When Is Self-Dealing a Breach Of Fiduciary Duty?

When Is Self-Dealing a Breach Of Fiduciary Duty?

Fiduciaries occupy an extremely important position. Someone else relies on them to manage and administer a valuable asset in which the beneficiary has a stake. A fiduciary’s actions can have a direct financial impact on a beneficiary. If fiduciaries make a mistake or are derelict in their duties, they can cause large financial losses. Those for whom the fiduciary acts have the legal right and ability to take direct action against the fiduciary when they act improperly.

If you believe a fiduciary violated their duty due to self-dealing conduct, you should discuss possible legal action with a fiduciary duty lawyer immediately.

Fiduciaries Have High Duties That They Must Execute

A fiduciary has a duty to place their own personal interests aside when they occupy a position of trust. When one agrees to act as a fiduciary, one agrees to put the beneficiaries’ interests first. There does not need to be an explicit agreement for someone to have fiduciary duties. The obligations can attach when one has a certain role.

When someone is in a relationship of trust with another party, they owe them certain fiduciary duties.

Here are some examples of relationships where one will owe a fiduciary duty to a beneficiary:

  • The executor of an estate
  • An investment manager
  • A majority shareholder in a closely-held corporation
  • The board members and senior executives of a company
  • An attorney representing a client
  • A real estate agent representing a buyer or seller in a transaction
  • A retirement plan administrator
  • Partners in a business

Who May Become A Fiduciary?

When one agrees to act as an agent for another, one usually assumes a fiduciary role. This relationship is rooted in the fact that one party has more information and authority, and the other is placing their trust in them. Fiduciaries can assume the role for fees or take it on as part of their professional position.

Fiduciaries can be someone that you know who you see face-to-face. They can even be a trusted family member. Fiduciaries can also be someone who you may never meet in your entire life, as they are professionals handling your assets from far away.

The Specific Duties Of A Fiduciary

There are two specific ways that one must uphold their fiduciary duty:

  • A fiduciary must use reasonable care in conducting the business of the trust or company. This standard is similar to negligence in a personal injury case. The fiduciary must remain informed and exercise their due diligence.
  • A fiduciary must avoid conflicts of interest that compromise their independence or judgment. These can be personal, professional, or commercial interests or relationships in which they may have a stake or potential benefits. 

How Fiduciaries Engage In Self-Dealing Transactions?

Self-dealing is another way of saying that the fiduciary had an actual financial conflict of interest that they had a legal obligation to avoid. This term is the legal way of saying that a fiduciary engaged in a transaction with themselves or a related entity when they were responsible for managing another’s money.

Self-dealing arises when the fiduciary places their own personal interests above that of the beneficiary. Most often, these interests are financial in nature. Self-dealing involves monetary transactions in which the assets or property of the beneficiaries are involved. 

Examples Of Possible Self-Dealing Transactions

Here are some examples of potentially self-dealing transactions:

  • The most common example of self-dealing happens when a fiduciary uses company or trust funds to buy an asset from themselves (often at an inflated price)
  • The reverse is when the fiduciary sells an asset to themselves (often at a lower price than the asset’s cost)
  • The fiduciary receives an excessive amount for compensation or pays themselves an unreasonably high fee
  • The fiduciary received a kickback for a transaction that involved company or trust assets
  • The fiduciary loans themselves money from trust funds or gives themselves a gift
  • The fiduciary makes an investment decision that gives them a benefit but not the beneficiaries

More Than One Trustee Can Still Mean Self-Dealing

A fiduciary does not have to directly engage in or benefit from the transaction to breach their duty. If a trusted name is more than one fiduciary, and someone participated in, ratified, or acquiesced to another’s violation of their fiduciary duty, you might hold that person responsible. 

Self-Dealing In A Partnership

Another example of impermissible self-dealing is when a partner learns of a business opportunity in the scope of their partnership duties. Instead of sharing the opportunity with their partners and investing in it on behalf of the partnership, the person takes the opportunity for themselves. They engaged in self-dealing because they put their own interests over those to whom they owed a fiduciary duty. The partner must take the opportunity to the partnership first and only invest in it personally if the partnership passes on the investment.

Self-Dealing Often Means The Fiduciary Profits At Someone Else’s Expense

The presumption is that a self-dealing transaction does not benefit anyone but the fiduciary. When fiduciary self-deal, they may pay inflated prices for services or purchase property belonging to a trust or company at a fraction of the price. The perception is that the fiduciary is lining their own pockets at the expense of those for whom they should be serving.

Fiduciaries must disclose a conflict of interest to beneficiaries. There are circumstances in which a beneficiary may consent to a transaction where there is a conflict of interest. They may derive some benefit from the transaction themselves.

How The Beneficiary Can Prove Self-Dealing?

The beneficiary will bear the burden of proving that the fiduciary violated their duty by engaging in self-dealing.

Among other things, they will need to show:

  • The defendant owed a fiduciary duty
  • The defendant engaged in self-dealing
  • The transaction was not authorized by law or by a trust instrument

A plaintiff does not need to prove that they lost money on a certain transaction. When you rely on someone to act in your interests, you have a legal right to expect them to proceed in a certain way. All that a plaintiff needs to show is that the fiduciary acted improperly. However, to recover significant damages, actual damages will need to be established. They do not even need to prove that the fiduciary acted with intent. Nonetheless, a fiduciary is presumed to act in good faith unless the plaintiff can show otherwise.

On the flip side, the plaintiff needs to show that there was an actual transaction that involved self-dealing. It is not enough to show that the situation has a potential for self-dealing. They cannot ask a court to act on something theoretical because a violation of their rights did not yet occur. 

The Fiduciary Can Disprove That There Was Self-Dealing

Once the plaintiff can prove that the fiduciary engaged in self-dealing, it is not necessarily the end of the case.

The burden will then shift to the fiduciary to prove:

  • The beneficiary actually benefited from the transaction in some way
  • The transaction occurred at a fair and reasonable price
  • There was a fair transaction process
  • The transaction did not harm the beneficiary, and the fiduciary did not profit from it

The fact that the transaction lost money is not a ground for liability. Fiduciaries may make investments that are not profitable. For example, fiduciaries managing investments can lose money, especially in a down market. What matters is the nuts and bolts of the transaction.

Self-dealing is not automatically a ground for liability. There may be some reasons why it should be permissible under specific circumstances. From the fiduciary’s standpoint, they should proactively communicate with the beneficiaries and seek their approval for transactions. Beneficiaries are more likely to sue when they have been kept in the dark and are suddenly surprised. A beneficiary can ratify and consent to a self-dealing transaction. 

The Fiduciary Can Face Many Consequences When There Has Been Self-Dealing

The consequences can be harsh when a fiduciary violates their duties to the beneficiary. The fiduciary can personally face a lawsuit for any breach of their duty. If the beneficiaries win the lawsuit, the fiduciary may need to pay damages out of their own pocket.

These damages can include:

  • Any profit that the fiduciary impermissibly made
  • The money they lost due to the conflicted transaction
  • Lost profits they should have earned had the fiduciary not acted in a conflicted manner

Other Potential Remedies For Self-Dealing

In addition to compensation, after impermissible self-dealing the beneficiary may also seek:

  • The removal of the defendant trustee from their position
  • Rescission of the disputed transaction
  • An injunction that can prevent further transactions of this type
  • The appointment of a receiver to oversee and administer the trust or company
  • An injunction that can order the fiduciary to take certain actions

In one respect, self-dealing cases are not as complex as fraud actions because you do not need to prove intent. On the other hand, these cases can be difficult because of the fiduciary’s ability to disprove the case against them by showing that the transaction was proper. 

Self-Dealing Cases Require Technical And Complex Legalities

Often, these disputes can be difficult and emotional. The beneficiary feels that the fiduciary betrayed them and violated their trust, resulting in lost money. In some cases, the fiduciary can be a family member or a business partner, adding even more emotion to the lawsuit.

Self-dealing cases are also complex because a court will look at the transaction process and the valuation of the asset. The fiduciary may argue that they followed a fair process or that there was a fair valuation of the asset. Then, there may be competing experts who give their opinion about the value of the asset. Self-dealing cases may involve forensic accountants who track transactions and opine about whether there were losses to the beneficiaries or improper profits for the fiduciary. The parties may also dispute the nature of the conflict that the fiduciary had. 

Both parties should consult with experienced business litigation lawyers in Chicago when there are potential allegations of a breach of fiduciary duty. This is a potentially dangerous area of the law with high stakes for all involved.

Not every case with an alleged breach of fiduciary duty will result in a trial. However, the beneficiary should act quickly to preserve their rights and prevent the fiduciary from any further improper transactions that can cost them money.

Seek help from the best business litigation law firm in Chicago that engages in complex business litigation. Having the right legal team can ensure you or your company does not unnecessarily struggle due to wrongful financial gain by a fiduciary. These lawsuits can be complex, so you want to start immediately. Never let your financial losses due to a breach of fiduciary duty spiral out of control.