What Constitutes a Breach of Fiduciary Duty Between Business Partners in Maryland?

Business partners are obligated by Maryland state business law to meet certain obligations of honesty, responsibility, and fairness when making decisions that could impact the partnership. When they fail in these areas, they open themselves up to liability.

There are four key theories of fiduciary duty owed by business partners to their fellow partners and the partnership generally: duty of care, duty of loyalty, duty of disclosure, and duty of good faith and fair dealing. Examples of actions that might violate these duties include self-dealing, embezzlement, fraud, and insider trading.

If you suspect that a business partner may have committed any of these violative acts, you can recover damages from them in line with what their actions have cost you. To find out more, you can call the Maryland business partnership lawyers at the Heyman Law Firm today.

What Fiduciary Duties to Business Partners Owe Each Other in Maryland?

Any business partner that participates in the management of the business owes certain fiduciary duties to both the other partners and the business itself. When a fiduciary duty exists, a party breaches that duty, and harm results to those who they owe the duty, the harmed victims may file a lawsuit. There are several different types of fiduciary duty, which we will touch on below.

Duty of Care

A business partner that wants to meet their obligation of due care must be reasonably prudent in all business decisions and matters. If they fail in this regard, and their unreasonable decisions cost the partnership money, they could personally face legal consequences in the form of a lawsuit for negligence.

Duty of Loyalty

If a business partner makes a business dealing, transaction, or other decision that puts their own personal interests above the interests of the partnership, they have violated the duty of loyalty that they owe to the partnership. Any conflict of interest that arises in a business dealing has the potential to cause a breach of the duty of loyalty.

Duty of Disclosure

Business partners should at all times be entirely transparent about the positives and negatives of the state of the business. In particular, partners are obligated to disclose any potential risks or liabilities that could affect the health or liquidity of the partnership.

Duty of Good Faith and Fair Dealing

This final category of duty is more of a catch-all category that ensures business partners act honestly, genuinely, and fairly in all aspects of their dealings with the partnership and the other partners.

What Are Some Examples of Breaches of Fiduciary Duty Between Business Partners in Maryland?

Sometimes, the best way to illustrate how a rule works is by using the most common occurrences that trigger it. Below are just a few of the ways in which a business partner might breach their fiduciary duties in Maryland.

Embezzlement

Not only is embezzlement a crime, but it is also grounds for a lawsuit for breach of fiduciary duty. Embezzlement occurs when a person within a company, such as a partner in a partnership, illicitly and secretly reappropriates company funds for their own personal use. Fake books, vague expense reports, and unexplained gaps in accounting are all signs that a business partner may be embezzling funds from a partnership.

Self-Dealing

Self-dealing is what happens when a business partner utilizes opportunities for their own personal benefit at the behest of the partnership. A partner might make a business transaction with another party for personal reasons, as opposed to what is in the partnership’s best interest. For instance, if a business partner awards a contract to a particular bidder in exchange for certain personal benefits (also called “kickbacks”), this is consideration as part of the deal that would have otherwise benefitted the partnership. Another example of self-dealing is when a partner discovers an opportunity available to a partnership and pursues it outside of the partnership.

Fraud

Lying or making material misstatements of facts about assets, contracts, debts, or other daily activities of a partnership is fraud, even if you are lying to your own business partners. No matter what the reasons are for the lie, if it ultimately results in a monetary loss to the business that would not have occurred or could have been reduced without the lie, the act of lying will likely be considered a breach of fiduciary duty.

Insider Trading

The act of insider trading is defined as when a person with access to material, non-public business information makes a personal business decision based on that information for their own gain. For instance, if a business partner discovers through the partnership’s activity that a certain stock price is going to go up and the partner purchases that stock for their personal portfolio, that partner would have engaged in insider trading.

How Do You Sue a Business Partner for Breach of Fiduciary Duty?

Until recently, potential plaintiffs who were contemplating filing lawsuits against business partners who had breached their fiduciary duties were forced to jump through procedural hoops. This is because Maryland law was unclear about whether a specific cause of action (or theory used to file a lawsuit) existed for breach of fiduciary duty.

But in 2020, the Maryland Court of Appeals held unequivocally that business partners may validly file a standalone claim of breach of fiduciary duty against a managing partner. This makes filing a breach of fiduciary duty lawsuit much easier than it had been previously, when plaintiffs would generally have to couch their lawsuit under a theory of negligence, fraud, or breach of contract. In the case of some of the examples discussed above, not every instance of breach of fiduciary duty fits neatly within one of these categories.

The Heyman Law Firm Will Hold Your Business Partner Accountable for Their Breach of Fiduciary Duty

The Maryland Court of Appeal’s decision gives you a clear avenue for financial recovery after a business partner’s self-serving or negligent actions caused you loss. If you feel that you may have a case, now is the time to file, with the help of our knowledgeable Baltimore business partnership attorneys. Call the Heyman Law Firm today to get started at (410) 305-9287.