Duty of Care v. Duty of Loyalty and the Shifting Burden of Proof
Intra-corporate dispute cases frequently involve litigants asserting breach of fiduciary duty claims. More specifically, they involve plaintiffs alleging the defendant(s) breached his/her duty of care and duty of loyalty. Before a plaintiff exercises the nuclear option and launches such highly contentious claims against a defendant(s) in court, the plaintiff and his/her counsel should consider who (plaintiff or defendant) will bear the burden of proof to prove such claims.
On January 9, 2014, the Iowa Court of Appeals published its opinion in Virgil Moore and Marilyn I. Moore vs. Pioneer Estates, LC, et. al, No. 3-1000/ 12-2105 (Full Opinion Here). In Pioneer Estates, the plaintiff launched a legal attack against defendants, alleging the defendants breached their duty of care and duty of loyalty in several ways (failing to disburse available funds; charging unauthorized and excessive management fees; making improper and unauthorized charges for business expenses of other entities; borrowing funds for other business entities owned by defendants; paying personal living expenses for defendants; and entering into transactions which were unfair). For its duty of loyalty claims, the plaintiff recognized that while the burden of proof is traditionally placed squarely upon plaintiffs, a duty of loyalty case is unique and the burden of proof shifts to the defendants. To address the plaintiff’s argument and this important proof question, the court relied upon a 1988 Iowa Supreme Court case. See Cookies Food Products, Inc., by Rowedder v. Lakes Warehouse Distrib., Inc., 430 N.W.2d 447, 453 (Iowa 1988).
In Cookies, the Iowa Supreme Court held the burden of proof shifts for duty of loyalty and duty of care cases:
… in duty of care challenges the burden of proof is on plaintiffs because of the business judgment rule which affords directors the presumption that their decisions are informed, made in good faith, and honestly believed by them to be in the best interests of the company … when self-dealing is demonstrated, the duty of loyalty supersedes the duty of care, and the burden shifts to the director[ ] to prove that the transaction was fair and reasonable to the corporation.
Cookies Food Products, Inc., 430 N.W.2d at 453 (internal citations and quotations omitted); see also Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255, 265 (2d Cir. 1984). Relying upon the excerpt above, the Iowa Court of Appeals agreed with the plaintiff and found the burden of proof shifted to defendants to prove the challenged conduct was fair and reasonable to the corporation. See Pioneer Estates, p. 12. As a result, the plaintiff was not required to tackle the burden of proof by introducing evidence and testimony that the defendants’ conduct was unfair and unreasonable to the corporation; rather, the defendants found themselves actively having to introduce evidence and testimony that demonstrated their conduct was fair and reasonable to the corporation.
If you or someone you know is interested in learning more about the duties of care and loyalty and how such cases are litigated in Court, or if you would like to further understand what you would need to prove or disprove if the nuclear option is exercised, you should consider contacting a licensed attorney in your jurisdiction.
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