WHAT ARE FIDUCIARY DUTIES AND WHY DO THEY MATTER?

Professionals and businessowners often understand the existence of fiduciary duties but generally overlook the unique nature of fiduciary duties and special circumstances under which they arise. This month, we examine fiduciary duties and their treatment under Texas law.

What Is a Fiduciary Duty and When Do They Arise?

A fiduciary duty is a special legal obligation requiring one person or entity to act for the benefit of another person or entity. The person or entity benefiting from the duty is the beneficiary. There are two types of fiduciary duties: formal fiduciary duties and informal fiduciary duties. Formal fiduciary duties arise as a matter of law in certain formal relationships. For example, a formal fiduciary duty may arise in the context of a business partnership, trustee relationships, attorney-client relationships, spousal relationships, realtor-client relationships, and more. By contrast, informal fiduciary relationships arise when someone relies on another’s moral, financial, or personal support or guidance. Because informal fiduciary relationships arise less clearly and less reliably than formal duties, Texas courts use several when assessing whether an informal fiduciary relationship may exist in a particular case. These factors include the existence of a familial relationship between the parties; the existence of a close, personal friendship between the parties; the length of the parties’ relationship; the extent to which one party relied upon the other for support; the parties’ relative age and health; and evidence of the relying party’s trust in the other party. Although informal fiduciary relationships arise on a case-by-case basis, an informal fiduciary relationship, once established, gives rise to similar obligations as a formal one.

Once established, a fiduciary duty may require of one party or both parties duties such as duty of loyalty, a duty of care, a duty of good faith or fair dealing, a duty of candor, or a duty to disclose. The particular duties owed will depend upon the nature of the relationship; whether the parties limited their fiduciary duties, as sometimes allowed under Texas law; and other factors. Moreover, fiduciary duties may be either unilateral or mutual. In the case of a trustee and trust beneficiary, for example, the relationship is often unilateral, and the trustee owes fiduciary duties to the trust beneficiary. In the case of business partners, however, the fiduciary relationship is mutual, and both or all the business partners may owe fiduciary duties to one another.

What Happens If I Breach a Fiduciary Duty?

What constitutes a breach of fiduciary duty turns on the nature of the fiduciary relationship and the specific duties owed. Depending on these factors, a party may breach a fiduciary duty if it engaged in a self-interested transaction, failed to disclose material information, disclosed confidential information to another party, or stole or embezzled money or other assets. If a party breaches its fiduciary duty, the breaching party may be vulnerable to a lawsuit. To establish a breach of fiduciary duty claim before a court, the claimant must prove that the breaching party owed a fiduciary duty to the claimant; that the breaching party breached that duty; and that the breach damaged the claimant or that the breaching party benefitted from the breach.

A successful claimant on a breach of fiduciary duty claim may recover out-of-pocket losses, lost profits, some mental anguish damages foreseeable from the breach, and punitive damages if the harm resulted from the breaching party’s fraud, malice, or gross negligence. Breach of fiduciary duty claims often accompany other claims, such as breach of contract or fraud, and these other claims may carry separate claims to damages.

Although fiduciary duty claims are formidable, a defendant in such a case is not without potential defenses, of which many exist. A party defending against such a case may raise in its defense the statute of limitations, the business judgment rule, abandonment of business opportunity, express limitation or elimination of fiduciary duties, fully informed consent by the claimant, shareholder ratification of the transaction, and others.

If you are considering bringing a claim for breach of fiduciary duty or if you may be defending against such a claim, contact Diab Law Firm, PLLC to discuss and review your rights under the law.

Samy Diab

Attorney

Diab Law Firm, PLLC