Commercial Division Blog
Accounting Claim Dismissed for Failure Adequately to Allege a Fiduciary Relationship
On July 16, 2020, Justice Borrok of the New York County Commercial Division issued a decision in Karen's Shipping, LLC v. West Side Foods, Inc., 2020 NY Slip Op. 32347(U), dismissing an accounting claim for failure adequately to allege a fiduciary relationship, explaining:
To demonstrate entitlement to equitable accounting, a plaintiff must establish (i) the existence of a confidential or fiduciary relationship between the parties, (ii) the defendant's breach of the duty imposed by that relationship with respect to money or property in which the plaintiff has an interest, and (iii) the absence of an adequate remedy at law.
Critically, Mr. Abate and Karen's Shipping fail to demonstrate that they maintained a confidential or fiduciary relationship with Mr. Ryan and West Side Foods. As discussed, under New York law, to sustain an action for accounting a plaintiff must demonstrate either a fiduciary or confidential relationship with the defendant. A fiduciary or confidential relationship arises when one is under a duty to act for the benefit of another within the scope of that relation. It is, therefore, grounded on a higher level of trust than normally present in the marketplace between those involved in arm's length business transactions. Generally, a business relationship, without more, is insufficient to create a fiduciary relationship.
Here, as noted, in support of their claim of a fiduciary or confidential relationship, Mr. Abate and Karen's Shipping allege that Mr. Ryan induced Mr. Abate to refrain from offering his services to competitors, that Mr. Ryan considered Mr. Abate like family, and that they functioned as de facto business partners in a near-joint venture in support of their claim. Mr. Abate and Karen's Shipping also point to a 2005 $200,000 loan (the Loan) that Mr. Abate made personally to Mr. Ryan as as evidence of the depth of the parties' relationship, claiming that Mr. Abate made the Loan because he trusted Defendants to deal fairly regarding his compensation, repayment and interest in the parties' venture, in so doing reposed trust and confidence in Defendants' integrity and fidelity. For the avoidance of doubt, although the Amended Complaint states that this Loan was never repaid, Mr. Abate and Karen's Shipping are not suing on the Loan and the Loan is not at issue in this action. While fiduciary relationships can exist between close friends or where confidence is based upon prior business dealings, a one-time loan, made based on feelings of trust and confidence, is simply not enough to establish any kind of special relationship.
Family relationships are likewise insufficient to establish a confidential or fiduciary relationship. Therefore, a "like family" relationship, without more, cannot constitute a confidential relationship. The sharing of profits - without the sharing of losses - also does not establish a partnership and/or a confidential or fiduciary relationship. Simply put, the conclusory assertion by Mr. Abate and Karen's Shipping of a near-joint venture and a de facto partnership does not sufficiently demonstrate the type of relationship necessary for equitable accounting. Critically, a partnership requires the sharing of both profits and losses. Here, Mr. Abate and Karen's Shipping do not allege any sharing of losses between the parties. Rather, they assert only that they were paid a portion of the profits of West Side Foods. This alone does not allege sufficient facts of a de facto partnership to serve a motion to dismiss.
Nor do subjective reliance and trust establish a confidential or fiduciary relationship. Here, Mr. Abate's subjective trust and confidence in Defendants' integrity and fidelity fail to establish a confidential relationship.
Rather, a showing of special circumstances is required to transform the parties' conventional business relationship into a fiduciary one. Inasmuch as the Amended Complaint asserts that, Plaintiffs' relationship with Defendants was not an arm's length business relationship between an independent sales agent and distributor, the allegations in the Amended Complaint simply do not support that assertion. Here, Mr. Abate claims that he made introductions and facilitated contact between merchants and West Side Foods and Mr. Ryan based on his connections in the meat and poultry industry, but these introductions do not present special circumstances that transform the relationship into a confidential or fiduciary one. Mr. Abate and Karen's Shipping fail to demonstrate the existence of a confidential relationship. Failure to establish this element requires the dismissal of the cause of action.
(Internal quotations and citations omitted).
Fiduciaries have special duties and complex commercial litigation often involves allegations of a breach of those duties. 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 firstname.lastname@example.org if you or a client have questions regarding such claims or appeals of such claims.