Breach of Fiduciary Duty

Breach of Fiduciary Duty in the U.S. Legal System

Background: Fiduciary duty

It is a legal requirement of loyalty and care that applies to any person or organization that has a fiduciary relationship with another person or organization. A fiduciary is a person, committee, or organization that has agreed to accept legal ownership or control and management of an asset or group of assets belonging to someone else. Some examples of fiduciary relationships might include an investment manager to participants in a pension plan, a majority stockholder in a corporation to minority investors, the members of a partnership to one another, a banker to customers, an attorney to a client, or even a parent to a child.

A fiduciary duty is one of complete trust and utmost good faith. While fiduciaries take legal title to assets, the assets do not belong to them. Rather, legal title allows fiduciaries to administer and manage the assets for a temporary period and for a specific purpose. In taking control of another’s assets, fiduciaries also agree to manage those assets in accordance with the wishes of the individual who established the fiduciary relationship. The powers and duties of fiduciaries are often established in a document that formally establishes the fiduciary relationship. The conduct of fiduciaries is governed by common law as well as by specific federal and state laws. The Uniform Fiduciary Act and the Uniform Trustees’ Powers Act serve as models for state legislation.

Fiduciaries owe two main duties to their clients: a duty of loyalty and a duty of care. The duty of loyalty requires that fiduciaries act solely in the interest of their clients, rather than in their own interest. Thus fiduciaries must not derive any direct or indirect profit from their position, and must avoid potential conflicts of interest. The duty of care requires that fiduciaries perform their functions with a high level of competence and thoroughness, in accordance with industry standards.

Corporate directors have a special fiduciary duty to their shareholders. They are accountable not only for the safekeeping of assets but also for their efficient and effective use. Directors may not profit personally at the expense of, or contrary to, the corporation’s shareholders. In other words, corporate directors must place the interests of shareholders above their own interests. The concept of fiduciary duty has a wide variety of other applications in the business world. But a particular area of concern for small businesses is the expanded definition of fiduciary duty that applies to employers that offer certain types of benefit plans to their employees.

Breach of Fiduciary Duty

A fiduciary obligation exists whenever the relationship with the client involves a special trust, confidence, and reliance on the fiduciary to exercise his discretion or expertise in acting for the client. The fiduciary must knowingly accept that trust and confidence to exercise his expertise and discretion to act on the client’s behalf.

When one person does agree to act for another in a fiduciary relationship, the law forbids the fiduciary from acting in any manner adverse or contrary to the interests of the client, or from acting for his own benefit in relation to the subject matter. The client is entitled to the best efforts of the fiduciary on his behalf and the fiduciary must exercise all of the skill, care and diligence at his disposal when acting on behalf of the client. A person acting in a fiduciary capacity is held to a high standard of honesty and full disclosure in regard to the client and must not obtain a personal benefit at the expense of the client.

breach of fiduciary duty