Breach of Fiduciary Duty Claim Must Be Dismissed Where Duplicative of Breach of Contract Claim

On December 2, 2020, Justice Platkin of the Albany County Commercial Division issued a decision in Rockmore v. Plastic Surgery Assoc., LLP, 2020 NY Slip Op. 51461(U), dismissing a breach of fiduciary duty claim as duplicative of a breach of contract claim because it was based on the breach of contractual.

In Rockmore, Defendants were a plastic surgery practice and its partners who were sued by former partners for breach of contract and breach of fiduciary duties, among other claims. In March 2012, the partners entered into a Limited Liability Partnership Agreement (“Partnership Agreement”). In January 2018, the Plaintiffs gave written notice of their intention to withdraw as partners due to “growing disagreements among the shareholder-employees.” Pursuant to the Partnership Agreement, the withdrawing partners were required to remain partners for one year following notice of intent to withdraw.

Plaintiffs alleged that after giving notice of intent to withdraw, Defendants “excluded Plaintiffs from the business and affairs [of the partnership] including decisions about its management, finances and liabilities and decisions” including with regard to a defined benefit pension plan (“Plan”). Plaintiffs alleged that, without disclosing their intentions to Plaintiffs, Defendants arranged for the Plan to terminate on January 1, 2019.

Plaintiffs alleged that terminating the Plan created “new and immediate financial liabilities” that were not Plaintiffs’ responsibility. In December 2018, the partnership agreed to allow Plaintiffs to withdraw from the partnership effective December 31, 2018. However, Plaintiffs alleged that the partnership refused to pay Plaintiffs the value of their partnership interests unless Plaintiffs agreed to pay a portion of a financial shortfall related to the Plan.

Plaintiffs asserted causes of action including (1) breach of the Partnership Agreement by failing to calculate and pay the value of the partnership interests, excluding Plaintiffs from partnership business, and other issues; (2) breaches of fiduciary duties; and (3) aiding and abetting breach of fiduciary duties.

Defendants moved to dismiss the breach of fiduciary duty claim, among other causes of action.

In dismissing the breach of fiduciary duty claim, the court reaffirmed the long standing doctrine that “a cause of action for breach of fiduciary duty which is merely duplicative of a breach of contract claim cannot stand.” The court noted that the issue was whether the Amended Complaint pleads any breaches of fiduciary duty “that are independent of, and distinct from, the alleged breaches in the Partnership Agreement.” Plaintiffs acknowledged there was some overlap between the breach of contract and breach of fiduciary duty claims, but argued that the factual and legal theories were distinct.

The court disagreed stating that:

According to Plaintiffs, the contractual claim is based on violations of the procedural consent, meeting and notice requirements of the Partnership Agreement, unauthorized deduction of $10,000 from [a withdrawing partner’s] December distribution and the deduction of expenses for January 2019, the improper reduction in [a withdrawing partner’s] Adjusted Basis under the BRA, which improperly increased [the withdrawing partner’s] liability for additional pension contributions, and the failure to pay [the withdrawing partner] the redemption value of its partnership interest.

In contrast, the gravamen of Plaintiffs' breach of fiduciary duty claim is that from the time that Plaintiff JLR-PC provided notice of intention to withdraw, Defendants . . . engaged in an intentional, concerted effort to (1) exclude Plaintiffs from participating in the management, business and affairs of [the partnership], (2) manage the business and affairs of PSA such that they shifted future practice liabilities to [a withdrawing partner] and (3) misappropriate [the withdrawing partner’s] revenues and contributions to the Plan for their own benefit and use, through distribution of such revenues to themselves or diversion of such revenues to satisfy their own obligations.

Finding that Plaintiffs failed to distinguish the factual basis of their breach of fiduciary duty claim from the breach of contract claim, the court dismissed the breach of fiduciary duty claim as duplicative. The court noted that Plaintiffs argued that the Partnership Agreement governed only the procedures to be followed in making partnership decisions and the breach of fiduciary duty claim related to substantive business and management decisions. However, the court found that a “close review of the Amended Complaint shows that plaintiffs are, in fact, challenging [Defendants’] substantive decisions and the financial responsibility for those decisions through their claim that defendants breached the Partnership Agreement.”

The attorneys at Schlam Stone & Dolan have extensive experience in litigation that frequently involves contract disputes where parties also allege a breach of fiduciary duty. Contact Schlam Stone & Dolan attorney Chris Dyess at cdyess@schlamstone.com for additional information.