Legal Question in Business Law in New York

Neglect of fiduciary responsibility to minority partner

I was a tiny % (share holder) minority partner in a small company, was an Officer of the company (pretty much in name only), but had no financial authority, and was not authorized to sign company checks. After a sales transaction occurred the new investors suggested fraud, false information, etc. Business was purchased back from equity investors but some investors (debt side investors who loaned a significant amount of money to the company) were still involved and had not been paid back. The major share holder then decided to take company to bankruptcy without my consent and to keep the money from the debt investor. He also decided to not pay several suppliers, employees, and other creditors, besides that significant debt investor. Much of this process, specifically the financial aspects and reporting, etc. were conducted solely by the majority officer. Now bankruptcy litigation and possible add'l fraud suits may be brought against us. I contend that due to major parnter's neglect of his fiduciary responsibility to me that he has jeopardized my career, my family, my reputation, besides having cost me significant legal fees. Do I have any legal recourse due to this negligence of fiduciary responsibility to me?


Asked on 2/27/05, 12:49 pm

1 Answer from Attorneys
William Frenkel Frenkel Sukhman LLP

Re: Neglect of fiduciary responsibility to minority partner

As you probably understand, yours is a complicated, very fact-specific situation that calls for the expertise of a corporate litigator.

In general, though, to prove a breach of fiduciary duty by the executive officer (who was also the majority shareholder) you have to demonstrate a breach of a duty of care or a duty of loyalty. The latter usually involves some sort of self-dealing or a conflict of interest, whereas the former is more of a negligence standard, which is mitigated heavily by the business judgment rule. This rule effectively immunizes directors and officers from liability if they acted for a proper corporate purpose, in good faith, without personal material interest and on an informed basis (reliance one experts). If a decision was taken that the corporation as a whole (and creditors once the corporation became insolvent) would benefit from filing from bankruptcy protection, it would be difficult to challenge as a violation of fiduciary duties.

Moreover, note that directors and officers generally owe fiduciary duties to the corporation as a whole and to its shareholders but not to other officers. So, if your claim is premised on the damages or harm suffered in the position of a vice president, it probably would not be recognized on that basis.

You may possibly have other claims against the majority shareholder/s based on other theories but, once again, you would need to consult a litigator to get a comprehensive review of your legal situation. You mentioned that you were named in bankruptcy and related litigation as a defendant so remaining without legal representation is no longer an option for you.

This reply is in the nature of general information, is not legal advice and should not be relied on as such.

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Answered on 3/01/05, 6:15 pm


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