## Facts

- Sacramento E.D.M., Inc. (EDM) operated a manufacturing business and needed equipment financing.
- EDM entered into a joint venture with Hynes Aviation Industries, Inc. (Hynes) under which Hynes would obtain equipment leases for EDM on favorable terms.
- Acting through its principal, Hynes procured multiple equipment leases for EDM and communicated key economic terms to EDM before EDM agreed to the leases.
- Each lease Hynes arranged added roughly 30% interest to EDM’s monthly payments.
- The leases lasted nearly twice as long as Hynes had represented to EDM.
- Over the full payment period, EDM paid almost double the price of each piece of equipment.
- EDM sued Hynes, alleging that Hynes’s conduct in arranging the leases and describing their terms amounted to breach of fiduciary duty and fraud, including constructive fraud, based on misrepresentations and nondisclosure regarding the interest and duration terms.

## Issues

1. Whether the parties’ joint-venture relationship imposed fiduciary duties on Hynes in connection with procuring and describing equipment-lease transactions for EDM.
2. Whether Hynes’s misstatements or omissions about the leases’ interest component and duration, made within that relationship, supported a finding of constructive fraud.
3. Whether the lease terms concerning pricing (effective interest) and length were unconscionable at the time of contracting.

## Decision

- The court concluded that, based on the joint-venture relationship, Hynes owed EDM fiduciary duties in connection with the leasing transactions.
- The court found that Hynes breached the fiduciary duty of loyalty to EDM in connection with the lease arrangements.
- The court determined that Hynes committed constructive fraud arising from misrepresentations regarding the interest and duration terms of the equipment leases.
- The court also concluded that the interest and duration terms were unconscionable as a matter of law at the time they were made.

## Legal Principles

- A joint venture or other relationship of trust and confidence can give rise to fiduciary obligations, including duties of loyalty and fair dealing, when one party undertakes to act for the benefit of the other in arranging business transactions.
- Constructive fraud may be found when a fiduciary gains an advantage by misleading the other party or by failing to disclose material facts within the scope of the fiduciary relationship; proof of intent to defraud is not required.
- Unconscionability is assessed as of contract formation and can be found when the contracting process involves meaningful unfairness (including material misrepresentations about the bargain) and the resulting terms are unduly harsh or one-sided.
- When a contract term is unconscionable, a court may limit or refuse enforcement of that term to prevent the inequitable result produced by the bargaining process and the term’s substantive effect.

## Conclusion

In *Sacramento E.D.M. Inc. v. Hynes Aviation Industries*, EDM and Hynes formed a joint venture for Hynes to secure favorable equipment leases, but the leases Hynes procured added about 30% interest, extended for nearly twice the represented period, and caused EDM to pay almost double the equipment price; the court held that Hynes owed fiduciary duties to EDM, breached the duty of loyalty, committed constructive fraud through misrepresentations about the interest and duration terms, and that those terms were unconscionable as a matter of law when made.


Sacramento E.D.M. Inc. v. Hynes Aviation Industries, 2017 WL 1383289 (2017)