Fiduciary Duty Claims
Many commercial disputes arise because someone broke a promise they made aloud or in a contract. But a plaintiff can sue a defendant in many situations without an express promise. In many cases, a defendant assumes a duty to act in a certain way and is exposed to a lawsuit for failing to uphold that duty. A lawsuit to address a breach of fiduciary duty involves claims against someone who has assumed such a duty, but these lawsuits may only succeed in certain specific situations.
Why should you read this post about breach of fiduciary duty claims?
Someone betrayed your trust and you want to sue them even though you don’t have a contract with them.
You are under the false impression that all of the rules that govern your conduct are in statutes or in contracts.
You are an officer or a director of a company and you want to know about a major exposure to liability.
Image credit: https://en.wikipedia.org/wiki/Protection#/media/File:Dresden-Zwinger-Armoury-Armor.02.JPG
Who is a Fiduciary?
Before figuring out when a plaintiff can sue for breach of fiduciary duty or what conduct constitutes a breach, a plaintiff must first know who qualifies as a fiduciary. The concept of a fiduciary refers to someone who is in a position of trust and so is expected to behave selflessly and competently on behalf of someone else. And so the law recognizes some situations where people take on this fiduciary duty.
Generally, the officers and directors of a corporation owe a fiduciary duty to shareholders. Additionally, the majority shareholders of a non-publicly traded company owe a fiduciary duty to the minority shareholders. And a trustee owes a fiduciary duty to the beneficiary of the trust. The administrator of a retirement plan has fiduciary duties to plan members. In the medical field, a doctor may owe a fiduciary duty to a patient.
Some people may seem like fiduciaries, but are not. An employee of a company may be a fiduciary for the company, but not always. A debtor does not owe her creditor a fiduciary duty. And accountants often do not owe a fiduciary duty to clients.
Knowing whether a fiduciary duty applies in any given situation often requires case law research.
What Duties do Fiduciaries Owe?
Once someone is a fiduciary, what do they need to do? There are two general duties fiduciaries have.
One is a duty of loyalty. A fiduciary cannot act in a manner that interferes with the interests of someone to whom they owe this duty. One major way in which fiduciaries violate this duty is by self-dealing, or taking for themselves something that should belong to the beneficiary. For example, if a corporate director causes her company to pay her an unreasonable amount of money, she may violate this duty by acting in her own best interest instead of the company’s. Or if a trustee uses trust funds to invest in her own business instead of another business, she may be accused of self-dealing. Similarly, when an employee takes company property or business for herself, she may be subject to a “faithless servant” claim, alleging a breach of the duty of loyalty.
Another is the duty of care. A fiduciary must act in a prudent manner when acting on behalf of a beneficiary. Although a court often does not second guess the decisions of business people, pursuant to the “business judgment rule,” if a court decides that a fiduciary acted recklessly, it may decide that the defendant breached this duty. Plaintiffs often bring a claim for the breach of duty of care when a corporate executive makes a business decision that is so bad that no reasonable person would not have made it. For example, a trustee’s decision to invest all of the assets in trust in one investment instead of diversifying is generally considered a breach of the duty of care.
To Whom is the Duty Owed?
Once someone is a fiduciary and they breach a duty, that does not automatically mean that the plaintiff has a winning case. Fiduciaries owe duties to specific people and, if the plaintiff is not one of the people owed the duty, she may not be able to sue for the breach.
For example, a board of directors owes a duty to shareholders, but may not owe that duty to people who hold options to purchase shares. Accordingly plaintiffs need to consider whether the breached duty applied to them.