Breach of Fiduciary Duty
Some relationships are so close and trusting that the law imposes special obligations on the persons being trusted, who are called fiduciaries. (The person that reposes trust in the fiduciary is called the cestui que trust.) Such relationships include the relationship that a lawyer has with his client, a director of a corporation has with the shareholders, partners have with each other, an agent has with his principal, a sales agent has with the manufacturer, and an accountant has with his customer.
In some cases, even a creditor may owe his debtor a fiduciary duty. Consider, for example, a homeowner who borrows money to buy a coop apartment. The lender will typically require the homeowner to give the shares in the cooperative building to the lender, a practice called pledging the shares. If the homeowner defaults in repaying the loan, the lender owes him a fiduciary duty in selling the shares. That duty may require the lender to use commercially reasonable means to get the best price possible.
And it doesn't matter that a contract may say that a party is an independent contractor. It's the realities of the relationship that governs whether there is a fiduciary relationship, not the labels put on the relationship by a contract. Thus, for example, in some instances a franchise agreement may give rise to a fiduciary duty.
The three duties imposed by a fiduciary duty are a duty of care, a duty of loyalty and a duty of honesty. Violating any of those duties may subject the fiduciary to a law suit. Thus, for example, if a stock broker fails to give an investor information about one of his stocks, the broker may have violated the duty of care imposed on him by his fiduciary duty to the investor.
One form of a breach of fiduciary duty is called self-dealing, where the fiduciary does something to help himself at the expense of the other party. For example, if the trustee managing investments in a trust diverts a valuable opportunity away from the trust and into his own business, that's a form of self-dealing. Similarly, if the manager of a pension fund permits an investment advisor to manage the fund in return for a bribe, that's a breach of fiduciary duty. If the fiduciary's contract with the beneficiary breaches a fiduciary duty, the law will refuse to enforce the contract.
The officers and directors of corporations bear a fiduciary responsibility to the corporation and to its shareholders. If the officers and directors waste corporate assets, that's a breach of fiduciary duty that may subject them to liability.
In addition, the majority shareholder has a fiduciary duty to the minority shareholder. So, let's suppose the majority shareholder refuses to declare a dividend to force the minority shareholder to sell his interest, that could be a breach of fiduciary duty.
But it isn't just the fiduciary who's liable. Under New York law, a person who induces a breach of fiduciary duty is also liable. This may be helpful if the fiduciary is judgment proof-- i.e., without the assets to pay a large judgment. Under New York law, the injured party may sue a relatively peripheral figure that induced the breach, who may have the resources to pay a judgment.
The existence of a fiduciary relationship imposes on the fiduciary a duty to volunteer relevant facts. That is, in an arms-length relationship, neither party is required to volunteer facts. But in a fiduciary relation, the fiduciary is required to disclose relevant facts. Failure to do so gives rise to a fraud claim. Thus, for example, if a fiduciary is selling real estate to the cestui que trust, the fiduciary is obligated to volunteer all the relevant facts.
One of the benefits of a fiduciary duty is that it permits the beneficiary of a duty to impose a constructive trust on property in the hands of the fiduciary. It's like having a mortgage on the property, so that, under certain circumstances, if the property is sold, the beneficiary can follow the property into the hands of the new owner.
The existence of a fiduciary duty may help people who are strangers to the fiduciary relationship. For example, a guarantor of a loan may assert any defenses available to the borrower. Thus, if the lender breached a fiduciary duty to the borrower, the guaranty may assert that breach in the lender's action on the guaranty.
Another benefit of being able to allege a breach of fiduciary duty is that doing so entitles the plaintiff to seek punitive damages. Unlike compensatory damages, which seek to compensate, punitive damages are meant to punish and deter recurrence, and are therefore not limited to the amount of the plaintiff's loss. Thus, a claim of punitive damages enables a plaintiff to increase the size of his claim, and have a significant bargaining chip in the lawsuit.
In some cases, even a creditor may owe his debtor a fiduciary duty. Consider, for example, a homeowner who borrows money to buy a coop apartment. The lender will typically require the homeowner to give the shares in the cooperative building to the lender, a practice called pledging the shares. If the homeowner defaults in repaying the loan, the lender owes him a fiduciary duty in selling the shares. That duty may require the lender to use commercially reasonable means to get the best price possible.
And it doesn't matter that a contract may say that a party is an independent contractor. It's the realities of the relationship that governs whether there is a fiduciary relationship, not the labels put on the relationship by a contract. Thus, for example, in some instances a franchise agreement may give rise to a fiduciary duty.
The three duties imposed by a fiduciary duty are a duty of care, a duty of loyalty and a duty of honesty. Violating any of those duties may subject the fiduciary to a law suit. Thus, for example, if a stock broker fails to give an investor information about one of his stocks, the broker may have violated the duty of care imposed on him by his fiduciary duty to the investor.
One form of a breach of fiduciary duty is called self-dealing, where the fiduciary does something to help himself at the expense of the other party. For example, if the trustee managing investments in a trust diverts a valuable opportunity away from the trust and into his own business, that's a form of self-dealing. Similarly, if the manager of a pension fund permits an investment advisor to manage the fund in return for a bribe, that's a breach of fiduciary duty. If the fiduciary's contract with the beneficiary breaches a fiduciary duty, the law will refuse to enforce the contract.
The officers and directors of corporations bear a fiduciary responsibility to the corporation and to its shareholders. If the officers and directors waste corporate assets, that's a breach of fiduciary duty that may subject them to liability.
In addition, the majority shareholder has a fiduciary duty to the minority shareholder. So, let's suppose the majority shareholder refuses to declare a dividend to force the minority shareholder to sell his interest, that could be a breach of fiduciary duty.
But it isn't just the fiduciary who's liable. Under New York law, a person who induces a breach of fiduciary duty is also liable. This may be helpful if the fiduciary is judgment proof-- i.e., without the assets to pay a large judgment. Under New York law, the injured party may sue a relatively peripheral figure that induced the breach, who may have the resources to pay a judgment.
The existence of a fiduciary relationship imposes on the fiduciary a duty to volunteer relevant facts. That is, in an arms-length relationship, neither party is required to volunteer facts. But in a fiduciary relation, the fiduciary is required to disclose relevant facts. Failure to do so gives rise to a fraud claim. Thus, for example, if a fiduciary is selling real estate to the cestui que trust, the fiduciary is obligated to volunteer all the relevant facts.
One of the benefits of a fiduciary duty is that it permits the beneficiary of a duty to impose a constructive trust on property in the hands of the fiduciary. It's like having a mortgage on the property, so that, under certain circumstances, if the property is sold, the beneficiary can follow the property into the hands of the new owner.
The existence of a fiduciary duty may help people who are strangers to the fiduciary relationship. For example, a guarantor of a loan may assert any defenses available to the borrower. Thus, if the lender breached a fiduciary duty to the borrower, the guaranty may assert that breach in the lender's action on the guaranty.
Another benefit of being able to allege a breach of fiduciary duty is that doing so entitles the plaintiff to seek punitive damages. Unlike compensatory damages, which seek to compensate, punitive damages are meant to punish and deter recurrence, and are therefore not limited to the amount of the plaintiff's loss. Thus, a claim of punitive damages enables a plaintiff to increase the size of his claim, and have a significant bargaining chip in the lawsuit.