Fiduciary duty is a legal relationship between two or more parties. And it's a big duty.
One party is the fiduciary, or the entity with the duty and the other party is the principle, or the entity benefiting from the duty. In general, it is a mutual relationship among partners who owe the duty to each other and their partnership.
What happens when that duty is has been breached? We will discuss what fiduciary duty means, some examples of how partners have breached their duty, and the steps the partnership can take to achieve a remedy.
Defining Fiduciary Duty
Fiduciary duty is the holding of something, usually money, in good faith. It is a combination of:
- Duty of honesty
- Duty of care
- Duty of loyalty
- Duty of fairness
- Duty to act in good faith
The duty of loyalty calls upon each partner to be loyal to the business above everything else.
The duty of care requires each partner to provide the best possible service or advice. In all cases, fiduciary duty requires partners to disclose any necessary, relevant information to the rest of the partners within the scope of the relationship. Also, each partner must act in a reasonably prudent manner when managing or directing operations for the partnership.
Fiduciary duty begins with preliminary negotiations when forming a partnership and continues until the partnership is dissolved and all partnership affairs completely settled. Alternatively, a partner can leave the partnership and end his or her fiduciary duty unless a contract to continue it is negotiated.
Fiduciary duty falls under Equity Law which states when a fiduciary relationship is agreed upon; it is illegal for the fiduciary to act contrary to the best interests of the principle. Sometimes a fiduciary relationship may be difficult to define because it can be based on a subjective concept of trust.
Our attorneys, Charles Vethan and Joseph Colvin, discuss the specifics of fiduciary duties in this video.
Who Owes Fiduciary Duty?
The duty owed by each partner depends on whether the partnership is a general partner or a limited partnership. Typically, fiduciary duty is only owed by those with management authority. Each partner’s fiduciary and other duties should be stipulated in the operational documents or partnership agreement developed when the business was formed.
In a general partner, all partners owe a duty to the partnership.
Within a limited partnership, the limited partner(s) can provide capital resources, but they are not involved in managing the business; the operational duties are left to the general partners. Non-managing partners usually do not owe a fiduciary duty to the partnership.
However, if a limited partner does participate in directing or operating a limited partnership, he or she could be treated as a general partner with fiduciary duty by the courts.
All partners are expected to avoid any conflicts of interest between the business and other activities. Partners are to hold partnership property in trust for the benefit of the business and not for personal advantage.
With higher levels of fiduciary duty comes greater legal liability for the partner who fails to live up to those obligations of trust. Think, “Spider-man.”
Altering Fiduciary Duties
Fiduciary duty is defined by state law and judicial determination (case law). Depending on the state, partners may limit, expand, or eliminate fiduciary duties by agreement. However, the changes must be reasonable under the circumstances. Also, there are some duties that cannot be legally altered or eliminated.
Consult an experienced Dallas business attorney to learn the specifics of the law in your state.
Breach of Fiduciary Duty
A breach of fiduciary duty is, at heart, a break in trust with partners who are owed such duty. It occurs when one partner fails to uphold financial obligations to the partnership.
- Duty is an obligation.
- Obligations imply a level of trust.
- When trust is violated, duty has been breached.
The typical result is a financial loss.
Examples of Breach of Fiduciary Duty
A breach may be said to have occurred in these circumstances:
- A business partner takes a business opportunity away from the company for his or her profit
- A board of directors takes action against the interest of the company for its financial gain
- A partner engages in insider trading
- A partner keeps a portion of the profits to which he or she is not entitled
- Negligence in management
- Misrepresenting or concealing relevant information from the partnership that results in financial damages
Filing a Claim for Breach of Fiduciary Duty
To file a claim for breach of fiduciary duty, you must prove all of the following:
- A fiduciary relationship existed
- The fiduciary breached a specific duty that was owed to you
- The breach entitles you to a remedy
You must have suffered financial damage because an individual with a fiduciary duty to you has taken advantage of your trust and violated the terms of your business relationship. If you can prove the three points above, you have the right to pursue a claim for damages.
The remedy you can receive depends on the breach.
- If a partner concealed profits or did not place earnings in trust for you, you may recover monetary damages.
- If a manager breached a fiduciary duty to you and the other partners, you might be able to have that individual removed from the partnership.
If you are the one accused of a breach of fiduciary duty your defense will be to act diligently to prove you acted within the boundaries and agreements of your position.
The partner filing the claim has the burden of proof, citing self-dealing or unfair advantage in a transaction involving the partnership. A presumption of fraud of undue influence arises, which you must rebut or counter by showing you acted within the bounds of fiduciary duty.
If found guilty of the breach, you are responsible for any losses.
Fiduciary duty is a serious concept in business law. Every general partner must be prepared to take full responsibility for fulfilling that duty to the partnership.