What Is a Breach of Fiduciary Duty? Definition and Examples
A fiduciary relationship exists when one party is entrusted to act only for the interests of the other. We see fiduciary relationships every day: agent to principal representations, lawyer to client representations, and board of directors to the shareholders of a corporation.
Generally, there are two parties in a fiduciary relationship. The first party is the fiduciary, who is the guarantor and protector of the second party, or the beneficiary. Under this arrangement, the fiduciary role is a position of trust that encompasses the breadth of the relationship, ensuring the rights and finances of the beneficiary are protected.
A breach of this relationship by the fiduciary is a legally actionable offense where the aggrieved party can sue the wrongdoer in court. Certain elements must be met for a successful claim and different avenues exist for awarding damages.
What Is a Breach of Fiduciary Duty?
A fiduciary is meant to follow specific rules and a certain code of conduct. When they break this duty, the beneficiary — the one they were supposed to protect — is harmed. This violation of duty constitutes a breach by the fiduciary, who has acted in their own self-interest to the detriment of the beneficiary.
Elements of a Fiduciary Breach Claim
It is possible to seek damages against the fiduciary. Doing so places the burden of proof on the beneficiary in a breach of duty case. In such a case, the beneficiary must show that:
- A fiduciary-beneficiary relationship existed.
- The fiduciary breached their legal duty.
- Damages were incurred by the beneficiary.
- A connection exists between the breach and the damages.
These four breach of fiduciary duty elements are similar to that of a negligence claim. Unlike a negligence claim, though, a fiduciary breach claim involves the existence of duty to a beneficiary, filing a claim against these persons (fiduciaries) for damage.
Fiduciary Relationships: What Are These?
While they may be based on informal relationships at times, fiduciary-beneficiary agreements are usually initiated through a legal contract, making them a type of business tort — one of the most common in business litigation.
Generally, a fiduciary relationship exists when one party (the fiduciary) acts for the benefit of another (the beneficiary). With this entrustment, the fiduciary has duties of loyalty and care. The fiduciary stands in a position of trust and must avoid any conflicts of interest. Here are examples of common fiduciary relationships.
Attorney-Client Relationship
An attorney-client relationship is a classic example of a fiduciary relationship. The lawyer owes the client fiduciary duties and must always act in the best interests of the client, informing the client immediately regarding any conflicts of interests that arise during their relationship.
Beneficiary Relationship
Another example is an executor of an estate or a trustee relationship. With an estate, the executor must act in the best interests of that estate. Likewise, a trustee must make decisions in the best interest of the trust and the beneficiary of that trust.
Guardian or Ward Relationship
A guardian is responsible for the care of another person. They are not permitted to act against the interests of the person they are looking after — their ward. This is also a type of fiduciary relationship recognized by law.
Principal Relationship
Any agent or principal relationship is also an example of a fiduciary relationship. The agent acts on behalf of the principal and must not breach the duties of loyalty and care.
Breach of Duty: What Constitutes a Breach of Trust?
A fiduciary owes specific duties to their beneficiary — a duty of loyalty, of care, or against self-dealing, for example. This breach of trust claim alleges that the fiduciary is no longer acting in the best interests of the beneficiary. Rather, they have betrayed this duty in order to promote their own self-interest by, for example, by self dealing.
Damages: What Does This Include?
The third element concerns damages. To bring a successful breach of fiduciary claim, you must show that you — as the beneficiary — incurred damages.
Sometimes, punitive damages are available if the wrongdoer acted fraudulently or with malice. The court can also order equitable damages, such as equitable prejudgment interest or disgorgement.
Causation: Who Is Really at Fault?
Under this breach of fiduciary duty claim, the beneficiary must show that it was the fiduciary's action that caused the injury. More specifically, the beneficiary must show that were it not for the fiduciary's action (or inaction), the beneficiary would not have incurred any damages.
Common Examples of Breach of Fiduciary Duty Claims
Unfortunately, breaches of fiduciary duty are commonplace. Here are some breach of fiduciary duty examples:
- An employee (fiduciary) shares their employer's trade secrets with a competing company for money.
- An executor (fiduciary) takes funds from an estate they oversee and uses them for personal matters.
- An attorney (fiduciary) ignores their client's instructions, which causes the client harm.
- An employee (fiduciary) quits their job and establishes a business that directly competes against their former employer, using company secrets.
- A company director (fiduciary) fails to exercise care in business decisions, negatively impacting shareholders.
What Is a Breach Without Damages?
A breach of fiduciary duty is not always followed by damages. Sometimes, the duty is breached, but no damage occurs.
Suppose a financial advisor withdraws $20,000 from their client's account and gambles at the horse track. Let's say they made $20,000 because their horse won the race. If they put the $20,000 back the next day, the fiduciary duty was still breached — the financial advisor withdrew client funds for their own personal use. Because the money was returned in full the following morning, though, no damage was incurred. However, a court may award nominal damages or disgorgement damages.
How Is a Breach of Fiduciary Duty Remedied?
There are several remedies for a breach of fiduciary duty, and they include receiving actual and equitable damages. Here are a few ways to remedy a breach of duty case.
Accounting of Profits: Example and Definition
Accounting of profits is a remedy used for a breach of fiduciary duty, sometimes called disgorgement. The fiduciary is ordered to surrender all the profits made from their wrongdoing. This prevents unjust enrichment — or the profit the fiduciary made of the breach.
An example is an executor of an estate who embezzled $10,000 from that same estate and went to a casino. The executor won $5,000. That $5,000 was profit the executor made from his wrongful act (embezzling the fund). Through the account of profits, the $5,000 he gained would also be returned to the estate to prevent unjust enrichment.
Equitable Compensation: What Will You Receive?
Equitable compensation is a personal monetary intended to compensate the beneficiary for the loss incurred. This loss-based remedy is similar to an account of profits.
Assessing the damages available for a breach of fiduciary duty requires that the beneficiary carefully consider which state’s law will apply. Remedies available for claims for breach of fiduciary duty include:
- Lost profits (the natural and probable consequence of the breach)
- Out-of-pocket losses (the difference between the value paid and the value received)
- Exemplary damages that punish rather than compensate (generally imposed only when actual damages are awarded)
Rescission: Returning to Prior Contract Terms
Rescission is an equitable remedy that allows a party to cancel the contract. The goal is to put the parties at the same or in a relative position as they were before the contract was made.
Constructive Trust and How It Resolves a Breach
A court establishes a constructive trust when someone benefits from a breach of fiduciary duty. The beneficiary becomes the owner of the trust, receiving the unjust enrichment that the fiduciary had taken, causing the breach.
How To Avoid a Breach of Fiduciary Duty
There are different ways to avoid a breach of fiduciary duty, depending on the type of relationship. Here are some examples:
- Record the minutes of your meetings
- Keep track of financial data
- Exercise due care and loyalty at all times in exercising your fiduciary duties
- Ask questions to the principal to make sure their requests are understood
Contact Us Today!
If you have put yourself in a position of trust with a fiduciary and have suffered a loss or if you have been sued for a breach of fiduciary duty, contact the law firm of King & Jones. Our attorneys have decades of experience representing clients in breach of fiduciary cases. We will help you!