Fiduciary Duty of Loyalty
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What Is a Fiduciary Duty?
Fiduciary duties fall into two general categories: the duty of loyalty and the duty of care. These duties exist when there is a type of special relationship between the fiduciaries and their parties that they are contracted with. Fiduciary duties are mainly imposed by public policy when there is specialized service involved, such as money management or legal help.
When Does a Fiduciary Relationship Arise?
Most fiduciary relationships arise in many legal contexts such as contracts, wills, trusts, agent-principals, and attorney-clients. Fiduciary relationships are also in many service relationships such as:
- Corporate officer/shareholder
When there is a fiduciary relationship creates, certain fiduciary duties are owed in the relationship and there are scopes and limitation within those duties.
What Are the Basic Types of Fiduciary Duties?
One of the most important fiduciary duties is the obligation to act for another’s benefit. A fiduciary is an individual whom another has placed the utmost trust and confidence to manage and protect property or money. Therefore, all of the duties and obligations of a fiduciary is to act for the benefit and advantage of the beneficiary. There are also three main duties owed by a fiduciary:
1) Duty of Care – A fiduciary has to use the amount of care that an ordinarily prudent person would exercise in a like position and under similar circumstances. For example, a fiduciary has the duty to act as if the property or money that they are managing and protecting is their own money and must make prudent and smart decisions.
2) Duty of Loyalty – A fiduciary has a duty of loyalty and must act for the best interest of the beneficiary. This requires the fiduciary to act for the benefit and advantage of the beneficiary without making any decisions that would put the beneficiary to a disadvantage because of his own self-interest and benefit. A broader concept of a fiduciary’s duty of loyalty is explained below.
3) Duty of Good Faith – Another aspect of the duty of loyalty is the duty to act with good faith. A fiduciary has a duty to act with conscious regard for their responsibilities as fiduciaries. This means a fiduciary must not act in a fraudulent or deceitful manner to the detriment of the beneficiary.
What Is a Fiduciary Duty of Loyalty?
One of the most important fiduciary duties is the duty of loyalty owed by the fiduciary. A fiduciary must act in good faith, and with conscientiousness, fairness, morality, and honesty that the law requires of fiduciaries. This means that the fiduciary must act for the best interest of the party he/she is representing and must not be involved in any self-dealing transactions, conflict of interest, or any other abuse of the principal for a personal advantage.
In all transactions and decisions, a fiduciary must avoid:
- Misappropriating a Business Opportunity: A fiduciary that manages and protects property and money on behalf of a beneficiary for business purposes must not seize a business opportunity while acting within the scope of his fiduciary duties for the benefit of his/her own. A fiduciary has an obligation to disclose the opportunity and offer to the beneficiary when the opportunity clearly belongs to the beneficiary.
- Make "Interested" Transactions: A fiduciary who is entrusted with a beneficiary’s property and money and has a duty to protect and manage the property on behalf of the beneficiary. A fiduciary must not make "interested" transaction using the property entrusted with him/her. For example, a fiduciary cannot buy/sell assets, make any type personal profit, or make any type of self-dealing transactions using the money or property entrusted with him/her.
- Duty of Confidentiality: A duty of loyalty also requires a fiduciary to maintain confidentiality regarding all decisions and private information entrusted within him/her. Sometimes a beneficiary does not like public disclosure of his/her private matters. Therefore in this situation, a fiduciary is prohibited from disclosing information about a beneficiary’s property or transactions without permission to disclose it.
Breach of the Duty of Loyalty
Breach of the duty of loyalty can occur in several ways. A breach of the duty of loyalty generally occurs when the fiduciary acts in a manner that benefits himself or others at the expense of the principal or party owed the duty to. Fraudulent conduct is also a breach of the duty of loyalty and the fiduciary could be prosecuted in violation of the duty and also for the underlying offense.
Damages: To recover damages where a fiduciary has breached a duty of loyalty, the claimant must only show:
- Fiduciary occupied in a position of trust or was placed in a fiduciary relationship
- The fiduciary acted in a manner that benefited him personally while in the scope of the fiduciary relationship
- Proof that the duty was owed to complaining party
- Breach of the duty by the fiduciary
- Breach caused damages to complaining party
In a civil claim brought by the claimant against the fiduciary, the claimant may receive damages for any lost profits and restitution for recover of profits that were gained by the fiduciary at the disadvantaged of claimant. The claimant can even recover profits that were gained by fiduciary even if the claimant did not actual suffer any type of harm themselves.
Do I Need to Consult an Attorney?
If a fiduciary has breached any duties owed within the special relationship, you should contact an attorney to help you understand your rights. A malpractice attorney may be able to help you recover for your losses.
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Last Modified: 06-19-2014 03:20 PM PDT
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