How an Alleged Breach of Fiduciary Duty Can Divide a Family Business

Going into business with family members is often fraught with peril. Issues regarding succession are often particularly tricky. Indeed, many family-owned businesses end up struggling–and often outright failing–because of legal disputes that arise when ownership must be transferred from one relative to another.

Sisters-in-Law Battle Brother-in-Law in Court

A recent decision from the Florida Third District Court of Appeals, Schmitz v. Schmitz, offers an interesting example. This case involves a corporation, Schmitz Development Company (SDC) founded in 1946. The original founder had three sons. While he was still alive and running SDC, the father and all three brothers served as “co-directors” for life of the company.

When the father died, the brothers continued to serve as co-directors, but now their father’s share passed to their mother. The three brothers then signed a shareholder agreement providing that, upon their mother’s death, they would each continue to serve as the sole directors of the SDC. Critically, the agreement further provided that none of the brothers could receive any “commissions or compensation” in connection with SDC’s investments without the unanimous approval of all three brothers.

Later, the brothers amended their agreement to provide that upon their respective deaths, their shares in SDC would pass to their surviving spouse, if any. Two of the brothers later died, and their wives inherited their shares. They then requested the surviving brother provide information regarding SDC’s finances. In response, the surviving brother “initially declined” to recognize his sisters-in-law as shareholders. They responded by removing him as president of SDC and appointing an interim president to oversee a forensic accounting of the business.

Litigation followed. The surviving brother sought to block his sisters-in-law’s actions. But a Florida judge sided with the two women and held they were lawful directors of SDC and had the authority to remove the surviving brother as president. The women then counter-sued, alleging their brother-in-law committed “breach of fiduciary duty” by engaging in a “decades-long pattern of fraud, abuse, and self-dealing,” in violation of the original shareholder agreement with his brothers.

Again, the trial court largely sided with the surviving spouses, awarding over $4.5 million in damages to them and SDC. Both sides appealed different parts of the trial court’s decision. In brief, the Third District held that the trial judge needed to reconsider some parts of his ruling because he failed to respect the surviving brother’s due process rights. The trial judge also failed to properly apply Florida’s four-year statute of limitations to certain claims. Additionally, the trial court erred in holding the sisters-in-law could not recover damages individually for their brother-in-law’s breach of the shareholder agreement.

Contact a Pompano Beach Breach of Fiduciary Duties Lawyer Today

Any person who serves as a trustee, personal representative, or agent under a power of attorney, has a fiduciary duty to avoid self-dealing and conflicts of interest. If you are involved in a legal dispute over an alleged failure to uphold this duty, it is imperative that you seek out qualified legal advice. To speak with a Pompano Beach breach of fiduciary duties lawyer, contact Mark R. Manceri, P.A., today to schedule a consultation.

Source:

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