Basics of Fiduciary Relationships: What Constitutes a Breach of Fiduciary Duty?
Fiduciary relationships are those in which one party places their trust, confidence, and reliance upon another who has a legal obligation to act in their benefit. In terms of the law, fiduciary relationships can exist in a number of contexts, and often as a result of service-based relationships in which a fiduciary provides an entrustor with services subject to policy and law. They may also be formal in nature (when statutory law explicitly defines the fiduciary relationship), and informal (when courts have determined through common law that certain relationships are fiduciary in nature).
Examples of circumstances with fiduciary relationships and individuals with fiduciary duties include:
- Executors and trustees of estates or trust
- Employers and employees
- Agents and principals
- Escrow, brokers, and real estate agents
- Corporate directors and officers
- Business partnerships
- Joint ventures
- Financial advisors
- Attorneys and clients
Fiduciary duties and the laws which govern them are designed to ensure parties in a fiduciary relationship act appropriately and uphold legal obligations our society have deemed critical to the relationships themselves. Although unique facts and circumstances play a role in defining the specific nature of fiduciary relationships and legal duties, there are generally three basic types of fiduciary duties. These include:
- Duty of Care – A duty of care refers to the fiduciary’s legal responsibilities in making decisions on behalf of an entrustor with the utmost care. For example, corporate directors or officers owe a duty of care to shareholders, and must ensure reasonable care is exhibited in any business decision that impacts the corporation and its shareholders.
- Duty of Loyalty – Fiduciary relationships also involve a duty of loyalty, which is intended to ensure a fiduciary never places their own interests before the interests of an entrustor. A director or officer, therefore, has a duty to make decisions in the best interests of shareholders or the corporation as a whole, and cannot benefit from opportunities, compete with corporations, or gain profit (unless specifically stated) due to decisions they make.
- Duty of Good Faith – A duty of good faith exemplifies the fiduciary duty in that it obligates a fiduciary to base decisions on good faith. A corporate director or officer would have the duty to ensure any decisions they make are in the best interests of shareholders and the corporation.
When is a Fiduciary Duty Breached?
By defining fiduciary duties, our laws protect individuals who suffer harm and losses when fiduciaries with whom they have entered into a legal agreement fail to uphold their obligations to act in their best interests.
Elements of a Breach of Fiduciary Duty Claim – Aside from the particularities of any given case, there are a few essential elements plaintiffs must prove when bringing a breach of fiduciary duty claim. This include:
- Proving the existence of a fiduciary relationship between plaintiff and defendant at the time of the breach of duty;
- Proving the defendant failed to uphold their duty as a fiduciary to the plaintiff; and
- Proving damages to the plaintiff, or benefits to the defendant arising from the breach of duty.
Cause of Action – Proving a fiduciary duty existed between a plaintiff and a defendant is a case-by-case matter, and one that may require not only evidence in the form of contractual relationships, but also providing that an information relationship was one which was fiduciary in nature. This would require a plaintiff to prove a relationship predicated on confidence and trust existed before any transaction or alleged breach of duty, as well as the fact that many transactions between the party occurred in the past, and solidified their trust in the party who acted as a fiduciary.
In terms of the facts, there can be various causes of action for claims involving a breach of fiduciary duty. Common examples in Texas include:
- Negligence / Gross Negligence
- Breach of Fiduciary Duty
- Unjust enrichment
- Professional Malpractice
- Breach of Contract
- Negligent Misrepresentation
- Deceptive Trade Practice
Damages – When successful, a breach of fiduciary claim can provide a prevailing party with various damages or equitable remedies. These include:
- Actual damages and lost profits incurred by plaintiffs as direct losses resulting from the breach of duty, and indirect or economic injuries such as business disruption, compromised customer relationships, and more.
- In some cases, prevailing parties may have the right to recover damages for the foreseeable mental anguish or intangible losses created by a breach of duty, as well as potential punitive exemplary damages in cases where a breach of duty was intentional and willful.
- In addition to damages, courts may order a constructive trust to control funds, proceeds, and property obtained as a result of a breach of duty, a forfeiture of fees (common in professional fiduciary / client relationships), and profit disgorgement to return any profits obtained from the breach of duty. Courts may also force an accounting, which can be critical to proving not only the extent of damages suffered by a plaintiff, but also the breach of duty.
- Other equitable remedies available in breach of fiduciary duty cases include rescission (where courts nullify or cancel the transaction to put parties in the position they were in prior to a contract), court-ordered injunction to stop injurious actions or compel a party to take certain action, and appointment, suspension, or removal of a receiver or trustee in cases involving trust funds.
Proactive & Responsive Representation from Proven Texas Business Lawyers
Hendershot, Cowart & Hisey, P.C. has cultivated a reputation as a Texas law firm comprised of highly experienced and insightful attorneys who assist clients throughout the state and the U.S. in matters involving business law, litigation, and family, health, and OSHA law. Our services have been utilized by numerous clients over the years to manage risks and protect themselves against litigation through the proactive drafting, review, and negotiation of contracts, as well as the responsive representation needed to address, enforce, and defend against claims regarding an alleged breach of duty.
If you have questions about fiduciary relationships in Texas, would like more information about working with our team to construct essential legal protections, or wish to discuss a potential breach of fiduciary duty claim, our legal team is readily available to help. Call (713) 909-7323 or contact us online to request an initial consultation.