What Can We Do About a Business Partner Misusing Company Funds?

Full Question:

I own a rental property company and a construction company. My partners were my boyfriend and, until recently, his brother. The brother recently quit the business. Many of his recent actions have been questionable, however I believe he sees his actions as simply lying to his brother and I. Actions include the following:1) He purchased a truck that needed to be restored. He told us that he was fixing it for a friend who was going to pay him $7500 for it that in turn would be business income. It turns out that he actually bought the truck himself, spent business time working on it, and now has kept it, refusing to sell it. In addition, he had been in an accident with his other vehicle which is titled in the business name and also insured by the business. He used an insurance check he received for this accident to make the repairs on this new vehicle without us knowing.2) He started a business behind our backs. While he was supposed to be working on a large construction project for the business, he was instead working on the before-mentioned truck and also was working on starting his own business. He paid himself out for work on the project when he was not onsite. During this time he also paid an additional worker to work on the project in his absence.3) Wrote out at least one payroll check to himself and another worker, and then did not pay the other worker.4) After quitting the business several weeks ago, he is still living in business property. He indicated that he would be moving, but he has not yet moved, and has not stated when he will be moving. We are losing rent and paying out additional heat/water expenses due to the fact that he has not vacated the property.5) Promised the full amount of his tax return to the business as is an expectation of the partnership. He claims he has not received the taxes, however he did tell us that even if he did receive them, he would not turn them over.Can you please tell me from the things I've mentioned where these actions stand from a legal perspective? He is refusing to communicated and discuss the issue with us at this time.Thanks much for your assistance!
04/02/2011   |   Category: Fiduciary Duty   |   State: Wisconsin   |   #24549

Answer:

Various remedies may be available if a fiduciary duty was breached. Common actions for an abuse of a fiduciary duty, among others, include a petition for an accounting, claim of breach of fiduciary duty, theft, conversion, or a fraud charge. In a corporation, an officer owes to the members of the company the duty of care, loyalty, and disclosure, and the members may owe a similar duty to the manager. Each party is expected to always act in the best interest of the company as a whole and avoid any potential conflicts of interest with the company.

It will be a matter of subjective determination for the court to determine whether there was a breach of fiduciary duty, based on all the facts and circumstances involved. Some of the factors that may be considered include, among others, whether the fiduciary personally benefitted at the expense of the corporation, or failed to disclose information to the corporation’s detriment. For example, were funds diverted to personal use? Was there knowledge of financial misdealings or risk factors that weren't disclosed by the fiduciary? In applying the statutory standards for the duty of care owed by a managing member of a corporation, the court will need to determine whether there was gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law. The standards of care are measured against the subjective interpretation of how a "reasonable" person would act in similar circumstances.

The elements of a cause of action for breach of fiduciary duty are:

(1) Plaintiff and Defendant share a relationship whereby:

(a) Plaintiff reposes trust and confidence in Defendant, and

(b) Defendant undertakes such trust and assumes a duty to advise, counsel and/or
protect Plaintiff;

(2) Defendant breaches its duties to Plaintiff; and

(3) Plaintiff suffers damages.

The elements of a claim for breach of fiduciary duty are not fixed as the claim may arise from virtually any case where one party accepts the trust and assumes the duty to protect a weaker party.

Affirmative defenses to a claim for breach of fiduciary duty can include, but are not limited to:

(1) The passing of the statute of limitations for filing the claim.

(2) Lack of fiduciary relationship (for example, when the parties did not enter a fiduciary relationship, but rather conducted business in an arm’s length transaction there is no duty to protect the other party or disclose facts which the other party could have discovered by its own diligence.)

(3) Lack of standing

(4) Approval (for example, if the alleged actions followed full disclosure to and the consent of the Plaintiff)

(5) Business judgment rule (ex. that the corporate fiduciary's actions were motivated by a bona fide interest in the well being of the corporation where shareholders are the ones owed the fiduciary duty)