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SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE.

The Second Department determined summary judgment was properly granted in the objectants’ actions against the executor (Mahler) for breach of fiduciary duty and negligence.  The executor sold the estate asset (real property) to an acquaintance for half of its value. The acquaintance sold the property for nearly double the purchase price:

A fiduciary acting on behalf of an estate is required to employ such diligence and prudence to the care and management of the estate assets and affairs as would prudent persons of discretion and intelligence in their own like affairs … . “[A] fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect” … . In performing his fiduciary duty as the executor of the decedent’s estate, Mahler was required to use good business judgment … . To the extent that the sale of the property does not meet this standard, the beneficiaries of the estate may seek to surcharge him … . “To obtain such a surcharge, it is not enough for the contestants to show that the representatives of the estate did not get the highest price obtainable; it must be shown that they acted negligently, and with an absence of diligence and prudence which an ordinary [person] would exercise in his [or her] own affairs” … . Matter of Billmyer, 2016 NY Slip Op 05994, 2nd Dept 9-14-16

TRUSTS AND ESTATES (SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE)/FIDUCIARY DUTY, BREACH OF (SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE)/EXECUTORS (SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE)

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COMPLAINT STATED A CAUSE OF ACTION FOR AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY.

The Second Department, reversing Supreme Court, determined plaintiff stated a cause of action for aiding and abetting the breach of a fiduciary duty. Plaintiff’s former partner left the partnership and joined defendant accounting firm, taking a client with him. Partners owe one another a fiduciary duty. The complaint alleged the defendant firm aided and abetted the former partner in breaching that duty. The court outlined the relevant law:

To recover damages for aiding and abetting a breach of fiduciary duty, a plaintiff must plead and prove that a fiduciary duty owed to the plaintiff was breached, that the defendant knowingly induced or participated in the breach, and that the plaintiff was damaged as a result of the breach … . Knowing participation in a breach of fiduciary duty occurs when the defendant provides substantial assistance to the primary violator … . ” Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur . . . . However, the mere inaction of an alleged aider or abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff'” … . Smallberg v Raich Ende Malter & Co., LLP, 2016 NY Slip Op 04704, 2nd Dept 6-15-16

 

PARTNERSHIP LAW (COMPLAINT STATED A CAUSE OF ACTION FOR AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY)/FIDUCIARY DUTY (PARTNERSHIP LAW, COMPLAINT STATED A CAUSE OF ACTION FOR AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY)

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QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW.

The Second Department determined plaintiff special guardian had raised a question of fact about whether the fiduciary tolling rule applied to this breach of fiduciary duty action brought on behalf of her mentally ill brother, thereby rendering the action timely. The court explained the rule and why the issue can be raised for the first time on appeal:

… [T]he plaintiff raised a question of fact as to whether the statute of limitations was tolled pursuant to the fiduciary tolling rule or the “repudiation rule,” under which the “applicable statutory period . . . does not begin to run until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated” … . Although the plaintiff raises the issue for the first time on appeal, the issue of whether the fiduciary tolling rules applies to the facts as alleged may be reached, since it involves a question of law which appears on the face of the record and which could not have been avoided if raised at the proper juncture … . Franklin v Hafftka, 2016 NY Slip Op 04692, 2nd Dept 6-15-16

CIVIL PROCEDURE (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)/STATUTE OF LIMITATIONS (QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)/FIDUCIARY TOLLING RULE (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)FIDUCIARY DUTY, BREACH OF (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)/APPEALS (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)

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EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO SAVE A TIME-BARRED CLAIM.

The Third Department, over a two-justice dissent, determined the doctrine of equitable estoppel should not have been invoked to save a time-barred claim to real property. The real property was the subject of a 1977 will which placed the property in trust for decedent's children and named defendant executor. In 1988 the property was conveyed to the defendant, but the will was never amended. Supreme Court denied defendant's motion to dismiss, finding that defendant's executor-status and familial ties created a fiduciary relationship, requiring defendant to notify plaintiffs of the 1988 transfer. The Third Department held the appointment as executor did not create a fiduciary relationship (prior to death), and the familial relationship, as well, did not create a fiduciary relationship. Therefore, the Third Department ruled, the defendant was not barred, by equitable estoppel, from asserting the statute of limitations defense:

Supreme Court recognized that “concealment without actual misrepresentation may form the basis for invocation of the doctrine [of equitable estoppel] if 'there was a fiduciary relationship which gave [the] defendant an obligation to inform [the] plaintiff of facts underlying the claim'” … . Here, the court found that plaintiffs had sufficiently alleged that defendant owed them a fiduciary duty to disclose the conveyance when it occurred in 1988 because of her nomination as executor-trustee in the 1977 will, as well as their familial relationship.

We note, however, that the existence of a familial relationship does not equate to a fiduciary relationship for equitable estoppel purposes … . Nor does the mere fact that a will has nominated an executor, in and of itself, create a fiduciary relationship between the nominee and the will's beneficiaries. Indeed, because of the ambulatory nature of a will, a nominated executor is prohibited from acting in a fiduciary capacity until the testator dies … . Similarly, “a testamentary trust cannot become effective prior to the testator's death” … . Picard v Fish, 2016 NY Slip Op 04086, 3rd Dept 5-26-16

CIVIL PROCEDURE (EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO BAR A TIME-BARRED CLAIM)/EQUITABLE ESTOPPEL (EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO BAR A TIME-BARRED CLAIM)/TRUSTS AND ESTATES (EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO BAR A TIME-BARRED CLAIM)

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SUIT ALLEGING BREACH OF FIDUCIARY DUTY IN CONNECTION WITH THE SALE OF AN ASSET OWNED NEARLY ENTIRELY BY BANKRUPT LEHMAN BROTHERS DISMISSED.

The First Department dismissed a complaint alleging, inter alia, breach of a limited partnership agreement and breach of fiduciary duty in connection of the sale of a fund (Archstone) nearly entirely owned by bankrupt Lehman Brothers. Plaintiff, who had purchased a 1% interest in the fund for $20 million, alleged the sale will generate enough to pay only the preferred interests and will “wipe out” the minority interests (including plaintiff). Plaintiff further alleged the sale was motivated by Lehman's desire to pay creditors relating to its 2008 bankruptcy. In dismissing the breach of fiduciary duty cause of action, the court explained the analytical criteria, including an “entire fairness” analysis:

Even under the heightened entire fairness standard advocated by plaintiff, the claim is insufficient. An “entire fairness” analysis focuses on two entwined considerations: fair dealing and fair price … . Plaintiff fails to allege facts demonstrating the absence of fairness, or that it did not “receive the substantial equivalent in value of what [it] had before” … . Conclusory assertions that amounts paid were “unfair” are insufficient … . Plaintiff concedes that the $16 billion transaction price attained Archstone's current value at the time of the transaction. Plaintiff also admits that the transaction “represented a premium of approximately 15% over the implied purchase price of Lehman's combined acquisitions of the interests of the other [s]ponsor [b]anks' interests earlier in 2012.” Plaintiff identifies no alternative transactions, let alone one that would have achieved more value for the Fund. Fiduciaries are “not required to abandon [a] transaction simply because a better deal might have become available in the future” … . Cambridge Capital Real Estate Invs., LLC v Archstone Enter. LP, 2016 NY Slip Op 02017, 1st Dept 3-22-16

PARTNERSHIP LAW (BREACH OF FIDUCIARY DUTY CAUSE OF ACTION BY MINORITY INTEREST HOLDER DISMISSED)/FIDUCIARY DUTY, BREACH OF (PARTNERSHIP LAW, BREACH OF FIDUCIARY DUTY CAUSE OF ACTION BY MINORITY INTEREST HOLDER DISMISSED)

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SIX-YEAR STATUTE OF LIMITATIONS APPLIES TO BREACH OF FIDUCIARY DUTY CLAIMS WHICH SOUND IN FRAUD.

The First Department, in a case remitted by the Court of Appeals, determined the six-year statute of limitations applied to “breach of fiduciary duty” causes of action because fraud allegations were at the heart of the claims. Where, as here, a “breach of fiduciary duty” cause of action seeks monetary damages and not equitable relief, the three-year statute of limitations usually applies. However, where, as here, allegations of fraud are central to the fiduciary duty cause of action, the six-year statute of limitations applies:

… [A] cause of action for breach of fiduciary duty based on allegations of actual fraud is subject to a six-year limitations period” … . An exception to this rule exists ” if the fraud allegation is only incidental to the claim asserted'” … . Thus, “where an allegation of fraud is not essential to the cause of action pleaded except as an answer to an anticipated defense of Statute of Limitations, courts look for the reality, and the essence of the action and not its mere name” … .

Here, although the fiduciary duty claims seek monetary relief, the six-year limitations period applies because the claims sound in fraud. Cusimano v Schnurr, 2016 NY Slip Op 01758, 1st Dept 3-15-16

 

CIVIL PROCEDURE (SIX-YEAR STATUTE OF LIMITATIONS APPLIES TO BREACH OF FIDUCIARY DUTY CLAIMS WHICH SOUND IN FRAUD)/FRAUD (SIX-YEAR STATUTE OF LIMITATIONS APPLIES TO BREACH OF FIDUCIARY DUTY CLAIMS WHICH SOUND IN FRAUD)/FIDUCIARY DUTY, BREACH OF (SIX-YEAR STATUTE OF LIMITATIONS APPLIES TO BREACH OF FIDUCIARY DUTY CLAIMS WHICH SOUND IN FRAUD)

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PLAINTIFF MINORITY SHAREHOLDER ALLOWED TO REPLEAD DIRECT CLAIMS UNDER CAYMAN ISLANDS LAW AGAINST THE CORPORATION STEMMING FROM DISPROPORTIONATE PAYMENT OF DIVIDENDS AND BREACH OF FIDUCIARY DUTY BETWEEN DIRECTORS AND PLAINTIFF.

The First Department, in a full-fledged opinion by Justice Andrias, over a two-justice dissenting opinion, determined two causes of action which improperly alleged both direct and derivative claims by a shareholder against the corporation were properly dismissed but could be repled to make direct claims under Cayman Islands law. The dissent argued leave to replead was not warranted by the facts alleged:

Plaintiff should be given an opportunity to replead to remedy the pleading deficiencies … . Although a challenge to a decision to pay dividends would generally be derivative, plaintiff asserts, inter alia, that his claim is direct because the disproportionate payment of dividends is discriminatory and directly harmed him as a minority shareholder. Thus, rather than corporate mismanagement, plaintiff asserts unequal treatment in the form of an intentional, premeditated plan to pay the Investors huge windfall dividends while freezing out minority shareholders in order to induce them to sell their shares to the Investors at a steep discount. * * *

… [P]laintiff should [also] be given leave to replead to separate his direct claim of being induced by the Directors to part with his common shares … for less than their true value from his derivative claim alleging harm to the company … , and to set forth facts to establish the special circumstances necessary under Cayman Islands law to create a fiduciary duty between the Directors and plaintiff as a minority shareholder. Davis v Scottish Re Group Ltd., 2016 NY Slip Op 01756, 1st Dept 3-10-16

CORPORATION LAW (SHAREHOLDER’S DIRECT CLAIMS STEMMING FROM DISPROPORTIONATE PAYMENT OF DIVIDENDS AND BREACH OF FIDUCIARY DUTY BETWEEN SHAREHOLDER AND DIRECTORS)/DIVIDENDS (DIRECT CLAIM AGAINST CORPORATION STEMMING FROM DISPROPORTIONATE PAYMENT OF DIVIDENDS)/FIDUCIARY DUTY (CORPORATION LAW, DUTY OWED SHAREHOLDER BY DIRECTORS AS BASIS FOR DIRECT CLAIM)

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QUESTION OF FACT WHETHER DOCTRINE OF EQUITABLE ESTOPPEL PRECLUDED STATUTE OF LIMITATIONS DEFENSE, CRITERIA EXPLAINED.

The Second Department determined plaintiff raised a question of fact whether the doctrine of equitable estoppel precluded defendants’ statute of limitations defense. The court explained the criteria:

The doctrine of equitable estoppel will preclude a defendant from asserting the statute of limitations as a defense ” where it is the defendant’s affirmative wrongdoing . . . which produced the long delay between the accrual of the cause of action and the institution of the legal proceeding'” … . A plaintiff seeking to invoke the doctrine of equitable estoppel must “establish that subsequent and specific actions by defendants somehow kept [the plaintiff] from timely bringing suit” … . “Equitable estoppel is appropriate where the plaintiff is prevented from filing an action within the applicable statute of limitations due to his or her reasonable reliance on deception, fraud or misrepresentations by the defendant” … . Where the defendant has a fiduciary duty to the plaintiff, the doctrine of equitable estoppel may be invoked based on the defendant’s failure to disclose facts underlying the claim … . North Coast Outfitters, Ltd. v Darling, 2015 NY Slip Op 09409, 2nd Dept 12-23-15

CIVIL PROCEDURE (EQUITABLE ESTOPPEL DOCTRINE EXPLAINED)/EQUITABLE ESTOPPEL (CRITERIA EXPLAINED)

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Statute of Limitations for Breach of Fiduciary Duty Tolled Until Fiduciary’s Roles Terminated

In an action against a fiduciary stemming from the distribution of an estate, Supreme Court determined the six-year statute of limitations applied to the breach of fiduciary duty cause of action and precluded any evidence from prior to 2007.  The Third Department agreed that the six-year statute was the correct one, but held that the statute never started running because the fiduciary’s roles were never terminated. Therefore pre-2007 evidence was not precluded:

Although “New York law does not provide a single statute of limitations for breach of fiduciary duty claims [and] the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks” …, the parties do not dispute that a six-year period applies to these two remaining causes of action. However, the statute of limitations for a claim alleging a breach of fiduciary duty is tolled until there has been an open repudiation by the fiduciary or the relationship has otherwise been clearly terminated … .

There is nothing in this record indicating that respondents’ relevant fiduciary roles have terminated. Although many of the actions about which petitioners complain were done openly, petitioners also allege that they were repeatedly assured that such actions were ultimately in their best interests. The amended petition alleges that respondents have not to date repudiated their positions as fiduciaries. That allegation is not denied in this pre-answer motion, which was supported only by an attorney’s affirmation and memorandum of law. Matter of Therm, Inc., 2015 NY Slip Op 07732, 3rd Dept 10-22-15

 

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Criteria for the “Fiduciary Exception” to the Attorney-Client Privilege in the Context of a Derivative Action Explained

The First Department, in a full-fledged opinion by Justice Acosta, in a matter of first impression, developed analytical criteria for determining whether documents sought by the plaintiff major investor (NAMA) in defendant limited liability company (Alliance) (formed for a major real estate development project) were protected by the attorney-client privilege. The documents at issue are communications between the managers of defendant Alliance and their attorneys, defendant Greenberg.  Supreme Court held that the 3000 communications were not protected by attorney-client privilege pursuant to the “fiduciary exception” to the privilege (re: derivative actions) because the interests of the plaintiff were not adverse to Alliance. However, that finding was not based upon a review of the communications. The First Department determined each individual communication must be reviewed to find whether it evinces an adversarial relationship. If so, such “adversity” would be only one factor to weigh in concluding whether “good cause” exists to invoke the “fiduciary exception” to the privilege. The First Department adopted the reasoning of a Fifth Circuit case, Garner v Wolfinbarger, 430 Fed 1093, which sets out a list of factors to be applied in finding good cause to apply the fiduciary exception to the privilege. “Adversity” is but one of those factors:

In the corporate context, where a shareholder (or, as here, an investor in a company) brings suit against corporate management for breach of fiduciary duty or similar wrongdoing, courts have carved out a “fiduciary exception” to the privilege that otherwise attaches to communications between management and corporate counsel. * * *

In 1970, the U.S. Court of Appeals for the Fifth Circuit extended the fiduciary exception to the corporate environment in Garner v Wolfinbarger (430 F2d 1093 [5th Cir 1970], cert denied 401 US 974 [1971]), for the first time allowing shareholders to use the exception to pierce the corporate attorney-client privilege. The Garner court was persuaded by two English cases that “treat[ed] the relationship between shareholder and company as analogous to that between beneficiaries and trustees” (id. at 1102). Relying on those cases and the traditional crime-fraud and joint-representation exceptions for the proposition that the corporate attorney-client privilege is not absolute, the court summarized its reasoning in the following way:

“[W]here the corporation is in suit against its stockholders on charges of acting inimically to stockholder interests, protection of those interests as well as those of the corporation and of the public require that the availability of the privilege be subject to the right of the stockholders to show cause why it should not be invoked in the particular instance” (id. at 1103-1104). * * *

While some factors in the Garner test are relevant to a determination of adversity, Garner did not create a categorical adversity limitation. Thus, adversity is not a threshold inquiry but a component of the broader good-cause inquiry. Moreover, of the Garner factors that pertain to adversity, some will indicate whether the parties are generally adverse, while others will require a review of the communications in dispute; the relevant factors may weigh against finding good cause to apply the fiduciary exception with respect to those communications that reveal adversity. Accordingly, a court may find that the party seeking disclosure has shown good cause to be given access to some communications but not others. NAMA Holdings, LLC v Greenberg Traurig LLP, 2015 NY Slip Op 07346, 1st Dept 10-8-15

 

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