## Facts

- Sonora Products Corp. of America (formerly Acoustic Products Co.) was formed to deal in radios and related products and sought access to basic radio patents.
- Acoustic targeted involvement with De Forest Radio Co., then in receivership, as a path to patent and management rights.
- Reynolds and W. R. Reynolds & Co. had a contract to buy 600,000 De Forest shares at $0.50 per share, lift the receivership, and reorganize De Forest.
- Acoustic employed Bell to negotiate with Reynolds; Bell and Biddle obtained an offer for a one-third participation: 200,000 shares for $100,000, subject to board approval by April 9, 1928, with contemplated board representation and business opportunities for Acoustic.
- On April 3, 1928, Acoustic’s board instructed its president, Deutsch, to attempt to obtain financing so Acoustic could accept the offer.
- Deutsch reported he could not obtain funds for Acoustic; on April 10 he accepted the offer and told Reynolds that if Acoustic could not fund the purchase, directors would take the stock individually.
- On April 24, 1928, the purchase price was paid by insiders (including Biddle, Deutsch, and Hammond), and Reynolds was later advised the stock was being purchased by a group including Bell, Biddle, Deutsch, Hammond, and others (the “Biddle syndicate”).
- The syndicate sold the De Forest shares at a profit, while Acoustic later entered bankruptcy.
- The bankruptcy trustee sued directors and associates for diverting a corporate opportunity and sought to hold Reynolds-related entities liable for participating in the diversion; Deutsch asserted a corporate release barred claims against him.

## Issues

1. Whether corporate fiduciaries breached their duties by taking for themselves a stock participation obtained through negotiations conducted for the corporation and connected to the corporation’s business plan.
2. Whether the corporation’s asserted inability to finance the purchase justified fiduciaries’ personal acquisition of the opportunity.
3. Whether a release in favor of Deutsch barred claims concerning the stock transaction absent full disclosure to the corporation.
4. Whether non-insider third parties (including Reynolds-related defendants) were liable for knowingly participating in the fiduciaries’ breach.

## Decision

- The Second Circuit modified the decree, reversing in part and affirming in part.
- The court held key insiders (including Bell, Biddle, Deutsch, and Hammond) breached fiduciary duties by appropriating a corporate opportunity and were liable to account for profits from the De Forest stock transaction.
- The court rejected financial inability as a complete defense to the insiders’ diversion of the opportunity.
- The court held Deutsch’s release did not bar claims tied to the De Forest transaction because the material facts were not adequately disclosed when the release was given.
- The court affirmed dismissal as to certain other defendants where fiduciary status or knowing participation was not proven.

## Legal Principles

- Directors and officers owe fiduciary duties of loyalty and may not take for personal benefit a business opportunity or contractual right obtained through corporate agency and related to the corporation’s business.
- A fiduciary who diverts a corporate opportunity must disgorge and account for profits realized from the diversion.
- A corporation’s lack of immediate financing does not, by itself, permit fiduciaries to seize a corporate opportunity; fiduciaries must act with candor and make genuine efforts to secure corporate performance rather than shift the opportunity to themselves.
- A release does not preclude liability for self-dealing where it was obtained without full and frank disclosure of material facts.
- Third parties are not liable absent a sufficient showing that they knowingly participated in the fiduciary breach.

## Conclusion

The court held that principal corporate insiders who diverted to themselves a time-limited stock participation negotiated for the corporation violated fiduciary duties and had to account for profits, while financial inability and an undisclosed release did not excuse the diversion, and other defendants were dismissed based on their limited role or lack of knowing participation.


Irving Tr. Co. v. Deutsch, 73 F.2d 121 (2d Cir. 1934)