March 2018 Update
The elements of a cause of action for breach of fiduciary duty are (1) the existence of a fiduciary duty, (2) breach of the fiduciary duty, and (3) damage proximately caused by the breach. Broadway Victoria, LLC v Norminton, Wiita & Fuster (2017) 10 CA5th 1185, 1192. See §§1.5, 8.4.
If the defendant in a case is an attorney, a physician, an investment adviser, or other professional who stands in a fiduciary relationship with the plaintiff, the plaintiff may join a professional negligence (malpractice) claim with a claim for breach of fiduciary duty, depending on the nature of the breach. “Beyond mere allegations of professional negligence, a cause of action for breach of fiduciary duty requires some further violation of the obligation of trust, confidence, and/or loyalty to the client.” Broadway Victoria, LLC v Norminton, Wiita & Fuster (2017) 10 CA5th 1185, 1193. See §1.9.
Applying California law, the federal district court in Strong v Cochran (D Utah, Oct. 13, 2017, No. 2:14-cv-788-TC) 2017 US Dist Lexis 170073, *17, referred to the potential fiduciary obligations of a member in a manager-managed LLC as a “fiduciary duty in fact” concept. Citing GAB Bus. Servs., Inc. v Newsom Claim Servs., Inc. (2000) 83 CA4th 409, 419, overruled in part on other grounds in Reeves v Hanlon (2004) 33 C4th 1140 (see §4.55), the court stated that “[u]nder that approach, an individual, regardless of title, owes a fiduciary duty to a company when the individual ‘participates in management of the corporation’ and ‘exercis[es] some discretionary authority.’” 2017 US Dist Lexis 170073 at *17. See §3.19.
If the LLC operating agreement does not limit or eliminate liability for breach of fiduciary duty, the managers of Delaware LLCs owe the same fiduciary duties as directors of Delaware corporations. McKenna v Singer (Del Ch, July 31, 2017, No. 11371-VCMR) 2017 Del Ch Lexis 138, *41. See chap 4. Only managing members or controlling persons have such fiduciary duties by default. Beach to Bay Real Estate Ctr. LLC v Beach to Bay Realtors Inc. (Del Ch, July 10, 2017, No. 10007-VCG) 2017 Del Ch Lexis 118, *15. The court in Beach to Bay noted that “[i]t is conceivable under certain circumstances a minority member of an LLC, with access to confidential information, could stand in a fiduciary relationship to the entity or to the other members. However, no such relationship exists here.” 2017 Del Ch Lexis 119 at *17. See §3.54.
In Central Laborers’ Pension Fund v McAfee, Inc. (Nov. 15, 2017, No. H039508) ___ CA5th ___, 2017 Cal App Lexis 1008, *95, the court held that, while Delaware law governed the standard of care applicable to the corporate director defendants in the case, the internal affairs doctrine did not extend to “matters properly governed by local forum rules, including form of the action (equitable or legal) and mode of trial (jury or bench).” See §4.4.
Delaware clearly defines a director’s duty of care in terms of gross negligence. See, e.g., Singh v Attenborough (Del 2016) 137 A3d 151, 151 (“[a]bsent a stockholder vote and absent an exculpatory charter provision, the damages liability standard for an independent director or other disinterested fiduciary for breach of the duty of care is gross negligence, even if the transaction was a change-of-control transaction”). See §4.29.
Once “a fully informed vote by a majority of a company’s disinterested, uncoerced stockholders” has been taken, “the business judgment rule irrebuttably applies to a court’s review of the approved transaction,” even if the vote was statutorily required and the transaction would otherwise have been subject to an enhanced standard of review. In re Volcano Corp. Stockholder Litig. (Del Ch 2016) 143 A3d 727, 738, citing Singh v Attenborough (Del 2016) 137 A3d 151. See §§4.31, 4.44.
In Singh v Attenborough (Del 2016) 137 A3d 151, 153, the court held that an advisor whose bad-faith actions cause its board of director clients to breach their situational fiduciary duties was liable for aiding and abetting. See also Malpiede v Townson (Del 2001) 780 A2d 1075, 1096; Buttonwood Tree Value Partners, L.P. v R. L. Polk & Co. (Del Ch, July 24, 2017, No. 9250-VCG) 2017 Del Ch Lexis 126, *24. For a California case applying the Delaware law of aiding and abetting a breach of fiduciary duty, see Central Laborers’ Pension Fund v McAfee, Inc. (Nov. 15, 2017, No. H039508) ___ CA5th ___, 2017 Cal App Lexis 1008. See §§4.58, 4.65.
In Thomson v Canyon (2011) 198 CA4th 594, 606, the court held that a cause of action for breach of fiduciary duty is governed by the residual 4-year statute of limitations because the California Code of Civil Procedure does not specify a limitations period for breach of fiduciary duty claims. The claim was brought against a real estate agent, however, not a corporate officer or director. See §4.89.
In Higgins v Higgins (2017) 11 CA5th 648, 659, the court noted the flexibility of a constructive trust to address “practically any case where there is a wrongful acquisition or detention of property to which another is entitled.” See §6.55.
Family Code §1101(g)–(h) remedies apply only to the concealment, transfer, or impairment of community assets that would be part of the property division in marital dissolution. Accordingly, Fam C §1101(g)–(h) remedies are not available for a failure to disclose income that was earned and spent during the marriage. Marriage of Schleich (2017) 8 CA5th 267, 281 (Fam C §2107 sanctions may be available in these cases). See §6.64.
The Fam C §1101(g)–(h) remedies apply only to improper concealment, transfer, or impairment of community property, not separate assets. Marriage of Schleich (2017) 8 CA5th 267, 278 (“value of the asset” remedies apply only to community assets) (citing Marriage of Simmons (2013) 215 CA4th 584, 588). When a party fails to disclose an account that contains part community and part separate property, a court may award Fam C §1101(g)–(h) remedies only with respect to the community portion. Schleich, 8 CA5th at 280 (Fam C §2107 sanctions may be available with respect to nondisclosure of separate assets). See §§6.64, 6.66.
For claims that are essentially remedies, such as a claim seeking to impose a constructive trust, the statute of limitations is determined by the underlying substantive right. Higgins v Higgins (2017) 11 CA5th 648, 659. See §6.68.
An alternate basis on which parties may elect to have their dispute managed and decided by a party-selected neutral is a “general reference” under CCP §638(a). Similar to when a temporary judge is appointed, when a general referee has decided a case under CCP §638(a) the parties may appeal the general referee’s otherwise appealable judgments and orders directly to the California Court of Appeal. See Lindsey v Conteh (2017) 9 CA5th 1296, 1302. In contrast, the decisions of a “special” or non-consensual referee are submitted to the trial court that referred the case. See §6.71.
Binding arbitration is more rarely used in intrafamily disputes than in commercial cases, due to the absence of preexisting mandatory arbitration clauses in family transactions and the reluctance of parties to waive appeal rights through a voluntary (i.e., non-contractual) submission to binding arbitration after a dispute has arisen. Stipulations to appoint a private temporary judge typically provide that the parties will conduct pretrial and trial proceedings before the private judge, but preserve appellate rights in the public courts. See §6.71.
In Bigler-Engler v Breg, Inc. (2017) 7 CA5th 276, 321, the court held that a breach of fiduciary duty claim against a doctor and medical group, arising out of a lack of informed consent (for use of a surgical wound-cooling medical device), was “based on professional negligence” and was subject to the statutory $250,000 noneconomic damage cap under CC §3333.2. See §7.19.
In February 2017, President Trump issued a memorandum directing the DOL to review the fiduciary rule (which was prepared and issued in full by the Obama administration) and prepare an updated economic and legal analysis of it. In March 2017, the DOL issued a proposed rule calling for a 60-day delay in the rule’s April 2017 applicability date to June 9, 2017, and re-opening the rule to public comment. That proposed rule became final in May 2017. The DOL also issued a field assistance bulletin saying that it will not enforce the rule in the near term. See DOL Field Assistance Bulletin No. 2017-02 (May 22, 2017), available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2017-02. See §7.27.
The fiduciary rule was officially implemented, in part, on June 9, 2017. Department of Labor enforcement of the rule, however, is on hold until July 1, 2019—the full implementation date. The extension of the transition period to July 1, 2019, was announced by the DOL on November 27, 2017. During the transition period, according to the DOL, fiduciary advisers are required “to adhere to a best interest standard when making investment recommendations, charge no more than reasonable compensation for their services, and refrain from making misleading statements.” See https://www.dol.gov/newsroom/releases/ebsa/ebsa20171127-0. See §7.27.
An employer may have liability under ERISA to employees or former employees. In Johnson v Fujitsu Technols. & Bus. (ND Cal, Apr. 11, 2017, No. 16-CV-03698 NC) 2017 US Dist Lexis 73132, *10, denying the defendant’s motion to dismiss, the court found that former employees plausibly alleged that their employer directly breached its fiduciary duties related to its employee pension benefit plan in six ways and also incurred ERISA liability by failing to monitor the plan administrator. See §7.33.
A real estate broker acting as a dual agent of both the seller and the buyer owes a fiduciary duty to both the buyer and the seller. Horiike v Coldwell Banker Residential Brokerage Co. (2016) 1 C5th 1024, 1040. See §7.36.
The elements of a cause of action for breach of fiduciary duty are (1) the existence of a fiduciary duty, (2) breach of the fiduciary duty, and (3) damage proximately caused by the breach. Broadway Victoria, LLC v Norminton, Wiita & Fuster (2017) 10 CA5th 1185, 1192. See §8.4.
When the fiduciary duty is based on or arises from a statute, standing to assert a claim for breach of that duty may be defined by the statute. See, e.g., Koeplin v Klotz (ND Cal, Sept. 5, 2017, No. 17cv01530DMR) 2017 US Dist Lexis 143325. The Klotz court dismissed an ERISA plan administrator’s breach of fiduciary duty claim against a participant because ERISA does not provide standing to plan administrators to sue. See §8.9.
A claim may be attacked at the pleading stage if each element of the aiding and abetting claim is not adequately pled. For example, in Namer v Bank of America, N.A. (SD Cal, Mar. 30, 2017, No. 16cv3024JM(WVG)) 2017 US Dist Lexis 48120, an aggrieved party in a corporate takeover bid sued for aiding and abetting a breach of fiduciary duty in connection with the removal of the plaintiff from the corporation’s account with Bank of America. The district court dismissed the aiding and abetting claim under Fed R Civ P 12(b)(6) because “actual knowledge” by the bank of the alleged breaches of fiduciary duty was not sufficiently alleged. See §8.11.
In Laymon v J. Rockcliff, Inc. (2017) 12 CA5th 812, the court held that the real estate sellers’ breach of fiduciary duty claims against brokers and service providers based on alleged kickbacks were subject to arbitration based on arbitration clauses in the real estate listing agreements. See §8.22.
The 1-year statute of limitations was applied broadly in Foxen v Carpenter (2016) 6 CA5th 284. A former client sued her former personal injury attorneys for declaratory relief, breach of contract, unfair business practices, conversion, money had and received, and breach of the implied covenant of good faith and fair dealing, based on a claim that the attorneys had improperly manipulated litigation costs in order to earn a greater recovery. The court of appeal affirmed the trial court’s sustaining of a demurrer based on the 1-year statute of limitations for legal malpractice. The court rejected the plaintiff’s argument that her breach of contract and related claims arose from breaches of “ordinary” and “non-legal” duties, stating, “In this case, plaintiff will not be able to establish her contract claims against defendants without demonstrating they breached professional duties owed to her.” 6 CA5th at 292. See §8.36.
In ESG Capital Partners, LP v Stratos (9th Cir 2016) 828 F3d 1023, the Ninth Circuit allowed non-legal malpractice claims to proceed against an attorney. The plaintiff negotiated an agreement with the defendant and defendant’s lawyer to buy pre-IPO Facebook shares. The Ninth Circuit determined that the conversion, breach of fiduciary duty, unjust enrichment, and unfair competition claims against the attorney were not barred by CCP §340.6(a) so long as they do not depend on proof that the attorney violated professional duties. The court held that the breach of fiduciary duty claims did depend on proof of the attorney’s violation of professional duties, and were therefore barred by the statute of limitations, but the other claims did not depend on the attorney’s violation of professional duties and were not barred. See §8.36.
In Williamson v Brooks (2017) 7 CA5th 1294, the beneficiary of a trust sued the trustee for the failure to distribute trust assets. After a bench trial, the trial court found in favor of the defendant because the beneficiary had not established any damages. The court of appeal affirmed, stating “we agree with the trial court that, even if a breach of fiduciary duty did occur, Beverly suffered no compensable loss.” 7 CA5th at 1302. See §8.37.
According to the economic loss doctrine, conduct amounting to a breach of contract is not also tortious unless the conduct violates an independent duty arising from principles of tort law. See Applied Equip. Corp. v Litton Saudi Arabia, Ltd. (1994) 7 C4th 503, 514. In MH Pillars Ltd. v Realini (ND Cal, Sept. 14, 2017, No. 15cv1383(PJH)) 2017 US Dist Lexis 149539, *50, the district court dismissed breach of fiduciary duty claims under Fed R Civ P 12(b)(6) because “an omission to perform a contract cannot give rise to tort damages when a plaintiff claims only economic loss, as plaintiffs do here.” See §8.37.
In Broadway Victoria, LLC v Norminton, Wiita & Fuster (2017) 10 CA5th 1185, the plaintiff asserted claims against its prior attorneys for legal malpractice and breach of fiduciary duty in connection with the defendants’ handling of a real estate dispute and a related bankruptcy. After the plaintiff rested at trial, the defendant filed a motion for a nonsuit on the breach of fiduciary duty claim. The court of appeal affirmed the trial court’s granting of the nonsuit, stating, “A defendant is entitled to a nonsuit if the trial court determines that, as a matter of law, the evidence presented by plaintiff is insufficient to permit the jury to find in his favor.” 10 CA5th at 1191. The court of appeal said that no California court has explicitly held that a breach of fiduciary duty claim can be asserted even if it is based on the same facts as the legal malpractice claim. The nonsuit was affirmed because “we conclude that, when the basis for a claim of breach of fiduciary duty arises from the same facts and seeks the same relief as the attorney negligence claim for malpractice, the claim for breach of fiduciary duty is duplicative and should be dismissed.” 10 CA5th at 1194. See §8.40.
Punitive damages are not recoverable based solely on the plaintiff’s proof of the prima facie elements of breach of fiduciary duty. “[A] breach of fiduciary duty alone without malice, fraud or oppression does not permit an award of punitive damages. The wrongdoer must act with the intent to vex, injure, or annoy, or with conscious disregard of the plaintiff’s rights.” Lackner v North (2006) 135 CA4th 1188, 1210. In Crowe v Gogineni (ED Cal, Sept. 28, 2017, No. 11dv3438(EFB)) 2017 US Dist Lexis 160237, the district court ruled in favor of the plaintiff on her breach of fiduciary duty claims after a bench trial and awarded more than $2 million in compensatory damages. However, punitive damages were denied because the plaintiff failed to adduce evidence of the defendant’s financial condition, which the court said was a key element in proving the entitlement to punitive damages. See §8.47.