In Brola v. Lundgren, C.A. No. 2024-1108-LWW, the Delaware Court of Chancery examined the parameters of, and differentiated, corporate internal affairs issues and interpersonal employment matters.
Credit Glory Inc. (the company) is a private Delaware corporation owned and directed by the plaintiff and defendant. The plaintiff also serves as president of the company and the defendant was formerly its vice president and secretary. Prior to this Chancery action, former employees of the company filed successful charges with the Equal Employment Opportunity Commission (EEOC) and lawsuits in New York state court that alleged the defendant had sexually harassed employees and exposed them to racist views and conduct. The lawsuits led to judgments against the defendant and the company totaling over $1.8 million. The plaintiff filed suit in the Court of Chancery to hold the defendant liable for the Company’s portion of the judgment claiming that the defendant’s actions constituted a breach of his fiduciary duty of loyalty.
The defendant moved to dismiss the plaintiff’s claims on the grounds that, among other things, the complaint failed to plead demand futility. The court granted the motion to dismiss finding that demand was not excused as futile because the plaintiff did not set forth a cognizable claim that would subject the defendant to a substantial likelihood of liability. In reaching this conclusion, the court drew a clear distinction between fiduciary duty claims, which implicate corporate affairs stemming from the powers and responsibilities of the offices that owe fiduciary duties, with interpersonal workplace disputes. And in doing so, the court resisted the plaintiff’s effective request to turn the Court of Chancery from a “court of equity into a general workplace disciplinary forum, adjudicating matters well beyond its purview.”
The court initially determined that the actions the plaintiff alleged to support a breach of loyalty claim lacked any fiduciary conduct. The duty of loyalty guards against self-dealing, conflicted transactions, and bad faith conduct by company fiduciaries. While bad faith includes both fiduciary conduct motivated by an actual intent to harm to the company and an intentional dereliction of duty, the defendant’s bigotry and harassment of company employees, however deplorable, did not stem from the defendant abusing the delegated authority of his corporate office. The court accordingly refused to extend the scope of the law of Delaware governing corporate affairs law to cover personal malfeasance by a fiduciary of a company.
The court further determined that preemption, comity and public policy principles prevented it from treating personal workplace misconduct under the banner of fiduciary duty claims. Federal and state laws indeed create a comprehensive body of law that governs harassment claims like those the defendant was guilty of. The court thus determined that it was preempted from allowing the plaintiff to use the same conduct as a basis to establish a fiduciary duty claim because doing so would permit the plaintiff and other stockholders to circumvent statutory frameworks that bind victims of that same conduct. The court further found that comity principles underlying the internal affairs doctrine prevented it from expanding Delaware law to reach beyond governing internal relationships between corporate governors and managers into governing external disputes between managers and employees stemming from conduct occurring in other states. Lastly, the court concluded that public policy disfavored treating sexual harassment claims as a corporate asset in that it “risks commodifying personal trauma” and would otherwise force it into the derivative litigation framework without the privacy protections of employment statutes.
Reprinted with permission from the Dec.17, 2025 edition of “Delaware Business Court Insider” © 2025 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com.