Is the Statute of Limitations for Breach of Fiduciary Duty Subject to Tolling?

 

Is the Statute of Limitations for Breach of Fiduciary Duty Subject to Tolling?

      In a decision rendered in June, the Kentucky Court of Appeals held that the statute of limitations for claims of breach of fiduciary duty (KRS § 413.120(6)) is not subject to tolling until discovery.  Middleton v. Sampey, No. 2015-CA-001029-MR, 2017 WL 2605224 (Ky. App. June 16, 2017).  All that is (or at least was) well and good, but now the Sixth Circuit Court of Appeals has decided that claims for breach of fiduciary duty are subject to a discovery rule if they arise in the context of familial fiduciary relationship.

      Osborn v. Griffin, ___ F.3d ___, 2017 WL 3205826 (6^th Cir. July 28, 2017), is a multifaceted decision affirming a trial court’s determination that, inter alia, two brothers deprived their sisters of significant assets they should have received under their parent’s wills.  The actions of the brothers took place in the 1980s and 1990s – suit was not filed until 2011, and the brothers asserted that the sister’s claims were barred by the five year statute of limitations.

      In opposition, the plaintiff sisters argued that (a) the brothers, as executors under the parent’s wills, owed them fiduciary duties, (b) the brothers actively concealed their conduct, and (c) a fiduciaries’ concealment of the facts demonstrating the breach of duty justifies tolling the statute of limitation as provided for in KRS § 413.090(2) until such time as the beneficiaries actually learned of the breach.

      The plaintiffs’ argument prevailed.

      Under KRS § 413.190(2), a statute of limitations is tolled if and so long as the wrongdoer is “concealing himself or by any other indirect means abstracts the prosecution of the action.” The Osborn court, in reliance upon Munda v. Mayfair Diagnostic Lab., 831 S.W.2d 912, 915 (Ky. 1992), which noting that application of KRS § 413.190(2) ordinarily requires an affirmative act of concealment, “when the law imposes a duty of disclosure, the failure to disclose may constitute concealment.” Osborn, slip op. at 17.

      In reliance upon Security Trust Co. v. Wilson, 210 S.W.2d 336 (Ky. 1948) as well as Hernandez v. Daniel, 471 S.W.2d 25, 26 (Ky. 1971) (“When a confidential relationship exists between the parties, however, the statute [of limitations] does not begin to run until actual discovery of the fraud [or] mistake.”) and McMurray v. McMurray, 410 S.W.2d 139, 141-42 (Ky. 1966) (“The rationale of the actual notice requirement is that persons in a confidential relationship do not have the reason or occasion to check up on the other that would exist if they were dealing at arm’s length.”, the Osborn court held.

This case closely parallels Security Trust.  As a Security Trust, Plaintiffs and Defendants were in a close family relationship that would have made it difficult for Plaintiffs to question their brothers’ integrity or demand a detailed accounting of the brothers’ business activities.  The parties’ family dynamics were such that Plaintiffs trusted their brothers implicitly, and generally deferred to their business judgment.  Moreover, Defendants reacted aggressively and disparagingly whenever Plaintiffs tried to inquire into Defendants’ management of the family business and their parents’ assets.  Under these circumstances, Kentucky law excuses Plaintiffs’ failure to discover Defendants’ wrongful conduct.  Security Trust, 210 S.W.2d at 338 (“Where a confidential relationship exists between the parties, failure to discover the facts constituting fraud may be excused.” Osborn, Slip op. at 19-20 (citation omitted).

      Ultimately, the Middleton and Osborn decisions are not in conflict.  While the corporate directors in Middleton did owe fiduciary obligations, those obligations are owed to the corporation and not the individual shareholders.  Hence there was no concealment as there was no duty to disclose.  In Osborn, in contrast, the duty to disclose arose out of estate administration obligations of disclosure, obligations that were not satisfied.  Further, in Osborn there were additional overlaps of familial bonds and affirmative rejections of any obligation to response to inquiries.