Hedge Fund Investment Does Not Give Rise to Claim Against Attorneys

In a June 2009 decision from New York’s highest court, the Court of Appeals held that attorneys for a hedge fund did not owe fiduciary duties to the investors.  The hedge fund in question was structured as a limited partnership, and the investors were limited partners.

When the investment turned sour, the investors sued, claiming the law firm knew that the hedge fund operators had invested money in violation of the restrictions set forth in the partnership agreement.  The lower court dismissed the action against attorneys, which decision was affirmed on appeal.

As to the claim against the attorneys for breach of fiduciary duty, the court explained that:

“A fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.  Put differently, a fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other.  Ascertaining the existence of such a relationship invariably requires a fact-specific inquiry.”

The court further held that:

“To the extent plaintiffs assert claims for fraud or aiding and abetting predicated on [the attorneys’] silence, they similarly fail for lack of a duty to disclose.  In the absence of a fiduciary relationship, we perceive no legal duty obligating [the law firm] to make affirmative disclosures to plaintiffs under the circumstances of this case.”

While that’s one way of defining the fiduciary relationship, it only leads to more questions.  Fiduciary duties  arise in the context of certain relationships, in which the law imposes heightened duties on one of the parties.  It would have been easier if the court simply stated that the attorneys did not owe a fiduciary duty to the investors because the attorneys represented the hedge fund, not the limited partners.

Eurycleia Partners v. Seward & Kissel, 12 N.Y.3d 553 (June 4, 2009)