Articles Posted in Breach of Fiduciary Duty

Under the Illinois Uniform Partnership Act (IUPA), all partners are liable for any wrongful act or omission by any partner (In re Keck, Mahin & Cate, 274 B.R. 740 (2002))(Bane v. Ferguson, 707 F.Supp. 988 (1989)). This includes acts that occur in the ordinary course of the partnership’s business or are authorized by the partners (Bane v. Ferguson, 707 F.Supp. 988 (1989))(In re Ascher, 141 B.R. 652 (1992))[3]. The liability is not limited even for “innocent” partners.

As for the protection against cheating, partners are fiduciaries for one another under Illinois law (Bane v. Ferguson, 707 F.Supp. 988 (1989)). This means they have a duty to exercise the utmost good faith and honesty in all partnership dealings (Johnson v. Woldman, 158 B.R. 992 (1993)). Particularly, the Uniform Partnership Act in Illinois imposes a trust duty (Johnson v. Woldman, 158 B.R. 992 (1993)), (Federal Deposit Ins. Corp. v. Braemoor Associates, 686 F.2d 550 (1982)). It mandates that every partner must account to the partnership for any benefit and hold as a trustee for it any profits derived by him/her without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership, or from any use by him/her of its property.

However, this fiduciary duty is only recognized when a partner derives profits without the consent of the other partners (Johnson v. Woldman, 158 B.R. 992 (1993)). Also, the liability of any partner does not extend to former partners. Additionally, partners cannot sue their fellow partners for acts that occur in the ordinary course of business or are authorized by the co-partners until there has been a final settlement of partnership accounts (In re Ascher, 141 B.R. 652 (1992)).

If a partner believes that he/she has been cheated, the appropriate remedy to seek under the Illinois Partnership Act could be an accounting, especially if the issue between partners requires an accounting.

In federal cases, the principle is generally the same. For instance, in the case of In re Keck, Mahin & Cate, it was established that under Illinois law and the Agreement, partners are liable for claims arising before or during the time they were partners (In re Keck, Mahin & Cate, 274 B.R. 740 (2002)). Continue reading ›

The elements required to establish a joint venture are broadly consistent across the search results. They include:

1. An express or implied agreement to carry on an enterprise (805 ILCS 206/202)(Ambuul v. Swanson, 162 Ill.App.3d 1065 (1987))(Yokel v. Hite, 348 Ill.App.3d 703 (2004)).

2. A manifestation of intent by the parties to be associated as joint venturers (805 ILCS 206/202)(Ambuul v. Swanson, 162 Ill.App.3d 1065 (1987)(O’Brien v. Cacciatore, 227 Ill.App.3d 836 (1992)).

3. A joint interest as shown by the contribution of property, financial resources, effort, skill, or knowledge by each joint venturer (805 ILCS 206/202)(Ambuul v. Swanson, 162 Ill.App.3d 1065 (1987))(Yokel v. Hite, 348 Ill.App.3d 703 (2004)).

4. Some degree of joint proprietorship or mutual right to exercise control over the enterprise (805 ILCS 206/202), (Ambuul v. Swanson, 162 Ill.App.3d 1065 (1987)).

5. Provision for the joint sharing of profits and losses (805 ILCS 206/202)(Ambuul v. Swanson, 162 Ill.App.3d 1065 (1987))(O’Brien v. Cacciatore, 227 Ill.App.3d 836 (1992)).

It is important to note that all four criteria must be established or a joint venture does not exist (Fogt v. 1-800-Pack-Rat, LLC, 2017 IL App (1st) 150383 (2017)).

The obligation of a joint venturer to account to another member of the joint venture arises from the fiduciary nature of their relationship. The relationship between joint venturers, like that existing between partners, is fiduciary in character and imposes upon the participants an obligation of loyalty and good faith in their dealings with each other with respect to the enterprise (Ambuul v. Swanson, 162 Ill.App.3d 1065 (1987)). In the case of a sale of joint venture property by one joint adventurer, the other is entitled to an accounting on principal and interest profit, if any, received by the seller on the purchase money mortgage received when the joint venture property was liquidated (Burtell v. First Charter Service Corp., 83 Ill.App.3d 525 (1980)).

However, it’s important to note that whether or not a joint venture exists is a question for the trier of fact as they are in the best position to judge the credibility of the witnesses (Ambuul v. Swanson, 162 Ill.App.3d 1065 (1987))(Thompson v. Hiter, 356 Ill.App.3d 574 (2005))(Andrews v. Marriott Intern., Inc., 2016 IL App (1st) 122731 (2016)). Continue reading ›

Under Illinois law, defenses for a partner accused of breaching fiduciary duties to the partnership and his other partners can be varied and nuanced (LID Associates v. Dolan, 324 Ill.App.3d 1047 (2001))(Pielet v. Hiffman, 407 Ill.App.3d 788 (2011)). Here are some potential defenses:

1. Compliance with Partnership Agreement: A partner who has acted in accordance with an express authorization in the partnership agreement may not be deemed in breach of fiduciary duties (1515 North Wells, L.P. v. 1513 North Wells, L.L.C., 392 Ill.App.3d 863 (2009). However, no language in a partnership agreement, however clear and explicit, can reduce a partner’s fiduciary duty toward other partners (Pielet v. Hiffman, 407 Ill.App.3d 788 (2011)).

2. Good Faith and Fairness: A partner can defend on the grounds that he has acted in good faith and fairness in his dealings with other partners (Winston & Strawn v. Nosal, 279 Ill.App.3d 231 (1996)). Under Illinois law, a fiduciary relationship exists between partners and each is bound to exercise the utmost good faith in all dealings and transactions related to the partnership business (Pielet v. Hiffman, 407 Ill.App.3d 788 (2011))1515 North Wells, L.P. v. 1513 North Wells, L.L.C., 392 Ill.App.3d 863 (2009)).

3. Lack of Personal Advantage: If a partner can show that he has not advantaged himself at the expense of the firm, this could be a defense against an accusation of fiduciary duty breach.

4. Right to Manage Partnership Affairs: If a partner was managing the affairs of the partnership and did not conceal, misrepresent or seek to take advantage of his partner, he might be able to argue that he was not in breach of fiduciary duties (Mermelstein v. Menora, 372 Ill.App.3d 407 (2007)).

5. Discrepancies in Accounting or Interpretation of Rights and Duties: Discrepancies or errors in accounting, or misinterpretations of rights and duties under partnership agreements, can be invoked as a defense, especially if the partner did not seek personal advantage.

6. Duty of Good Faith: If it can be shown that the partner always exercised good faith in his dealings with other partners, he can defend against the accusations (Pielet v. Hiffman, 407 Ill.App.3d 788 (2011))(Winston & Strawn v. Nosal, 279 Ill.App.3d 231 (1996)).

Remember that each case is unique and the success of these defenses can depend on the specifics of the partnership agreement and the facts of the case. These defenses are not exhaustive and other defenses may be available depending on the specifics of a case. Continue reading ›

To protect beneficiaries in Illinois estates from breaches of fiduciary duty by the administrator, several measures can be taken based on the duties and responsibilities outlined in the relevant laws and cases.

Firstly, it’s important to establish that the relationship between an executor or administrator and a beneficiary is that of a trustee and cestui que trust, and is fiduciary in nature (In re Estate of Lis, 365 Ill.App.3d 1 (2006). This fiduciary duty requires the administrator to act with the highest degree of fidelity and utmost good faith in handling estate assets (Matter of Estate of Pirie, 141 Ill.App.3d 750 (1986)(In re Estate of Neisewander, 130 Ill.App.3d 1031 (1985(Will v. Northwestern University, 378 Ill.App.3d 280 (2007). However, this fiduciary relationship does not extend to all affairs and transactions between administrators and beneficiaries (In re Estate of Lis, 365 Ill.App.3d 1 (2006))(Will v. Northwestern University, 378 Ill.App.3d 280 (2007)(Epstein v. Davis, 2017 IL App (1st) 170605 (2017).

One of the main duties of an administrator is to collect the estate, convert it into cash, and distribute it to those entitled thereto (In re Estate of Wallen, 262 Ill.App.3d 61 (1994)(In re Estate of Zagaria, 2013 IL App (1st) 122879 (2013)(In re Estate of Cappetta, 315 Ill.App.3d 414 (2000). In this process, the administrator is expected to perform their responsibilities with the degree of skill and diligence which an ordinary prudent man bestows on his own similar private affairs (Matter of Estate of Pirie, 141 Ill.App.3d 750 (1986)(Will v. Northwestern University, 378 Ill.App.3d 280 (2007).

An administrator is also obligated to act in the best interests of the estate, which includes carrying out the wishes of the decedent and acting in the best interest of the estate (Estate of Hudson By Caruso v. Tibble, 2018 IL App (1st) 162469 (2018). This means that the administrator should act in good faith to protect the interests of beneficiaries (Will v. Northwestern University, 378 Ill.App.3d 280 (2007)(Szymakowski v. Szymakowski, 185 Ill.App.3d 746 (1989). Continue reading ›

In Illinois, the protections for minority shareholders or LLC members from breaches of fiduciary duty in closely held companies can be found in a combination of statutory provisions and case law.

Firstly, the Illinois Limited Liability Company Act (805 ILCS 180/15-3) specifies that a member of a manager-managed LLC does not owe a fiduciary duty to the LLC unless they are a manager under the terms of the operating agreement (Katris v. Carroll, 362 Ill.App.3d 1140 (2005))(Tully v. McLean, 409 Ill.App.3d 659 (2011)). This means that members of an LLC who are not managers do not owe a fiduciary duty to the company or to other members (Katris v. Carroll, 362 Ill.App.3d 1140 (2005)(800 South Wells Commercial LLC v. Cadden, 2018 IL App (1st) 162882 (2018). However, members in a member-managed LLC do owe each other fiduciary duties of loyalty and care (Anest v. Audino, 332 Ill.App.3d 468 (2002)(Schultz v. Sinav Limited, — N.E.3d —- (2024).

Secondly, under the Illinois Business Corporations Act (805 ILCS 5/12.50), a minority shareholder may sue a corporation directly for its dissolution if they can establish that the majority shareholders have acted in a way that is illegal, oppressive, or fraudulent. This provides a means for minority shareholders to recover their investment from the corporation when no other methods are available (Kalabogias v. Georgou, 254 Ill.App.3d 740 (1993).

Moreover, under common law, a controlling shareholder in a cash-out merger owes the minority shareholders the default fiduciary duties of loyalty and due care, and courts apply an exacting standard of judicial review known as “entire fairness” (Schultz v. Sinav Limited, — N.E.3d —- (2024). Additionally, LLCs can contractually impose fiduciary duties on their managers. Furthermore, the Illinois courts have held that minority shareholders in closely held corporations may sue company directors for breaches of fiduciary duty (Elleby v. Forest Alarm Service, Inc., 2020 IL App (1st) 191597 (2020)). Continue reading ›

Choosing the right law firm to protect your minority interests in a closely held company is crucial, particularly when it comes to addressing breaches of fiduciary duty. Lubin Austermuehle is a firm that you might consider for several reasons:

  1. Concentration in Business Litigation: Firms like Lubin Austermuehle that concentrate in business litigation are likely to have a deep understanding of the complexities involved in disputes within closely held companies. This specialization can be beneficial in effectively navigating the legal landscape to protect minority shareholders.
  2. Experience with Fiduciary Duties: The protection of minority interests often hinges on issues related to fiduciary duties. A firm experienced in this area will understand the nuances of fiduciary responsibilities and how breaches can occur, which is critical in formulating a robust legal strategy.

In Illinois, a derivative lawsuit can be filed by an individual shareholder or a member of a limited liability company (LLC) to enforce a right that belongs to the corporation or the LLC (Silver v. Allard, 16 F.Supp.2d 966 (1998))(Pistone v. Carl, Not Reported in N.E. Rptr. (2020). The aim of such a lawsuit is to protect the interests of the corporation or the LLC from the misconduct of its directors and managers (Silver v. Allard, 16 F.Supp.2d 966 (1998)).

There are certain prerequisites for filing a derivative lawsuit. Firstly, the shareholder or member must make a demand upon the board of directors to enforce a corporate right (Silver v. Allard, 16 F.Supp.2d 966 (1998)). However, this demand requirement can be excused in certain situations. For instance, if the shareholders can demonstrate that the directors were aware of the misconduct but consciously chose not to act, the demand can be excused. In such cases, the plaintiffs would effectively be arguing the futility of such a demand. It’s important to note, as per Illinois choice of law rules, that the pre-suit demand requirement is governed by the law of Delaware in the case of corporations incorporated there (Wells v. Reed, — N.E.3d —- (2024). Continue reading ›

Retaining Lubin Austermuehle for a breach of fiduciary duty lawsuit could be beneficial for several reasons:

  1. Focus on Business Litigation: Lubin Austermuehle has a focus on business litigation, which includes handling cases of breach of fiduciary duty. This specialization means they likely have a deep understanding of the laws and complexities involved in such cases.
  2. Experience: The firm boasts extensive experience in this area of law, which can be crucial for navigating the often complex legal issues that arise in breach of fiduciary duty cases. Experienced lawyers are more likely to understand the nuances of the law and how it applies to specific situations.

Yes, taking excessive compensation can indeed violate a managing member or majority shareholder’s fiduciary duties. Case law supports this assertion. In Fleming v. Louvers International, Inc., the court found that a majority shareholder violated his fiduciary duties by taking excessive compensation, depriving a minority shareholder of his rightful distributions. This conduct was seen as a breach of both his common-law fiduciary duty and his duty under section 12.56(a)(3) of the Act, and also constituted constructive fraud.

The case of Kovac v. Barron highlighted the defendant shareholder who had the corporations pay him and his wife millions in excessive compensation, which was then concealed by disguising the payments as “contract labor” on the corporations’ tax returns.

Similarly, in Halperin v. Halperin, it was held that the payment of excessive compensation and the concealment of the amount of compensation received by the officers were breaches of fiduciary duty. Concealing compensation amounts from shareholders could still constitute a breach of fiduciary duty, even if the compensation was not found to be excessive. Continue reading ›

Extensive Experience in Partnership, LLC Member, and Shareholder Disputes

At Lubin Austermuehle, we understand the complexities of business disputes in closely held companies. Whether you are facing a partnership disagreement, LLC member conflict, or shareholder dispute, our experienced attorneys are here to provide you with the guidance and representation you need to protect your interests.

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