Fiduciary Duty Archives - New York Appellate Digest

Civil Procedure, Contract Law, Corporation Law, Fiduciary Duty

CAUSES OF ACTION FOR UNJUST ENRICHMENT, BREACH OF FIDUCIARY DUTY AND AN ACCOUNTING SHOULD NOT HAVE BEEN DISMISSED; FAILURE TO TRANSFER ASSETS ALLEGED A CONTINUING WRONG AND PAYMENTS WHICH ALLEGEDLY SHOULD HAVE BEEN MADE DURING THE STATUTE OF LIMITATIONS PERIOD WERE ACTIONABLE (SECOND DEPT).

The Second Department, reversing Supreme Court, determined plaintiff stated causes of action for unjust enrichment, breach of fiduciary duty and an accounting against her sister (Weisel), the sole manager of A & Z, of which plaintiff is also a member. The court noted that the allegation that Weisel did not transfer assets to A & Z alleged a continuing wrong, so payments allegedly owed to A & Z within the statute of limitations period were actionable:

To state a cause of action for unjust enrichment, the plaintiff must allege that (1) the other party was enriched, (2) at the plaintiff’s expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered … . …

“[A] fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect . . . barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty” … . Here, the plaintiff has alleged that Wiesel is the sole manager of A & Z—which, if true, would impose a fiduciary duty on Wiesel arising out of her position as the sole manager of A & Z … . The amended complaint sufficiently alleges that Wiesel is in a fiduciary relationship with the plaintiff, arising out of both her position as sole manager of A & Z and her familial relationship with the plaintiff … . …

A cause of action for accounting requires “the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest” … . Greenberg v Wiesel, 2020 NY Slip Op 04927, Second Dept 9-16-20

September 16, 2020/0 Comments/by Bruce Freeman

Contract Law, Family Law, Fiduciary Duty, Trusts and Estates

THE CAUSE OF ACTION SEEKING THE IMPOSITION OF A CONSTRUCTIVE TRUST TO PREVENT UNJUST ENRICHMENT SHOULD NOT HAVE BEEN DISMISSED; PLAINTIFF WIFE ENTERED A SETTLEMENT AGREEMENT REQUIRING PAYMENTS BY HER EX-HUSBAND; AFTER HER EX-HUSBAND’S DEATH HIS CHILDREN ALLEGEDLY EMPTIED THE ESTATE OF ASSETS, THEREBY PREVENTING THE FULFILLMENT OF THE TERMS OF THE SETTLEMENT AGREEMENT (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the cause of action alleging the existence of a constructive trust to prevent unjust enrichment should not have been dismissed. Plaintiff and her deceased ex-husband entered a settlement agreement in which plaintiff would be entitled to certain payments until 2020 and 2023. Plaintiff’s ex-husband died in 2017 and the complaint alleged that all of the ex-husband’s assets had been removed from the estate by the husband’s children making it impossible for the terms of the settlement to be fulfilled:

The purpose of a constructive trust is to prevent unjust enrichment … . Accordingly, ” the constructive trust doctrine is given broad scope to respond to all human implications of a transaction in order to give expression to the conscience of equity and to satisfy the demands of justice'” … . ” A constructive trust is an equitable remedy, and may be imposed when property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest'” … .

Moreover, an agreement between spouses, such as the agreement and addendum here, involve a fiduciary relationship requiring the utmost good faith … . Since the agreement and addendum provide that, if necessary, the plaintiff could use the assets of Iannazzo’s [the ex-husband’s] estate to satisfy his obligations to her, and, thereafter, all of Iannazzo’s assets were transferred to the Trust before his death, his estate can provide no relief to the plaintiff and the obligations she is owed pursuant to the agreement and addendum will not be met. The plaintiff therefore adequately states a cause of action that the defendants would be unjustly enriched if the Trust is allowed to retain the portion of the assets now owned by the Trust that would satisfy the unmet obligations of Iannazzo and his estate pursuant to the agreement … . Derosa v Estate of Iannazzo, 2020 NY Slip Op 04917, Second Dept 9-16-20

September 16, 2020/0 Comments/by Bruce Freeman

Attorneys, Civil Procedure, Corporation Law, Fiduciary Duty, Trusts and Estates

PLEADING REQUIREMENTS FOR A BREACH OF FIDUCIARY DUTY CAUSE OF ACTION WERE NOT MET; ATTORNEY REPRESENTING A CORPORATION DOES NOT OWE A FIDUCIARY DUTY TO SHAREHOLDERS OR EMPLOYEES (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the pleading requirements for a breach of fiduciary duty cause of action were not met and defendant attorneys, who represented the corporation, not the decedent, did not owe a fiduciary duty to decedent:

We disagree with the Supreme Court’s determination denying that branch of the Berger defendants’ [attorneys’] motion which was pursuant to CPLR 3211(a)(7) to dismiss the sixth cause of action, alleging breach of fiduciary duty against them. ” [T]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendants misconduct'” … . A cause of action to recover damages for breach of fiduciary duty must be pleaded with the particularity required under CPLR 3016(b) … . Here, the sixth cause of action, alleging breach of fiduciary duty against the Berger defendants, contained only bare and conclusory allegations related to damages, without any supporting detail, and failed to satisfy the requirements of CPLR 3016(b) … .

Additionally, the complaint alleges that the Berger defendants represented Rockland Inc., and owed a fiduciary duty to the decedent based upon that representation. However, a corporation’s attorney represents the corporate entity, not its shareholders or employees … . Mann v Sasson, 2020 NY Slip Op , 04737, Second Dept 8-26-20

August 26, 2020/by Bruce Freeman

Attorneys, Contract Law, Fiduciary Duty, Partnership Law

FORMER LAW FIRM PARTNER WAS ENTITLED TO AN ACCOUNTING; IN DETERMINING THE BUYOUT PRICE UPON THE PARTNER’S WITHDRAWAL FROM THE PARTNERSHIP, THE TERMS OF THE PARTNERSHIP AGREEMENT, RATHER THAN PARTNERSHIP LAW, CONTROL (SECOND DEPT).

The Second Department determined plaintiff, a former partner in a law firm, was entitled to an accounting and a buyout price calculated pursuant to the provisions of the partnership agreement:

” The right to an accounting is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest'” … . A plaintiff seeking an accounting has to show that he or she entrusted money or property to the defendant with respect to which he or she has an interest or which, in equity, ought to be divided … . Here, we agree with the Supreme Court’s determination awarding the plaintiff summary judgment on the cause of action for an accounting to determine the amount due to him pursuant to the terms of the partnership agreement. ” … [W]here . . . there is a fiduciary relationship between the parties, there is an absolute right to an accounting notwithstanding the existence of an adequate remedy at law” … Here, it is undisputed that there was a fiduciary relationship between the plaintiff and the defendants. …

… “[A] partnership is a voluntary, contractual association in which persons carry on a business for profit as co-owners. In the agreement establishing a partnership, the partners can chart their own course” … . … [W]hile New York’s Partnership Law provides certain default provisions where a partnership agreement is silent, where the agreement clearly sets forth the terms between the partners, it is the agreement that governs … .

Here, the partnership agreement expressly provides that the partnership “shall not be dissolved” upon the resignation of a partner. The terms of the partnership agreement take precedence over Partnership Law § 62, which permits a partnership to be dissolved at any time by any partner. The firm was not dissolved, but rather, the plaintiff withdrew from the firm on August 3, 2010. Accordingly, pursuant to the terms of the partnership agreement, the plaintiff was entitled to the buyout price, as defined in that agreement, and payable in accordance with the terms of that agreement. Zohar v LaRock, 2020 NY Slip Op 04202, Second Dept 7-22-20

July 22, 2020/by Bruce Freeman

Appeals, Attorneys, Contract Law, Corporation Law, Fiduciary Duty, Limited Liability Company Law

NO APPEAL LIES FROM A NONFINAL ORDER, HERE ORDERS WHICH DID NOT RESOLVE THE AWARD OF ATTORNEY’S FEES; IN A SUCCESSFUL SHAREHOLDERS’ DERIVATIVE ACTION ATTORNEY’S FEES ARE PAID BY THE CORPORATION (FOURTH DEPT).

The Fourth Department determined no appeal lies from a nonfinal order and, in a successful shareholders’ derivative action, the corporation is liable for attorney’s fees. The facts of the case are too complex to fairly summarize here. Defendant limited liability company was formed to develop a residential subdivision. The action alleged breach of contract and breach of fiduciary duty and sought dissolution of the LLC:

… “[A]lthough all of the substantive issues between the parties were resolved, the order was facially nonfinal, since it left pending the assessment of attorneys’ fees—a matter that plainly required further judicial action of a nonministerial nature” … . Further, plaintiffs’ “request for attorneys’ fees was an integral part of each of the asserted causes of action rather than a separate cause of action of its own,” and therefore that issue cannot be implicitly severed from the other issues … . Thus, the order … does not constitute a ” final order’ ” within the meaning of CPLR 5501 (a) (1) and does not bring up for our review any prior non-final order … . * * *

… [W]e agree with defendant that the court erred in determining that plaintiff is entitled to attorneys’ fees and disbursements in his status as a derivative plaintiff acting on the LLC’s behalf and in awarding such fees and disbursements … . “The basis for an award of attorneys’ fees in a shareholders’ derivative suit is to reimburse the plaintiff for expenses incurred on the corporation’s behalf . . . . Those costs should be paid by the corporation, which has benefited from the plaintiff’s efforts and which would have borne the costs had it sued in its own right” … . Thus, plaintiff’s success as a derivative plaintiff is not an acceptable basis for an award of attorneys’ fees and disbursements against defendant individually. Howard v Pooler, 2020 NY Slip Op 03347, Fourth Dept 6-12-20

June 12, 2020/by Bruce Freeman

Cooperatives, Corporation Law, Fiduciary Duty

A CORPORATION DOES NOT OWE A FIDUCIARY DUTY TO ITS MEMBERS OR SHAREHOLDERS (FIRST DEPT).

The First Department, dismissing the complaint, noted that the breach-of-a-fiduciary-duty action was brought solely against the corporation, which does not owe its members or shareholders a fiduciary duty:

“[I]t is well settled that a corporation does not owe fiduciary duties to its members or shareholders” … . Here, while the complaint alleges that defendant’s board of directors breached its fiduciary duty to plaintiff in refusing to approve the sale of certain units in the cooperative market to plaintiff, plaintiff brought this action solely against the cooperative corporation and thus, the complaint is dismissed. C & J Bros., Inc. v Hunts Point Term. Produce Coop. Assn., Inc., 2020 NY Slip Op 01454, First Dept 3-3-20

March 3, 2020/by Bruce Freeman

Civil Procedure, Contract Law, Employment Law, Evidence, Fiduciary Duty

SANCTIONS IMPOSED FOR A DELAYED RESPONSE TO DISCOVERY DEMANDS WERE TOO SEVERE, EFFECTIVELY PRECLUDING PROOF OF COUNTERCLAIMS CENTRAL TO THE DEFENSE; NEW TRIAL ORDERED (FIRST DEPT).

The First Department, reversing the verdict in favor of plaintiff employees, determined the sanctions imposed upon the employer (appellants) for a delayed response to discovery demands were too severe and ordered a new trial. The plaintiffs alleged appellants breached oral employment contracts. The appellants in their counterclaims alleged plaintiffs breached their fiduciary duty by violating Securities and Exchange Commission (SEC) regulations and destroying and replacing handwritten notes about conversations with one of the appellants. The sanctions effectively prevented the appellants from demonstrating plaintiffs’ violation of SEC violations and destruction of evidence:

Pursuant to CPLR 3126, if a party “refuses to obey an order for disclosure or wilfully fails to disclose information which the court finds ought to have been disclosed . . . , the court may make such orders with regard to the failure or refusal as are just.” Although “[i]t is within the trial court’s discretion to determine the nature and degree of the penalty,” “[t]he sanction should be commensurate with the particular disobedience it is designed to punish, and go no further than that” … . Further, “the drastic remedy of striking a party’s pleading . . . for failure to comply with a discovery order is appropriate only where [it is] conclusively demonstrate[d] that the non-disclosure was willful, contumacious or due to bad faith” … .

Although the court here did not strike a pleading, its ruling could fairly be viewed as having done so, since the precluded evidence was critical to the fiduciary duty claims. Moreover, the court’s drastic sanctions were disproportionate to the alleged discovery malfeasance. It is unclear why a short continuance to give plaintiffs time to review the newly-produced documents would not have been a viable option, or why further curative instructions would not have sufficed. The record as a whole does not support a finding of willfulness or bad faith so as to justify the severe sanctions imposed … . No basis exists to indicate that this was anything other than a disagreement over the scope of discovery. Indeed, the court at trial stated that the alleged discovery omissions “appear[] not to have been in bad faith.” Beach v Touradji Capital Mgt., LP, 2020 NY Slip Op 00230, First Dept 1-14-20

January 14, 2020/by Bruce Freeman

Attorneys, Fiduciary Duty, Legal Malpractice, Negligence

THE COMPLAINT STATED A CAUSE OF ACTION TO DISGORGE LEGAL FEES PAID TO LAWFIRM WHICH IS ALLEGED TO HAVE REPRESENTED ADVERSE PARTIES IN THE SAME MATTER; THE ACTION TO DISGORGE FEES IS INDEPENDENT FROM ANY ACTION ALLEGING LEGAL MALPRACTICE OR BREACH OF A FIDUCIARY DUTY (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the complaint stated a cause of action for forfeiture of legal fees on conflict of interest grounds:

The complaint alleged that the plaintiff’s decedent retained the defendant in 2005 to, among other things, analyze her ownership interest in Wilson [Corporation], including her right to certain retained earnings in the sum of $20 million. The complaint further alleged that, in January 2007, the defendant began acting as Wilson’s corporate counsel, and, beginning in 2008, performed legal services for Wilson regarding the decedent’s right to those retained earnings. * * *

“An attorney who violates a disciplinary rule may be discharged for cause and is not entitled to fees for any services rendered” … . A cause of action for forfeiture of legal fees based on an attorney’s discharge for cause due to ethical violations may be maintained independent of a cause of action alleging legal malpractice or breach of fiduciary duty, and does not require proof or allegations of damages … .

… [T]he complaint seeks forfeiture of legal fees paid to the defendant between January 2007 and August 2009 in connection with the plaintiff’s decedent’s claim against Wilson for retained earnings. The complaint alleges that the decedent retained the defendant in January 2007 to recoup the retained earnings from Wilson, that the defendant also represented and performed legal work for Wilson on that issue between 2008 and 2009, that the interests of the decedent and Wilson on that issue were adverse, and that the dual representation violated rule 1.7 of the Rules of Professional Conduct (22 NYCRR 1200.0). The complaint further alleged that, as a result of its previous dual representation, the defendant was disqualified from representing the decedent’s estate in a 2009 turnover proceeding against Wilson to collect the retained earnings. Contrary to the determination of the Supreme Court, these allegations are sufficient to state a viable cause of action to disgorge legal fees … . Baugher v Cullen & Dykman, LLP, 2019 NY Slip Op 04904, Second Dept 6-19-19

June 19, 2019/by Bruce Freeman

Contract Law, Fiduciary Duty, Tortious Interference with Contract

HANDWRITTEN PROVISION OF A LETTER OF INTENT CONTROLS, THE LETTER OF INTENT IS NOT A BINDING CONTRACT, BREACH OF A FIDUCIARY DUTY AND TORTIOUS INTERFERENCE WITH CONTRACT CAUSES OF ACTION PROPERLY DISMISSED IN THE ABSENCE OF A BINDING CONTRACT, UNJUST ENRICHMENT CAUSE OF ACTION PROPERLY DISMISSED BECAUSE THE BENEFIT TO THE DEFENDANTS WAS UNIDENTIFIED (SECOND DEPT).

The Second Department determined that a letter of intent concerning the development of defendant-church’s property was not a binding contract because of a handwritten provision. Because there was no binding contract, the fiduciary duty, joint venture, covenant of good faith, and tortious interference with contract causes of action were properly dismissed. The unjust enrichment cause of action was properly dismissed because the benefit allegedly received by defendants was not identified:

“It is a fundamental principle of contract interpretation that when a handwritten or typewritten provision conflicts with the language of a preprinted form document, the former will control, as it is presumed to express the latest intention of the parties'” … . Here, there are inconsistent provisions in the letter of intent regarding whether the parties intended it to be a binding agreement. However, the parties modified the letter of intent, with a handwritten provision, to state that it is “not intended to constitute a binding contract.” Accordingly, this handwritten provision controls over the conflicting printed provisions stating that the letter of intent will become binding after a period of five days … . …

“To prevail on a claim of unjust enrichment, a party must show that (1) the other party was enriched, (2) at that party’s expense, and (3) that it is against equity and good conscience to permit [the other party] to retain what is sought to be recovered” … . A bare legal conclusion that it is against equity and good conscience to retain an unidentified benefit is insufficient to adequately allege that an asserted enrichment was unjust … . Here, the complaint does not identify the benefit the defendants allegedly obtained or explain why it is against equity and good conscience to allow the defendants to retain such benefit. FoxStone Group, LLC v Calvary Pentecostal Church, Inc., 2019 NY Slip Op 04916, Second Dept 6-19-19

June 19, 2019/by Bruce Freeman

Civil Procedure, Corporation Law, Fiduciary Duty, Judges

RES JUDICATA APPLIES TO ISSUES WHICH COULD HAVE BEEN RAISED IN A SMALL CLAIMS ACTION, NO NEED TO PIERCE THE CORPORATE VEIL TO BRING A BREACH OF FIDUCIARY DUTY ACTION AGAINST A FORMER PARTNER IN A PROFESSIONAL CORPORATION, JUDGE SHOULD NOT HAVE SEARCHED THE RECORD AND RENDERED SUMMARY JUDGMENT WHERE NEITHER PARTY REQUESTED THAT RELIEF (SECOND DEPT).

The Second Department, modifying Supreme Court, determined: (1) although the Small Claims Act provides that collateral estoppel (issue preclusion) does not apply to fact-findings made in a small claims action, the doctrine of res judicata does apply to any issue which could have been, but was not, raised in the small claims action; (2) a breach of fiduciary duty cause of action does not entail piercing the corporate veil in a proceeding against a former partner in a professional corporation; (3) the judge should not have searched the record to render summary judgment when neither party requested that relief:

… “[T]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct” … . Contrary to the Supreme Court’s finding, it is not necessary to pierce the corporate veil in order to maintain a cause of action alleging breach of fiduciary duty against former partners in a professional corporation. …

Since … neither party moved for summary judgment with respect to the counterclaims and none of the issues raised in the first, second, or third counterclaims were litigated in the summary judgment motion, or the small claims action, the Supreme Court should not have, in effect, searched the record and awarded the plaintiff summary judgment dismissing those counterclaims … . Weinberg v Picker, 2019 NY Slip Op 03400, Second Dept 5-1-19

May 1, 2019/by Bruce Freeman