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, and an accountant has with his customer.

Some common place business relationships may have special factors that give rise to a fiduciary duty. For example, when one party's superior position or superior access to confidential information is so great as to virtually require the other party to repose trust and confidence in the first party. For example a fiduciary duty may arise between a bank and its customer where the bank assumes control and responsibility over the customer's assets and operations, or where the customer places special trust and confidence in the bank and becomes dependent on it.

The three forms of fiduciary duties 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.

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.

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 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.

Another benefit to being able to allege breach of fiduciary duty is that it permits the injured party to recover for pain and mental suffering. There are relatively few causes of action in the world of business that will permit that: neither breach of contract nor fraud permit recovery of pain and mental suffering. And of course, the advantage to being able to recover for pain and mental suffering is that the numbers become very large.

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