fiduciary duties

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I love endurance sports, and I work out incessantly. But I don’t watch sports or know much about them. Before hanging out with a group other men, I ask my wife to give me a summary of which local sports teams have recently won a match so I don’t embarrass myself. Results have been mixed. So forgive me if my football analogies are a little off here.

In football, wide receivers have little control over whether they’ll be thrown the ball on any given play. Though they might end up making a big play once the ball is thrown to them, they’re powerless without it in their hands. Even plays that are designed to get them the ball might be impacted by the defense, leaving them high and dry.

Unlike a wide receiver, a court-appointed receiver can exert control over the situation. A receiver is a court-appointed neutral steward of a business. They have independent authority to manage operations, make business decisions, and preserve (or strategically wind down) the business’s assets while litigation grinds forward. In some situations, they’re given limited marching orders from a court, and they must take action that’s within the confines of those orders.

But at other times, they have broad authority to call the shots, including whether to buy or sell company assets, and how to wind down a business.

A recent Pennsylvania Superior Court decision, Toth v. Toth, 324 A.3d 469, offers a detailed look at just how broad authority a receiver can have to protect the assets of a closely held business when feuding co-owners threaten to destroy it from the inside out.

Toth v. Toth: When a family business leads to a family war

Toth concerned a battle over Learning Sciences International, LLC (“LSI”), a company founded by Michael Toth in 2002. The company provides solutions for professional development and performance management in education. Over the years, Michael gave ownership interests in LSI to his brother Bryan, his father Eugene, and his mother Marie. Michael and Bryan each held 50% in voting rights and 25% in ownership rights, while Eugene and Marie held only 25% in ownership rights.

In late 2020, their relationships deteriorated dramatically. By January 2021, Bryan, Eugene, and Marie executed a series of documents that they believed amended LSI’s operating agreement to change the company’s headquarters to Florida, remove Michael as CEO, and strip him of his management role. They based this attempted coup on a technical reading of the voting provisions in the original operating agreement.

There was just one problem. They were wrong.Continue Reading THIS AIN’T FOOTBALL: PA. SUPERIOR COURT LETS A RECEIVER CALL THE PLAYS

Business partnerships are built on the trust and loyalty of their participants. Without mutual coordination and honesty among all involved, tensions will inevitably arise that could derail a partnership’s success. The resulting fallout could be costly in several ways, as lost profits, ruined business opportunities, protracted litigation, and busted personal relationships would surely follow.

Given the dark clouds that quickly form overhead as tensions increase among partners in a partnership, one would assume it would make good business sense, if not common sense, for those partners to look out for each other.

It certainly would make legal sense to do so because partners in a partnership, and, generally speaking, co-owners of all businesses, will typically be deemed to owe a fiduciary duty to each other. At its core, a fiduciary duty is the legal duty of a fiduciary (i.e., one business owner) to act at all times in the best interests of the beneficiary (i.e., the other owner(s) of a business). This requires partners in a partnership to act loyally toward each other, with care, with good faith and fair dealing, and to disclose material information to each other.Continue Reading PA. SUPERIOR COURT CHANNELS SPIDER-MAN: RULES THAT IN BUSINESS PARTNERSHIPS, GREAT POWER COMES WITH GREAT RESPONSIBILITY (INCLUDING FIDUCIARY DUTIES TO OTHER PARTNERS)

For some owners of closely held companies, installing a board of directors may seem more painful than cutting off one of their pinkie fingers.

They’d have to give up control of their business.

They’d have to share confidential information.

They’d have to waste time on the formalities of having a board.

They’d have to waste money on compensating directors.

Putting aside for a moment whether these concerns are valid (they’re not), for many owners of closely held companies, installing a board could be one of the best things they do for their companies—and their sanity.Continue Reading PREPARE TO BE BOARDED! YET ANOTHER REASON CLOSELY HELD COMPANIES SHOULD CONSIDER INSTALLING BOARDS OF DIRECTORS

There is arguably no more prevalent legal claim in business divorces than a claim of breach of a fiduciary duty. Simply put (and I do mean simply), when one person owes a fiduciary duty to another, the person with the duty must act in the best interests of the person to whom they owe the duty.

When the co-owner of a closely held business owes a fiduciary duty to another shareholder of the business, the co-owner must act in the best interests of that shareholder. That means, among other things, treating the other shareholder in a way that allows them to realize the value of their interest in the business.Continue Reading WITHOUT EQUAL? PENNSYLVANIA FEDERAL COURT CHARTS NEW PATH, RULES FIDUCIARY DUTY EXISTS BETWEEN 50/50 CO-OWNERS OF A BUSINESS

Last month, we tackled Pennsylvania’s “universal” demand requirement. As a refresher, unlike many states, Pennsylvania will not excuse the shareholder of a company who wants the company to sue its executives or directors from making a written demand on the company’s board of directors prior to filing a lawsuit even when doing so would…

I recently covered whether parties can be liable for a claim of aiding and abetting breach of fiduciary duty in Pennsylvania.

In that post, I explained the two different frameworks for these claims that have been established by Pennsylvania courts. Both contain a knowledge requirement. One framework requires “knowledge of the breach by the aider…

In Pennsylvania, can you be liable for someone else’s breach of their fiduciary duty to a co-owner of a closely held business if you knew about the breach, were somehow involved with it, and assisted or encouraged that person’s breach?

Section 876 of the Restatement (Second) of Torts addresses the civil tort (but not the…