Breach of Fiduciary Duty Jurisprudence of the New York State Court of Appeals in the Current Millennium

This Article was originally published by Thomson Reuters on May 18, 2012.

Claims for breach of fiduciary duty appear to have proliferated, possibly because the nature of the claim suggests some sort of outrageous or egregious conduct, on the one hand, while a finding of such wrongdoing may entitle the complainant to exemplary damages, on the other.  Needless to say, the sine qua non for a claim of fiduciary duty is the existence of a fiduciary relationship.  Under the circumstances, it is quite remarkable that, in so many cases, the existence of such a relationship is simply assumed and, as a result, the determination of whether or not a fiduciary relationship exists is often regularly litigated as a threshold and dispositive issue.

In the current millennium, the New York Court of Appeals has addressed questions relating to breach of fiduciary duty on almost two dozen occasions.  And, because the determination of whether or not a fiduciary relationship exists is both a matter of law, in general, and often fact specific, in particular, the decisions on that threshold issue by the Court of Appeals raise as many questions as they answer.

Clergy and Their Congregants

In Lightman v. Flaum[1], the Court of Appeals was called upon to decided “whether CPLR §4505 imposes a fiduciary duty of confidentiality upon members of the clergy that subjects them to civil liability for the disclosure of confidential communications.”

In a divorce proceeding and related application for temporary custody of the parties’ four children, her husband submitted, under seal, affirmations from two rabbis.  The affirmations disclosed conversations between the plaintiff and the rabbis.  Plaintiff commenced an action against the rabbis asserting, among others, a cause of action for breach of fiduciary duty in violation of the CPLR §4505 of ‘clergy and penitent privilege’[.]”.  Supreme Court denied a motion for summary judgment dismissing the breach of fiduciary duty claim and, upon appeal, the Appellate Division modified by dismissing the cause of action.

The Court of Appeals “view[ed] the CPLR 4505 privilege…as a rule of evidence and not as the basis for a private cause of action.”  Accordingly, the Court of Appeals held that “as a matter of law, CPLR §4505 – directed at the admissibility of evidence does not give rise to a cause of action for breach of fiduciary duty involving the disclosure of oral communications between a congregant and a cleric.”

In Wende v. United Methodist Church, New York West Area[2], parishioners husband and wife sued their pastor, from whom they had sought individual counseling services, during which the pastor developed a sexual relationship with the wife that lasted several months.  Plaintiffs sued the church and their ecclesiastical entities and officials for various torts; however, no breach of fiduciary cause of action was asserted.  Accordingly, the Court of Appeals held that:

While the complaint’s brief reference to a “sacred trust” may arguably be couched as alluding to a fiduciary duty, the surrounding language and the allegations that follow sound in clergy malpractice, which would improperly require courts to examine ecclesiastical doctrine in an effort to determine the standard of due care owed to parishioners undergoing ministerial counseling.  Given that no fiduciary cause of action is properly before us, we leave open for another day the question whether such a claim may arise between a cleric and a parishioner under very different circumstances, not present here.  Plaintiffs’ remaining contentions are without merit.

In Marmelstein v. Kehillat New Hempstead[3], the Court of Appeals addressed the issue left unresolved by United Methodist Church.  In this case, the Court was required “to consider whether the allegations in the complaint establish a viable cause of action for breach of fiduciary duty against a cleric premised on an alleged 3 1/2 –year sexual relationship between consenting adults.”

In Marmelstein, Supreme Court dismissed the claim for breach of fiduciary duty; the First Department affirmed the dismissal; and the Court of Appeals agreed with the Appellate division that the complaint must be dismissed.  In so doing, the Court of Appeals held that:

Marmelstein claims that Tendler held himself out as a counselor and advisor and that he provided those services to her.  But these general assertions alone are inadequate to cast Tendler as a fiduciary beyond that of ordinary cleric-congregant affiliations.  Nor can Marmelstein show that a duty existed by merely stating, in a conclusory fashion, that Tendler acted as a fiduciary and that a relationship of trust existed.  Rather, it is essential that a plaintiff articulate specific facts that will allow a court to distinguish a viable claim of breach of fiduciary duty from nonactionable seductive conduct, however reprehensible the offending conduct may be.

Allegations that give rise to only a general clergy-congregant relationship that includes aspects of counseling do not generally impose a fiduciary obligation upon a cleric.  To establish that a course of formal counseling resulted in a cleric assuming “de facto control and dominance” over the congregant, a congregant must set forth facts and circumstances in the complaint demonstrating that the congregant became uniquely vulnerable and incapable of self-protection regarding the matter at issue.

In Zumpano v. Quinn[4], plaintiff sued a priest and a bishop, for, inter alia, breach of fiduciary duty,  “alleging an ongoing abusive relationship beginning in 1963 – when he was 13 years old – and continuing until 1970.

Defendants in Zumpano asserted a defense of the statute of limitations because the action was commenced 33 years after the alleged abuse occurred.  In turn, plaintiff asserted that the doctrine of equitable estoppel applied and that, under the circumstances, it would be unjust to allow defendants to assert a statute of limitations defense.  In Zumpano, Supreme Court granted defendants’ motion to dismiss the complaint as time-barred; the Fourth Department affirmed; and the Court of Appeals affirmed the order of the Appellate Division.  In so doing, the Court of Appeals held that:

Even if the Court were to assume that a fiduciary relationship existed between the parties during plaintiffs’ infancy and that the diocesan defendants had a legal duty to disclose any knowledge of prior incidents of sexual abuse and breached that duty, plaintiffs still failed to demonstrate how that breach prevented them from bringing a timely action.

Thus, in Zumpano, the Court of Appeals simply assumed (without deciding, for purposes of the motion) that a fiduciary relationship existed between the parties.

In Doe v. Roman Catholic Diocese of Rochester[5], plaintiffs/husband and wife congregants sued the Diocese after a priest, from whom the plaintiff wife had sought counseling had a sexual relationship that lasted more than three years, despite complaints by the plaintiff-husband, to the Diocese.  Plaintiffs asserted claims, among others, for breach of fiduciary duty against the priest.  Supreme Court granted a motion to dismiss the claim for breach of fiduciary duty; the Fourth Department reversed; and the Court of Appeals reversed the decision of the Appellate Division.  In so doing, the Court of Appeals stated:

As we recently reaffirmed [in Marmelstein], a fiduciary relationship must exhibit the characteristics of “de facto control and dominance”.  Specifically, we held that in order to demonstrate the existence of a fiduciary duty between a cleric and a congregant involved in a formal counseling relationship, a “congregant must set forth facts and circumstances in the complaint demonstrating that the congregant became uniquely vulnerable and incapable of self-protection regarding the matter at issue[.]

The complaint in this case, although drafted prior to our decision in Marmelstein, falls short of what is necessary to state a claim for breach of fiduciary duty.  The bare allegation that Jane Doe was “a vulnerable congregant” is insufficient to establish that plaintiff was particularly susceptible to Father DeBellis’s influence.  Nor does the complaint provide any other allegations to show that the parties had a relationship characterized by control and dominance.

The line of decisions by the Court of Appeals with respect to fiduciary claims against clergy shows an unexplained reluctance to treat the clergy-client relationship as a fiduciary relationship.  As will next appear, the Court of Appeals has been significantly less charitable when it comes to other professions and vocations, especially brokers.

Real Estate and Other Brokers

In Sonnenschein v. Douglas Elliman-Gibbons & Ives[6], the Court of Appeals started the analysis with the statement that:  [A] real estate broker is a fiduciary with a duty of loyalty and an obligation to act in the best interests of the principal”.  The Court then addressed the “preliminary question” of:  “whether defendants had a broker/principal relationship with plaintiffs giving rise to an obligation to act as their fiduciaries.”  The Court of appeals noted that:  “[i]n determining the existence of a broker/principal relationship – with its concomitant fiduciary obligations – courts must review the particular communications and agreements between the parties under the circumstances presented.”

The Court of Appeals in Sonnenschein also noted that:  “plaintiffs did not establish at the summary judgment stage that defendants agreed to become plaintiffs’ broker and act as plaintiffs’ fiduciaries”.  And the Court then concluded that:

Even assuming a broker/principal relationship developed over the course of dealings between plaintiffs and defendants, plaintiffs failed to come forward with proof that defendants engaged in conduct which would have amounted to a breach of fiduciary duty.

Parenthetically, the Court of Appeals also found that, “in the absence of an agreement with a principal to the contrary, a broker owes no duty to refrain from “offering the properties of all [its] principals to a prospective customer[;]” and that:

Unless a broker and principal specifically agree otherwise, a broker cannot be expected to decline a prospective purchaser’s request to see another property listed for sale with that broker.  Any other rule would unreasonably restrain a broker from simultaneously representing two or more principals with similar properties for fear of violating a fiduciary obligation in the event a buyer chose the property of one principal over that of another.

In M.R. Dubbs v. Stribiling & Associates[7], “[a]t issue was whether a real estate broker breached a fiduciary duty owed a principal”.  In deciding the issue, the Court in Dubbs noted that:

In New York, it is well settled that a real estate broker is a fiduciary with a duty of loyalty and an obligation to act in the best interests of the principal.

and that:

Where a broker’s interests or loyalties are divided due to a personal stake in the transaction or representation of multiple parties, the broker must disclose to the principal the nature and extent of the broker’s interest in the transaction or the material facts illuminating the broker’s divided loyalties.  “The disclosure to be effective must lay bare the truth, without ambiguity or reservation, in all its stark significance.”

In Dubbs the Court of Appeals held that:

Applying these principles to this case, we conclude that defendants were entitled to summary judgment.  Certainly, as a broker who endeavored to obtain a personal interest in the principals’ property, Chappel-Smith had a duty to inform plaintiffs of her intent to purchase their apartment and to disclose any information that could reasonably bear on plaintiffs’ consideration of her offer.  She clearly fulfilled this obligation for there is no evidence in the record that Chappel-Smith withheld any relevant information that was in her possession at the time she and her husband entered into the 1994 purchase contract with plaintiffs.

The People of the State of New York v. Coventry First LLC[8] was an enforcement action by the Attorney General against defendants, Life Settlement Providers (purchasers of life insurance policies from policy owners for cash).  The complaint alleged fraudulent and anticompetitive conduct and sought damages and anti-injunctive relief.  The contract between defendant and policy holders contained an arbitration clause.  Defendants sought to compel arbitration.  Supreme Court denied defendant’s motion to compel arbitration and allowed the breach of fiduciary action to proceed.  The Court of Appeals in Coventry First LLC addressed the issue:  “whether the Attorney General has pleaded a viable cause of action for inducement of breach of fiduciary duty.  The Attorney General claims that defendants aided and abetted, participated in, and benefitted from the life settlement brokers’ breach of fiduciary duties to their clients.”  And the Court stated:  “Our first question therefore is whether the facts concerning life settlement brokers, as alleged by the Attorney General, fit within the legal theory of fiduciary duty.”

The Court of Appeals in Coventry First stated that:

A fiduciary relationship “exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation”.  It exists only when a person reposes a high level of confidence and reliance in another, who thereby exercises control and dominance over him.

Based upon the allegation that “life settlement brokers [held] themselves out as seeking to obtain the highest purchase price for their clients’ policies, the Court found that:

[T]he Attorney General’s allegations describe a set of circumstances in which life settlement brokers, by claiming relationships with large numbers of other financial institutions and professionals, and by persistently representing that they seek the highest possible offer for their clients’ life insurance policies, hold themselves out to be highly-skilled experts and are on notice that their advice is specially relied on by their clients.  The sale of life insurance policies is alleged to be a relatively new and largely unregulated industry – one in which even sophisticated clients rely on what they take to be expert advice when seeking offers on policies they wish to sell.  These allegations comport with the legal theory of fiduciary duty.

Based on the foregoing, the Court of Appeals in Coventry First held that the Attorney General “sufficiently alleged defendants’ knowledge of the life insurance brokers fiduciary duties”; affirmed the order of the Appellate Division; and reinstated the common law fraud of cause of action based upon breach of fiduciary duty.

The People of the State of New York v. Wells Fargo Insurance Services[9] involved an action by the Attorney General against defendant insurance brokerage firm alleging “repeated fraud or illegal acts” in violation of Executive Law § 63(12) that, among other things, allegedly constituted a breach of fiduciary duty.

The Court of Appeals in Wells Fargo restated “the rule that one acting as a fiduciary in a particular transaction may not receive, in connection with that transaction, undisclosed compensation from person[s] with whom the principal’s interests may be in conflict”.  The Attorney General argued:  “that an insurance broker is the agent of the insured…that a principal-agent relationship is, by nature, a fiduciary relationship; and that a fiduciary must disclose to its principal any interest in a particular transaction that causes the fiduciary’s loyalties to be divided[.]”.  The Court of Appeals in Wells Fargo nevertheless found that:

A broker is the agent of the insured, but it customarily looks for compensation to the insurer, not the insured, and it is sometimes the insurer’s agent also – for example, when collecting premiums.  We have thus referred to the broker’s “dual agency status”.  Indeed the word “broker” suggests an intermediary – not someone with undivided loyalty to one or the other side of the transaction.

Accordingly, in Wells Fargo the Court of Appeals held that “[a insurance] broker need not disclose to its customer contractual arrangements it has made with its insurance company[:]”.

Recognizing the complexity of an insurance broker’s role, several Appellate division cases hold that such a broker need not disclose to its customers contractual arrangements it has made with its insurance companies.[10]

Other Professionals

In Joseph I. Rosenzweig v. Radiah K. Givens[11], a mortgage foreclosure action, defendant/mortgagor asserted that plaintiff/mortgagee – who was her paramour at the time the mortgage was signed – “secured the mortgage through fraud and overreaching and by exploiting a fiduciary relationship with her”.  The plaintiff/attorney hired a friend to represent both parties at the closing; after they married, defendant discovered that “plaintiff had a wife and two children, rendering their marriage bigamous”.  Plaintiff demanded payment; accelerated the loan; and started a foreclosure proceeding.  Supreme Court granted plaintiff a judgment of foreclosures; the Appellate Division modified by reinstating the counterclaim and affirmative defense; and the Court of Appeals affirmed concluding that “defendant has stated a prima facie case of fraudulent inducement to marriage”.

In Sokoloff v. Harriman Estates Development Corp.[12], plaintiff/purchasers sought specific performance of a contract to purchase a new home from Harriman Estates.  The contract included the following pre-construction services:  “architectural and site plans/landscape designs[.]”.  Plaintiffs paid Harriman $55,000 for the architectural plans and other services; however, Harriman and the architect “refused to allow plaintiff to use these plans to build their home to be built at an estimated cost of $1,895,000, a sum significantly greater than Harriman’s earlier estimates”, unless Harriman was hired as the builder.  Supreme Court denied Harriman’s dismissal of the first cause of action for specific performance; the Appellate Division reversed; and the Court of Appeals reversed the order of the Second Department.  In Sokoloff, the Court of Appeals accepted as true on Harriman’s motion to dismiss:  “plaintiffs’ allegation that Harriman was acting as plaintiffs’ agent when it entered into the contract with Ercolino to prepare the architectural design for their home”.  Based upon the foregoing, the Court of Appeals held that:

A person who enters into a contract with another to perform services as an agent “is subject to a duty to act in accordance with his promise”.  Moreover, fundamental to the principal-agent relationship “is the proposition that an [agent] is to be loyal to his [principal] and is ‘prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties”.

And that:

Agents “must act in accordance with the highest and truest principles of morality” and, as fiduciaries, are forbidden from engaging in “many forms of conduct permissible in a workday world for those acting at arm’s length”.  It thus follows that an “agent must not seek to acquire indirect advantages from third persons for performing duties and obligations owed to [the agent’s] principal”…If “an agent receives anything as a result of his violation of a duty of loyalty to the principal, he is subject to a liability to deliver it, its value, or its proceeds, to the principal”…

Accordingly:

Accepting plaintiffs’ allegations as true, Harriman could be found to have breached its duty of loyalty to plaintiffs by entering into a stipulation with a third party preventing plaintiffs, its principals, from using the architectural plans it procured for them unless they also agreed to Harriman’s terms for building their home.  As plaintiffs’ agent, Harriman would not have been acting in plaintiffs’ best interests when it agreed with Ercolino to place such a restriction on their right to use the architectural plans.  Under those circumstances, it should not be permitted to invoke a contractual provision entered into with a third party in breach of its fiduciary duties as a legal ground for withholding its own consent to plaintiffs’ use of the architectural plans.

ECT I, Inc. v. Goldman, Sachs & Co.[13] arose out of a claim by a committee of unsecured creditors against the lead managing underwriter of the debtor’s initial public stock offering.  Goldman Sachs acted as lead underwriter of a “firm commitment underwriting pursuant to which the company sold an entire allotment of shares to the firm who purchased the shares for resale to the public.”  The Court of Appeals in ECT I described the underwriter’s function as follows:

As underwriter, the functions of the investment firm include negotiating an initial public offering price for the securities with the issuer, purchasing the securities from the issuer at a discount and reselling them on the market at the public offering price.  The difference or “spread” between the amount the underwriter pays for the securities and the price at which the securities are sold to the public makes up the underwriter’s compensation for its services.

Plaintiffs sued Goldman Sachs for, among other things, breach of fiduciary duty, on the ground that Goldman Sachs failed to disclose that it had a conflict of interest as to the pricing of the initial public offering:

Specifically, the complaint alleges that Goldman Sachs entered into arrangements whereby its customers were obliged to kick back to Goldman a portion of any profits that they made from the sale of eToys securities subsequent to the initial public offering.  Because a lower IPO price would result in a higher profit to these clients upon the resale of the securities and thus a higher payment to Goldman Sachs for the allotment, plaintiff alleges Goldman Sachs had an incentive to advise eToys to underprice its stock.  As a result of this undisclosed scheme, Goldman Sachs was allegedly paid 20% to 40% of the clients’ profits from trading the eToys securities.

While dismissing other causes of action, Supreme Court denied defendant’s motion to dismiss the first cause of action for breach of fiduciary duty “finding that “[a]lthough the contract did not establish a formal fiduciary relationship…the pleading sufficiently raises an issue as [to] the existence of an informal one[;] noting that Goldman Sachs had also advised eToys in connection with a preferred stock offering.

The Appellate Division affirmed denial of the motion to dismiss the first cause of action:

opining that the breach of the fiduciary duty claim was correctly sustained upon allegations showing a preexisting relationship between eToys, Inc. and Goldman Sachs that justified eToys’ alleged trust in pricing the shares.  The Court further held that the trial court properly dismissed the fraud cause of action with leave to replead, reasoning that plaintiff did not allege with the sufficient particularity who made the purported misrepresentations to eToys, Inc.  The Appellate Division, however, disagreed with the Supreme Court as to the breach of contract, professional malpractice and unjust enrichment causes of action, reinstating all three.

As a threshold matter, the Court of Appeals in EBI I stated:

A fiduciary relationship “exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation”…Such a relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm’s length business transactions.  Generally, where parties have entered into a contract, courts look to that agreement “to discover…the nexus of [the parties’] relationship and the particular contractual expression establishing the parties’ interdependency”.  “If the parties…do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them”.  However, it is fundamental that fiduciary “liability is not dependent solely upon an agreement or contractual relationship between the fiduciary and the beneficiary but results from the relation”.

The Court of appeals found that a fiduciary duty existed because:

Here, the complaint alleges an advisory relationship that was independent of the underwriting agreement.  Specifically, plaintiff alleges eToys was induced to and did repose confidence in Goldman Sachs’ knowledge and expertise to advise it as to a fair IPO price and engage in honest dealings with eToys’ best interest in mind.  Essentially, according to the complaint, eToys hired Goldman Sachs to give it advice for the benefit of the company, and Goldman Sachs thereby had a fiduciary obligation to disclose any conflict of interest concerning the pricing of the IPO.  Goldman Sachs breached this duty by allegedly concealing from eToys its divided loyalty arising from its profit-sharing arrangements with clients.

However, the Court of Appeals also cautioned that:

Accepting the complaint’s allegations as true, as the Court must at this stage, plaintiff has sufficiently stated a claim for breach of fiduciary duty.  This holding is not at odds with the general rule that fiduciary obligations do not exist between commercial parties operating at arm’s length – even sophisticated counseled parties – and we intend no damage to that principle.  Under the complaint here, however, the parties are alleged to have created their own relationship of higher trust beyond that which arises from the underwriting agreement alone, which required Goldman Sachs to deal honestly with eToys and disclose its conflict of interest – the alleged profit-sharing arrangement with prospective investors in the IPO.

In Tzolis vv. Wolff[14], members of an LLC that owned an apartment building in Manhattan, suing individually on behalf of the company, alleged:  “that those in control of the LLC, and others acting in concert with them, arranged first to lease and then to sell the LLC’s principal asset for sums below market value; that the lease was unlawfully assigned; and that the company fiduciaries benefitted personally from the sale.”  Plaintiffs assert several causes of action, of which only the first two are in issue here:  The first cause of action sought “to declare the sale void, and the second [sought] termination of the lease.”  The Court of Appeals was asked to determine whether a derivative action could be brought on behalf of an LLC where “no stated provisions for such an action exist”.

Apparently assuming, without deciding, that the majority owners of the LLC own a fiduciary duty to owners of the minority interest, the Court held that:  “When fiduciaries are faithless to their trust, the victims must not be left wholly without a remedy…To hold that there is no remedy when corporate fiduciaries use corporate assets to enrich themselves was unacceptable in 1742 and in 1832, and it is still unacceptable today.  Derivative suits are not the only possible remedy, but they are the one that has been recognized for most of two centuries, and to abolish them in the LLC context would be a radical step”.

In AG Capital Funding Partners, L.P. v. State Street Bank and Trust Company[15], the question before the Court of appeals was “whether plaintiffs have viable claims against defendant State Street Bank and Trust Company…for breach of contract, violation of the federal Trust Indenture act of 1939 (see 15 USC § 77aaa et seq.), breach of fiduciary duty and negligence based on its alleged failure to deliver debt transaction registration statements arguably required to secure the debt”.  The complaint alleged various causes of action including “breach of fiduciary duty as an indenture trustee” and “breach of fiduciary as a secured party representative”.

The Court of Appeals held:

“[T]hat an indenture trustee owes a duty to perform its ministerial functions with due care, and if this duty is breached the trustee will be subjected to tort liability.  However, contrary to plaintiff’s arguments, the alleged breach of such duty neither gives rise to fiduciary duties nor supports the reinstatement of plaintiffs’ fourth and fifth causes of action”.

The Court of Appeals noted that:  “We further note that a number of courts have held that prior to default, indenture trustees owe note holder an extracontractual duty to perform basic, nondiscretionary, ministerial functions redressable in tort if such duty is breached[.]”

In AG Capital, the Court of Appeals noted that:  “First, [plaintiffs] cannot point to any provision in the indentures that places fiduciary obligations on State Street prior to an event of default.  Second…fiduciary obligations are wholly different from the performance of ministerial functions with due care.  Finally, mere allegations that a fiduciary duty exists, with nothing more, are insufficient to withstand summary judgment.”

And with respect to the claim that State Street was a fiduciary as a secured party representative, the Court of Appeals in AG Capital held that:

Plaintiffs’ fifth cause of action alleging that State Street had a fiduciary duty as a “Secured Party Representative” is not viable under the general principles governing fiduciary relationships.  “A fiduciary relationship ‘exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation’”.  Determining whether a fiduciary relationship exists necessarily involves a fact-specific inquiry.  “[E]ssential elements of a fiduciary relation are…’reliance…de facto control and dominance’” [citations omitted].  Stated differently, “[a] fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other”.

Here, State Street never became a secured party representative, as defined by the CTA, in the first instance.  Accordingly, State Street never undertook “a duty to act for or to give advice for the benefit of another” in that capacity.

In Eurycleia Partners LP v Seward & Kissel, LLP[16], a suit arising from the collapse of a hedge fund, “certain limited partners brought [an] action sounding in fraud and breach of fiduciary duty against the fund’s attorneys based on the law firm’s failure to disclose improper fund activities and its misrepresentations in the offering memoranda”.

In Eurycleia Partners, plaintiffs asserted “that S&K owed them a fiduciary duty and breached that duty by failing to reveal Wood River’s fraudulent actions, in particular, the fund’s violation of SEC reporting requirements in connection with its ownership of 5% and, later, 10% of Endwave’s stock”.

The Court of Appeals restated the ground rules for finding a fiduciary relationship:

A fiduciary relationship arises “between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation”.  Put differently, “[a] fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other”.  Ascertaining the existence of such a relationship inevitably requires a fact-specific inquiry.

The Court of Appeals then noted that:

“Here, plaintiffs do not allege that they had direct contact or any relationship – contractual or otherwise – with S&K.  Indeed, plaintiffs acknowledge that the offering memoranda advised prospective limited partners to consult their own legal counsel prior to investing in Wood River.  Plaintiffs nevertheless contend that S&K’s attorney-client relationship with Wood River in and of itself created a fiduciary relationship between S&K and the limited partners themselves.  We disagree.”

And the Court of Appeals finally concurred (with decisions by the Appellate Division) “that the fiduciary duties owed by a limited partnership’s attorney do not extend to the limited partners.”

Greenberg, Trager & Herbst, LLP v. HSBC Bank USA and Citibank, N.A.[17] involved the following issues:

(1) the scope of the duty a payor bank owes to a non-customer depositor of a counterfeit check and (2) the scope of the duty of a depository bank owes its customer when it as a colleting bank during the check collection process.

Citibank sent a check to law firm [GTH] which was deposited into the firm’s attorney trust account at HSBC.  Plaintiff law firm asserted several causes of action against HSBC and Citibank after a check in payment of the firm’s engagement retainer was returned and dishonored after the firm had been informed by telephone that the funds had cleared and were available for disbursement.

Supreme Court dismissed the complaint, finding that HSBC had no duty under the Uniform Commercial Code to inform plaintiff that the check had been returned.  The Appellate Division affirmed holding that the bank’s misrepresentation did not give rise to an action for negligent misrepresentation barring a fiduciary relationship which, the Appellate Division found, did not exist between a bank and its customers.

The Court of Appeals affirmed based upon the fact that plaintiff was not a customer of Citibank and that “the only duty Citibank owed GTH was to pay the check, return the check or send notice of dishonor of the check by midnight of the next banking day after receiving the check”.

As to plaintiff’s claim against HSBC for negligent misrepresentation, the Court in Greenberg, Trager stated:

As for the claim of negligent misrepresentation, “liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party for such that reliance on the negligent misrepresentation is justified”…”[T]he relationship between a bank and its depositor is one of debtor and creditor”…and “an arms length borrower-lender relationship…does not support a cause of action for negligent misrepresentation…This is true even if there is a long standing relationship between the customer and a particular bank employee…or “if the parties are familiar or friendly”…

The Court of Appeals rejected the plaintiff’s claim that HSBC owed a fiduciary duty to the law firm:

Although an agent owes a duty to its principal to disclose all material facts that come to its knowledge regarding the scope of the agency…the purpose of UCC 4-201 is not to impose a fiduciary duty on a collecting bank.  We have interpreted the statute such that the use of the term “agent” means that the item and any inherent risk in that item remains with the depositor and not the collecting bank…[“[a] collecting bank acts as the agent of its customer, and until such time as the collecting bank receives final payment, the risk of loss continues in the customer, the owner of the item”]…operates to keep the risk of loss upon the owner of the item rather than the bank and gives to the depositary bank a right to reimbursement superior to the owner’s rights to the proceeds and superior to the rights of the owner’s creditors”]).

In Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V.  “Plaintiffs claim[ed] they were fraudulently induced to sell their ownership interests in a company they co-owned with one of the defendants, and to release defendants from claims arising out of that ownership.]”.  Plaintiffs (owners of a minority interest) alleged that they were fraudulently induced to sell their ownership interests and release defendants (owners of the majority interest).  The Court of Appeals started its analysis by stating:

That the parties had a fiduciary relationship does not alter our conclusion.  It is true that Telmex, as a majority shareholder in a closely held corporation, owed a fiduciary duty to plaintiffs, minority shareholders…Telmex was therefore required to “disclose any information that could reasonably bear on plaintiffs’ consideration of [its purchase] offer”…

And with respect to the transaction, the Court of Appeals stated that:

A sophisticated principal is able to release its fiduciary from claims – at least where, as here, the fiduciary relationship is no longer one of unquestioning trust – so long as the principal understands that the fiduciary is acting in its own interest and the release is knowingly entered into…[“There is no prerequisite to the settlement of a fraud case that the (fiduciary) defendant must come forward and confess to all his wrongful acts in connection with the subject matter”]…To the extent that Appellate Division decisions such as Littman v. Magee…suggest otherwise, they misapprehend our case law.  Plaintiffs here are large corporations engaged in complex transactions in which they were advised by counsel.  As sophisticated entities, they negotiated and executed an extraordinarily broad release with their eyes wide open.  They cannot now invalidate that release by claiming ignorance of the depth of their fiduciary’s misconduct.

However, the Court of Appeals admonished that:

In certain circumstances, a fiduciary’s disclosure obligations might effectively operate like a written representation that no material facts are undisclosed, and this might satisfy a principal’s obligation to investigate further.  Where a principal and fiduciary are sophisticated parties engaged in negotiations to terminate their relationship, however, the principal cannot blindly trust the fiduciary’s assertions.  This is particularly true where, as alleged here, the principal has actual knowledge that its fiduciary is not being entirely forthright:  “[W]hen the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it.  It cannot reasonably rely on such representations without making the additional inquiry to determine their accuracy”…the fiduciary is “aware of information that rendered (its) reliance unreasonable, or if (it) had enough information to create a duty to investigate further, the requisite reliance cannot be established”]).

In Aspro Mechanical Contracting, Inc. v. Fleet Bank, N.A.[18], Plaintiffs – individuals and entities who had subcontracted with Berry Street to provide labor, services and materials for the project – commenced a special proceeding to recover Lien Law article 3-A trust funds allegedly diverted by Fleet and the New York City Housing Authority.

Plaintiffs commenced an action pursuant to Lien Law article 77 alleging that “they were owed monies on their subcontracts and that Fleet had diverted trust funds by paying itself prior to paying plaintiffs’ claims”.  After motion practice, a trial, appeal and a remand, the parties stipulated “to damages and judgment was entered for plaintiffs in the amount of $1,904,923.48”.  Fleet appealed.  The Court of Appeals held that:

Under Lien Law article 3-A, the funds NYCHA owed Berry Street under the turnkey sale contract were trust assets subject to the rights of trust beneficiaries and it is undisputed that plaintiffs’ as subcontractors on the project, are trust beneficiaries (see Lien Law §§ 70, 71).  Berry Street assigned its rights under the NYCHA’s direct payment of the sale proceeds to Fleet rendered Fleet a statutory owner-trustee.  As a statutory trustee, Fleet was obligated to act “as fiduciary manager” of the funds (1959 report of NY Law Rev Commn, at 214).  Fleet therefore owed the beneficiaries a duty of loyalty and was required “to administer the trust solely in the interest of the beneficiaries”.

Accordingly, the Court of Appeals found that:

In these circumstances, Fleet’s application of the trust assets to repay its loans to Berry Street – without acknowledging its status as trustee and providing notice to trust beneficiaries of the transfer constituted a breach of its fiduciary duty.

Roni LLC v. Arfa.[19] arose “from a series of related business transaction in  which a number of Israeli investors acquired membership interests in seven limited liability companies that purchased residential buildings in the Bronx and Harlem for renovation and resale”.  Investors or their assignees sued the promoter/defendants “alleging that the promoter defendants deliberately concealed that property sellers and mortgage brokers paid them commissions of up to 15% of the purchase prices of the properties and that these commissions inflated the purchase prices by millions of dollars”.

Supreme Court dismissed the causes of action for waste and actual fraud but sustained the remaining causes of action, including a claim for breach of fiduciary duty.  The promoter defendants asserted:  “no fiduciary relationship existed between the promoter-defendants and plaintiffs before the formation of the limited liability companies”.

The Court of Appeals held that:

A fiduciary relationship arises “between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation”.  Put differently, “[a] fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other”…Ascertaining the existence of a fiduciary relationship “inevitably requires a fact-specific inquiry”.

And, on the facts, the Court of Appeals held that:

Here, plaintiffs assert that the promoter defendants planned the business venture, organized the limited liability companies, solicited their involvement and exercised control over the invested funds.  We agree with plaintiffs that the promoters of a limited liability company are in the best position to disclose material facts to investors and can reveal those facts more efficiently than individual investors, who would otherwise incur expense investigating what the promoters already know.  In addition, the complaint alleges that the promoter defendants represented to the foreign investors that they had “particular experience and expertise” in the New York real estate market.  Although the promoter defendants describe plaintiffs as “sophisticated prospective investors,” the complaint paints a different picture, stating that they were “overseas investors who had little or limited knowledge of New York real estate or United States laws, customs or business practices with respect to real estate or investments.”  Moreover, plaintiffs contend that the promoter defendants assumed a position of trust and  confidence, in part, by “playing upon the cultural identities and friendship” of plaintiffs.  Accepting the totality of these allegations to be true, as we must at this early stage of the litigation, the complaint adequately pleads a fiduciary relationship.

Analysis

The recent decisions of the Court of Appeals in cases involving the question of whether or not a fiduciary relationship exists defy simple or linear analysis.

The Court consistently finds that clergy are not fiduciaries and that real estate brokers almost always have such a relationship with their clients.  All other vocations and professions fall on one side of the “fiduciary” line or the other – depending upon either fact specific documents, the nature of the transaction or the character of the information involved.

In a word, except for clergy and brokers, simply asserting that a defendant was a fiduciary will not suffice to sustain a claim.

If called upon to do so, as a threshold matter the courts are not reluctant to determine whether or not a defendant was, in fact, a fiduciary, based upon the circumstances of the case.  Accordingly, attorneys asserting a breach of fiduciary duty claim on behalf of a client should not simply characterize the defendant as a fiduciary in their pleadings but should, instead, recite and detail the documents, facts  and circumstances upon which that relationship is based.

And attorneys representing the target of a breach of fiduciary claim should not simply accept a self-serving characterization of “fiduciary” status.  Instead, defense counsel should marshal the facts, and search the law, to determine whether or not their client was, in fact, a fiduciary under the circumstances of that case.

Victor M Metsch is a Senior Litigation/ADR Partner at Hartman & Craven LLP.