Fiduciary duties of partners: tips for avoiding legal pitfalls.
Partnerships are a commonly-used business entity, employed in a variety of professions. Leaving one partnership for another can pose legal issues for the departing partner, and both partnerships involved. A recent New York court case examined this situation and the legal issues related to fiduciary duties owed by one partner to fellow partners.
A New York appellate court recently issued a decision which examined fiduciary duties owed by partners in a professional setting, and looked at circumstances that constitute aiding and abetting a partner’s breach of his fiduciary duty.
In Fall of 2012, two small Long Island accounting firms (“Firm A” and “Firm B”) were negotiating a possible merger. Talks stalled and the merger never happened. At the same time, Firm A—through one of its partner, Mr. Sorkin—was courting, and was close to engaging, a potential new client (“Client C”). A few months later, Mr. Sorkin abruptly left Firm A and partnered with Firm B, which promptly engaged Client C. Firm A alleges that Sorkin breached his fiduciary duties and seeks to sue Firm B for aiding and abetting Sorkin’s breach.
The Fiduciary Duty Standard:
In its decision, the court recapped aspects of the fiduciary duty standard, noting: a fiduciary duty entails a higher-than-ordinary level of trust, and includes a duty of undivided and undiluted loyalty. Partners owe a fiduciary duty to each other.
As a partner of Firm A, Sorkin owed his firm’s fellow partners undivided and undiluted loyalty. Firm A alleges Sorkin breached this duty in his departure and misappropriation of Client C. Firm A seeks to sue Firm B for aiding and abetting Sorkin’s breach.
In order for Firm A to sue Firm B, it must show that Firm B knowingly induced or participated in Sorkin’s breach by providing substantial assistance—which could be established by showing that Firm B affirmatively assisted Sorkin. Mere inaction on the part of Firm B would not be sufficient unless Firm B owed a duty directly to Firm A. (Not the case here.)
The facts remain to be fleshed out, but the court felt Firm A might be able to prove Firm B aided and abetted Sorkin’s breach and so it permitted Firm A to amend its complaint to sue Firm B.
Savvy professionals contemplating a move should know and consider the fiduciary duties they owe to fellow partners, and conduct themselves in a manner to obviate legal trouble. Likewise, partnerships will benefit from consulting knowledgeable counsel in order to understand: (i) their rights—with respect to departing partners; and (ii) the risks—with respect to the partnership’s conduct when bringing on a new partner.
The full decision can be found here: http://www.courts.state.ny.us/reporter/3dseries/2016/2016_04704.htm