Donahue v. Rodd Electrotype Co., 367 Mass. 578 (1975); Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842 (1976); G.L. c. 260, § 2A
Breach of fiduciary duty in Massachusetts — and the close corporation rule
A claim in Massachusetts trial courts · Last verified August 26, 2026
Most of this claim is ordinary: someone in a position of trust put their interests ahead of yours.
What makes Massachusetts different is the close corporation. In Donahue v. Rodd Electrotype Co., 367 Mass. 578, 593 (1975), the Supreme Judicial Court held that shareholders in a close corporation owe one another "the utmost good faith and loyalty" — the standard partners owe each other — and "may not act out of avarice, expediency or self-interest in derogation of their duty of loyalty."
A year later, Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842 (1976), supplied the limit, and the two cases together are the framework for every Massachusetts freeze-out dispute.
What the claim is
Someone you trusted with your money, your business or your affairs used the position for themselves.
Where the right comes from
Common law, with the close-corporation duty from Donahue and Wilkes.
What a plaintiff has to prove
- A fiduciary relationship between the parties;
- Breach of the duty of loyalty or care;
- Causation; and
- Damages, or a benefit to the fiduciary that should be disgorged.
Element one carries the case. Everything else follows once the relationship is established.
Who is a fiduciary
As a matter of status — a trustee to a beneficiary; a partner to a partner; a corporate director or officer to the corporation; an agent to a principal; an attorney to a client; an executor to an estate; a guardian to a ward.
In a close corporation, shareholders to one another — the Donahue rule.
As a matter of fact. Massachusetts also recognises a fiduciary relationship arising from the circumstances, where one party reposes trust and confidence in another who knows of and accepts it. That is how a long-standing banking relationship, a family business arrangement or a financial adviser's role can become fiduciary without a formal title. It is fact-intensive, and it is the argument a plaintiff makes when no category fits.
Ordinary commercial parties are not fiduciaries. An arm's-length contract does not create the duty, however much one side relied on the other.
The close corporation — Donahue and Wilkes
A close corporation is one with a small number of shareholders, no ready market for its shares, and substantial participation by the majority in management. The shares of a minority owner are, in a practical sense, unsellable, which is what makes the freeze-out possible: terminate the minority's employment, stop dividends, remove them from the board, and their investment produces nothing they can reach.
Donahue answers that by imposing the partnership standard of utmost good faith and loyalty between shareholders.
Wilkes keeps it from swallowing ordinary management. The framework is a burden-shift:
- The controlling group must demonstrate a legitimate business purpose for its action.
- If it does, the minority may show that the same objective could have been achieved through an alternative course of action less harmful to the minority's interest.
- The court weighs the legitimate purpose against the practicability of the less harmful alternative.
That structure is why these cases are won on facts about alternatives rather than on motive. A majority that cut a minority shareholder's salary can defend the decision on business grounds; the minority's reply is that the company could have achieved the same saving without eliminating the only return the minority ever received.
The duty runs both ways. A minority shareholder with veto power over a corporate decision owes the same duty when using it.
How long you have to file
Three years under G.L. c. 260, § 2A.
The discovery rule matters here more than in most claims, because a fiduciary's position makes concealment easy and inquiry unnatural. A beneficiary is entitled to trust the fiduciary, and the period generally does not run while the fiduciary conceals the breach.
Fraudulent concealment tolls the period under G.L. c. 260, § 12 — and a fiduciary's silence can amount to concealment, where a non-fiduciary's would not, because the fiduciary had a duty to speak.
For a trust, repudiation is the trigger. Limitations generally does not begin to run in favour of a trustee until the trustee repudiates the trust and the beneficiary knows of the repudiation.
What has to happen before you file
A derivative demand, where the claim belongs to a corporation rather than to you personally. Mass. R. Civ. P. 23.1 requires the complaint to allege with particularity the plaintiff's efforts to obtain the action they want from the directors or shareholders, and the reasons for not obtaining it — or why demand would be futile.
The direct-versus-derivative question comes first and decides a great deal. Injury to the corporation — a diverted opportunity, looted assets, excessive compensation paid to an insider — belongs to the corporation, and any recovery goes there. Injury to you specifically — a freeze-out, a denied buyout, a refusal of information — is direct.
In a close corporation Massachusetts has been willing to let a shareholder proceed directly on facts that would be derivative in a public company, because the practical effect of the wrong falls on the individual owner.
What the claim pays
Compensatory damages — the loss the breach caused.
Disgorgement. A fiduciary must account for profits made from the position, whether or not the beneficiary lost anything. This is the remedy that makes the claim worth bringing: the measure is the fiduciary's gain, not the plaintiff's loss.
Constructive trust over property or profits traceable to the breach.
Equitable relief — an accounting, an injunction, removal of a trustee, and in an appropriate case the appointment of a receiver.
Rescission of a self-dealing transaction.
Twelve percent interest on the damages, from the day the action was filed.
No punitive damages at common law.
No attorney's fees as a rule — though a court sitting in equity may award them from a fund the litigation created, and a chapter 93A claim on the same facts can carry fees and a multiplier where the conduct was in trade or commerce between separate business actors.
Who can be sued
The fiduciary, personally.
A majority shareholder or controlling group, in a close corporation.
A third party who knowingly participated in the breach — the aiding-and-abetting theory, which requires knowledge of the fiduciary relationship and substantial assistance, and is how a lawyer, accountant or bank becomes a defendant.
Common defenses
- No fiduciary relationship — the parties dealt at arm's length.
- Legitimate business purpose, under Wilkes, with no less harmful practicable alternative.
- The business judgment rule, protecting informed, disinterested decisions made in good faith.
- Full disclosure and consent to the transaction.
- The claim is derivative and no demand was made or excused under Rule 23.1.
- Limitations, subject to the discovery and repudiation rules.
- Ratification by the shareholders or the beneficiary.
What people get wrong
Minority shareholders in Massachusetts have real protection. Donahue imposes a partnership-level duty that most states reserve for actual partnerships.
A legitimate purpose is not the end of the case. Wilkes lets the minority answer with a less harmful alternative, and that is where these disputes are decided.
Disgorgement does not require a loss. The fiduciary's profit is the measure.
Derivative claims need a demand. Rule 23.1 particularity is enforced, and a complaint that skips it is dismissed.
Being owed money by a business partner is not automatically a fiduciary claim. The relationship has to be established first.
Where it came from
The law of fiduciaries developed in equity, for trustees, and the standard has always been higher than the market's — famously, not honesty alone but the punctilio of an honour the most sensitive.
Donahue is the Massachusetts contribution, and it came from an observation about power. A minority shareholder in a small company has no market for their shares, no vote that matters, and no way out. The corporate form gives the majority everything a partnership's fiduciary rules were designed to restrain, and the SJC concluded that shareholders in a close corporation are in substance partners and should be held to a partner's standard.
Wilkes arrived a year later because Donahue proved too strong. Read literally, a duty of utmost good faith would make any decision that disadvantaged a minority owner a breach, and majorities need to be able to run companies. The legitimate-purpose test with a less-harmful-alternative reply gave courts a way to distinguish management from expropriation.
The pair has been Massachusetts law for fifty years, and it is the reason a minority owner squeezed out of a family business has a stronger claim here than in most of the country.
Common questions
How long do I have to sue for breach of fiduciary duty in Massachusetts?
Three years, but the period often does not start until you knew or should have known of the breach — and a fiduciary's concealment tolls it.
Am I protected as a minority shareholder in a small company?
Yes. Donahue requires shareholders in a close corporation to act toward each other with the utmost good faith and loyalty.
Can the majority fire me or cut off my dividends?
Only with a legitimate business purpose — and even then, you may show the same goal could have been reached in a way less harmful to your interest.
Can I recover attorney's fees?
Usually not. A 93A claim on the same facts can carry fees where the conduct was in trade or commerce.
What is a derivative claim?
One that belongs to the corporation rather than to you. It requires a Rule 23.1 demand on the board, or a showing that demand would be futile, and any recovery goes to the company.
Do I have to prove I lost money?
Not always. A fiduciary can be made to disgorge profits from the position even where you lost nothing.