The concept fiduciary duty is broad and legally complex, but what does it mean, and what happens when there is a breach of that duty? Keep reading to find out.
What Is Fiduciary Duty
A fiduciary duty is the acceptance of responsibility to act in a client’s best interest whether they be a corporation or an individual. In some cases, a fiduciary duty exists between an attorney, advisor, agent or professional and the business or person they are entrusted with serving. It also can be implicated between business partners or between a company’s leadership and the company itself.
Simply put, a representative acting in a fiduciary capacity must respect their client/fiduciary’s best interests at all times and maintain a level of competence when doing so. When the representative breaks the trust, or standard of care, a breach of fiduciary duty occurs.
For example, a CEO may breach fiduciary duty by participating in insider trading or fail to communicate properly resulting in significant financial and job loss for their company’s shareholders. A partner to a limited liability company (i.e. LLC) may engage in side deals that properly belong to the company or the other partner. An accountant may secretly and unfairly embezzle or award themselves monies they are not entitled to. A stockbroker may provide foolish and reckless advice to their clients. A nonprofit director may negligently supervise financial matters or grants.
In a corporate setting, there are three possible fiduciary relationships where a breach may occur:
- Leadership against company, owners, shareholders, or employees
- Employees against the company
- The company against its clients
Other cases may involve a breach on a one-to-one basis, i.e., an accountant breaking trust with their client or a lawyer with their ward. Either way, wherever there is a fiduciary duty to act in another’s best interests, there are opportunities to breach that trust.
Factors of a Breach of a Fiduciary Duty Claim
When a breach occurs, the harmed party may pursue legal action against the negligent party. When a breach claim is filed, the legal representative of the party harmed by the breach (the plaintiff) must prove that the breach occurred and was caused by direct actions from the liable party (the defendant).
To do so, the plaintiff must provide evidence to support the following:
- Duty
- Breach
- Causation
- Damages
Duty
In a breach case, the plaintiff must prove that there was a fiduciary duty. This means that there was an obligation on the defendant’s part to act legally, ethically, and within the bounds of a contractual agreement with their client’s best interests in mind.
If the plaintiff cannot prove that such a duty existed, then there cannot be a valid breach of fiduciary duty claim and the court will not proceed with the case.
Breach
Once the plaintiff proves that a fiduciary duty was in effect, they must provide evidence that a breach occurred. What is considered a breach depends on the individual case and circumstances—it can be failure to perform competently, self-interested dealing or other forms of negligent or malfeasant behavior. For example, a breach between trustee and beneficiary may not be the same as a breach between representative and client. A breach of fiduciary duty between business partners is not the same as a breach fiduciary duty of a company’s leadership towards the company’s owners.
Causation
Causation shows that the damages incurred by the plaintiff were the direct result of the breach and no unrelated or outside factors. For example, loss of property value because of a housing market crash does not have causation. However, if a real estate agent recommends selling a property for far too low a price, the client may have proof of causation due to the fact that the agent should have recommended the property to be sold a market rate price based on standard research.
Damages
After proving that a fiduciary duty existed, was breached and causation, the plaintiff will need to show actual damages. In the same way that the definition of a breach may be different from case to case so are the resulting damages. For example, if a stockbroker fails to communicate changes in the market with their client, the client could lose money. If a trustee fails to transfer real estate from the deceased to the beneficiary, the damages may include the house and its equity. If a company CEO fails to supervise employee’s activities, and losses occur, the company is in a worse market position. In all cases, the damage was caused by the breach, but the level and scope are different.
Schedule a Strategic Consultation with an Experienced Litigation Attorney
At Tomlinson Bomsztyk Russ, our experienced business litigation attorneys have successful prosecuted and defended many types of breach of fiduciary cases. We understand what is at stake for you or your company. We know how to evaluate breach of fiduciary duty lawsuits, and we have the skills and expertise to protect your interests in this complex area of law.
If you have questions or need immediate legal action on a breach of fiduciary duty claim, contact Tomlinson Bomsztyk Russ.