Court Awards Punitive Damages on Breach of Fiduciary Duty Claim

On December 28, 2022, Justice Schecter of the New York County Commercial Division issued a decision in Hall v. Middleton, 2022 NY Slip Op. 34418(U), awarding punitive damages on a breach of fiduciary duty claim, explaining:

Having breached his fiduciary duty of loyalty to the Company, Middleton may be held liable for punitive damages regardless of whether his conduct was aimed at the public generally. To be sure, Middleton’s conduct affected the public. He solicited investment from the public based on material misrepresentations about the Company’s ownership of blockchain patents and then conducted an illegal ICO, thereby resulting in a consent order that essentially destroyed the entire value of the Company.

Punitive damages are warranted because Middleton’s diversion of assets in breach of his fiduciary duty to the Company was
intentional and deliberate, the related securities-law violations constitute aggravating and outrageous circumstances and his attempted scheme to effectively steal the patents for himself was impelled by a fraudulent motive.

A punitive-damages award should deter morally culpable conduct. In determining the proper amount to award, the court is mindful of the significant amount of money implicated by Middleton’s wrongdoing. The small percentage of shares plaintiff
purchased for almost $65,000 suggests the Company was at one point extremely valuable. Middleton raised millions of dollars by issuing tokens but did so as unregistered securities and coupled with his misappropriation of the patents, his actions have rendered the Company worthless. The SEC ordered Middleton to pay more than $8 million in disgorgement and a $1 million penalty.

Punitive damages of a similar magnitude are warranted here. Anything other than a sizeable penalty would be insufficient given that recovery belongs to the Company in which Middleton himself owns a very large stake. Under these circumstances, a $1 million punitive-damages award against him is justified. Hopefully, it will deter violations of bedrock corporate law.

(Internal citations omitted).

Stay informed!
Sign up for email alerts and notifications here.
Read more about our Complex Commercial Litigation practice.