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Tuesday, May 20, 2014

Fiduciary Duty - Recent decision

New York Court grants summary judgment removing a general partner from a partnership due to his flagrant breach of his fiduciary duty to the entity (See Cohen v. Stanley Cohen, NYLJ 1202655216511 (Sup. SUF, Decided April 28, 2014).  By way of background, the duty owed by a fiduciary to those whose the fiduciary must protect is the utmost duty of care and loyalty.  More specifically, the term “fiduciary duty” includes (i) the duty to act as an ordinary prudent person would in a like position, (ii) the duty to be informed and/or gain sufficient information prior to making a decision, (iii) the duty to disclose information, including potential conflicts of interest, and (iv) the duty to act in the best interest of the entity.   Generally speaking, individuals who exercise control over an entity are held to this standard.  The list of individuals includes, depending upon the circumstances, managers and/or members in the limited liability company context; general partners in the limited partnership context; and directors (and possibly shareholders) in the corporation context.  Fiduciary duties apply to most decisions these individuals take that effect the business entity.  

In rendering its decision, the Court noted that due blatant breaches of the fiduciary duty, which breaches undermined the partnership’s assets and viability, the Court was within its power to remove the general partner as a general partner and elevated a limited partner to general partner.

As a final comment, it is important to note that a carefully crafted agreement could waive certain aspects of the fiduciary duty. 


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