A fiduciary is a person who has either a legal or ethical relationship of trust to someone else. When a person has a fiduciary duty to another person, the fiduciary must conduct themselves according to the benefit of that other person. The person to whom the duty is owed is sometimes referred to as the principal, or the beneficiary. A fiduciary generally takes care of money or other such assets for the beneficiary.
One of the most important fiduciary duties is the obligation to act for the beneficiary’s benefit, not the benefit of the fiduciary. Fiduciary duties can be categorized in three ways:
- Duty of Care: A fiduciary is expected to use the amount of care that any ordinarily prudent person would exercise in a similar position, and under similar circumstances. An example of this would be a fiduciary’s duty to treat the property or money that they are trusted to manage and protect as their own. They must make prudent decisions regarding the best ways to manage and protect the assets they are entrusted with;
- Duty of Good Faith: The fiduciary is tasked with the duty of acting with conscious regard for their responsibilities as a fiduciary. Meaning, the fiduciary must not act in any fraudulent or deceitful way, to the detriment of the beneficiary; and
- Duty of Loyalty: A fiduciary’s duty of loyalty is vast and will be further explained below. In short, the fiduciary must act for the benefit and advantage of the beneficiary, without making any decisions that would be disadvantageous for the beneficiary. A fiduciary may not make any decisions on behalf of the beneficiary that are out of self interest, or for their own benefit.
The above mentioned duties are mainly imposed by public policy when a specialized service is involved, such as money management, legal help, or medical care. Most fiduciary relationships occur in legal context, such as when wills, contracts, and trusts are involved. Other examples include but may not be limited to:
- Attorney and client;
- Executor and heir;
- Guardian and ward;
- Agent and principal;
- Doctor and patient;
- Trustee and beneficiary; and
- Corporate officer and shareholder.
What Is a Fiduciary Duty of Loyalty?
As previously mentioned, one of the most important fiduciary duties is the duty of loyalty. Fiduciaries are expected to act in good faith, and with all of the fairness, morality, and honesty that the law requires of their position. They must not be involved in any self dealing transactions, conflicts of interest, or any other abuses of the principal for any personal advantage.
When making any transactions or decisions, it is imperative that the fiduciary avoid the following:
- Misappropriating Business Opportunities: When a fiduciary manages and protects property and/or money on behalf of a beneficiary for business purposes, they must not seize a business opportunity while acting within the scope of their fiduciary duties. Simply put, they must not seize the business opportunity for their own benefit. The fiduciary has an obligation to disclose and offer the business opportunity to the beneficiary, when that opportunity clearly belongs to the beneficiary;
- Make Interested Transactions: Fiduciaries entrusted with a beneficiary’s property and money have a duty to protect and manage the property on behalf of the beneficiary. As such, they must not make interested transactions using the property entrusted to them. An example of this would be how a fiduciary may not buy or sell assets, make any type of personal profit, or make any type of self dealing transactions using the money or property entrusted to them; and
- Breaking Their Duty of Confidentiality: A duty of loyalty also requires that a fiduciary maintains confidentiality regarding all decisions and private information they have been entrusted. A beneficiary may not wish for public disclosure of their private matters. As such, the fiduciary would be prohibited from disclosing information about the beneficiary’s property or transactions. They must first obtain permission to disclose.
What Can Be Done About a Breach of the Duty of Loyalty?
Breaches of the duty of loyalty can occur in several different ways. However, breaches generally occur when the fiduciary acts in any way that benefits themselves as opposed to the beneficiary, or to the detriment of the beneficiary. A breach could also include the fiduciary acting in such a way that benefits others at the expense of the beneficiary. Fraudulent conduct also constitutes a breach of the duty of loyalty, and the fiduciary may be prosecuted for the violation as well as the underlying offense.
In order to recover damages for a breach, the claimant must show:
- The fiduciary occupied a position of trust, or was placed in a fiduciary relationship;
- The fiduciary acted in a manner that benefited them personally while in the scope of the fiduciary relationship;
- Proof that the duty of loyalty was in fact owed;
- The duty was breached by the fiduciary;
- The breach caused damages to the claimant; and
- What exact damages occurred.
If a civil claim is brought by the claimant against the fiduciary, the claimant may receive damages for any lost profit. They may also receive restitution in order to recover profits that the fiduciary gained to the detriment of the beneficiary. It may be possible for the claimant to recover profits that were gained by the fiduciary even if the claimant themselves did not actually suffer any type of harm.
Do I Need an Attorney for Fiduciary Duty of Loyalty?
If you are in a fiduciary relationship, and the fiduciary has breached their duty to you, you should consult with a skilled and knowledgeable estate attorney. An experienced estate attorney can help you understand your rights and options. Finally, an estate attorney can file any necessary legal paperwork to protect your rights, as well as represent you in court as needed.