The Waiting Was the Hardest Part: The Court of Appeals Finally Makes Clear that a Breach of Fiduciary Duty Claim Exists Under Maryland Law
On July 14, 2020, the Maryland Court of Appeals issued its opinion in Plank v. Cherneski, (Misc. No. 3, Sept. Term 2019) (July 14, 2020), which finally harmonized Maryland case law as to the existence of a standalone “breach of fiduciary duty” claim. The Court held that such a claim exists under Maryland law and that its elements are: “(1) the existence of a fiduciary relationship; (2) breach of the duty owed by the fiduciary to the beneficiary; and (3) harm to the beneficiary.” The Court stressed that the nature of the fiduciary relationship and available remedies are fact specific and considered on a case-by case basis. “If a plaintiff describes a fiduciary relationship, identifies a breach, and requests a remedy recognized by statute, contract, or common law applicable to the specific type of fiduciary relationship and the specific breach alleged, a court should permit the count to proceed.” The remedy available depends on the specific fiduciary relationship at issue.
Running Down a Dream: The Facts and Procedural History
In Plank, the defendant James Cherneski was “a former professional soccer player who invented and patented a non-slip athletic sock.” In April 2011, together with Sanford Fisher and Jeff Ring, Mr. Cherneski established Trusox, LLC to produce and distribute the patented sock. In October 2013, the plaintiff William H. Plank, II acquired a 20% membership interest in Trusox by investing $1.5 million in the company, leaving Cherneski with a 65% membership interest, and Fisher and Ring each owning 7.5% of the company. In late 2015, minority members of the company became dissatisfied with Cherneski’s management of Trusox, and in June 2016, “Messrs. Fisher and Plank, filed an action against Mr. Cherneski and Trusox, alleging, among other things, that Mr. Cherneski was violating the Operating Agreement, had engaged in unlawful conduct related to investors and employees, and had breached contractual and fiduciary duties.” The complaint alleged nine causes of action, one of which, as relevant hereto, was breach of fiduciary duty.
After a lengthy trial in the Circuit Court for Anne Arundel County, the court found that Cherneski had the right and authority to run the company without Plank’s interference and, as applicable here, while unclear whether Maryland recognized a breach of fiduciary duty claim, it mattered not in the instant case because Cherneski had violated no duty in his running of the company.
A Higher Place: The Appeal
The case was appealed to the Maryland Court of Special Appeals, and ultimately came to the Maryland Court of Appeals on two issues:
- May minority members of an LLC (a) bring a stand-alone cause of action for breach of fiduciary duty against the managing member of the LLC (b) premised on allegations that the managing member was engaged in unlawful actions that placed at risk the investments of the minority members?
- If so, is such a claim (a) limited to allegations that would also support another viable cause of action, (b) limited to allegations that would not also support another viable cause of action, or (c) not limited by whether or not there is another viable cause of action to address the same conduct?
Time to Move On: The Tortuous History of Breach of Fiduciary Claims in Maryland
Since the Maryland Court of Appeals decided Kann v. Kann, 344 Md. 689 (1997), there have been inconsistent holdings involving the existence and scope of breach of fiduciary claim in Maryland with everyone from the Court of Special Appeals to the United States District Court for the District of Maryland weighing in on the issue.
In Kann, to resolve whether a trust beneficiary could assert a claim for breach of a fiduciary duty against the trustee, the Court of Appeals looked to § 874 of the Restatement (Second) of Torts (1977) and concluded that there is a “universal proposition that a breach of fiduciary duty is a civil wrong, but the remedy is not the same for any breach by every type of fiduciary.” The court thereafter refused to create a universal tort that would apply to all fiduciaries, but clarified that “[t]his does not mean that there is no claim or cause of action available for breach of fiduciary duty.”
Since that decision, several cases have addressed whether such a claim exists under Maryland law, including: Insurance Company of North America v. Miller, 362 Md. 361, 363–64 (2001); International Brotherhood of Teamsters v. Willis Corroon Corp. of Maryland, 369 Md. 724 (2002); Della Ratta v. Larkin, 382 Md. 553, 557 (2004); Storetrax.com, Inc. v. Gurland, 397 Md. 37, 42 (2007); Clancy v. King, 405 Md. 541, 546 (2008); Shenker v. Laureate Education, Inc., 411 Md. 317, 326–27 (2009). The long and short of it was that, prior to Plank, “Maryland courts have not spoken uniformly on this issue” and have “made seemingly inconsistent pronouncements.” Consequently, “[l]itigants pick and choose which statement they believe to be controlling, depending on which outcome benefits their position.”
Learning to Fly: The Decision
After fully documenting the history of breach of fiduciary claims in Maryland, the Court of Appeals concluded that many “holdings” in the cases it recited were not holdings at all, but rather, dicta and that much of the confusion sprang from the fact that “fiduciary relationships can be created by common law, statute, or by contract, and can have different characteristics.” The seeming inconsistencies in the case law thus arose from a failure at times to apply the proper lens through which to view the issue. The Court of Appeals sought to rectify that failure by holding as follows:
- A breach of a fiduciary duty may be actionable as an independent cause of action under Maryland law;
- To establish a breach of a fiduciary duty, a plaintiff must demonstrate: (a) the existence of a fiduciary relationship; (b) breach of the duty owed by the fiduciary to the beneficiary, and (c) harm to the beneficiary;
- The remedy for any breach is dependent upon the type of fiduciary relationship and the historical remedies provided by law for the specific type of fiduciary relationship and specific breach in question and may arise under statute, common law, or contract; and
- The cause of action may be pled without limitation as to whether there is another viable cause of action to address the same conduct.
Equally important, the Court of Appeals confirmed that “managing members of an LLC owe common law duties to the LLC and to the other members based on agency principles.” Agreeing with the Court of Special Appeals, the Court noted that under Maryland law, “provisions within operating agreements could alter existing duties or create other duties that would otherwise not exist.” However, as the operating agreement at issue contained no provisions that would displace common law duties, the Court did not address to what extent, if any, an operating agreement may limit a managing member’s fiduciary duties.
Into the Great Wide Open: What the Future Holds
Transactional lawyers and litigators alike will have to pay close attention to Plank, as it will drive the former to carefully examine what duties should be included, or not as the case may be, in operating agreements and the latter to carefully draft complaints that adequately plead, among other things, where a fiduciary duty arises from and what the appropriate remedy would be if in fact a breach occurred.
At Silverman Thompson, we regularly draft operating agreements and litigate both LLC disputes and breach of fiduciary claims, regardless of the context in which they arise. To learn more, call (410) 385-2225 and ask to speak with any of our partners in the Business Litigation group.