California Cannabis Claims: Breach of Fiduciary Duty

18 Jan California Cannabis Claims: Breach of Fiduciary Duty

Welcome back to our litigation series on California cannabis claims. We’re continuing today with a cause of action we unfortunately commonly see in cannabis litigation: the breach of fiduciary duty.

Introduction

A fiduciary relationship exists between parties when at least one of the parties is, in duty, bound to act with the utmost good faith for the benefit of the other party. Meaning, if you’re classified as a fiduciary (either under statute, or by virtue of an agreement you have signed), you MUST act in good faith for the benefit of the other party on any matter within the scope of your relationship. This encompasses sub-duties, like managing the subject matter with “due care,” providing an account to the beneficiary, or keeping the beneficiary fully informed.

Statute of Limitations

Subject to certain exceptions, the California statute of limitations on a breach of fiduciary duty claim is four years. One exception we see often, and is worth mentioning here, is when the essence of the claim is that the defendant’s act constituted actual or constructive fraud – in that case, the claim is actually subject to California Code of Civil Procedure s. 338’s three-year statute of limitations period.

Elements of a Breach of Fiduciary Duty Claim

The elements of a breach of fiduciary duty cause of action are: (1) the existence of a fiduciary relationship, (2) breach of the same, (3) damage (4) caused by that breach.

1. Existence of a fiduciary relationship: California case law has come a long way in recognizing certain relationships or transactions as establishing fiduciary relationships. In general terms, a fiduciary duty under common law can arise in any situation where “one person enters into a confidential relationship with another.” The most common fiduciary relationships in the business context are:

• Corporate officers and directors toward corporation and shareholders;
• Controlling shareholders toward minority shareholders;
• Partner toward partner: “In all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.” Enea v. Sup.Ct. (2005) 132 Cal. App. 4th 1559, 1564; and
• Joint venturer toward co-joint venturer.

2. Breach of fiduciary duty: to have a valid claim, the plaintiff must prove that the defendant breached its fiduciary duty. This is a question of fact, so make sure you have concrete documentation and other evidence.
3. Causation: the plaintiff must then demonstrate that the defendant’s breach proximately caused the plaintiff’s damages.
4. Damages: finally, the plaintiff must demonstrate its damages.

Remedies

Under a valid breach of fiduciary duty claim, both legal and equitable remedies are available:

1. Legal Remedies

• Compensatory damages: compensation for all the plaintiff’s harm caused by the breach.
• Punitive damages: unlike under a breach of contract claim, punitive damages can be awarded if the court is satisfied, by clear and convincing evidence, that the defendant is guilty of oppression, fraud or malice.

2. Equitable Remedies

• Accounting: if, for example, your partner was in charge of handling your business’ funds and it’s unclear how much money was stolen over a one-year period, the court can order an accounting to be complete.
• Constructive trust: if a defendant has obtained property by violation of a fiduciary relationship, the court may impose a constructive trust to compel the transfer of that property back to its rightful owner.
• Disgorgement of profits: if a defendant profits from transactions it conducted as a fiduciary, another proper measure of damages is full disgorgement of any secret profit made by the defendant.

Stay tuned next week, when I plan to cover one of the sexier claims: fraud.  Part one of this series covered breach of contract, and you can find that here.