Fiduciary Relationship

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 What is a Fiduciary Relationship?

A fiduciary relationship is a relationship in which one individual places some trust, confidence, and reliance on another individual. The individual who is given the trust and confidence has a fiduciary duty to act for the benefit and interest of the other individual.

The individual who owes a duty to another to act in their best interest is known as the fiduciary. The individual to whom the fiduciary duty is owed is known as the principal.

A fiduciary relationship is created in many different types of legal assignments. These may include:

  • Contracts;
  • Wills;
  • Trusts;
  • Elections; and
  • Corporate settings.

The main goal of a fiduciary relationship is to establish an honest and trusted relationship between two individuals. The principal can rely and be confident that the fiduciary is working in their best interest and not using their power for their own interest or the interest of a third party.

How Is a Fiduciary Relationship Created?

A fiduciary relationship may be created by an express agreement made in writing between the two parties or be implied by law due to the conduct of each party. Some parties that typically have a fiduciary relationship with one another may include:

  • Attorneys and clients;
  • Doctors and patients;
  • Agents and principals;
  • Trustees and beneficiaries;
  • Directors and stockholders;
  • Officers and stockholders; or
  • Guardians and wards.

What are the Duties Owed in a Fiduciary Relationship?

There are three main duties that all fiduciaries owe to the principal:

  • The duty of care;
  • The duty of good faith and fair dealing;
  • The duty of loyalty; and
  • Full disclosure.

The duty of care requires a fiduciary to act with the care that an ordinary prudent person in the same or a similar position would exercise under the same or similar circumstances. The fiduciary must also act in a manner that a reasonable person would believe would be in the best interest of the principal

The duty of good faith and fair dealing requires the fiduciary to act honestly and fairly. The fiduciary is required to act in accordance with the principal’s desires for the property they oversee.

Their duty of loyalty requires the fiduciary to act with the care that an ordinary prudent person in the same or a similar person would under the same or similar circumstances. It also requires the fiduciary to act in a manner that a reasonable person would perceive as being in the best interest of the principal.

The fiduciary is required to disclose all information related to the fiduciary relationship to the principal. This includes any and all business opportunities, contracts entered into, and any other type of action that relates to the fiduciary relationship.

What Must be Avoided in a Fiduciary Relationship?

The main purpose of the fiduciary relationship is that the fiduciary who is entrusted with power, confidence, and reliance, acts solely in the best interest of the principal. The fiduciary must avoid certain actions, including:

  • Any acts of self-dealing;
  • Any situation in which the fiduciary’s own interest conflicts with the interest of the principal;
  • The use of fiduciary power to receive a profit or benefit at the expense of the principal;
  • Any fraud, misappropriation, or abuse of trust; or
  • The acceptance of any secret commission.

A fiduciary may be in breach of their duties even if there was no criminal or fraudulent intent behind their actions. The fiduciary is prohibited from making any type of personal profit or gain regardless of whether it benefits the principal or harms the principal. Any and all actions of the fiduciary require full and honest disclosure to the principal.

What are the Consequences of a Breach in a Fiduciary Relationship?

There are several consequences that may arise when the fiduciary breaches the fiduciary relationship. The fiduciary relationship may be breached if the fiduciary breaches the duty of care, the duty of act in good faith, or the duty of loyalty. 

The principal is not required to prove the fiduciary had any criminal or fraudulent intent when the duty was breached. To prove there was a breach of fiduciary duty, the principal must prove two elements. The first element is that the defendant held a position of trust, confidence, and reliance that established the fiduciary relationship between the parties. The second element is that the defendant breached the fiduciary duty to benefit personally and at the expense of the principal.

Breach of fiduciary duty is a civil claim. The penalties or consequences of a breach of fiduciary duty may include:

  • An account of profits where any personal profits or gains made by the fiduciary are required to be turned over to the principal;
  • Equitable remedies, which may include compensation for any losses that were suffered by the principal as a result of the fiduciary’s actions;
  • A constructive trust, created by a court order that establishes a trust for any property or asset gained by the fiduciary at the expense of the principal. This is used to restore the losses that the principal may have incurred; or
  • Recession, or cancellation, of any contract entered into by the fiduciary without the consent of the principal.

What are Fiduciary Duties in Partnerships?

In a partnership, each partner owes the other partner or partners a fiduciary duty. The specific fiduciary duty owed may vary depending on the nature of the partnership and what was agreed on in the partnership agreement. 

Depending on how the partnership is set up, the individual who owes the fiduciary duty may differ. In a general partnership and a limited partnership, each general partner and each limited partner owes a duty of fiduciary duty. 

This is due to the fact that in both a general and a limited partnership, any individual who manages the partnerships has a direct impact on the best interests and goals of that partnership. Additionally, both general partners and limited partners have management duties.

However, in some limited partnerships, a limited partner merely contributes capital in order to form the partnership. Therefore, they do not have any management capabilities. 

This type of limited partner leaves all management duties to the general partners. In these situations, this type of limited partner does not owe a fiduciary duty. 

However, if they have any type of management control, a court will view them as a general partner with a fiduciary duty. The fiduciary duties of partners are the same fiduciary duties discussed above for other types of fiduciary relationships.

Should I Consult an Attorney for Fiduciary Relationship Issues?

Yes, it is essential to have the assistance of an experienced estate lawyer for any fiduciary relationship issues you may have. If you believe a fiduciary has abused their position, an attorney can help you pursue a claim for breach of fiduciary duty. Your attorney can help you gather evidence and take the necessary action against the fiduciary to ensure that the fiduciary does not further damage the assets of the estate.

It is important to note that if you are a fiduciary, you can consult with an attorney prior to taking any action to ensure you do not breach your duties. That way, you can ensure any actions you take are proper and in the best interest of the principal.

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