Adverse Domination. Wilson v. Paine (KY 2009)

In Wilson v. Paine, 288 S.W.3d 284 (KY 2009), the Kentucky Supreme Court adopted the “adverse domination” doctrine.  Under that doctrine, the statute of limitations on claims of misconduct against a corporation’s officers and directors does not begin to run until the corporation “knows” of the misconduct giving rise to the claim.  Taking off from the “adverse agent” exception to the rule that the knowledge of agents is ‘attributed” to the principal, the adverse domination doctrine does not impute to the corporation the knowledge of the offending officers and directors.  The Court adopted the “majority” domination variant of the doctrine, under which the knowledge of an innocent corporate “agent” will not be attributed to the corporation so long the offenders control the Board of Directors.

The Court also held that the doctrine does not apply when a majority of the directors are merely negligent.  Instead there must be “intentional wrongdoing of some kind, which would include fraud”.  Slip Op. at 12.  The rationale of the court was two-fold.  First,

To [allow a negligence standard] would effectively eliminate the statute of limitations in all cases involving a corporation’s claims against its own directors . . . . [I]t could almost always be said that when one or two directors actively injure the corporation, or profit at the corporation’s expense, the remaining directors are at least negligent for failing to exercise “every precaution or investigation.” (Internal citation omitted.) If adverse domination theory is not to overthrow the statute of limitations completely in the corporate context, it must be limited to those cases in which the culpable directors have been active participants in wrongdoing or fraud, rather than simply negligent. 

Id. at 11 (quoting from FDIC v. Dawson, 4 F.3d 1303, 1310 (5th Cir. 1993)).  Second, the Court believed that

[T]he danger of fraudulent concealment by a culpable majority of a corporation’s board seems small indeed when the culpable directors’ behavior consists only of negligence.”

Id. (quoting from Dawson, 4 F.3d at 1312-13) (emphasis added by Court).

Here the Court drifts off the path.  First, the conduct of directors is protected by the business judgment rule, which generally requires at least gross negligence or bad faith before directors will be found liable.  Second, a similar standard protects directors against liability for failures to supervise or to monitor.

Leave a Reply

*