Breach of Fiduciary Duty in NYC: What Business Owners Need to Know
In New York City’s business environment—where closely held corporations, LLCs, partnerships, startups, and nonprofits often operate side by side—fiduciary duties play a central role in maintaining trust and accountability among those in control. When those duties are breached, the consequences can be severe, including personal liability, injunctions, damages, and even dissolution of the business.
This article provides an overview of fiduciary duties under New York law, common ways those duties are breached, and what business owners should know when navigating disputes involving directors, officers, managers, partners, or controlling shareholders.
What Is a Fiduciary Duty Under New York Law?
A fiduciary duty arises when one person or entity is legally obligated to act in the best interests of another. In the business context, fiduciary duties commonly apply to:
Corporate directors and officers
Managing members and managers of LLCs
General partners in partnerships
Majority or controlling shareholders in closely held corporations
Trustees and officers of nonprofit organizations
Under New York law, fiduciary duties are typically divided into two core obligations:
Duty of Care
The duty of care requires fiduciaries to act with the level of care, diligence, and prudence that a reasonably careful person would use in similar circumstances. This includes:
Making informed decisions
Exercising appropriate oversight
Avoiding gross negligence or reckless conduct
Importantly, New York courts generally defer to business judgment, meaning that poor outcomes alone do not establish a breach if decisions were made in good faith and with reasonable diligence.
Duty of Loyalty
The duty of loyalty requires fiduciaries to put the interests of the entity and its stakeholders ahead of their own personal interests. This duty prohibits:
Self-dealing transactions
Usurping corporate or LLC opportunities
Competing with the business while still serving as a fiduciary
Using confidential information for personal gain
Breaches of the duty of loyalty are often treated more harshly than care violations, particularly where there is evidence of bad faith, concealment, or personal enrichment.
Common Breach of Fiduciary Duty Scenarios in NYC Businesses
In practice, fiduciary duty claims frequently arise in the following situations:
1. Self-Dealing and Related-Party Transactions
A fiduciary enters into a transaction with the business—directly or indirectly—on terms that benefit the fiduciary at the expense of the company. Examples include:
Paying above-market compensation or consulting fees
Leasing property owned by the fiduciary at inflated rates
Steering business to affiliated entities without disclosure
While not all related-party transactions are prohibited, they must be fully disclosed and demonstrably fair to the entity.
2. Misuse of Company Funds or Assets
Using corporate or LLC funds for personal expenses, unauthorized transfers, or non-business purposes often forms the basis of fiduciary duty claims, especially in closely held companies.
3. Freeze-Outs and Oppression of Minority Owners
In closely held corporations and LLCs, majority owners may attempt to squeeze out minority owners by:
Withholding distributions
Terminating employment without cause
Denying access to financial information
New York courts scrutinize such conduct closely, particularly where control is used to deprive minority owners of the economic benefits of ownership.
4. Diversion of Business Opportunities
A fiduciary may breach their duty by taking for themselves—or redirecting to another entity—a business opportunity that properly belongs to the company.
5. Failure to Disclose Conflicts of Interest
Even where no direct harm occurs, failing to disclose material conflicts of interest can constitute a breach, particularly when decisions are made without informed consent from disinterested directors, members, or shareholders.
The Business Judgment Rule: A Key Defense
New York’s business judgment rule protects fiduciaries from liability for decisions made:
In good faith
With reasonable care
Within the scope of their authority
In the honest belief that the decision was in the company’s best interests
This doctrine is a powerful shield, but it does not protect conduct involving fraud, illegality, self-interest, or bad faith. Once self-dealing or disloyalty is shown, the burden may shift to the fiduciary to prove fairness.
Remedies for Breach of Fiduciary Duty
Depending on the facts, New York courts may award a range of remedies, including:
Monetary damages
Disgorgement of profits
Injunctive relief
Rescission of transactions
Accounting and forensic review
Removal of directors, officers, or managers
Judicial dissolution in extreme cases
The availability of remedies often depends on the governing documents (bylaws, operating agreements, shareholder agreements) and whether the claim is brought directly or derivatively on behalf of the entity.
Practical Takeaways for Business Owners
Document governance clearly. Well-drafted bylaws and operating agreements can define, limit, or clarify fiduciary obligations.
Disclose conflicts early. Transparency is often the best protection against later claims.
Separate personal and business finances. Commingling is a frequent trigger for litigation.
Address issues promptly. Delayed action can worsen exposure and complicate remedies.
Seek counsel early. Fiduciary duty disputes escalate quickly and are often fact-intensive.
Conclusion
Breach of fiduciary duty claims are among the most common—and most consequential—business disputes in New York City. Whether you are a business owner, investor, or manager, understanding the scope of fiduciary obligations and the risks of noncompliance is essential to protecting both your enterprise and yourself.
Careful governance, informed decision-making, and early legal guidance can significantly reduce the likelihood of costly and disruptive disputes.
Disclaimer
This article is provided for general informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Laws and legal standards vary based on specific facts and circumstances. You should consult qualified legal counsel regarding your particular situation.
