The US Court of Appeals for the Sixth Circuit recently affirmed the largest award of prejudgment interest in Kentucky history. In Osborn v. Griffin, 865 F.3d 417 (6th Cir. 2017), the Sixth Circuit affirmed the District Court’s award of more than $250 million in prejudgment interest in this dispute among siblings. Courts vary about whether and to what extent prejudgment interest will be awarded. The Osborn case shows, however, that when a fiduciary’s breach of duty is egregious, a large prejudgment interest award could be warranted.
Osborn v. Griffin
In Osborn, the plaintiffs were four sisters (Sisters) who alleged that two of their six brothers (Defendants) cheated them out of stock and real property relating to the family’s business, Griffin Industries. The Sisters noted that their parents’ estate plans expressed a “clear and consistent desire to bequeath their property equally to their eleven living children.”
Notwithstanding this clear intention, Defendants used their positions as executors of their mother’s estate and as agents for their disabled father to engage in a series of stock transactions. As a result of those transactions, the six Griffin sons owned all of their parents’ shares of Griffin Industries, controlling approximately 87 percent of the stock, to the exclusion of their sisters. Defendants also used a sham corporation to acquire their father’s real estate interests, also to the exclusion of their Sisters. Defendants misled the Sisters about their mother’s estate plan.
After discovering Defendants’ misdeeds, the Sisters sued Defendants. The breach of fiduciary duty claim proceeded to trial. At trial the court determined that Defendants’ conduct violated their fiduciary duties to the Sisters and awarded disgorgement of $330 million in profits. The court also ordered Defendants to pay more than $250 million in prejudgment interest to the Sisters. The Sixth Circuit affirmed the District Court’s judgment, including the prejudgment interest award in this first decision of its kind on the issue.
Sixth Circuit Decision
In affirming the $580 million prejudgment interest award, the Sixth Circuit carefully considered the District Court’s determination that the Sisters’ damages were liquidated. The Sixth Circuit explained that a “damages claim is liquidated if it is of such a nature that the amount is capable of ascertainment by mere computation, can be established with reasonable certainty, can be ascertained in accordance with fixed rules of evidence and known standards of value, or can be determined by reference to well-established market values.” On the other hand, an unliquidated claim is “unspecified and undetermined prior to a breach.” The Sixth Circuit disagreed with the District Court about whether the damages were liquidated and concluded that they were not. However, under Kentucky law, that decision did not end the question of whether the prejudgment interest award was nevertheless warranted.
Under Kentucky law, prejudgment interest is mandatory when damages are liquidated at a rate of 8 percent per annum. However, Kentucky law permits a court to exercise discretion to award prejudgment interest even when the damages are unliquidated, at a rate up to 8 percent per annum. Thus, even though the Sixth Circuit concluded that the damages were unliquidated, it nevertheless affirmed the prejudgment interest award because of the egregious nature of the Defendants’ conduct.
The Sixth Circuit recognized that its decision was somewhat unprecedented. The court noted that “Kentucky courts rarely award prejudgment interest on unliquidated claims on equitable grounds.” However, the court reasoned that “such awards are more frequently appropriate in cases where there are allegations of bad faith.” The Sixth Circuit expressly referred to the Defendants’ “repeated and flagrant” violations of their fiduciary duties that “functionally disinherit[ed] their own Sisters, who reposed great trust in their brothers.” The Defendants’ “extraordinary” and “brazenly wrongful conduct,” which “span[ned] decades,” clearly informed both the award and affirmance of the prejudgment interest award.
But What About Due Process?
The entire Sixth Circuit panel, however, did not agree with the prejudgment interest award. To the contrary, the dissent rejected the majority’s decision concluding that the damages were “excessive, unreasonable, and probably in violation of due process.” The dissent focused on the fact that the prejudgment interest award of more than $250 million was almost as much as the $330 million in damages awarded. The dissent observed that the prejudgment interest award was “intended more to punish the defendants than to compensate the plaintiffs for the time-value of the disbursements involved in the case.” The dissent argued that the imposition of punishment requires due process scrutiny, and this award did not survive such stringent standards.
What Did We Learn?
The trust reposed in fiduciaries is of utmost importance. And, when those fiduciaries are also related to the beneficiaries they serve, their breach of their duties can be considered that much more egregious. Courts in equity have the power to take such circumstances into consideration—and the Osborn court clearly did just that.