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Why equity, and not money, is what matters when pursuing a separate claim for breach of fiduciary duty in Maryland

Why equity, and not money, is what matters when pursuing a separate claim for breach of fiduciary duty in Maryland.

More than sixteen years after the decision in Kann v. Kann, 344 Md. 689, 690 A.2d 509 (1997), confusion still exists concerning the scope and viability of independent claims for breach of fiduciary duty in Maryland.  Indeed, the decision in Kann has recently prompted one federal court in Maryland to conclude, “[to] be sure, the post-Kann landscape has been a bit muddled,” Novara v. Manufacturers and Traders Trust Co., No. ELH-11-736, 2011 WL 3841538, at *11 (D.Md. Aug. 26, 2011), and another to remark that “[c]ourts have not entirely agreed on how to interpret the language of Kann.”  McGovern v. Deutsche Post Global Mail, Ltd., JFM-04-0060, 2004 Lexis 15215, at *37-38 (D.Md. Aug. 4, 2004).  Much of the confusion stems from Kann’s elliptical analysis of the issue and some of the reasoning used by several cases that followed, particularly as to what kind of actions could give rise to independent claims for breach of fiduciary duty.  Important for practitioners, it appears clear that breach of fiduciary duty claims for money damages will largely, if not entirely be disallowed, while claims seeking equitable relief remain viable.

Some Background

The tort of breach of fiduciary duty has a relatively recent and unusual history in Maryland, and was first recognized as a potential, independent cause of action in Hartlove v. Maryland School for the Blind, 111 Md.App. 310, 681 A.2d 584 (1996).  In Hartlove, the Maryland Court of Special Appeals relied on the Restatement (Second) of Torts § 874 in concluding that a separate and independent cause of action did indeed exist for breach of fiduciary duty.

After Hartlove, however, the Maryland Court of Appeals in the aforementioned Kann v. Kann, 344 Md. 689, 690 A.2d 509 (1997), ruled that “there is no universal or omnibus tort for the redress of breach of fiduciary duty by any and all fiduciaries.”  690 A.2d at 521.  Expressly disapproving of Hartlove, the Court of Appeals reasoned that breach of fiduciary duty as an independently viable tort would lead to the duplication of existing remedies at law in some cases, and the elimination of the “nearly complete exclusivity of equitable jurisdiction” in others.  Just months after Kann, the Maryland Court of Special Appeals, Bresnehan v. Bresnehan, 115 Md. App. 226, 693 A.2d 1, 5 (1997), held, “[i]n light of Kann, it is doubtful that Hartlove’s creation of an independent tort of breach of fiduciary duty has survived.”

Equity In, Money Out

There is a particular passage in Kann that has been cited numerous times by courts and practitioners.  This language, coming directly after the court concluded that there was no universal tort for breach of fiduciary duty states, this “does not mean that there is no claim or cause of action available for breach of fiduciary duty.”  Kann, 344 Md. At 690, 690 A.2d at 521.  See also Stewart v. Baltimore Teachers’ Union, 243 F. Supp. 2d 377, 379 (D. Md. 2003) (“Maryland law is clear that there is no free-standing, independent tort for breach of fiduciary duty.”)  Counsel, the Kann court continued, have an obligation to “identify the particular fiduciary relationship involved, identify how it was breached, consider the remedies available and select those remedies appropriate to their client’s problem.”  Id. at 521.

What does this mean?  The U.S. District Court for the District of Maryland recently held that “Maryland courts have limited independent causes of action for breach of fiduciary duty to those seeking equitable relief.”  Allstate Ins. Co. v. Warns, No. CCB-11-1848, 2012 WL 681792, at *7 (D.Md. Feb. 29, 2012).  Kann and its progeny therefore do not obliterate the possibility of a separate cause of action for breach of fiduciary duty in an action seeking equitable relief.  Wasserman v. Kay, 197 Md. 586, 631, 14 A.3d 1193, 1219 (2011).

Pursuing Disgorgement Vis-à-Vis Breaches Of Fiduciary Duties

One kind of claim that practitioners should be cognizant of, particularly in the area of professional liability, is for disgorgement of fees.  Because disgorgement is not a claim for money damages, but lies in equity, disgorgement can be sought vis-à-vis a claim for breach of fiduciary duty.  S.E.C. v. Resnick, 604 F.Supp. 2d 773, 782 (D.Md. 2009); Benjamin v. Erk, 138 Md. App. 459, 471, 771 A.2d 1106, 1113 (2001).  Disgorgement is often tethered, at least in legal malpractice cases, to other claims for, among others, negligence and breach of contract.  While the law in Maryland concerning claims for disgorgement is not as well developed as the law of the District of Columbia.  See, e.g., Nat’l R.R. Passenger Corp. v. Veolia Transp. Services, Inc., No. 07-1263 (BJR), 2012 WL 3574350 (D.D.C. Aug. 21, 2012); Bode & Grenier, L.L.P. v. Knight, 821 F.Supp.2d 57 (D.D.C. 2011); Hendry v. Plelland, 73 F.3d 397 (D.C. Cir. 1996); Avianca v. Corriea, No. 85-3277 (RCL), 1992 WL 93128, *12 (D.D.C. April 13, 1992), disgorgement can still be a valuable tool, even though it is viewed by some Maryland courts as an extraordinary remedy.  See Lerner Corp. v. Three Winthrop Props., Inc., 124 Md. App. 679, 691, 723 A.2d 560, 566 (1999) (analyzing various jurisdictions’ approaches to disgorgement in breach of fiduciary duties case and holding that “Maryland has recognized the restitutionary remedy of disgorgement” when, for instance, an agent breaches a fiduciary duty to a principal).

Disgorgement In Legal Malpractice Cases

A claim for disgorgement can be extremely disquieting to those against whom it is sought.  In point of fact, claims for disgorgement are often used in legal malpractice cases (in addition to claims for compensatory damages), to place additional leverage on defendants who are extremely leery of having to produce all of their billing records or other materials relating to the fees they charged former clients.  Breach of fiduciary duty and disgorgement claims can be particularly effective in regards to corporate plaintiffs seeking redress against prior counsel and law firms.  Often, when a corporate client asserts legal malpractice claims against prior counsel, the scope and substance of billed time will necessarily also be at issue.  It is important for defense counsel to recognize that there is authority for the proposition that disgorgement may not be an appropriate remedy when a client is overbilled by his or her former law firm absent some other showing of a breach of fiduciary duty.  Fairfax Sav., F.S.B. v. Weinberg & Green, 112 Md. App. 587, 627-28, 685 A.2d 1189, 1209 (1996).  However, the argument can certainly be made even if an overbilled client cannot recover all of the fees he or she has been billed, they should be able to recover those portions directly attributable to the breach or breaches of fiduciary duty.

The bottom line is this:  breach of fiduciary duty remains a viable claim in Maryland under certain circumstances.  It can be particularly useful when combined with a claim for disgorgement of fees in the legal malpractice context, although counsel should strive to fully delineate the scope of the breach or breaches, since there is authority limiting recovery to fees associated with the alleged breach.