outside accounting assistance.
The NCUA examiner, in his September, 1986 report, recognized as much: "The glue that holds all this together is a board of directors who must get involved a little bit more to help the treasurer perform his job." Jt. Exh. 105. The examiner reiterated his findings, in much stronger terms, in an Examination Overview dated 8/31/87: "In continuing to rely totally on the treasurer, who is retiring from the credit union at the end of the third quarter of 1987, the officials confirmed and acknowledged their lack of understanding and comprehension of existing regulatory restrictions and accounting requirements." Jt. Exh. 95.
In short, the court finds that holding Kanaryk liable as a fiduciary in these circumstances would only reward the Credit Union board of directors for their own misfeasance. The court concludes that Kanaryk acted in good faith and is not liable for breach of his fiduciary duties to the Credit Union.
The court, having considered all of the relevant evidence presented at trial and plaintiff's legal claims, dismisses all of plaintiff's claims against defendant for the reasons stated above. The court orders the clerk of court to enter final judgment in accordance with this opinion.
Dated: New York, New York
March 16, 1994
Charles H. Tenney, U.S.D.J.