Spurned Law Firm States a Claim for Breach of Fiduciary Duty Against Departing Partners Says the Fourth Department

• Posted on: Feb 4 2019

Readers of this Blog know that we have addressed fiduciary duty claims in the past (here), most often in the context of a claim against a financial advisor, a corporate officer, or an LLC member (e.g., here, here, here). There are, of course, other relationships that involve fiduciary duties, e.g., lawyers, bankers, business partners, corporate officers and directors, managing shareholders, personal representatives (executors and administrators), and trustees. Fiduciaries, such as those listed here, have an obligation to act in a trustworthy manner, with honesty, and in the best interests of those to whom they owe such duties. When fiduciaries breach these duties and obligations, as was alleged in Cohen & Lombardo, P.C. v. Connors, 2019 N.Y. Slip Op. 00755 (4th Dept. Feb. 1, 2019) (here), litigation typically ensues.

There are two types of fiduciary relationships: 1) those created by law (e.g., statute) or contract; and 2) those that arise from the circumstances underlying the relationship between the parties and the nature of the transactions at issue.

While courts generally look to a statute or contractual arrangement to determine the nature of the parties’ relationship (e.g., the first type of fiduciary relationship), the existence of a fiduciary relationship is not dependent solely upon a statute or contractual relation. See EBC I, Inc. v. Goldman, Sachs & Co., 5 N.Y.3d 11, 20 (2005). Rather, the actual relationship between the parties determines the existence of a fiduciary duty (e.g., the second type of fiduciary relationship). Id.

There are three forms of fiduciary duties (often referred to as the “triad” duties): due care, loyalty, and candor.

The duty of care requires a fiduciary to act as a reasonable and prudent person would in a similar circumstance.

The duty of candor requires a fiduciary to act with honesty and transparency – i.e., he/she must fully disclose information that may harm the business or individual that is owed the duty.

The duty of loyalty requires fiduciaries to act in good faith and with the best interests of the business or individual in mind, putting the interests of the business or individual above their own personal interests. Examples of a breach of the duty of loyalty include: usurping a corporate or business opportunity; acting with a conflict of interest; competing with the business, partnership or corporation; and misappropriating assets of the business, partnership or corporation.

The reasons for the loyalty rule are evident. A person cannot fairly act for his/her interest and the interest of others in the same transaction. Consciously or unconsciously, he/she will favor one side or the other, and where placed in this position of temptation, there is always the risk that he/she will favor the position of self-interest.

Any disinterested and independent decision that is made by a fiduciary is analyzed under the business judgment rule. The business judgment rule is based on the premise that a court should not be entitled to Monday-morning quarterback decisions made by fully informed individuals who are free from conflicts of interest. Auerbach v. Bennett, 47 N.Y.2d 619 (1979). Thus, the courts will not second-guess the decisions made by fiduciaries and will not hold them personally liable even if the decision turns out to be the wrong one. If a fiduciary breaches the duty of loyalty, the business judgment rule does not apply, and the fiduciary may be held personally liable for his/her actions.

Cohen & Lombardo, P.C. v. Connors

Cohen & Lombardo involved a common situation faced by law firms today – partners have disagreements over the direction of their firm and decide to leave and start a new competing one. Often the departure involves clients moving with the departing partners and associates from the old firm signing on with the new one.

In New York, and elsewhere, “[t]he members of a partnership owe each other a duty of loyalty and good faith, and ‘[a]s a fiduciary, a partner must consider his or her partners’ welfare, and refrain from acting for purely private gain.’” Gibbs v. Breed, Abbott & Morgan, 271 A.D.2d 180 184 (1st Dept. 2000 (quoting, Meehan v. Shaughnessy, 404 Mass. 419, 434 (1989)). “Partners are constrained by such duties throughout the life of the partnership and ‘[t]he manner in which partners plan for and implement withdrawals is [still] subject to the constraints imposed on them by virtue of their status as fiduciaries.’” Id. at 184-85 (quoting Hillman, Loyalty in the Firm: A Statement of General Principles on the Duties of Partners Withdrawing from Law Firms, 55 Wash & Lee L. Rev. 997, 999 (1998)).

Defendants Daniel R. Connors (“Connors”) and James J. Nash (“Nash”) were shareholders in Cohen & Lombardo, P.C. (“C&L” or the “Firm”). Both terminated their respective ownership interests in the Firm on May 2, 2016. The following day, four associates of the Firm resigned from their employment with C&L to join Conners and Nash (collectively, “Associate Defendants”).

C&L commenced the action seeking damages for breach of fiduciary duty, misappropriation, and conspiracy to violate fiduciary duties. In its complaint, C&L alleged that, between August 2012 and April 29, 2016, Connors and Nash devised a plan to leave the Firm and establish a new law firm, taking with them most of C&L’s civil litigation practice; that Connors and Nash conspired with the Associate Defendants to carry out this plan; and that, shortly after defendants’ departure from C&L, several of the Firm’s long-time clients transferred their cases to the new firm established by Connors and Nash.

Defendants moved to dismiss the complaint pursuant to CPLR §§ 3211 and 3016. The motion court granted defendants’ motion in part by dismissing the causes of action for conspiracy to violate fiduciary duties against each of the defendants. The court denied the motion with respect to the causes of action against Connors for breach of fiduciary duty and misappropriation and the cause of action against Nash for breach of fiduciary duty. Both parties appealed. The Appellate Division, Fourth Department, affirmed.

The Court’s Decision

The Court held that the Firm had met its burden of pleading a breach of fiduciary duty with particularity. Slip Op. at *1 (citing Litvinoff v. Wright, 150 A.D.3d 714, 715 (2d Dept. 2017)). In that regard, the Court found that, for pleading purposes, the Firm satisfactorily alleged the elements of the claim against Conners and Nash, to wit: the defendants owed the Firm a fiduciary duty, that the defendants committed misconduct, and that the Firm suffered damages caused by that misconduct. Id. (citing Northland E., LLC v. J.R. Militello Realty, Inc., 163 A.D.3d 1401, 1402 (4th Dept. 2018)).

The Court also held that the Firm adequately alleged a misappropriation claim against Conners. In affirming the motion court, the Fourth Department drew a distinction between stating a claim and proving a claim on a pre-answer motion to dismiss, where factual matter was submitted on the motion: “where, as here, evidentiary material is submitted and considered on a motion to dismiss a complaint pursuant to CPLR 3211 (a) (7), the question becomes whether the plaintiff has a cause of action, not whether the plaintiff has stated one, and unless it has been shown that a material fact as claimed by the plaintiff to be one is not a fact at all, and unless it can be said that no significant dispute exists regarding it, dismissal should not eventuate.” Slip op. at *2 (internal quotation marks and brackets omitted; quoting Gawrych v. Astoria Fed. Sav. & Loan, 148 A.D.3d 681, 683 (2d Dept. 2017)). Against the foregoing, the Court declined to determine whether C&L could “ultimately establish its allegations.” EBC I, 5 N.Y.3d at 19 (“Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss”). Thus, the Court held that it was an issue of fact whether “the items allegedly taken by Connors constitute[d] misappropriated material.…” Id.

Takeaway

Conners & Lombardo is as much about the fiduciary duties law partners and associates owe to the law firm at which they work as it is about the pleading standards under the CPLR in a pre-answer motion to dismiss. While the Court did not delve into the facts and the allegations in any depth, the decision illustrates the point that “on a motion to dismiss under CPLR 3211, the pleading is to be given a liberal construction, the allegations contained within it are assumed to be true and the plaintiff is to be afforded every favorable inference.” Simkin v. Blank, 19 N.Y.3d 46, 52 (2012) (citation omitted). The Court’s citation to Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491-492 (2008)) underscores this point. In Pludeman, the Court of Appeals explained that the purpose of CPLR 3016(b) is to inform a defendant of the complained-of conduct. For that reason, CPLR 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” 10 N.Y.3d at 491 (internal quotation marks and citation omitted). Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” Id. at 492. Thus, a plaintiff will satisfy CPLR 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. Id. In Conners & Lombardo, the Court found that the Firm met this standard. Slip Op. at *2.