Many business relationships form a fiduciary duty between a principal and the fiduciary. Litigation may also ensue, giving way to the defendant's scurrying to devise a defensive strategy. Understanding common defenses to breaches of fiduciary duties claim can help business leaders prevent them from happening in the first place and prepare them for potential legal issues arising from the claims.
This post discusses fiduciary duties, common defenses to breach claims, and where companies can get legal help.
Overview of Fiduciary Duties
Fiduciary duties are obligations on one party to act in good faith toward the other, such as a business partner or client. This obligation exists when trust or reliance on the fiduciary to exercise discretion for the other party's benefit.
Some examples of formal relationships that create a fiduciary duty include:
- Guardians handling affairs on behalf of a dependent
- Financial advisors provide advice to client-investors
- Other situations involving fiscal accountability
In a corporation context, corporate executives (i.e., officers, and directors) typically owe a heightened fiduciary duty of care and loyalty in managing the corporation's affairs.
Corporate executives ultimately breach their fiduciary duty when they fail to act in the corporation's best interest. Typically, the breaches arise from corporate transactions in which the corporate executives are conflicted or have acted in bad faith, exploiting the corporation and harming the company's shareholders.
But not all claims for breach are valid. When corporate executives are being sued for breach of their fiduciary duties, there are several common defenses that the fiduciaries may assert to defend against those claims.
Below are five common defenses that defendants for a breach of fiduciary duties should carefully exam and see if these defenses apply.
Defense 1. No Fiduciary Relationship Exists
A bona fide fiduciary relationship did not exist. The law is clear about what a fiduciary is and is not. Moreover, depending on the level of sophistication between the parties, the parties may contractually disclaim a fiduciary relationship or waive a fiduciary duty.
Defense 2. Statute of Limitations Defense
In New York, depending on the remedies that a plaintiff seeks in a breach of fiduciary duty claim, a plaintiff must bring the claim within three years of discovering the breach if the plaintiff's relief is monetary; six years if the relief is an equitable. Plaintiff's lawsuit will be barred by the applicable statutes of limitations if the claim is brought outside the time limits.
Defense 3. The Business Judgment Rule Defense
High level speaking, the Business Judgment Rule (a legal doctrine) requires that corporate executives exercise their due diligence by being informed of the material facts regarding the corporation transactions when making business decisions affecting the corporation; act in good faith; and act in the best interest of the corporaiton. If they have done so, the Business Judgment Rule will shield the executives from liability even if the decision turns out to be a commercial disaster.
In a breach of corporate fiduciary duty claim, the court will presume that the corporate executives have followed their business judgment in making these significant corporate decisions in managing the business. Yet the presumption of the Business Judgment Rule can be rebutted by evidence showing that the directors have acted in bad faith, committed corporate waste, or are conflicted in the challenged corporate transactions.
Defense 4. Duplicative claim Defense
Check and see if the claim for breach of fiduciary duty is merely a restated breach of contract claim. If so, the breach of fiduciary duty claim may be dismissed as duplicative.
Defense 5. Elimination of Duty of Care Defense
Under New York law, a corporation may include provisions in the certificate of incorporation to eliminate the liability of directors for damages for breach of duty. But such elimination of breach of fudiciary duty will be defeated if the director is found to act in bad faith, involved in intentional misconduct or a knowing violation of law, or obtain financial profits or other advantages to which he was not legally entitled or at the expense of the company or the shareholders.
Final Thoughts and Considerations
While breach of fiduciary breach claims is common in commercial litigation, they often involve complicated factual situations. The business litigation practice group at HAN LLP devises case strategies that work toward ideal outcomes. If your business needs litigation help, contact us to learn more about how we can help.