Liability of Agent(s) of Buyer of Bloodstock for Taking Undisclosed Kickbacks from Sellers or Consignors

October 12, 2005

Issues

(1) What causes of action may a buyer initiate against the agent(s) for taking kickbacks from the sellers of horses?

(2) What causes of action may a buyer initiate against the seller(s) and their agent(s) for paying kickbacks to the agent(s) involved in the purchases of horses?

(3) What remedies may a buyer seek in a lawsuit against an agent and/or the seller?

Answer

(1) Upon proof that an agent received kickbacks from a seller or sellers of the horses in the transactions undertaken for a buyer, an agent is liable to a buyer for breach of the fiduciary duties of loyalty and full disclosure. The agent is also potentially liable in a civil action under Kentucky criminal bribery and conspiracy laws, as is any third party acting in concert with such agent. Additionally, any intentional misrepresentations made by the agent to a buyer, or omissions to disclose payments from consignors or sellers, should establish a critical element of a fraud claim and may subject the agent to further liability for punitive damages.

(2) Upon proof that the sellers or sellers’ agent(s) paid undisclosed compensation to a buyer’s agent for ostensibly representing him in the purchases of the horses, the sellers are liable to a buyer for inducing the agent to breach his/her fiduciary duties to the buyer. Additionally, the seller(s) or its agent(s) are liable under Kentucky bribery, conspiracy, complicity, and fraud statutes, and for tortious interference with the business relationship between the buyer and his agent(s).

(3) A buyer may seek restitution for his/her losses due to the improperly negotiated purchases of the horses. Additionally, a buyer may recover any kickbacks paid to his agent in the transactions. The agent(s) may still be liable to a buyer for the balance of the full amount of damages resulting from the breach of fiduciary duties despite any partial restitution paid by the sellers. The existence of fraud in the transactions may also subject the sellers and the agent to punitive damages if their conduct and self-dealing is determined to be “outrageous” by the trier of fact. The Restatement also suggests that other equitable measures, such as rescission of the sales contracts and rescission of the agency contract may also be appropriate remedies.

Discussion

Part I of this discussion sets forth the Restatement and Kentucky common law bases for liability of the agent(s) and seller(s) for any established breach of the duty of loyalty to a buyer. Commercial bribery, perhaps the most compelling cause of action available to a buyer against the seller(s) and agent(s), is discussed in Part II, along with other Kentucky statutory liability for conspiracy and complicity in committing the crime of bribery. Part IV discusses an alternate cause of action against a third party for tortious interference. As described in Parts III and V, damages for established liability may be enhanced by the presence of fraud in the transactions, which, by statute, may entitle the aggrieved party to punitive damages.

I. LIABILITY FOR BREACH OF FIDUCIARY DUTIES

A. Restatement Provisions

1. Liability of the Agent(s)

An agency relationship between a buyer and any agent hired to assist buyer with the purchase of horses pursuant to Kentucky law would create a fiduciary relationship between the principal and the agent. An agent has a duties of loyalty, care, and disclosure to the principal in all activities relating to the scope of the agency. Assuming arguendo that the agent accepted hidden commissions, kickbacks, or other payments from third parties in connection with transactions orchestrated by the agent for a buyer, the agent would have breached all of the above duties while completing the transactions for which the agency relationship was formed.

The agent(s)’ duty of loyalty is defined in the Restatements as “a duty. . . not to act on behalf of an adverse party in a transaction connected with his agency without the principal’s knowledge.” Restatement (Second) of Agency § 391 (1958). In an illustration of that principle in the Restatement, the principal employed an agent to find a purchaser for his house. The agent subsequently agreed to represent another party in finding a new home. The agent introduced each party to one another, but never disclosed his relationship with the home buyer to the home seller. The Restatement concludes that this undisclosed dual relationship by the agent constituted a breach of the agent’s fiduciary duty to the home seller. Id., illus. 2. Similarly, assuming a buyer’s agent(s) accepted kickbacks, they have breached the duty of loyalty to the buyer.

The agent(s) also owe a duty of loyalty against self dealing. If an agent “makes a profit in connection with the transaction conducted by him on behalf of the principal[, he] is under a duty to give such profit to the principal.” Restatement (Second) of Agency § 388 (1958). Accordingly, an agent is obligated to pay any unauthorized and undisclosed commission to the principal. Id., ill. 1. Where an agent participates in undisclosed self-dealing, the principal need not show that the conflict of interest actually created any harm. Damages are still recoverable simply because of the breach of the duty of loyalty. Restatement (Second) of Agency § 389 cmt. c (1958).

If a buyer did not authorize his agent(s) to take additional compensation from the sellers in connection with a horse transaction, any kickbacks received by the agent(s) are owed to the buyer. The buyer is entitled to the recovery of these kickbacks even if he does not show that the breach of fiduciary duty caused any additional harm (i.e. payment of unnecessarily inflated price of the horses and/or real property.)

An agent’s fiduciary duty of disclosure requires that the agent “use reasonable efforts to give his principal information which is relevant to affairs entrusted to him and which… the principal would desire to have...” Restatement (Second) of Agency § 381 (1958). Accordingly, an agent is under a duty to reveal to the principal his representation of another entity with interests adverse to the principal. Restatement (Second) of Agency §§ 389-92 (1958). An agent would breach this duty by failing to disclose an agreement to receive kickbacks from the sellers in connection with purchases they recommended or negotiated as agent for a buyer. Had the buyer known about the agent(s)’ self-dealing and receipt of kickbacks from the sellers (or their agents) in the transactions the buyer, more likely than not, would not have proceeded on the terms recommended by the agent. Such information would indicate an ineffective negotiation on the agent(s)’ part and that the agent(s) were in collusion with the sellers in the transactions. Since the sellers’ interests were directly adverse to the buyer’s, any representation of the sellers by the agent(s) constitutes an additional breach of fiduciary duty.

Further, an agent also has a duty of good conduct, defined as a “duty not to conduct himself with such impropriety that he brings disrepute upon the principal or upon the business in which he is engaged.” Restatement (Second) of Agency § 380 (1958). A buyer’s agent(s)’ self-dealing corrupts the horse sale industry.

1. Liability of the Sellers (or Their Agents)

Liability for breach of fiduciary duty may extend to those outside the fiduciary relationship. “A person who… intentionally causes or assists an agent to violate a duty to his principal is subject to liability to the principal.” Restatement (Second) of Agency § 312 (1958). Therefore, any seller (or seller’s agent) who paid compensation to or otherwise improperly influenced a buyer’s agent(s) with knowledge that the agent(s) was/were negotiating the sales on behalf of another, is personally liable to a buyer for the related breach of duty by the agent(s).

It also should be noted that sellers are liable for the torts of their agent(s) acting within the scope of their agency. Restatement (Second) of Agency § 265 (1958). Therefore, if a seller’s consignor caused a buyer’s agent to breach his fiduciary duty, a buyer may seek recovery from either the consignor or the seller.

B. Kentucky Case Law on Agency

1. General Rule Supporting Cause of Action for Breach of Fiduciary Duty by Agent(s)

The case of Hoge v. Kentucky River Coal Corporation, 287 S.W. 226, 227 (Ky. 1926) summarizes the duty of loyalty an agent owes to his principal in the context of their fiduciary relationship:

Everyone – whether designated agent, trustee, servant or what not – who is under contract or other legal obligation to represent or act for another in any particular business or for any valuable purpose must be loyal and faithful to the interest of such other in respect to such business or purpose. . . . The agent is not entitled to avail himself of any advantage that his position may give him to profit beyond the agreed compensation for his services. . . . He will be required to account to his employer or principal for any gift, gratuity or benefit received by him in violation of his duty, or any interest acquired adverse to his principal without full disclosure, though it does not appear that the principal has suffered any actual loss by fraud or otherwise.

An agent may be said to have provided “full disclosure” to his principal when he “advise[s] his principal fully of all the facts within his knowledge affecting the matter in hand reasonably calculated to influence his judgment.” Smith v. Fidelity & Columbia Trust Company, 12 S.W.2d 276, 276 (Ky. 1928). See alsoBuchanan v. Fristt., 240 S.W.2d 614, 616 (Ky. 1951) (noting that “there is a duty upon a real estate agent to deal fairly with his principal and to disclose to him all material facts within his knowledge”).

Assuming that an agent failed to disclose the above conduct to a buyer, the rule set forth in Hogerequires that, in all transactions where he represented the buyer as an agent, the agent must pay whatever kickbacks he received from the sellers (or their consignors) to the buyer.

2. Dual Agency Cases

There are several Kentucky cases illustrating the notion that an agent cannot serve simultaneously represent both the seller and the buyer in the same transaction. In the case of Lloyd v. Colston & Moore, 5 Bush 587, 590 (Ky. 1869),

An agent to sell cannot become an agent to buy in the same transaction; good faith requires that he shall purchase the property on the best terms he can obtain for his principal. And in like manner he is bound to sell for the best price he can for the owner proposing to sell, and who is likewise his principal. In such a position the temptation to violate his duty to one or both is too great.

If the agent(s) representing a buyer could be said to have undertaken representation for both sides of the transactions that occurred, they may have favored one side over the other. If this case is established, the agent(s) would clearly be guilty of violating the law of Agency recognized in Kentucky.

There is an exception to this rule that one cannot act as an agent for both sides of a transaction. As stated in Beasley v. Trontz, 677 S.W.2d 891, 894 (Ky. Ct. App. 1984), one can act as the agent of both the buyer and seller in a transaction when “both parties are aware of, and consent to, the dual representation.” The Trontz case provides a useful illustration of how an agent may be deemed to be acting for both the buyer and a seller in the same transaction. The case involved an agent who initially contracted with the owner of a mare and filly to sell the horses. The agent also had a prior agency relationship with one of the interested buyers and did not disclose this relationship with the seller. In addition, the interested buyer gave the agent a personal check for $20,000 that the agent failed to disclose to the seller. Id.at 893. When the seller changed his mind with regard to the sales price of the two horses and refused to relinquish the horses pursuant to a sales contract signed by the buyer, the buyer brought suit seeking specific performance on the contract. Id.The seller, on the other hand, filed a counterclaim alleging that there was collusion between the agent and the buyer. Id.

The agent testified that he considered himself an agent for both the seller and the buyer. Id.at 894. Ultimately, the court indicated that whether the agent was simultaneously acting as an agent for both parties was a question of fact properly answered by the jury. Nevertheless, the court did state that a principal has the right to either void or repudiate “all transactions in which the agent either acted for himself or for a party whose interest is adverse to his principal . . . without a showing that he was injured.” Id.at 894. The court also discussed the irrelevance of whether or not there was an absence of bad faith by the other party or that the agent did not receive additional consideration from the other party to the transaction. Id.The key factor is whether or not both parties have agreed on the agent’s dual role in the matter. Id.According to the court, “[t]he rationale for this rule of law is that ‘fraud might be committed, or unfair advantage taken, and yet, owing to the imperfections of the best human institutions, the injured party be unable either to discover it or to prove it in such manner as to entitle him to redress.’” Id.(quoting Ferguson v. Gooch, 26 S.E. 397, 400 (Va. 1896)).

II. LIABILITY OF AGENT AND SELLERS UNDER KENTUCKY STATUTES

A. Civil Liability for Violation of Criminal Statutes

Under Kentucky law, “[a] person injured by the violation of any statute may recover from the offender such damages as he sustained by reason of the violation.” Ky. Rev. Stat. Ann. § 446.070 (Michie 2004). See alsoBig Rivers Elec. Corp. v. Thorpe, 921 F.Supp. 460, 462 (W.D. Ky. 1996). Therefore, the agent(s)’ and sellers’ violations of the criminal statutes discussed below may also subject them to civil liability to a buyer. Not all violations of criminal statutes also create civil liability; the plaintiff must be in the class of person intended to be protected by the statute. SeeLouisa Coca-Cola Bottling Co. v. Pepsi-Cola Metropolitan Bottling Co., 94 F.Supp. 2d 804, 810 (E.D. Ky. 1999). A buyer using an agent to conduct horse business privately or at public auction, however, fits within the category of person the bribery and conspiracy statutes seek to protect.

B. Bribery Statutes

1. Liability of the Agent(s)

An agent is subject to liability for acceptance of a commercial bribe when “[a]s an… agent without consent of… the principal, agent knowingly solicit[ed], accept[ed] or agree[d] to accept any benefit from another person upon an agreement or understanding that the benefit [would] influence his conduct contrary to his… principal’s best interest or… his conduct contrary to his fiduciary obligation.” Ky. Rev. Stat. Ann. § 518.030 (Michie 2004). An agent(s)’ acceptance of kickbacks related to the transactions for which the agency relationship was formed from a seller (or his agent(s)) directly adverse to the principal and clearly meets the requirements set out above. Bribes accepted for the purpose of securing a sale, presumably upon terms less favorable than what the buyer’s agent could have secured had he not accepted the kickbacks, is actionable. Additionally, the bribe constitutes conduct contrary to several of the agent(s)’ fiduciary obligations as set forth above.

2. Liability of the Sellers

The sellers (or their agent(s)) offering commercial bribes to the agent(s) are also liable to a buyer. Kentucky law imposes liability on one who “offers, confers, or agrees to confer any benefit upon any… agent without the consent of the latter’s… principal with intent to influence his conduct contrary to his principal’s best interests… or contrary to his fiduciary obligation.” Ky. Rev. Stat. Ann. § 518.020 (Michie 2004). The sellers or sellers’ agents who intentionally secure a deal with a buyer at an unfairly negotiated price by offering kickbacks to the buyer’s agent(s) satisfy the above requirements. The kickbacks also cause a breach of the agent(s)’ duty of loyalty to his principal, as discussed above. Therefore, the sellers or sellers’ agent(s) are liable to a buyer in a civil suit for the losses caused by the bribe.

3. A Buyer’s Standing

The commercial bribery statutes were enacted “to protect employers from the manipulation of their employees in ways contrary to the employer’s interests.” Louisa Coca-Cola, at 811. Since a buyer seeks to protect himself from his employee(s)’ self-dealings with an adverse party, he may use the commercial bribery statutes to seek redress against the agent(s) and the sellers.

C. Other Statutes

1. Conspiracy

Kentucky law holds one liable who agrees that one conspirator will “engage in conduct constituting [a] crime” with the “intent to promote or facilitate the commission of [the] crime.” Ky. Rev. Stat. Ann. § 506.040 (Michie 2004). Since both the agents and the sellers agree to participate in and assist each other in the participation of the crime of bribery, as discussed above, both the agents and sellers are liable for damages caused by conspiracy as well. A buyer should have standing to pursue civil liability for conspiracy of the agents and the sellers. He was damaged by their collusion to deprive him of a fairly negotiated sale.

2. Complicity

Kentucky law imposes additional liability on the agent(s) and the sellers for complicity in the crime of bribery: “A person is guilty of an offense committed by another person when, with intention of promoting or facilitating the offense, he… engages in a conspiracy with such other person to commit the offense… or having a legal duty to prevent the commission of the offense, fails to make a proper effort to do so.” Ky. Rev. Stat. Ann. § 502.020 (Michie 2004). In particular, this statute creates liability of the agent(s) for complicity in bribery, since they had a duty to protect his principal’s interests within the scope of their agency. Restatement (Second) of Agency § 391 (1958). The sellers (or their consignors) and a buyer’s agent(s) are all liable under the complicity statute, since they engaged in conspiracy to commit the offense of bribery, as discussed above. A buyer may have standing to pursue civil liability for the complicity charges, since the statute was enacted to prevent the collusion of multiple people to commit a crime. If a buyer suffers harm as a result of such a crime that could not be committed without the complicity of a bribe payer and a bribe acceptor. He would be in the category of people the statute was enacted to protect.

III. FRAUD IN THE TRANSACTIONS

A. Kentucky Statutory Fraud Requirements

In addition to the liability imposed for breach of fiduciary duties and statutory civil liability, the agent(s) and sellers (or their consignors) may be subject to punitive damages if the existence of fraud in the transactions can be proven. “For the purpose of punitive damages, ‘fraud’ means the intentional misrepresentation, deceit or concealment of material fact known to the defendant and made with the intention of causing injury to the plaintiff.” Ky. Rev. Stat. Ann. § 411.184(1)(b) (Michie 2004). If during the agency and the negotiation of transactions the seller(s) and the agent(s) conceal from the buyer that his agent(s) were influenced and additionally compensated by the sellers (or their consignors) and the sellers and the agent(s) did so intentionally to cause the buyer to engage in a transaction without properly negotiating for his best interests, a cause of action for fraud showing a fraudulent transaction would subject both the agent(s) and the seller to liability to a buyer. Restatement (Second) of Agency § 315 (1958).

A “clear and convincing” level of proof of fraud is required for the imposition of punitive damages. Ky. Rev. Stat. Ann. § 411.184 (2) (Michie 2004). Proof showing clearly and convincingly that the agent(s) and sellers intended to deceive the buyer about the fairness of the sale price and that they intended a result that would injure the buyer by dividing his loss on the sale amongst themselves would be sufficient proof. The materiality of the misrepresentation could be shown by the substantiality of the kickbacks or the unfair pricing of the horses. The imposition and quantification of punitive damages is discussed later in this memorandum.

B. Kentucky Common Law Fraud Requirements

Kentucky common law describes actionable fraud differently than the statute. The elements of actionable fraud in a sale are: “(1) that the seller made a material representation; (2) that it was false, (3) that when he made it he knew it was false… and it was a positive assertion; (4) that he made it with the intention of inducing the buyer to act, or that it should be acted upon by the buyer; (5) that the buyer acted in reliance upon it; (6) and that the buyer thereby suffered injury.” Keck v. Wacker, 413 F. Supp. 1377, 1383 (E.D. Ky. 1976).

In a similar equine sales case, punitive damages were imposed on a seller who acted with “wanton disregard for the rights of others” and “deliberately and consciously suppressed” information material to the conditions of the sale. Chernick v. Fasig-Tipton Kentucky, Inc., 703 S.W.2d 885, 888 (Ky. App. 1985), citingFowler v. Mantooth, Ky., 683 S.W.2d 250 (Ky. 1984), Hensley v. Paul Miller Ford, Inc., 508 S.W.2d 759 (Ky. App. 1974), and Island Creek Coal Co. v. Rodgers, 644 S.W.2d 339 (Ky. 1982). In Chernick, the seller did not disclose certain defects of a “problem mare” to the buyer. The court found that, because the sellers consciously deceived the buyers of information material to the sale (ie., the horse’s defects), punitive damages would be appropriate. Id. At 888-890. Similarly, in the present case, the sellers, their consignors, and A buyer’s agent(s) deceived him about information material to the sale (i.e., the kickbacks received by the agent(s)). Punitive damages are available to a victimized horse buyer.

1. Intent

If the agent(s) and the seller(s) acted together to deprive a buyer of his lowest price in the purchase of horses so that they might profit, the buyer should prevail. The agent(s)’ misrepre­sentations to a buyer that a price is acceptable, and that they made that determination in accordance with their fiduciary duties to act in a buyer’s best interests, if intentionally made to induce a buyer to purchase at the agreed upon price, would be sufficient proof of intent.

2. Misrepresentation

The common law test also requires the making of a “positive assertion” which is a “material misrepresentation.” If the agent(s) maintained an agency relationship with the buyer, and through that relationship “negotiated” the purchase of horses, including a kickback from the seller, such misrepresentations can be inferred by their conduct and status as an agent for the buyer.

a. Representation of Agency

An agent has a fiduciary duty to disclose his relationship with any adverse parties to the principal within the scope of the agency. Restatement (Second) of Agency §.381 (1958). By acting as the buyer’s agent, agent(s) impliedly represent to the buyer that they will comply with the buyer’s fiduciary duties to buyer. Though agent(s) may not directly state to buyer that they are complying with fiduciary duties of loyalty, their actions in the ongoing negotiation of sales “positively assert” a continuance of the agency relationship to buyer. The continuance of the agency relationship entails a continuation of the duty of loyalty. If an agent omits to disclose their disloyalty, or the buyer’s agents falsely represent that they were not taking kickbacks, both would be a “statement of omission” sufficient to satisfy the common law standard for fraud.

This fraud also extends to the seller(s) and his/their agent(s). Though they do not have a fiduciary duty to disclose the defective negotiations of the sales to the buyer, they are liable for assisting and inducing the buyer’s agent(s) to breach their fiduciary duty to the buyer. Restatement (Second) of Agency § 312 (1958).

b. Fraudulent Concealment

Kentucky common law also recognizes that the requirements for a “material representation” and “positive assertion” can be satisfied where there is no direct statement. “Actionable fraud may consist as well of the concealment of what is true as the assertion of what is false.” Adkins v. Stewart, 166 S.W. 984, 985 (Ky. 1914). In many cases, the active concealment of a contractual defect not likely to be discovered by the buyer creates “overcome[s] the legal presumption of innocence and beget[s] a belief of the truth of the charge of fraud.” Id. Though these cases often occur in the concealment of a defect in sold real estate, they are analogous to both Chernick and the concealment of the agreements to encourage a buyer to pay inflated prices in anticipation of receiving agreed upon on “kickbacks” if he consummated the recommended purchases. This theory may not extend to proving the fraud of the sellers or their agent(s), though, since they had no duty to disclose and did not actively conceal the partiality of a buyer’s agent(s).

IV. TORTIOUS INTERFERENCE WITH PERFORMANCE OF CONTRACT BY A THIRD PARTY

A. Restatement Provisions

The tort of intentional inference with performance of contract by a third person is defined in § 766 of the Restatement (Second) of Torts:

One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.

To determine when a defendant’s conduct is improper, § 767 of the Restatement (Second) of Torts states:

In determining whether an actor’s conduct in intentionally interfering with a contract or a prospective contractual relation of another is improper or not, consideration is given to the following factors: (a) the nature of the actor’s conduct, (b) the actor’s motive, (c) the interests of the other with which the actor’s conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor’s conduct to the interference, and (g) the relations between the parties.

B. Kentucky Case Law

In Walt Peabody Advertising Service, Inc. v. Pecora, 393 F. Supp. 328, 330 (W.D. Ky. 1974), the court discussed the history of Kentucky law with respect to the tort of interference of contractual relations. Although Kentucky had once rejected the notion that a party could assert a cause of action against a party inducing or otherwise causing the other party to the contract to not perform, the court indicated that Kentucky law was now in accord with the majority rule of Alpha Distributing Company of California v. Jack Daniel Distillery, 454 F.2d 442 (9th Cir. 1972), which states that

An action will lie for the intentional interference by a third person with a contractual relationship either by unlawful means or by means otherwise lawful when there is a lack of sufficient justification.

Id.at 331 (quoting Herron v. State Farm Mutual Ins. Co., 363 P.2d 310 (Cal. 1962)). The court also indicated that the majority rule contains the following elements:

(1) an existing contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) an intentional unjustified inducement to breach the contract; (4) a subsequent breach by the third party; (5) resulting damage to the plaintiff.

Id.

In Carmichael-Lynch-Nolan Advertising Agency, Inc. v. Bennett & Associates, Inc., 561 S.W.2d 99 (Ky. Ct. App. 1977), the Kentucky Court of Appeals adopted the original Restatement of Torts’ definition of the tort of interference with a contract. According to the court, “one who, without a privilege to do so, induces or otherwise cause a third person not to (a) perform a contract with another, or (b) enter into or continue a business relation with another is liable to the other for harm caused thereby.” Id.at 102 (quotingRESTATEMENT OF TORTS § 766).

To assert a cause of action against sellers involved for interfering with a buyer’s fiduciary relationship with his agent(s), a buyer should attempt to satisfy each of the elements discussed in Pecora. If the question whether there is a contractual relationship between a buyer and his agent(s), Kentucky courts have “long held that an agency is a contract either express or implied, by which one of the parties confides to the other the management of some business to be transacted in his name, or on his account, by which the other assumes to do the business and render an account of it.” Stewart v. Kentucky Paving Company, Inc., 557 S.W.2d 435, 473 (Ky. Ct. App. 1977). Whether or not the seller(s) had knowledge of the contract between a buyer and his agent(s) is a question of fact. This, however, does not appear to be a significant hurdle to overcome as the existence of an agency relationship is contractual in nature and, therefore, a non-principal party dealing with an agent would likely be aware of this fact.

In determining whether a defendant’s conduct is improper or unjustified, the seven factors set forth in § 767 of the Restatement (Second) of Torts provide a useful starting point in evaluating the propriety of an actor’s conduct. In fact, the Kentucky Supreme Court specifically adopted them in Nat’l Collegiate Athletic Assoc. v. Hornung, 754 S.W.2d 855, 858 (Ky. 1988). To determine whether a defendant improperly interfered, the Kentucky Supreme Court stated that the seven factors set forth in § 767 of the Restatement (Second) of Torts should be considered by the court in ruling on a motion for directed verdict or by the jury if the case is submitted to the jury. Id.at 858. Furthermore, the Hornungcourt indicated that a party seeking recovery “must show malice or some significantly wrongful conduct.” The court cited with approval a passage from Prosser and Keeton on Torts stating that

the [interference] cases have turned almost entirely upon the defendant’s motive or purpose, and the means by which he has sought to accomplish it . . . some element of ill will is seldom absent from intentional interference; and if the defendant has a legitimate interest to protect, the addition of a spite motive usually is not regarded as sufficient to result in liability.

Id.at 759 (quoting Prosser and Keeton on Torts§ 130, W.P. Keeton ed. 5th ed. 1984). The court then noted that “malice may be inferred in an interference action by proof of lack of justification.” Id.See alsoBourbon County Joint Planning Comm’n v. Simpson, 99 S.W.2d 42, 46 (Ky. Ct. App. 1990) (stating that the burden of showing that the defendant acted with an improper purpose or without justification is on the plaintiff and that “it is a difficult one”). An interfering defendant may, however, “escape liability by showing that he acted in good faith to assert a legally protected interest of his own.” Hornung at 858.

The Kentucky Supreme Court has provided additional guidance with respect to assessing whether a defendant’s conduct is improper as to the ways in which a defendant may be characterized as acting improperly. In Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 487 (Ky. 1991), the Court indicated that

[u]nder Kentucky law, tort liability exists for the interference with a known contractual relationship, if the interference is malicious or without justification, or is accomplished by some unlawful means such as fraud, deceit, or coercion.

Given that “the relation of principal and agent is one of extreme confidence and requires of the latter the exercise of the utmost good faith and confidence,” and these duties are contractually imposed upon the agent, an agent who receives kickbacks and fails to disclose this to his principal likely can be said to have breached his contract with his principal. Johnson v. Mitchell, 233 S.W. 884, 885 (Ky. 1921). See3 AM. JUR. 2D Agency § 204 (2002) (stating that “the existence and extent of the duties of the agent to the principal are determined by the terms of the agreement between the parties . . . .”).

With regard to the final element (damages) necessary to establish a cause of action for tortious interference with a contract, it appears that a buyer could meet this burden if the buyer could prove he had to pay higher purchase prices as a result of his agent(s) taking kickbacks from sellers. A buyer could then readily establish that he sustained damages as a result of the sellers’ (or sellers’ consignors’) interfering conduct. The damages would be equal to the spread between the amounts the buyer actually paid to the sellers involved and the amounts that the buyer would have paid to the sellers had they not improperly or unjustifiably interfered.

V. REMEDIES

A. Restitution

Restitution may be available from both the agent(s) and the sellers (or sellers’ consignors). The agent(s) are liable for either the amount of the kickbacks accepted or the amount of damage caused by the breach of loyalty in accepting the kickbacks.

If an agent has received a benefit as a result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received… and the amount of damage thereby caused; except that, if the violation consists of the wrongful disposal of the principal’s property, the principal cannot recover its value and also what the agent received in exchange therefore.

Restatement (Second) of Agency § 407 (1) & cmt. a (1958).

Therefore, the offended buyer may opt to recover from the agent(s) either the amount of money received in kickbacks or the estimated loss incurred because of the improper negotiation of the sales. He cannot recover both amounts from the agent(s). The fact that the buyer also seeks restitution from the sellers does not bar his recovery of the kickbacks from the agent(s). Restatement (Second) of Agency § 407 (2) (1958).

Recovery of some damages from the agent(s) does not bar full recovery from the sellers or sellers’ consignors. In fact, since the sellers had notice that the agent(s) were disloyal and breaching a fiduciary duty to the buyer in making the sale, the buyer may recover the full value of the losses he incurred. Restatement (Second) of Agency § 314 (1958). If the agent(s) fully compensate the buyer for the damages due to him, the sellers are no longer liable to the buyer. Restatement (Second) of Agency § 313, cmt. b (1958). If only partial damages are recovered from the agent(s), the sellers may still be liable for the whole amount of the ordered restitution. Id.

B. Punitive Damages

Punitive damages are available in addition to restitution because of the presence of fraud in the transactions involving the agent(s). The amount of these awards is determined upon an examination of five factors: “(1) the likelihood at the relevant time that serious harm would arise from the [agent(s)’s and sellers’] misconduct; (2) the degree of the [agent(s)’ and sellers’] awareness of that likelihood; (3) the profitability of the misconduct to the [agent(s) and sellers]; (4) the duration of the misconduct and any concealment of it by the [agent(s) and sellers]; (5) and any action by the [agent(s) or seller] to remedy the misconduct once it became known to the defendant.” Keck, 413 F. Supp. 1383 (E.D. Ky. 1976).

There is a high standard of proof of fraud for a court to grant punitive damages. Kentucky law requires that “a plaintiff. . . show outrageous conduct evidencing fraud, evil intent, or reckless indifference to the rights of others.” Anderson v. Wade, 33 Fed. Appx. 750, 759 (6th Cir. 2002). “The distinguishing characteristic in cases where punitive damages are authorized has not been whether the injury was intentional but whether the misconduct has the character of outrage.” Horton v. Union Light, Heat & Power Co., 690 S.W.2d 382, 389 (Ky. 1985). A blatant bribe to agent(s) to deprive the principal of a fair sale price almost certainly has such an outrageous character as to merit the imposition of punitive damages.

C. Rescission

If an agent is employed by parties on opposite sides of a transaction and does not inform a party of his dual role, the transaction is voidable by that party. Restatement (Second) of Agency § 313 (2) (1958). Rescission of the sales contracts is also available to a buyer because of fraud in the transaction. Where the sellers perpetrate fraud on the buyer through his agent, rescission is among the remedies listed as appropriate. Restatement (Second) of Agency § 315 cmt. a (1958).

A buyer may also be able to rescind his contract for employment of the agent(s) and refuse to pay any further compensation owed to the agent(s) because of the agent(s)’ breach of the duty of loyalty. Restatement (Second) of Agency § 399 (k) (1958). Rescission of that contract would relieve a buyer from any further payment for the agent(s)’ dishonest and ineffective service.

VI. POSSIBLE DEFENSES TO THE CLAIMS ASSERTED

A. Custom of Dual Agency in the Horse Sales Industry

Agents and sellers may claim that there was no violation of fiduciary duty in the agent’s acceptance of the kickbacks because such kickbacks are commonly given in the sale of horses. If a court were to find that kickbacks were customarily granted and accepted in the equine sales industry, the agent(s) may be allowed to accept the compensation without breaching a fiduciary duty. Restatement (Second) of Agency § 388, cmt. b (1958).

The agent(s) cannot accept the kickbacks where they are “evidence that the agent is committing a breach of duty to the principal by not acting in his interests.” Id. The kickbacks reflect the agent(s)’ breach of the duty of loyalty to the seller through a representation of the adverse sellers’ interests. Therefore, custom should not be a defense to the claims of breach of fiduciary duty. Additionally, custom is no defense to the agent(s) and sellers’ civil liability for bribery, conspiracy, complicity, and fraud.

B. Constructive Knowledge of the buyer

A seller may claim that he believed that, because of the usual practice of dual agency in horse and horse farm sales, a buyer was aware of the agent(s)’ compensation from the seller. If the seller can establish that such a belief is reasonable, he is no longer subject to liability for inducing the disloyalty of the agent(s). Restatement (Second) of Agency §313 (1958). It is unlikely, however, that a court will condone the practices of self-dealing agents simply because such practices might be common in the horse industry.

C. Lack of Damages

If a proper and untainted negotiation never occurred between the seller and the buyer, it may be impossible to show the exact amount of damages a buyer suffered. Even so, this is not a complete bar to liability for the sellers and agent(s). A buyer may seek the recovery of the kickbacks from the agent(s). Restatement (Second) of Agency § 407 (1). Therefore, some damages can be quantified. Additionally, punitive damages may be assessed for the fraudulent transactions.

D. Lack of Misrepresentation and Fraud by the Sellers

Sellers and their consignors may claim that they are not subject to punitive damages because they made no fraudulent representations to a buyer, and therefore do not satisfy the common law requirements for fraud. SeeKeck, 413 F. Supp. 1383. Since paying and concealing kickbacks given to influence the negotiation of the transaction is not in accordance with the principles of good faith and fair dealing implied in contract law, a seller’s fraudulent misrepresentation of this kind violates the implied in law principles in the transaction. This may be sufficient to establish fraud and subject the sellers and sellers’ consignors to punitive damages.

Portions of this exegesis were published in the Kentucky Quarter Horse Association Spring 2008 issue.