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.
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.
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:
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 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.
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.
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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