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What Is Fiduciary Duty?
Within the United States legal system, fiduciary duty refers to the obligation of a person in a position of trust—such as a real estate agent, executor, or broker—to operate in good faith on behalf of another person. A fiduciary obligation exists whenever the relationship between the two parties involves a special confidence or trust placed in the hands of the fiduciary to act in the best interest of the client.
6 Examples of Fiduciary Duty Relationships
Typical examples of fiduciary duty relationships include:
- Trustee/beneficiary: A trustee/beneficiary fiduciary relationship often arises during estate arrangements and implemented trusts. In this scenario, the person deemed the estate trustee or trust acts as the fiduciary, and the beneficiary acts as the principal. As the common law owner, the fiduciary possesses the authority to handle assets in the trust’s name because they have legal ownership of the property in question. However, they also hold a duty of loyalty to make decisions that are in the beneficiary’s best interest and not the trustee’s own interests.
- Guardian/ward: In a guardian/ward relationship, a minor is placed under the legal guardianship of an adult. The fiduciary is appointed when a state court determines that the minor is unable to be adequately cared for by their natural guardian. The fiduciary responsibility of a court-appointed guardian could include determining where the ward attends school, ensuring they receive adequate medical care, and otherwise guaranteeing their overall welfare.
- Principal/agent: Provided that there are no conflicts of interest, an agent may be legally appointed to act on behalf of the principal. For instance, a team of shareholders nominating high-level corporate officers or management to act as agents is an example of a principal/agent relationship in which the c-suite individuals (the agent) are expected to act in the interests of the corporation (the principal). Any person, corporation, or government agency can act as an agent or principal as long as they have the legal ability to do so.
- Attorney/client: According to the U.S. Supreme Court, the absolute highest level of trust exists in an attorney/client relationship. When a client grants power of attorney to a lawyer or law firm, the attorney has a legal duty to act in total fairness and fidelity towards the client. If an attorney is found in breach of fiduciary duty (such as acting in the attorney’s own self-interest rather than the client’s), they are accountable to the court in which the client is represented.
- Controlling stockholder/company: The duties of a fiduciary may apply in certain instances to controlling stockholders who have a majority interest in corporate business decisions. If a breach of duty of good faith is determined to have taken place, there could be legal ramifications for the corporate directors, corporate officers, or majority shareholders.
- Other common fiduciary duty relationships: These relationships include retirement plan administrators/retirees, liquidators/companies, and mutual savings banks/depositors.
3 Types of Fiduciary Duty Under Corporate Law
There are three primary fiduciary duties owed by a company’s officers, the board of directors, and other controlling persons:
- Duty of care: The fiduciaries must consider all available information in order to take informed action on behalf of the company. This means they must be reasonably informed of alternatives and may solicit input from other employees or advisers.
- Duty of loyalty: The controllers must consider the interest of the company and not their own. They may not use their role as a fiduciary in order to benefit themselves.
- Duty of good faith: Fiduciaries must employ prudence and care when making business decisions—in other words, they must act “in good faith.”
What Are Breaches in Fiduciary Duty?
According to case law, breaches in fiduciary duty occur when a valid fiduciary relationship is found to have been compromised by actions that are harmful or counterproductive to the client’s interests. Full disclosure of any potential conflicts of interest is necessary to ensure that no conflict occurs during the course of the relationship, and failure to do so usually indicates a breach of duty. Often in breaches of fiduciary duty, a fiduciary is found to have given intentionally poor legal advice or operated in their own interest or in the interest of a third party instead of the client’s.
4 Elements of a Breach in Fiduciary Duty
In order to prove that a duty of care has been breached, there are four elements that must be established in order for a plaintiff to prevail in a breach of duty claim. The details and legal terms of these elements can vary according to state laws, but they generally exist as follows:
- Duty: The plaintiff must clearly demonstrate that a fiduciary duty existed.
- Breach: The plaintiff must prove that a breach in duty occurred. Examples include a lack of candor in offering legal advice, negligence, or illegal use of funds (such as insider trading).
- Damages: The plaintiff must demonstrate that the breach resulted in damages.
- Causation: In addition to proving damages, the plaintiff must prove that those damages were a direct consequence of the breach in fiduciary duty.
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