When one person is responsible for working for the benefit of another person as an agent, or in another position of trust, they will take on specific duties towards that individual. The highest form of duty one can owe another in that situation is a fiduciary duty. If a person violates that duty, they can be personally responsible for damages they cause.
Commonly, one assumes a fiduciary duty towards another when they act as a trustee. When one serves as a trustee, they take legal ownership of the trust assets and are responsible for managing those assets on behalf of the beneficiaries. It follows that a trustee must have principles that guide their work. The beneficiaries, while they need and expect the assets from the trust, are not in a role where they can make decisions themselves. Therefore, they count on the trustee to do their job properly.
Common Types of Fiduciary Relationships
Here are some examples of relationships that can create a fiduciary duty:
- The personal representative of an estate and the heirs
- Corporate directors to their shareholders
- Attorneys to their clients
- Investment advisors to their clients
- Employees to their employers (in some cases)
Even though all these relationships are different, the core principles are the same. When you have a fiduciary duty to someone, you are being counted on to act in their interests and not yours. At its core, a fiduciary duty is about honesty and diligence because someone else is counting on you to do a critical job for them. They may even be paying you to act in this capacity.
The Core Aspects of a Fiduciary Duty
There are three basic tenets of fiduciary duty:
- Duty of care – A fiduciary is expected to use reasonable care and prudence in carrying out their duties. This is similar to a negligence standard in a personal injury case. For example, if a trustee is investing, they should prudently consider all options, do their due diligence, and decide after considering relevant information.
- Duty of loyalty – The fiduciary must act selflessly and in the interests of the other person. They must put others ahead of themselves. Fiduciaries can violate this duty when they engage in self-dealing or steer business to affiliated people or entities in which they have a financial interest.
- Duty of good faith – This duty encompasses elements of the first two duties, requiring the fiduciary to do their job with prudence and care, and in an honest and honorable way.
Examples of Violations of Fiduciary Duties
Here are some examples of ways that fiduciaries can violate their duties to others:
- An employee acting on behalf of their employer’s competitor while working for their employer
- A trustee investing trust funds with a company in which they or someone close to them owns an interest
- A personal representative commingling assets from the estate with their own, or taking estate assets for personal use
- A trustee investing all the assets of the trust in dubious penny stocks or questionable cryptocurrencies
The fiduciary does not get away with the wrongful acts described above. When someone agrees to or assumes a fiduciary role, there are potential liabilities that go along with their responsibilities. Beneficiaries can be compensated for the losses they suffer as the result of a breach of fiduciary duty, and the money would come out of the pocket of the fiduciary who committed the violation.
Lawsuits for Breach of Fiduciary Duty
A plaintiff has the burden of proof in a breach of fiduciary duty lawsuit. They must first prove a fiduciary duty existed (it does not always). Then, the plaintiff must prove both an actual breach of fiduciary duty and the harm that came from it. Not every breach causes actual harm and damages.
If a plaintiff does win their breach of fiduciary duty case, they may receive the following damages:
- Out-of-pocket damages that were caused by the breach
- Lost profits
- Mental anguish damages for the emotional harm caused by the breach
- Possible punitive damages if the breach of fiduciary duty was particularly egregious
A plaintiff could also get injunctive relief from a court that could put an end to the challenged actions and/or order an accounting from the fiduciary.
Fiduciaries Must Do Everything They Can to Protect Themselves
It is critical that fiduciaries perform their duties, both to the best of their ability and with the utmost level of integrity. There are defenses to allegations of breach of fiduciary duty, such as business judgment, but you do not want to be in the position of having to answer for your actions in court. Litigation can be expensive and draining. If fiduciaries have any questions about the proper course of action, they should get legal help.
Here are some ways a fiduciary can protect themselves from possible liability in the future:
- Get help from a professional if you find yourself uncertain about something
- Keep detailed records of your transactions and the effort you made to honor your fiduciary duty
- Listen to the principal and answer questions as they ask them, making sure to remain transparent
Breach of fiduciary lawsuits are almost always complicated and often bitter. In many cases, they involve allegations of wrongdoing by family members. Regardless of the type of case, the plaintiff in these lawsuits is usually outraged because they think they have been misled or let down by someone whom they trusted.