If Sisyphus were a judge, he’d be assigned the Fuks case.
Fuks began on December 26, 1996. Fire up your mental time machine, travel back in time, and picture what was going on in your life those many years ago.
I just finished my first semester of college. My biggest worry was what to do for New Year’s Eve because my favorite band was not playing MSG. Over the next 28 years, I attended and graduated college. Moved to Colorado. Moved back to New York. Attended and graduated law school. Took the bar exam. Began and grew a law career. Met friends, lost friends, got married, had two kids, got divorced, got promoted to partner, got remarried to the greatest woman ever. And all this time, the Fuks case remained a constancy, a Sisyphean boulder for the unfortunate jurists assigned to it.
An end of sorts finally arrived in June, when Manhattan’s Appellate Division – First Department issued Fuks v Rakia Assocs., 228 AD3d 501 [1st Dept 2024]. In Fuks, the Court affirmed the imposition of a $375,000 money damages award in favor of a 50% general partner against the other for breach of fiduciary duty.
What jumped out about Fuks was not the case’s astounding longevity, but the following snippet of legal doctrine:
While there was little direct evidence of the amount of damages, there is no question that Shomron’s breaches caused plaintiff injury. This, along with the other evidence in the record of damages caused by Shomron, was sufficient, given the special nature of fiduciary duty claims and the lenient standard for proof of damages in such cases.
Is there a more “lenient standard” for “proof of damages” where the plaintiff alleges breach of fiduciary duty? If so, when will courts apply this more forgiving evidentiary standard?
We’ll consider those questions in this week’s piece.
The Facts
The Fuks case began nearly three long decades ago with a complaint by Mali Fuks (“Fuks”) alleging direct and derivative claims against Ruth Shamron (“Shamron”) over Shamron’s alleged seizure of control of R&L Realty Associates (the “Partnership”), an entity formed to sponsor the conversion of a Manhattan residential apartment building into a cooperative. Count 12 alleged breach of fiduciary duty and sought an accounting.
Years of arbitration ensued but failed.
In 2005, a whopping nine years into the case, Shamron filed her answer and counterclaims.
In 2006, former Manhattan Supreme Court Justice John E.H. Stackhouse issued a Decision ruling that Shamron defrauded Fuks, ordering the Partnership “dissolved and the assets divided equally.” Much later, the Appellate Division affirmed.
In 2010, former Commercial Division Justice Marcy S. Friedman referred the matter to a special referee to hear and report.
The Inquest and Confirmation
After a seven-year (!) inquest, in 2017, Special Referee Lancelot B. Hewitt issued a Decision and Order. In 2018, he issued a second Decision and Order. And in 2021, he issued a final, massive “Referee’s Report-Findings of Fact and Conclusions of Law”.
In relevant part, the referee concluded, “I find that as a result of the breach of fiduciary duty owed by Ms. Shamron to Ms. Fuks, the evidence supports an award in damages in the amount of $375,000.” How the referee computed that amount, however, was entirely unclear.
In 2021, Commercial Division Justice Melissa A. Crane issued a Decision, Order, and Judgment lamenting that “both sides have unduly complicated and prolonged these proceedings for reasons unknown,” afforded the referee great deference, and confirmed the referee’s report.
The Remand, Re-Confirmation, and Judgment
In 2022, though, the Appellate Division reversed Justice Crane’s confirmation for absence in the record of the inquest transcripts (for which the lawyers were obviously to blame, not Justice Crane), remitting the matter “for a new decision that takes into consideration the transcripts and other evidence before the Referee.” Back to that boulder, judge.
On remand, Justice Crane issued a Decision and Order in which she:
- Lamented that “this case rivals the long running dispute in Charles Dickens’ novel, Bleak House, and will end no better”;
- Justifiably blamed the lawyers for having “failed to provide the court with the record from the inquest,” causing the Appellate Division’s reversal;
- Blamed both sides for having “unduly complicated and prolonged these proceedings”;
- Lambasted Shamron for having “gone out of her way to conflate issues and confuse the court”; and
- On the merits of Fuks’ fiduciary duty claim, confirmed the referee’s award of $375,000, attributed to Shamron the difficulty Fuks had proving damages, reasoning that (i) “Shamron should not be allowed to benefit from her utter failure to keep proper financial records, which makes it difficult to ascertain the exact amounts she pilfered from the company”; and (ii) that Shamron, in a prior appeal, “conceded $201,631 in damages.”
The Court concluded, “The difference” between the two sides’ numbers “certainly falls under the ‘significant leeway’ to which the Report deserves, especially considering Shamron’s utter failure to maintain proper accounting records.”
Justice Crane entered an Amended Judgment for Fuks in the principal amount of $375,000 plus – get this – 238% interest from December 1996, turning $375,000 into $1,270,345. Nice!
The Appeal
On appeal, the parties battled over the propriety of the damages award due to the scant evidence in the record of actual damage (you can read the briefs here, here, and here). Shamron, in particular, argued that there was not just a shortage of evidence – but “no documentary evidence or testimony, credible or not,” to show damages.
You already know from the quoted passage at the beginning of this article what the appeals court did – the Court held that there was “no question that Shomron’s breaches caused plaintiff injury” and that the finding of breach itself, together “with the other evidence in the record of damages caused by Shomron, was sufficient.”
The Law on Damages
At last, let’s take a look at the law.
In a quintet of decisions over the past 25 years, the Appellate Division – First Department held that it will give lower courts the benefit of “significant leeway” in approximating damages for fiduciary breach:
- Oshrin v Hirsch, 6 AD3d 352 [1st Dept 2004] [“The methodology employed to determine damages was fair and reasonable and in accordance with the significant leeway granted to a court in making a fair approximation of the loss occasioned by a breach of fiduciary duty”];
- Wolf v Rand, 258 AD2d 401 [1st Dept 1999] [for a claim of breach of fiduciary duty, “the court may be accorded significant leeway in ascertaining a fair approximation of the loss, as contrasted with the more precise, compensatory, standard of a contract or tort case, so long as the court’s methodology and findings are supported by inferences within the range of permissibility”] [citations omitted].
As the Court wrote in Wolf, the “purpose” of this leniency doctrine is that “this type of action is not merely to compensate the plaintiff for wrongs committed but also to prevent them” (citations quotations omitted).
Under all of these cases, to benefit from the “significant leeway” rule, the plaintiff must necessarily first prove breach. As the Court wrote in Keizman, the rule applies only “where, as here, a breach of fiduciary duty has been proved”]).
Is the significant leeway concept for proof of breach of fiduciary damages totally foreign to other areas of the law? Not exactly.
Under the law of lost future profits damages, a plaintiff must provide both the fact and amount of damages with “reasonable certainty” – a higher standard of proof than ordinary damages. But when “the existence of damage is certain, and the only uncertainty is as to its amount, the plaintiff will not be denied recovery”; the defendant may not insist upon “theoretical perfection”; and it is “always the breaching party who must shoulder the burden of the uncertainty regarding the amount of damages” (Wathne Imports, Ltd. v PRL USA, Inc., 101 AD3d 83 [1st Dept 2012] [quotations omitted]).
Under the law of contracts, there is case law holding that “actual damages are not an essential element, and nominal damages are recoverable to vindicate contract rights” (Perry v McMahan, 164 AD3d 1488 [2d Dept 2018]). A finding of breach and award of just nominal damages, of course, opens the door to “prevailing party” status and fee-shifting if the contract so provides.
Under the law of defamation, “damages are presumed” where the alleged defamatory statements “tend to injure a plaintiff in his or her trade, business or profession,” among other kinds of statements deemed defamation per se (Schindler v Mejias, 100 AD3d 1315 [3d Dept 2012] [quotations omitted]).
And under the law of faithless servant (which is another form of fiduciary duty claim), the plaintiff is entitled to disgorgement of defendant’s compensation upon a showing of disloyalty, and “[i]t makes no difference that the services were beneficial to the principal, or that the principal suffered no provable damage as a result of the breach of fidelity” (Panos v Mid Hudson Med. Group, P.C., 204 AD3d 1016 [2d Dept 2022] [quotations omitted]).
Interestingly enough, though, none of the other three Departments of the Appellate Division has ever adopted the “significant leeway” principle for breach of fiduciary duty damages award. Will they? That remains an open question for thoughtful appellate lawyers in the Second, Third, and Fourth Departments.
Finally, back to our Sisyphus theme. Shamron currently has a fully-briefed motion in the Appellate Division for leave to reargue or for leave to appeal to the New York State Court of Appeals. Our unfortunate jurists will just have to keep shouldering the Fuks boulder. It’s enough to make you say, Fuk!
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