An Examination of Fiduciary Duties in a Closely–Held Corporation
When business relationships turn sour, they can often become as bitter and unpleasant as the worst divorces. Some people like to think that business can be completely removed from personal feelings, but the truth is that business conflicts can often be very emotionally-charged.
There may be many reasons as to why this is the case. One reason can be that closely-held companies often become heavily involved with a particular family, or core group of people, and in a sense the business becomes a key part of personal identity. This was the case in the Taubenfeld v. Lasko matter.
In this post, we will give a brief recap of the background and procedural history of this case, and then turn to some of its core lessons. As it stands, the case still hasn’t been decided on its merits, but this appellate decision ensures that the merits will at least be considered at some point.
Factual Overview of the Taubenfeld Case
Passover FB was formed in 2010 by Jonathan Lasko and Harry Taubenfeld. This entity was formed primarily as a way to rescue a business which was previously operated by Mr. Lasko’s relatives. This previous business – which was named Lasko Family Kosher Tours – had fallen into debt, and its acquisition by the newly formed Passover FB was financially necessary.
The Passover FB entity was owned equally by Taubenfeld and Lasko, with each holding 50%, and since its inception Taubenfeld held the title of President of the company and Lasko acted as operations officer. As we’ve seen many times, Taubenfeld and Lasko did not follow any corporate formalities, there were no bylaws or other governing corporate documents, they never elected directors, and had no shareholder agreement. These steps should have been taken to help protect the business long before any wrongdoing.
Later, in 2017, the relationship between Lasko and Taubenfeld declined due to issues related to a large credit card debt seemingly incurred by Taubenfeld, which Taubenfeld contends was for Passover FB expenses. This ultimately led to Lasko removing Taubenfeld from his position and moving the assets of Passover FB to a new company formed and controlled by Lasko and his family members. Taubenfeld then initiated a lawsuit against Lasko, making several claims, including breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and conversion.
At the trial court level, Mr. Taubenfeld’s claims were all rejected and the suit was dismissed with prejudice. The court held that Taubenfeld failed to state facts which were sufficient to allow the case to proceed on its merits. On appeal, the appellate court overturned the dismissal and remanded the case for further proceedings.
Owners of Closely Held Companies Owe Fiduciary Duties
The Taubenfeld court provides a great discussion of the duties owed by closely-held corporate officers and directors, usually the owners/shareholders of the company. The Taubenfeld court specifically instructs that:
- Florida courts have recognized that corporate officers and directors owe two fundamental fiduciary duties: a duty of loyalty and a duty of care to the corporation that they serve.
- The duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally
- The duty of care is the requirement to “use that amount of care which ordinarily careful and prudent men would use in similar circumstances, and consider all material information reasonably available in making business decisions,” with alleged breaches giving rise to liability only if the actions are grossly negligent
- In the context of a closely-held corporation, a plaintiff shareholder is required to bring a derivative action, rather than a direct action, to pursue his cause of action for breach of fiduciary duty against the majority shareholders who allegedly opened a competing business and diverted assets to the new business, as the allegations would affect the relative value of all the shares owned by all the shareholders.
- To state a cause of action for aiding and abetting the breach of a fiduciary duty, a plaintiff must plead facts establishing: 1) a fiduciary duty on the part of a primary wrongdoer; 2) a breach of that fiduciary duty; 3) knowledge of the breach by the alleged aider and abettor; and 4) the aider and abettor’s substantial assistance or encouragement of the wrongdoing.
Under this backdrop of guidance, the Taubenfeld court held that Taubenfeld sufficiently alleged claims for breach of fiduciary duty against Lasko, aiding and abetting this breach against Taubenfeld’s relatives, and conversion against Lasko Getaways.
Although not every business dispute involves these exact claims, the Taubenfeld case instructs that most cases will clear the relatively low bar for pleading breach of duties and related claims. What this means is that these types of cases will very often be heard on their merits so, unless there is a prospect for settlement, parties can expect a long and expensive litigation process.
If you are an entrepreneur or owner of a closely-held corporation or other entity, it is essential that you engage experienced business counsel to guide, help protect, and put safeguards in place to lessen the risk of costly, time-consuming litigation in the future.
Contact The Frazer Firm for a Consultation Today
To learn about the steps you can take to protect your business, contact the experienced business attorneys at The Frazer Firm for a consultation today.
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