Suing a Business for Breach of Fiduciary Duty

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What is a Fiduciary Duty?

A fiduciary duty is a legal relationship between at least  two parties, where there is a fiduciary (the person who has the duty) and the principal (the person who benefits from the duty).  Common examples of where this relationship exists include:

How Can A Fiduciary Duty Be Broken?

A fiduciary duty consists of two equal parts: duty of loyalty and duty of care. The duty of loyalty means that the agent must be loyal to the client above all others, including the agent’s own. As such, a fiduciary cannot have more than one fiduciary relationship if the fiduciary duties would conflict with one another. This is why, for example, an attorney cannot represent both the plaintiff and the defendant. Keeping a portion of the profits or engaging in insider trading also violates the fiduciary duty of loyalty.

The duty of care means that the agent must provide the best possible service or advice that the agent can provide. Negligence is a common way of breaching the duty of care that the fiduciary owes the principal. Fiduciary failure to disclose information necessary for the principal to make an informed decision also constitutes as an infringement of the duty of care.

What Fiduciary Duties Might Affect my Business?

Regardless of the structure of your company, it is likely that some fiduciary duty exists between the members or partners.  If you are unsure of the exact duty owed by each person involved, it is likely that your company's organizational documents or partnership agreement may stipulate these duties. 

Fiduciary Duty Between Partners:

If you are involved in a partnership, your fiduciary duty will include a duty of loyalty to the other partners, duty to fully disclose any information regarding the partnership and its affairs, and a duty to operate in good faith and fair dealing.  You must also avoid engaging in any transactions outside of the company that might conflict with the interests of the partnership.

Fiduciary Duty Between a Manager and the Members of a Limited Liability Company:

In an LLC, the manager owes to the members of the company the highest duty of care, loyalty, and disclosure, and the members may owe a similar duty to the manager.  Each party is expected to always act in the best interest of the company as a whole and avoid any potential conflicts of interest with the company.   

What Can I Recover if a Partner, Manager, or Member of My Company has Breached a Fiduciary Duty to Me?

The remedies available to you will depend upon the breach that has occurred.  If the partner has concealed profits or not placed the company's earnings in trust for the partners, you may recover monetary damages.  If a manager has breached a fiduciary duty to you and the other members of your company, you may be able to have him/her removed.

What Defenses Do I Have If I am Accused of Breaching a Fiduciary Duty?

A typical breach of fiduciary duty defense consists of proving that the agent acted within the boundaries and agreements of his or her position. A doctor being sued by his or her patient for failure to diagnose, for example, might argue that any reasonable doctor would have made a similar error. 

Should I Contact an Attorney?

If you are accused of breaching a fiduciary duty within your company, of if you believe a duty owed to you has been breached, you should contact an attorney.  A lawyer with experience in business can represent you and protect your rights in any action brought against you, as well as advise you of the duties owed to you and what remedies you may have in the event of a breach. 

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Last Modified: 04-23-2012 02:22 PM PDT

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