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A mere expectancy interest does not create a fiduciary relationship. Before a fiduciary duty arises, an existing property right or equitable interest supporting such a duty must exist. The obvious example is stock ownership. Until the debenture is converted into stock the convertible debenture holder acquires no equitable interest, and remains a creditor of the corporation whose interests are protected by the contractual terms of the indenture.
Appellant Louise Simons filed a class action on behalf of the holders of appellee Knoll International, Inc.’s convertible debentures and asserted that appellees – Knoll, its controlling shareholder, Marshall S. Cogan, and other related corporate constituents, breached a fiduciary duty to the debenture holders when it eliminated the holders' rights to convert their debentures into shares of appellees' common stock. In addition, the complaint alleged breach of indenture and common law fraud. The lower court dismissed appellant's class action lawsuit. Appellant sought relief from the lower court’s decision.
Did the appellees owe fiduciary duty to the holders of convertible debentures, thereby making the appellees liable to such holders for alleged breach?
The Court affirmed the lower court’s decision, finding that appellee issuing corporation and its directors did not owe a fiduciary duty to the debenture holders because the convertible indenture did not represent an equitable interest in the issuing corporation necessary for the imposition of a trust relationship with concomitant fiduciary duties. The Court ruled that the restrictive provisions of the indenture agreement precluded a claim for breach of indenture. Finally, the Court dismissed the fraud claim because appellant's complaint failed to plead facts constituting actionable fraud.