A fiduciary duty exists in law when a person or entity places trust, confidence, and reliance on another to exercise discretion or expertise in acting on behalf of the client. The fiduciary must knowingly accept that trust and confidence.
In the U.S. legal system, a fiduciary duty describes a relationship between two parties that obligates one to act solely in the interest of the other. The party designated as the fiduciary owes a legal duty to a principal, and strict care must be taken to ensure that no conflict of interest arises between the fiduciary and the principal. Learn here the consequences of a breach in a fiduciary duty and some illustrative examples that may be useful if you find yourself in a similar situation.
- A fiduciary duty is an acceptance of responsibility to act in the best interests of another person or entity.
- It most clearly describes the relationship between an attorney and a client or a guardian and a ward.
- However, it has been successfully argued that an employee may have a fiduciary duty of loyalty to an employer.
- A breach of fiduciary duty occurs when a principal fails to act responsibly in the best interests of a client.
- The consequences of a breach of fiduciary duty are multiple. They can range from reputation damage to loss of a license and monetary penalties.
Breaches in Fiduciary Duty
Fiduciary duties are taken on by many people for many beneficiaries. They include lawyers acting for clients, company executives acting for stockholders, guardians acting for their wards, financial advisors acting for investors, and trustees acting for estate beneficiaries, among others.
An employee may have a fiduciary duty to an employer. Employers have a right to expect that employees are acting in their best interests, not sharing trade secrets, using company equipment for private purposes, or stealing away customers from a competitor. These expectations may not be labeled as fiduciary duties but may be spelled out in an employee handbook or contract clause.
Each of these relationships is different, but in all cases, a breach of fiduciary duty occurs when a principal fails to act responsibly in the best interests of a client.
Case law indicates that breaches of fiduciary duty most often happen when a binding fiduciary relationship is in effect and actions are taken which violate or are counterproductive to the interests of a specific client.
Typically, the actions are alleged to have benefitted the fiduciary's interests or the interests of a third party instead of a client’s interests. In some cases, a breach has stemmed from a principal's failure to provide important information to a client, leading to misunderstandings, misinterpretations, or misguided advice.
In all cases, disclosure of any potential conflict of interest is important in a fiduciary relationship because any conflict can be seen as a cause for a breach of trust.
Elements of a Fiduciary Breach Claim
A number of precedents and elements have been established in law to protect those who have been harmed by a breach of fiduciary duty. Jurisdictions differ, but in general, the following four elements are essential if a plaintiff is to prevail in a breach of fiduciary duty claim.
Many professionals are obligated, legally, and ethically, to conduct their businesses honestly. That is not the same as doing business solely in the interests of a particular client. In law, the plaintiff must show that a fiduciary duty existed. A fiduciary duty is accepted as such, preferably in writing.
The plaintiff must show that a breach of fiduciary duty occurred. The type of breach varies in every case. For example, if an accountant gets sloppy in filling out a client's tax returns, and the client is slapped with an enormous fine for nonpayment, the accountant may be guilty of a breach of fiduciary duty. If the client was sloppy and omitted to provide complete income statements, no breach occurred.
The plaintiff must show that the breach of trust caused actual damage. Without damage, there is typically no basis for a breach of fiduciary duty case. The more specific the better. For example, a trustee might be sued for selling a beneficiary's property too cheaply. If the buyer is a relative of the trustee, it's clearly a conflict of interest, but a dollar figure on the loss to the beneficiary is needed to prove a breach of fiduciary duty.
Causation shows that any damages incurred by the plaintiff were directly linked with the actions taken in breach of fiduciary duty. In the above example of a property sale, the link appears to be clear, but the trustee might argue that a quick sale was in the best interests of the beneficiary and that no other buyer was interested.
The adjective fiduciary means held or given in trust. A fiduciary commits to acting in the best interests of a client or beneficiary.
Consequences of a Fiduciary Breach
A breach of fiduciary duty can lead to a number of consequences. Not all of them are legal consequences.
An accusation of a breach of fiduciary duty can hurt the reputation of a professional. A client can end a professional relationship because they do not trust in a professional’s care of the required fiduciary duty.
If a breach of duty case proceeds to the courts, steeper consequences can result. A successful breach of fiduciary duty lawsuit can result in monetary penalties for direct damages, indirect damages, and legal costs.
A court ruling can also lead to industry discrediting, the loss of a license, or removal from service.
But proving a breach of fiduciary duty is not always easy.
Examples of Fiduciary Breach Cases
A Duty of Loyalty
One example of a breach in fiduciary duty case got to the Virginia Supreme Court in 2007.
In Banks v. Mario Industries of Virginia, a lighting manufacturer and supplier sued a former employee for establishing a directly competing business, allegedly using proprietary information acquired in their previous employment.
The manufacturer did not require its employees to sign a non-compete or confidentiality clause, though the company handbook outlined related policies.
In this case, the question of whether the employees had a fiduciary duty to their former employer, and breached it, was fundamental to an appeal that brought the case to the Supreme Court of Virginia.
The court affirmed the lower court's ruling, essentially ruling that the employees owed Mario a duty of loyalty. In effect, it supported the claim of a breach of fiduciary duty, and a penalty of more than $1 million.
A Menswear Store vs. Ex-Employees
In 2006, a high-end menswear store sued two of its former sales professionals for taking a job with a competitor, Saks Fifth Avenue, citing a breach of fiduciary duty. The department store was able to prove it suffered real losses after the salesmen left, but the court ruled that the losses could not be directly attributed to the actions of its former employees. The suit failed.
Aiding and Abetting a Breach of Duty
A comptroller for a corporation embezzled $15 million from his employer by writing checks against his company's bank account and depositing them into another account at his own bank. The company sued the bank that took the deposits, alleging that it aided and abetted a breach of fiduciary duty. The court ruled that there was insufficient evidence that the bank was aware of its role in the scam.
Examples of Fiduciary Relationships
A single parent with young children might write a will that creates a trust to administer the assets that they will inherit in the event that the parent dies while the children are still underage.
In this case, the person will name a person or an entity such as a law firm as trustee of the estate. That person or entity has a fiduciary duty to the children, who are the beneficiaries of the estate.
Under a trustee/beneficiary duty, the fiduciary has legal ownership of the property and controls the assets held in the name of the trust.
However, the trustee must make decisions that are in the best interest of the beneficiary as the latter holds equitable title to the property.
The trustee/beneficiary relationship is an important aspect of comprehensive estate planning, and special care should be taken to determine who is designated as trustee.
In a guardian/ward relationship, the legal guardianship of a minor is transferred to an appointed adult. The guardian, as the fiduciary, is tasked with ensuring that the minor child or ward has appropriate care, which can include deciding where the minor will attend school, arranging for medical care, and deciding all other matters related to the daily welfare of the child.
A guardian may be appointed by a state court when a parent dies or for any reason is unable to care for the child. In most states, the guardian/ward relationship remains intact until the minor child reaches adulthood.
A more generic example of fiduciary duty lies in the agent/principal relationship. Any person, corporation, partnership, or government agency might be called upon to act as a principal or agent. In this case, the agent is legally obliged to act on behalf of a principal without a conflict of interest.
A common example of an agent/principal relationship that implies fiduciary duty exists between the shareholders of a company and the executives of the company. The shareholders expect that the executives will make decisions based on their interests as owners.
A similar relationship exists between personal investors and the fund managers they select to manage their assets.
The agreement between an attorney and a client is arguably one of the most stringent of fiduciary relationships.
The U.S. Supreme Court has stated that the highest level of trust and confidence must exist between an attorney and a client and an attorney, as a fiduciary, must act in complete fairness, loyalty, and fidelity in every action taken on behalf of the client.
Attorneys are held liable for breaches of their fiduciary duties by the client and are accountable to the court in which that client is represented when a breach occurs.
In certain circumstances, fiduciary duties may apply to a stockholder who possesses a majority interest in a corporation or exercises control over its activities. A breach of fiduciary duty may result in personal legal liability for the director, officer, or controlling shareholder.
How the Fiduciary Rule Can Impact You
What Does It Mean to Have a Fiduciary Duty?
The adjective fiduciary means held or given in trust. In accepting a fiduciary duty, an individual or entity enters into a commitment to act in the best interests of a beneficiary. In designating a fiduciary, a beneficiary is entrusting a responsibility.
What Are the Two Main Fiduciary Duties?
Broadly speaking, fiduciary duties fall under two categories: the duty of loyalty and the duty of care. Duty of loyalty implies that the fiduciary will always act in the best interests of the client. No conflicting interest will be permitted to influence the judiciary's actions on behalf of the client. The duty of care suggests that the fiduciary will not shirk the responsibilities or fall on the job.
What Are Some Examples of Fiduciary Duty?
The most common fiduciary duties are relationships involving legal or financial professionals who agree to act on behalf of their clients. A lawyer and a client are in a fiduciary relationship, as are a trustee and a beneficiary, a corporate board and its shareholders, and an agent acting for a principal.
However, any individual may, in some cases, have a fiduciary duty to another person or entity. For example, an employee may be found to have a duty of loyalty to an employer if they cause harm to the employer by misusing information or resources entrusted to them.
What Does It Mean to be a Fiduciary?
A fiduciary is entrusted with the authority to act on behalf of another person or entity.
What Is a Breach of Fiduciary Duty?
As noted above, the main categories of fiduciary duty are the duty of loyalty and the duty of care. Failing in either is a breach. In a court of law, it is also necessary to prove that the client suffered an actual loss as a result of the breach.
The Bottom Line
A fiduciary duty is a commitment to act in the best interests of another person or entity. Broadly speaking, a fiduciary duty is a duty of loyalty and a duty of care. That is, the fiduciary must act only in the best interests of a client or beneficiary. And, the fiduciary must act diligently in those interests.
While you should always expect a high standard of care from your fiduciary, you should know what rights this relationship grants you and what responsibilities are not part of your fiduciary's duties, in order to protect yourself.