If you look up "fiduciary duty" in a legal dictionary, the definition will look like this: "An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for the benefit of another." Under Texas law, a person who has the responsibility of a fiduciary duty has a strict requirement to place the interest of the person they are responsible for above their own personal interests. Steven G. Blum, lecturer on ethics and law at the University of Pennsylvania's Wharton School, explains that a fiduciary "commits to using technical proficiency in the service of clients, but also honors the complex trust placed in them by those they serve."
What is a fiduciary relationship?
Fiduciary is a broad term for someone who is acting on behalf of another person under circumstances which create a relationship of trust and confidence. The term includes those holding custody and control of the property of others, such as trustees, administrators, executors, or those acting under powers of attorney. It may also include escrow agents, brokers, corporate directors and officers, partners, or condominium board members. When determining the existence of a fiduciary relation, the courts may consider factors such as the inequality of the parties, age, mental capacity, or other factors making one person dependent upon, or having an advantage over, another.
Fiduciary duties frequently arise in formal, legal relationships, such as attorney-client, business, or trustee relationships. But an informal fiduciary relationship may exist in situations where a particular relationship of trust and confidence exist, whether the relationship is a social, domestic or personal one. But relationships of trust do not always create a fiduciary duty. In a business setting, there are often elements of trust and confidence, or relationships that go back for many years, however, it can be tricky to determine whether such a confidential relationship exists. Mere subjective feelings of trust on one side are not enough.
Fiduciary duties also apply to married couples in some circumstances. The Family Court may also take fiduciary duties into consideration in cases of prenuptial agreements.
What duties does the fiduciary owe to the beneficiary?
Fiduciary duties generally fall into two categories: the duty of care and the duty of good faith. Duties within these categories vary depending on the many types of relationships between fiduciaries and beneficiaries (also called entrustors). These duties include:
- Acting with strict integrity in all matters relating to the fiduciary relationship
- Adhering to any applicable professional standards regarding ethics.
- Complete honesty and accountability when handling finances.
- Fair and honest dealing. The fiduciary must not take any action that could be seen as contrary to the beneficiary's interest without the full knowledge and consent of the beneficiary.
- The fiduciary must always place the welfare of the beneficiary above their own interests.
What is a violation of fiduciary duty?
There is no easy answer to this question. A breach of fiduciary duty frequently occurs when company directors violate their fiduciary duty towards shareholders, or when a person acting as a guardian does not act in the best interests of the individual. For anyone acting in a fiduciary capacity, the standards are high. They require undivided loyalty and the obligation to avoid even the appearance of inappropriate behavior.
The main questions to consider are:
- Was there a fiduciary relationship when the misconduct occurred?
- If yes, then what was the scope of the relationship?
- Was there a violation of the duties within the scope of the relationship? -
A violation of fiduciary duty may give rise to a number of legal penalties, including a tort, special damages or, in Texas, even possible criminal exposure.
If you have questions or are concerned about a matter of fiduciary duty, please contact us.
Meyer v. Cathey, 167 S.W.3d 327, 331 (Tex.2005).
Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex.1997).