Breach of Fiduciary Duty

Illinois Appellate Court Affirms Oppression and Fiduciary Breach Claims

May 10, 2023 | Peter S. Lubin and James V. DiTommaso

Labovitz v. Dolan, 189 Ill. App. 3d 403 (1st Dist. 1989) is a case that was heard by the Appellate Court of Illinois, First District, Second Division. The case involved a dispute between Joel Labovitz and a group of investors, who were referred to as the “Labovitz Group,” and Charles F. Dolan and a group of investors, who were referred to as the “Dolan Group.”

The dispute centered around a real estate development project in Chicago. The Labovitz Group had entered into a joint venture agreement with the Dolan Group to develop a commercial real estate property in Chicago. The agreement specified that the parties would share equally in the profits and losses of the project. However, after the project was completed, the Dolan Group refused to distribute any profits to the Labovitz Group, claiming that there were no profits to distribute.

The Labovitz Group then filed a lawsuit against the Dolan Group, alleging breach of contract and fraud. The trial court ruled in favor of the Dolan Group, finding that there were no profits to distribute and that the Labovitz Group had failed to prove their fraud claims.

The Labovitz Group appealed the trial court’s decision to the Appellate Court of Illinois. The appellate court overturned the trial court’s decision, finding that the Dolan Group had breached the joint venture agreement and that the Labovitz Group was entitled to an equal share of the profits. The appellate court also found that the Dolan Group had committed fraud by misrepresenting the financial condition of the project.

One of the key issues in this case was the interpretation of the joint venture agreement. The appellate court found that the agreement was clear and unambiguous in its terms and that the Dolan Group had breached the agreement by failing to distribute profits to the Labovitz Group.

Another important issue in this case was the question of fraud. The appellate court found that the Dolan Group had made misrepresentations about the financial condition of the project, which constituted fraud under Illinois law.

Labovitz highlights the importance of clear and unambiguous contracts in business transactions. It also underscores the importance of honesty and integrity in business dealings and the legal remedies that are available to parties who have been wronged. The case also highlights that controlling partners or owners owe very high fiduciary duties to other limited partners. shareholders or LLC members. The decision relies upon what has become the most celebrated pronouncement characterizing the fiduciary relationship that exists among partners, Chief Judge Benjamin N. Cardozo stated for the court in the case of Meinhard v. Salmon (1928), 249 N.Y. 458, 463–64 that:

“… copartners, owe to one another … the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. [Citation] Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.”

The case found that Dolan’s discretion to withhold cash was not absolute; it was limited by an implied covenant of good faith and fair dealing implicit in every Illinois contract and by his fiduciary duty to his partners. “Good faith between contracting parties requires that a party vested with contractual discretion must exercise his discretion reasonably and may not do so arbitrarily or capriciously.” The Court held:

It is also clear, however, that despite having such broad discretion, Dolan still owed his limited partners a fiduciary duty, which necessarily encompasses the duty of exercising good faith, honesty, and fairness in his dealings with them and the funds of the partnership. (See: Couri, 95 Ill.2d 91, 69 Ill.Dec. 117, 447 N.E.2d 334; Mandell, 86 Ill.App.3d 437, 41 Ill.Dec. 323, 407 N.E.2d 821; Dayan, 125 Ill.App.3d 972, 81 Ill.Dec. 156, 466 N.E.2d 958; Foster Enterprises, 97 Ill.App.3d 22, 52 Ill.Dec. 303, 421 N.E.2d 1375.) It is no answer to the claim that plaintiffs make in this case that partners have the right to establish among themselves their rights, duties and obligations, as though the exercise of that right releases, waives or delimits somehow, the high fiduciary duty owed to them by the general partner—a gloss we do not find anywhere in our law. On the contrary, the fiduciary duty exists concurrently with the obligations set forth in the partnership agreement whether or not expressed therein. Indeed, at least one of the authorities relied upon by defendants is clear that although “partners are free to vary many aspects of their relationship inter se, … they are not free to destroy its fiduciary character.” Saballus, 122 Ill.App.3d at 116, 77 Ill.Dec. 451, 460 N.E.2d 755.

Thus, the language in the Articles standing alone does not deprive plaintiffs of the trial they seek against Dolan for breach of fiduciary *413 duty.

Former McDonald’s CEO Charged with Lying to Investors

January 14, 2023 | Peter S. Lubin and James V. DiTommaso

When Stephen Easterbrook was first fired from his position as CEO of McDonald’s, the firing was listed as “without cause,” which allowed Easterbrook to keep his severance pay, including shares in the company. But that was before McDonald’s found out about the extent of Easterbrook’s alleged misconduct.

At the time he was fired, Easterbrook allegedly denied having any inappropriate relationships with any of his employees, except for one relationship, which he claimed had not been physical. Afterwards, an internal investigation found emails that allegedly revealed Easterbrook’s sexual relationships with multiple McDonald’s employees during his time as CEO. Once these emails were uncovered, the company sued Easterbrook in 2020.

The lawsuit resulted in Easterbrook returning his shares in the company, as well as cash, the combined value of which was about $105 million at the time he returned it. Continue reading ›

Seventh Circuit Rules in Favor of Investment Firms in Breach of Fiduciary Duty Lawsuit

October 20, 2022 | Peter S. Lubin and James V. DiTommaso

In a recent decision, the Seventh Circuit federal court of appeals affirmed the dismissal of an action for breach of fiduciary duty brought against two investment firms by a disgruntled customer. In ruling that the District Court properly dismissed the claims, the Court found that the fiduciary duties the investment firms owed to the plaintiff did not include a duty to stop the plaintiff’s daughter who acted under a power of attorney from making certain withdrawals from the plaintiff’s accounts.

The plaintiff, Joseph Allen, amassed a net worth of nearly $8 million dollars. He enlisted the services of the defendants, Brown Advisory, LLC and Brown Investment Advisory & Trust Company, to help him invest and manage his wealth. When Allen and his wife experienced declining health and he could no longer manage their finances, Allen granted a financial power of attorney to his daughter Elizabeth Key. For several years Key used the power of attorney to make withdrawals from Allen’s investment accounts. Those withdrawals had depleted the value of Allen’s IRA accounts from approximately $2.3 million to less than $600,000.

Five years later, Allen revoked the power of attorney and sued the two investment companies in Indiana state court accusing the defendants of breach of fiduciary duty and breach of contract. He alleged that Key’s withdrawals (or some of them) were not to his benefit and that the investment companies should not have honored them. The defendants moved to dismiss Allen’s complaint.

The District Court judge granted the defendants’ motion, reasoning that the investment firms could not be liable for breach of contract because the challenged withdrawals were directed by Key and authorized by her power of attorney. The trial court also dismissed Allen’s breach of fiduciary duty claim after holding that Maryland law does not recognize a separate cause of action for breach of fiduciary duty arising from a contractual relationship. Allen appealed the dismissal. Continue reading ›

Breach of Fiduciary Duty in Estate Planning and Administration: What You Can Do

October 8, 2022 | Peter S. Lubin and James V. DiTommaso

The death of a loved one or a business partner can be difficult. The administration of a large estate can add to that difficulty. Often the duty of settling the estate and distributing the assets falls to a fiduciary such as an attorney, a trustee, a personal representative, an administrator or an executor. That fiduciary holds a position of trust and is responsible for holding and managing property that belongs to the beneficiaries.

With this position of trust comes certain legal obligations that are owed to the estate’s beneficiaries such as the duties of care and loyalty.

In the context of being an executor or administrator, a fiduciary duty is a legal obligation to act in the best interest of the beneficiaries of the estate. Illinois law imposes various responsibilities and duties on these individuals, including:

Acting in the grantor’s and beneficiary’s best interests
Acting loyally and uphold a duty of care
Avoiding conflicts of interest
Abstaining from engaging in self-dealing (i.e. taking actions that personally benefit the trustee or executor at the expense of or contrary to the best interest of the beneficiaries)
Avoiding favoring one beneficiary over another
Investing the estate’s assets to maintain or increase their value
Distributing estate assets to the intended beneficiaries correctly and in a timely manner

Abuse of Trust: Breach of Fiduciary Duty by a Trustee

October 1, 2022 | Peter S. Lubin and James V. DiTommaso

Abuse of trust is considered a breach of the fiduciary duties owed by the trustee of a will or estate. When an individual decides how to distribute his or her estate among one or more beneficiaries, he or she will typically name a trustee who will be responsible for carrying out those wishes. A trustee may be a person or an organization and, in fact, can be anyone specified by the deceased, from a family member or friend to a lawyer to a financial investment company.

Depending on the size of the estate and the complexity of the deceased’s instructions, acting as a trustee can involve coordinating with multiple beneficiaries and being entrusted with distributing millions of dollars. Whenever there is a lot of money and someone in a position of trust, there is a potential for abuse. When a person in a position of trust, like a trustee, abuses that trust, it can be devastating for all involved.

If the trustee does not perform its duties in a careful and loyal manner as instructed, the trustee has engaged in an abuse of trust and breached its fiduciary duties. Because a trustee is expected to make judgment calls at times regarding the best disposition of the estate, it can be difficult to determine if an abuse of trust has taken place. This is where it can be useful to consult with an experienced breach of fiduciary duty attorney as not all breaches are cut and dried. Continue reading ›

Delaware Judge Finds for Elon Musk on Breach of Fiduciary Duty Claims

June 12, 2022 | Peter S. Lubin and James V. DiTommaso

A Delaware Chancery Court judge recently rendered a post-trial verdict in the In re Tesla Motors Stockholder Litigation in which he found in favor of co-founder and CEO of Tesla Motors, Elon Musk, on claims that Musk breached his fiduciary duties, was unjustly enriched, and created corporate waste in connection with Tesla’s 2016 acquisition of the SolarCity Corporation.

This high-profile, high-stakes lawsuit stemmed from alleged conflicts of interest created by Musk’s leadership and ownership of both companies during the 2016 acquisition. At the time of the merger, Musk was SolarCity’s largest stockholder and chaired its board of directors. At the same time, he owned 22% of Tesla stock and served as CEO and a director of Tesla. When the potential acquisition of SolarCity came up, Tesla’s board elected not to form a special committee of independent directors to negotiate the transaction. It did, however, condition approval of the acquisition on the “affirmative vote of a majority of the minority of Tesla’s disinterested stockholders” and recused Musk from certain Board discussions regarding the acquisition.

Despite these protections, the plaintiff shareholders alleged that Musk, as Tesla’s controlling shareholder, exerted his influence over Tesla’s board to approve the acquisition at an unfair price, following a highly flawed process, in order to bail out his (and other family members’) foundering investment in SolarCity. Plaintiffs named both Musk and members of Tesla’s board as defendants and sought damages as well as equitable remedies. Before trial, all defendants except Musk settled with plaintiffs, leaving only the claims against Musk proceeding to an 11-day trial over July and August 2021. Continue reading ›

Texas High Court Rules that Breach of Fiduciary Duty Claims Barred by $820 Million Settlement

May 14, 2022 | Peter S. Lubin and James V. DiTommaso

The Texas Supreme Court dealt a fatal blow to Brazilian state-run petroleum company Petrobras’s breach of fiduciary duty claims against former joint venture partner Belgian Transcor Astra Group S.A. The Texas high court ruled that an $820 million settlement agreement between the two oil and gas companies precluded Petrobras from asserting breach of fiduciary duty claims accusing Astra of bribing certain high-ranking Petrobras employees.

In 2006, Petrobras and Astra formed an ill-fated joint venture of Pasadena Refining System Inc. The joint venture between the two multi-national oil companies soon began to unravel. After the parties found themselves embroiled in several disputes, they initiated an arbitration to break up the partnership which resulted in a 2009 arbitration award requiring Astra to sell its 50% interest to Petrobras for $640 million.

Astra alleged that pursuant to the arbitration award it turned over its interest in the Texas refining company, but Petrobras never paid the $640 million purchase price for that interest. A series of lawsuits ensued leading to Astra obtaining judgments against Petrobras totaling more than $750 million with more than $400 million more in pending claims when the parties agreed to a global settlement. Under the 2012 settlement agreement Petrobras agreed to pay Astra $820 million in exchange for a release by each party of all claims against the other party.

By 2016, the peace between the companies ended when Petrobras initiated two separate legal proceedings against Astra. First, Petrobras filed a lawsuit against Astra and several of its employees, asserting that they breached fiduciary duties owed to Petrobras by offering bribes to certain Petrobras officials and failing to disclose the offers during the parties’ settlement negotiations. Petrobras also asserted derivative claims for declaratory judgment, conspiracy, aiding and abetting, unjust enrichment, and exemplary damages and attorney’s fees, and sought to invalidate the 2012 settlement agreement and render it unenforceable. Simultaneously, Petrobras initiated arbitration proceedings to invalidate the 2006 stock-purchase agreement due to the bribes Astra allegedly paid to Petrobras officials in connection with that agreement. Continue reading ›

Illinois Appellate Court Finds Fraud and Breach of Fiduciary Duty Claims against Bank and Officer Time Barred

January 23, 2022 | Peter S. Lubin and James V. DiTommaso

An Illinois appeals court recently held that the plaintiffs in a commercial litigation lawsuit could not sustain claims for fraud, breach of fiduciary duty, conversion, and tortious interference with contract because the claims were untimely. The Court also affirmed dismissal of the plaintiffs’ claims for respondeat superior liability, prejudgment interest and attorney’s fees on the basis that the substantive underlying claims were untimely or had been released by the plaintiffs.

The appeal stemmed from a November 2016 lawsuit filed by Edward Shrock, a minority owner of the company Baby Supermall, LLC, against the company’s bank and the bank’s vice president for allegedly aiding the company’s majority owner, Robert Meier, in using the company as his “personal piggy bank” and misappropriating millions of dollars from the company during a decade-long scheme. According to Schrock’s complaint the company was eventually driven to insolvency as a result of Meier’s scheme.

The 2016 lawsuit followed on the heels of another lawsuit Schrock filed against Meier in 2009, which alleged nearly the same underlying facts as alleged in the 2016 lawsuit against the bank. In the 2009 suit, Schrock won an injunction enjoining Meier and his family from taking payments from the company under certain “profit-sharing” plans Meier had drafted and entered with the company. Following entry of the injunction in the 2009 case, Schrock won an approximately $11 million jury verdict against Meier, which Schrock later released in 2018 even though the judgment had only been partially satisfied. Continue reading ›

Illinois Supreme Court Puts the Kibosh on Energy Company’s Stolen Corporate Opportunity Claims against Two Former Employees

September 3, 2021 | Peter S. Lubin and James V. DiTommaso

The Illinois Supreme Court ruled recently that an energy company could not sustain a claim for stolen corporate opportunities against two of its former business developers. In doing so the Court overturned a ruling by the appellate court which had revived the stolen corporate opportunity claim. The ruling, which many consider to be a bombshell in stolen corporate opportunity jurisprudence, was not without its detractors with three justices dissenting from the majority’s decision.

The plaintiff, Indeck Energy Services, is a privately held Buffalo Grove company that develops, owns, and operates independent power plants. Indeck’s lawsuit targets two former Indeck employees, Christopher M. DePodesta and Karl G. Dahlstrom, whom the energy company alleged secretly operated their own company while employed by Indeck and in doing so secured certain opportunities for themselves in breach of their fiduciary duties to Indeck.

Indeck hired DePodesta in 2010 as its vice president of business development and Dahlstrom in 2011 as its director of business development. The two were brought in to help Indeck scout out and secure new opportunities to develop natural gas powered plants within a region of Texas known as the Electrical Reliability Council of Texas.

Dalhstrom founded Halyard Energy Ventures, LLC (HEV) in late 2010. DePodesta became a member of HEV in 2011. HEV is a consulting, management, and administration firm that develops electrical power generation projects. Following DePodesta and Dalhstrom’s departure from Indeck, the two allegedly negotiated a deal for HEV to partner with a private equity fund to develop, construct, and operate electrical power generation plants. Continue reading ›

Court Revives Breach of Fiduciary Duty and Shareholder Oppression Claims against Lumber Executive Accused of Diverting Profits to Son’s Company

August 19, 2021 | Peter S. Lubin and James V. DiTommaso

An Illinois Appellate Court recently revived a breach of fiduciary duty and shareholder oppression lawsuit filed by minority shareholders against the president, director, and majority shareholder of a lumber company. The suit accused the majority shareholder of diverting nearly a million dollars from the lumber company to a separate company owned by the majority shareholder’s son. The trial court dismissed several of the minority shareholders’ claims and ruled in favor of the majority shareholder following a trial on the breach of fiduciary duty claims. In a blow to the majority shareholder, the Second District appeals court reversed the trial court finding that the majority shareholder did breach his fiduciary duties to the company and engaged in shareholder oppression.

The case provides practitioners and shareholders a useful primer on pleading and evidence requirements for successfully asserting breach of fiduciary duty and shareholder oppression claims against a corporate officer. It also sheds light on the contours and limits of a key legal doctrine implicated in such claims: the business judgment rule doctrine.

The case, Roberts v. Zimmerman, involved four separate but related lumber companies: Our Wood Loft, Inc. (OWL), Outstanding, 3 Corp. Lumber Company, and Lake City Hardwood. The plaintiffs in the case were minority shareholders who collectively owned one-third of OWL, with the defendant, Stefan Zimmerman, owning the other two-thirds of the company. Zimmerman’s son, Thomas, owned Lake City.

The plaintiffs’ complaint alleged that Zimmerman initially sought to have his son buy shares in OWL but the minority shareholders refused. Instead, the plaintiffs agreed to allow Thomas to work as a manager at OWL. While working at OWL, Thomas started Lake City. Shortly thereafter, Lake City began purchasing lumber and re-selling it to OWL at a profit. The complaint alleged that Zimmerman did not reveal the relationship between OWL and Lake City and that Thomas owned Lake City until several years after OWL started buying lumber from Lake City. Continue reading ›