Sexual harassment allegations can of course support an employment practices claim. But if the conduct results in harm to the company through an adverse judgment, can the same misconduct allegations also support a claim under Delaware law for breach of fiduciary duty? At least one past Delaware court said, in the context of that case, that the answer is “yes.” However, a recent Delaware Chancery Court decision took a different view, holding that “interpersonal” conduct alleged was “not a matter of corporate internal affairs.” A copy of the December 1, 2025, decision can be found here.

Background

Credit Glory is a private Delaware corporation. Its sole stockholders are Alex Brola and Christopher Lundgren. Brola is the company’s co-founder and President. Lundgren was the company’s Vice President and Secretary.

Two former company employees charged that Lundgren sexually harassed them, subjecting them to offensive material and demands. The two employees resigned and ultimately sued Lundgren and the company in New York state court. Their actions resulted in substantial judgments against both Lundgren and the company.

Brola then sued Lundgren in a shareholder derivative suit in Delaware Chancery Court, alleging that Lundgren’s actions breached his duty of loyalty by “acting in pursuit of his own personal interests and gratification, and contrary to the best interests of the Company.” Lundgren filed a motion to dismiss, arguing that Brola had not sufficiently alleged demand futility.

The December 1, 2025, Opinion

In a December 1, 2025, Opinion, the Delaware Court of Chancery granted Lundgren’s motion to dismiss, holding that Lundgren does not face a substantial likelihood of liability on the fiduciary duty claim, and therefore the plaintiff had not established demand futility.

In assessing the plaintiff’s derivative claims, the “core issue,” the court said, is “whether corporate law can be broadened to encompass interpersonal workplace disputes.” Having posed this question, the court said that “it cannot.” Delaware corporate law “governs internal affairs,” while “external relationships between managers and employees, by contrast, are often governed by “the substantive law of the jurisdiction where the injury occurs.”

The court said that Brola’s liability arguments transform the Delaware corporate law principles “into a general morality code.” Brola had specifically relied on the Vice Chancellor Travis Laster’s January 2023 decision in the McDonalds case (discussed here), in which the court sustained a claim for breach of fiduciary duty against a corporate officer accused of sexually harassing employees. The court in this case said, with reference to the McDonalds opinion, that “that decision – whatever its outer bounds – did not create a rule that a viable breach of fiduciary duty claim arises whenever an officer engages in unlawful harassment.”

The court went on to note that the defendant in the McDonalds case was a senior officer and head of the company’s HR function, whose duties included maintaining a safe and respectful workplace. The court in the McDonalds case “conceivably breached his duty of loyalty by … engaging in acts that subverted that function.” He was alleged to have engaged in the “corruption of the corporate mission he was entrusted to lead.”

Even with the prior case clearly in mind, the court in this case when on to say that “Still, fiduciary liability is not a catch-all for every wrong committed in the workplace simply because the perpetrator happens to hold a title. Egregious interpersonal misconduct, even when violative of employment law and company policy, generally falls outside the scope of Delaware corporate law.”

In drawing a distinction between the facts involved in the McDonalds case and the facts in this case, the court noted that Lundgren is “not alleged to have abused the specific delegated authority of his office.” None of the factual allegations concern fiduciary conduct taken in Lundgren’s capacity as a director or as the Corporate Secretary. However deplorable, his harassment and bigotry “were personal malfeasance, not a misuse of his corporate office.”

Adopting the plaintiff’s theory here, the court said, would “undermine the principled distinction between interpersonal harms and fiduciary breaches.” A literal application of the McDonalds court’s syllogism – that because sexual harassment is selfish and selfishness is disloyal, therefore it is a breach of the duty of loyalty – “would impose strict fiduciary liability for workplace misconduct.” This logic “lacks a limiting principle.” The court added that if “every self-serving, reprehensible act by an officer constitutes fiduciary disloyalty, then a breakroom fistfight, a defamatory media post, or theft of office supplies becomes an internal affairs matter.”

The court concluded by noting that the individual victims of Lundgren’s misconduct had sought and obtained redress for their harms. Those proceedings, the court said, “confirm that the remedy for Lundgren’s behavior lies in tort and employment law, not corporate doctrine.” To sustain the plaintiff’s claim here “would impose a precarious layer of fiduciary liability onto comprehensive legal frameworks and convert this court of equity into a generally workplace disciplinary forum, adjudicating matters well beyond its purview.”

Discussion

I have to say I am gratified and relieved to see the way that the court applied and interpreted the holding of the McDonalds court with respect to the misconduct of the defendant in that case constituting a breach of fiduciary duty. I said at the time that I thought VC Laster’s decision in McDonalds sustaining these claims was “explosive” adding that I thought that the “possibilities for this conclusion to do mischief was incalculable.”

My specific concern, which I noted at the time, was that the holding in the McDonalds case raised the possibility that every sexual misconduct claim would become a Delaware Chancery Court D&O claim brought by shareholders, in addition to an employment practices liability claim brought by the victim of the alleged misconduct.

The Delaware Court of Chancery in this case apparently shared similar concerns. The court here drew a sharp distinction between conduct relating to the internal affairs of the company (which is subject to the purview of Delaware corporate law) and conduct relating to interpersonal affairs (which is not). Fiduciary duties are not a “catch-all” for all misconduct allegations.

The court was at particular pains here to establish that the McDonalds court did not establish a rule that a viable claim for breach of fiduciary duty arises in every instance of alleged sexual harassment involving a corporate director or officer.

Nevertheless, there is a seeming conflict between the two cases, as the derivative claim in the McDonalds case was allowed to go forward, while it was not in this case. A December 8, 2025, memo from the Sheppard Mullin law firm (here) addresses this tension, saying that the two decisions “can be harmonized by focusing on the nature of the claims at issue.” The officer defendant in the McDonalds case was charged with managing human resources and implementing a system of corporate harm as a result of sexual harassment, whereas the officer defendant in this case was interpersonal and not a matter of internal affairs.

The law firm memo suggests that the distinction may lie with “whether the alleged wrongdoing occurred within the domain of that fiduciary’s corporate responsibilities.” A claim for breach of fiduciary duty “may be stronger if it is tied to the fiduciary’s specific corporate responsibilities.”

While the two decisions can perhaps be harmonized, there is no doubt that the court in the Brola case made it clear that the court did not believe that Delaware corporate law should extend to workplace misconduct, regardless of what the court in the McDonalds case said. Ultimately, the Delaware Supreme Court is, in the words of the law firm memo, going to have to weigh in on the “potential conflict in the reasoning of Brola and McDonalds.”

A Final Note: In his opinion in the McDonalds case, VC Laster noted and addressed concerns about his holding on the breach of fiduciary duty issue. He observed that “Some might ask whether the Court of Chancery should be hearing sexual harassment claims and worry that recognizing such a claim would open the floodgates.” He was of course correct because those concerns were indeed expressed. However, Laster also noted that because this type of claim woudl be a derivative lawsuit, it would be subject to all of the defenses associated with derivative claims, such as the demand requirement; he also added that mere claims of misconduct would not suffice to support the fiduciary duty claim.

It could be that the court’s opinion in the Brola case validates Laster’s response to the “floodgates” fears. The Brola case was indeed brought as a shareholder derivative lawsuit, and the lawsuit was indeed subject to one of the associated defenses — in this case, the demand requirement. And the Brola case certainly does stand for the proposition that mere claims of misconduct alone will not suffice to support a fiduciary duty claim. Laster might well say this unfolded exactly the way I said it would, I suppose.