Establishing a Fiduciary Relationship

Establishing a Fiduciary Relationship

Not everyone has the ability or desire to act on their behalf in every matter. For example, if one is selling a home, they may not know the real estate market or how to publicize the listing.

People may not know how to manage their money and select investments from the large universe of financial instruments. In each of these cases and many others, one may decide that there is someone who has the experience and experience to be relied on to act as they will.

There are core hallmarks of a relationship between two parties when one is acting on behalf of the other or when they have a dominant position in the relationship.

Fiduciary duties have deep roots in English common law principles. They even applied as far back as Roman law. It makes sense that when others rely on someone or give them particular authority, that person should have extra obligations to act with particular care.

People Almost Always Need to Rely on Fiduciaries in Their Lifetime

There will come a time when you need to rely on someone else's skill and judgment. You may lose the capacity to make your own decisions, or you may not have the experience to make certain choices. Chances are that you will rely on fiduciaries in many contexts. If you have an employer-sponsored retirement plan, you rely on a fiduciary. There is a chance that you can become a fiduciary yourself, even if you do not realize it.

Courts believe that they need to protect someone who is in a position of relying on someone's particular knowledge or skill. They want to ensure that the people being relied upon do their job impartially and to the best of their ability. Any time one exercises discretionary power on behalf of another, the law will impose a heavy burden upon them.

Fiduciary Duties Attach to Relationships of Trust

A fiduciary duty arises when a relationship of trust exists, where one party can exert power and dominance over the other. They can appear in a formal context when there is an agreement between the two parties. They can also arise in an informal context, where an arrangement between the parties will impose fiduciary duties.

Parties can establish fiduciary duties in many ways. One common way for a fiduciary duty to arise is through a contract. The agreement can explicitly state that one is to act as a fiduciary on behalf of another. Even if a contract does not explicitly state that one is acting as a fiduciary, the nature of their duties under the contract will require fiduciary status.

Fiduciary Duties in Different Contexts

Here are some examples of fiduciary duties:

  • Executors - When one is appointed the executor of a will, they are responsible for managing estate property on behalf of the heirs. They have a fiduciary duty in their decisions on behalf of the trust.
  • Trustees - A trustee manages money and assets on behalf of a beneficiary based on a trust agreement. The beneficiaries rely on the trustee to make the correct decisions about the trust's assets. The trustee owes a fiduciary duty to the beneficiaries.
  • Majority shareholders - When there is a controlling majority shareholder, they will owe a fiduciary to minority shareholders because their actions will significantly affect the minority shareholder's investment. 
  • Agent/principal - There are many different relationships where someone acts on behalf of another. An agent assumes fiduciary duties because they represent the principal. For example, when a real estate agent receives offers for a home, their client is placing special trust in them. 
  • Attorney/client - An attorney is an agent of their client. The client is also placing their trust in their attorney's superior knowledge of the law. 
  • Employees - An employee has a fiduciary obligation to act in the best interest of their employer.
  • Partners - Two or more people in a partnership owe a fiduciary duty to the other partners.

Fiduciary Duties Do Not Require a Written Agreement

In any context, there may be an implied fiduciary duty. One party may rely on another to act on their behalf, even without a definite contractual agreement. Parties might establish a fiduciary relationship based on special trust.

Courts do not take it lightly when asked to imply a fiduciary relationship. They will look for something extra besides simply trusting in the faith, judgment, and competence of another. In other words, a plaintiff cannot make broad and generalized allegations.

Examples of Informal Implied Fiduciary Duties

One example of an informal fiduciary relationship is between a liability insurance company and its policyholder. The insurance company has to defend the policyholder when there is a lawsuit. They will be the ones determining whether to settle the case.

The policyholder places special trust in the insurance company because they can be liable for any amount over the policy limit in a lawsuit. If the insurance company fails to uphold its fiduciary duties, it can face a lawsuit for bad faith and a breach of fiduciary duty.

Another example of an informal fiduciary relationship is between limited liability company members. One member may be in a dominant position in the company. The other members rely on the member with the most power for the company's continued success.

One member may force the other members into special reliance on them because they have assumed power in the LLC or take advantage of the superiority of their position. That member should owe a fiduciary duty to the other members.

One common area where there are lawsuits over informal fiduciary relationships is when two parties engage in a merger transaction. The buyer of the business often relies on the seller's representations when they agree to the terms of the deal.

Buyers can undertake due diligence before the deal closes but cannot learn everything. When there is something that the buyer hid that the seller could not have learned, the buyer may breach their fiduciary duty to the seller.

The Duties That a Fiduciary Owes

In a relationship of trust, the fiduciary will have two primary duties:

  • The duty of care - This duty calls for the fiduciary to use reasonable care and due diligence in making decisions on behalf of others. A fiduciary can breach this duty through negligence. For example, if the fiduciary carelessly invests trust money without researching the investment and loses money, the fiduciary can breach the duty of care.
  • The duty of loyalty - The fiduciary must put the interests of others ahead of their self-interest. They have a duty to avoid conflicts of interest. For example, if the fiduciary sells a home to a related entity for less than it is worth, they violate the duty of loyalty.

A fiduciary's duties may also include:

  • The duty to inform the beneficiary of relevant information that impacts the beneficiary's interests
  • The duty to maintain the confidentiality of the beneficiary (this is especially important in the investment advisory and trust context)
  • The duty to perform all their duties in good faith

The beneficiary may begin to have concerns about the fiduciary's conduct. One of the first steps the beneficiary can take is to seek an accounting from the fiduciary that will require them to detail transactions. Then, the beneficiary can notice that the fiduciary has breached their duties.

If you are a beneficiary, you must take legal action to protect your interests when the fiduciary violates them.

Here are some examples of lawsuits for breach of fiduciary duties:

  • A client sues a real estate agent because they failed to listen to multiple offers and sold a home to themselves or a related entity.
  • An investment adviser fails to do their due diligence when investing your money and causes you a large loss.
  • An executor of a will steals money from the estate before they distribute remaining property to the heirs.
  • A partner takes a business opportunity from the partnership and keeps it for themselves.
  • A majority shareholder takes a wrongful action to force out a minority shareholder.
  • An employee of a company acts on behalf of a competitor while performing their job duties.
  • An attorney gives a corporate client wrong legal advice because they failed to take the time to research the law (this can also be an example of legal malpractice)

Fiduciaries Might Have to Pay From Their Own Pockets

A fiduciary can be personally liable when they breach their duties. In other words, the money to pay you back can come out of their pocket. Therefore, one must be incredibly careful before putting themselves in a position where there is a fiduciary relationship and when exercising their duties.

One may end up legally responsible for a breach of fiduciary duty when they never knew that they were a fiduciary in the first place.

You can and should take strong legal action when a fiduciary has breached their obligations to you. You may need to sue to recover the money that you lost. You should contact an attorney when you believe you may have suffered a loss.

How Your Attorney Can Help You in a Breach of Fiduciary Duty Case

An attorney can file a lawsuit on your behalf. It is of equal importance to put a quick stop to wrongful action before your damages become worse. Therefore, your attorney may also seek a temporary and permanent injunction to end the conduct, even before the court rules on the case. You cannot always wait until the end of the case for some form of legal relief.

Breach of fiduciary duty lawsuits can be complex on several accounts:

  • If you allege a breach of the duty of care, you must establish what the fiduciary did and compare it to what a reasonable person should have done under the circumstances.
  • If you allege a breach of the duty of loyalty, you will need evidence of the wrongful transactions. In other words, you will need to follow the money trail.

These lawsuits require an attorney who has specialized experience in these cases. You should hire a business litigation lawyer to investigate your case and obtain crucial information through discovery. Then, they can present your case to a jury if your case goes to trial.

Plan Extensively When You Will Be in a Fiduciary Relationship

In addition, you should plan ahead when you will be a party to the exercise of fiduciary duty, whether you are a fiduciary or a beneficiary.

If you are a beneficiary, you should know what warning signs to look for when you suspect the fiduciary may be engaging in misconduct. In addition, you should seek legal protections in the agreement that makes someone a fiduciary.

If you are a fiduciary, you should seek legal advice about properly executing your duties within the bounds of the law to reduce your own risk of a lawsuit.

If you do not want to be a fiduciary, you must clearly outline your duties to keep you from acting in a position of trust. Once you have a fiduciary duty, the beneficiary may be unable to waive it. You can end up facing legal liability without even knowing of your risks in the first place.

A Business Litigation Attorney Can Advise You

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Business Litigation Lawyer, Peter M. King

Are you a fiduciary with concerns about how to uphold your duty? Have others accused you of breaching a fiduciary duty? Are you suspicious that someone else has breached their fiduciary duty, causing you financial harm?

In any of these situations, you need a business litigation lawyer on your side with experience filing and defending against fiduciary duty claims. You never need to wait until someone initiates litigation to involve a litigator. They can often help resolve the matter without going to court and, if not, they can represent you in court.