Friday, July 16, 2010

Fighting business to business fraud (Part II): What to do if you are a victim of business fraud

My prior post considered some of the recurring causes of business fraud. In business litigation, there are several common remedies for such fraud. In this post we consider only one.

Breach of Fiduciary Duty

Lawyers and accountants owe fiduciary duties to their clients. Officers, directors, agents, employees, shareholders of small corporations, managers of LLCs, partners, and others owe fiduciary duties to others with whom they are in business. This means that they have duties of disclosure, honest dealing, and loyalty to their company and partners.

LLC Acts and Fiduciary Duties

One of the biggest issues in LLC law today is whether state statutes allowing LLC’s should permit their organizers to write the fiduciary duty obligation out of the agreement. Delaware permits LLC’s to draft operating agreements to eliminate fiduciary duties, whereas Illinois only permits LLC’s to define the scope (limit) of fiduciary duties if not manifestly unreasonable and denies the parties the right to eliminate fiduciary duties, including the duty of loyalty. Separate statutes govern corporations.

So, if you have a partner who secretly arranged to compete against you, examine your agreements and the relevant statutes to see if you can sue for breach of the fiduciary duties of loyalty, candor, and care. Damages for breach include forfeiture of the perpetrator’s compensation and money damages for the victim’s lost revenue. In some cases you will need a temporary remedy (a temporary restraining order or preliminary injunction) to enforce your rights.

Business Corporation Acts and Breaches of Fiduciary Duty

The Illinois Business Corporation Act permits injunctions to preserve the right to relief for any of the actions allowed by the Act. The inherent judicial power allows courts to grant injunctions to preserve your ability to sue in situations not covered by any state statute governing corporations. Injunctions for breaches of fiduciary duty based on a partnership agreement or LLC operating agreement can be granted where the elements necessary for such relief can be shown.

Delay in seeking protection of your rights when you are victimized by a breach of fiduciary can be fatal. Getting a money judgment after the entity or the individual defendant is insolvent is a useless exercise.