Common Examples of Breach of Fiduciary Duty That Result in Litigation

Common Examples of Breach of Fiduciary Duty That Result in Litigation

Many types of fiduciary relationships can arise in the business world. Examples include the relationship between a trustee and beneficiary, investment advisor and client, principal and agent, corporate director and shareholder, and attorney and client.

Understanding fiduciary duties—what they are, how to uphold them, and what happens if they are breached — is imperative to fostering productive relationships. It can also help avoid costly and time consuming breach of fiduciary duty litigation.

What Constitutes a Breach of Fiduciary Duty?

A fiduciary duty is an obligation to act in the best interest of another party. For instance, A board of directors has a fiduciary duty to act in the best interests of the company’s shareholders. A breach of fiduciary duty occurs when the fiduciary breaches any of the responsibilities, obligations, or duties that he or she owes the principal. The fiduciary is liable for harm resulting from a breach of the duties.

While the elements can vary by state,  to successfully bring a breach of fiduciary duty claim, the plaintiff must generally show that:

• A fiduciary relationship existed between the plaintiff and the defendant;
• The defendant breached a fiduciary duty owed to the plaintiff; and
• The breach of duty entitles the party to a remedy.

Establishing a Fiduciary Relationship

In many cases, a fiduciary duty is created by statute, such the Employee Retirement Income Security Act (ERISA). However, a fiduciary duty may also arise through a contractual relationship or course of dealing.

Because not all business relationships involving trust rise to the level of a fiduciary relationship, plaintiffs must often rely on factual circumstances. These circumstances help establish the relationship.

New Jersey courts have described the test as whether the “relationship between the parties were of such a character of trust and confidence.” It must be reasonably certain that one party occupied a dominant position over the other.

Plaintiffs must also be able to demonstrate that the alleged misconduct occurred within the scope of the fiduciary relationship. While statutes may often define the scope, other cases may require the plaintiff to show that the defendant was a fiduciary with regard to a specific undertaking, i.e. obtaining tax advice from an accountant. 

Proving a Fiduciary Breach Occurred

Several types of duties may arise from a fiduciary relationship, including the duties of loyalty, care, full disclosure, good faith, and fair dealing. A fiduciary must act in the best interests of his principal and avoid conflicts of interest. Further, a fiduciary should adhere to a standard of care whereby the fiduciary acts in a reasonable and prudent manner.

In light of the following, a breach is often supported by evidence that the fiduciary:

• Failed to act solely for the benefit of the party;
• Failed to disclose all relevant facts;
• Failed to exercise the required level of care; or
• Failed to maintain client confidences.

Finally, when suing for breach of fiduciary duty, plaintiffs must demonstrate that they suffered measurable damages as a direct result of the breach. They must also show that such damages were directly caused by the fiduciary’s breach.

Common Examples of Fiduciary Breaches

Breaches of fiduciary duty can take a variety of forms. Below are some of the most common examples:

• Misappropriation of Assets: Taking or using assets that do not belong to you for your own benefit. 
• Conflict of Interest: Failing to disclose or properly manage a conflict of interest.
• Self-Dealing: Taking actions that benefit you or someone else at the expense of the person to whom you owe a fiduciary duty.
• Negligent Management of Assets: Failing to manage assets with the level of skill and care that a reasonable person in a similar situation would exercise.
• Fraud/Misrepresentation: Actively deceiving or misleading the person to whom you owe a fiduciary duty.

Remedies When Suing for Breach of Fiduciary Duty

When a fiduciary breach does occur, plaintiffs may have several legal remedies available. The most common is compensatory damages, which are awarded to a party as compensation for harm sustained by the party.

The goal is to place a party “in a position substantially equivalent in a pecuniary way to that which he would have occupied had no tort been committed.”

The principal may also seek to avoid an unfair contract in which the fiduciary failed to disclose all the relevant facts, as well as a contract that is the product of undue influence (regardless of whether it is fair or not). A constructive trust may also be enforced against fiduciaries that acquire property or profits in violation of their duties.

In addition, an injunction may also be available in cases where the fiduciary has improperly used confidential information as a means to prevent further disclosure. The plaintiff may also seek an injunction to prevent the fiduciary from wrongfully competing with the company in violation of the fiduciary duty. ERISA also provides a wide range of statutory remedies for breach of fiduciary duty.

Partner With a Trusted Legal Advisor

Navigating the legal landscape of fiduciary duties can be challenging. Our attorneys understand the intricacies of fiduciary relationships and we help our clients to fulfill their fiduciary obligations and prevent potential breaches. For personalized guidance, we encourage you to contact a member of our Corporate Transactions & Business Practice Group today.