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What Is Breach of Fiduciary Duty?

Posted on January 1, 2019

One type of civil claim a party can make against another is for alleged breach of fiduciary duty. A breach of fiduciary duty suit is based on the principle that one party (the defendant) acted outside the best interests of another party (the plaintiff), despite having an obligation to do otherwise. Most of these lawsuits take the form of business torts. A successful breach of fiduciary duty claim could result in compensation for the injured party.

Defining Fiduciary Duty

Fiduciary duty is someone’s legal obligation to act in a way that will benefit another person, usually financially. The fiduciary is the one that owes the duty, while the beneficiary or principal is the one meant to benefit from the duty. A few federal and state laws touch on the subject of fiduciary duties. The Uniform Fiduciaries Act, for example, defines fiduciaries and what a fiduciary relationship means.

One common example of a fiduciary duty is the duties a corporation owes its shareholders. In this relationship, the directors of a corporation owe responsibilities such as loyalty, good business decisions, prudence, and reasonable care to shareholders. Should the corporation breach these duties, shareholders may have grounds for a lawsuit. A breach of fiduciary duty is an actionable form of misconduct under Alabama law. It is up to the beneficiary to file a claim in pursuit of damage recovery.

Types of Fiduciary Duties

Many parties in managerial positions may be fiduciaries, and may lawfully owe others related duties of care. Establishing these duties can help shareholders and others understand their rights, and more quickly recognize harmful breaches. Since corporations are the most common defendants in breaches of fiduciary duty claims, the following are five duties corporations owe others, including shareholders and consumers.

  1. Duty of care and prudence. Directors must take reasonable care to review all applicable materials and information available to them on a subject before making an important business decision. Negligently, carelessly, or wantonly making a decision, resulting in harm to shareholders or others, could constitute a breach of fiduciary duty. Trustees also bear a duty of prudence while administering a trust.
  2. Duty of loyalty. On top of a duty to exercise reasonable prudence and care in decision-making, fiduciaries also often carry the responsibility of loyalty. Everyone working as higher-ups at a corporation must not use their positions to further private interests. Instead, they must act in the best interests of the company, without a personal conflict of interest.
  3. Duty of good faith. Officers and directors must also obey their job duties without breaking the law. They must act with the good faith belief that what they were doing was lawful. Intentionally breaking the law within an official capacity could constitute a breach of duty.
  4. Duty of confidentiality. It is a breach of fiduciary duty to intentionally and knowingly release corporate information that should have been private, to further benefit the defendant’s best interests. A corporate director or officer who discloses information for personal gain would be guilty of a breach.
  5. Duty of disclosure. Finally, a corporation’s fiduciary duty includes a responsibility to act with complete candor, or to be honest and upfront with all relevant facts and circumstances involved in a corporate decision. It is a breach in some circumstances to disclose key information.

A breach of any of these duties could mean the corporation broke the rules and may be liable for resultant damages. This is just one example, however; many parties owe fiduciary duties to their consorts. Fiduciary relationships exist between attorneys and their clients, insurance companies and their policyholders, stockbrokers and their clients, banks and customers, and financial advisors to their clients. Understanding whether someone breached a fiduciary duty may require consulting with an attorney.