Remedies in Breach of Fiduciary Duty Cases

Earlier this month I wrote about the case of a dentist who had sued a consultant for breach of fiduciary duty and failed. The court in that case found that the allegations were insufficient to establish the existence of an agency relationship, and without such a relationship, the consultant owed no fiduciary duty to the dentist. In a similar case between a medical doctor and a consultant, Bocek v. JGA Associates, the trial court reached the same conclusion, but was reversed on appeal, the Fourth Circuit holding that the doctor had proved as a matter of law that the defendants were agents of the doctor and had breached fiduciary obligations by misappropriating a business opportunity for themselves. When the case went back to the trial court, the only issue was to determine the appropriate remedies for the consultants’ breach of fiduciary duty. The latest opinion offers a helpful guide as to the potential remedies available in breach-of-fiduciary-duty cases. What follows is a brief summary of the various forms of relief discussed in the opinion.

Constructive Trust

Where one person owes a fiduciary obligation to another he cannot acquire an interest in the subject matter of the relationship adverse to the other party. If he does acquire such an interest, equity will regard him as a “constructive trustee” and compel him to convey to his associate a proper interest in the property or to account to him for profits derived therefrom. (See Horne v. Holley, 167 Va. 234, 240 (1936)). A constructive trust arises by operation of law against one who, by fraud, wrongdoing, or any other unconscionable conduct, either has obtained or holds legal right to property which he ought not to, in equity and good conscience, hold and enjoy. The imposition of a constructive trust is an equitable remedy, subject to equitable defenses like unclean hands. In other words, “equity will not give relief to one seeking to restrain or enjoin a tortious act when he has himself been guilty of fraud, illegality, tortious conduct or the like in respect of the same matter in litigation.” (See Cline v. Berg, 273 Va. 142, 147 (2007)). A constructive trust will not be recognized when “violations of conscience” affect the equitable relations between the parties with respect to the matter before the court. (See Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240, 245 (1933)).

Compensatory Damages

In addition to allowing restitutionary relief in the form of a constructive trust, courts also permit the recovery of compensatory damages reflecting the value of any loss to the plaintiff caused by the breach of fiduciary duty. Recoverable loss can come in many forms, such as lost business opportunity, loss of expectancy interest, and cost of mitigation. If there is physical harm or wanton and willful conduct, sometimes courts will even award damages for emotional distress. (See Cartensen v. Chrisland, 247 Va. 433, 446 (1994)). To receive an award of compensatory damages, a plaintiff must prove two factors. First, a plaintiff must show a causal connection between the defendant’s breach of fiduciary duty and the damages asserted. (See Saks Fifth Avenue, Inc. v. James, Ltd., 272 Va. 177, 189 (2006)). Second, the plaintiff must prove the amount of those damages “by using a proper method bandaidand factual foundation for calculating damages.” Id. Claims for compensatory damages must be proved with reasonable certainty, supported by sufficient facts. Reasonable certainty does not require absolute precision, but speculative damages are not recoverable.

Punitive Damages

Awards of punitive damages are not favored generally, but can be awarded in tort cases involving particularly egregious conduct. In cases involving breach of fiduciary duties, “punitive damages may be awarded only if the acts are done with malice and wantonness.” (See Woods v. Mendez, 265 Va. 68, 76 (2003)). Actual malice is defined as a sinister or corrupt motive such as hatred, spite, ill will, or desire to injure the plaintiff. (See Peacock Buick, Inc. v. Durkin, 221 Va. 1133, 1137 (1981)). Playing “commercial hardball” may not be enough to satisfy this standard, as a selfish desire to make money is not the same as a sinister desire to harm the plaintiff. (See Simbeck, Inc. v. Dodd Sisk Whitlock Corp., 257 Va. 53, 59 (1999)). Other factors may cause a court to decline to award punitive damages, even if they are authorized. Good faith reliance on the advice of counsel, for example, may be deemed a sufficient basis to decline to punish the defendant with punitive damages. Unclean hands can also weigh against an award of punitive damages.

Attorneys’ Fees

In rare cases, attorneys’ fees may be awarded. The general rule in Virginia is that attorneys’ fees are not recoverable in the absence of a statute or contract to the contrary. Courts maintain inherent equitable power, however, to award legal fees whenever overriding considerations indicate a need for such a recovery. In the context of a breach-of-fiduciary-duty case, this generally requires a level of egregiousness comparable to intentional fraud. (Other examples of situations in which courts have allowed the recovery of attorneys’ fees despite not being authorized by statute or contract can be found in Prospect Development Co. v. Bershader, 258 Va. 75, 92 (1999)).

Interest

Courts have discretion to award prejudgment interest under Va. Code § 8.01-382, and are generally more likely to grant such interest where liability is clear and the amount of damages is certain. The application of post-judgment interest for all money judgments is mandatory, so post-judgment interest will always be available.

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