Security Federal Savings & Loan Ass'n of Nashville v. Riviera, Ltd.
856 S.W.2d 709 (1993)
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Rule of Law:
A transaction between a fiduciary and the person to whom the duty is owed is presumptively invalid unless the fiduciary can prove its fairness. A principal cannot enforce an agreement procured by their agent's breach of a fiduciary duty to the other party, as the agent's tortious conduct is imputed to the principal.
Facts:
- Mickey Ridings, an accountant and attorney, provided financial planning and tax advice to businessman Tom Robinson, eventually becoming Robinson's designated attorney-in-fact for negotiations with the IRS.
- In 1987, Robinson realized a large capital gain from the sale of a business, creating a significant tax liability.
- In early 1988, Ridings proposed that Robinson's partnership, RRY, purchase Riviera, Ltd., an apartment complex owned by a partnership in which Ridings and Jack Redditt were general partners and personally liable for its debts.
- Ridings prepared a financial analysis for Robinson showing that the purchase would reduce Robinson's tax burden by allowing him to claim Riviera's 1987 losses, which required backdating the transaction to January 1, 1987.
- The proposal valued the Riviera property between $2,500,000 and $2,700,000.
- Robinson, relying on Ridings' advice despite a warning from another attorney to seek independent counsel on the tax issue, proceeded with the purchase agreement.
- In 1989, Robinson discovered that he could not legally claim the 1987 tax losses and that the Riviera property's actual value was substantially less than what Ridings had represented.
- Robinson attempted to cancel the transaction and return the property, but Ridings and Redditt refused.
Procedural Posture:
- Security Federal Savings & Loan filed a collection action in the Chancery Court of Davidson County (trial court) against Mickey Ridings, Jack Redditt, and Jack W. Redditt Co., Inc. on loan guaranties.
- The defendants (Ridings and Redditt) filed a cross-claim against RRY, Tom Robinson, and Andrew Robinson, seeking to enforce an indemnity agreement from the sale of the Riviera property.
- After a bench trial, the chancellor found that no fiduciary relationship existed and entered judgment in favor of Ridings, Redditt, and the Redditt Co. on their cross-claim.
- The Robinsons and RRY, as cross-defendants, appealed the chancellor's judgment to the Tennessee Court of Appeals.
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Issue:
Does an agent's breach of a fiduciary duty to a third party, which induces that third party to enter into a purchase agreement, render the agreement unenforceable by the agent's principals?
Opinions:
Majority - Cantrell, Judge
Yes, an agent's breach of a fiduciary duty to a third party renders the resulting agreement unenforceable by the agent's principals. The court found that a fiduciary relationship existed between Ridings and Robinson based on their prior professional relationship and Robinson's reliance on Ridings for tax and financial advice. Transactions between fiduciaries are presumptively invalid, and the burden is on the fiduciary to prove the transaction was fair. Here, the transaction was unfair because the consideration failed (the tax benefits were illusory), the property's value was misrepresented, and Ridings personally benefited by being relieved of partnership debts. Because Ridings acted as an agent for Redditt and his corporation in procuring the agreement, his breach of fiduciary duty is imputed to them. A principal cannot enforce a contract procured through the tortious acts of his agent, and therefore neither Redditt nor his corporation can enforce the agreement against Robinson.
Analysis:
This decision reinforces the high standard of conduct imposed on fiduciaries, extending the duty of utmost loyalty to transactions where an ongoing advisory relationship exists, even if the fiduciary is not specifically employed for that transaction. It establishes that the presumption of invalidity in self-dealing transactions can only be overcome by a strong showing of fairness, including full disclosure, adequate consideration, and independent advice. Critically, the case extends the agency principle of vicarious liability for an agent's fraud to an agent's breach of a fiduciary duty, preventing an unwitting principal from enforcing and benefiting from a contract tainted by the agent's misconduct.
