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 individual can owe another in that situation is a fiduciary duty. If a person violates that duty, they can be held personally responsible for damages they cause.
Commonly, a person assumes a fiduciary duty toward others 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
Fiduciary relationships are commonly associated with formal contracts or agreements where parties expect integrity and honesty in all related matters. Those holding a fiduciary duty must act within the law and according to the terms of the arrangement. The definition is broad, covering interactions such as:
- The personal representative of an estate and the heirs
- Corporate directors to their shareholders
- Attorneys to their clients
- Agents with power of attorney to their principals
- 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
Fiduciary duty can arise in both formal and informal relationships, as long as there is some element of financial or asset management on behalf of others. Whenever someone puts their faith in another, in good conscience, the person bearing the fiduciary duty is subject to certain expectations regarding their actions and judgment. They must display complete candor at all times and maintain the 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.
Those who breach their fiduciary duty can be subject to penalties that may include criminal or civil litigation, along with dismissal from their position of trust. For example, Section 113.082 of the Texas Property Code allows for removal of trustees who commit fraud, misrepresentation, or withhold information from beneficiaries. Fiduciaries must always uphold the terms of the trust in the best interest of those involved without succumbing to their own wishes.
Examples of Violations of Fiduciary Duties
When a person violates their fiduciary duties, how they are penalized depends on the details of their relationship with those harmed. Wronged parties can make a breach-of-fiduciary claim to recover their losses. Here are some examples of ways that fiduciaries can violate their duties to others:
- An employee who acts on behalf of their employer’s competitor while working for their employer.
- A trustee who invests trust funds with a company in which they or someone close to them owns an interest.
- A personal representative who commingles assets from the estate with their own or who takes estate assets for personal use.
- A trustee who invests 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.
Criteria for Bringing a Breach-of-Fiduciary Claim As a Beneficiary
When a party who holds a fiduciary duty violates their duties, the law, or terms of a trust or other agreement, those who are harmed are eligible to bring a breach-of-fiduciary claim against them. In Texas, the claimant must demonstrate three elements to have standing, which are:
- Pre-existing relationship: The plaintiff must show evidence of an existing fiduciary-beneficiary relationship through documents or other means. The relationship must have existed prior to the alleged breach as an indication of the trust that was broken or violated.
- Wrongful fiduciary action (breach): The claimant must demonstrate the fiduciary engaged in some action(s) that violated the established trust and legal obligations. If the fiduciary invested wisely but unforeseen circumstances caused a loss, it may not constitute a breach. The claimant must supply proof of willful or negligent actions that resulted in legal injury.
- Legal injury to beneficiaries: The beneficiary must show evidence clarifying how they were legally injured by the fiduciary’s action or inaction. They may use financial or other statements indicating devaluation of assets or proof of ill-gotten gains to benefit the fiduciary, even if the beneficiary experienced no loss.
Those facing accusations of breach-of-fiduciary can rebut with documentation of consent from the beneficiary or other appropriate instruction. Texas allows a four-year statute of limitations to bring breach-of-fiduciary claims that aim to recover losses or ill-gotten gains. The statute begins on the date the plaintiff discovered the breach.
While waiting for a lawsuit to finish, the plaintiff may wish to prevent the fiduciary from causing any more harm in their role.
To remove a trustee from a fiduciary position in an estate or trust, plaintiffs must file in probate or other appropriate courts. They can also seek restraining or other protective orders to stop further action by the fiduciary until they can secure a removal.
Potential Damages Available in Breach-of-Fiduciary Duty Lawsuits
Because a breach of fiduciary duty lawsuit is a civil trial, the plaintiff has the burden of proof. They must provide evidence supporting their claim of a fiduciary relationship, actions that led to the breach, and how they were harmed. Demonstrating legal injury can be complicated, and plaintiffs should expect defendants to fight back vigorously.
However, by working with an experienced business litigation attorney, claimants can prepare a robust case showing how they were wronged. They can also calculate all current and future losses to seek damages. These can include the following:
- 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 or order an accounting from the fiduciary. In instances where the breach resulted in criminal behavior, such as defrauding an employer via embezzlement, the claimant may be able to use evidence from a criminal trial to support their civil claim against the same defendant. Each case is different and should be handled with the help of a skilled business and civil litigation team.
Who Can Be Held Responsible for Breaching Fiduciary Duty?
Individual and joint fiduciaries can be held personally responsible for any financial or other losses they cause through breaches or violations of their duties. If there is more than one defendant, they may be assigned fault and held as jointly and severally liable under Texas Civil Practice and Remedies Code Section 33.013.
A breach-of-fiduciary case may also involve third parties along with the fiduciary. Those individuals can also be held jointly and severally liable for their actions. They may be held responsible even if they personally did not owe a fiduciary duty to the claimant.
For example, suppose a real estate agent convinces a client to sell a property at an unfairly discounted price to a buyer who pays a kickback to the realtor. The agent and the buyer could be held liable for the seller’s legal injury, even though the buyer did not have a strict fiduciary duty to the buyer.
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 professionals, such as valuation, financial, investment, or real estate specialists, 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.
- Establish and maintain a relationship with a skilled attorney to assess the legal implications of your fiduciary decisions.
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 plaintiffs in these lawsuits are usually outraged because they think they have been misled or let down by someone whom they trusted.
Learn More About Handling Fiduciary Duty and Fiduciary Breach Lawsuits
In matters of law, it is vital to work with those who have the knowledge, training, and experience to ensure your protection against unfair allegations. Many individuals accept a role that includes fiduciary duties without fully understanding the obligations and potential risks. If you are serving a fiduciary role in any capacity but are unsure of what this might mean for you from a legal standpoint, you must contact a seasoned business law firm to learn more and protect yourself.
Likewise, if you believe you have been the victim of a fiduciary breach, you must take action to recover your losses and ensure no further harm results. Building a convincing case against the defendant requires help from an accomplished team with years of managing successful cases. Our attorneys will help you identify the full range of losses you have suffered, including those you may have overlooked.
At Feldman & Feldman, we have worked with business professionals and private individuals who need qualified guidance in their fiduciary duties. If you need representation in a legal action involving alleged fiduciary breaches, schedule a consultation with one of our commercial litigation attorneys right away. Contact us by phone or through our online form today.