Breach of Fiduciary Duty
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Being able to trust the people you work with is key to a business’s success. Duties exist under the law among people in business together to help ensure that trust is not violated.
A fiduciary is a person who owes a duty to another to act in good faith and with due regard for the interests of the other person. In business that includes: business partners, agent and principal, corporate officers and the corporation, and joint ventures.
Unfortunately, many people are victims of a breach of fiduciary duty which, in a commercial litigation context, often involves an officer, director, or partner being sued for harming a business. A breach of fiduciary duty is an abuse of trust by a party that is legally bound to act in the best interests of a second party. A fiduciary obligation can exist in various types of relationships; from a board of directors to shareholders, a bank to clients, or a trustee to beneficiaries.
Proving a breach of fiduciary duty involves showing misconduct by a defendant and establishing that damages resulted from their neglect or misbehavior. If you believe you’ve been the victim of a breach of fiduciary duty, contact the commercial litigation lawyers at The Potts Law Firm to discuss your case during your free consultation.
- Economic loss
- Exemplary damages
In a derivative action, “the individual shareholder steps into the shoes of the corporation and usurps the board of directors’ authority to decide whether to pursue the corporation’s claims.” This allows shareholders an opportunity to seek recovery against officers and directors that have hurt a company when the board of directors refuses to do it themselves. There are several statutory requirements to filing a derivative action that must be complied with or the case will be dismissed.
Without a specific contract or special relationship, a corporation’s officers and directors do not owe a fiduciary duty to individual shareholders, but only to the corporation itself. Therefore, the right to sue officers and directors for breaching their fiduciary duties generally belongs to the corporation, not the shareholders. However, most states have enacted statutes that enable shareholder to bring a derivative claim on behalf of the corporation.
In Texas, there are three duties owed by officers and directors to a corporation:
- Duty of obedience; forbids ultra vires acts, or acts outside the scope of corporate power
- Duty of loyalty; requires that officers and directors refrain from engaging in transactions that they have a personal interest in
- Duty of care; requires officers and directors to manage the corporation’s affairs with diligence and prudence
Generally, the officer or director will need to have acted more than negligently to be liable for breaching a fiduciary duty to a company. Texas law protects the business judgment of officers and directors so long as they act within the exercise of their discretion and judgment.
Business partners owe one another a duty of loyalty to the business, duty to refrain from competition with the business, and duty not to usurp opportunities for the business for themselves.
A fiduciary is obligated to act on behalf of a beneficiary. When a trust relationship is agreed upon, it is illegal for a fiduciary to take actions that hurt the beneficiary’s interests.
The three core duties of this agreement are:
- Care – The fiduciary must use utmost care managing the interests and assets of the beneficiary
- Impartiality – The fiduciary must not favor one beneficiary over another; all must be treated equally and with disinterest
- Loyalty – The fiduciary must act only in the interests of the beneficiaries
A fiduciary relationship is not always clearly stated. In some cases, it may be assumed or based on subjective information. Before a breach can be proven, a fiduciary relationship must first be shown to exist.
Someone harmed by the failure of a fiduciary duty may be entitled to damages. Every case is different, and damages may hinge on the nature of the abuse, the fiduciary relationship and other factors specific to the case.
Common breach of fiduciary duty legal remedies include:
- Removal of the fiduciary – A court may order the removal or replacement of a fiduciary
- Punitive damages– If a breach of duty is proven, a court could require the fiduciary to pay punitive damages
- Denial of fees – A fiduciary may be denied the right to collect fees
- Surcharges – A court could require a fiduciary to pay money to a trust