Fiduciary Duties of “Ordinary” People

In a recent blog post, I discussed how all-encompassing a fiduciary duty can be and how in-house counsel in closely held businesses might want to advise insiders about measures that could curb or even eliminate some of those duties. A new case from the Massachusetts Superior Court, Christensen v. Cox, highlights some other need-to-know aspects of fiduciary duties.

Clayton Christensen is a leader in the field of “disruptive innovation,” and he and his brother, Mathew, are involved in at least two companies working in that area, Disruptive Innovation GP, LLC and Rose Park Advisors, LLC. In 2010, Shawn Cox was hired as an employee at will of Rose Park, although he ended up providing various services to both companies. In April of 2013, Cox notified the Christensens that he would be taking a new job, and his last day of employment with Rose Park was at the end of May.

Shortly after Cox left, he asserted that he had been given equity in Disruptive Innovation and demanded a distribution based on that equity. While the Christensens disputed that Cox had been given any equity in Disruptive Innovation, Cox pointed to an April 2013 memo (signed by Mathew) and a May 2013 update to the company’s operating agreement (executed by both Christensens), each of which noted that Cox was given equity. Although the Christensens admitted signing the documents, they contended that they never read them and that Cox (who gave them the documents to sign) misled them as to what they said.

After efforts to try to resolve various disputes between the parties failed, the Christensens filed suit, alleging, among other things, that Cox had breached his fiduciary duty to them by misleading them into signing the documents indicating that he had been given equity in Disruptive Innovation. Cox moved to dismiss this claim, and in its decision on that motion, the Court noted that even though Cox was an employee at will:

The Christensens placed [a] high level of trust in Cox because he and Matthew [Christensen] had a preexisting friendship, and they attended the same church. Cox accepted the trust and responsibility placed upon him by the Christensens.

As such, and because whether “a fiduciary relationship exists in a particular case is largely a question of fact,” the Court ruled that it would be improper to dismiss the Christensens’ fiduciary duty claim on the theory that Cox was not a fiduciary.

In any event, Cox also argued that he could not be liable for breach of fiduciary duty because the Christensens admitted signing documents that, if read, would have informed them that Cox was being given equity in Disruptive Innovation. Nevertheless, while a signatory to a document generally is bound by what the document says even if he chooses not to read it:

“[W]here a person is induced to sign a legal document by one standing in a fiduciary relation to that person and where the fiduciary has an interest in the document’s execution . . . the document can generally be avoided by its signer on a showing merely that the fiduciary failed to make him aware of the legal significance of the signing of the document … The rule is based on the principle that the fiduciary owes complete and undivided loyalty to the person towards whom he stands in such a relation and should not permit any other consideration to influence his actions or advice.” … Here, plaintiffs allege enough in their Complaint to plausibly suggest that Cox owed them a fiduciary duty. Therefore, he was required to make a full disclosure of the contents of the documents he presented to the Christensens.

In sum, Christensen is a good reminder for in-house counsel that (i) even if people are not officers, directors or equity holders, they still can have fiduciary duties to a company or individuals if others repose significant trust and confidence in them; and (ii) people easily (and sometime unknowingly) can breach their fiduciary duties unless they act solely for the benefit of their fiduciaries and eschew their own interests.