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Posts Categorized: Fiduciary Duty

Aiding and Abetting a Breach of Fiduciary Duty

Posted & filed under Fiduciary Duty, Limited Liability Company (or LLC).

home-imageA common claim in litigation between and among business owners and a business is a breach of fiduciary duty claim.  A claim for breach of fiduciary duty requires proof of the existence of a fiduciary duty, breach of that duty, and damage proximately caused by the breach.  Importantly, there must be a “fiduciary duty.” For example, a manager in a manager-managed limited liability company generally owes fiduciary duties to the LLC’s members.

Sometimes, however, a wrongdoer does not owe a fiduciary duty to the business owner harmed by the breach of fiduciary duty.  Fortunately, the law may provide a remedy if this individual procured the breach of fiduciary duty.  Although less common, Georgia law recognizes a claim for aiding and abetting a breach of fiduciary duty (i.e., procuring a breach of fiduciary duty) if a plaintiff can show that the wrongdoer engaged in wrongful conduct without privilege (which it had no right to engage in) to procure a breach of the fiduciary’s duty to the plaintiff; that the wrongdoer knew the fiduciary owed a fiduciary duty to the plaintiff but purposely intended to injure the plaintiff; the wrongdoer’s conduct actually procured the breach of the fiduciary’s duty; and the wrongdoer’s conduct proximately caused damage to the plaintiff.  In such cases where a third party intentionally induces an individual owing fiduciary duties to another to breach those duties, the third party (even though he does not himself owe any fiduciary duties to the plaintiff) can be held liable to the plaintiff. This gives the plaintiff an additional avenue of recovery for his damage.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

 

Breach of Fiduciary Duty Claims May Proceed Against Resigned Directors

Posted & filed under Fiduciary Duty.

columnsAre you a shareholder who suspects one or more directors of a corporation have breached their fiduciary duties to you, but feel that you have no recourse because they have resigned?  If so, you may be in luck.  A recent Delaware case found that a company’s directors can still be held personally liable for acting in bad faith and failing to exercise oversight of the corporation, even after they resign from the Board.  Thus, directors cannot automatically exonerate themselves by resigning.  While Georgia law is not identical to Delaware law, Delaware is an innovative leader in corporate law, and this case could represent a hopeful trend for shareholders seeking recourse against directors who resign when facing trouble.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner

Fiduciary Duties in the Face of Corporate Bankruptcy

Posted & filed under Corporation, Fiduciary Duty.

SJP_1423v1While many corporate officers and directors understand their duties to their corporation, they may be unaware of their potential duties to their corporation’s creditors in the face of bankruptcy. Although the law is not necessarily consistent regarding officers and directors’ duties to creditors, if you are an officer or director of a corporation facing bankruptcy, there are steps you can take to help avoid personal liability for creditors’ breach of fiduciary duty claims.  

First, you should make sure you have current financial data so you can inform yourself of the company’s current financial condition and have the data necessary to make competent decisions. Second, you should keep detailed records that show that you diligently and thoroughly reviewed the corporation’s financial options.  For example, you should keep records of any financial presentation and/or meetings regarding the company’s financial options. Third, because disclosure is a defense to many creditors’ claims, you should regularly communicate with the company’s key creditors about the company’s prospects. Fourth, you should not favor one type of creditor over another (i.e., employees, lenders, vendors)—you should remain neutral. Fifth, you should avoid personal financial dealings with the corporation or at a minimum, have those dealings reviewed by the corporation’s disinterested directors, as these “insider” deals will be closely looked at when the corporation is facing bankruptcy. Sixth, you may want to consider staying with the company, as that is the only way to be able to provide input in the company’s decisions and hopefully avoid personal liability claims.  Finally, you should consider retaining legal counsel and financial advisors, as independent expert advice can help you make better decisions and provide a defense to a potential breach of fiduciary duty claim.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Reference: Jeffrey Baddeley, Defending Directors and Officers Against Breach of Fiduciary Duty Claims in Bankruptcy, Bloomberglaw.com, 2013.

Fiduciary Duties Associated with “the Cloud”

Posted & filed under Corporation, Fiduciary Duty, Limited Liability Company (or LLC).

home-imageMany business owners understand their fiduciary duties to look after the best interests of their corporation or limited liability company, and while many business owners may believe they are adequately doing this, many business owners have not considered the risks associated with “the cloud.”  In today’s modern cyber-world, where security, hacking, privacy breaches, and data protection are serious concerns, business owners should consider these risks in order to act with the standard of care that the law requires.

In order to act with the requisite standard of care, business owners and/or directors should be aware of their business’ significant risks and address those risks in a reasonable manner. Today, many businesses are outsourcing many of their services to the cloud.  While this may result in increased efficiencies and cost savings for a business, this outsourcing creates significant risks that business owners should recognize and address.  For example, business owners/directors should engage in due diligence regarding their vendors (i.e., understanding how the vendors will deal with data segregation, recoverability, and/or reliability), determine a way to audit and oversee their cloud vendors, consider the challenges associated with terminating a cloud vendor (i.e., consider the challenge of recovering your data when you are unsure of the exact location of the data), and consider how to deal with multiple vendors, including some that you do not know.  Failure to consider and reasonably address the risks associated with the cloud in today’s business landscape may subject your business, and you individually, to liability.  In sum, business owners that decide to use the cloud should include its board of directors in this decision-making process, consider the risks associated with cloud computing, and establish methods and procedures for evaluating and addressing risks associated with cloud computing.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Reference: John P. Tomaszewski, A Board’s Legal Obligations for the Cloud: You Have to Carry an Umbrella, Business Law Today, Aug. 2013.

Even Lawyers Have to Follow the Rules

Posted & filed under Fiduciary Duty.

columnsIn today’s economy, law firms are not immune from declining profits and less work, causing many law firms to show their partners the door.  But even law firms must be cognizant of the rules they must follow in asking a partner to leave, as they cannot freely “fire” partners.  Just as in any other type of business, law firms must comply with applicable laws and contractual obligations, including their partnership agreements.  If the firm’s partnership agreement does not identify a process for pushing out partners in tough economic times; the firm may want to revise its partnership agreement to put a process in place to prevent a legal dispute down the road.  This recommendation applies for just about any business with more than one owner – an exit plan in writing is smart.

The law firm (and departing partner) also have fiduciary duties to each other based on the trust and confidence that is inherent in partnerships. These duties do not end until the departure of a partner is effective, although some statutory and common law duties can be altered by the written partnership agreements.  Some duties may even continue after the partner leaves. 

So whatever your business focus – be it medicine, financial services, sales, manufacturing, technology or even law – the rules governing your relationship with your business partners apply.  If you put those rules in writing up front, at least everyone will be on the same page.  If you don’t, then you may learn too late that the statutory defaults are not in your favor.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Options to allow members to compete with the LLC without crossing the line

Posted & filed under Fiduciary Duty, Limited Liability Company (or LLC).

While default fiduciary duties are absolutely necessary to protect the business owner who relies on the LLC for their sole source of income, they may seem unfair to the entrepreneur desiring to own and/or operate numerous businesses or the business owner who already runs a successful business that could be deemed a “competitor.” Fortunately if you are this second type of business owner, there are solutions to this dilemma.  First, you could form the LLC as a manager-managed LLC (as opposed to the statutory default member-managed LLC).  In a manager-managed LLC, unless otherwise provided in an operating agreement or the LLC’s articles of organization, only the manager(s) owe fiduciary duties.  Thus, a non-managing member is free to compete with the LLC.  However, even if you choose this solution, you need to be careful not to participate in management, as you could still be liable to the extent you participate in management.

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Attention Members of LLCs: Do you understand your fiduciary duties to other members and the LLC?

Posted & filed under Fiduciary Duty, Limited Liability Company (or LLC).

As the LLC increasingly becomes the entity of choice for businesses in Georgia, more and more business owners are receiving the LLC’s “limited liability” protection.  However, while reaping the benefits of this “limited liability,” many business owners overlook their potential liability to their fellow business owners and/or the very LLC they own.  We lawyers refer to these as their fiduciary duties.

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