Articles Posted in Breach of Fiduciary Duty

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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 ›

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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 ›

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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 ›

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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. DiTommaso Lubin is a firm that you might consider for several reasons:

  1. Concentration in Business Litigation: Firms like DiTommaso Lubin 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.
Continue reading ›

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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 ›

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

  1. Focus on Business Litigation: DiTommaso Lubin 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.
Continue reading ›

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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 ›

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Extensive Experience in Partnership, LLC Member, and Shareholder Disputes

At DiTommaso Lubin, 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.

Personalized Attention for Closely Held Companies

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When facing corporate oppression, selecting the right legal representation is crucial. DiTommaso Lubin stands out as a firm capable of effectively handling such complex legal matters. Here’s why you should consider them for your corporate oppression case:

1. Concentration in Corporate Law

DiTommaso Lubin possesses a deep understanding of corporate law, including the nuances of corporate oppression. Their experience in dealing with closely-held companies and understanding the dynamics of shareholder relationships positions them well to address the unique challenges of corporate oppression cases.

2. Commitment to Client Success

The firm’s commitment to delivering significant victories for their clients extends to their approach to corporate oppression matters. They focus on achieving outcomes that are not only legally sound but also aligned with the best interests of their clients.

3. Reputation for Integrity and Success

DiTommaso Lubin has established a reputation for honesty and success in the Chicagoland area. This is reflected in the recognition received by its lawyers, including Peter Lubin being named a “Super Lawyer” and Patrick Austermuehle as a “rising star” by prestigious rating services. Their accolades demonstrate their commitment to legal excellence.

4. Personalized Attention to Clients

One of the key strengths of DiTommaso Lubin is the personal attention they provide to each client. This is particularly important in corporate oppression cases, where understanding the specific context and nuances of each situation is crucial for effective representation. Continue reading ›

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In closely held companies, particularly LLCs and corporations with a limited number of shareholders, the issue of compensation for owners and shareholders can be a legal minefield. A significant concern arises when majority owners, often also serving as executives, award themselves excessively high salaries or compensation. This practice, while appearing to be a clever business strategy, can veer into illegality, particularly if it’s done with the intent to minimize or avoid distributions to minority owners.

Understanding the Legal Framework

The legal principles governing such practices are rooted in the fiduciary duties that majority shareholders or LLC owners owe to minority stakeholders. These duties include the duty of loyalty, which mandates that decisions must be made in the best interests of the company and all shareholders, not just a select few.

When majority owners inflate their compensation unjustly, they may be breaching this duty. This is especially true if the inflated salaries negatively impact the company’s profitability or the ability to pay dividends or distributions to other shareholders.

Case Law and Legal Precedents

Various legal precedents highlight this issue. Courts have often scrutinized such practices under the lens of fairness and the fiduciary duties owed. For instance, in cases where the majority shareholders’ salaries are disproportionately high compared to the company’s overall financial health or industry standards, courts have found this to be a breach of fiduciary duty.

In cases such as Fleming v. Louvers International, Inc., courts have found that depriving a minority shareholder of his rightful pro rata distributions through excessive compensation can constitute a breach of fiduciary duty. Another case, Kovac v. Barron, identified a shareholder who committed constructive fraud by causing the corporation to pay him and his wife millions in excessive compensation, which was then concealed as “contract labor” on tax returns.

Certain regulations also provide guidance on this matter. For instance, compensation exceeding the costs that are deductible as compensation under the Internal Revenue Code are deemed unallowable for owners of closely held companies. The Small Business Administration (SBA) views the payment of excessive officers’ salaries as a type of withdrawal from a company, implying that the SBA may see such actions as an attempt to avoid excessive withdrawal limitations. Continue reading ›

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