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THE
FIDUCIARY DUTY: WHAT IS IT AND WHAT DOES IT IMPOSE UPON YOU?
Introduction:
The odds are good you
already have a fiduciary duty to someone. Probably you have many
fiduciary duties to many people. And the odds are good you may not fully
understand the scope and the risks inherent in having such a fiduciary
duty.
The fiduciary duty is an
obligation of loyalty and good faith to someone or some entity that is
the highest duty known to the law. It requires a degree of loyalty and
care that does not allow any violation without exposing the violator to
personal liability. Often, it can apply without you even expressly
agreeing to undertake it. It does
not allow for any conflict of interest whatsoever and requires full
disclosure of any potential conflict of interest. It requires complete
honesty and disclosure of any relevant information from the fiduciary to
the person to whom it is owed. As one great jurist wrote, it does not
allow for, “…a scintilla” of disloyalty to exist.
Before one marries, before
one becomes a director of a company, a partner in a company, a parent,
the executor of a will, the trustee of a trust, an employee to a company, a contractor
to a company, a lawyer to a client, a real estate broker or agent, a
doctor, a therapist, etc, etc, one should have a good understanding of
the nature of fiduciary duty and how it affects your exposure to
liability since all those relationships can create a fiduciary duty on
your part.
Definition:
To owe a duty to someone or
something means that one has a set of obligations owed to that person.
The fiduciary duty is the highest set of obligations that one can owe to
another. In its simplest terms, it means that the “fiduciary”
(the one who has the duty) owes to the “beneficiary”
(the one to whom the duty is owed) the highest degree of care and
devotion. It means that the fiduciary must act in the best interests
of the beneficiary at all times and can never take any action which harms
the beneficiary intentionally and must avoid negligently harming the
interests of the beneficiary as well. It means that the fiduciary can not
place him or herself in a position in which the interests of the
fiduciary are in conflict with the duty to the beneficiary. It means that
full disclosure of any potential conflicts
of interest must be
revealed to the beneficiary if they arise. In some cases, it requires the
fiduciary to make proactive investigation to determine what is in the
best interests of the beneficiary and act accordingly.
Perhaps some examples will
best illustrate. A lawyer owes a fiduciary duty to a client. The lawyer
must at all times act in the best interest of the client and must make
full disclosure of any economic or other interest that the lawyer has
that might conflict with the interest of the client. The lawyer is
obligated to take all actions and give all advice that will benefit the
client and to use professional skill and energy to protect the
client’s interests. Should a conflict of interest arise (for
example, the lawyer discovers that one client wishes to hire him to sue
another one of his clients) the lawyer must immediately make full
disclosure of such conflict and take steps to immediately end the
conflict regardless of the personal cost to the lawyer.
And that duty requires the
lawyer to affirmatively determine if there is a conflict of interest. In California, the lawyer is required to
investigate to determine if he or she represents any client that is in
conflict with another or has any economic interest that may not be to the
benefit of the clients. (Law firms are required to perform a
“conflicts” search to check each client they have ever represented
to make sure a new client is not adverse to that previous client’s
interests.) Implicit in this concept is that one can not act as a
fiduciary and be in even a potential
conflict of interest. The
very fact that one may be placed in the future in a conflict requires one
to make full disclosure and withdraw unless both clients, after full
disclosure, waive the potential conflict.
Another example is a parent
to a child. Each parent owes to each child, as a legal matter, a
fiduciary duty. The parent is required by law to act in the best interest
of the child and failure to do so can impose both civil and criminal
liability (child neglect.) And, since the child is a minor, there can be
no waiver of such fiduciary duty by the child. That fiduciary duty
applies also to any guardian of the child.
Spouses owe to one another
fiduciary duties as well. Each spouse is required to act in the interests
of the other in all economic and other dealings, being required to make
full disclosure. Contracts between spouses thus require a degree of
disclosure of information and warning of possible conflicts that one does
not find in a typical contract and if these disclosures are not made a
spouse can often void a contract. Such fiduciary duties have been found
to apply even to fiancées about to be married.
The list of such duties is
extensive: A few examples:
·
Lawyer to
Client
·
Director
of Corporation to Corporation and its shareholders.
·
Officer of
Company to the Owners of the corporation.
·
Broker to
client (both stock and real property brokers have the duty.)
·
Employee
to Employer
·
Executor
of Will to Beneficiaries.
·
Trustee of
Trust to Beneficiaries.
·
Spouses to
each other. Parent to child.
·
Partner to
all other partners.
·
Doctor to
patient.
·
Psychiatrist
to patient.
·
Financial
advisor to client.
·
Insurance
broker to client.
·
Agent to
Principle.
·
Accountant
to client
·
Guardian
to beneficiary
·
Conservator
to beneficiary (conservatee)
And many, many others. To
determine if a fiduciary duty applies, one should seek legal advice. It is
vital to know if your relationship to another person or entity is a
fiduciary one.
Certain relationships that
may be close are not held to amount to a fiduciary duty. Thus friends do
not have such a duty to each other, nor do shareholders to other shareholders
(unless one is a majority shareholder in which case some jurisdictions
impose such a duty) nor advertising executives to clients nor negotiation
parties to each other. Sales people do not normally have any fiduciary
duty to the customers, and most employers do not have a fiduciary duty to
most employees though duties to keep a location secure and safe and free
from illegal harassment have been imposed on some employers in some
jurisdictions.
Contrasting
Other Types of Duties:
The law does impose other,
lesser, duties. For instance, one has a “duty of due care” in
operating an automobile so that one does not injure another. One has a
duty to act to reasonably mitigate damages if one has suffered a breach
of contract and is planning to sue. There are dozens of other duties that
the law imposes, but none reach the high standard of fiduciary duty which
is, literally, the highest obligation that the law can impose on a
person.
Personal
liability and the Statute of Limitations:
Inherent in the concept of
fiduciary duty is that one is personally liable if one violates it. Thus,
if you are a trustee or a real estate broker, the law imposes personal liability upon you for the breach of that
duty. While corporations or other limited liability entities may at times
act to limit the extent of personal liability in some instances, and
while insurance is often available that can cover one for negligent
breach of fiduciary duty, in most instances the law will impose liability
directly on the fiduciary who is found to have breached that duty and if
the breach was willful, insurance will normally not cover the liability.
Thus, a director to a
company, an executor to a will, a trustee to a trust, etc, etc, undertake
a personal obligation that can have far reaching risks should they breach
that duty. Further, the statute of limitations (the time in which an
injured party must commence action for alleged breach of duty) is
normally extremely long for a fiduciary. First, if the beneficiary is a
minor, the statute is normally tolled until the minor reaches the legal
age to sue. Further, if the fiduciary does not fully disclose to the
beneficiary the facts that give rise to the liability, the statute may be
tolled until the beneficiary knew or should have known that the wrongful
act occurred.
This office filed an action
against a trustee who had breached her duty to her beneficiaries in 1963.
The embezzlement was discovered twenty years after the theft and five
years after she died. During the discovery, additional wrongful acts were
discovered going all the way back to the 1940’s and since those had
been kept hidden they were allowed by the Court as additional causes of
action…including action against co trustees, in this case the bank.
Thus almost fifty years after the wrongful act occurred
the Court granted a judgment based on breach of fiduciary duty! Since by
the time of the judgment the fiduciary was deceased, the verdict was
enforced against her spouse who had received (perhaps unknowingly) some
of the proceeds of her wrongdoing.
Joint Fiduciary
Duties:
One aspect of fiduciary
duty not understood fully by many fiduciaries is that if they are co
fiduciaries (joint trustees, joint executors, directors, etc.) the duty
and the liability may be “joint and several.” This essentially
means that if two fiduciaries breach their obligations resulting in harm
to the beneficiary, each is individually liable for the entire damage
rendered to the beneficiary. While each fiduciary may be able to claim
contribution from the other for payments therefore due the beneficiary,
the beneficiary need not collect equally from both. Commonly, one
fiduciary disappears or is insolvent and the remaining fiduciary must
therefore bear the entire brunt of the payments.
The duty of inquiry on the part of a fiduciary also
means that if you know or should know that another fiduciary is breaching
his or her duty, you must both make reasonable inquiry to determine if
that is the case and take proactive steps to protect the beneficiary. If
your own negligence allows the other fiduciary to harm the beneficiary,
you may find yourself liable, at least in part, even if the other
fiduciary acted intentionally wrongfully. (Typical example is that you
allow a co fiduciary to sign all the checks and do not audit or oversee
the action. If that co fiduciary steals some money and disappears, it is
likely your negligence would allow the beneficiary to seek relief against
you.)
Recent events have
demonstrated that Boards of Directors of companies are often found liable
for failure to exercise their fiduciary duty when an officer of the
company breaches his or her own fiduciary duty and they fail to exercise
reasonable oversight.
The key lesson is this:
just because you have other people sharing your fiduciary duty does NOT
lessen your obligations to protect the beneficiary. Indeed, in light of
the need to carefully oversee the actions of the other fiduciaries, it
may enlarge your duties.
Protections:
The most important steps a
fiduciary can take are to exercise due care in protecting the beneficiary
and understand that duty can not be easily avoided by waiver or
“excuses.” If you are a fiduciary, you are there to protect
and you must take those duties seriously and continuously oversee the
obligations you have undertaken.
If there is any conflict of
interest, you must make full disclosure and either get
a written waiver from the beneficiary AFTER full written disclosure is
made or, better yet, resign from any fiduciary position in which you are
in a conflict of interest. The important steps are disclosure and
informed consent or resignation.
If you become ill or other
factors make it impossible to perform your duties, you must immediately
take those steps to assure someone else will assume the duties. If no
other people are apparent, you may have to petition the court to be
removed and to appoint another person to assume your duties. Most
documents creating fiduciary duties, such as By-laws of a corporation or
a Will or Trust provide for either alternative fiduciaries or a method to
appoint one.
For those duties imposed by
law, such as parent to child or spouse to spouse, the duty can not be
abrogated so easily and in some cases, as with a child, not at all. In
that case, you must simply perform as the law requires.
Self-Dealing
By far the most common
cause of litigation with fiduciaries involves “self dealing,”
namely acting to benefit the fiduciary to the harm of the beneficiary.
Typical situations are entering into contracts between the Trust or
Company and the fiduciary that are above market value to the fiduciary;
borrowing money from the Trust or estate; failing to report errors made
so the beneficiary can not protect him or herself, etc. etc.
In such instances, the
fiduciary is often not only removed, but faces reimbursement to the
beneficiary and possible punitive damages if the self dealing was known.
A good basic rule is never engage in any transaction with the fiduciary
in which the decision to make the transaction is not approved WITHOUT
your involvement AND is in the best interests of the beneficiary who has
received full written disclosure of all aspects of the transaction.
A typical method and one
often seen in corporations is that any director whose business is to
enter into a transaction with the company makes written disclosure to the
board, removes himself from the board room when
the matter is deliberated, and does not vote on the decision. (The
corporations code specifically allows such self dealing if certain steps
are taken. Other fiduciary obligations, as when one is a Trustee of a
trust, may be much harder to overcome in self dealing situations.) Legal
advice is vitally necessary before any such transaction occurs and both
the fiduciary and the beneficiary should obtain separate legal counsel to
advise on the transaction.
So,
Why Become a Fiduciary?
Some duties are
imposed upon you and you have no choice (parents and children, spouses,
etc) but others are undertaken voluntarily by the fiduciary who understands
that the obligation is either necessary to achieve business or family
ends, or a moral obligation that must be undertaken.
Most fiduciaries are
in the family estate and trust structure and understand that they must assume
the obligation for protection of siblings, parents or children. And if
you are in a corporate or limited liability structure, or a partnership
structure, such duty is necessarily imposed as part of the business
structure. Even as an employee you must assume that duty and the simple
fact is that to get by in life and earn a living and be a member of a
family or community, one necessarily finds oneself assuming such
fiduciary duties and, in most cases, many fiduciary duties.
It is thus important
to fully understand what that means and to make sure your actions do
conform to those obligations. One friend put it well to the writer when
asked if he really wanted to assume that obligation in an estate plan:
“One can judge oneself by the number of people who trust you enough
to ask you to undertake what amounts to the highest obligation that
exists. They want me to protect them if incompetent. What greater
compliment could they ever give me?”
But with that
compliment comes obligation and perhaps the
first duty of a fiduciary is…to know what the total duties are!
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