An officer or executive employee of a company usurps a business opportunity or misuses funds. Most clients assume this is an open-and-shut case of breach of fiduciary duty. Two recent decisions from the Illinois Court of Appeals serve as a reminder that proving damages in breach of fiduciary duty cases is rarely so simple.
In one lawsuit, the plaintiff presented what seemed to be a clear breach of fiduciary duty case. See Tufo v. Tufo, 2021 IL App (1st) 192251. The defendant engaged in a series of questionable conduct, including diverting opportunities to a separate business and using a corporate line of credit for personal expenses. Despite the fact this conduct did not appear disputed, the court ruled that the plaintiff had not proven any damages resulting from the multiple breaches of fiduciary duties. The court reached that conclusion even though the plaintiff presented expert testimony from an accountant who had reviewed extensive financial and tax records. At first blush the ruling seems erroneous – clear breaches of the fiduciary duty coupled with expert accountant testimony should establish damages. But the cliché still applies that the “devil is in the details” and a close examination of the evidence demonstrates why the court reached its conclusion.
Even where there has been a clear breach of a fiduciary duty, Illinois courts still require a reasonable basis for computing any damages. In the Tufo case, the court closely examined the expert testimony on damages and found it lacking. The accountant started strong, identifying questionable transactions and practices. But the expert did not take the necessary next step “to reconcile all of these transactions, documents, loans, and payments and to quantify his damages using additional evidence, such as the fair market value of the rent . . . or the cost of” supplies. In other words, it is not enough to identify questionable transactions. To prove damages, evidence is needed on the specific amount of harm from the misconduct. For example, where an officer causes the company to pay inflated rent to a landlord that the officer secretly owns, the plaintiff needs to prove the fair market value of the rent. Without such proof, a court will not award damages. A second case from the same court, decided one week later, contains a detailed example of adequate proof of damages. See Cahnman v. Timber Court LLC, 2021 IL App (1st) 200338. There, the plaintiff proved specific amounts of the improper transactions, linking them to the fiduciary duties.
These cases provide lawyers and business owners with an important reminder. It is not enough to be right; it is still necessary to prove it. That lesson applies not just to whether a breach of fiduciary duty exists. It also applies to proving the harm from such a breach.
Breach of fiduciary duty cases are complicated and require experienced counsel. Best practices can help avoid them in the first place, but sometimes litigation is necessary. The attorneys at Tomlinson & Shapiro regularly counsel clients on these matters – both to avoid litigation and to go to court when other options fail – and are ready to assist your company. Please contact us by calling 312-715-8770 or by filling out the form at https://www.tomlinsonshapiro.com/contact/ to schedule a consultation.