Utah Breach of fiduciary duty

“[i]n Utah, a claim for breach of fiduciary duty is an independent tort that, on occasion, arises from a contractual duty.” Norman v. Arnold, 2002 UT 81,¶ 35, 57 P.3d 997; see also Restatement (Second) of Torts § 874 cmt. b (1979) (“A fiduciary who commits a breach of his duty as a fiduciary is guilty of tortious conduct to the person for whom he should act.”).

d'Elia v. Rice Dev., Inc., 2006 UT App 416, 147 P.3d 515, 523

Generally, in Utah a breach of fiduciary duty claim against the manager of an LLC or the officer or director of a corporation must be brought by the entity itself or by the members or shareholders as a derivative action.

“[S]hareholders in closely held corporations owe their coshareholders fiduciary obligations.” McLaughlin v. Schenck:

• closely held “corporations are more vulnerable to malfeasance because of the overlapping identify of board members and majority shareholders”

• “the legislature intended to protect shareholders from the oppression and misconduct by those in control”

• “minority shareholders who disagree with the direction or governance of the close corporation must rely on contractual or statutory remedies, which are often nonexistent, impractical, or inadequate”

• it “leaves the [minority] shareholder with no remedy for the abuses and oppression that may result . . . and the likelihood that majority shareholders control the board”

Omega Inv. Co. v. Woolley, 72 Utah 474 (1928). “A confidential relation exists when confidence is reposed by one party and a trust accepted by the other, when a confidence has been imposed and betrayed, or when influence has been acquired and abused. It embraces both technical and fiduciary relations and those informal relations where one man trusts in and relies on another.”

Utah Code Ann. § 16-10a-840

(1) Directors and officers must discharge their duties in 1. good faith 2. with the care of an ordinarily prudent person in a like position and similar circumstances 3. that he reasonably believes are “in the best interests of the corporation” (2) Directors and officers are not liable UNLESS 1. he has breached the duties of this section (see above) AND 2. that breach is gross negligence, willful misconduct, or intentional infliction of harm on the corporation or shareholders

Standards of Conduct

Utah Code Ann. § 48-3a-409 Utah Revised Uniform Limited Liability Company Act

48-3a-409. Standards of conduct for members and managers.

(1) A member of a member-managed limited liability company owes to the limited liability company and, subject to Subsection 48-3a-801(1), the other members the duties of loyalty and care stated in Subsections (2) and (3).

(2) The duty of loyalty of a member in a member-managed limited liability company includes the duties:

(a) to account to the limited liability company and to hold as trustee for it any property, profit, or benefit derived by the member:

(i) in the conduct or winding up of the limited liability company's activities and affairs;

(ii) from a use by the member of the limited liability company's property; or

(iii) from the appropriation of a limited liability company opportunity;

(b) to refrain from dealing with the limited liability company in the conduct or winding up of the limited liability company's activities and affairs as or on behalf of a person having an interest adverse to the limited liability company; and

(c) to refrain from competing with the limited liability company in the conduct of the company's activities and affairs before the dissolution of the limited liability company.

(3) The duty of care of a member of a member-managed limited liability company in the conduct or winding up of the limited liability company's activities and affairs is to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(4) A member shall discharge the duties and obligations under this chapter or under the operating agreement and exercise any rights consistently with the contractual obligation of good faith and fair dealing.

(5) A member does not violate a duty or obligation under this chapter or under the operating agreement solely because the member's conduct furthers the member's own interest.

(6) All the members of a member-managed limited liability company or a manager-managed limited liability company may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.

(7) It is a defense to a claim under Subsection (2)(b) and any comparable claim in equity or at common law that the transaction was fair to the limited liability company.

(8) If, as permitted by Subsection (6) or (9)(f) or the operating agreement, a member enters into a transaction with the limited liability company which otherwise would be prohibited by Subsection (2)(b), the member's rights and obligations arising from the transaction are the same as those of a person that is not a member.

(9) In a manager-managed limited liability company, the following rules apply:

(a) Subsections (1), (2), (3), and (7) apply to the manager or managers and not the members.

(b) The duty stated under Subsection (2)(c) continues until winding up is completed.

(c) Subsection (4) applies to managers and members.

(d) Subsection (5) applies only to members.

(e) The power to ratify under Subsection (6) applies only to the members.

(f) Subject to Subsection (4), a member does not have any duty to the limited liability company or to any other member solely by reason of being a member.

9 Watts asserts that the trial court imposed an incorrect heightened standard of care when it instructed the jury that Watts should be held to the standard of care of a manager who was also a builder and developer of real estate. Utah Code section 16–10a–840 states that a director of a corporation “shall discharge his duties ... with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Utah Code Ann. § 16–10a–840(1)(b) (2005) (emphases added). It also states that “[a] director ... is not liable to the corporation ... for any action taken ... unless ... the director['s breach of his or her duties] ... constitutes gross negligence, willful misconduct, or intentional infliction of harm on the corporation.” Id. § 16–10a–840(4)(a)–(b).

Stevensen 3rd E., LC v. Watts, 2009 UT App 137, 210 P.3d 977, 986

Codification of the Business Judgment Rule

The standard of care for a corporate director specifically allows the jury to compare the director to others “in a like position” who are in “similar circumstances.” See Utah Code Ann. § 16–10a–840(1)(b).

Stevensen 3rd E., LC v. Watts, 2009 UT App 137, 210 P.3d 977, 986

“In Utah, a claim for breach of fiduciary duty is an independent tort that, on occasion, arises from a contractual duty.” Norman v. Arnold, 2002 UT 81, ¶ 35, 57 P.3d 997. Like the fiduciary duties of general partners or corporate officers, a limited liability company manager's fiduciary duty arises from the corporate relationship itself, independent of any contractual duties. See d'Elia v. Rice Dev., Inc., 2006 UT App 416, ¶ 36, 147 P.3d 515 (holding that a general partner's fiduciary duties arose “independent of any contractual duties” (citing Utah Code Ann. § 48–1–18 (2002) (describing the fiduciary relationship inhering in a partnership))); see also Jones Mining Co. v. Cardiff Mining & Milling Co., 56 Utah 449, 191 P. 426, 438 (1920) (describing corporate officers as “managing agents of the corporation, [who], as such, sustain a fiduciary relation both to it and to the stockholders collectively”). See generally Utah Code Ann. § 48–2c–802(2)(a) (2007) (describing a limited liability company manager as “an agent of the company”); id. § 48–2c–807(3) (distinguishing limited liability company members who are managers from members who are not *987 and stating that ordinary members do not have fiduciary duties). As a result, “a breach of those fiduciary duties sounds in tort.” See d'Elia, 2006 UT App 416, ¶ 36, 147 P.3d 515.¶ 33 Although the remedy of a beneficiary against a breaching fiduciary can be in equity, “the beneficiary is entitled to tort damages for harm caused by the breach of [the fiduciary's] duty.” Restatement (Second) of Torts § 874 cmt. b (1979). “In addition to or in substitution for these damages the beneficiary may be entitled to restitutionary recovery....” Id. This restitutionary measure of recovery is allowed because the beneficiary is “not only ... entitled to recover for ... harm done to his legally protected interests by the wrongful conduct of the fiduciary, but ordinarily he is entitled to profits that result to the fiduciary from his breach of duty and to be the beneficiary of a constructive trust in the profits.” Id.¶ 34 Other measures of damages can apply to a breach of fiduciary duty action depending on the particular fiduciary relationship involved. The Restatement of Torts notes that “[s]ome fiduciary relations ... are the subject of a considerable group of substantive rules of law” and are thus “controlled by the substantive law rules governing the relationship.” Id. § 874 reporters notes. These types of fiduciary relations can include “trustee and beneficiary, principal and agent[,] and director and corporation.” Id. Nevertheless, “the action [for breach of fiduciary duty] may properly be regarded as in tort for damages.” Id.¶ 35 Utah courts have applied the approach described by the Restatement of Torts, varying the exact measure of damages in a breach of fiduciary duty case based on the type of fiduciary relationship involved and the extent to which other areas of substantive law apply to that relationship. For example, the Utah Supreme Court determined that damages for the breach of a real estate agent's fiduciary duty to its principal—the seller of real property—is properly measured by the amount the agent negligently failed to collect in earnest money. See Hopkins v. Wardley Corp., 611 P.2d 1204, 1206–07 (Utah 1980). Where an insurer breached its fiduciary duty to defend its insured, the insurer was “expose[d] ... to consequential and punitive damages awards in excess of policy limits.” Black v. Allstate Ins. Co., 2004 UT 66, ¶ 25, 100 P.3d 1163 (internal quotation marks omitted). Additionally, where a common shareholder in a corporation can prove that a merger was a result of a breach of fiduciary duty, the supreme court held that “the appropriate measure of damages is the value of the [shareholder]'s shares had the company not merged.” Borghetti v. System & Computer Tech., 2008 UT 77, ¶ 30, 199 P.3d 907.

Stevensen 3rd E., LC v. Watts, 2009 UT App 137, 210 P.3d 977, 986-87