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Breach Of Fiduciary Duty

One of the highest standards of fiscal care that one party may owe another in business is a fiduciary duty. The party owing the fiduciary responsibility may be referred to as the fiduciary or agent, while the party to whom the duty is owed is called the beneficiary or principal. Business partners may owe each other fiduciary duties, while a company’s board of directors may owe a fiduciary duty to its shareholders. Most agents realize the weightiness of their duties. A breach of fiduciary duty in business may take many forms. Legal action may be required to remedy these breaches. To learn more about how to protect your business in the event of breach of fiduciary allegations, or to seek help in determining whether your business may have a claim for breach of fiduciary duty against another party, reach out to an experienced business law attorney with Schwab & Gasparini to schedule a personalized consultation. You can reach us in Syracuse at (315) 422-1333, in Albany at (518) 591-4664, or in White Plains or Hudson Valley at (914) 304-4353. 

What Is a Breach of Fiduciary Duty?

According to the Federal Deposit Insurance Corporation (FDIC), fiduciary relationships take two main forms:

• Created by law (or statute) or a contract
• Arising from the circumstances of the relationship between the two parties and the ensuing transactions between the two

In both types of relationships, the fiduciary duty of the agent to the beneficiary takes three forms:

• A duty of care
• Loyalty to the beneficiary
• Candor in business dealings

Who Is Affected by a Breach of Fiduciary Duty?

In a business context, a breach of fiduciary duty may affect either a person, such as a business partner who lost assets because the other partner was engaging in self-dealing, or an entity, such as a breach between a company’s directors and the company itself. Directors, shareholders, or other decision-makers in a corporation have a fiduciary duty to the corporate welfare of the organization. If the company's board of directors wastes resources, for example, that could be a breach of fiduciary duty. Alternatively, if one director makes financial decisions to support their side business with company funds (such as using that side business as a vendor for the company), then they could be considered to have breached their fiduciary duty.

Recognizing Breach of Fiduciary Duty

A breach of fiduciary duty may be readily apparent, which can make the injured party’s job, or their attorney’s responsibility if they are working with professional legal counsel, a little easier. However, some breaches, especially deliberate, concealed fraud, may require an investigation by a forensic accountant. To remedy the breach, the fiduciary may need to be removed from their position, or the wronged parties may need to initiate court proceedings. 

Breach of Fiduciary Duty Examples

Some common examples of a breach of fiduciary duty that may arise in a business context, according to Cornell University’s Legal Information Institute include:

• Conflict of interest
• Misappropriation of assets
• Negligent management of assets
• Self-dealing
• Failure to account or inadequate record keeping
• Failure to distribute assets

Breach of Fiduciary Duty Honest Errors

Decisions of the fiduciary are typically analyzed under a business judgment rule based on the premise that the fiduciary will use their knowledge, experience, and professional judgment to act in the beneficiary's best interest. If the fiduciary makes the wrong decision, it may not automatically be considered a breach of their duty of care, but rather a simple mistake. Honest error can be an effective defense against allegations of breach of fiduciary duty, but differentiating honest error from breach of fiduciary duty can be difficult. For this reason, parties to a business relationship who suspect they have been injured by a breach of fiduciary duty, as well as those who have been accused of the same, may wish to consult with an experienced business law attorney to discuss their particular circumstances.

Proving Breach of Fiduciary Duty

Once an injured party determines, with the help of an attorney if appropriate, that a breach of fiduciary duty has likely occurred, it will be the plaintiff’s responsibility to prove that breach in court to receive compensation for damages. To build the case, the plaintiff or their lawyer must gather evidence to establish the following elements:

• A fiduciary relationship existed between the plaintiff (the beneficiary) and the defendant (the fiduciary)
• The defendant engaged in misconduct (similar to the examples above)
• That misconduct caused damages to the plaintiff

Legal Remedies for a Breach of Fiduciary Duty

A party who suffers financial losses due to a breach of fiduciary duty may have the right to sue the agent who committed the breach, as well as anyone who aided or abetted that breach. In business settings, for instance, if the breaching agent was one member of the company board of directors, and the other directors were aware of this member’s activity but failed to stop them, the entire board may be legally liable for any losses the company or its shareholders suffered. 

Generally speaking, in civil torts the aggrieved parties may demand compensatory damages from the breach and in some cases may also seek punitive damages. Compensatory damages are the losses suffered by the plaintiff, and the award is intended to return them to the same financial status they were before the breach. Punitive damages are intended to punish the wrongdoing party, usually on the premise that such punishments may deter those in similar positions from engaging in the same kind of deceptive or fraudulent behaviors. Regardless of the damages sought, the burden of proof rests with the plaintiff. Building a case to prove a breach of fiduciary duty can be challenging, so New York businesses may wish to consider consulting with an experienced business law attorney with Schwab & Gasparini before pursuing legal action. 

What Is a Breach of Fiduciary Duty Cause of Action?

A breach of fiduciary duty cause of action is the legal action, or lawsuit, that a plaintiff files against the breaching party. A breach of duty action is a form of civil tort and, as such, will be heard in New York civil court, not criminal. While the burden of proof is on the plaintiff, in civil cases the plaintiff, and their attorney if they choose to work with professional counsel, must only show by a preponderance of the evidence that the breach occurred, rather than proving the defendant’s guilt beyond a reasonable doubt. 

The plaintiff in a suit for breach of fiduciary duty must also overcome the business judgment rule, which according to Cornell’s Legal Information Institute is the legal protection of a company director from being sued for making an error in judgment. The plaintiff must show, in order to prove their case, that the defendant did not act in good faith, did not take the care a reasonably prudent person would take in the same or similar situations, or did not act in the reasonable belief that they were acting in the best interests of the party to whom they owed the fiduciary duty, when making the decisions that led to the plaintiff’s losses.

Hire an Experienced New York Business Attorney To Protect Your Interests

If you have been harmed by a breach of fiduciary duty, or if you have been accused of breaching your fiduciary duty to another person or entity, you may wish to seek experienced legal counsel to help evaluate your situation. A skilled New York business law attorney from Schwab & Gasparini may be able to guide you through the process of assessing the circumstances of the case and assist in devising a plan to protect your rights and interests. Call us in Syracuse at (315) 422-1333, in Albany at (518) 591-4664, or in White Plains or Hudson Valley by dialing (914) 304-4353. 

Sun Apr 28 2024, 12:00am