Grappling with Fiduciary Duties in Enforcing Contracts - By Kevin Schlosser

by Meyer, Suozzi, English & Klein, P.C.
Contact

KEVIN SCHLOSSER IN NYLJ: GRAPPLING WITH FIDUCIARY DUTIES IN ENFORCING CONTRACTS

October 27, 2011

Publication Source: New York Law Journal

Written By: Kevin Schlosser

Warning to lawyers tasked with drafting contracts in which fiduciary duties are lurking: Fasten your seatbelts, you're in for a wild ride!

New York case law has been moving fast and furiously as to the enforceability of contracts involving fiduciaries where it is claimed that the contract was induced by a breach of the fiduciary's duties. From 2002, when the earth-shattering decision in Blue Chip Emerald LLC v. Allied Partners Inc., 299 A.D.2d 278, 279, 750 N.Y.S.2d 291, 294 (1st Dept. 2002), was handed down by the First Department, the cases have been on a whirlwind of twists and turns. The Court of Appeals recently jumped into the fray,1 only to see the First Department quickly get back onto center stage.2

Oftentimes, in this age of increasingly specialized legal representation, lawyers who write contracts do not also handle the disputes that arise over the meaning or enforceability of those contracts. Thus, those who write the contracts do not typically benefit from how the courts interpret those contracts.

Given the fast-moving case law interpreting contracts involving fiduciaries, those preparing the contracts should understand the evolving law and address the important issues. As discussed below, the Court of Appeals has now indicated that a fiduciary can in fact be relieved of its stringent and unbending duties by virtue of contractual disclaimers and/or releases, but the language used will be carefully scrutinized. Ignoring the latest law could have disastrous results.

'Blue Chip' and Its Progeny

While the concepts applicable to fiduciary duties have been recognized for centuries, the First Department's decision in Blue Chip applied them with eye-opening impact. In Blue Chip, a limited liability company was owned 50 percent by plaintiff and 50 percent by defendant, which also was the managing member and in control of day-to-day operations. The sole asset of the LLC was a valuable piece of real property in Manhattan.

After plaintiff sold its interest in the LLC to defendant based upon an $80 million valuation of the real property, defendant contracted to sell the property for $200 million just two weeks later. Plaintiff acknowledged in the transactional contracts that (i) it was entering into the buyout agreement without receiving any "representations or warranties" from defendant as to the "actual or projected value" of the real property or "any other matter affecting or related to" the property; (ii) defendant had discussed the possible "operation, leasing, sale and/or valuation" of the property with 16 third parties, among whom the ultimate purchaser was identified; (iii) it had been "afforded an opportunity to conduct its own due diligence;" and (iv) it was satisfied with the information made available to it by defendant and otherwise.

Plaintiff also disclaimed any interest in the profit realized by the defendant on a future sale of the property to any of the disclosed third parties and "any claim for fraud, breach of loyalty or breach of fiduciary duty" arising out of the LLC except as to any claim in the event the defendant had sold or leased the property to an unidentified third party if the transaction arose from discussions on or before the buyout date.

After learning of defendant's deal to sell the property for $200 million, plaintiff sued defendant and its principals for fraud and breach of fiduciary duty, seeking the additional $60 million of profit it would have realized when the property was sold. Plaintiff alleged that it was induced to sell its interest in the LLC for an unfairly low price based upon defendants' misrepresentations and omissions concerning the discussions they were conducting with third parties to sell the property, including failing to disclose both the true price range in which they were negotiating and the existence of an oral agreement to purchase the property for $200 million.

The trial court dismissed the complaint in its entirety based upon the contractual representations and disclaimers. The First Department reversed and reinstated the complaint.

Notwithstanding the explicit contractual disclaimers, the First Department found that the trial court "overlooked" the unbending fiduciary "duty of undivided and undiluted loyalty" the defendant owed to plaintiff. The court continued: "Consistent with this stringent standard of conduct, which the courts have enforced with '[u]ncompromising rigidity'…it is well-established that, when a fiduciary, in furtherance of its individual interests, deals with the beneficiary of the duty in a matter relating to the fiduciary relationship, the fiduciary is strictly obligated to make 'full disclosure' of all material facts….

LOADING PDF: If there are any problems, click here to download the file.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Meyer, Suozzi, English & Klein, P.C. | Attorney Advertising

Written by:

Meyer, Suozzi, English & Klein, P.C.
Contact
more
less

Meyer, Suozzi, English & Klein, P.C. on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!