Frame v. Maynard
83 A.D.3d 599, 922 N.Y.S.2d 48 (2011)
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Rule of Law:
A fiduciary who engages in self-dealing has a stringent duty to make full disclosure of all material facts that could reasonably bear on the beneficiary's consideration of the transaction. A breach of this duty involving a serious conflict of interest may subject the fiduciary to appreciation damages, measured by the value of the property at the time of trial rather than at the time of the breach.
Facts:
- Maynard was the sole general partner of a limited partnership that owned a building; limited partners included Guthrie, Paulson, and Hines.
- A partnership agreement stipulated how proceeds from a sale or refinancing would be distributed among the partners.
- Starting in March 2001, Maynard began secretly negotiating with Community Preservation Corporation (CPC) for a mortgage loan on the property in the amount of $1.55 million.
- An independent appraisal prepared for the loan application in June 2001 valued the property in the range of $2.2 million.
- In May 2001, while negotiating the loan, Maynard offered to purchase the limited partners' interests based on a valuation of $842,427, providing them with historical profit and loss statements to support this lower value.
- Maynard did not disclose the loan negotiations or the $2.2 million appraisal to the limited partners.
- A majority of the limited partners, relying on Maynard's representations, consented to the buyout and accepted payments based on the lower valuation.
- After securing the limited partners' interests, Maynard's entity, 5008 LLC, acquired the property and on the same day secured a mortgage loan from CPC for $1,485,000.
Procedural Posture:
- Plaintiff Frame sued defendant Maynard in the Supreme Court, New York County (the trial court).
- Limited partners Guthrie, Paulson, and Hines filed cross-claims against Maynard.
- Following a bench trial, the trial court entered a judgment awarding damages to Frame, Guthrie, and Paulson.
- The trial court dismissed the cross-claims asserted by Hines.
- The parties against whom judgment was entered, as well as cross-claimant Hines, appealed the judgment to the Supreme Court, Appellate Division, First Department (the intermediate appellate court).
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Issue:
Did a general partner breach his fiduciary duty to the limited partners by failing to disclose his ongoing negotiations for a high-value mortgage loan on the partnership property while simultaneously offering to buy out their interests at a valuation substantially lower than that used in the loan negotiations?
Opinions:
Majority - Per Curiam
Yes, the general partner breached his fiduciary duty. A general partner owes the limited partners a duty of undivided loyalty that requires full disclosure of all material facts, and the facts relating to a mortgage loan nearly double the buyout valuation were indisputably material to the limited partners' decision. As a fiduciary, Maynard was strictly obligated to disclose the loan negotiations and the associated higher appraisal value, as this information would reasonably bear on the limited partners' consideration of his offer. The partners were entitled to rely on his representations without conducting an independent investigation, especially since Maynard actively concealed the information. Maynard's conduct constituted a breach of fiduciary duty, constructive fraud, and actual fraud resulting from self-dealing. The appropriate remedy for such a breach, involving a serious conflict of interest, is appreciation damages as established in Matter of Rothko, which measures damages based on the property's value at the time of trial to prevent the fiduciary from profiting from his wrongdoing.
Analysis:
This decision reaffirms the high standard of conduct required of fiduciaries, particularly general partners in self-dealing transactions. It underscores that materiality is viewed from the perspective of the beneficiary and that failure to disclose information directly contradicting the basis of an offer is a clear breach. Critically, the case extends the application of 'appreciation damages' from the estate context of Matter of Rothko to partnership law, establishing a powerful deterrent against self-dealing fiduciaries. This precedent warns fiduciaries that they cannot profit from their breach and may be liable for the full appreciated value of the asset at the time of judgment, not just the loss at the time of the transaction.
