What is Self-Dealing?

Self-dealing occurs when a fiduciary acts in their own best interest while conducting a business transaction, rather than in the interest of the business. In other words, the individual who self-deals is essentially on both ends of the transaction and disregards their duty of loyalty to the company. One of the most common examples of self-dealing is using business resources for a direct personal benefit.

There are many different ways self-dealing can arise. Other examples of self-dealing can include the following:

If you have been accused of self-dealing, or your company has been financially harmed by it, contact an experienced business litigation attorney at Litico Law Group. We can advise you regarding your options and help you achieve a successful outcome.

• Using company funds for a personal loan
• Engaging with a connected company without making proper disclosures
• Failing to share knowledge of a business opportunity with partners
• Seizing corporate opportunities for a personal benefit
• Diverting corporate opportunities
• Engaging in a transaction that involved company assets and receiving a kickback
• Paying oneself an excessive amount of compensation
• Insider trading
• Using corporate assets to pay for personal expenses
• Purchasing a controlling interest in a competing company

For those who do not have a direct fiduciary duty, self-dealing can also refer to situations where a person buys or sells stocks before relevant information is made public.

Is Self-Dealing Ever Permitted?

The business judgment rule acknowledges that there are risks when it comes to making business decisions. This rule insulates corporate directors and other fiduciaries from liability for making decisions on behalf of the company, as long as they were made in good faith. However, it is important to understand that the rule does not protect corporate officers and other fiduciaries from liability when it comes to self-dealing. Fiduciaries must act in good faith at all times and disclose any conflicts of interest.

Nevertheless, engaging in a conflict of interest may not always lead to liability. While the fiduciary duty of loyalty prohibits self-dealing, it may be permitted in limited instances where the conflicting transaction has been fully disclosed and approval has been given by the other partners or shareholders. Self-dealing is also allowed if the fiduciary can show that the transaction was fair to the company and its shareholders. While it’s best to avoid self-dealing entirely, a transaction involving a conflict of interest can be cured subsequently through ratification — this means obtaining approval from the disinterested shareholders after the transaction has already been completed.

When Does Self-Dealing Constitute a Breach of Fiduciary Duty?

Self-dealing can have a substantial economic impact on a company. If an LLC member, corporate officer, director, or other party in a fiduciary relationship engaged in self-dealing, it may constitute a breach of fiduciary duty. In such cases, the party could be held responsible for any harm they caused the company or its shareholders to suffer as a result.

There are a number of both legal and equitable remedies that a court may impose in cases involving self-dealing. For instance, a court may order an award of compensatory damages, disgorgement of profits, a constructive trust, or an injunction to prevent further harm. A judge might also order the appointment of a receiver or order an injunction that requires the fiduciary to take certain actions.

Disputes involving self-dealing don’t always need to be resolved in litigation. In some cases, alternative dispute resolution methods such as mediation or arbitration can successfully resolve business conflicts involving self-dealing and other breach of fiduciary duty matters. These methods can offer a flexible, cost-effective, and efficient way to settle business disputes outside the courtroom with less disruption to business operations.

Contact an Experienced Illinois Business Attorney

If you have been accused of self-dealing, or your company has been financially harmed by it, an experienced business litigation attorney can advise you regarding your options and help you achieve a successful outcome. Located in Rolling Meadows, Litico Law Group provides reliable representation for a variety of business and corporate matters throughout Illinois. We welcome you to contact us by filling out our online form or calling 847-307-5942 to schedule a consultation to learn how we can assist you.

Members of a Limited Liability Company (LLC) owe certain fiduciary duties to the LLC and each other under Illinois law. Among the most important are the duties of care and loyalty. Unfortunately, LLC members can sometimes violate their fiduciary duties to the company by placing their own interests above the interests of the company or other LLC members. It’s vital for LLC members to fully understand their obligations — and the repercussions of breaching these duties.

What is an LLC Member’s Fiduciary Duty?

A fiduciary duty is a legal obligation that requires an LLC member to act in the best interests of the company. In a member-managed LLC, all members owe a fiduciary duty to one another since they all have input regarding the LLC’s operations. In contrast, in a manager-managed LLC, one member — the manager — is responsible for handling the operations of the company and owes a fiduciary duty to the other members.

Specifically, the fiduciary duties of LLC members help to ensure all members or managers of an LLC put the interests of the LLC above their own. These duties include both the duty of loyalty and the duty of care, as well as the duty to refrain from competing with the LLC and the duty to act fairly toward the company.

What is the Duty of Care?

The duty of care is a fiduciary duty that requires the LLC members to act in good faith, with the same level of care that a reasonably prudent person would set forth when fulfilling their obligations to the company. For example, an LLC member is expected to be thoughtful and prudent when purchasing property and advising other members. As long as an LLC member complies with the duty of care, they would likely be protected from liability in the event the deal did not work out.

Pursuant to the duty of care, an LLC member may not:

• Engage in intentional or reckless conduct
• Engage in grossly negligent conduct
• Knowingly violate the law when it comes to the LLC

Significantly, an LLC member’s duty of care and good faith also extends to wind-up situations. In such cases, they must still act fairly to the LLC, even if they have adverse interests. An LLC member must not compete with the interests of the company until the LLC has been dissolved.

What is the Duty of Loyalty?

Simply put, the duty of loyalty requires that an LLC member put the interests of the company above their own. An LLC member must not only account to the LLC, but they must also not engage in any conflicts of interest when it comes to their own financial interests and the company’s objectives. In addition, an LLC member may not use the LLC’s property for their own personal use — or capitalize on an opportunity that would benefit the LLC for their own economic gain.

In other words, an LLC member must act honestly, avoid conflicts of interest, and not take advantage of the LLC’s business opportunities for themselves. In some instances, an LLC member may be permitted to receive a personal benefit, as long as they’ve disclosed the deal and received approval from the LLC.

What Happens if an LLC Member Violates Their Fiduciary Duties?

Breaching a fiduciary duty can come with serious consequences. If it can be established that an LLC member breached their fiduciary duty, the LLC may be entitled to recover monetary damages to compensate for things like loss of business opportunities, loss of profits, and the wrongdoer’s unjust enrichment. In cases where fraud or egregious conduct can be shown, a court might award punitive damages — this category of damages is meant to serve as a deterrent to others and punish the defendant. A judge might also impose equitable remedies in cases involving an LLC member’s breach of duty of care or loyalty, such as an injunction or the appointment of a receiver.

Can an LLC Member Waive Their Fiduciary Duties?

As of 2017, the Illinois Limited Liability Company Act permits LLC members to waive their fiduciary duties or eliminate them, except for the duty of care. However, this must be specified in the operating agreement using clear and unambiguous language. An operating agreement may also alter the duty of care — but it may not authorize a violation of the law or intentional misconduct.

Contact an Experienced Business Law Attorney

If you are facing an LLC breach of fiduciary duty claim, it’s crucial to have the guidance of an experienced attorney. Located in Rolling Meadows, Litico Law Group serves the needs of LLCs and LLC members throughout Illinois for a wide variety of legal matters. We welcome you to contact us or give us a call at (847) 307-5942 to schedule a consultation to learn how we can assist you.

Illinois law specifies that any shareholder in a close corporation owes a fiduciary duty not only to the corporation, but to other shareholders. This includes minority shareholders. In addition, the shareholders of a regular corporation might also owe a fiduciary duty when the corporation operates in the same way as a close common law corporation — regardless of whether it is incorporated under the Illinois Business Corporations Act or the Close Corporations Act.

Specifically, a close corporation is one that looks like a partnership. There are a variety of factors a court would evaluate in determining whether a corporation resembles a close common law corporation, including the following:

• Whether the stock is held in only a few hands
• The frequency with which the stock is sold
• Whether the stock is publicly traded
• Whether all shareholders are officers or directors
• Whether all shareholders participate in the corporation’s day-to-day business

Even if a court determines that a shareholder owes fiduciary duties to the corporation, there are a few steps they might be able to take to avoid owing them.

How Can Minority Shareholders Avoid Owing Fiduciary Duties?

Whether it is committed by a majority or minority shareholder, a breach of fiduciary duty can result in serious disruptions to a company — and cause substantial damages. Litico Law Group’s business lawyer provides high-quality legal services in Illinois for a broad scope of business disputes.

Fiduciary duties can give rise to obligations a minority shareholder might not have anticipated. For example, owing a fiduciary duty might mean they can’t enter into deals with the company or compete with it. This can result in an unexpected loss of economic opportunity. Accordingly, there are a number of reasons a minority shareholder might wish to avoid owing fiduciary duties.

Pursuant to the Illinois Close Corporations Act, a shareholder may waive their fiduciary duties, as long as they have not yet been breached — this can be done by a shareholder in two primary ways. A shareholder can broadly waive their rights to control the corporation, vote shares, or serve in the role of a director. They can also avoid owing a fiduciary duty by executing a shareholder agreement that expressly states (1) no fiduciary duty is owed and (2) they do not have the ability to control the corporation simply because they have shareholder status. In the event litigation is commenced due to allegations of breach of fiduciary duty, a shareholder may be able to argue that they have no influence or control over the corporation.

Contact an Experienced Illinois Shareholder Dispute Attorney

Whether it is committed by a majority or minority shareholder, a breach of fiduciary duty can result in serious disruptions to a company — and cause substantial damages. Located in Rolling Meadows, Litico Law Group’s corporate litigation attorney provides high-quality legal services in Illinois for a broad scope of business disputes. We welcome you to contact us at (847) 307-5942 to schedule a consultation to learn how we can help.

There are many situations in business that involve a fiduciary duty. These types of relationships may arise between directors, officers, controlling shareholders, and with any party that has an obligation to act in the best interests of another. If this duty is breached, the injured party may incur considerable costs and suffer reputational harm. However, it’s important to understand that business matters can be complex — and not every mistake will constitute a breach of fiduciary duty.

Who Owes a Fiduciary Duty?

In a business context, fiduciary duties can arise in various fields and industries. Specifically, controlling shareholders owe a fiduciary duty to minority shareholders, business partners have this duty to each other, and directors have a duty to act in the best interests of the corporation. While corporate governance is one area in which fiduciary duties play a critical role, attorneys, financial advisors, real estate agents, stockbrokers, and the trustee of a trust also must act in accordance with this duty.

A breach of fiduciary duty can be a serious matter for a company, resulting in a wide variety of damages. In such cases, it is crucial to have a knowledgeable business attorney to guide you through the legal process. Litico Law Group offers reliable representation and high-quality legal services for a broad scope of business disputes, including breach of fiduciary duty claims.

Common Examples of Breaches of Fiduciary Duty

A fiduciary duty is the highest legal standard of care — and failure to adhere to it can have significant financial ramifications for a company. Under Illinois law, there are two specific duties that fall under a fiduciary duty. These include a duty of care and a duty of loyalty. While the duty of care requires a corporation’s officers and directors to make decisions on behalf of the company in good faith, the duty of loyalty means they must act without economic conflict.

Simply put, a breach of fiduciary duty occurs when a party has an obligation to act in the interests of another party but fails to do so. A corporate officer or director can breach their fiduciary duty to the corporation in many different ways. The following are common examples of breach of fiduciary duty that may lead to litigation:

• Sharing trade secrets
• Failing to exercise reasonable care
• Improperly using company funds
• Acting on behalf of a competitor
• Engaging in fraud, corruption, or embezzlement
• Making decisions in bad faith
• Failing to reasonably investigate before making a business decision
• Acting on improper motives
• Conflicts of interest
• Insider trading
• Purposely misrepresenting or concealing information

In addition, a fiduciary must be free from self-dealing and acting in their own best interests — rather than on behalf of the company. Fiduciaries are also prohibited from commingling or taking corporate assets and using them for their own personal advantage. If a plaintiff can show that (1) a fiduciary relationship existed; (2) the fiduciary duty was breached; and (3) the breach proximately caused the plaintiff’s damages, they may be able to secure a legal remedy. Specifically, the aggrieved party may be entitled to recover their monetary losses, equitable relief, an injunction, and punitive damages in some cases.

How Can Breaches of Fiduciary Duties Be Avoided?

Since there are many ways in which a fiduciary duty can be breached, it’s important to ensure you always act in the best interests of the party to whom you owe the duty. One way to help ensure breaches of fiduciary duty are avoided in a company is by creating policies that prohibit self-dealing, engaging in conflicts of interest, and other conduct that runs afoul of these obligations. It’s also a good idea for companies to keep minutes, document all meetings, and create board resolutions when major decisions are made.

While a business decision must be made in good faith, that doesn’t always mean it has to be the right one. Another way a claim for a breach of fiduciary duty can be avoided is by applying the business judgment rule. This doctrine presumes that corporate officers and directors made decisions in good faith and honestly believed they were in the corporation’s best interests — even if the outcome was not favorable to the company. It can be extremely challenging for a plaintiff to rebut this rule, absent a showing of fraud, corruption, or bad faith.

Contact an Experienced Illinois Business Attorney

A breach of fiduciary duty can be a serious matter for a company, resulting in a wide variety of damages. In such cases, it is crucial to have a knowledgeable business attorney to guide you through the legal process. Located in Rolling Meadows, Litico Law Group offers reliable representation and high-quality legal services in Illinois for a broad scope of business disputes, including breach of fiduciary duty claims. We welcome you to contact us at (847) 307-5942 to schedule a consultation to learn how we can assist you.

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How Do You Prove Breach of Fiduciary Duty?

Partnership & Shareholder Disputes

In business, directors, officers, and controlling shareholders owe each other and the corporation certain duties. This means that they are trusted to act in the best interests of the company when making business decisions and carrying out transactions. However, officers, directors, and other fiduciaries may sometimes fail to act in the best interests of the corporation. Under such circumstances, a breach of fiduciary duty claim may arise — and the wrongdoer may be held liable for the damages they caused the company to incur.

What Is a Fiduciary Duty?

Breach of fiduciary duty claims can be complex and it’s crucial to have an experienced business attorney on your side to help you navigate the legal process. Litico Law Group provides high-quality legal services in Illinois for a broad scope of business disputes. Contact us to schedule a consultation to learn how we can help.

A fiduciary duty is the commitment of one party to act in the best interests of another. This obligation often arises in a business context. Specifically, the board of directors of a corporation owe a fiduciary duty to the shareholders and the corporation itself. A failure to adhere to these duties can result in that party being held liable to the other for their damages.

In Illinois, there are two main duties in a fiduciary relationship: the duty of care and the duty of loyalty. The duty of care requires that the officers and directors of a corporation make decisions in good faith, with reasonable prudence and diligence. Similarly, the duty of loyalty means that directors and officers must act without economic conflict. They must also ensure they do not disclose the company’s confidential information.

How Is a Breach of Fiduciary Duty in Illinois Established?

Breaches of fiduciary duty can arise in various contexts. They may occur when an employee or co-owner of a company discloses trade secrets or acts on behalf of a competitor. A breach may also arise when a partner mismanages or comingles company assets, fails to disclose a conflict of interest, or damages a company’s goodwill through wrongful conduct. Self-dealing and exposing the company to liability through negligence are other common ways in which a fiduciary duty can be breached.

Three elements must be met to establish a breach of fiduciary duty in Illinois:

1. A fiduciary duty exists — A fiduciary relationship generally exists when one party places their confidence and trust in another, with that party’s full knowledge.
2. The fiduciary duty was breached — The plaintiff in a breach of fiduciary duty claim must demonstrate that the defendant acted in a manner contrary to their duty.
3. The breach proximately caused an injury to the plaintiff — A legal claim for a breach of fiduciary duty can only be made if the plaintiff can prove they suffered damages due to the defendant’s actions.

If a plaintiff is unable to demonstrate that a breach of fiduciary duty has occurred, the case may be dismissed under the business judgment rule. Nevertheless, if the plaintiff can show that a reasonable person would not have acted in the same way, a court may allow the case to proceed.

In addition, it’s essential to be aware that a plaintiff in a breach of fiduciary duty case has a limited amount of time to sue for a violation. The statute of limitations for a breach of fiduciary duty claim in Illinois is five years from the date of the occurrence.

The Business Judgment Rule

The business judgment rule is a common defense asserted in breach of fiduciary duty claims. This doctrine presumes that the decisions of corporate officers and directors were made in good faith — and they honestly believed their decisions were in the best interests of the company.

Under the business judgment rule, corporate officers, directors, managers, and other agents are protected from personal liability for actions taken in the ordinary course of business as long as they have used their best business judgment. In other words, a business decision does not always need to be the right one. It must simply be made with diligence and in good faith.

It can be very difficult for a plaintiff to overcome the business judgment rule. In order to do so, a plaintiff must plead facts that demonstrate the agent did not act with due care. Usually, this is shown by establishing fraud, corruption, a conflict of interest, bad faith, a failure to reasonably investigate prior to making a business decision, or improper motives.

What Are the Legal Remedies for a Breach of Fiduciary Duty in Illinois?

A breach of fiduciary duty can result in considerable costs to the aggrieved party. Not only can this type of breach cause a corporation to suffer financial loss, but also reputational damage. Depending on the conduct of the defendant and other facts of the case, a court may impose a variety of legal and equitable remedies.

Critically, a plaintiff may be entitled to recover the monetary damages they incurred as a result of the breach, in addition to punitive damages in certain cases — such as those involving fraud. Equitable relief that may be available can include disgorgement of profits, forfeiture of fees, or an injunction to stop the defendant from engaging in the harmful conduct. If a contract was in place, a court may order recission, reformation of the contract terms, or impose a constructive trust.

Contact a Knowledgeable Illinois Business Attorney

Breach of fiduciary duty claims can be complex and it’s crucial to have an experienced business attorney on your side to help you navigate the legal process. Located in Rolling Meadows, Litico Law Group provides high-quality legal services in Illinois for a broad scope of business disputes. We welcome you to contact us at (847) 307-5942 to schedule a consultation to learn how we can help.

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What Are Some Examples of a Breach of Fiduciary Duty?

Partnership & Shareholder Disputes

The Smith case, pending in the U.S. District Court for the Eastern District of Michigan, involves issues that regularly present in shareholder oppression cases. First, despite corporate success and the controlling shareholders receiving millions through compensation and self-dealing, the minority shareholder receives nothing of value. Second, the controlling shareholders provide inadequate information for the minority shareholder to recognize the controlling shareholders’ actionable conduct and take legal action.

Judge Mark A. Goldsmith recently issued an opinion touching on these themes in the course of ruling on the parties’ motions for partial summary judgment in Smith. This paper synthesizes the parties’ positions and the court’s analysis of those positions, which provide an illustration of how minority shareholders, majority shareholders, and courts address common issues in shareholder disputes.

Martin Smith, the plaintiff, is a 48.5% shareholder in E&E Manufacturing Corporation, Inc. 2020 U.S. Dist. LEXIS, 81240 at *2. Wallace Smith and his wife, Joan Smith, own 51.5% of E&E’s stock. Id. Wallace and Joan are E&E’s sole directors and Wallace is E&E’s president, secretary, and treasurer. Id. Martin is not employed by E&E. Id. at *28.

Between 2012 and 2018, E&E generated annual net income of approximately $3.5 million to $5.0 million. Id. *3. Despite the considerable profits, Wallace and Joan did not make any dividend distributions to E&E’s shareholders. Id. Martin alleges that Wallace and Joan also caused E&E to enter into various transactions, including leases in which E&E paid millions, to companies owned by Wallace, Joan, and their children. Id. at *3-4. Martin also alleges that Wallace received, on average, approximately $1.8 million dollars annually in compensation. Id.*28.

Martin filed suit against Wallace, Joan, and others for shareholder oppression, breach of fiduciary duty, and other statutory relief under Michigan’s corporate statutory scheme. Id. at *5. He seeks a buyout of his shares in E&E, payment of dividends, removal of Wallace and Joan from management, an accounting, profit disgorgement, and damages. Id.*28

The defendants argued that Martin’s claims should be subject to Michigan statutes of limitations of two and three years. Id. at *9-10. The court held that only Martin’s damages claims were subject to those statutes whereas his equitable claims, i.e. all relief other than money damages, were subject to a six-year statute of limitations. Id. at 10-11.

Crucially, the court reserved for trial the issue of whether any application of the statute of limitations should be tolled based on fraudulent concealment. Id. *17-18. Under Michigan law, “fraudulent concealment must be manifested by some affirmative act or misrepresentation, an exception to this rule applies when there is an affirmative duty to disclose material information by virtue of a fiduciary relationship.” Id. at *15. As directors and majority shareholders, Wallace and Joan owed Martin fiduciary duties. Id. at *16.

Martin alleged Wallace and Joan failed to disclose “information bearing on his present claims”, including the sum of Wallace’s compensation, the terms of self-dealing lease agreements, and the value of distributions Wallace, Joan, and their children received through entities receiving rent from E&E. Id. at *16. Additionally, Martin alleges the defendants provided incomplete annual financial reports that excluded information that would have provided notice to Martin of some of his claims. Id. The court agreed with Martin, concluding that “[i]f Wallace and Joan had a fiduciary obligation to disclose this information to Martin—including the information in the full balance sheets—their failure to do so would be consistent with fraudulent concealment.” Id. at *19.

In essence, the court decided which statutes of limitations apply to Martin’s claims with the caveat that whether the statute of limitations are offset by fraudulent concealment for trial. This being a pretrial decision on summary judgment, the final result of the Smith case is as yet undetermined. The opinion nevertheless provides shareholders a case study in the legal issues that arise in what is a remarkably typical shareholder oppression case fact pattern.

If you’re in a business partnership, whether as a partner, shareholder, or member, and you suspect your partner is stealing, embezzling, or otherwise cheating the company, take actions to enable yourself to prove it. Save all financial data that you can. Have access to the company QuickBooks file? Download it, and keep the file somewhere safe. The same goes for bank account statements and credit card statements. Save tax returns, payroll records, invoices, and receipts. If you confront your partner, he or she could, even if illegally, revoke your access to these documents or even to the business generally. Your partner may also start to cover his or her tracks. It’s wise to develop a plan with your attorney before you raise the issue.

Beyond securing accessible records, you should work with your attorney to develop a strategy for rectifying the problem. Tools at you and your attorney’s disposal include statutorily-protected demands for documents, corporate actions to end the misappropriation, forensic accounting audits, removal of the partner, or a fair value buyout of your interest in the company. In some cases, these matters are resolved through negotiation. In others, lawsuits are ultimately necessary.

When partnership problems become apparent, seeking your attorney’s help immediately generally pays dividends in the long run. Self-help early in disputes can create expensive problems to solve in litigation.

The de facto manager had a 50% interest in the company, and two other members shared the remaining 50% interest.

After an eleven-day trial, the trial court found that the de facto manager breached his fiduciary duties by making “unilateral, unauthorized decisions,” including: (1) hiring an attorney in the litigation and paying him with company funds; (2) compensating another business of his with company funds; (3) falsifying articles of amendment to the operating agreement; (4) opening bank accounts, funded with company money, accessible only by him and his son by not his co-owners; and (5) directing the company’s accountant to file tax returns that ignored the other members’ ownership interests in the company. Id. ¶ 34.

On appeal, the de facto manager argued that he was not the legal manager and therefore had no fiduciary duties. See Id. ¶¶ 63, 66. He also argued that if he have did have fiduciary duties, the trial court erred by deciding that he had breached them. Id. The Appellate Court rejected the de facto manager’s argument regarding the existence of fiduciary duties because under the Illinois LLC Act, a member in a manager-managed LLC may have fiduciary duties to other members “if the member ‘exercises the managerial authority vested in a manger by the Act.” Id. ¶ 67 (citing 805 ILCS 180/15-3(g).)

The Appellate Court also affirmed the trial court’s finding that the de facto manager breached his fiduciary duties to the other members by unilaterally making decisions to the detriment of the other members without their authorization, as described above. Id. ¶ 69. Further, the other members were damaged by the de facto manager’s payment of his own attorney fees in the litigation with company money. Id. ¶ 71.