What Constitutes a Breach of Fiduciary Duty?

Breach of Fiduciary Duty

When a grantor conveys assets to a trustee on behalf of a beneficiary, a fiduciary relationship ensues. Such an arrangement can take place in property financing, where – in certain states – a trustee receives title to the house until the loan is paid in full. When an attorney holds funds in escrow until a contractual task is complete also constitutes a fiduciary trust. In countless like scenarios, each party assumes specific duties. When such obligations go unperformed, the responsible party is in breach.

Fiduciary Duty in a Nutshell

Before we can understand breach of fiduciary duty, we best grasp the foundational concept. In addition to the examples referenced above, fiduciary relationships take diverse forms. A trustee can act in the interests of beneficiaries of an estate. Alternatively, a guardian can assume parental responsibilities over a minor if the latter is named a ward. A realtor can act as the agent of a principal, namely a seller or buyer. Perhaps the most formal fiduciary bond is between an attorney and a client.

Common among all of these examples are the duty of loyalty, on the one hand, and the duty of care on the other. To be sure, courts find fiduciary connections between patients and doctors; union members and leaders; and priests and parishioners. In every case, the fiduciary executes a service for the one who has entrusted him or her. Many people are bound as fiduciaries without even realizing it. This is why breach of fiduciary duty is frequently an unconscious act or omission.

How Is a Fiduciary Relationship Formed?

As the aforementioned examples demonstrate, a fiduciary link need not result from a precisely formatted, legally styled, notarized document. Where one party attends to matters affecting the other – based on the former’s experience, knowledge and training – the relationship exists so long as both assent to the services. Still, a boatload of case law and more than a few statutes qualify this understanding. Nevertheless, the parameters of fiduciary relationships are broad. Those seeking to own a business, serve the public or simply do a few good deeds do well to remember how easily fiduciary ties develop.

How to Recognize a Breach

With fiduciary connections so ubiquitous and hard to avoid, how can a person know when he or she commits a breach of fiduciary duty?

Identify the Fiduciary

A little research is necessary. Fortunately, the Code of Federal Regulations points to fiduciaries as defined by federal law. State codes and county ordinances may similarly designate certain service providers as fiduciaries. Statutes are good but they do not tell the whole story. Case law will show that spouses, employers, stockholders and business partners all act as fiduciaries at one time or another. Before you consider whether a breach of fiduciary duty exists, consult an attorney with experience in this area.

Understand the Responsibility of the Fiduciary

Just because somebody upset you does not mean a breach of fiduciary duty abides. Having knowledge of the offender’s obligations puts any potential breach into stark relief. In addition to laws and government regulations that give shape to the expectaions upon various fiduciaries, prospective complaintants can also access professional standards (when the fiduciary is practicing a bona fide profession).

For instance, bar associations publish rules for professional conduct. Contractors and builders adhere to a common law Standard of Care that binds design professionals. Certified Public Accountants and professional engineers do likewise. Even the Hippocratic Oath represents a commitment to certain normative expectations among physicians. These criteria matter, and a failure to conform may indeed constitute a breach of fiduciary duty.

Comprehend the Nature of the Breach

A breach of fiduciary duty takes differing forms. It might be an action that injures the relationship and wrongs the other party. Alternatively, the infraction could be an act that–while meant for the benefit of the relationship–demonstrates improper or incompetent performance. Otherwise, the breach would be a failure to act when action is required. In legal parlance, these are malfeasance, misfeasance and nonfeasance, respectively. If the complaint can define the alleged breach in such terms, it builds a stronger argument that an actual fiduciary trespass took place.

These elements must be subject, of course, to judicial evaluation. Yet they provide some parameters to forming a contention that a breach occurred. You stand a better chance of success in court if the matter is resolved in your own heart and intellect.

Consequences of Breach of Fiduciary Duty

The idea of fiduciary duty protects consumers, heirs, patients, employees and myriad others who must now and then assume a position of dependency. A breach of fiduciary duty might be trivial. Then again, it might cause incalculable harm. Acting in the capacity as a fiduciary, a financial advisor is obliged to direct a client to that fund that yields the highest return for the lowest cost – even if the advisor gets no commission from the purchase. To do otherwise is to knowingly burden the principal with additional expense. This is a breach of fiduciary duty.

Any fiduciary found guilty of such transgrssions can face three kinds of ramification. First, he or she might have to compensate the principal for monies lost. Secondly, a court can impose punitive damages not only to punish the offender, but to inform the public of the seriousness of fiduciary breaches. Finally, these sorts of violations might lead to professional discipline, e.g. loss of licenses, accreditations or commissions. Such measures should prompt every fiduciary to think long and hard before cutting corners or seeking enrichment.

Summing Up

Since the field of fiduciaries is broad and the scope of their duties wide, precisely defining breach can only happen case by case. Still, these very facts should give everyone pause. There might be many times we act as fiduciaries and just as many times that we fail in our responsibilities. Where trust resides, care must follow. Those who exercise this care are bound to do so with both consistent integrity and practiced competence.


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