Contractual Right to Take Actions Cannot Shield Fiduciary From Breach of Fiduciary Duty Claim if Fiduciary Acted in Bad Faith

On September 28, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Yu v. Guard Hill Estates, LLC, 2018 NY Slip Op. 32466(U), holding that a contractual right to take certain actions cannot shield a fiduciary from a breach of fiduciary duty claim if the fiduciary acted in bad faith, explaining:

Conduct is not a breach of fiduciary duty if there is a formal written agreement covering the precise subject matter of the alleged fiduciary duty, and no showing that defendant was seeking to advance its or a third party's interests over plaintiffs. Where one has a right under a contract, that right may not be exercised solely for personal gain in such a way as to deprive the other party of the fruits of the contract. A fiduciary may breach his duties by exercising his contractual rights in an unfair or inequitable manner.

Here, affording the complaint liberal construction, accepting the facts alleged therein as true, and according the plaintiff the benefit of every possible favorable inference, I find that Patrick sufficiently alleged facts to support a cause of action for breach of fiduciary duty. Defendants argue that they properly exercised their contractual rights by initiating the capital call and effecting the promissory notes and pledge agreements. Patrick alleges that defendants' actions were not taken in good faith and in legitimate furtherance of corporate purposes, rather, they were taken as part of a family vendetta to oust him from the family entities. He describes the history and background of the family dispute and describes how the actions taken by his siblings and Guard Hill were in furtherance of the family's agenda, rather than to fulfill a need in the company. Because of the actions taken, he now owes $590,887 on the promissory notes executed by Raymond and Catherine on his behalf, and his shares in Guard Hill are pledged. While Raymond and Catherine did have certain rights under the Guard Hill operating agreement, whether they exercised those rights in good faith and in an equitable manner is disputed and must be determined through the course of litigation.

(Internal citations omitted).

As this decision shows, fiduciaries have special, extra-contractual duties. However, the question of whether a defendant is a fiduciary, and thus can be liable for a breach of fiduciary duty, is sometimes a complicated one. We both bring and defend breach of fiduciary duty and professional malpractice claims and other claims relating to the duties of trustees and professionals such as lawyers, accountants and architects to their clients. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding such claims or appeals of such claims.