Fictional fiduciary makes loan against stock

Question

This question is about events in the SF novel Owner's Share by Nathan Lowell. The novel is set in the year 2373. Obviously there is no way to be sure what the law will be at that date, so I am asking what the law for a similar situation would be in the year 2022, in New York State, although I would also be interested in the law in other jurisdictions. [This question includes spoilers for the earlier books in the series.]

IN this novel the main character, Captain Ishmael Wang, has a chance to purchase a used spaceship designed for both freight and passengers at the bargain price of 35 million credits (about 1/3 of the market price). Not having that much money of his own, Ishmael hires a financial advisor, William Simpson. Simpson sets up a company with nine shares of stock, each with a face value of ten million credits. He arranges for four venture capital investors to buy one share each at face value, which would give Ishmael the purchase price plus additional start up funds. In return the stock will pay 5% dividends annually, starting after five years. But at the last moment, one investor backs out of the deal. Simpson arranges a 90-day loan of 8 million, at 6%, backed by one share of the company.

As the end of the 90-day period approaches, the company ios doing well, but has not earned the required eight million credits. Here is the relevant conversation between Ishmael Wang and William Simpson (from chapter 65 of Oner's Share)

“So, how can I help you today, Captain?” Mr. Simpson asked with a small smile and a sidelong glance.

“I’ve come about the note, sir. It’s due in a couple of days and the ship hasn’t earned enough in so short a time. I wondered if you’d found a buyer for the stock so that we might avoid default.”

He reached over and patted my forearm with one bony hand. “Here’s what will happen on the twenty-sixth, my boy.” He laced his fingers together across his chest and continued. “Assuming you haven’t the liquid assets needed to repay the loan, you will default. Larks, Simpson, and Greene will take ownership of the single share of stock that you’ve assigned as collateral. Once that happens we’ll sell it to an investor, removing ourselves from ownership, and leaving you to deal with your board of directors.”

“You already have an investor, sir?” “We do, my boy. We do.”

“Then why not sell them a share of unencumbered stock, and let me pay off the loan without incurring the default?”

He turned his head toward me. “If we did that, we’d forego the opportunity to earn a profit of two million credits.” He shook his head, and turned back to gaze out through the armorglass. “We’ve invested a great deal of time and money in getting you started up, Captain. You’ll walk away with an unencumbered company, and the opportunity to succeed or fail on your own without long-term liabilities. Please don’t deny us a modest profit on the transaction.”

It seems to me that the Simpson character, a paid financial advisor who knows that Wang is relying on his advice, is in the position of a fiduciary (or would be under current law) and would be ethically and legally required to but his client's interest first, and not take the two million additional profit, on top of his fees and the 6% interest on the loan. Is that correct?

[I will add that I recommend this series, which consists of the novels Quarter Share, Half Share, Full Share, Double Share, Captain's Share, and Owner's Share. Buty I would not advise starting with the sixth of these.]

Answer 1

Is this person a fiduciary?

You describe Simpson as a financial advisor, however, I believe that is a mischaracterisation. His role appears rather to be that of a business advisor: a financial advisor offers investment advice whereas a business advisor offers business and corporate capital advice. In most jurisdictions, financial advisors are heavily regulated, business advisors aren’t.

To be a fiduciary, the person must come from a recognised class where the relationship is fiduciary by its nature, or the relationship must be one of special trust and confidence.

Such relationships will possess the “critical feature” spoken of by Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96-97, namely:

“... that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.”

Is Simpson in a class recognised to have a fiduciary duty?

Probably, but not to Wang.

One class the law recognises as owing a fiduciary duty is that of Promoter of a company: Tracy v Mandalay Pty Ltd (1953) 88 CLR 215, Dixon CJ, Williams and Taylor JJ at 241–242.

However, that duty is owed to the company, not to any particular shareholder. Indeed, a duty to the company is incompatible with a duty to potential investors in that company, If the loan default is by the company, this would appear to breach that duty.

However, Wang is not owed such a duty if the loan is in his name.

We can’t really tell if the loan is owed by the company or by Wang: either is possible on the information given.

Does Simpson’s relationship to Wang possess the “critical feature”?

On the facts given (here and probably in the book), it’s impossible to say.

It’s likely that this relationship is a contractural one and fiduciary duties are rarely found in such relationships. As with most things involving contract law, the terms of the contract are critical.

The imposition of fiduciary duties in contractual relationships can be problematic. In Hospital Products, Mason J spoke in terms that came to be endorsed by the High Court in John Alexander’s Clubs v White City Tennis Club (2010) 241 CLR 1 at 36; [2010] HCA 19. Sir Anthony Mason examined cases where contract provides the foundation for a fiduciary relationship:

“In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

If the terms of the contract create a fiduciary relationship, either explicitly or implicitly, then there will be one. However, almost all contracts don’t do this: the rights and responsibilities in most contracts are incompatible with a fiduciary relationship.

What does the contract say?

If the contract explicitly allows Simpson to behave in this manner then that’s the end of it. It says he can so he can.

If the contract gives Simpson discretion to act in this manner, or if it is silent, then it gets a bit jurisdiction specific. In the US, there is an obligation to act in good faith to achieve the purposes of a contract. Other common law jurisdictions do not impose this positive duty: they impose a negative duty to not act in bad faith.

While Simpson’s actions are certainly not those of a good faith actor, they are not obviously bad faith. Good faith requires powers to be exercised reasonably and not arbitrarily. Bad faith requires an intention to mislead or deceive by performing the contract dishonestly or fraudulently. There is a gap in between and Simpson might be in that gap.